1. Complexity in Our Financial Reporting System
Bob Herz
The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations.
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What is Complexity
Depends on one’s perspective (What makes your work more complex)
Preparers and auditors
What to do
How to do it
Costs and effort to do it
Is it right (will it be second guessed)
Users
What was done
Does it reflect the underlying economics
Making comparisons between companies and over time
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Sources of Complexity
Complex transactions and business arrangements
Volume and detail of GAAP, GAAS, SEC rules and regulations
Scope (including exceptions)
Different measurement attributes
Treatment alternatives and transition alternatives
Rules and “bright lines” vs. principles
Disclosure vs. recognition
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4. Why Complexity is Created
Conflicting perspectives of different constituents
Desire to reduce earnings volatility
Desire for exceptions and special treatments to suit business objectives/structure transactions
Desire for flexibility/options
Desire for certainty in application
Fear of second guessing by auditors/regulators/trial bar
Evolutionary approach to standard setting
Accounting vs. economics and finance
Gaps in education and teaching of accountants
Inability to handle a more principles-based system
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5. Consequences of Complexity
Complexity in application for preparers and auditors
Lack of transparency for investors/analytical/complexity
Structuring opportunities which allow reported results to not reflect actual economics
Rule-based and compliance-based mentality by auditors, preparers and regulators
Increase in restatements
The complexity and lack of transparency diminish public confidence in the financial reporting system, which could lead to market disruption.
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6. Measures Taken by FASB to Address Complexity
FASB has been readdressing specific accounting standards that do not provide relevant and comparable financial information, e.g.
Business combinations
Share-based payments
Pensions and OPEBs
Lease accounting
Revenue Recognition
An improved conceptual framework would provide a more solid foundation to develop principles-based standards
Many of the projects are or will be joint projects with the IASB
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7. Measures Taken by FASB to Address Complexity
FASB has taken steps to stem the proliferation of new pronouncements from other standard setters, including the AICPA and the SEC staff
FASB has undertaken a massive project to codify all existing accounting literature organized by subject matter
Develop future standards in a more understandable, principles-based manner
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8. Will these FASB Actions Turn the Tide?
Not on their own — accounting standards setting is only part of the issue
Requires actions and changes by others
Many “solutions” have been proposed including:
Fair value accounting
Return to transactions – based historic cost accounting
Further use of technology
Batch effective dates of changes in standards
Revamp the reporting model
Changes in SEC and PCAOB review and enforcement
Litigation reform
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A Way Forward
Establishment of a high-level committee or commission made up of representatives from all key constituent groups
Needs broad support
Commitment by SEC, FASB, PCAOB, as well as other governmental agencies and key policy makers.
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The Way Forward
The committee would be chaired or co-chaired by an independent person or persons recognized for their experience, objectivity, and commitment to improving the reporting system.
Committee members would need to check special interest agendas at the door.
The committee would study the sources of complexity and the impact complexity has on transparency and quality of financial reporting.
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The Way Forward
The committee would provide specific recommendations to the SEC, FASB, PCAOB and others.
In developing these recommendations the committee should keep in mind the interrelated components of our financial reporting system and what a desirable future system might look like.
Committee might continue on to monitor implementation of recommendations.
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