RSS feedsOver the years, everyone in the corporate governance and financial reporting communities has got used to the American approach to business life. It is a question of process first, process last, and, just in case things get slightly off-track in the middle, some more due process there too. It has made for a mightily inflexible regulatory system and a sluggish and complacent approach to any regulatory or corporate governance issues. It has become a process which relies on an underlying assumption that the whole system is so cumbersome and has been around for so long that it must be right. And, in part, it has derived its strength from that. Unquestioning acceptance leads to a belief, over the years, that all must be well.
But it also means the growth of huge bureaucracies at both the market regulators’ and standard-setters’ organisations. All of them going through the process of due process every day of their lives, happy in the knowledge that their life is the most secure it can be and looking forward, after years of ensuring that the due process is still firmly on the rails, to a really useful pension. It is a recipe for a system which is stuck solid in stone. It takes you back to the old days of socialist empires when life revolved around a secure elite of government employees slowly moving everything around the system while ordinary people suffered the consequences.
But things are changing. Or at least the leaders of the relevant US organisations have noticed that something has been going on beyond their shores and that they had better take a look. You know that things have changed when the chief accountant of the main US regulatory body, the greatly feared Securities and Exchange Commission, announces that, frankly, he wants people to consider ‘thinking outside the box’.
And when he says this in a speech which follows immediately on from one on the same platform in which his chairman has announced that he wants “an all-out war on complexity in accounting” you do tend to sit up somewhat expectantly in your seat. The SEC chairman, the urbane Christopher Cox, is clearly trying to stir something up. “When it comes to giving investors the protection they need, information is the single most powerful tool we have,” he says. “And surely we can’t say we’ve achieved our investor protection objective if the information is provided in a way that isn’t clearly understandable to the men and women for whom it is intended”.
You rub your eyes a bit at that. This speech, being made in early August, may well have escaped its wider audience, who were probably heading off on holiday in the days following. But this is exactly the sort of speech which people in the UK standard-setting community were making in the late 1980s and which, in part, provided the impetus for the revolution in the approach to standard-setting which followed. No longer would it be a convoluted bureaucracy in thrall to whichever interested party wanted to put its particular oar in. Instead, it would follow sensible and clear principles and see where that led it.
Cox continued: “The truth is, financial reporting has become overly complex. That means not only are financial statements difficult for investors to understand, but also companies incur excessive costs as a result of complying with voluminous and overly prescriptive accounting and reporting rules.” And in an echo of those heady days of the late 1980s in the UK he urges his audience on.
You might ask at this stage precisely who the audience which he is urging on to greater things might be. And to add to the surprise you would find that it was the newly formed Committee on Improvements to Financial Reporting, known as CIFiR. This was its first meeting and clearly the top guns of the SEC were intent on laying down the guidelines at the outset. “Your job”, he told them, “is to help end this destructive cycle and get our financial reporting system back to first principles.” At this point, your head cracks back and makes contact with the hard seatback. This is the chairman of the SEC, once seen as the most powerful regulatory body on the planet, mentioning the word principles in the same sentence as financial reporting system.
All over America, CFOs and financial directors were probably up out of their seats doing little dances of joy. At last, the crippling bureaucracy was going to lighten up and look at what really mattered, rather than what ticked the myriad boxes. They listened on to what Conrad Hewitt, the SEC chief accountant, had to say. “Many companies assert that it is difficult to ensure compliance with the voluminous requirements contained in US GAAP and SEC reporting rules when preparing financial reports.” No one would voice it out loud, but you can imagine the brisk words “too right” flashing through their minds.
So what happens next? Well it is all down to something called a committee, so the answer could probably be not too much. But this much is clear. The Americans are at least thinking a bit outside of, not only the box, but also their usual comfort zones.
