SEC chairman calls for modern financial reporting.

Steven M. H. Wallman, commissioner of the Securities and Exchange Commission, told participants of the American Institute of CPAs annual conference on SEC developments that he was concerned methods of financial accounting and disclosure did not meet modern business needs. The commissioner said the accounting profession must work with the SEC to develop a strategic plan to assure the "continued utility and integrity of financial reporting."

Wallman, who was sworn in as commissioner last July, commended the work of the AICPA's special committee on financial reporting for opening the door to emerging issues of financial reporting. He also said the Institute's special committee on assurance services would provide an important framework for analyzing trends in financial reporting and the role of the auditor in the next century. But Wallman said more is needed to keep U.S. financial disclosure and accounting at the frontier.

New approaches needed for the new market

In recent years, said the commissioner, carrying costs of assets on corporate balance sheets have become more difficult to recognize, resulting in balance sheets that bear little resemblance to the companies' true financial positions. "Whole categories of assets are poorly measured through historical cost accounting," said Wallman. "More important, whole categories of assets are not recognized at all." The commissioner said companies must implement changes carefully to avoid a recognition and measurement burden that could outweigh the benefits of disclosure. But, said Wallman, failure to make changes would severely limit the purpose of the balance sheet.

Timely financial reporting, said the commissioner, is another area of concern. Annual audits and quarterly reports do not keep pace with today's rapid changes. "Product cycles have shortened, and products and whole companies become obsolete more quickly now than ever before. For example, certain derivatives have significant monthly, weekly or daily market fluctuations that can cause material shifts in corporate portfolio values, and imperil a company's entire equity capital in a matter of a few months or less." The commissioner said he is not suggesting a system of monthly, weekly or daily audits and reports to the SEC but that the current system, in place for decades, puts companies at great risk.

"I also believe the concept of the company is changing," he said, noting that there are increasingly more public companies with multiple public subsidiaries, each with joint ventures, licensing arrangements and other affiliations that form and dissolve in months or weeks. He warned that generally accepted accounting principles and SEC reporting requirements are not keeping pace with changes in company structure, raising difficult questions about who is the issuer of certain types of securities.

What is at risk?

Wallman said competitors frequently have far more information about companies than the average public investor, and analysts, banks, suppliers and other institutions frequently demand and get more meaningful, real-time information from management. The commissioner warned that the public disclosure system could become two-tiered, with those having the resources to obtain relevant financial information on the top and the public investor on the bottom. "With a two-tiered system we would lose our global advantage," said Wallman. "I would hate to lose that advantage because we were unwilling to think about and plan for the future."