Improving Financial Reporting

My favorite quote regarding the relevance of financial statements came from Bob Herz, who indicated that we need to stop thinking about a “paper-based paradigm,” and instead focus on making information more useful and having less enforcement and regulatory scrutiny in areas that are not really important. This pertains not just to financial statements, where the requirements are somewhat structured by FASB and SEC standards, but also to corporate reporting packages, investor-relations materials, and other forms of reporting (including sustainability and corporate responsibility reporting).

This same panel mentioned that the most effective audit committee communications (and financial reporting) are those that involve others outside of accounting and finance who truly understand what is going on in a company's operations and which metrics drive results. This same theme was echoed by Mark Bielstein, who called for “an overall reconsideration” of financial information.

As Herz noted, it is not only the content, but also the delivery, of financial information that is lacking. He pointed out that our reporting system is not what it should be, given available technology. Although much has been said about XBRL as a way to share data in real time, rather than periodically, and to facilitate comparison across companies, would preparers and auditors say that XBRL has actually helped so far? Or has it just added complexity for those trying to tag and report data based on regulatory requirements? Would analysts say that they are benefitting from the use of XBRL data? Or would preparers say that they still have to provide separate reports and answer multiple questions from analysts and rating agencies in addition to their required financial reporting?

The Audit Process and Audit Committees

On the subject of the audit process, I enjoyed the panel discussion around what makes for a “smooth audit” and Robert Laux's comment that “an audit is not necessarily supposed to be fun.” Both auditors and their clients would surely agree with that statement. I also agree with Laux's and Allan Cohen's comments that auditors need to ask tough questions, but management has the responsibility to understand its own issues and help the auditors be more effective through consistent documentation and communications. Writing memos takes time, but it is a key part of internal controls and makes management's job (along with the auditors’ job) easier, because it memorializes the decisions that were made and the thought processes that accompanied them.

With respect to the discussion about audit committees and their relationship with preparers, I was most interested in the panelists’ differing views on the role and effectiveness of the audit committee in the area of financial statement disclosures. Different companies have different approaches to audit committee involvement; at times, the approach depends upon the company's size and management's experience. Over the years, I have worked with audit committees that possessed varying degrees of expertise and interest, and I agree with the panelists’ overall support for and optimism about the role of effective audit committees in improving financial reporting and disclosures.

Cohen shared that his audit committee played an active role in this area by asking at every meeting about sensitive accounting issues and significant areas of judgment related to the financial statements. He suggested that management support the audit committee by providing them with analysis not just on the financial statements but also on other issues important to the company. Laux, on the other hand, expressed his disappointment that audit committees are not structured in a way that allows them to succeed in this area; he noted that too much is expected of them in the limited time they have. Herz, as an audit committee member, supported Cohen's view that it is important for audit committees to understand key business issues in order for them to ensure that financial statement disclosures and controls are appropriate. Mark LaMonte noted the importance of audit committees in helping management make “strategic choices around disclosure.”

Moving Forward

As the panelists noted, these issues are not new ones, and we have had these discussions at annual conferences for a very long time. FASB and the SEC are working on “new” projects that involve the current disclosure systems, and they are promoting “simplification” once again.

Let's keep chipping away at these issues. As Laux noted, “Things are complicated, but we're smart people. We get paid well. We can figure them out.”