BUS103: Introduction to Financial Accounting

These obstacles to good financial reporting are challenging under the best of circumstances. They have become even more so as our economy has shifted to companies with intangible assets, the valuation of which is particularly difficult and subjective. So it is an appropriate time to examine whether there are ways to get different and improved metrics and indicators that are better suited to investors' needs. 

As we do so, however, there is one point that is worth keeping in mind. The current reporting framework - and in particular the MD&A - gives companies flexibility to provide useful information to investors outside the GAAP framework. In that spirit, we would love to see metrics and indicators that the market deems useful. Unfortunately, MD&A disclosure has not reached its full potential because companies view it as an obligation, rather than an opportunity to discuss their business with investors and potential investors. Last year, the Commission's Division of Corporation Finance reviewed the reports of all of the Fortune 500 companies. The Division's most frequent comments related to the MD&A, and typically cited instances where companies simply recited financial statement information with boilerplate analysis that did not provide any insight into the companies' past performance or business prospects. That, in my opinion, is a tremendous lost opportunity to fill the gaps in GAAP, and is one of the main reasons programs like this one are questioning the relevance of GAAP. 

Although we have been trying to limit the counter-incentives inherent in the process, there is no way to eliminate judgment and subjectivity from the reporting process. Any reporting framework - whether based on rules, principles, or objectives - will therefore present the potential for bad choices. 

In that sense, the reporting framework relies on a culture that demands and rewards good reporting. Aggressive interpretation, technical compliance, and gamesmanship have in too many instances replaced conservatism, full disclosure, and transparency as the guiding principles for financial reporting. I have no doubt that reporting under the current GAAP framework could be improved significantly by a culture that rewards and values good reporting. Conversely, it may be foolish to believe that we can improve corporate disclosure by changing the reporting framework without improving the underlying culture. I believe we must work on both. 

I hope that we are able to move the discussion of this important topic forward during the course of the day. And I hope that we end up with clearer, more transparent, and more useful metrics and indicators (and not fructooligosaccharide). 

Thank you. I would be happy to take your questions.