FSN: SEC pursues simplification agenda for financial reporting in the US

SEC pursues simplification agenda for financial reporting in the US

9th July 2007
Securities and Exchange Commission (SEC) Chairman Christopher Cox last week announced the establishment of an advisory committee that will examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors. It is a laudable objective but will yet another committee really make a difference to the mountain of red-tape and disclosure requirements besetting large companies? Gary Simon, FSN's managing editor reports.

Balancing the needs of investors for more transparency of reporting whilst keeping a lid on the burden of disclosure placed on large companies is a difficult balancing act to achieve. At last the SEC seems to recognise that neither party is satisfied with the current regime which makes financial statements virtually unintelligible – even to experienced accountants let alone shareholders – and lumbers companies with ever increasing compliance costs to produce something that few investors wish to read.

The problem of course is not confined to the United States . In Europe there are doubts whether IFRS has really achieved the harmonization, comparability and ease of use that initiative promised in its early days. Here too, investors are put off by the sheer weight of disclosures in the Annual Report and Accounts. According to a Deloitte report in 2006 the number of pages of closely woven text in the average Annual Report climbed to 85 compared with 75 just a year earlier. This year the accounting firm, responding to the demands of the EU Transparency Directive, predicts that the trend will move away from more disclosures in existing reports to more information and more reports!

To add ‘insult to injury' timescales for reporting on both sides of the Atlantic are being accelerated so that companies will have to produce information that many people find difficult to use in ever quicker timescales. Furthermore, the EU Transparency Directive introduces the requirement for IMS (Interim Management Statements) where quarterly reporting did not exist before.

But not everything about financial reporting is gloom and doom. Convergence between US-GAAP and IFRS is making progress with the recent proposal by the SEC to accept financial statements prepared in accordance with IFRS without reconciliation to US-GAAP (generally accepted accounting principles). There is also progress in simplifying reporting in the UK with the potential move to IFRS for all non-listed companies (apart from the very smallest businesses), sweeping away the need for both local UK and IFRS reporting standards.

The new SEC committee on “Improvements to Financial Reporting” will study the causes of complexity and recommend to the Commission how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting.

Announcing the initiative, Chairman Cox said, "Our current system of financial reporting has become unnecessarily complex for investors, companies, and the markets generally, and the time is ripe to review how that system can be made less complex and more useful to investors."

Robert C. Pozen, chairman of MFS Investment Management in Boston and former vice chairman of Fidelity Investments, will chair the SEC's advisory committee followed by the appointments of 13 and 17 additional members with varied backgrounds within the next few weeks. However, this raises the question of whether a committee of up to 18 people is compatible with a brief to simplify financial reporting.

Furthermore, the terms of reference for the committee are imposing. "In addressing the complexity of the current system, our advisory committee will focus not only on offering better guidance to preparers of financial reports, but also on providing more user-friendly disclosures to meet the different needs of various types of investors," says Mr. Pozen.

According to Cox, the Commission will direct the advisory committee to conduct its work with a view toward removing practical and structural impediments that reduce transparency or unnecessarily increase the cost of preparing and analyzing financial reports to the detriment of the investor. The advisory committee will focus on the current approach to setting financial accounting and reporting standards as well as the current process of regulating compliance by registrants and financial professionals with accounting and reporting standards.

The huge brief will also take systems and process issues into account. For example, the committee is tasked with looking at current systems for delivering financial information to investors and accessing that information as well as other environmental factors that drive unnecessary complexity and reduce transparency to investors.

As part of its consideration of these areas, the advisory committee will focus on how technology can help address accounting complexity by making financial information more useful to a greater number of investors.

Cox who has previously been noted for his enthusiasm for technology wants the committee to look at the futher potential for XBRL, hyperlinks, and other technological advances. “The opportunity exists to redesign the financial reporting system to deliver the type and level of information that investors need to access their preferred indicators of company performance,” says the SEC.

FASB Chairman Robert Herz voiced his support for the SEC project, “The SEC, PCAOB, and FASB have been discussing the need for an advisory panel to explore issues and opportunities to improve financial reporting for some time. Therefore, I am very pleased with the formation of this committee and applaud Chairman Cox for bringing it together. This advisory committee represents an important step toward addressing the institutional, structural, cultural, and behavioral issues that create complexity, reduce transparency, and impede usefulness of reported information to investors.”

However, for most international organisations the complexity is in handling global reporting requirements. This raises the question of whether a US oriented project is going to make a significant impact in simplifying financial reporting for companies with dual listings in the US and elsewhwere. Furthermore, the brief looks just too wide. Perhaps the new committee will surprise us all – but don't hold your breath.

The advisory committee will begin its work after additional members are named and the SEC staff files the committee's charter with Congress.

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