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November 14, 2007

Stakeholders debate the future of financial reporting

Stakeholders debate the future of financial reporting

The state and future of financial reporting was debated by three stakeholders at the PricewaterhouseCoopers (PwC) UK Meet the Experts event in London recently.

Bill Knight, chairman of the UK Financial Reporting Review Panel (FRRP), represented regulators; Richard Sexton, a partner and head of assurance at PwC UK, represented auditors; and Lindsay Tomlinson, vice chair of Barclays Global Investors, represented investors. It was Tomlinson’s presentation that elicited the most heated discussion. He said many accounting experts in the investor community don’t want financial reporting to be improved because they want to exploit the anomalies – as they see that as their market advantage. “Those that do want to help don’t have time,” he said.

Tomlinson said there is a general support for convergence within the investor community. However, the community is wary that it is a means of adopting US GAAP and are worried the International Accounting Standards Board (IASB) is too close to the US Financial Accounting Standards Board (FASB).

Tomlinson outlined what UK investors want from financial reporting. “We expect the financial statements to be for us,” he said, adding that they don’t want to lose principles-based standards and believe cases such as the Enron and Parmalat scandals were a result of too much rules-based accounting.

Greater participation Tomlinson noted that investors are becoming more interested in participating in the financial reporting debate. “We’ve reached the point where we’re participating; we’re just not sure if anyone is listening,” he said.

In a panel discussion following Tomlinson’s presentation, FASB chair Bob Herz was quick to disparage many of Tomlinson’s comments. In reply to Tomlinson’s comment about investors not being listened to, Herz said: “I’d say that’s rubbish.” He added: “We get an awful amount of input in the US and have done for a number of years.”

IASB board member Warren McDonald agreed with Herz: “Like FASB, we have a great deal of interaction with the investor community. They are a small group and they are busy, but you can’t have it both ways.”

Sexton used his presentation to suggest four options for the future of financial reporting: continuation down the current path, reporting driven by users’ needs, real- time reporting and disaggregated reporting.

He said continuation down the current path could lead to increasingly long, consistent but irrelevant reporting. He described it as reporting that becomes more academic and theoretical as it is developed by academics who don’t use it. Sexton suggested that this type of reporting would meet the needs of regulators, but less so those of other users.

Users’ needs Sexton suggested that reporting driven by users’ needs would be concise, focused and more principles-based. He said it would involve all stakeholders engaged and working together, and would fulfil the needs of capital markets. However, he warned that it is not all positive as “users’ needs can be confusing and inconsistent”.

Sexton said real-time reporting is “often spoken about as the future, but there are challenges”.

He said that if he had to back one of the four options, it would be disaggregated reporting, as it allows the construction of “more purposeful reporting for particular user groups”. Still, he warned, this method would be a challenge for preparers and although it is more relevant, it is perhaps less consistent. “Regulators would struggle because ultimately the market would have to regulate itself,” he said.

Knight said the FRRP believes in maintaining quality in a principles-based environment, consistent application of IFRS and interaction with global regulators. He highlighted one of the panels’ primary aims as identifying where the risk lies. “Size matters,” he said, explaining that listed and large private companies are under the panel’s scrutiny. The panel also watches over sectors under strain and reacts to complaints.

Knight explained that once the panel identifies risk, it analyses financial reports to check if they comply with IFRS. “If you don’t understand the revenue recognition, there are two possible answers – either it’s explained badly or it’s wrong,” he said.

He stressed the panel’s commitment to principles-based regulations. “Principles-based regulations require judgement,” he said. “We have no doubt it should be the judgement of the board and so long as we believe it is justified, we will not try and impose our judgement.”

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