Obstacles to Good Financial Reporting

Read these remarks from a former SEC Commissioner, which goes behind the scenes to discuss issues of reporting financial information for public companies. GAAP is integral in reporting transactions.

I. Introduction

Good morning, and thank you for inviting me to participate in this important program. I am glad that the financial reporting debate is big enough to leave room for more than one Glassman on the program. Before beginning, I should point out that the views I express are my own and not necessarily those of the Securities and Exchange Commission or its staff. 

I must admit that, although we are here to discuss financial reporting issues, in some ways I feel like the Commissioner of the Food and Drug Administration must have felt a decade ago, as he pondered whether to require companies to disclose the nutritional information we see on the side of every food package. For as long as I can remember, FDA regulations have required food companies to disclose the ingredients of their products. That was useful information for consumers when the ingredients were things like eggs, milk, flour, and sugar. As foods became more (shall I say) "sophisticated," that information became less useful in trying to plan your diet. I frankly do not know whether fructooligosaccharide will help me live a long, active life, or whether it will kill me. So the FDA came up with a new paradigm to give consumers the critical information they need to know - which for most of us is how many grams of fat, protein, and carbohydrates there are. 

We have reached a similar crossroads with respect to corporate reporting. Company filings today contain more information than they have at any time in history. But when we talk about things like fair value or intangible assets, it is not entirely clear that we are getting good quality information about the ingredients, much less whether or not they are "healthy" for investors. 

Over the past 18 months, the Commission has addressed many of the systemic issues that were exposed by the corporate scandals. Much of our work has focused on improving corporate governance and improving the professional conduct of auditors, analysts, lawyers, and corporate officers and directors. We have also tried to increase transparency of disclosure in some specific areas such as off-balance sheet transactions and the use of non-GAAP financial information. 

More recently, in our report on objectives-oriented accounting standards, we have focused attention on the corporate reporting framework. We have been asking some fundamental questions about what we require public companies to report, and whether the framework is adequate to ensure that investors get information that allows them to answer their key question - whether the product is good for them. This is not a coincidence. While there have been several notable failures by gatekeepers whose job was to prevent large-scale fraud, we cannot ignore the role reporting standards themselves played in enabling corporate mischief. 

You will be spending a good portion of your day assessing how well - or not well - Generally Accepted Accounting Principles or "GAAP" are suited to providing quality financial information to the market. I will focus more generally on the financial reporting framework, and some issues we need to address to keep it relevant for businesses that do not lend themselves to easy measurement. Of equal importance is whether the metrics or indicators we use to value companies have become less useful, or even obsolete, as we have moved from a manufacturing to a service economy. I will then leave the ball in your court - and fully expect that by the end of the day you will have resolved all of these issues and will have a blueprint for quality financial reporting in the U.S. 

Source: US Securities and Exchange Commission, https://s3.amazonaws.com/saylordotorg-resources/wwwresources/site/wp-content/uploads/2011/11/SAYLOR-BUS103-5.2.pdf
Public Domain Mark This work is in the Public Domain.