public Dialogue: Minneapolis, MN
To better serve investors, publicly traded companies will need to produce financial reports that are easier to understand and include information that offers better guidance on a company’s future performance, suggested panelists and participants at a Center for Audit Quality forum in Minneapolis.
The Public Dialogue discussion, the third in a nationwide series sponsored by the Center, also focused on whose interests the public company auditor best represents. Many participants said the auditor’s most important relationship is with the company’s auditing committee, a panel whose primary obligation is to serve investors by reviewing the financial records of the company.
“This has been the most spirited discussion we’ve had,” said Cindy Fornelli, executive director of the Center for Audit Quality. “We heard some great ideas, and there are a lot of takeaways here for the Center.”
Panelists and participants said that new reporting requirements created in the wake of corporate scandals, have increased the volume and complexity of corporate financial reports. Panelists argued that these changes don’t necessarily promote a clearer understanding of a company’s financial picture.
“If you keep it in plain English, it will work much better for us,” said Ilene Meade, president of the Minneapolis/St. Paul chapter of BetterInvesting, a nationwide investors group.
Alison Davis-Blake, dean of the Carlson School of Management at the University of Minnesota, said the mandated increase in financial information that companies are required to report is well-intentioned, but often counterproductive.
“We are bad processors of large bodies of information, unless we are experts,” Davis-Blake said. “Putting more things out there, in more detail, goes against everything we know about how people process information. What we do is, we simplify it.”
Many participants and panelists agreed that financial reports will be more useful if they do a better job of projecting future performance. Further, participants agreed that companies can offer guidance on future performance without locking themselves into hard-and-fast predictions like earnings per share and market share growth.
“Providing a straightforward set of metrics, like outlining growth and expansion plans, would give investors benchmarks to know whether the company accomplished what they set out to do,” said Tom Schreier, CEO of FAF Advisors, an investment management company.
Many participants said they understand the difficulties companies face with financial reporting. Besides the required volume of data, there is a growing breadth and variety of investors, each with a different set of needs and aptitude for digesting complicated financial data.
“You have so many different audiences. You have audiences that deserve it straight and simple, and you have very sophisticated audiences who can look at things in a very granular way,” Schreier said. “You need to provide a clear path to more detail for those who need it.”
Bill Blazar, senior vice president of the Minnesota Chamber of Commerce, raised a provocative question: “Who is ‘really’ the independent auditor’s client: Company management? Shareholders? The company’s board of directors?”
“I see those as very different constituencies,” Blazar said.
Dave Sinason, a professor at Northern Illinois University who has authored textbooks on accounting, said an auditor’s lines of responsibility are clear.
“It’s the audit committee,” Sinason said. “The board of directors are the representatives of the shareholders. You can’t be responsible to large groups of people. Those [shareholders] are supposed to elect a board of directors, and that board and the audit committee are supposed to be looking out for the shareholder’s interests.”
“The relationship should be kept directly with the audit committee, and the audit committee should be made up of people independent from the company,” Schreier added. “Ultimately, any audit committee member should view themselves as having shareholder interests first and foremost.”
The Center’s next Public Dialogue tour event will be in Seattle on June 28. After visiting additional U.S. cities over the next 12 months, the Center intends to compile the ideas and suggestions into a blueprint for next steps and share those thoughts with anyone interested in the vibrancy of the capital markets.