Pensions, Leases Worry PCAOB Member

The financial reporting system still harbors problems that could explode, says PCAOB member Charles Niemeier.

The players in the U.S. financial reporting system are driving while looking in the rearview mirror, says one regulator.

Speaking at a conference on Sarbanes-Oxley Tuesday in New York, Charles Niemeier, board member of the Public Company Accounting Oversight Board (PCAOB), reiterated much of a speech he presented at Baruch College in May on the statistical evidence of benefits from the 2002 legislation. However, Niemeier advised professionals in the auditing industry and the U.S. financial system as a whole to move past their lingering focus on internal controls and look at new issues coming down the road that he believes will help improve the financial reporting system — particularly lease and pension accounting.

Credit is due to the Financial Accounting Standards Board for tackling leasing and pension issues while moving toward fair value, said Niemeier. During his speech, Niemeier said he believes fair value accounting provides more relevant information for investors. But in comments to CFO.com following his speech, Niemeier also acknowledged harboring some of the same concerns that have made many CFOs wary of a fair value approach. There are risks associated with moving toward fair value, he told CFO.com. “How do you verify the results in financial statements [under fair value standards]?” he mused. “Where there is more discretion, there is more chance for manipulation. By its very nature, fair value requires more discretion.”

“We need courage to improve the financial reporting model, but need to be thoughtful because we can’t lessen the reliability of financial reporting for the sake of providing more information,” Niemeier added.

While financial reporting is stronger than it has been for a significant period of time, there are many issues already embedded in the system that deserve attention, Niemeier said. “We do not think we have to deal with it; it’s too painful, so we ignore it,” he told CFO.com.

Financial system problems that ultimately prove crippling can grow unnoticed for a long time, said Niemeier, who drew an analogy during his speech to the Southeast Asian mozo bamboo plant. That plant, he said, does not appear to grow for its first five years while its root system spreads underground, but then it sprouts a foot each day until reaching its height of 100 feet. In an example more grounded in corporate experience, Niemeier also noted that off-balance sheet reporting was not a problem that ultimately evaporated, but rather festered and imploded with Enron.

“Investors do not see the signs and the root systems are growing,” said Niemeier, in an apparent reference to his concern over lease and pension accounting. “I worry we are missing some of the most important things.”

Niemeier noted that his speech at the conference, which is sponsored by the Foundation for Accounting Education, represents his personal views, and not those of the PCAOB.

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