For the Investor
By Marc Siegel, FASB Member

The end of my second and final term as a FASB Board Member is quickly approaching and this represents my final For the Investor column. The lessons have been many; I’d like to highlight some things that worked well and what some of the challenges and opportunities might be going forward.

The FASB staff has been exemplary. These are dedicated individuals who strive to become experts in their subject areas. They take seriously the responsibility of objectively educating Board Members such that they have the information they need to make their decisions. While the staff might have a strongly held recommendation, the bulk of the Board’s briefing materials is an unbiased articulation of many possible alternatives the Board could take and the pros and cons for each.
 
Constructive dialog with stakeholders of all kinds has enhanced our understanding and hopefully helped us make decisions that are in the middle of the cost-benefit fairway.

Constructive dialog with stakeholders of all kinds has enhanced our understanding and hopefully helped us make decisions that are in the middle of the cost-benefit fairway. Investors, preparers, auditors, academics, actuaries, attorneys and others have spent time with staff and Board Members on the phone or in person to help us trade off the costs and benefits of various decisions. I’m particularly grateful for those who have volunteered to participate on advisory committees, working groups or other similar settings for their donation of time and knowledge.

Some of the most memorable and constructive of these have occurred when we have brought representatives from different stakeholder groups together to have real-time back and forth discussions about priorities. In addition to public roundtables where this is commonplace, two less well-known examples were workshops held to discuss potential revenue disclosures and forums held to discuss disclosure effectiveness. 
 
One particular lesson I’ve learned in my ten-year tenure: everything is interconnected.

One particular lesson I’ve learned in my ten-year tenure: everything is interconnected.
 
Initiatives taken in one setting have ramifications throughout the financial system, both globally and domestically. Cross-cutting issues abound that sometimes slow progress.  I’ve learned that some of the challenges and opportunities facing the financial reporting system will require parallel efforts by many stakeholders to see them through.


A short non-exhaustive list of some of these cross-cutting items include:
  • Accounting conventions (a recognition and measurement application of materiality)
  • Disclosure effectiveness in financial statements (in part a disclosure application of materiality)
  • Broader corporate reporting
  • The impact of technology on the financial statements of the future 
The FASB alone does not have sole authority over these areas.  In the U.S., while the Securities and Exchange Commission (SEC) has the legal authority to set accounting standards, they recognize the FASB to perform that function.  Auditing standards are similarly set by the Public Company Accounting Oversight Board (PCAOB). Separate agendas and priorities creates a challenge for all of the organizations to identify ways to move the needle in any of the areas noted above. 

Furthermore, even if there were policy coordination amongst all the organizations, some of the items listed above also require changes to behaviors and incentives beyond the control of regulators and standard setters.

For example, the litigious nature of our system has caused some market participants to consider the regulatory filings as a compliance exercise, instead of a communication vehicle. There is often a checklist mentality when it comes to disclosures and a disincentive to use materiality to scale back less relevant disclosures. The disincentive to not get second-guessed on a judgment is great. 

While the FASB has progressed on many key aspects of the disclosure framework project, the SEC has also strongly signaled that preparers should look to achieve more effective disclosures. The International Accounting Standards Board (IASB) is also spending considerable time in this area.  But the goal of effective disclosures, focusing on material items, and spending less space on less material items, has not been reached.
 
I have been impressed by certain industry initiatives to help focus efforts on improved corporate reporting.

As I consider further steps that can be taken, I have been impressed by certain industry initiatives to help focus efforts on improved corporate reporting. For example, the real estate industry years ago recognized a need to create a more standardized measure of performance. Industry participants from several communities including preparers, auditors, investors and others worked together and negotiated the metric of funds from operations (FFO).

Similarly, during the financial crisis, the Financial Stability Board recognized a need to help get investors more information about the risks at banks to enhance faith in the system. They realized that setting regulations would take too long, so they sponsored the Enhanced Disclosure Task Force, bringing investors, banks, auditors, regulators and others together to come to agreed-upon recommendations. 

Efforts such as these, though voluntary, could help advance the ball on some of these cross-cutting issues.