Against the backdrop of a growing global concern with the efficacy of financial statement disclosures, the PCAOB’s Standing Advisory Group examined issues around financial statement disclosures during their March meeting. PCAOB Member Dan Goelzer began the meeting by noting that financial statement disclosures have evolved and are still evolving significantly in their extent and nature. The increasing complexity of business transactions, including off-balance sheet transactions and non-recognition of assets and liabilities, as well as the increased use of fair value and other accounting estimates, have all augmented the importance of financial statement disclosures. PCAOB Chairman James Doty said that a major challenge in the post-Enron, post-financial crisis world is how can the auditing of the financial statement come to grips with non-quantitative disclosure in the financial reporting model.
SAG members especially and favorably noted the IAASB policy paper on financial statement disclosure. The discussion paper, entitled The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications, was released for public comment earlier this year and explores key issues relating to disclosures in financial statements. The paper highlights recent trends in the range, volume, and complexity of financial statement disclosures, and explores issues and practical challenges in preparing, auditing, and using them.
In the view of SAG member, and Grant Thornton senior partner, John Archambault, the IAASB paper lays out the complete issues on the evolving nature of financial reporting disclosure. Mr. Archambault, who also serves on the IAASB, said that the Board is looking for robust responses on its discussion paper from a wide variety of stakeholders. He said that the IAASB would provide input to the PCAOB as it gets responses. He noted that risk standards point auditors to what they should consider for disclosures, adding that risk based standards are conceptually going in the right direction. Echoing these comments, SAG member, and KPMG national managing partner, Sam Ranzilla said that the IAASB discussion paper was excellent and asks all the right questions. He urged the PCAOB to get involved with the IAASB effort.
SAG member, and former FASB chairman, Dennis Beresford outlined three approaches to financial statement disclosure. The first is the overall conceptual approach that aims to provide all the information users need to understand the financial statement. The second way is the specific topic approach that FASB generally uses under which FASB will focus on a specific topic, such as pensions or leases, and place the disclosure around the topic. Under this approach, disclosure is not looked at holistically.
The third approach is a subset of the other two and is what the Mr. Beresford calls the `trees approach, ’’ which envisions a long GAAP checklist of items of individual disclosure requirements, some which are freestanding and some of which are linked to specific topics. The problem for companies is that there is no basis or guidance for deciding what to put in. He urged the PCAOB to begin a project aimed at a standard that looks for specific auditing requirements to ferret out the ``trees approach.’’.
SAG member Gaylen Hansen, and Director of Accounting and Auditing Quality Assurance, Ehrhardt Keefe Steiner & Hottman, said that a holistic approach to financial statement disclosure is laudable but that it would be a challenge to apply such an approach to disclosure decisions made under time pressure by preparers of financial statements. He added that a holistic approach to financial statement disclosure applied in hindsight would not be very helpful.