Here’s How to Fix Accounting’s Complexity

Tips for a new SEC committee tasked with simplifying financial reporting.

A Securities and Exchange Commission group charged with simplifying the U.S. financial-reporting system in one year will consider several recommendations during its second open meeting next Friday.

One of the topics on the table is whether the group’s 17 members can actually address the weighty job of figuring out how to whittle down the complexities inherent in accounting by next August, when they are mandated to turn over their recommendations to the SEC. “We believe that the advisory committee in its limited life cannot address all of the issues raised in [its] discussion paper,” wrote midtier accounting firm BDO Seidman in its comment letter to the Advisory Committee on Improvements to Financial Reporting (CIFR).

Indeed, many of the group’s agenda items could easily take a year to debate on their own, such as whether principles-based accounting standards are better to use than rules-based standards. Nevertheless, the committee’s agenda for its November 2 meeting includes considering its subcommittees’ recommendations and those that came out of the public comment period for the discussion paper that CIFR chairman Robert Pozen presented during the summer.

In that paper, Pozen suggested that the committee examine the inner workings of the Financial Accounting Standards Board and the Public Company Accounting Oversight Board, and the consequences of giving auditors more professional judgment, among other issues. He hopes the group — made up of current and former CFOs, professors, securities lawyers, investor advocates, and audit-firm executives — will eventually come up with about 12 recommendations for reducing complexity in financial reporting.

The group blames the complexity build-up on the wealth and length of accounting standards from FASB in the past several years, and on the mounting interpretations of those rules coming from regulators and the accounting firms. “We have too much GAAP running around,” Pozen said during the CIFR’s first meeting. “We need to figure out what is and isn’t GAAP and grab hold of it.”

That sentiment was echoed in at least one of the 19 letters the CIFR received during the public-comment period for its discussion paper. The Big Four accounting firms have added to the confusion by publishing different interpretations of standards, particularly those that are considered principles-based, according to Kenneth Bentsen, president of the Equipment Leasing and Finance Association. “These interpretations are, in effect, establishing GAAP,” he wrote.

ELFA recommended that the Big Four’s interpretations undergo regulatory review, perhaps by FASB staff members. The trade association also suggested that this type of guidance should be made consistent and widely available through a public Website with a Q&A-type format from FASB and SEC staff, creating a “case law” for GAAP.

Like others who wrote in to the CIFR, the trade association also shared its own problems with certain accounting standards. In its case, the group anticipates being deeply affected by the impending changes to the lease-accounting standards, a joint project by FASB and the International Accounting Standards Board that will require companies to capitalize more lease agreements on their balance sheets.

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