A word from accounting's powers that be

Strategic Finance, Feb, 2005 by Alan Levinsohn

The mind-set of financial reporting should ideally evolve from "minimum compliance" to "investor driven." This was an overarching theme from preparers, auditors, regulators, standards setters, and users of financial reports who made presentations at the American Institute of Certified Public Accountants' (AICPA) National Conference on Current SEC and PCAOB Developments in early December 2004.

"Are users receiving the information that we would want to have before making an investment decision--and is the information timely, complete, accurate, and transparent?" presenters asked and answered, according to a summary of the conference prepared by PricewaterhouseCoopers (PwC). Our financial reporting framework should continue changing from a "backward-facing, mixed-attribute model" to one that's flexible and dynamic and focuses on fair value, key performance indicators, and forward-looking information, PwC's report said. Standards should be "objectives oriented" and supported by good guidance, and preparers should adhere to the standard's intent instead of "engineering" around it.

Donald T. Nicolaisen, the Securities & Exchange Commission's (SEC) chief accountant, said financial reports should reflect current, past, and future changes so that investors will be informed about the relationship between risk exposures and company performance. Nicolaisen urged preparers, accountants, and auditors to improve the organization of reports, write them in plain English, and avoid boilerplate language. He also challenged preparers to initiate disclosures to obviate more SEC rule making. They should consider SEC rules the floor, not the ceiling, of financial reporting. (Nicolaisen's speech is located at www.sec.gov/news/speech/spch1206 04dtn.htm.)

Robert H. Herz, chairman of the Financial Accounting Standards Board (FASB), said the Board wants to improve and simplify U.S. accounting standards and achieve international convergence. Herz said he wants the FASB to move toward principles-based and objectivesoriented standards and away from "detailed rules, bright lines, and exceptions." But it's a difficult challenge because Sarbanes-Oxley is making preparers fearful of being "second-guessed by regulators, enforcers, the trial bar, and the business press." That, Herz said, "reinforces the demand" for rules-based standards. (Herz's speech is located at www.fasb.org/herz_aicpa_12-0704.pdf.) Staff members of the SEC addressed principles-based accounting standards in the Commission's July 2003 report to Congress required by Sarbanes-Oxley (this report is located at www.sec.gov/news/ studies/principlesbasedstand.htm).

It was clear from the speakers throughout the conference that internal control reporting under Section 404 of the Sarbanes-Oxley Act is weighing heavily on people's minds, according to PwC's summary. Collectively, everyone agreed that, in the early years of implementing Section 404, there will be difficulties as issuers and their auditors shine a spotlight on this complex yet fundamental area. For their part, users and regulators said that disclosure of one or more material weaknesses in internal controls shouldn't be a surprise and shouldn't necessarily be a harbinger of severe regulatory or marketplace reaction. But preparers must do their part to foster a measured and balanced response by ensuring that any material weakness disclosures are robust and transparent and provide readers with an understanding of the situation, the potential impacts, and a clear picture of remediation efforts already undertaken, in process, and planned.

Meanwhile, SEC staff reported that they're doing their part to move the eXtensible Business Reporting Language (XBRL) endeavor along. The Commission released a proposed rule, "XBRL Voluntary Financial Reporting Program on the EDGAR System" (www.sec.gov/rules/proposed/ 33-8496.htm), accompanied by a "concept release" titled "Enhancing Commission Filings Through the Use of Tagged Data" (www.sec.gov/ rules/concept/33-8497.htm). The comment periods for the proposed rule and the concept release ended November 1, 2004, and November 15, 2004, respectively. The SEC staff is currently evaluating comment letters that it received in response to the proposed rule and the concept release, developing internal capabilities for receiving and analyzing XBRL-formatted data, and learning more about XBRL.

XBRL promises to enable investors to pore through data more quickly and apply advanced analytics of financial reports more easily. Information that is tagged can be automatically searched, retrieved, and analyzed without errors commonly associated with manual data collection and analysis. Registrants would need to learn data-tagging concepts and related software tools, as well as keep current with taxonomy changes and software advances. At the general ledger level, XBRL would give auditors a tool for enhanced financial analysis, risk assessments, and additional internal control testing.

A number of speakers in addition to Robert Herz discussed convergence of U.S. and international accounting standards and expected the SEC to someday accept financial statements prepared in accordance with international financial reporting standards (IFRS) without requiring reconciliation to U.S. generally accepted accounting principles (GAAP), the PwC report noted. But no one at the conference would predict when that day might come.