Public Dialogue Tour:
Boston, Massachusetts
Meeting the needs and expectations of multiple audiences was much of the focus of panelists at the CAQ’s Public Dialogue Tour event in Boston.
The panel examined the challenges of developing both principles and hard-and-fast rules in the audit profession. The discussion was attended by nearly 70 individuals and facilitated by Terence Smith, special correspondent for The NewsHour with Jim Lehrer. CAQ Executive Director Cynthia Fornelli hosted the proceedings. Attendees were welcomed by BDO Seidman, LLP CEO Jack Weisbaum, who noted that public company auditors “have the expertise, and the responsibility, to lead this national discussion.”
While a modernized audit process must be rooted in guidance that is widely applicable to multiple industries, the realities of the United States’ litigation and investment climates demand a level of specificity and complexity that makes adoption of such principles daunting, according to the panel.
"I see a bit of schizophrenia among the [auditing] profession, because on the one hand people want principles, presumably instead of rules,” said Robert Pozen, Chairman of MFS Investment Management. “On the other hand, when we get a specific subject and people ask ‘Well, how do we treat this example?’ and ‘We don’t understand that; it’s ambiguous,” added Pozen, who also chairs the U.S. Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting. “People criticize the [Financial Accounting Standards Board] for the length of the hedging standard, but a lot of that length has to do with lots of companies, and lots of auditors, asking for guidance on many, many situations,” he went on to say.
Addressing the volume of financial restatements, James Kroeker, Deputy Chief Accountant for the SEC, noted that companies “restate because they think it would be important to a regulator. They may conclude that it’s not important to their investors, but that they’re going to get second-guessed by a regulator based on how they look at materiality,” he explained. Thus, companies are making auditing decisions based on legal safety, rather than “focusing on what’s important to users.”
Other panelists provided a wider context of the audiences and issues facing the modernization of financial reporting and auditing.
Dr. Jean Bedard, the Timothy B. Harbert Professor of Accountancy at Bentley College, described recent studies comparing the activities and foci of different types of investors, which found that there “was no consensus on which footnote was most important.” Her research found that more than twice as many professional investors (70 percent) reviewed at least one footnote. “The non-professionals are looking at less stuff, which you’d expect,” Bedard added. “They don’t really understand what they’re going to read.” She also noted that another study determined that analysts who looked at footnotes did less well in predicting earnings than those who did not look at the footnotes.
Panelists agreed that a balance needs to be struck to appease both the non-professional and professional investment communities. Professional analysts require the flexibility to base their decisions on detailed, historical data, while non-professional investors may not study filings and data as deeply. Yet auditors must ensure they are protected legally in either case.
“Companies really like to have the framework where you have boundaries around the things you have complete responsibility for in terms of liability,” said John Mahoney, Chief Financial Officer and Vice Chairman of Staples, Inc., adding that companies also need the flexibility to meet changing rules and market conditions. Mahoney warned, however, that “There isn’t a safe harbor in the world that’s sufficient to protect you if you say something that turns out to be not true and affects the company.”
All panelists noted the benefits of online technology for reaching both audiences, allowing for use of hyperlinks and other Internet-based methods to allow professional investors to delve deeply into a top-line filing with a short series of clicks. Such solutions are a key part of ensuring availability of robust data while better presenting that information to multiple audiences.
Bedard also offered an assessment of the Sarbanes-Oxley Act, five-plus years after its enactment. “Although it has annoyed many people, much good has come of it,” she remarked. “There is such complaint about the costs of [Section] 404, but there is a corresponding benefit here.”
The Boston event was the ninth stop on the national Public Dialogue Tour, which is gathering suggestions on ways to improve financial reporting. The tenth—and final—stop will be in Washington, DC, on July 22.
