Financial Executives Research Foundation (FERF) interviewed individuals of varying, but vested, interests in the financial reporting process, and encountered diverging views. Most agreed that the volume of standards being implemented simultaneously is posing a significant challenge.

"There has been enough in the press, particularly for smaller and middle-market companies, regarding the strain on resources, says Teresa E. Iannaconi, partner in charge of Practice Advisory Services in KPMG LLP's Department of Professional Practice. "I have certainly been aware of significant resources being devoted by large companies, but it is hard to judge whether or not [it] is taking away from the business of business."

Additional reporting and disclosure are time-consuming and absorb resources. However, as Iannaconi notes, the confluence of standards itself is the larger issue. "Perhaps the biggest challenge is that all of this expanded and accelerated reporting is happening at the same time."

"The [current] environment has changed the stakes," says Brett D. Heffes, CFO and treasurer of Minneapolis-based franchisor and financial-services provider Winmark Corp., a public company with a market capitalization of approximately $150 million. "If you have pride in your work product, you want to think through all the issues, given everything that's in the press," he adds.

Heffes notes that preparation of disclosures is relatively straightforward and in many instances may just be a compilation of information already in financial statement footnotes. Instead, the time involved in researching applicability of a standard poses the greater challenge. For his company, he says, "I don't think it's a matter of financial reporting overload. It's a matter of trying to interpret a barrage of new pronouncements in an acceptable timeframe [of] tighter deadlines."

The situation is further complicated with the upcoming AS2 implementation. "The biggest hurdle for 2004 is The Sarbanes-Oxley Act Section 404," says Kenneth R. Trammell, senior vice president and CFO of Lake Forest, Ill.-based Tenneco Automotive. "Though we went through most of our testing last year, our audit firm has given us a testing scope at a much lower level, so we've had to expand our scope."

Newer standards, such as Financial Accounting Standards Board (FASB) Interpretation 46 (FIN 46), introduce more complexity to Section 404 compliance. "Companies are dealing with new disclosures. At the same time, auditors are testing controls around these new disclosures," explains Marsha L. Hunt, vice president and controller of Columbus, Ind.-based engine-manufacturer Cummins Inc. "It's difficult to manage when preparers and auditors are all trying to interpret the requirements simultaneously," she adds. And, disclosure requirements introduced during this time add additional complexity to the internal control environment.

Trammell says he encountered no significant implementation issue during the 2003 reporting season, but he concurs with the theory of standards confluence. "It's hard to argue that anything [provided in financial reports] is not good disclosure, but if you add it all up, you might as well ask users if they would want a copy of the general ledger," he says.

Converging U.S. generally accepted accounting principles (GAAP) with international financial reporting standards (IFRS) is yet another upcoming hurdle. "It's the calm before the storm," says Charles Holley, senior vice president and controller for Benton, Ark.-based Wal-Mart Stores Inc. "I applaud FASB for going in that direction, but it will be difficult to get there. Going through considerable changes will be difficult for everyone, including users; in the end, it's all about the user."

Neri Bukspan, managing director and chief accountant at Standard & Poors, sees a bright side. "Clearly, a lot is going on concurrently. The good news is that next year will be better once systems (post-Sarbanes 404) are implemented. To the extent that corporations [make a] bona fide attempt to comply, there will be understanding by analysts, investors and regulators [that this is all] new," he adds.

Rulemaking: Reaction to Failures
Iannaconi notes that the Sarbanes-Oxley era is not so different from other times marked by significant financial reporting failures. The Treadway Commission was created in response to financial reporting failures, including the savings and loan crisis of the 1980s. And, the Foreign Corrupt Practices Act responded to halt bribery of foreign officials during the 1970s.

The 2000 stock market bubble had some observers saying the pendulum has swung too far to one side. Many now believe it has swung in the opposite direction. Lynn Turner, a professor at Colorado State University, managing director for research for at Glass Lewis and former chief accountant at the SEC, points out events, such as the 1990s failed mergers and dot-com IPOs, led to today's business environment. Sympathetic to the challenge of multiple regulations, Turner is quick to note that changes proposed in the 1990s were rejected by business and other market participants.

"There were a lot of opportunities to make incremental changes during the bubble. Only a few took up what some had recommended as best practice," Turner says, citing FEI and National Investor Relations Insititue (NIRI) guidelines on controls and pro forma disclosure.

Wal-Mart's Holley agrees with the pendulum effect, but notes that recent accounting standards have been reactionary. "Though some of it is necessary, some is too blind." He contends that standards should be "more thoughtful and field-tested to understand the implications."

Go With Quality and Long-Term Focus
In a June 2004 Financial Executive online article, FASB Chairman Robert Herz acknowledges the challenges to preparers but also stresses the importance of transparency for users. "…we're respecting that people can only handle so much at a point in time. ...On the other hand, I don't think we are going to stop trying to move forward. But [we will] do it in a thorough way, because it is clear for the investor world, that there are things they are still not happy with ...They make very convincing arguments that the current accounting is just not right, and needs some attention."

S&P's Bukspan stresses the diversity of user needs. Different users, he notes, ranging from analysts, regulators or average investors, will have different objectives. Those who carry the torch of conducting more rigorous research may find some information more useful than others, and vice versa, he explains.

Also, Bukspan sees the quality and clarity of information as probably the most important attributes. "Improvements to both, he says, can be accomplished by streamlining disclosure and minimizing duplication in financial statements and MD&A." For example, "If an FR67 (SEC Final Rule: Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations) disclosure also appears in a guarantee footnote, I have to carefully read both since there may be something that appears in one but not the other."

Many view Wall Street's emphasis on short-term performance over long-term results as the root cause of failures that resulted in the increased regulation. Turner argues that analyst-related issues were not solved by Sarbanes-Oxley. While he believes many independent research firms provide good analysis, some firms, he believes, are focused on hype rather than substance. Thus, Turner supports changing compensation plans to reward portfolio managers based on long-term and not quarterly performance.

Short-term focus can be alleviated by the tone at the top. Winmark's Heffes says, "The tone that our company sets clearly [supports] doing the right thing. We don't spend a lot of energy focusing on [what] expenses fall in [a given] quarter. Numbers will fall out, and we disclose what we need to disclose. This goes back to our chair's philosophy of running the business for the shareholders and not providing forward earnings guidance to analysts. If someone then decides to be a shareholder, [that's] great."

Heffes acknowledges less pressure due to Winmark's small market capitalization and low analyst coverage, but highlights a simple, but positive, philosophy: "We have no motivation to stretch for numbers. We care about the performance of the business for ourselves and our shareholders, not some research analysts in New York."

Time Will Tell
Only hindsight will tell if the changes improve financial reporting and balance the needs of users with preparers' efforts. KPMG's Iannaconi concedes that new requirements are demanding. "Whether or not the costs are worth the benefits, we'll figure out over time," she says.

Turner advocates setting up a system that promotes working together based on customer needs instead of one marked by teams representing competing special interests. "Until this is changed, additional disclosures will always be needed to supplement financial statements that fail to provide users what they need." Additionally, he says, "People [have to] put aside personal agendas and get back to the notion of a high-quality product and a focus on putting our best [efforts forward] in an efficient and a cost-effective [way]."

As companies and individuals are confronted with understanding and implemementing the new regulations, it's too early to tell how it will play out. No one can refute that regulators, auditors and corporations could use more than a few good accountants.

CHERYL DE MESSA GRAZIANO, CPA (cgraziano@fei.org), is Director of Research for Financial Executives Research Foundation (FERF). 

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