Rewriting the Rules

Everything you thought you knew about accounting is about to change. Is there any reason to smile?

Now the hard part begins. Five years after the Sarbanes-Oxley Act was passed, its raison d’être — to improve corporate transparency and thus boost investor confidence — has been realized, at least to a degree. Debates still rage about how much credit the act can claim for Wall Street’s (pre-subprime) rebound, and, more fiercely, about the cost/benefit equation, but companies have largely made their peace with the act’s major requirements, and many agree that its impact has been positive.

But any hope for a respite is misplaced. Most publicly traded companies may now be in compliance with Sarbox, but the push for transparency that it set in motion is rippling out in all directions, and there is scarcely any aspect of corporate accounting — from overarching principles to specific standards — that isn’t ripe for reconsideration. “I’ve been a student of financial reporting for 25 years,” says Greg Jonas, managing director of Moody’s Investors Service, “and I’ve never seen a time when so many big-ticket financial-reporting issues were in play.”

Those issues cover enormous ground, from the macro (Will generally accepted accounting principles still be accepted?) to the micro (specific changes to lease, pension, securitization, and other accounting standards that could have a major impact on companies’ reported results). In between those extremes are issues such as the move to fair-value accounting, which could affect everything from hedging strategies to emissions credits, and a push to overhaul financial statements to make them better reflect corporate performance (see “Work Zone Ahead” at the end of this article).

Enter the “Complexity Committee”

Adding a further wrinkle to these interesting times is the fact that no single organization or entity has complete dominion over all aspects of corporate reporting. Nor do investors, companies, and lawmakers always agree on how to proceed or even what the destination should be. While it is true that the Securities and Exchange Commission has asserted itself more vigorously in the wake of Sarbox (see Part 2 of this series, “The SEC Rules,” August), the broad scope and complexity of financial reporting demands some level of collaboration among a wide range of parties.

That was made clear in July, when the SEC established the Advisory Committee on Improvements to Financial Reporting. Known as CIFR or, more colloquially, the “Complexity Committee,” it comprises 17 experts from academia, banking, law, Wall Street, and Corporate America. The group has been asked to make recommendations on everything from the relative merits of rules-based versus principles-based accounting systems to “current systems” for delivering financial information to the manner in which accounting and reporting standards are set and whether any current standards could be deemed unnecessarily complex or costly — or unnecessary altogether.

“Financial statements should do a good job for both preparers and users,” says Robert Pozen, chairman of MFS Investment Management and also the chairman of CIFR. “There are a lot of people who are trying to get it right, and yet [the high incidence of misstatements indicates that] something isn’t working here.” In fact, Pozen says, “most individual investors are probably throwing them [financial statements] in the trash, and sophisticated investors want a lot more information in different formats,” so no one is happy.


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