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Corporate governance: Loosen up

Over 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

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

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.

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