Financial Accounting Standards Board chairman Robert Herz recently addressed the complexity of the financial reporting system, calling for a concerted effort to simplify the rules and increased transparency.
Herz spoke at the December 2005 conference of the American Institute of Certified Public Accountants on reporting developments at FASB, the Securities and Exchange Commission, and the Public Company Accounting Oversight Board.
That the financial reporting system is too complex has been vocalized by companies, accounting firms, and regulators for some time. Much of Herz’s speech was a historical overview of how the rules became so complicated. Among the many contributing factors he cited were outdated rules-based legacy accounting standards, the continuing focus on short-term results in earnings reports, and anti-abuse rules that were designed to curb the use of accounting “illusions” to boost financial results. Regular demands for exceptions to the rules, from companies and industry groups, have also contributed to complexity in financial reporting.
In his speech, Herz offered few specifics regarding the areas of accounting that most urgently need simplification. (In response to a question after the speech, he did mention lease accounting, reported Dow Jones.) He also said little about precisely what steps FASB, the SEC, and the PCAOB will do to address the problem. The effort would start, he said, with a thorough analysis of the problem of complexity and lack of transparency before looking at possible solutions.
However, Herz’s comments are distinguishable from previous calls for simplification by what seemed to be an increased sense of urgency.
“I believe it is time to stop observing the problem and start thinking about how to solve these issues,” said the chairman, explaining that the situation may snowball, begetting even more complexity and less transparency. “As you can probably tell, I feel pretty strongly that the time has comeÂ to address these issues,” he said toward his conclusion, adding that “the status quo is neither acceptable nor sustainable.”
For a different reason, however, companies that are hoping for a lighter reporting workload might want not to hold their breath. Said Herz: “To many preparers, reducing complexity seems to imply accounting and reporting that is easier to do. Similarly, for many auditors it would seem to imply accounting and reporting that is easier to audit. But for many users, it seems to mean making reported financial information more understandable and more useful, which includes making it more relevant and more representationally faithful of the underlying economics.”
Those objectives of the end users of financial information, observed Herz, “may not translate into accounting and reporting that is easier to do or easier to audit.”
There was no FASB meeting last week. Looking ahead to this Wednesday:
• The board is scheduled to address uncertain tax positions. The discussion will center around subsequent recognition and measurement, change in judgment, disclosure provisions, recognition, measurement and classification of interest and penalties, classification, transition, and effective date for the final interpretation.
• Board members will briefly discuss an editorial change in EITF Issue 04-6, Accounting for Stripping Costs Incurred During Production in the Mining Industry, and liability classification, by clarifying the definition of the “production phase” of a mine.
• The board will also discuss whether to add a project to its agenda considering the classification of an option issued as part of a share-based payment arrangement that includes a change-in-control provision.