Key Trends in Financial Compliance and Reporting

June 9, 2011

You can expect technology to play a major role

Footnotes interviews Robert Herz, former Chairman of FASB As Chairman of the Financial Accounting Standards Board (FASB), from 2002-2010, Robert Herz led the nation’s accounting standard setter through challenging times. In this Footnotes interview, Bob shares his perspective on issues ranging from the need for increased transparency and improved shareholder communication, to the role technology is likely to play in the future of business reporting. Footnotes: You’ve just joined WebFilings in an advisory role. What led you to that? Herz: Well, I have an abiding passion for improving the information provided to investors and the capital markets. I'm a big believer that the better the information, the more timely it is, the more understandable and usable it is, the better our capital markets will function as well as the overall economy. Last year I was introduced to WebFilings at the annual AICPA Conference on Current SEC and PCAOB Developments. I met a lot of the people involved and got much more familiar with the product and the plans of the company. It just knocked my socks off. Filings are not just compliance exercise. They are, at the heart of it all, a communication between companies and investors and the capital markets. But if you are spending all your time on just the compliance aspect—just on getting the work done—then you don't have enough time to figure out how to really improve the communication aspect of it. At a broad level I'm a believer in the Warren Buffet approach. For example, in his annual letter to shareholders, he says he tries to treat the communication as if he was talking to a 50-50 partner who has been away for a year: "What do I really need to tell you about and have you understand about what went on at the company this past year and where we stand." I think that's a good approach. At a more detailed level I think the Wdesk External Reporting Solution helps a lot in this regard. I believe that conveying information through tables and charts and then explaining it in narrative improves understanding a lot. I think that XBRL and WebFilings can work together to help companies more efficiently gather and organize information, and then disseminate it in a way that allows improved analysis. The Wdesk Solution is particularly suited to any situation that involves a lot of numbers that need to be organized and presented along with company narratives. Right now the product is clearly and appropriately targeted at SEC filings. SEC filings are a good example of documents that combine both numbers and narrative. But there are many other types of documents like that, and I see the product as portable to those other arenas. Footnotes: What do you see as trends in business reporting and compliance that companies should prepare for? Herz: The first thing companies can expect is a continued emphasis on timely reporting. For good or for bad, a number of years ago the SEC reduced the time frames for filing 10-Ks and 10-Qs. When that first happened, it was a major challenge for companies, and it continues to be a real challenge because the volume of information required from companies seems to continue to increase. So the second challenge is increased content, because of new accounting standards, as well as new SEC requirements. There is also a move toward more reporting of key performance indicators and more granular information, including information about the environmental and social impacts of what companies are doing. For example, the International Integrated Reporting Project is looking at ways to better integrate financial information with key nonfinancial information, including information on environmental, social, and governance aspects of an organization. So we have both the demands for quicker and additional information, as well as new formats. In my view, technology becomes a very important aspect of enabling all this. Third, I see a continuing trend towards more regulatory review and enforcement. These things seem to go through cycles, but in the wake of the financial crisis I believe the tendency is toward more review and enforcement of standards, rules, and regulations. Footnotes: What’s your take on the move towards international reporting standards? Herz: The drive to converge US GAAP with IFRS was a major focus when I was at the FASB and is continuing. In the meantime it's up to the SEC to decide whether, when, and how we move to international standards for U.S. issuers. The SEC is going through an extensive review of all the issues and has said that it will make some decisions later in 2011. But the SEC has also said that even if they decide positively—they use the words "incorporate" IFRS into US GAAP—the earliest that would happen would be 2015. And it could happen in stages, for example, first for larger companies, then for medium-size filers, and finally smaller filers. Footnotes: Do you think US GAAP will eventually disappear? Herz: Ultimately, I believe there are significant potential benefits from having a single set of accounting standards used across the major capital markets of the world. It's still a work-in-process and a decision in the U.S. is still to be made. However, my guess is that legally we won't supplant US GAAP. Whatever we use in the U.S. (although it might be identical to or substantially similar to IFRS) it may well still be called US GAAP. The words US GAAP or "generally accepted accounting principles" are contained in many of our laws and regulations, including the tax laws and lots of contracts. Therefore, it could cause legal, regulatory, and contractual issues if we were just to say there is no more US GAAP; it is now IFRS. "Incorporating" IFRS into US GAAP as a legal wrapper might help avoid some of those problems. Footnotes: How would incorporating IFRS affect XBRL in the future? Herz: As accounting standards change, the taxonomy will change, as it relates to that particular topic. That is another matter that needs to be considered by the SEC as it decides whether, when and how to incorporate international standards into our reporting system. The SEC has not yet approved an IFRS taxonomy for use by foreign registrants that use IFRS. We have a fairly well-developed US GAAP taxonomy at this point. The IFRS Foundation has developed an IFRS taxonomy as well, but my understanding is that it is based only on what's required by the standards. The US GAAP taxonomy, however, goes beyond the standards to include current practices. So if there are common practices in an industry, there will be tags for that in the US GAAP taxonomy that may not be in the IFRS taxonomy at present. The IFRS Foundation has recently announced a project to expand the IFRS taxonomy to include commonly used pieces of data beyond those in the standards. Footnotes: In addition to convergence and the increasing role of technology, what other issues should companies watch for? Herz: There is a major project underway at the FASB and IASB on financial statement presentation which could significantly change both the look and feel, and specific content of the financial statements themselves—including how information in the financial statements is arranged. There is also a FASB project called the "disclosure framework," which, among other objectives, is aimed at trying to reduce clutter in the footnotes and redundancies of information within the filings. The financial statement presentation project is a joint effort between the FASB and the IASB. A paper issued a couple years ago proposed that the financials be reorganized to better distinguish operating activities from how the businesses is financed. For example, the income statement would be rearranged so that is it more like the cash flow statement. There might also be information to help reconcile the income statement to the cash flows statement, say, by having tabular roll forwards in the footnotes for key accounts. There's also been discussion of enhancing segment information. The boards are looking at putting out a more concrete proposal later this year or next year. The disclosure framework project—something that I added to the FASB's agenda almost two years ago—aims to improve the effectiveness of the communication in financials, by eliminating disclosures that are out of date and no longer useful. It is also meant to find better ways to organize the information in the footnotes. For example, are there redundancies between what's in the footnotes and other parts of SEC filings that could be eliminated? My view is that technology can be a huge part of that, because there's no universal user of financial information. Some only want very summarized information and others will pour over as much detail as you give them. Imagine that information is arrayed with a "drill-down" approach. You could have summarized information at the top level of a company's P&L. For example, if you click on revenues it says, "Would you like to see the revenues for each of our 10 major products?" and you see that. "Would you like to see the trend in sales for each of them over the last three years? Would you like to see the accounting policies we use for revenue recognition?" Technology lets you present different audiences with the information they want, when they want it.
Mike Sellberg

About the author

Mike Sellberg is Executive Vice President and Chief Product Officer at Workiva. He is the former EVP and CTO at iMed Studios and the former Divisional General Manager at Engineering Animation, Inc.