Recommendations to Improve Financial Reporting Given to SEC

Investors are on their way to gaining greater insights into the information in public companies’ financial reports.

On July, 31, 2008, the Securities and Exchange Commission (SEC) Advisory Committee on Improvements to Financial Reporting (CIFiR) provided the SEC with its final report.

CIFiR was formed in June 2007 to examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors.

“Thanks to the recommendations of the committee, those who rely on financial statements to make investment and other business decisions may soon have more meaningful information upon which to base those decisions,” said Melanie King, HSCPA President. “We believe the committee’s final report recognizes the value of clarity and reduced complexity in financial reporting to make it more useful.”

Officially presented to SEC Chairman Christopher Cox in a press conference on Friday, Aug. 1, 2008, the CIFiR Final Report contains 25 recommendations. The SEC previously had taken action on two of those recommendations:

1) proposing the implementation of interactive financial reporting (XBRL), and

2) providing guidance to companies on the display of that data on Web sites for investor use.

Earlier this year, Randy Fletchall, CPA, Chairman of the AICPA Board of Directors, testified before the CIFiR on its preliminary recommendations regarding the use of XBRL and increasing the level of respect for well-reasoned, good-faith judgments of preparers of financial statements and auditors.

The Center for Audit Quality (CAQ; www.thecaq.org), an affiliate of the AICPA, also was involved with the CIFiR and submitted a comment letter on its draft report and is expected to do the same for the final report.

At the press conference, Chairman of CIFiR, Robert Pozen, highlighted four key topics in the report. Pozen believed these topics to be the most important that the committee discussed during its year-long service:

• Fair value versus historical cost and which is better to use.

• The Financial Accounting Standards Board should be responsible for industry-wide issues and take the lead on those matters.

• In 2006, financial restatements were at 9%, this is higher than most of the world. Reducing the need for restatements and bringing the U.S. average to a more acceptable number around 3-4% should be a high priority.

• Requiring a short executive summary at the beginning of a public company’s annual report on Form 10-K.

Five main themes pervade the final report, including measuring the usefulness of information in SEC reports, enhancing the accounting standards-setting process, improving the substantive design of new accounting standards, delineating authoritative interpretive guidance and clarifying guidance on financial restatements and accounting judgments. The SEC, upon reviewing the report, will determine if any further action will occur.

The final report is available from the SEC Web site at www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf. Watch our publications for additional developments.