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The SEC's Advisory Committee on Improvements to Financial Reporting held its first meeting August 2, addressing ways to tackle the enormous task of simplifying the U.S. financial reporting system. Sarbanes-Oxley, which is celebrating its fifth year, included a call for an examination of the complexity of the current U.S. financial reporting system. The committee will present its proposal to the SEC next August.
Advisory Committee Chairman Robert Pozen, who's also chairman of MFS Investment Management, said companies are now attempting to report a voluminous amount of data under requirements set out in U.S. GAAP and SEC reporting rules. Because it's impossible to fix the entire reporting structure, Pozen suggested five areas the committee should focus on as it contemplates how and where to make changes: substantive complexity, standard setting process, audit process and compliance, delivering financial information, and international coordination.
One reason improvements need to be made to the reporting structure, Pozen said, is the large number of company restatements that have occurred--10% of U.S. companies restated their financial reports in the last year, which is costly for them. "Preparers and auditors who put together financial statements are trying to get it right," he said, "but the high number of restatements" shows a "high error rate." Linda Griggs, a partner in the law firm of Morgan Lewis in Washington, added that in the last 10 years, "financial statements have become increasingly difficult to prepare." She said the committee should really study the reasons why so many restatements have occurred.
Financial reporting modifications need to occur, too, because investors have a hard time understanding financial reports, Pozen and other members of the committee agreed. On the flip side, more sophisticated investors complain there's not enough "nitty-gritty" information included in financial reports to satisfy them. Because "there are lots of different users of financial statements," said committee member Susan Bies, a Federal Reserve Board Governor from 2001 to 2007, the challenge will be to create guidelines that address these varying needs.
Denny Beresford, Ernst & Young Executive Professor of Accounting at the University of Georgia, and former chairman of the Financial Accounting Standards Board (FASB) from 1987 to 1997, said the committee should study the "relevance" of U.S. GAAP along with its complexity.
Joe Grundfest, a Stanford law professor and former SEC commissioner, suggested the committee set up a blog or other form of communication that allows "knowledgeable" folks to offer their comments on modifications that need to be made. He also said the committee should "jump start" the adoption of XBRL, an interactive data tagging technology that allows users to quickly and easily focus on the information they want to access in financial reports.