CIFR Delivers Recommendations for Improved Financial Reporting
With an eye toward making financial reports more useful and less confusing for investors, the Security and Exchange Commission (SEC) Advisory Committee on Improvements to Financial Reporting (CIFR) has submitted its 25 recommendations to the SEC designed to reduce unnecessary complexities in the U.S. financial reporting system.
The report was the final product of a year-long effort by CIFR, which is comprised of members representing investors and other key constituencies in the nation’s capital markets. It was delivered to the SEC on Aug. 1, 2008 by CIFR Chairman Robert C. Pozen, who noted that "our recommendations would make financial reports more useful to investors - with clearer guidelines, fewer exceptions and greater focus on really important information."
In its report, CIFR provides recommendations to improve financial reporting in five key areas:
- Increasing the usefulness of information in SEC filings, in part by requiring companies to provide a brief executive summary at the beginning of their annual reports that concisely describes the main aspects of the business and key performance metrics.
- Enhancing the accounting standards-setting process, including more investor participation through the expanded representation on the Financial Accounting Standards Board (FASB) and the Financial Accounting Foundation (FAF).
- Improving the substantive design of new standards, such as improved rules on off-balance sheet accounting, fewer situations where alternative accounting standards exist for the same transaction and better disclosure to investors about what portion of a company’s earnings constitutes cash or accrued income and what portion represents unrealized gains or losses based on fair value estimates.
- Delineating authoritative interpretive guidance, including finalizing codification of all authoritative accounting literature into one document and clearer delineation of functions on interpreting accounting standards, with the FASB taking the lead on broad issues and the SEC on registrant-specific issues.
- Clarifying guidance on financial restatements and accounting judgments, such as increased correction of accounting errors and more disclosures about those corrections to investors.
In the report, CIFR notes: “We believe that financial reporting should provide information that aids investors in making investment, credit, and similar resource allocation decisions. Of paramount importance are investors, defined as all providers of capital, including current and potential providers of equity capital and creditors. Some argue that, over time, financial reporting has become a burdensome compliance exercise with decreasing relevance to investors.”
CIFR attributes the changes, in part, to:
- The evolution of new business strategies and financing techniques that stretch the limits of what the traditional reporting framework can effectively convey.
- An overly litigious culture that, arguably, results in financial reporting designed as much to protect against liability as to inform investors.
“As a result, we believe the disconnect between current financial reporting and the information necessary to make sound investment decisions has become more pronounced,” states the report.
The recommendations are meant for implementation by the SEC, FASB and the Public Company Accounting Oversight Board (PCAOB). According to SEC Chairman Christopher Cox, the SEC will begin evaluating the recommendations immediately.
"I commend the Advisory Committee and Chairman Pozen for their work to make financial reporting less complex and more useful to investors,” he said. “I have asked the Commission staff to immediately begin analyzing these recommendations, and to prepare regulatory actions based on them wherever appropriate.”
Also in this month's issue: