Speech by SEC Staff:
Opening Remarks Before the Initial Meeting of the SEC Advisory Committee on Improvements to Financial Reporting
Conrad W. Hewitt
Chief Accountant, Office of the Chief Accountant
U.S. Securities and Exchange Commission
August 2, 2007
Thank you, Chairman Cox. Good morning. Also, I'd like to welcome all of you to the first meeting of the Advisory Committee on Improvements to Financial Reporting.
The formation of this committee has been a top priority for me. When I first interviewed with Chairman Cox in becoming Chief Accountant, he indicated his desire to form a committee to study how we could make improvements to our financial reporting system. As part of this effort, he wanted to see what could be done to reduce the complexity of financial reporting for the benefit of companies and investors. Based upon my experience on several boards and as chairman of several audit committees, I too thought this a worthwhile endeavor. I am very happy to be able to address the committee and welcome it to the public.
The U.S. system of financial reporting has long been the most robust and transparent in the world. However, in order to retain our position as the gold standard, we must from time to time step back and evaluate whether changes are necessary. From my various roles as an auditor, board director, audit committee chairman, and regulator over the years, it has become increasingly apparent to me that the current system has become overly complex. The financial reporting system needs to be improved to more effectively meet the needs of the entire spectrum of investors.
As you know, the Commission's mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Financial reporting permeates every aspect of this mission, making this committee an important element in supporting the Commission's role in the U.S. capital markets. Please consider the following.
Today, equity securities are broadly held, with approximately half of American households investing in stocks. This presents a challenge — investors have expressed concerns that the one-size-fits-all financial reports of today do not meet the needs of the spectrum of investors that rely on those reports. Individual investors may be interested primarily in summarized, plain-English reports that are easily understandable, and may find difficult to understand all of the underlying detail included in financial reports that are currently produced. On the other hand, market analysts and other investment professionals may desire information at a far more granular level than is currently provided. Technology certainly must play a role in delivering the customized level of information that different types of investors desire.
Aside from investors' concerns, companies have expressed concerns with our current financial reporting system. Many companies assert that it is difficult to ensure compliance with the voluminous requirements contained in US GAAP and SEC reporting rules when preparing financial reports. In fact, during 2006, almost 10% of US public companies restated prior financial reports. This is an alarmingly high number, and has the potential to obscure those companies with serious underlying problems and those with unintentional misapplications of complex and nuanced accounting literature. Restatements are costly to companies, and can undermine the confidence of investors in the financial reporting system.
Committee members, as you study these issues, I encourage you to look beyond the accounting applied in the basic financial statements and footnotes. You should consider more broadly the array of information that investors need to make informed decisions. The U.S. capital markets can run fairly, orderly and efficiently only through the steady flow of comprehensive and meaningful information. As some have noted, the percentage of a company's market value that can be attributed to accounting book value has declined significantly from the days of a bricks and mortar economy. Thus, you may want to consider a more comprehensive business reporting model, including both financial and non-financial key performance indicators. We must also consider how to deliver all of this information more timely. In the 21st century, in a world where messages can be sent across the world in a blink of an eye, it is ironic that the analysis of financial information is still subject to many manual processes, resulting in delays, increased costs, and errors.
As you can see, the improvement of financial reporting involves more than, for example, an effort to trim down the hundreds of pages of guidance on accounting for derivative instruments. Instead, to me, improvements to financial reporting go beyond the complexity debate to encompass the usefulness of financial reporting and the delivery of information to investors. As you consider these issues, I encourage you to consider how you define complexity and the scope of areas that you believe should be addressed as part of an effort to improve financial reporting.
Throughout the next year, I also encourage you to consider the expertise and work performed by others in tackling the many facets of this issue. Academics, organizations and private citizens alike have performed research and provided numerous recommendations that may bear on the matters you will deliberate. They will also continue to do so via the many opportunities for public comment this committee will provide.
In some cases, activities related to the many topics you will consider are already underway — for example, reconsideration of the conceptual framework by the FASB and IASB, codification of US GAAP by the FASB, international convergence efforts, development of an enhanced business reporting framework, and use of XBRL, among others. However, I also encourage you to begin your considerations with a blank sheet of paper, an open mind that is not bound by past precedent, current activities, popular or fad views and opinions, or political pressure. I suggest that you consider "thinking outside the box."
I recognize the ambitious nature of our goals and the enormous amount of work ahead of us. However, with the formation of this committee, we have the potential to continue to improve our financial reporting system, solidifying the position of the U.S. capital markets as the most transparent and reliable in the world. I am confident that with your varied backgrounds, experience, and points of view, as well as the participation of those you represent in this process, we will be able to address the matters that lie before us.
In closing, for many years into the future, investors should benefit from your recommendations. I sincerely appreciate your commitment to this committee. My staff and I look forward to working with you in this process. Thank you for your time and efforts.
With that, I will now turn the floor over to my Deputy Chief Accountant, Jim Kroeker, to call the meeting to order and will turn the floor over to Bob Pozen, Chairman of the Advisory Committee on Improvements to Financial Reporting. Jim?