Management Accounting

Fixing the Financial-Reporting Supply Chain

Despite improvements in the process of financial reporting, financials are just as hard to understand, a new survey finds.
Alan RappeportMarch 6, 2008

The world’s accountants are concerned about the usefulness of financial statements, a tendency for over-regulation, and the costs of converging to international standards, according to a new report by the International Federation of Accountants.

The IFAC survey , which polled 341 people around the world responsible for various parts of the financial reporting “supply chain,” finds that financial reports have become less useful due to their complexity and the burdens of compliance, which often cause “the essence of the business” to be overlooked. Respondents included accountants, managers, directors, auditors, regulators, and standard setters.

“Despite the strengthening of the financial-reporting process and the many improvements made, there is still much to be done to meet the needs of investors and other stakeholders,” said Norman Lyle, chair of the Financial Reporting Supply Chain Project.

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Many of the concerns expressed in the report echo criticism that regulators such as the Securities and Exchange Commission are already tackling, such as making financial statements more readable and using technology to allow individuals to compile and format information on their own.

The survey found that most of those involved with financial reporting have been pleased with new efforts to improve the process but are worried about some negative side effects. For instance, improved corporate governance has made for better risk management, internal controls, and transparency. However, many felt that some companies comply with the “letter of the law” rather than the spirit. Others felt that some regulations, such as Section 404 of the Sarbanes-Oxley Act, represented a “knee-jerk” reaction to corporate scandals that has proved costly and burdensome.

The costs of converting financial statements to International Financial Reporting Standards also remain a concern. Although most agree that IFRS is a good thing because it creates a “global level playing field” and better transparency, many say the transition is costly and complicated. Among the greatest concerns are that the transition is happening too fast, that there seem to be few IFRS experts, and that the universal standard is overly complex despite its promise of greater simplicity.

One area that IFAC respondents were especially pleased with was audit quality. They said auditors have been doing a better job during the last five years as they have become more independent from companies and more focused on risk. Improved oversight of auditors and better standards have also led to higher quality. Respondents still found areas where auditing could improve, though. They griped about the limited choice of audit firms, boilerplate audits, and a lack of room for auditors to make professional judgments.

IFAC, which gives guidance on international accounting issues, will use the survey results to address accounting’s ongoing challenges, said CEO Ian Ball.

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