Letter from the chairman of the American Institute of CPAs special committee on financial reporting.

The American Institute of CPAs special committee on financial reporting now has completed its work and its recommendations have been made. This has been a singular effort by the AICPA involving years of work by committee members and staff from the AICPA, accounting firms, the Financial Accounting Standards Board and the Securities and Exchange Commission, as well as the time and thoughtful input of a wide spectrum of users and user groups and preparers and preparer groups. I would like to thank all the people involved for their contributions to improving the usefulness of business reporting.

ABOUT THE COMMITTEE

The AICPA formed the committee in 1991 to address concerns about the relevance and usefulness of business reporting. The committee's charge was to recommend (1) the nature of information that should be made available to others by management and (2) the extent to which auditors should report on the various elements of that information.

The committee's work is part of the AICPA's broad initiative to improve the value of financial information and the public's confidence in it. The broad initiative seeks to:

* Enhance the utility of business reporting.

* Improve the prevention and detection of fraud.

* Assure the independence and objectivity of the independent auditor.

* Discourage unwarranted litigation that inhibits innovation and undermines the profession's ability to meet evolving financial reporting needs.

* Strengthen the auditing profession's disciplinary system.

Just as successful businesses align the features of their products and services with the needs of their customers, so, too, should the providers of business reporting align the features of business reporting with the information needs of those who use it. Recognizing this, the committee based its recommendations on an unprecedented indepth study to learn directly from users of their information needs. The committee also recognized the significant costs that can result from business reporting, and it also considered cost-benefit issues in developing recommendations.

The committee is not a standard-setting body. It offers its recommendations for the consideration of all those who have an interest in furthering the cost-effective quality of business reporting. If subsequently pursued by standard setters or regulators, the recommendations will be subject to full due process.

The committee worked closely with the FASB, the SEC and other standard setters and regulators during the course of its work. From observing the committee's meetings, to providing staff, to offering comments and insights on issues, the FASB has been involved. The committee's activities have been complementary to the standard-setting and regulatory process. The work of the committee should help standard setters and regulators establish future agendas and set priorities for projects that will be the most important for improving business reporting.

KEY POINTS ABOUT THE COMMITTEE'S WORK

It is not possible to summarize briefly the committee's work or its recommendations--that is the purpose of the report that accompanies each AICPA member's copy(*) of this issue of the Journal of Accountancy. However, following are six key points that help one to understand the committee's work and its results:

1. Business reporting serves a critical role in supporting effective capital allocation. In many respects, it serves the role well, providing those who use it with essential information. However, profound, accelerating changes affecting business threaten the continued relevance of business reporting. To stay relevant, it must change in response to users' evolving needs for information.

2. To meet users' changing needs, business reporting must

* Provide more information about plans, opportunities, risks and uncertainties.

* Focus more on the factors that create longer term value, including nonfinancial measures indicating how key business processes are performing.

* Better align information reported externally with the information reported internally to senior management to manage the business.

3. Users believe that auditor involvement with financial information is essential. To serve its customers better, the auditing profession should prepare to be involved with all types of information in business reporting to the extent companies and users decide such information is necessary.

4. Because business reporting is not free, improving it requires considering the relative costs and benefits of information, just as costs and benefits are key to determining the features included in any product. Undisciplined expansion of mandated reporting could result in large and needless costs. In forming recommendations, the committee adopted a flexible, cautious and practical approach, proposing ideas supported by users that would result in useful information while recommending constraints on disclosure when costs could be significant.

5. Participants in the business reporting process must do a better job of anticipating change by

* Focusing on users' information needs and finding cost-effective ways of better aligning reporting with those needs.

* Developing and maintaining a comprehensive model reflecting the kinds of information users need. (The committee has designed and illustrated such a model.)

* Adopting a longer term focus by developing a vision of the future business environment and users' future needs for information.

6. The current legal environment discourages companies from disclosing forward-looking information. Companies should not have to expand the reporting of such information until there are more effective deterrents to unwarranted litigation.

THE CHALLENGE OF CHANGE

Companies everywhere are learning that change, although tough, is essential to survival. Process reengineering and continuous improvement are becoming a way of life for many. They are managing for change by building it into their thinking and processes. Indeed, many are using change to their strategic advantage. Business reporting, like business itself, must change to survive, to keep pace with evolving needs for information and to support the capital allocation process. The changes called for by the committee's recommendations will require a supportive regulatory, business and legisative environment. Thus, the committee is pleased that the AICPA board of directors has established a coordinating committee to assist all constituents involved in the standard-setting and reporting processes in seriously considering the committee's recommendations and planning for change in business reporting.

REACTIONS TO THE COMMITTEE'S WORK

One thing the committee learned early in its work is that issues related to business reporting elicit strong views--and often conflicting ones--even from those representing similar constituencies of the reporting process. For example, not all users are of a common mind on an issue, nor are all preparers. Without question, the issues studied by the committee were controversial. Thus, when the committee asked for comments on its report, as summarized in the following Focus On pages, it recognized there would be disagreement by some with certain of the committee's recommendations. Some commentators like forward-looking information; some do not. Others like the idea of core-noncore display; others do not. And over and above the specific recommendations is the fact that change--almost any change--is difficult, as discussed above.

The committee recognized these disagreements and considered the pros and cons, the benefits and costs, of each area. It believes that each of its recommendations has sufficient merit to warrant additional consideration by standard setters and regulators. It will be essential that these standard setters and regulators consider in a full due-process environment the matters raised by the commentaries that follow.

(*)For ordering information on the committee's publications, see page 108.