public Dialogue: Seattle, WA
Collaboration and balance. Those were the words CAQ Executive Director Cindy Fornelli used to sum up the Seattle dialogue themes, noting that recommendations to improve audit quality and financial reporting focused on collaboration among corporate leaders, auditors and policy makers, and balance between the quantity and quality of financial information, regulation and the approach to the audit.
The June 28 panel discussion, fourth in the CAQ's public dialogue tour, brought together an audience of more than 40 investors, corporate leaders, academics and other stakeholders in the capital markets.
"I agree that there is a lot more information and people are a lot happier about the amount of information. The problem is that the quality of the information is confusing to many," said Keith Grinstein, partner, Second Avenue Partners, pointing out the niche that some have created translating financial records into plain English. "Jim Cramer is making a name for himself with “Booyah” because he actually tries to boil down a lot of complicated information into things that people understand."
Grinstein was not alone in his sentiment that investors benefit when companies balance the amount of information they put out with the way they explain it.
"I think there’s no way of getting away from the laundry list approach to the different kinds of information and data that has to be provided because you have so many constituencies that have to be satisfied," said Washington State Attorney General Rob McKenna, comparing financial reports with the software license agreements to which consumers regularly click "I agree" without reading in detail. "So we have this basic problem that consumers are not very good at sifting through large amounts of information. I like the idea of deciding what the most important information is so that you get up front “top five things you should know” if you download the software. If we could do that in the investment context it would be great. It’s just that it’s a lot more complex when you’re making an investment decision than it is when you are buying a piece of software."
James Jiambalvo, dean of the University of Washington Business School, agreed: "I think there’s been a sea-change in financial reporting. I think financial statements are much more reliable. There still is the problem, as we’ve mentioned several times, that the financial statements are very complex. They’re very hard to get through. There is a lot of information that’s buried, but the quality of the information I think has improved tremendously because of changes in the board, the PCAOB, etc."
Panelists and the audience pointed to quarterly reports as one example of how companies do a better job of putting financial information in context. "Earning calls are the best example of what companies can do to make information simple," said Richard J. Taggart, executive vice president and former chief financial officer, Weyerhaeuser. "The focus is on consistency, timeliness and comparability. It compares the performance in the current period against the previous."
Grinstein agreed: "Quarterly reports are a good snapshot of what a company is doing and how corporate leadership feels about what is coming up. The question is, 'How do you institutionalize that along all financial reporting mechanisms?'"
Panelists agreed that balance was needed not only in the quality of information made available to investors but also in the approach to the audit. They raised concerns about audit costs and whether the cost increases were commensurate with the increase in quality. Further, they expressed concern as to whether those costs were pushing companies to privatize or list on foreign exchanges.
"The cost of an audit, the basic audit including the 404, has about tripled for our company over the last five years.... I don’t believe even the auditors would agree that the quality of it has increased that much," Taggart said.
McKenna agreed: "The system is working well now, but does the pendulum have to go back in the other direction? I'm concerned about the impact of this law [Sarbanes-Oxley] on our competitiveness and capital markets." He noted the reauthorization of the Patriot Act, and the steps Congress has taken to balance tradeoffs between security and privacy, as a possible bellwether for SOX. "That time is coming for Sarbanes-Oxley. It is time for Congress to reevaluate."
As the subject turned to reforms, Jiambalvo offered a cautionary note saying, "The auditing profession is doing a good job, better than 10 years ago. There are a lot of suggestions to change the game and we don't need to. We need good blocking and tackling [in the current system]."
His sentiments were echoed by Bob Adams, associate director, Puget Sound Chapter, BetterInvesting. "A triple burden is a serious problem because it is a serious expense," Adams said. "And, for a small company, this could be devastating. But there is another cost standpoint—one from the shareholder if there is another debacle."
As the discussion continued to cover topics ranging from risk, to fraud, to the role of technology and to the impact of real-time financial reporting, a consensus arose from the panel: collaboration among all stakeholders is essential to creating an efficient, effective and transparent business reporting model.
Panelists at the June 28 Seattle event sponsored by the Center for Audit Quality included: Rob McKenna, attorney general for the State of Washington; Richard J. Taggart, executive vice president and former chief financial officer, Weyerhaeuser; James Jiambalvo, dean of the University of Washington Business School; and Keith Grinstein, partner, Second Avenue Partners.