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"Practical and doable" reforms to financial reporting are in the works.
By Susan Webster, BNA Tax and Accounting
NEW YORK—Robert Pozen, the chairman of a Securities and Exchange Commission advisory panel aimed at reducing financial reporting complexity, Nov. 12 outlined several "practical and doable" reforms the group is considering. He said the reforms could be accomplished within a year without congressional action.
Reducing the number of financial restatements, offering a simplified summary of financial statements filed with the SEC, creating a better process for offering guidance on accounting standards, and replacing bright-line rules in accounting standards with a more "pro rata" approach were among eight specific recommendations that Pozen said he hopes the committee will endorse.
Pozen, chairman of MFS Investment Management and chair of the SEC Advisory Committee on Improvements to Financial Reporting, also told attendees at the annual Current Financial Reporting Issues conference of Financial Executives International he would like to see the committee recommend:
- ways to make a forthcoming proposal from the SEC on use of eXtensible Business Reporting Language (XBRL) work for financial statement preparers without creating a process as arduous as the one for Section 404 of the Sarbanes-Oxley Act;
- support for the Financial Accounting Standards Board's efforts to narrow generally accepted accounting principles to a few authoritative sources—namely FASB and the SEC;
- a rebuttable presumption against industry-specific accounting standards and instead support for FASB to work toward activity-specific standards; and
- support for efforts already underway at FASB in its financial statement presentation project designed to come up with a way to "chunk" the earnings statement to "start to distinguish between accrued earnings and paper profits."
"We aren't planning on revolutionizing accounting," Pozen emphasized. "Our intent here is to come up with a few doable and workable solutions that we can accomplish within the year. If we can do that, and persuade people like [FASB Chairman] Bob Herz and [SEC Chairman] Chris Cox to adopt them, then I think we will have been successful."
Pozen emphasized that his comments reflected only his own opinions and conclusions, and did not represent the thinking of his advisory panel or the SEC.
Focus on Auditor Judgment.
Auditor judgment is another area the committee will tackle, Pozen said. While the Public Company Accounting Oversight Board's new internal control audit standard (AS 5) emphasizes that auditors need to use judgment, Pozen observed that if PCAOB inspectors second-guess auditors, there will not be much exercise of auditor judgment.
"This is a tough issue," Pozen said, but the committee "is gradually reaching a consensus that what we need is a procedural approach" under which the process of exercise of judgment is explained and concurrently documented.
"I believe if we can reach that sort of framework for judgment, we will help educate investors that there is no right answer, but there is a disciplined process for deciding about reasonable answers and documenting the answer that is chosen. And then we can bring back judgment to its rightful place in accounting," he added.
"In the end, probably the most important thing the committee can do is help lead the PCAOB toward what I view as a procedural framework for reviewing exercise of auditor judgment," Pozen said.
When asked about auditor concerns over liability issues, he observed that he is grateful that a separate Treasury advisory committee is charged with tackling that topic, but that he believes the best thing his committee could do is get the PCAOB to accept this framework for judgment.
This article is brought to you by BNA Tax & Accounting and the Accounting Policy & Practice Report. For more information or a free trial to the BNA Tax and Accounting Center, please visit www.bnatax.com. |
