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August 14, 2008

US committee reveals ingredients to simplify financial reports

Key performance indicators and eXtensible Business Reporting Language (XBRL) are two tools Edward Nusbaum believes could significantly help investors better understand complicated financial reports.

The Grant Thornton US chief executive was one of 17 members on the US Security and Exchange Commission’s (SEC) advisory committee on improvements to financial reporting, which issued its final recommendations recently.

The committee was established in June last year to examine the US financial reporting system and suggest ways to increase the usefulness of financial information to investors, while reducing the complexity of the system to investors, preparers and auditors. Its members also included users of financial statements, former regulators, chief financial officers and Deloitte Global chief executive James Quigley.

The 25 final recommendations had five underlying themes:

• increase the usefulness of information in SEC reports;

• enhance the accounting standards-setting process;

• improve the substantive design of new accounting standards;

• delineate authoritative interpretive guidance; and,

• clarify guidance on financial restatements and accounting judgments.

No complete solution

Nusbaum said no single recommendation or even the cumulative effect of 25 recommendations will completely eliminate all layers of complexity.

“Part of the problem of course is that the world is complex. There are a lot of very complicated business transactions that take place and when you have complicated derivatives or financial instruments, the accounting is going to be complicated and there is nothing we can do about that,” he said. “Having said that, when you add up all of these recommendations, they do make a difference and they do have the cumulative effect of partially reducing complexity.

“For example, something like adding key performance indicators (KPIs) doesn’t simplify a company’s life, but it does provide useful information on a consistent basis to investors. And it should make it easier for investors to analyse the performance of a company – not just financial performance, but the overall development of a company. In essence, that reduces the complexity of the ability to analyse the financial results.”

KPIs would take the form of a short executive summary at the beginning of a company’s annual report to describe the most important themes and indicate where investors could find more detailed information on particular subjects.

Electronic tagging

The mandatory use of XBRL was also promoted as a way of simplifying the delivery of financial information.

Nusbaum said KPIs and XBRL are two recommendations Grant Thornton will be particularly active in implementing.

“We have been a leading supporter of both KPIs and XBRL. Grant Thornton will continue to play a leadership role in all of the recommendations, but particularly those two,” he said. The mid-tier leader said recommendations on providing guidance for accounting judgements and getting investors more involved in the standard-setting process were also important.

The accounting judgement recommendation suggested the SEC should issue a policy statement articulating how it evaluates accounting judgements, including the factors it considers when making evaluations. It was suggested the Public Company Accounting Oversight Board should also adopt a similar approach.

The statement of policy regarding accounting judgements should address the choice and application of accounting principles, as well as estimates and evidence related to the application of those principles, the committee said.

Suggested methods to further the involvement of investors in the standard setting process included adding investors to the Financial Accounting Standards Board’s (FASB) oversight board – the Financial Accounting Foundation, including more experienced investors on both the FASB and its staff, and re-evaluating the manner, timing and quality of the investor input received throughout the standard-setting process.

Nusbaum said many of the recommendations, such as the one on accounting judgement, could be implemented immediately by the SEC. However, other recommendations, such as XBRL and KPIs, could take a few years to implement effectively.

Carolyn Canham

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