gaa finanancial reporting way forward

7/31/2019 GAA Finanancial Reporting Way Forward

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Making Financial RepoRting

SiMpleRandMoRe USeFUl

The Way Forward

A report on roundtables convened by the Global Accounting Alliance


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Published December 2009Global Accounting Alliance Ltd

2009ISBN 978-1-904574-61-3

EAN 9781904574613

Tis document is published by Global Accounting Alliance Ltd (GAA). Te viewsexpressed are those o the speakers at the roundtable discussions held in March,

April and July 2009, and do not necessarily represent the views o the organisationor which they work, or o the GAA Board.

No responsibility or loss occasioned to any person acting or reraining rom actionas a result o any material in this publication can be accepted by the authors or the

publisher.

All rights reserved. No part o this publication may be reproduced, stored in aretrieval system, or transmitted in any orm or by any means, electronic, mechanical,photocopying, recording or otherwise, without appropriate acknowledgement o

the publisher.

Copies o this document are available rom the GAAs websites:

www.globalaccountingalliance.com

www.gaaaccounting.com


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Page

Foreword................................................................................................................................... 1

Acknowledgements..................................................................................................................... 2

Introduction - Te Way Forward.............................................................................................. 4

1. London Roundtable ............................................................................................................... 6

2. Beijing Roundtable ............................................................................................................ 8

3. New York Roundtable ........................................................................................................ 9

4. Te Heart of the Matter .................................................................................................... 11

Te transorming eect o principles and the exercise o judgement ................................ 11

Te need to reverse the growth o complexity .................................................................. 12

Te challenge o regulators and audit rms ...................................................................... 14

Te needs o analysts ....................................................................................................... 14

Te Warren Buett panacea ............................................................................................ 14

Te value o XBRL ......................................................................................................... 15

Te dead hand o the lawyers inuence .......................................................................... 15

5. Conclusion - Consensus and Action ................................................................................. 16

aPPendix1: Te Global Accounting Alliance ........................................................................ 17

Table of contents


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F o r e w o r d by Kevin Dancey FCA - Chair , Global Account ing Al l iance

Te Global Accounting Alliance (GAA) released

its report Getting to the Heart o the Issue: Can

Financial Reporting be made Simpler and More

Useul in December 2008. Tis reported on a

series o interviews undertaken across the globe as

part o a GAA research project on two key issues

aecting nancial reporting: the structure and

culture o accounting standards, oten termed the

principles versus rules debate, and the growing

complexity and detail contained in companynancial statements. Te report is available rom

any o the GAA member bodies or rom the GAA

website gaaaccounting.com.

Tis document reports back rom a series

o three Roundtable discussion events which the

GAA subsequently held in London in March, in

Beijing in April, and in New York in July. Tese

discussed the themes emerging rom our original

report and sought to assess the degree o consensus

on the key issues.

In some respects, December 2008 was not aparticularly avourable time to issue our original

report. Te world was in the midst o a serious

nancial crisis and Governments and regulators

were ocusing on ameliorating the impact o the

crisis and starting to think how they could ensure

that this never happens again. Specic aspects o

nancial reporting came under the microscope,

particularly the need or a level playing eld

between the US and Europe, and the issue o air

values.

Our report seemed to push against the tide.

A number o commentators had called or harsher

regulatory regimes, and some had dismissed

principles based rameworks as too sot. Tis

contrasted with the views expressed in our report

which, in relation to nancial reporting at least,

would tend to the view that principles based

rameworks which are properly and responsibly

enorced are much more eective at achieving the

desired regulatory outcomes.

Additionally, calls were made or more

disclosure in inancial statements and annual

reports, in the belie that such additional disclosure

might have exposed the banks unsustainable

business models at an earlier stage. Tere is clearly a

risk thereore that nancial statements may become

even longer and more complex, and this contrasts

with our original report and the views emergingin the Roundtables which call or better quality

communication and not just more disclosure.

Te GAA would like to thank all those who

participated in the three Roundtable events in

London, Beijing and New York, or sparing the

time to engage in this important debate: these are

listed on the Acknowledgements page.

he GAA looks orward to contributing

urther to the debate on how to improve nancial

reporting. We hope that this report, combined

with our original report reerred to above, willassist in providing some ocus and direction to

that debate, and help to move us towards a better

communication ramework or corporate reporting.

Kevin Dancey FCA

President & Chie Executive Ofcer

Canadian Institute o Chartered Accountants

December 2009


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Te Global Accounting Alliance would like to thank the panellists in each o theRoundtables, and also those who chaired the Roundtables and made presentations:

Robert BruceFinancial Journalist

Neri BukspanChie Quality Ofcer and Chie AccountantStandard & Poors

Wayne CarnallChie Accountant o the Division o Corporate FinanceSecurities and Exchange Commission (USA)

Paul CherryChairmanStandards Advisory Council o the International Accounting Standards Board

Frank DAndreaDirector o Corporate Accounting and ReportingHydro One (Canada)

Robin Freestone

Chie Financial OfcerPearson plc

Bob GarnettBoard member o the International Accounting Standards Board

Stephen HarrisonChie ExecutiveGlobal Accounting Alliance

Bob Herz

ChairmanFinancial Accounting Standards Board

Dr P M KamGroup Financial Controller

Jardine Matheson

Ken LeeDeputy Head o Equity ResearchBarclays Capital

A c kn o w le d ge m en t s


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Jerey LucyChairmanFinancial Reporting Council (Australia)

Daniel NollDirector o Accounting StandardsTe American Institute o Certied Public Accountants

Bill PalmerDirector (Asia)Te Institute o Chartered Accountants in Australia

Dr Nigel Sleigh-JohnsonHead o the Financial Reporting FacultyTe Institute o Chartered Accountants in England and Wales

Arleen TomasVice President or Member Competency and DevelopmentTe American Institute o Certied Public Accountants

Sir David weedieChairmanInternational Accounting Standards Board

David Wood (Project Leader)Executive Director, echnical PolicyTe Institute o Chartered Accountants o Scotland

Ian WrightDirector o Corporate ReportingFinancial Reporting Council (UK)

Dr Liu YutingDirector-General - Accounting Regulatory DepartmentMinistry o Finance in the Peoples Republic o China


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From a preparers perspective the report emphasises

how we need to apply complex accounting standards

to an intricate business environment. For us to do that

efectively in a clear and transparent manner we need to

step back and look at developing a principles-based or an

objectives-based disclosure ramework that allows us to

communicate in a manner thats more useul, organised,

and transparent.

hat was how Frank DAndrea, Director oCorporate Accounting and Reporting with Hydro

One in Canada, summed up the key message o the

previous Global Accounting Alliance report and how

the nancial reporting community could make its

ndings and recommendations into reality. He was

speaking at one o the three Roundtables which the

GAA organised to carry this work orward. Te rst

was held in London in March 2009, the second in

Beijing in April 2009 and the third in New York in

July 2009.Te original report: Getting to the Heart o the

Issue: Can Financial Reporting be made Simpler and

More Useul? was published at the end o 2008 and

had brought together the ndings rom an extensive

series o interviews carried out earlier that year with

a wide range o stakeholders in nancial reporting

around the world. Te objective had been to identiy

the barriers to the application o a more principles-

based accounting regime and how the current

complexity and detail in listed company nancial

statements could be reduced, so as to ocus on bettercommunication with nancial statement users.

Tat report, ull o insights into the process

that might be required, passed on a series o issues

or consideration and charged the key stakeholders

in nancial reporting to consider them and provide

answers. Te ndings had suggested that there was

one overall question: I everybody supports principles-

based accounting why can we not move more towards

it and why can we not get shorter, simpler, more

principles-based standards? And hanging rom those

undamental questions were others. Principles andrules are not mutually exclusive. Both are required

and a balance is needed. Te issue is where on the

spectrum we should be.

Te ideas around these undamental issues were

broken down into a series o more specic questions

and those provided the oundation or the structure

o the Roundtables held around the world.

Tis report provides summaries o the range o

discussions and views expressed at the Roundtables

held around the world. It then provides a lengthiersection explaining where there was consensus, as well

as examining the many emerging ideas, thoughts and

actions proposed. A brie conclusion draws these

together and proposes uture actions which should

lead, slowly but surely, to nancial reporting becoming

simpler and more useul.

I n t r o d u c t i o n - T h e W a y F o r w a r d


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Issues for further consideration

Based on the research, the GAA calls or the

ollowing questions to be considered by the key

stakeholders in nancial reporting:

1. Should an agreed international ramework

or accounting standards be adopted - with a

clear hierarchy comprising: (i) the conceptual

ramework which sets out the undamental

principles; (ii) outcome-oriented and principles

based standards which establish how the

undamental principles are applied to particular

subject areas; and (iii) sufcient additional

guidance to acilitate practical implementation

o the standards?

2. Should guidance be provided or preparers

and auditors on the exercise o judgement inthe application o principles based standards

and on the documentation o reasons or

the judgements made, or example by means

o an internationally accepted proessional

judgement ramework?

3. Should regulators be encouraged to accept a

reasonable degree o variation in accounting

treatments and to take a more eective,

outcome oriented approach to regulating,

engaging more experienced sta as necessary tosupport this approach? As a rst step, should we

encourage a debate with regulators as to what is

a reasonable degree o variation in accounting

treatments?

4. Should a single denitive set o general purpose

nancial statements be retained, or should we

accept that it is impossible to ull the needs o

all users with one set o nancial statements?

5. Should standard setters, in conjunction

with business, investors and other users, be

encouraged to actively seek to drop requirements

considered redundant or superuous?

6. How can company boards be encouraged

to ocus on the communication value o the

nancial statements rather than the compliance

aspects? Why are Warren Buetts letters

regarded as so eective?

7. By reerence to existing precedents and market

practices in this area, should an international

ramework or high level summary nancial

statements be developed which can provide

inormation suitable or retail and less

sophisticated investors, encapsulating summarynancial inormation drawn rom the general

purpose nancial statements and balanced and

inormative narrative inormation?

8. Should general purpose nancial statements be

developed and published in XBRL ormat so as

to orm an inormation database which allows

users to drill down to whatever level o detail

is required?

9. Should company communication be improvedthrough the use o clearer language, less jargon

and coded language, and a ocus on clarity and

transparency?

10. How has the recent nancial crisis aected the

debate on these issues?

Extract rom 2008 GAA Publication Getting to the Heart o the Issue: Can Financial Reporting be made Simpler

and More Useul?


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Te London Roundtable was chaired by nancial

journal ist Robert Bruce and consisted o Robin

Freestone, CFO o Pearson plc, the publishing

empire which includes the Financial imes, Bob

Garnett, Board Member o the International

Accounting Standards Board, Ken Lee, at that time

Head o Accounting, Valuation and Research with

Citigroup and Ian Wright, Director o Corporate

Reporting at the Financial Reporting Council andthe man behind the FRCs work on trying to reduce

complexity in inancial reporting. David Wood

and Nigel Sleigh-Johnson rom the Institute o

Chartered Accountants o Scotland and the Institute

o Chartered Accountants in England and Wales, both

members o the GAA Project team, started the event

with a brie presentation.

Troughout the event the emphasis was on the

practical aspects o what could be done. Te panel

started by making their current thoughts clear. For

Robin Freestone, the complexity was created largely tomeet the many needs o a diverse investor community

and or him the key was comparability. And he was

also unsure about how ar principles helped him as

a CFO when he elt his deep desire was simply to

comply. Tough he, like others on the panel, elt that

aspiring to explain nancial reporting in what came

to be seen as the Warren Buett way would help.

Bob Garnett pointed up some paradoxes. Te

IASB had introduced a principles-based standard on

disclosing inormation about nancial risk, IFRS7,

which had asked people to describe, rom the view

o management, how inancial risks were being

handled. And what had happened? We got a lot o

boilerplate, suggested Garnett. We did not get any

useul inormation whatsoever. He thought that an

emphasis on narrative had additional benets in that

it became a discipline across the company itsel as well

as being useul to investors. He also questioned the

idea o assuming that people made decisions based on

general purpose nancial statements. He elt people

used the inormation to build their own models rather

than to make decisions based on the inormation.

And he stressed the limitations o nancial reporting

data. In the pharmaceutical or biotech industries

what people were interested in was what potential

developments were coming through. And all that can

be ound in the nancial reporting are undierentiatedexpenses which do not tell you anything about what

is happening. In the end he thought that the gures

should not be allowed to dominate the reports

at the expense o a clear explanation. Reports

had to be shorter and concise, clear, reasonable

and understandable, so that the chairman o an

audit committee or a reasonably competent and

sophisticated investor could understand what they

are trying to portray.

It then ell to analyst Ken Lee to point out that

analysts were very dierent people and came romvery dierent standpoints and so needed a mass o

inormation relecting those dierences in need.

Some analysts would love more narrative and would

love a Warren Buett approach, while analysts

specialising in quantitative analysis would ignore

narrative entirely and ocus on data alone. He elt the

answer was not just to make reporting less complex

and simpler but also to attempt a type o layering

so that investors could nd the kernel o truth or

which they were searching. He also introduced the

idea that none o this would come about through a

great moment o revelation, trying to achieve it all in

one go. He elt it had to be nudged along, slowly and

incrementally, through small steps, achieving better

quality, better understanding, the use o technology,

better audit understanding, better understanding o

what users wanted, better drating o the accounts by

management, and so on.

L o n d o n Ro u n d ta b le


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Ian Wright elt that the nudging had to

concentrate on people providing less, but more useul,

inormation. Tere were an awul lot o debates about

what can be added in but no one ever had discussions

about what could be deleted.

In the subsequent lively discussion, people made

the point that starting rom the new SME standard

might be a sensible benchmark. People could then

ask how much more complexity the entity needed.Others worried that a regulatory space was opening

up between what standard setters put in a standard

and what happened in practice. he worry was

that this space would be occupied by auditors and

regulators, who would in eect be making a ruling and

enshrining common practice as the deault standard,

which was not necessarily desirable. A straw poll was

held which suggested that complexity was unlikely

to be overcome. And in the nal panel summing-up

the emphasis was on the need to change our own

behaviours which was not something which derivedrom more regulation.


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he Beijing Roundtable was chaired by Stephen

Harrison, Chie Executive o the Global Accounting

Alliance and conducted by Bill Palmer, Director,

Asia, or the Institute o Chartered Accountants in

Australia. Te panel consisted o Sir David weedie,

chairman o the International Accounting Standards

Board, Dr Liu Yuting, Director-General o the

Accounting Regulatory Department o the Ministry

o Finance in the Peoples Republic o China, Jerey

Lucy, chairman o the Financial Reporting Council inAustralia, and PM Kam, Group Financial Controller

o Jardine Matheson and member o the IASB

Standards Advisory Council.

Bill Palmer started the proceedings o with a

view that the consensus was that nancial reports were

too complex and that principles needed to be retained.

Sir David weedie ollowed on by pointing out that

he had started his career in the days when there were

no accounting standards and thereore judgement

had to be used. IFRS now consists o about 2,500

pages, US GAAP is nearer 10,000 and the new IASB

standard or SMEs 250. He suggested that much o

the current complexity was due to that build up o

what he called micro-accounting. He suggested that

a high level statement o: Show the liability you had

incurred by signing the lease contract and the rights to

the asset you have attained therebywould cover most

o what anyone could possibly want rom a leasing

standard. And he reiterated his ot-quoted advice to

people who ask what they should do in particular

circumstances: You do your best. Te problem withthe prolieration o, particularly US, rules was that you

needed a search engine to do the accounting that way.

He was ollowed by Director-General Liu who

stressed the need to increase the useulness o nancial

reports. He reported that Chinas accounting systems

were in good shape and that he had not ound any

problems with the idea o principles-based standards.

It was a question o everyone in the nancial reporting

supply chain pulling together to address the issues o

complexity.

Jerey Lucy stressed how much cultural change

IFRS had brought about and suggested that another

actor was the signiicant increase in regulatory

intervention which, as he put it, had taken a lot o

oxygen away rom the proession. In the years since

Enron, the accountancy proession had been under

greater stress rom a higher level o expectation rom

the rest o the market. But he was cheered by the lack

o demand or interpretations, which he had eared

would undermine the implementation o IFRS. Tisenhanced the value o truly principles-based standards.

For PM Kam this was the great test. Te danger

o having too much guidance was that it would simply

turn into rules whereas much o what was required was

simple common sense. Tere had been ar too much

complication in accounting standards in the past and

preparers had not helped by trying to be too creative.

In the end standards had to be written in plain

English so that even a student could grasp their gist.

He thought that the gradual growth o inormation

in nancial reporting which had been driven by a

need to satisy every user in detail had changed the

nature o the reports. Te whole process had become

a compliance exercise rather than a communication

exercise. A new clarity project was required.

During the roundtable there were discussions

o the issue o how regulators would deal with the

inevitable disparity in treatment that a true exercise

o judgement based on principles would bring about.

Jerey Lucy argued that recent experience showed

that regulators tended not to take on a preparer andan auditor where both had acted in good aith. Other

questions covered the issue o what happened when

some preparers became too creative in their judgement

and PM Kam suggested that there might have to be

some guidance, but very brie guidance, so that the

essence o principles could be adhered to. In the end,

he suggested it was a question o mindset. It might

take a long time. But eventually it would work.

Be i j i n g Ro u n d ta b le


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Te New York Roundtable was chaired by Dan Noll,

Director o Accounting Standards at the AICPA

and moderated by Arleen Tomas, Senior VP at the

AICPA or Member Competency and Development.

Te panel consisted o Frank DAndrea, Director o

Corporate Accounting and Reporting at Hydro One,

Wayne Carnall, Chie Accountant o the Division o

Corporate Finance at the SEC, Paul Cherry, Chairman

o the Standards Advisory Council o the IASB, Neri

Bukspan, Chie Quality Ofcer and Chie Accountantat Standard & Poors and Bob Herz, Chairman o the

Financial Accounting Standards Board.

Frank DAndrea started the event o by

reminding everyone that what they were discussing

was an age-old problem. Users o nancial statements

had long echoed their concerns over the complexity o

nancial reporting. He elt they had to step back and

think the issue through anew, and then move on it.

Wayne Carnall urged both preparers and auditors

to stop looking at nancial reporting documents as

compliance documents but to look at them instead as

inormational documents, and then urged them to not

write them just to protect themselves rom litigation

or to satisy a regulator.

Paul Cherry said it was important to admit that

there was a serious problem and that chipping away

at the edges was not going to accomplish anything.

A strategy was required. But the problem was that

everyone was out ireighting and never devoted

enough time to really sorting the issue out. People

had to decide whether or not they really cared whetherpeople could understand nancial statements or not.

Neri Bukspan ollowed on by suggesting that

it was time or pencils down, as he put it. Te

solution did not lie in xing accounting. Te solution

lay in thinking whether the inormation was clearly

packaged. But he warned that in reducing complexity

it was important to avoid diminishing utility.

For Bob Herz, the starting point was reiterating

that nancial reporting was a means o communication

between companies and the providers o their capital.

Unortunately, as the process had developed, it had

become more useul to accountants, auditors, lawyers

and regulators. Te original purpose had become lost.

He also wanted to distinguish between avoidable

complexity and unavoidable complexity. And he was

sorry that the notion o a judgement ramework

had, in this post-crisis period, come to be seen as

deregulatory and rowned upon by some. He elt that

getting issues like measurement and presentation in

nancial statements right would help. Paul Cherry

agreed. It would lead to clearer, simpler standardsthat are objective-based. But it came down to the

point o whether people were comortable with the

current style o a typical nancial report. He said that,

personally, he was not.

Wayne Carnall bemoaned the pressure on the

SEC to keep coming up with immediate solutions.

It only incrementalised the problems and brought

greater complexity all round. Frank DAndrea said

that what was needed was an environment where

proessional judgement would be accepted, but

that meant variability which made it difcult or

outsiders. He wanted something closer to the internal

accounting which management used to run the

business rather than the external reporting which too

oten became a compliance checklist.

As at the London Roundtable, there was a

discussion about perhaps stratiying inormation

and providing dierent levels o reporting. But, as

Wayne Carnall pointed out, once you have let people

have a particular amount o inormation they are not

going to put up with less, regardless o its quality. Hereminded people that back in the 1990s proposals

or summary inormation received a very negative

response.

Bob Herz emphasised that Warren Buett style

narrative reporting was ne i you trusted the people

concerned but, although hard to believe, some people

liked to spin. Wayne Carnall added that the increase

in the volume o pages o disclosure in a nancial

report does not necessarily mean an increase in the

value o inormation. Te difculty, all agreed, was in

New Yo r k Round tab le


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turning nancial reporting rom being compliance-led

to being communication-led.

Bob Herz noted that many investors and

other users are interested, but suggested that some

proessional investors and analysts liked opacity

because it meant they could derive some perceived

competitive advantage by digging urther. Neri

Bukspan agreed. He elt companies were oten

penalised by the market or disclosing inormation

which their peers were not. He didnt want accountantsto provide predictive inormation but wanted them

to provide inormation rom which predictions could

be made.

Principles-based standards could work, Bob Herz

said, with good implementation, good education, and

good policing. But, he added, there should also be

sufcient implementation guidance. Neri Bukspan

thought such a system would settle down and converge

around a mean.

Further discussion suggested that we might be

moving to a world where the audit rms, all tryingto maintain consistency, one-with-another, started

to become the standard-setters as they provided the

advice on what judgement should be reached. It

was elt that the nancial crisis had not helped. Fire

ghting meant, as Paul Cherry explained, another

spate o piecemeal changes. Every addition to the

literature, he said, ...once its there its bloody hard

to get rid o this stu.


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The Transforming Effect of Principles and the

Exercise of Judgement

Tere was almost overwhelming agreement that the

use o principle-based standards and the consequent

exercising o judgement would stand accountants,

auditors, preparers and users o nancial statements

in much better stead. here is no doubt that a

consensus exists or this position. Te problem arises

rom what people perceive as a principles-basedsystem and the exercise o those principles. One mans

principle turned out to be another mans rule. And or

accountants in business it oten seemed to be a red

herring, an irrelevance to their main objective which

was simply to comply with whatever the regulators

decreed and let the users get on with it.

Te opening point rom Sir David weedie,

Chairman o the IASB, at the Beijing Roundtable puts

the issue in context. His point was that when he started

out as a young accountant

dealing with recalcitrant auditclients in the dark Scottish

industrial heart o Glasgow,

standards, in the ormal sense,

did not exist. So he, and all

accountants, had to exercise

judgement. It was simply what

proessional accountants did.

He brought his audience up to date. Te rulebooks

had burgeoned. Now IFRS was about 2,500 pages,

US GAAP was nearer 10,000, and the new IASB

standard or small and medium-sized enterprises ran

to 250 pages. Principles, or weedie, were an attitude

o mind. He took leasing as an example. In the US

there were some 12 separate standards on leasing. Yet

a perectly acceptable principles-based standard could

be reduced to one simple sentence: Show the liability

you had incurred by signing the lease contract and the

rights to the asset you have attained thereby. It would

be a simple, short standard, wholly understandable

and ready and waiting or judgement to be applied

to the practical issues which might arise.

his is the helpul side o principles-based

work. he Beijing Roundtable also brought out

other benets. Te Chinese representatives stressed

how helpul the basic assumption that standards

had to be based on principles had been in their

recent work in bringing standards into line with

international practice. And in London there was also

a general consensus or the primacy o principles

to be upheld. Te truth is that great accounting

standards have principles in them, said one panellist,well expounded, so that everybody can understand.

Tey have lots o rules in them. And they have lots o

examples. He was happy with this. For one thing it

meant that, should the regulators ask him questions,

he would have the answers and a context in which to

explain them.

But this also led to one o the reasons why the

place on the spectrum between principles and rules

is always going to be blurred. For a preparer the

achievement o compliance

was the most important thing.And preparers tend to think

that a regime which emphasises

principles over rules does not

help them in that objective.

One example was the question

o how much prot would be

recognised on a transaction this

year at the point o the transaction. Te answer the

preparer did not wish to hear was a discussion about

how it could be this much, or it could be that much,

depending on which principle you wish to give more

weight to, and perhaps it would be best to wait until

the year end and see how much we could declare.

For preparers there was always going to be a much

greater reliance on the mix o principles and rules,

present practice within that industry, and what line

the regulator was likely to be taking.

his issue o how preparers ind rules very

useul when dealing with other parties in the process

also came to the ore in New York. One panellist

was shocked to have recently ound that somepreparers were not very supportive o what, in the

T h e H e a r t o f t h e M a t t e r

Yet a perectly acceptable principles-based standard could be reduced to one

simple sentence. It would be a simple,

short standard, wholly understandable

and ready and waiting or judgement to

be applied to the practical issues which

might arise.


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US, are reerred to as objective-based standards.

Te preparers had been taken aback at this reaction

and had explained that rankly rules helped them

to avoid conict. I someone told them what to do

then they didnt need to have a ght with the CEO,

or the auditors.

Tere was also a view that some people held

to the perception that a shit to greater principles-

based judgements would create greater uncertainty.

But panellists were keen to argue that experienceshowed that this was not so. Wayne Carnall rom the

SEC made the point that there have been very ew

instances in which they told companies that they were

required to restate their nancial statements because

o dierences in view regarding areas o proessional

judgement. Te overwhelming majority o instances

in which they required restatement were rom

situations in which the company hadnt ollowed the

technical requirements o a rule.

Another danger was that this may just prove to

be the wrong time to be trying to shit the systemtowards more judgement. In the lingering atermath

o the nancial crisis, there was a eeling that the

environment would not welcome any moves towards

something which was perceived to be, or elt like, a

lessening o regulation, or a lessening o the burden

o regulation.

Tere is also the danger o principles not achieving

the improvement in nancial reporting which they

were designed to create. Tis largely happened where

standard setters hoped or improvement through

better disclosure, when in act industry chose to

decline that invitation. Bob Garnett o the IASB

made this point at the London Roundtable. He

said that IFRS7, which was intended to provide the

market with much more inormation about how

companies were handling nancial risks, resulted in

a lot o boilerplate. We did not, he said, get useul

inormation.

Despite all these caveats and observations it

was generally elt that the important element was

to have the inuence o principles extend throughnot only the standard-setting process but also that o

implementation.

The Need to Reverse the Growth of Complexity

he greatest consensus coming out o the

roundtables was that complexity was the real problem

with nancial reporting. Possibly the most heartelt

comment in all o the roundtables came in New York

where one panellist simply asked or pencils down.

Tere was a eeling that the whole issue o complexity

was one which could be dealt with but, like the idea

o nally agreeing on a conceptual ramework, wasan issue which was always being shelved because

something else more urgent, like a nancial crisis,

came along. Many people in all o the roundtables

complained that so much o their lie was spent

reghting rather than achieving the long-term

and much more useul strategic issues. Tis would

apply to grand plans to rid the accounting world o

complexity as well.

But there is rustration. One o the panellists in

London made the point that it was very sensible to

have as an objective making nancial reporting lesscomplex, simpler and more understandable. No one

would disagree with that. It was laudable. But he

doubted it was achievable.

It was elt that, to state the obvious, one o the

reasons or complexity in nancial reporting was the

growing complexity o business activities and, running

in parallel, the growing complexity o accounting

issues. Added to this was a perception that there is a

natural tendency to add urther elements o disclosure

when there is a problem but have no mechanism on

the other side o the equation which gets rid o stu

which no one needs anymore. Financial reporting

shares this problem with tax systems around the world.

here are many recipes or trying to bring

about change. One was to recognise the dierence

between unavoidable and avoidable complexity.

Te unavoidable complexity is the stu which is the

natural result o the acceptance that the world o

business is not getting any simpler and is unlikely to

do so. Te reason the avoidable complexity still exists

is down to laziness. Particular needs, biases, specialtreatments, exceptions, options, dierent models or

similar things, and so on. Te list is endless. One


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panellist pointed to the exponential growth in thedisclosure o key perormance indicators. Beyond

a certain point the number o KPIs conused rather

than provided insight.

One action which would make a dierence was

the idea o always trying to turn the argument rom

what more should we put in? to what could we take

out? Tere was a suggestion that when compiling a

comment letter, or example, people should, instead

o simply compiling a list o what they wanted,

could compile a list o what they

wanted taken out. In particular, it

was thought that industry groups

might take better note o the

overall objective o simplicity

and rerain rom advocating specic, oten detailed,

measures to suit the circumstances o their industry.

It is also a side-eect o being part o a proession.

Te accounting proession, like all other proessions,

eels a need to always be making a contribution.

Everything is geared to providing more, not to

providing less. Te ability to make a proessionaljudgement has come to depend on a considerable

and ever-growing corpus o learning. Tat grows

in tandem with the importance o the proession.

Te American legal proession, oten blamed or the

growth o rules and complexity in the US business

world, is not immune rom this either.

Regulators argue that part o the problem

is people coming to them and demanding more

regulation, which in turn means ever more complex

disclosure. And once people had that extra disclosure

they would always vote against reducing it because otheir perception that somehow they would be less well

inormed as a result.

Tese were the difculties. One panellist in New

York tried to turn this mass o seemingly impossible

obstacles into advantage. Dont look at nancial

reports as a compliance document, he suggested,

look at them as an inormational document. For

many people this was what people orget as they labour

under the weight o the inormation. A ellow panellist

added to this by suggesting that the proession had to

admit that it had a serious problem and that simply

chipping away at the edges was not going to accomplish

anything. And at some point another uncomortabletruth had to be aced: does the proession, and do

all the participants in nancial reporting, really care

whether people understand nancial statements or

not? I they do care, then how do they think that

something around 500 pages long is really serving

anyones purposes? Another panellist suggested that

we should think o annual reports as packaging and

think how we reduce that. Part o the problem was

also that these reports were originally designed to be a

means o communication between

companies and their providers

o capital: the accumulation o

extra detail has partly come about

because a whole ramework o

accountants, regulators, lawyers, all o them on the

supply side o the equation, had steadily pitched in.

One example which had reduced complexity

was cited as a possible way orward. Tis was the

proposed standard on nancial reporting or small and

medium-sized enterprises which the IASB recently

published and which Sir David weedie praised inBeijing or being only 250 pages long. Tere was much

support rom the audience at the London Roundtable

or the idea o simply saying that it should be used

as the starting point. It should be taken as a base

and everyone should measure themselves against it.

Ten the burden would be on people to explain in a

ormal statement the reasons why they needed more

complexity in a particular area, or more disclosure,

or additional reporting. Tey would have to justiy

everything they added on top o the basic reporting.

Te suggestion was that the level o disclosure andcomplexity o a private entity should be the base case

or everyone.

Te whole issue o complexity was seen as an

age-old problem. One panellist in New York quoted

rom a speech made by the then SEC Chairman

ty years previously which, while not mentioning

complexity specically, discussed many o the same

issues about the nature o the nancial reporting

which the accounting proession created. Te panellist

said that, ty years on, was an opportune time to

bring about change. Te stars were aligned to do it.

Tere had been a great nancial crisis. Tere was the

Dont look at fnancial reports as acompliance document, look at them as

an inormational document.


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14

evolutionary process going on between the two mainsystems o accounting standards and the two main

standard-setting boards. Tere is a time o change and

harmonisation in the air.

Another panellist in New York emphasised this

need or determination. I think there has to be

someone who says: We are committed to making this

happen, he said. And i you dont have that and some

accountability, I think well just drit, and well take

some steps orward, some backwards, and hopeully

itll be a net gain. But I think theres an opportunity

or a signicant move orward. But it requires us to

break a lot o old habits. And it doesnt happen easily.

Te view was that, collectively, everyone had

to make a dierence. Tere was no single event or

initiative which would suddenly stop the growth o

complexity in its tracks. It was a question o changing

behaviours. It was a question o getting hold o a set

o accounts, looking through them and working out

what could be taken out. Te shorter they are the

easier they are to read and understand. Tere was

much discussion o the contemporary nudge theorywhich suggests that change which previously seemed

intractable can be brought about in small increments.

Instead o retreating deeated by the enormity o the

problem and the lack o a single obvious answer, the

strategy is to push the difculties back one small step

at a time. It would be a question o nudging it along

to achieve better quality and better understanding.

echnology might help. Nudging the auditors to

bring about incremental improvements, getting better

attuned to what users want, helping the audit o the

accounts to work better, helping the managementto drat the accounts in the best way possible, just

nudging small changes along. Tis was seen to be

practicable and, in the long-term, transormational.

The Challenge of Regulators and Audit Firms

Another concern was what would happen in the

uture when nance directors and CFOs sought advice

when they were about to apply some judgement. Te

assumption was that they would call in their auditors,which were likely to be one o the large international

rms. Te audit partner would check in to central

ofce or check the existing guidance within the rm.Te rms would have checked with each other. Te

end result would be an eort at conormity. As a

preparer panellist in New York said, the goal would be

uniormity. Te result o this is that standards would,

in eect, be set by the large international rms. Tere

is a regulatory space that has to be lled between what

the standard-setter puts in the standard, said one legal

adviser at the London Roundtable, and then how it

is applied in practice. Where does that regulatory

space get lled? It gets lled by the auditors and by

regulators.

The Needs of Analysts

At the London Roundtable one presentation rom

a panellist rom the analyst community illustrated just

how hard it would be to reduce the complexity and

the sheer quantity o inormation in the blizzard o

disclosure. Analysts diered, he said. Some required

great technical detail, others wanted to deal more

with the state o the market. But, rankly, what theyall wanted was a vast pile o inormation which they

could dig into. He gave the example o investors who

had asked him why banks did not outline exactly

how they valued each derivative or dierent class o

derivative. Tey have over 200,000 dierent types

o derivative instrument, he had answered, and they

have hundreds and hundreds o dierent models. He

had pointed out that the resulting accounts would be

around 1,000 pages long. Investors would always say

they wanted more. But oten they didnt understand

the implications and, had they done so, would nothave wanted the extra inormation.

The Warren Buffett Panacea

At many stages in the Roundtables around the

world people who elt themselves to be drowning in

the mass o principles, rules and the complexity o

nancial reporting started to reach out and clutch at

the straw represented by the sort o narrative reporting

personiied by Warren Buett and his homely,straightorward and perceptive ruminations in the

annual report o his company Berkshire Hathaway.


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15

he preparer on the London Roundtable

probably expressed it the most clearly: the Warren

Buett Narrative is the thing everybody points to

and says what a wonderul way it is to talk about your

accounts and perormance in the year. Te Buett

narratives were agreed to be excellent though people

did suggest that lawyers had never been anywhere near

them and that was how they maintained their purity

o expression. Te Buett approach was seen to be

difcult to achieve but should remain an aspiration.

It was also seen as a very good way to orce themanagement o a company to provide the most useul

inormation that investors could have, which was

an insight into what the management really believes

about the business. Narrative reporting was seen as

a very useul step in this direction, though it was

accepted that there was only one Warren Buett and

that many others might struggle to ollow his example.

Te result could be just as much boilerplate as other

methods had engendered. Te point about Buett

is also, o course, that he wantsto do it. Others may

not. Bob Herz o FASB pointed out at the New York

Roundtable that he knew that this might be hard to

believe, but some people do like to spin and be very

selective about what they talk about and emphasise.

The Value of XBRL

XBRL, once seen as the electronic panacea

to the problems o complexity, received more o a

muted perormance amongst the many participants

around the world. Once it was seen as possibly thebest solution. Electronic tags would enable users to

eectively do their own re-ordering o the nancial

inormation to suit their own models and purposes.

At the London Roundtable Ian Wright, onetime

PricewaterhouseCoopers partner, told o his own early

days on the XBRL project. Te rst IFRS XBRL

taxonomy was written on my kitchen table over one

weekend, he revealed. It had 200 tags in it and it

seemed to me that was all that was necessary. He

eventually parted company rom the pioneering XBRL

group because it had been taken over by individuals

who wanted to create a 20,000 item version. Te

programme had, in his view, started to become part o

the complexity problem. I did not believe that what

the market needed was a 20,000 item version o XBRL

taxonomy because I ear the same outcome, which is

that you generate more and more numbers. More and

more numbers by themselves are not terribly useul.

Te more numbers you get into the more you question

the reliability o the individual numbers. Numbers,

as he pointed out, do not convey inormation. It is

only when you get management to explain numbersthat you manage to achieve something rather better.

he same sentiment emerged in New York

where it was elt that accountants were expecting too

much o XBRL. We just dump things in, said one

panellist, and standard-setters dont think about it

as a communication. Overall it seemed that XBRL

might be part o any solution to the complexity issue

but should no longer be seen, as newish technologies

oten are, as the long-awaited complete answer.

The Dead Hand of the Lawyers Inuence

One panellist in New York, talking about the

possibility o ling the ull 10K corporate reports

with the SEC but adding a short summary at the

ront, summed up much o the difculty in making

something simpler, short, and understandable. Te

lawyers will go nuts i we go down this path, he said.


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Te 2009 Roundtables, which ollowed up the originalGAA report and research, have shown conclusively

that there is wide consensus on many o the areas o

discussion.

here is no doubt that, broadly, the idea o

principles-based, or objectives-based, nancial reporting

standards has won the day. Tere are arguments about

where on the spectrum between pure principles and a

mass o rules they should all. But that is detail. What

is accepted is that a nancial reporting process based,

to a greater extent, on principles and judgement would

make the whole process simpler. Te challenge is ingenerating the necessary leadership, commitment and

actions to achieve this in practice.

It was clear that or preparers and auditors, and also

or regulators, some agreed ramework or the exercise

o proessional judgement would be helpul. Whilst it

would seem that regulators would not normally conront

preparers and auditors where judgements have been

made in good aith, it would be helpul to set out the

broad terms under which judgements would normally

be accepted.

Tere is also a consensus that the current levels ocomplexity in nancial reporting cannot be allowed to

continue. Again, the real question is how to achieve this.

No single compelling course o action was identied

which would speed the demise o complexity. he

answer which emerged was that, unlike much in nancial

reporting, this was not wholly a technical issue.

Tere was unavoidable complexity, which related to

the growing complexity o business and the accounting

which underpinned it. And there was avoidable

complexity, the simple accretion o unnecessary detail.

Accepting one while ridding reports and accounts o theother has to be the aim.

here would also be changes leading through

rom the gradual move towards principles-based

standards. Te current problems, which oten stem

rom inancial reporting being dominated by the

objective o compliance, would change as the objective

o communication slowly gained the upper hand.

It is a question o human behaviour. Te continual

urge to add more and more renements and additions to

the nancial reporting process has to be curtailed. Tere

has to be an active eort to remove elements which arenow either unnecessary or have been ound wanting.

Action is required to keep the issue in the mindso everyone in the nancial reporting world so that they

would be deterred rom creating urther complexity

which could be avoided and encouraged at every

opportunity to remove redundant complexity. he

roundtables revealed a consensus behind the idea o

steady, determined, incremental change being the way

orward.

Te Global Accounting Alliance wishes to express

its support or:

A singlesetof globally accepted financial

reporting standards, as called or by the G20

Governments with a primary ocus on

transparency and the needs o the capital

markets, rather than stability and the needs o

prudential regulators.

Suchstandardstobe partof an outcome

oriented, principles based nancial reporting

ramework.

Tepreservationof theindependenceof the

International Accounting Standards Board,subject to appropriate governance and oversight,

and ree rom undue inuence o vested interests

other than through the normal due consultative

processes.

Proportionateregulationtosupportaprinciples

based nancial reporting ramework, including

a ramework or proessional judgement agreed

by regulators to provide guidance to preparers

and auditors involved in judgements on

accounting treatments.

Preparersand other stakeholders innancialreporting moving away rom a legally

constrained tick box, or compliance, mentality,

to a ocus on quality communication.

Te GAA will be pursuing these goals by seeking to

nudge all the players in the nancial reporting debate

standard setters, preparers, auditors, regulators,

analysts, investors and other users - to make the

necessary changes so as to achieve the objective o a

simpler, principles based standard setting ramework,

and more accessible and understandable nancial

statements.

Co n c lu s io n - Co n s e n s u s a n d Ac t i o n


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THE GLOBAL ACCOUNTING ALLIANCE

Te Global Accounting Alliance (GAA) was ormed in November 2005 and is an alliance o leading proessional

accountancy bodies in signicant capital markets. It was created to promote quality services, share inormation

and collaborate on important international issues. Te Alliance works with national regulators, governments

and stakeholders, through member-body collaboration, articulation o consensus views, and working in

collaboration, where possible, with other international bodies, especially IFAC.

Te Alliance acilitates a co-operation between eleven o the worlds leading proessional accountingorganisations:

AmericanInstituteofCertiedPublicAccountants(AICPA)

CanadianInstituteofCharteredAccountants(CICA)

HongKongInstituteofCertiedPublicAccountants(HKICPA)

InstituteofCharteredAccountantsinAustralia(ICAA)

InstituteofCharteredAccountantsinEnglandandWales(ICAEW)

InstituteofCharteredAccountantsinIreland(ICAI)

InstituteofCharteredAccountantsofScotland(ICAS)

InstitutderWirtschaftsprferinDeutschland(IDW)

JapaneseInstituteofCertiedPublicAccountants(JICPA)

NewZealandInstituteofCharteredAccountants(NZICA)

SouthAfricanInstituteofCharteredAccountants(SAICA)

Tese organisations represent over 775,000 proessional accountants in over 165 countries rom around the

globe.

Te GAA was established to promote quality services, share inormation, and collaborate on important

international issues, whilst operating in the interest o a quality accounting proession and the public interest.

Te over riding objectives o the GAA are those o operating in the interest o a quality accounting proession

and the public interest.

A P P E N D I X 1


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In addition the GAA has the objective o:

1. Enhancing the accounting proession and business through global leadership in the areas o thought leadership

and research.

2. Assisting the development o national accounting institutes and their national qualications.

3. Promoting the brands represented by the member bodies through their linkages with the GAA, enabling

growth or the member organisations.

4. Increasing advocacy leverage with national regulators, Governments and stakeholders through member body

collaboration, articulation o consensus views and working in collaboration with other international bodies

such as IFAC.

5. Increasing member benets through overseas support mechanisms and value adding services.

6. Promoting the international portability and recognition o the respective national qualications, includingspecialisations, while ensuring that we always act in the public interest and do not set up any real or perceived

barriers to other proessional accounting bodies being able to conduct their business in any country.


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