Now the hard part begins. Five years after the Sarbanes-Oxley Act was passed, its raison d'être — to improve corporate transparency and thus boost investor confidence — has been realized, at least to a degree. Debates still rage about how much credit the act can claim for Wall Street's (pre-subprime) rebound, and, more fiercely, about the cost/benefit equation, but companies have largely made their peace with the act's major requirements, and many agree that its impact has been positive.
But any hope for a respite is misplaced. Most publicly traded companies may now be in compliance with Sarbox, but the push for transparency that it set in motion is rippling out in all directions, and there is scarcely any aspect of corporate accounting — from overarching principles to specific standards — that isn't ripe for reconsideration. "I've been a student of financial reporting for 25 years," says Greg Jonas, managing director of Moody's Investors Service, "and I've never seen a time when so many big-ticket financial-reporting issues were in play."
Those issues cover enormous ground, from the macro (Will generally accepted accounting principles still be accepted?) to the micro (specific changes to lease, pension, securitization, and other accounting standards that could have a major impact on companies' reported results). In between those extremes are issues such as the move to fair-value accounting, which could affect everything from hedging strategies to emissions credits, and a push to overhaul financial statements to make them better reflect corporate performance (see "Work Zone Ahead" at the end of this article).
Enter the "Complexity Committee"
Adding a further wrinkle to these interesting times is the fact that no single organization or entity has complete dominion over all aspects of corporate reporting. Nor do investors, companies, and lawmakers always agree on how to proceed or even what the destination should be. While it is true that the Securities and Exchange Commission has asserted itself more vigorously in the wake of Sarbox (see Part 2 of this series, "The SEC Rules," August), the broad scope and complexity of financial reporting demands some level of collaboration among a wide range of parties.
That was made clear in July, when the SEC established the Advisory Committee on Improvements to Financial Reporting. Known as CIFR or, more colloquially, the "Complexity Committee," it comprises 17 experts from academia, banking, law, Wall Street, and Corporate America. The group has been asked to make recommendations on everything from the relative merits of rules-based versus principles-based accounting systems to "current systems" for delivering financial information to the manner in which accounting and reporting standards are set and whether any current standards could be deemed unnecessarily complex or costly — or unnecessary altogether.
"Financial statements should do a good job for both preparers and users," says Robert Pozen, chairman of MFS Investment Management and also the chairman of CIFR. "There are a lot of people who are trying to get it right, and yet [the high incidence of misstatements indicates that] something isn't working here." In fact, Pozen says, "most individual investors are probably throwing them [financial statements] in the trash, and sophisticated investors want a lot more information in different formats," so no one is happy.
That fact has not been lost on the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which have been collaborating on the so-called presentation project since 2005. Whether CIFR's work dovetails or conflicts with the FASB/IASB effort is unclear, but it is reasonable to assume that such wholesale changes to financial statements will increase complexity for users and preparers, at least initially. One early set of revised financials that was distributed during a meeting of the Financial Accounting Standards Advisory Council (FASAC, a cross-section of businesspeople who advise FASB in much the same way that CIFR will advise the SEC) this past spring provided a side-by-side comparison of how financial statements might look at some point. The familiar income statement would be replaced by a statement that, in theory at least, would provide greater detail on the different types of income generated, so that investors could see core earnings versus earnings related to financing or investing activities.
"There's a wholesale commitment to this," says Leonard Griehs, vice president of investor relations for Campbell's Soup Co. and a FASAC member. "But I hope that they [FASB and the IASB] do it in a way that doesn't put companies through a lot of work that doesn't do all that much for investors."
If efforts to revamp financial statements appear duplicative, that's just the start. In the broader effort to rethink various aspects of financial reporting, work is under way at three (and possibly more) FASB committees, a new Treasury Department advisory committee, the Public Company Accounting Oversight Board (PCAOB), and the House Financial Services Committee.
"There are definitely too many cooks in the kitchen," says Marc A. Siegel, director of research for the Center for Financial Research and Analysis and a member of FASB's Investors Technical Advisory Committee, which was formed earlier this year. "There's way too much lobbying going on in Washington in an effort to influence accounting rules. I'm afraid this is turning into a turf war." That can sometimes be exacerbated by a combination of current events and politics, as when the recent crisis in the subprime market prompted the House Financial Services Committee to explore proposed changes to securitization accounting.
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