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.
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By GlobalDataIn 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.”
