What's next for the business reporting model?

"What you are doing today is remarkably important." Steven M. H. Wallman, a commissioner of the Securities and Exchange Commission, used these words to open the Business Reporting Symposium held in October in New York City, cosponsored by the American Institute of CPAs and other organizations. Wallman told financial statement users, preparers and regulators that "we can't just fall back on the idea that the United States has the best financial markets. Because things are constantly changing, our task is to make them better."

Wallman addressed nearly 100 representatives from public accounting, industry, academia and Wall Street, plus regulators from the United States and Canada, who were meeting to consider the next steps in developing a comprehensive business reporting model following the 1995 report by the AICPA special committee on financial reporting (the Jenkins committee), Improving Business Reporting-- A Customer Focus.

Wallman heralded the explosion of foreign capital coming to the United States and warned that "the notion that we are an island and can have our own financial reporting standards is wrong." He said the current financial reporting model was not working as well as it might and the one proposed by the Jenkins committee was worthy of review to see if it could provide users with better information. More specifically, he said the underlying model needed to be reexamined so users would have the information they needed to "make a better allocation of resources."

Wallman said that while some have suggested the SEC take the leadership role in getting the Jenkins committee model adopted, in reality, "the private sector will have to do it." He said the SEC could be a leader, but it needed help from organizations such as the Financial Accounting Standards Board and the AICPA.

On the FASB agenda?

FASB member Joseph V. Anania reported on responses to the board's invitation to comment on the Jenkins committee report. He said the FASB had issued the invitation as the best way to begin due process because about 70% of the report's recommendations were directed at the board. The FASB is expected to decide by April 1997 whether to place a project on its agenda dealing with the business reporting model.

Of the 53 responses the FASB received, 50% were from financial statement preparers, 30% from auditors, 8% from statement users and the remaining 12% from others, including academics. Anania said preparers strongly opposed broadening the FASB's role to cover nonfinancial information in a comprehensive business reporting model. Preparers thought the FASB should concentrate its efforts on financial statement reporting issues.

In their comments, auditors from both small and large firms slightly favored a broader FASB role, Auditors who did not support a larger role said it was premature for the FASB to move ahead. Disclosure effectiveness should come first. Comments received from financial statement users were mixed.

Users and preparers: two perspectives

To help participants better understand the concerns of financial statement users and preparers, the symposium included two panel discussions where these groups offered their views.

Users. Speaking for users, Gerald I. White, of Grace & White, investment counsel, said there was no single user decision-making process. Analysts, he said, want the data they need to estimate a company's core earnings themselves, not a preparer or auditor estimate. "Projections are the analyst's job. Management's job is to provide data on the range of future outcomes."

Another user, Nancy L. Young of Young Scanland Associates, who consults with companies on financial disclosure practices, said disclosure was a competitive tool with incredible power to help companies raise capital. She compared the current financial reporting system to an overgrown garden that desperately needed weeding and pruning. In Young's view, the comprehensive reporting model is "one blueprint for redesigning the garden." Panelist James L. Gertie of the Bank of Boston said the current reporting model was inefficient and what was needed were flexible standards that allowed disclosures to be adapted as situations arise.

Preparers. Representing preparers, John J. Perrell, vice-president of financial standards and policy for American Express, said existing generally accepted accounting principles and SEC disclosure requirements already covered many elements in the comprehensive business reporting model. In advocating that nonfinancial information be kept out of financial statements, Perrell emphasized the easy availability of other sources of such information, including companies' Internet Web sites. Another panelist, Robert B. Wells, executive vice-president and chief financial officer of the Bank of Montreal, said investors were more interested in finding out how management managed the company.

Recommendations

Symposium participants split into small groups to consider the handling of nonfinancial data and forward-looking information and what steps should be taken on the proposed comprehensive business reporting model, particularly if information disclosures should be governed by reporting standards.

The task of summarizing the results fell to Paul Kolton, former chairman of the American Stock Exchange, who identified some broad themes that came from the breakout groups. Kolton said there was a consensus that the existing SEC framework actually provided most of what preparers and users needed and even what the average investor needed. There was a strong feeling that the SEC, the FASB, the AICPA and others might be persuaded to get together to focus on omitting redundancies and making data more effective.

Kolton reported that most participants believed a reporting model "does not lend itself to a standard-setting process." Any guidance should come from a broad-based, high-level group. There was a feeling that guidelines would be helpful, but the real issue was how many and how detailed. There also was some concern that appropriate flexibility be built into the process. Voluntary programs were preferred.

What regulators heard

To conclude the symposium, a panel of standard setters and regulators, including representatives of the FASB, the AICPA, the SEC and the Canadian accounting standards board, summarized what they had heard from participants and how they might act on it. G. Michael Crooch, chairman of the AICPA accounting standards executive committee (AcSEC), said the symposium confirmed several points for him, including that users, preparers and investors did not want a great deal of change. For now, Crooch said he was still uncertain how AcSEC might participate in the process of implementing the conclusions of the Jenkins committee report.

Peter D. Chant, chairman of the Canadian standard-setting body, told participants that what seemed to be wanted was "nonstandard standards." He said he had trouble understanding why a standard-setting approach could not work in implementing the Jenkins committee report. Chant's U.S. counterpart, FASB Chairman Dennis R. Beresford, said he still agreed with the report's conclusion that "a lot is right with financial reporting" and that many of the financial statement related issues the FASB was now working on were key to improving the existing business model.

SEC Chief Accountant Michael H. Sutton, himself a member of the Jenkins committee before joining the SEC, said he was pleased the ideas presented in the report had been judged to have enough merit to justify the attention they had received. Sutton said he was struck by the high degree of consensus about the importance of nonfinancial and forward-looking information to investors and creditors as well as by the lack of consensus about what should be done and by whom. Echoing SEC Commissioner Wallman, Sutton said he believed that if further progress was to be made, "there will need to be some leadership from the private sector." Any changes in our disclosure system, Sutton said, would need to "be tested against our simple mission--that is, how the changes benefit the interests of investors." Sutton concluded that meeting such a goal would "require reasonable vigor and candor in the system, which in turn would provide confidence to the capital markets that the information would be relevant and reliable and would provide the degree of comparability investors expect and deserve."

Full and fair hearing

During the symposium, Jerry J. Weygandt, chairman of the AICPA financial reporting coordinating committee and Arthur Andersen Alumni Professor of Accounting at the University of Wisconsin-Madison, said his committee's mission was to get a "full and fair hearing" on the Jenkins committee recommendations. Events such as the symposium were helpful in getting the recommendations in front of standard setters. In his concluding remarks at the symposium, Weygandt said he was looking forward to the follow-up discussions that would come in the next few months. We have to, he told participants, look for a process by which we can move the business reporting model forward.

--Peter D. Fleming