From the President’s Desk
The clanging bell that opens and closes the trading sessions of the New York Stock Exchange every working day has a practical function—but it’s an important symbol as well. In my view, that bell represents something that we in the United States all too often take for granted—the efficient and orderly operation of our capital markets.
Recently, a group of us from Norwalk had the privilege of ringing the closing bell at the NYSE. It was a brief and simple event, but one that drove home in a personal way the important role that transparent financial reporting and high-quality accounting standards play in keeping our capital markets efficient and competitive.
The occasion for the bell ringing was our first annual capital markets dinner, held at the NYSE. The dinner brought together members of the Financial Accounting Foundation and our standard-setting bodies, the Financial Accounting Standards Board and the Governmental Accounting Standards Board, with business and financial leaders from a broad range of backgrounds.
The keynote speaker at our event, Internal Revenue Service Commissioner Doug Shulman, identified some of the critical factors that have driven—and continue to drive—U.S. economic competitiveness and the strength of our capital markets: the integrity of our public institutions, the transparency of our decision-making processes, and our entrepreneurial culture.
“Clearly, accounting standards and the infrastructure around financial reporting are a core part of the transparency in our markets,” Commissioner Shulman said. “Indeed, the FAF’s core values statement says that its mission of developing accounting standards that result in high-quality financial reporting ‘increases investor confidence’ and that ‘increased investor confidence leads to better capital allocation decisions, and by extension, a stronger economy.’”
Economic ebbs and flows notwithstanding, the growth and expansion of the U.S. economy during the past 150 years has been aided, at least to some degree, by improvements in the ways that businesses have reported their financial results. For companies to attract the capital they need to hire workers, build plants, and invest in research and development, they must report financial information in a way that investors find useful. Investors of all types demand that the financial information companies report be relevant, reliable, clear, consistent, and comparable to allow them to make informed investment decisions.
The extent to which improvements in financial reporting have affected our country’s economic growth has been the subject of much scholarly research—and there is evidence that improved financial reporting helped spur investment at critical moments in our economic history. During the Industrial Revolution, as America’s transportation links were being forged, railroad companies pioneered standardized financial reporting to attract public and private capital for projects. And at least some of the expansion of the U.S. automobile industry in the 1920s has been attributed to accounting modernization. By presenting its financial information in the form of ratios (such as return on investment and return on equity), the industry was able to provide the market with more detailed and useful metrics, attracting capital that otherwise might have gone elsewhere.
On the other hand, the failure of companies to report clear, comparable, and transparent financial information played a role in our worst economic crisis. The pivotal economic event of the 20th century, the Great Depression, focused the United States on the need for comprehensive accounting reform that would require all companies that offered stock to the public to adopt better accounting practices. In 1930, the American Institute of Accountants (now the AICPA) and the New York Stock Exchange began an effort to revise financial reporting requirements. Shortly thereafter, Congress enacted the Securities Act of 1934 and gave the newly created Securities and Exchange Commission the power to establish accounting and auditing practices for publicly traded companies, working with and through the accounting profession.
For nearly 40 years, the SEC looked to bodies established by the accounting profession to consider, develop, and establish accounting standards. By the 1970s, market participants’ thinking about accounting standard setting evolved, as they came to believe in the importance of an independent standard-setting structure, separate and distinct from the accounting profession. Following a detailed study, the accounting profession in 1972 recommended creation of a new body, the Financial Accounting Foundation, to serve as the nation’s accounting standard-setting authority. Through the FAF, the FASB became the designated organization in the private sector for setting standards that govern the preparation of corporate financial reports along with not-for-profit organizations. In 1984, the GASB was formed under the FAF umbrella to issue standards that result in useful information for users of state and local government financial reports.
In today’s world, with unprecedented access to financial information via the Internet, the need for relevant and comparable financial reporting is perhaps greater than ever. Moreover, this need applies across the international landscape. Today, global capital markets depend on a constant flow of reliable financial data from U.S. companies to make decisions about moving capital into and out of one of the world’s most important economies. Without clear accounting standards and an open, independent process for creating and improving these standards, financial information would be more opaque, and capital markets around the world would function less efficiently. That, in turn, could drive up costs for all sectors of the economy.
At the FAF capital markets dinner, Commissioner Shulman said: “I’m a firm believer that there’s a link between transparency and integrity. An open, public dialogue is essential to this. One key attribute of this country, which leads to trust and better outcomes, is our democratic tradition of making policy decisions in the light of day—with a lot of public debate on important issues that affect market participants.”
Public debate and transparency are keystones of the standard-setting process. The FAF’s ultimate goal is to foster the delivery of accurate and reliable financial information for the investors who provide capital to businesses—and to the taxpayers who provide capital to state and local governments. Our standard-setting Boards strive each day to update and improve financial reporting, aided by a vigorous and open exchange of ideas with a broad range of constituents. Through that process, everyone involved in developing high-quality accounting standards—financial statement users, preparers, and auditors, as well as members of the standard-setting Boards—plays an important role in keeping our capital markets efficient and competitive. As I stood on the NYSE podium with the FASB and GASB chairs, the clanging of the closing bell reminded me just how important that work is.
FAF President and Chief Executive Officer
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