Annual Conference Focuses on Good Reporting

Annual Conference Focuses on Good Reporting
Improvements in Financial Statements Are Better for Users

Improved auditing standards and a continued focus on ethical behavior are part of an overarching and continuing effort to restore confidence in financial markets, government officials said in an April conference.

Panelists at Baruch College’s Third Annual Financial Reporting Conference in Manhattan delved into the nitty-gritty of business combinations, MD&A disclosures and GAAP, emphasizing the need for ever more transparent business reporting to win back the investing public.

Auditors are pivotal to that end, given recent history, panelists said.

“We’re all aware of what’s happened to investor confidence,” Donald Nicolaisen, chief accountant for the Securities and Exchange Commission, said. “How the accounting profession behaves (now) is extremely important.”

Panelists were quick to recognize that auditors are fully cognizant of the shifting climate of the post-Enron era. Preparers have had to deal with often complex changes, they said, such as implementing Section 404 of the Sarbanes-Oxley Act. The first panelists in the day-long conference on April 29 empathized with auditors, but they placed a far greater weight on trustworthy financial reporting.

“(Investors) relied upon financial statements,” Nicolaisen said. “People had planned to retire on these investments. They had faith in the marketplace.”

Following the accounting scandals that cost individuals billions of dollars, Nicolaisen said, investors “couldn’t retire, couldn’t send their kids to school, because of overzealous expectations or because of real failures. Investors today demand more.”

Nicolaisen said the SEC sought to continue improving MD&A to include information beyond earnings per share and encouraging management to “really talk to investors about what they see with their eyes.”

But Nicolaisen also underscored the need to attract the best and brightest to the profession and to encourage forthrightness in their training so that in the business world they will “speak up” when others “aren’t doing the right thing.”

Fellow panelist Robert Herz, chairman of the Financial Accounting Standards Board, also talked about the importance of the user of financial statements in a brief mention of a current investigation into what he called “big GAAP vs. little GAAP.” Herz referred to a task force the American Institute of CPAs launched earlier this year to discuss whether there is a need for separate accounting standards for private companies.

“I understand the need but I’m not keen on two systems,” Herz said. “I have an open mind, but whatever system you have has to meet the needs of the user. For private companies, the banks are the users.”

Herz said that FASB is at a critical juncture in financial reporting, with its “commitment to truly independent standards setting” and its ongoing talks with the International Accounting Standards Board on standards convergence.

Herz’s comment about truly independent standards may have been an oblique reference to the board’s proposed rule for expensing stock options, which has received some resistance from Congress.

Herz also said there should be a move toward simplification of GAAP; toward an agreement on asset and liability view vs. revenue and expense view in the reporting framework; and toward solving the question of whether the U.S. can handle principle-based accounting, a subject in which he sees much conflict.

“I see a clash between principles-based accounting and people seeking rules and bright lines,” Herz said. “People ask us all the time for exceptions. If we’re going to get more accounting based on economics, we have to resist the temptation to preserve those exceptions.”

Keynote speaker Douglas Carmichael, chief auditor of the Public Company Accounting Oversight Board, also discussed standards, describing the close relationship between accounting and auditing.

“All auditors are at first accountants because one can’t verify the data without understanding what that data means, in practice,” Carmichael said.

He added later, “A deeper examination of accounting theory would be illuminating for setting future (audit) standards.”
Carmichael pointed out that the Sarbanes-Oxley Act defines “professional standards” as including, first, accounting principles and, second, auditing standards, but that, in practice, the application of accounting standards is heavily related to the audit, because the resolution of an accounting issue is “based on an audit effort.”

Their close relationship means there is some ambiguity where an accounting principle ends and an auditing standard begins, though Carmichael said that preparers should follow the GAAP hierarchy.

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