On April 4, 2002, the Securities and Exchange Commission (SEC) hosted a roundtable in Chicago to find out how best to improve financial disclosures. The participants represented key occupations and associations that typically take a back seat in the setting of accounting standards. Their nearly unanimous conclusion: the SEC should take the lead in bringing accounting and financial disclosures into the Internet Age.
How to Overcome Obstacles
The panelists also gave the SEC some advice about how to overcome obstacles to needed reforms:
- Priority no. 1: real-time reporting. Real-time reporting should take highest priority. More frequent reporting of results will help solve the problem of managed earnings because daily or weekly earnings will be harder to manage than quarterly earnings. SEC's proposal for faster reporting of some 8-K items is helpful, but it doesn't go far enough. Registrants should be required to send their 8-Ks to anyone who signs up by putting their email address on the company's web site. The SEC may also need to regulate the formatting of electronic versions of financial reports, particularly with regard to the note disclosures. "When we send out our reports to data vendors," explains one panelist, "they format the reports in such a way that investors can access the statements but the footnotes don't get attached."
- Summary level reporting. Disclosure overload is particularly troublesome to individual investors. The Financial Accounting Standards Board (FASB) explains this is part of the larger problem of standards overload. "The term standards overload," writes FASB, has been used to describe "concerns about not only the volume of accounting rules and the level of complexity and detail of those rules, but also the resulting profusion of footnote disclosures." The solution is summary level reporting in which management adds its perspective on key value drivers, risk factors, accounting policies and footnotes. This approach might build on a proposal by SEC staff. Chief Accountant Robert Herdman explains this approach calls for issuance of "condensed financial statements and abbreviated footnotes" to shareholders with annual meeting proxy statements, with full disclosure available on Form 10-K.
- Rethinking Regulation FD. SEC's Regulation FD, which requires companies to make the same information available to individual investors and analysts, adds an odd paradox to the overload problem. On the one hand, it responds to the information needs of individual investors who welcome the hard-won access to previously privileged information. On the other hand, it adds to their disclosure overload problem and pushes them into the hands of securities analysts and index funds managed by professional money managers. As these trends are reinforced by XBRL and real time reporting, the ironic result is that the needs of individual investors will become less important than the needs of analysts and professional money managers. But the latter are far less pleased with FD. They say it makes management reluctant to give them information for fear of legal liability. The solution appears to lie in greater safe harbors for management.
- Regulation of analysts and research. In response to recent talk of regulating analysts and investment research, panelists feel the sell-side securities analysts have gotten something of a bum rap. They cite recent publicity about the apparent conflicts of interest that can arise when investment bankers provide investment advice and also sell securities. This publicity is designed to focus attention on apparently startling statistics that show the vast majority of the sell-side analysts' recommendations are buys rather than sells. But panelists say the findings are not exactly a revelation. Most agree there are very talented analysts on both the sell-side and the buy-side. They suggest the value of the research lies in the insights provided by the analysts, rather than the concluding buy or sell recommendation. A suggested solution is to simply drop the buy or sell recommendation.
- GAAP and standard-setting. The panelists acknowledge the evidence that FASB has not kept up, and there are areas in which generally accepted accounting principles (GAAP) can be improved. Of all these areas, improvements in disclosure requirements are seen as most critical. One panelist went so far as to say that of all the potential reforms that may need to be addressed, "disclosures are 90% of it." Ironically, analysts and institutional investors would seem to be uniquely qualified to identify needed improvements, but they have no incentive to participate in the accounting standard-setting process. Instead they simply sell the securities of companies with inadequate reporting or they provide less favorable research reports. Solutions are for analysts and institutional investors to get more involved in standards setting and for the SEC to accept alternative standards (such as International Accounting Standards) and let the forces of competition drive improvements in accounting standards.
Listen to the roundtable discussion and remarks by panelists John Regenthaler, president of online advice for Morningstar Associates; John Zielinski, senior portfolio manager of the institutional investments division at Northern Trust; Dr. John Markese president of American Association of Individual Investors; James Diamond, CEO of Bank One; Robert Litan, director of economics study at the Brookings Institution; and Maryann Waryjas, an attorney who specializes in securities transactions and partner in the law firm Katten Muchin and Zavis.