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The CPA Journal symposium on recommendations for improving business reporting.

An examination of the AICPA Special Committee's report

The first of two long-awaited reports of the AICPA Special Committee on Financial Reporting (Special Committee) was distributed in early October 1994 to all members of the AICPA. (It was included with the October issue of the Journal of Accountancy.) This first report, Improving Business Reporting--A Customer Focus: Meeting the Information Needs of Investors and Creditors, is 20 pages in length and is in the nature of an executive summary. The remaining 100,000 or so of the initial 450,000 copies printed will be widely distributed throughout the business and professional communities. According to Special Committee chair Edmund L. Jenkins, this is the first time a special report of this kind has received such a broad distribution. Obviously, the AICPA believes the report is a landmark event warranting maximum exposure to all members.

The second report, some 200 pages in length, gives greater details and, most importantly, a comprehensive example of the Special Committee's recommendations. Copies of this report are being distributed on a more limited basis to standard setters, regulators, professional and business organizations, state CPA societies, and the like. The report was released on December 1, 1994.

On October 3, 1994, The CPA Journal held a symposium on the recommendations as presented in the first report. Moderator James Don Edwards, professor at the University of Georgia, led the discussion among a distinguished group of panelists representing many of the groups that will be affected by the recommendations.

Edmund L. Jenkins, chair of the Special Committee, opened the discussion with an overview of the report and an explanation of the process the Special Committee followed in reaching its conclusions.

The other panelists were then given the opportunity to make an opening statement and explain their interest in the recommendations. Patricia McConnell, a managing director of Bear Stearns & Co. and member of the Board of Governors of the Association for Investment Management and Research (AIMR) and past chair of its Financial Accounting Policies Committee, spoke first, followed by Keith E. Lawder, Senior Vice President/Group Executives for Business Banking at Wachovia Bank of Georgia and member of the Accounting Policy Committee of the Robert Morris Associates (RMA); Kenneth J. Johnson, Vice President and Controller and Director of Internal Audit of Motorola Corporation and member of the Committee on Corporate Reporting of the Financial Executives Institute (FEI); Judith H. O'Dell, shareholder of Beucler, Kelly & Irwin, Ltd, CPAs and immediate past chair of the Technical Issues Committee (TIC) of the PCPS; Dan L. Goldwasser, partner of the law firm of Vedder Price, Kaufman, Kammholz & Day and chair of the American Bar Association Committee on Law and Accounting; Robert J. Sack, professor of business administration at the University of Virginia and a former chief accountant of the Enforcement Division of the SEC; and Dennis R. Beresford, chair of the Financial Accounting Standards Board.

A question-and-answer period involving the panelists and the audience of invited guests followed.

An accompanying sidebar presents further background on the panelists and excerpts of their remarks giving their particular points of view on the Special Committee's recommendations.

About the Special Committee's Report

The recommendations took over three years to produce and are presented in a report a mere 20 pages in length. The recommendations are not revolutionary. They preserve the historic cost model as it presently exists in its hybrid form; they do not seek preferability answers on some tough accounting issues (e.g., purchase v. pooling or various measurement methods where current practice allows alternative approaches). They even go so far as to suggest to the FASB that it not work on certain projects such as a value-based accounting model or forecasted financial statements.

However, as the symposium revealed, the recommendations are not without controversy nor should they be taken lightly. They have the potential for changing the fundamental way in which financial reporting is developed and implemented. At the heart of all this was the revelation to the Special Committee as articulated at the Symposium by Robert Sack, "It's the user, stupid."

In his remarks, Ed Jenkins took time to explain this "customer" focus of the Special Committee's activities. It narrowed its focus to the investor and creditor as the principal customers of financial reporting. Said Jenkins: "Our study was an unprecedented in-depth work, to learn directly from users how they use information to make investment and credit decisions."

It is this customer focus that will create fundamental changes in the way standards are set.

Business Reporting Replaces Financial Reporting

Another fundamental change the recommendations seek is to broaden the reporting model to more than just financial statements and financial information. As a step in this transformation, the Special Committee recommends the substitution of the phrase "business reporting" for what previously has been referred to as "financial reporting." Since its recommendations go into nonfinancial disclosures, the Special Committee concluded a broader label was needed. The report does not explain whether the term "business reporting" would apply to non-business entities such as not-for-profit and governmental enterprises.

Jenkins stressed that business reporting, as the Special Committee sees it, is built upon information as known to the management of the company that will help users with capital allocation decisions.

The Special Committee's Recommendations

Exhibit 1 contains an outline of the recommendations of the Special Committee. Obviously all of these recommendations were not addressed at the Symposium nor was there any intent to do so. A number of them were addressed by several of the panelists or by questions from the audience. These recommendations and related comments follow.

Standard setters should develop a comprehensive model of business reporting. The elements to be included in the model suggested by the Special Committee are shown in Exhibit 2. Much of the information in the model is designed to replace, and not be additional to, information for public companies in their filings with the SEC. Non-public companies would not have the burden of producing all this information if it is not needed. In this latter case, the decision as to which elements to be included in reports would be a matter of negotiation between users and preparers.

Jenkins feels the business reporting model is the single most important recommendation of the Special Committee. While existing models are useful, too much of the focus is on financial statements. The use of the model would put the focus on the broad range of user information needs. The model would provide a better integration and alignment of information in a comprehensive document.

Pat McConnell sees the model as a call to pull together all the existing requirements of registration statements, annual reports, proxy statements etc., into one comprehensive package. To her, it is a very logical step to rationalize an increasingly complex, overlapping and interrelated set of rules.

She did however indicate some problem with the concept of flexible reporting. The concept of flexible reporting applies mostly to non-public companies as the SEC will be the primary force in determining the extent of public reporting. Her concern is that if companies are not regularly required to provide certain information, management will not set up systems to gather it. At the point in time where the information is required, management will argue it cannot be provided in either a timey or cost-efficient manner. Ultimately this could lead to a loss of information.

Keith Lawder agreed with the concept of flexible reporting. In his view, the concept of different information for different users partially addresses concerns about privacy and competitive information as well as potentially unnecessary costs in providing additional information to users with lesser requirements.

Report separately the effects of core and non-core activities and events, and measure at fair value non-core assets and liabilities. This recommendation is based on the Special Committee's observation that many users adjust historical statements to exclude the effects of unusual and non-recurring activities and amounts. While agreeing that core earnings is a very important concept to analysts, McConnell suggested that the FASB should not address this matter as an agenda item at this time. Accountants have tried to define net income for over 50 years and have failed. She does not believe standard setters can define net earnings in a manner that will satisfy all the people all the time. As an alternative, management should be encouraged to provide as much information about non-core income as they do in providing information about non-core expenses such as restructuring charges. In that way analysts and investors can decide for themselves what is core and what is non-core and adjust their models accordingly.

McConnell also indicated she didn't quite understand why the Special Committee was recommending fair value accounting for the assets and liabilities of non-core activities. She pointed out the Special Committee has recognized that users generally oppose replacing today's cost-based accounting model and it is unclear to her why some assets and liabilities would be based on fair value and others would not.

Ken Johnson agreed with her and went on to say that hc didn't know what a non-core asset was. His company had a great deal of difficulty in attempting to determine what is core v. non-core. What may be non-core this year, may be core next year.

Jenkins during the question and answer period explained the Special Committee's thinking. His response also revealed why the Special Committee did not feel a fair-value based accounting model was especially helpful. According to Jenkins when users, either investors or creditors, value a business they don't seek values of the operating assets. They are more concerned with the earnings those operating assets can generate. The value of these assets is obtained by applying a multiple of some kind to core earnings. To complete the entire valuation, the fair value of the non-core net assets must be added to the computed value.

Improve quarterly, reporting by reporting on the fourth quarter separately and including business segment data. This is a two-pronged recommendation. The first is that there be separate reporting on the fourth quarter that would include management's analysis of fourth quarter activities including year-end adjustments. The second is that all quarterly reporting include segment data.

Jenkins noted that the Special Committee has suggested that all information, both within and without the financial statements, be presented on segment lines. He stated that this is where differing opportunities and risks exist and is what users are after.

McConnell called these two recommendations the most important in the report. She also took some comfort in the fact the Special Committee referred to quarterly reporting and did not suggest some fallback to reporting less frequently such as semiannually.

A somewhat different view was taken by Lawder. While acknowledging the importance of segment reporting, he noted that lenders are more interested in the legal entity and its ability to generate earnings and cash flows.

While neither Johnson nor his company had any major problems with the recommendations on segment reporting, he reported concern among other members of the FEI. Some very large companies report only one segment.

While working with the Special Committee, a member of the FEI task force applied the suggestions of the Special Committee to his own company's financial statements and found that each segment would require 61 pages in the annual report. Since there were five segments, there would be over 300 pages of financial data.

Cost Considerations

Prior to issuance of the final report of the Special Committee, organizations such as the FEI were reported in the financial press as having serious reservations about the cost of implementation. Dan Goldwasser expressed similar concerns as a member of the American Bar Association's Committee on Law and Accounting. It looked to Goldwasser, at least in the beginning, that there was more emphasis being made on users' needs and less on the costs to companies that would have to provide this information. "I have never met an analyst who would not welcome more information. I have never met a corporate controller who was ready to provide that additional information," Goldwasser said.

The final report goes at great length to express the concept that flexible reporting is based upon only providing expanded information where there is a cost benefit to the preparer and the user. This perhaps will be the litmus test for the success of "business reporting" in the private reporting sector.

Where Do We Go From Here?

Panelist Beresford indicated clearly that the recommendations of the Special Committee will receive serious and in-depth consideration by the FASB and its oversight committee. The most significant question that must be answered will be FASB's and the business community's response to recommendations that go beyond financial statements and traditional financial reporting.

Will FASB expand its agenda to begin to establish standards for nonfinancial information? Panelist Beresford in considering this question mentioned the activities of FASB's sister organization on the governmental side, the Government Accounting Standards Board. GASB has had a major effort underway for several years on what is referred to as service efforts and accomplishments. The governmental reporting sector has recognized that not only does the amount of money spent matter, but also what were the effects or accomplishments of having spent that money. Beresford also pointed out that the Board in the 1970s had a project dealing with information outside the financial statements. At that time interest in the project was not there. Observers, said Beresford, advised us "to stick to our knitting."

Judith O'Dell offered another approach to the development of flexible reporting options by describing a recent project of the PCPS Technical Issues Committee (TIC). TIC formed a joint task force with RMA to produce the Business Credit Information Package (BCIP). O'Dell indicated how she was struck by how many of the recommendations of the Special Committee are right on with just by instinct. The BCIP is an information package, both financial and nonfinancial, partially completed by the borrower, that includes financial statements prepared using GAAP, but with selected disclosures. TIC worked with RMA to search for and eliminate less relevant disclosures. This package is a vehicle for the company and a prospective lender (i.e., user) to agree on the level of financial reporting and auditor involvement.

However, the most important player has not been heard from. When a representative of the SEC was asked to attend the Symposium, he declined on the ground that the SEC would be studying the matter for several months.

There are several scenarios that could take place. One would be for the SEC to adopt the recommendations and amend Reg. S-K and the requirements of various forms etc. This would require no action on the part of the FASB.

Another scenario would be for the FASB to adopt requirements for supplementary information for public companies incorporating the Special Committee's suggestions. The SEC could then drop S-K requirements since all the information would have to be disclosed whenever audited financial statements are required. However, the SEC would lose some of its flexibility and control if it adopted this approach.

Of course, the FASB could begin to expand its role to require nonfinancial and expanded disclosures as set forth in the recommendations, and the SEC do nothing. This is unlikely to happen since it would require companies to produce almost the same information in two different formats. So without some action on the part of the SEC, the model goes nowhere for public companies.

For non-public companies implementation of the recommendations will have to depend on market forces. Under the theory of flexibility, the add-on modules of information would be optional and presumably only presented at the request of users. If the additional information is not worth the cost to prepare, there is little likelihood the recommendations will "catch on" in the non-public sector.


Improve the Types of Information in Business Reporting

* Standard setters should develop a comprehensive model of business reporting indicating the types and timing of information that users need to value and assess the risk of their investments.

* Divide reporting into elements that address the broad range of users' needs for information.

* Allow for flexible reporting.

* Provide forward-looking information as well as historical information.

* Report on each business segment.

* Focus on the information that senior management uses to manage the business.

* Focus on measurement.

* Balance the costs and benefits of business reporting.

* Improve understanding of costs and benefits of business reporting, recognizing that definitive quantification of costs and benefits is not possible.

Improve Financial Statements

* Improve disclosure of business segment information.

* Address the disclosures and accounting for innovative financial instruments.

* Improve disclosures about the identity, opportunities, and risks of off-balance-sheet financing arrangements and reconsider the accounting for these arrangements.

* Report separately the effects of core and non-core activities and events, and measure at fair value non-core assets and liabilities.

* Improve disclosures about the uncertainty of measurements of certain assets and liabilities.

* Improve quarterly reporting by reporting on the fourth quarter separately uand including business segment data.

* Other recommendations related to financial statements.

* Standard setters should defer attention to issues that have low priority according to current evidence of users' needs.

Value-based accounting model. Accounting for intangible assets, including goodwill. Forecasted financial statements. Accounting for business combinations. Alternative accounting principles.

* Standard setters should search for and eliminate less relevant disclosures.

Improve Auditor Involvement

* Allow for flexible auditor association with business reporting, whereby the elements of information on which auditors report and the level of auditor involvement with those elements are decided by agreement between a company and the users of its business reporting.

* The auditing profession should prepare to be involved with all the information in the comprehensive model, so that companies and users can call on them to provide assurance on any of the model's elements.

* The newly formed AICPA Special Committee on Assurance Services should research and formulate conclusions on analytical commentary in auditor's reports within the context of the Committee's model, focusing on users' needs for information.

* The profession should continue its projects on other matters related to auditor association with business reporting.

Facilitate Change

* National and international standard setters and regulators should increase their focus on the information needs of users, and users should be encouraged to work with standard setters to increase the level of their involvement in the standard-setting process.

* U.S. standard setters and regulators should continue to work with their non-U.S. counterparts and international standard setters to develop international accounting standards, provided that the resulting standards meet users' needs for information.

* Lawmakers, regulators, and standard setters should develop more effective deterrents to unwarranted litigation that discourages companies from disclosing forward-looking information.

* Companies should be encouraged to experiment voluntarily with ways to improve the usefulness of reporting consistent with the Committee's model. Standard setters and regulators should consider allowing companies that experiment to substitute information specified by the model for information currently required.

* Standard setters should adopt a longer-term focus by developing a vision of the future business environment and users' needs for information in that environment. Standards should be consistent with that long-term vision.

* Regulators should consider whether there should be any changes to the current requirements that public companies make all disclosures publicly available.


Financial and nonfinancial data

* Financial statements and related disclosures

* High-level operating data and performance measurements that management uses to manage the business

Management's analysis of the financial and nonfinancial data

* Reasons for changes in the financial, operating, and performance-related data, and the identity and past effect of key trends

Forward-looking information

* Opportunities and risks, including those resulting from key trends

* Management's plans including critical success factors

* Comparison of actual business performance to previously disclosed opportunities, risks, and management's plans

Information about management and shareholders

* Directors, management, compensation, major shareholders, and transactions and relationships among related parties

Background about the company

* Broad objectives and strategies * Scope and description of business and properties * Impact of industry structure on the company


Edmund L. Jenkins, CPA, is Managing Director--Accounting Principles for the worldwide practice of Arthur Andersen & Co., S.C., and chairman of the AICPA Special Committee on Financial Reporting. He has had firm-wide responsibility for practice before the SEC, has been the managing parmer of its Indianapolis office, and has been a managing director of his firm's accounting and audit practice.

When asked by moderator Edwards as to how the priorities of FASB should be reordered as a result of the recommendations he responded:

"To me, the single most important issue here for both standard setters and the SEC is coming to grips with the comprehensive business-reporting package. The FASB has until this point limited its work to financial reporting, and yet some would read their mission to be broader than that, to address in fact business reporting. Others believe that it does not. Clearly, the SEC through 10-K disclosure and proxy disclosure requirements has been addressing business reporting for a long, long time, albeit somewhat differently and perhaps without focusing specifically on a comprehensive, integrated business reporting model. But the long-term implementation will depend upon some standard setter stepping up to begin the process of developing requirements, hopefully in the private sector. This is a whole new dimension to FASB's role, if the FASB is the one to carry it out. It is hard to imagine it being done without additional resources. The Special Committee believes it is central to its work that something be addressed."

Keith E. Lawder is Senior Vice President/Group Executives for Business Banking at Wachovia Bank of Georgia. He is responsible for the business development activity of 70 small business relationship managers across the state. His 20-year career at Wachovia includes service in the international division, regional offices, and the senior loan administration office. He is past director of Robert Morris Associates and currently serves on its Accounting Policy Committee.

"Robert Morris Associates is an association of 16,000 bank loan and credit officers from across North America. Our member institutions account for roughly 80% of the commercial and industrial loans in banking assets in this country. Our customers include start-up operations, as well as Fortune 500 companies and everything in between. Robert Morris's Accounting Policy Committee is the group in our association that deals with accounting issues. Our committee had an opportunity to review the Special Committee's report on a preliminary basis. There were about as many opinions on the effects of the recommendations as there were members of our committee. But based upon this quick look, we are basically pleased with the end product.

"Our perspective is solely from the viewpoint of a user of financial information generally, related to making credit decisions. 'Flexible reporting,' in concept sounds reasonable to address these concerns. Standards that are yet to be determined and the judicious application of those standards will largely determine the business

Patricia McConnell, CPA, is a managing director of Bear, Stearns & Company, Inc., where she specializes in accounting and taxation applied to investment banking transactions and institutional securities analysis. She works closely with clients, helping them solve accounting problems or to structure transactions to fit existing accounting requirements. McCounell is a member of the Board of Governors of the Association for Investment Management and Research (AIMR), past chair of AIMR's Financial Accounting Policies Committee, Director at Large of the New York Society of Security An lysts, a member of the FASB's Financial Instruments Project Task Force, and a member of the International Accounting Standards Board.

"The Association for Investment Management and Research is not-for-profit organization of more than 24,000 investment analyst portfolio managers, and other investment decision makers, employed by broker dealers, banks, mutual funds, investment management funds, insurance companies, pension funds, and other enterprises. AIMR represents financial analysts who advise investors, including institutions, such as mutual or pension funds, and individuals. AIMR also represents portfolio managers, who in my opinion, are also investors, in this case making decisions on behalf of the owners of portfolios. This extends to the individual investor purchasing a mutual fund, who is making a decision about what portfolio to buy based upon the performance of the portfolio manager.

"When the Special Committee was formed I was initially concerned it would do more harm than good for financial reporting. Much of the rhetoric surrounding the announcement of its formation suggested that our reporting system was materially deficient. I do not and never have believed that to be the case. While it can be improved at the margins, I believe that we have the best accounting and disclosure system in the world. My concern was that the Special Committee, believing the system to be flawed, would make recommendations without understanding what information was useful and how it was used. I am happy to report that my concern was unfounded. In my opinion the Special Committee went to extraordinary lengths to learn what users do with information and what information they use in an effort to decide what users need.

"I would like to commend the Special Committee for diligently seeking the views of users. I am sure the committee's report will open up much debate and as such be a catalyst for change."

Kenneth J. Johnson, CPA, is Corporate Vice President and Controller and Director of Internal Audit of Motorola Corporation. He joined Motorola in 1971 with prior work experience in public accounting and two controllership positions. He is a member of the Financial Executives Institute, presently serving on its Committee on Corporate Reporting. He is a member of the Management Accounting Practices committee of the Institute of Management Accountants. He headed a FEI task force that interacted with me Special Committee.

"There were about six of us on the FEI task force who were given the Special Committee's preliminary documents. We in effect made a field test of the material the Special Committee was proposing. We gave consideration to the cost to produce--whether it was moderate, significant, or not--and whether the data called for was competitively sensitive so that we would not wish to disclose it to the outside world. We are pleased to note that our findings and comments in fact did have some influence on the ultimate report. The Committee's survey claims users did not need fair value statements. We hope the conclusion will put the issue to rest once and for all. The FEI, representing preparers of financial information, or business information as it is now called, is concerned about possible overload and cost considerations. We don't need 3OO-page annual reports that no one reads and are prepared at great cost. At this point we are at least partially convinced that this is not what will result from the Special Committee's recommendations."

Dan L. Goldwasser, Esq., is a partner of Vedder, Price, Kaufman, Kammholz and Day, specializing in counseling and defending CPAs. He currently serves as special counsel to the Task Force on Professional Liability of the NYSSCPA and is a member of the AICPA's Subcommittee on Accountant's Professional Liability Insurance. He serves as chairman of the Law and Accounting Committee of the American Bar Association (ABA). He is a frequent lecturer and author on the subject of accountant's professional liability, editor of The CPA Journal's "Accountants' Liability" column, and member of the advisory board of Business Accounting for Layers, a monthly newsletter of the Practicing Law Institute. He has participated in the defense of over 150 professional liability cases against accountants and has represented the NYSSCPA before New York courts dealing with legal issues affecting the liability exposure of accountants.

"I have been invited here in my capacity as the chairman on the ABA's Committee on Law and Accounting. Our committee is composed of roughly 45 members, whose function it is to review accounting and auditing pronouncements and to render comments that will hopefully keep the accounting profession off the legal shoals. Three of our committee members issued an unofficial letter report on the preliminary findings of the Special Committee.

"My first reaction to the Special Committee's preliminary report led to more or less the same conclusion that Ken Johnson of FEI reached--were we going to have 350-page annual reports full of legal pitfalls and opportunities for stumbling. As a lawyer that obviously got my juices going. I don't think that's the direction in which we are headed, at least I hope not.

"The Special Committee's analysis is the sort of thing the accounting profession ought to do regularly, about once every 10 years, because business practices do change and the analytical procedures that businessmen and investment analysts utilize change, At the very beginning, I feared the accounting profession was about to enter the information void, a void created largely because of liability exposure.

"The ABA Committee's comment letter dealt with 16 issues that were raised by the preliminary proposals. We were particularly concerned with the introduction of "soft" information, where there is a great deal of judgment. We cautioned very heavily that there should be some forms of safe harbor to protect corporate officials and members of the accounting profession. We were also concerned with the whole aspect of differential disclosure and the potential burden to small companies.

"I understand from Ed today that it is his concept that, at least with respect to public companies, these disclosures would be dictated by the SEC. That seems wholly appropriate.

"What has happened here is that the accounting profession has realized there are additional types of disclosures that users feel are necessary tu better facilitate capital allocation decisions. What the Special Committee has done is to start the ball rolling to put into place a mechanism for dealing with these types of disclosures. It goes back to the principle, 'If you build it, they will come,' and quite frankly, in my estimate, they will come."

Dennis R. Beresford, CPA, has served as chairman of the Financial Accounting Standards Board since January 1, 1987, after a productive career with Ernst & Young. He is a former chair of the AICPA's Accounting Standards Executive Committee and a former member of both the International Accounting Standards Committee and the Financial Accounting Standards Advisory Council. He was active in the Institute of Management Accountants and one of the first individuals to earn the Certificate in Management Accounting. He is a member of AAA and FEI.

"We at the FASB are very supportive of the process leading to the recommendations. Contrary to what many may have thought, we never felt threatened, challenged, or undermined by the formation of the Special Committee. The idea for the Special Committee came out of a seminar held at Wharton School, Philadelphia. The seminar was suggested by me and sponsored by the AICPA. Phil Chenok followed up on the idea, and it happened: users, preparers, and auditors.

"Soon to be chairman of the AICPA, Tom Rimmerman, attended that Wharton Symposium, and shortly after issued the challenge to the relevance of financial reporting and also the auditor's involvement in that process.

"Most of what the FASB does is react to individual problems, Somebody says segment reporting needs fixing, so we, after some consultation, add a project on that, and spend the next several years working on it. Our oversight committee, the trustees of the Financial Accounting Foundation, has been reviewing the operations of FASB, and one of the recommendations it made about three years ago was that we should have more of a long-term strategic plan. We think that this report can help us in developing this approach.

"We have been very actively involved in the work of the Special Committee for the last two and a half years or so. Even setting aside the specific recommendations in Ed's report, just some of those things about how users think will be very useful to us for all our projects.

"It also identified a number of users that we previously were not familiar with who might participate in task forces and other direct activities of the FASB.

"One obvious point is that some of our current projects are consistent with the recommendations of the Special Committee.

"We plan to discuss the report with our Financial Accounting Standards Advisory Council. We might also consider asking for public comments on the recommendations such as through an invitation to comment or public hearing, or some other sort of public meeting.

"Even without such a direct solicitation, we are sure to get input. Interestingly, we have already received several letters from corporations urging us to reject the entire report. Whatever we decide to do, we have to carefully evaluate the recommendations, and weigh them against suggestions that have been made by other groups. Bob Sack made reference to the AIMR report on financial reporting and there is a FEI study under way now, called Financial Reporting and Economic Reality. There was a reference earlier to Ray Groves' article on disclosure overload. The PCPS TIC obviously has points of view on these particular issues.

"It is not likely we will simply drop a number of our projects from our existing agenda and put on some of the things from the report, For example, if anyone believes this will be a good excuse for us to drop the stock compensation project, I think that they will be sorely disappointed. But the recommendations could and should affect the priorities that we give to certain current projects."

Robert J. Sack, CPA, is a professor of business administration at the Darden School, the University of Virginia. He joined the Darden School after three years as the Chief Accountant of the SEC's Enforcement Division and 25 years in public practice as a partner of Deloitte & Touche. He is a member of the AICPA, American Association of Accounting, Institute of Management Accountants and Ohio Society of CPAs. He chairs the AAA committee on liaison with the SEC. He sewed a three-year term as managing co-editor of Accounting Horizons. He is the coauthor of an accounting text book and frequent contributor to professional journals.

"My reactions to the report will be in the context of an ex-enforcement staffer and teacher of MBA students.

"The last time the profession did anything like this project was twenty years ago, when the profession issued a report to itself on the objectives of financial statements. Moderator Edwards was a part of that team as I recall. Let me read you the first recommendation from the Trueblood Study Group report: 'the basic objective of financial statements is to provide information useful for making economic choices.' For many of us that conclusion was startling--we had come to think of accounting as an end in itself. The most important thing that report--and this current report--told us is that the accounting work we do, the students we train, the reports that we issue, the standards that we put out, are judged only on one basis. Does it make the user better off? We need to say that to ourselves frequently. It occurred to me that I could go back to the university and hang a sign in the front of my classroom that would say, 'It's the user, stupid.' It might be a useful sign to hang in the SEC and at the FASB.

"Ten years ago, something like 69% of the stock in the U.S. was held by you and me as individual stockholders. Today that number is down to 54%. While the proportion of individual investors has declined the number of securities analysts has grown substantially. I believe these statistics reflect that we have not done a good enough job in providing information to individual investors. As a consequence, they have decided they need to look for third parties (analysts) to find that information.

"A second condition that says we have not done a good job in financial reporting is the explosion of law suits against us. I do not believe the basic things in this report, like core earnings or trend data, are going to reduce the liability exposure of the profession. But I do think the concept of thinking of the user will. When companies, in the midst of temptation to 'optimistically' view the condition they find themselves in make a choice with the third-party user in mind, better choices will be made."

Judith H. O'Dell, CPA, is a shareholder of Beucler, Kelly & Irwin, Ltd., CPAs, in Wayne, Pennsylvania. She has been active in the AICPA Private Companies Practice Section (PCPS) since 1986 and is immediate past chair of its Technical Issues Committee. She is also a member of the Auditing "Soft" Accounting Information Task Force of the AICPA Auditing Standards Board. She chairs the AICPA National Accounting and Auditing Technical Symposium Task Force and is a member of AICPA Council. She also served on the joint AICPA/Robert Morris Associates task force that developed the Business Credit Information Package.

"The PCPS Technical Issues Committee is comprised of 14 members, who are from CPA firms ranging in size from sole practitioners to maybe a 100 or 150 people total. Our mission is to review pending accounting and auditing pronouncements and comment as to their effect on small businesses which are the clients we serve. They are typically small, closely held businesses and small nonprofit and governmental entities. So we really represent both the preparers' side and the accountants' side, since many of these entities are not capable of preparing their own financial statements and footnotes.

"We have been following the efforts of the Special Committee through Ed Rockman, a member of the Special Committee and my predecessor as TIC chair. We have been told small business needs were properly considered in the process. However, I believe a lot of the criteria through which the committee filtered its conclusions through did not take into consideration small business.

"I think the small business community will react to the recommendations on a wait and see basis. It is not immediately clear how they will impact the relationship between smaller entities and their users, which in part includes owner/managers and financial institutions.

"From a small business perspective I appreciate the spirit of flexibility, relevance, and awareness of the cost versus benefits that pervades this report. The small business community feels strongly that there are far too many required business disclosures and that some financial disclosures could be weeded out at this point. They have grown incredibly. Therefore, I hope that flexibility, relevance, and cost will guide any implementation of the recommendations, especially where small business is concerned."


James Don Edwards, PhD, CPA, is the J.M. Tull Professor of Accounting at the University of Georgia. He has combined a successful academic career with active participation in the accounting profession and the business community. Noteworthy service to the profession began as a member of the Trueblood Commission, continued with service on the Anderson Committee, and extends to active participation today. He was the managing editor of the Centennial issue of the Journal of Accountancy. He has also served--and still serves--in other leadership positions at the AICPA, the American Accounting Association (including president), the Institute of Management Accountants, and the University of Georgia. He is the author and coauthor of 23 books (60 editions) and over 100 articles in accounting and professional journals.
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Title Annotation:includes related article
Publication:The CPA Journal
Article Type:Cover Story
Date:Jan 1, 1995
Previous Article:Nonqualified deferred compensation.
Next Article:The 1995 tax season tune-up.

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