Obstacles to Good Financial Reporting

The beginning of the reporting process involves adopting the standards companies will use to construct their reports. There are several problems that can arise at this stage. 

The standard-setting process itself can be subject to political pressure and other external influences, with the end result being standards that may not reflect the economics of a transaction in a neutral, unbiased manner. If that is the case, then we have essentially lost the game before it even started, because the standards themselves contribute to a lack of transparency. This concern led Congress to provide the standard-setters (i.e., the Financial Accounting Standards Board) a greater degree of independence by providing them with an independent source of funding. 

Another problem is that standards that incorporate too many detailed rules and requirements can be too complex, and also can fail to capture a transaction's economics. The pace of business innovation has outstripped innovation in accounting standards. In too many instances, detailed accounting rules have been misused as a roadmap to structure transactions to reduce transparency. In a rules-based world, the standards will almost always be one step behind, which is one of the reasons the Commission's staff recently suggested that it is time to evaluate whether a more objectives-oriented system would better achieve our goals.