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Advisory Committee on Improvements to Financial Reporting Convenes First Meeting

Robert Pozen, the chairman of MFS Investment Management who was selected to head the Advisory Committee on Improvements to Financial Reporting, said the committee is needed because of the high stakes in getting financial reporting right and because of the continuing high incidence of restatements. Investors cannot understand the disclosure documents, he added, and would prefer summaries that are easier to read. Sophisticated investors, on the other hand, say there is not enough information, or at least not enough of the right kind. Press releases have become an alternative communication vehicle for finding out what is really important, according to Pozen.

Because of the U.S. litigation environment, Pozen said those who are trying to get it right desire rules. He does not believe "principles versus rules" is the answer. The committee's mandate is to provide proposals by next August. Pozen said he hopes the committee's recommendations will be easy to adopt and will not require legislation. The committee needs to take advantage of the support is has from the SEC and the PCAOB, he said, unlike other groups that have formulated recommendations on their own initiative.

Pozen said he also hopes the committee's recommendations will be focused. It is impossible to address every single issue that arises in connection with financial reporting, he said. The committee should not be judged by whether it develops 100 recommendations, in his view, but whether it proposes 10 or 12 items that can be implemented to make significant improvements to financial reporting.

Pozen prepared a discussion paper which outlines the areas of focus for the committee as complexity, the standard setting process, compliance audits, the delivery of information and international coordination. The SEC is very active in the last area, Pozen noted, so he suggested that the committee concentrate on the first four items in order to benefit later from the comment letters submitted in response to the SEC's recent proposals on international financial reporting standards.

Committee member Denny Beresford, a professor at the University of Georgia, sees the biggest issue as how to make financial reporting relevant and useful. Complexity is a much more long-term problem than what the committee can resolve in a year, he said. Beresford believes that MD&A, while burdened with excessive legalisms and boilerplate, still provides a lot of meaningful information. The clear winner is the earnings release where companies provide real information that is indispensable to the investor community, in his view.

Joseph Grundfest, a professor at Stanford Law School, suggested that no one remembers any lasting contributions that previous advisory committees have made. In order to ensure that this committee's recommendations are useful, he said it should be open to all good ideas from all parties. In the area of technology, Grundfest said that XBRL is a better language that nobody speaks. It is a technical success but a marketing failure, in his view, so the committee should try to jump start its wider acceptance. As for principles versus rules, Grundfest urged the committee to get past that rhetoric and explain when to use each.

Greg Jonas, the managing director of Moody's Investors Service, believes it is a critical time for financial reporting with many big issues in play. He described an unprecedented level of regulation reflecting years of improvements, but noted that no one ever steps back to see if it makes sense as a whole.

G. Edward McClammy, the CEO of Grant Thornton, believes that generally accepted accounting principles are being set by too many forces, whether intended or not, including the SEC's comment letters and the PCAOB's inspection reports. Thomas Weatherford, a board member at a number of companies, said that smaller companies in particular are overwhelmed by the number of accounting developments from various sources. If 100 countries can use IFRS, why can't the U.S., he asked.

James Quigley, the CEO of Deloitte Touche Tohmatsu, and David Sidwell, the CFO at Morgan Stanley, agreed that the work of previous groups is important, including a look at why their recommendations were not implemented.

John White, the director of the Division of Corporation Finance, reminded the committee that it is his staff that will be responsible for drafting any rulemaking proposals and urged the members to provide practical recommendations. White also pointed out that the Advisory Committee on Smaller Public Companies submitted 25 recommendations, a number of which have been proposed for comment. He also noted that the staff will be acting on a number of initiatives that the committee intends to consider, such as XBRL, before next August, and urged the committee to consider making interim recommendations where progress is already underway at the SEC.

Pozen said the committee will try to "make itself famous" with a limited number of usable recommendations. The committee will work with Corporation Finance, he added, and will heed its advice on the use of interim recommendations.

Jacquelyn Lumb