|DANIEL J. NOLL,
CPA, is a technical manager in the American Institute of
CPAs accounting standards division. Mr. Noll is an employee of
the American Institute of CPAs. His views, as expressed in this
article, do not necessarily represent the views of the AICPA.
Official positions are determined through certain specific
committee procedures, due process and deliberation. |
JERRY J. WEYGANDT, CPA, PhD, is Arthur Andersen Alumni Professor of Accounting at the University of Wisconsin
Where is financial reporting heading? The 21st century holds many surprises, but the model for business reporting in the future may already have been created. A little more than two years have passed since the American Institute of CPAs special committee on financial reporting (the Jenkins committee) issued its report, Improving Business Reporting—A Customer Focus . In that short time, it has become apparent that some of the committees recommendations are critical and deserve the attention of everyone who has an interest in business reporting.
The Jenkins committee extensively interviewed investors and creditors—both important users of financial information—and heard good and bad news. The good news was that financial statements were an important component of the information users needed to make investment and credit decisions. The bad news was that financial statements apparently were not meeting some key information needs. In short, the users message was: "Dont scrap the financial reporting system; improve it."
Because of what it heard, the Jenkins committee made many recommendations to enhance financial reporting or, more broadly, business reporting. Its key recommendation was for standard setters and regulators to develop a comprehensive model of business reporting to better meet users information needs. (See the exhibit on page 61 for the proposed model.) To ensure the Jenkins committee recommendations were not left on the shelf to collect dust, the AICPA formed a financial reporting coordinating committee to follow up.
For now, standard setters and regulators have addressed, or are in the process of dealing with, many of the committees recommendations. For the future, momentum is building to act on its comprehensive model recommendation.
|Elements of the Jenkins Committee Business Reporting Model|
|Financial and nonfinancial data |
Standard setters took their first formal action on the proposed business reporting model in February 1996, when the Financial Accounting Standards Board released an Invitation to Comment (ITC), Recommendations of the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research . (The report by the Association for Investment Management and Research [AIMR], Financial Reporting in the 1990s and Beyond , is not covered in this article.)
The ITCs objectives were to (1) get respondents views on the recommendations and (2) generate information to help the FASB decide how best to address them. The ITC emphasized the Jenkins committees proposed comprehensive reporting model because the FASB considered it the most challenging of all of the recommendations. While some criticized the ITC as unnecessary since the Jenkins committee had already gone to great lengths to solicit users and preparers views, others believed the invitation was a wise first step to allow standard setters to hear directly from their constituents before proceeding.
The coordinating committee, sensing the ITC was not enough of a first step, thought all parties with a personal stake in business reporting should be brought together to discuss the merits of the proposed comprehensive model. In the spirit of the call made by Commissioner Steven M. H. Wallman of the Securities and Exchange Commission for the accounting profession to improve the relevance of financial reporting, the committee organized a business reporting symposium that was held in October 1996 (see JofA, Dec.96, page 14).
The symposium brought together approximately 100 users and preparers of business information, CPA public practitioners, academics, standard setters and regulators from the United States and Canada to discuss the elements of the proposed comprehensive model. Panelists from the user, preparer, standard setter and regulator communities gave their views on the model and answered audience questions. In addition, many of the attendees participated in breakout groups to decide what future courses of action, if any, should be taken on the proposed model.
The breakout groups proved to be the most useful part of the program because each group had representatives from a cross-section of interested parties. The groups were asked to focus on three broad questions:
- What are the major agreements and disagreements on the nonfinancial information element in the proposed model?
- What are the major agreements and disagreements on the forward-looking information element in the proposed model?
- What are the possible next steps with respect to the information proposed in the comprehensive model?
The questions emphasized the nonfinancial and forward-looking information elements because they are widely recognized as the most challenging disclosures in the proposed model.
WHAT DID WE HEAR?
Perhaps the most agreed-on point was that nonfinancial and forward-looking information is critical to assessing opportunities and risks; in other words, users of business information need such information to make informed decisions. In addition, almost all participants agreed on the importance of customers being satisfied with the financial reporting product. While it may appear obvious to some, this consensus proved to be ground-breaking.
Market- vs. regulation-driven data. No standards! Let the market decide what information in the proposed model is necessary. Most participants believed standard setters should not develop specific reporting standards for nonfinancial and forward-looking information now. Best reporting practices (disclosures that best meet users needs) should be developed on an industry-by-industry basis and encourage (but not require) entities to disclose the data users need to make informed decisions. From there, the marketplace would reward companies providing the best information. Such a methodology would give entities the flexibility to report certain kinds of nonfinancial and forward-looking information. This best practices approach is similar to how entities are adopting the report on internal controls of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. However, the profession needs to provide some form of leadership and direction to ensure that users get the critical information they need.
Conceptual framework. Symposium participants debated about the need for a conceptual framework for reporting nonfinancial and forward-looking information.
Pro. Those favoring a conceptual framework believed it would provide structure and consistency to disclosures—reasons similar to why the FASB developed a financial reporting framework. Supporters of a conceptual framework believed the FASB would have a legitimate claim to being involved with the information, which would stress the importance of the disclosures and spur organization and entity involvement in the reporting process. Finally, supporters believed a framework would help less sophisticated entities decide whether they should report certain nonfinancial and forward-looking data.
Con. Those opposing a framework said it would be too difficult to develop a broad concepts statement that would cut across all industries because nonfinancial and forward-looking information is industry-specific. They thought using a bottom-up approach would be better (develop best practices for an industry or industries and decide later whether there should be a framework). Regardless, some of those opposed feared any kind of standard—even a conceptual framework—might lead to boilerplate disclosures and inhibit the disclosure of "good" information.
Form coalition. One attendee compared current reporting practices to a childs slinky dog toy. The gap is widening between the front end of the slinky (best reporting entities that already disclose much of the information in the proposed comprehensive model) and the back end (other entities that comply with only minimum disclosure requirements). Those entities at the back end may be there because they do not understand how the marketplace uses this information to allocate resources.
Practically all symposium participants favored forming a coalition to develop best reporting practices on an industry basis. While developing them, the coalition should become more knowledgeable and be in a better position to decide the best way to meet users critical information needs. Such a coalition might include representatives from the organizations that cosponsored or participated in the symposium, including the American Accounting Association, the AICPA, the AIMR, the Canadian Institute of Chartered Accountants, the FASB, the Financial Executives Institute, the Institute of Management Accountants, Robert Morris Associates, the SEC and the Business Roundtable.
Eliminate redundancies. Many participants agreed that the current reporting model provides entities with the opportunity to disclose much of the information in the proposed model; in fact, some best reporting companies already disclose such information through annual reports, press releases, fact books, conference calls with analysts, etc. However, many also agreed that current disclosures are a mishmash of data that are not presented consistently or effectively. As a result, it was suggested that a working group be formed to identify redundancies in SEC and generally accepted accounting principles literature and propose ways to streamline disclosures in the entire reporting package.
THE NEXT STEPS
Some of the best minds in the accounting profession and the user community came together at the symposium and overwhelmingly agreed that the information in the proposed comprehensive model was critical to informed decision making. The profession would be irresponsible if it ignored that belief and did nothing to ensure that users get that critical information—especially nonfinancial and forward-looking data.
Who should lead the coalition of interested parties, described earlier, to develop best reporting practices on an industry-by-industry basis? Because it has the resources, we believe that the private sector—namely the FASB—should be the leader. The FASB needs the strong, vocal support and cooperation of the SEC. Only when there is cooperation of this sort will any real progress be made.
A word of caution. Any coalition of volunteers with varying interests requires substantial time commitments from those volunteers (who may not be recognized by their employers for their contributions) and risks running out of gas before it achieves its objectives. That risk could be reduced by having the FASB lead the coalition and by considering a rotation of volunteer members.
While the coalition would spend much of its time studying industry-specific information, we believe the FASB could leverage the coalitions work and explore whether the board has a basis for developing a conceptual framework for nonfinancial and forward-looking data. The coalition should determine the nonfinancial and forward-looking information already provided by best reporting companies and ask users if other important disclosures have been left out. The coalition would do well to use the expertise of such groups as the AICPA business and industry committees, the AIMR corporate information committee and other industry accounting and reporting groups. As it tackles an industry, the coalition should learn better ways to ensure user needs are met.
Standard setters, regulators and other organizations have limited resources to carry out their current responsibilities, much less fulfill new ones. It is a question of priority. The future ability of CPAs to meet customer needs, and the ability of all users to get high-quality, relevant information, deserves a high priority.
As one symposium participant noted, change, no matter in which direction, will be opposed by human nature. Another participant said the road to change would be bumpy because not everyone is pointed in the same direction or has the same motives. By moving forward on the issues addressed in this article, however, all interested parties are likely to receive a significant payoff.