SEC advisers recommend financial reporting reforms

Internal Auditor, Oct, 2008 by T. McCollum

A U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) advisory committee has issued recommendations to improve financial reporting for investors. The final report of the Advisory Committee on Improvements to Financial Reporting, chaired by Robert Pozen, calls for reforms to corporate reporting and accounting standard-setting processes. "Our recommendations would make financial reports more useful to investors--with clearer guidelines, fewer exceptions, and greater focus on really important information," Pozen said at a press event announcing the report in Washington, D.C.

[ILLUSTRATION OMITTED]

To make financial reports easier to understand, the committee recommends that companies include a short executive summary at the beginning of their annual reports describing the main aspects of the business and its key performance metrics. Advisers also recommend that companies use their Web sites to provide summary information with hyperlinks to more detailed information.

Because investors are the primary users of financial reporting information, the advisers recommend increasing investor representation on the Financial Accounting Standards Board (FASB) and Financial Accounting Foundation and creating a forum to discuss pressures on the financial reporting system. The committee also calls on the FASB to increase field work for proposed standards and formalize post-adoption reviews of new standards and periodic reviews of existing standards.

Along similar lines, advisers call for standard-setters to change their approach to designing standards. The committee supports the FASB's project on financial statement presentation and favors a focus on the nature of the business activity over industry-specific guidance in authoritative literature. However, advisers urge the FASB to take "a judicious approach" to the contentious issue of expanding the use of fair value accounting. Although the report acknowledges the complexity of the current system that mixes historic cost and fair value attributes, advisers say that it would help investors for companies to portray the different sources of changes in their income, such as by distinguishing cash receipts from unrealized changes in fair value.

Regarding interpretive guidance, the SEC advisers support the FASB's efforts to codify all authoritative accounting literature into one document. They also recommend a clearer delineation of responsibility for interpreting accounting standards, with the FASB leading on broad issues and the SEC leading on registrant-specific issues.

On the contentious topic of financial restatements, the committee recommends increased correction of accounting errors and more disclosures about those corrections to investors. However, advisers warn that such corrections should not automatically result in financial restatements for prior years. Instead, such restatements should be undertaken to correct accounting errors that are material to current investors, the committee advises.

The SEC advisory committee's full report is available on the commission's Web site, www.sec.gov.

Audit Committees and CFOs Concerned About ERM Data Volume Poses Litigation Problem IAASB Sets Three-year Work Plan GRC Tools Provide Greater Risk Visibility

ILLUSTRATIONS BY TIMOTHY COOK