By James Hamilton, J.D., LL.M.
At the first meeting of the Advisory Committee on Improvements to Financial Reporting, SEC Chairman Christopher Cox opined that financial reporting has become overly complex. He emphasized that financial statements are difficult for investors to understand and that companies incur excessive costs in complying with voluminous and overly prescriptive accounting and reporting rules.
He charged the committee with helping end what the chair called a ``destructive cycle’’ and get the financial reporting system back to first principles. The advisory panel must help the SEC reduce complexity and its costly burdens. When it comes to financial statements, he continued, most investors today probably feel the way Mark Twain did when he said, "The more you explain it, the more I don't understand it."
When it comes to giving investors the protection they need, he noted, information is the single most powerful tool in investor protection. In his view, the SEC will be unable to say that the goal of investor protection has been achieved until the information provided in financial statements is clearly understandable to average investors. Empowering investors does not just mean better access to information, he observed, it also means access to better information. Simply put, once SEC-mandated information is available, it must be understandable.
The SEC looks forward to the committee’s specific recommendations on how unnecessary complexity in the financial reporting system can be reduced and how the system can be made more useful to investors. In this regard, the committee is mandated to focus on the current approach to setting financial accounting and reporting standards and the current process of regulating compliance with those standards. In addition, the advisory panel will examine the factors that may drive unnecessary complexity and reduce transparency, as well as any lessons that can be learned from the growing use of international accounting standards.