APPENDIX IV

BACKGROUND ABOUT THE COMMITTEE AND

ITS WORK

EVENTS THAT LED TO THE COMMITTEE'S FORMATION

The Committee was formed in April 1991 by the AICPA Board of Directors. A number of events led to that action. They go back at least as far as 1988 when the profession was subject to significant criticism by the accounting profession itself, by academics, and by Congress and regulatory bodies. The AICPA Strategic Planning Committee then urged the AICPA to play a more effective role in the accounting standardsetting arena and to develop an aggressive program designed to enhance the relevance, reliability, and costeffectiveness of business reporting. The AICPA Future Issues Committee reported the same year that business reports are losing their significance because they are not future oriented and do not provide valuebased information.

In the spring of 1990, Thomas W. Rimerman, then vicechair of the AICPA Board of Directors, published an article in the April 1990 Journal of Accountancy on "The Changing Significance of Financial Statements." The article called for the appointment of a new blueribbon commission to study the relevance of reporting. Mr. Rimerman's article was followed in the fall of 1990 by the Wharton Symposium on Financial Reporting and Standard Setting, which also called for change: "Continuing on the present course, we believe, will lead to the growing irrelevance of conventional financial reporting in the new age of information." The symposium concluded that, while the current accounting model should not be scrapped, it should be reengineered to provide more relevant information to users of financial statements. It also concluded that this reengineering would require research as to what users require followed by different levels of information to meet those needs. Other commentators in the United States were raising similar issues:

• The American Accounting Association Committee on Accounting and Auditing Measurement, 1989-1990, concluded that ". . . the most general criticism to be leveled at financial statements in their present form is that they are seriously incomplete."
• The Financial Executive Research Foundation agreed in 1991 to a research proposal to study economic reality in financial reporting, including economic valuation concepts, innovative reporting practices, and performance measurements and reporting.
• A.A. Sommer, Jr., chair of the Public Oversight Board of the SEC Practice Section of the AICPA Division for CPA Firms, said that "the time may be ripe for . . . a National Commission on Auditing and Accounting. . . ."
• Walter P. Schuetze, a past chair of AcSEC and now chief accountant of the SEC, said that "We need an . . . inquiry into the met and unmet needs of users of financial statements."
  Meanwhile, similar events were occurring in other countries. U.K. accountancy bodies issued several documents challenging current business reporting:
• Making Corporate Reports Valuable (1988). "The present model for corporate reporting is not satisfactory. . . . Presentday financial statement packages seldom give any indication of the overall objectives of the entity; and even crucial information about its management and ownership is provided only on a limited scale."
• Financial Reporting, The Way Forward (1990): "What is principally wrong with present financial statements is that they do not reflect the economic reality of a company's progress and position. . . . Present day financial statements are deficient in that they concentrate on . . . past events rather than the future."
• The Future Shape of Financial Reports (1991): "There is increasing support for the view that the existing financial reporting package is not adequate to meet the needs of users. The balance sheet and profit and loss account have evolved from the limited requirements of reporting in the developing industrial economy of the nineteenth century, and extensive tinkering has not been sufficient to bring them in line with the requirements of the late twentieth century market economy, . . . The contents of financial reports should be user driven. . ."

The Canadian Institute of Chartered Accountants issued the Report of the Commission to Study the Public's Expectations of Audits (1988): "The CICA should initiate . . . a study of risks and uncertainties leading to conclusions as to how they may best be disclosed in financial statements or elsewhere [in the business report]."

THE COMMITTEE'S CHARGE

The AICPA Board of Directors charged the Committee to recommend (1) the nature and extent of information that should be made available to others by management and (2) the extent to which auditors should report on the various elements of that information. It also required the Committee in developing its recommendations to determine the understanding of the information currently provided by financial statements and the perception of the assurances provided by auditors and to evaluate the full range of information and assurances that should be made available. The charge required the Committee to consider whether its recommendations would apply to all entities or only some and that the Committee also consider whether there is a need for any structural changes in the standardsetting process to increase the likelihood that its recommendations would be implemented.

The Committee's charge was broad in scope. Due to time and resource constraints, it was necessary to limit the Committee's work to the most critical concerns that led to its formation. As a result, the Committee decided to focus on forprofit entities and to exclude notforprofit entities and governmental organizations. Similarly, the Committee decided to focus on investors, creditors, and their advisors that use information for decision making but cannot compel information from the preparer. While the Committee was aware there are many other users of externally reported information, including employees, government agencies, and others, it decided the primary users ; and those associated with the concerns about business reporting ; were investors and creditors.

COMMITTEE MEMBERS AND STAFF

The following persons were members of the Committee:

Edmund L. Jenkins, partner, Arthur Andersen, chair

Michael H. Sutton, partner, Deloitte & Touche, vicechair Lonnie A. Arnett, vicepresident and controller, Bethlehem Steel Corporation

William W. Holder, Ernst & Young Professor of Accounting, University of Southern California

Executive Director: Gregory J. Jonas, partner, Arthur Andersen Members were chosen to represent a broad cross section of the AICPA membership. In addition to those from large accounting firms, representatives of mediumsized and smaller accounting firms, the business community, and academia were included in the Committee's makeup. One group missing was users. However, a major focus of the Committee's work involved direct contact with a large number of users, so their input was readily available to the Committee. The Committee also benefited from four observers who participated in meetings and otherwise provided guidance and information. They were:

John W. Albert, SEC staff

The staff work of the Committee was performed by a large group of individuals provided by Committee members' firms, the AICPA, and the FASB. The Committee could not have completed its work without the exceptional efforts of the staff, the principal members of which were:

David M. Lukach, Coopers & Lybrand

technical standards and services

THE COMMITTEE'S ORGANIZATION AND STRUCTURE

The Committee organized its work to take in a broad range of input into the decision making process. It also operated as a working committee rather than relying primarily on staff work. As a result, the Committee not only met frequently as a committee but also participated in subcommittee meetings, formed a special task force, commissioned research, and directed the work of its staff. More specifically, the Committee operated with the following subcommittees and task force:

• Current Model Enhancement Subcommittee was charged with considering changes to financial reporting on the assumption that the present model will be retained in preparing generalpurpose financial statements. It studied areas frequently cited by users as currently deficient, including disclosures about measurement uncertainties, opportunities, risks, and liquidity; disaggregated and segment information; and offbalancesheet items.
• New Model Subcommittee was charged with considering whether there is a new business communication model that should modify or replace the model currently in use. It analyzed alternative financial reporting models, including various fair value models, and the need for information on changes in general purchasing power and evaluated forwardlooking and prospective information. This subcommittee supervised the work of the Breakthrough Task Force.
• NonFinancial Business Reporting Subcommittee was charged with considering the extent to which business reports should include nonfinancial information. That includes all the information about the business of the reporting entity other than financial measurements of the entity's past, present, and future resources and obligations and the results of its operations or cash flows. The subcommittee considered information about economic, social, and technological trends; industry structure and outlook; and the company's mission and objectives and its success in meeting those objectives as indicated by various performance measures.
• Users' Needs Subcommittee was charged with providing information for use by the other subcommittees about the categories of users of financial information and the nature, timing, and reliability of information that users need. It directed the research on users' needs for information.
• Integration Subcommittee was charged with taking the conclusions of the Current Model Enhancement Subcommittee, the New Model Subcommittee, and the NonFinancial Business Reporting Subcommittee and preparing, from the elements of those conclusions, a comprehensive model of business reporting for use by the Committee in preparing its final recommendations. It was also charged with preparing a comprehensive illustrative business report based on the comprehensive model.
• Auditor Association and Differential Reporting Subcommittee was charged with considering the extent of auditor association with information traditionally presented in financial statements; whether to continue with standardized reporting; what kinds of association auditors should have with information in business reporting outside financial statements; and whether auditors should include commentary such as that on the opportunities, risks, and uncertainties associated with the reporting entity and the financial presentation.
• Breakthrough Task Force was charged with assessing who the users of business information will be in the year 2005; the kinds of decisions such users are likely to be making then; and the kinds of business information that will be presented to aid them in making those decisions. The task force contemplated the forces that will shape the global business environment in the longer term and the implications of those forces on the needs for information. The task force studied what entities will be called on to provide business information; to whom the information should be directed; and what kinds of information will be required to serve the decisions made, including the nature, frequency, channels, and extent of communication of such information.
  To provide a broad perspective, the task force included experts from various disciplines ; including business strategy, management, economics, finance, accounting, information technology ; and a futurist. The members of the task force who were not members of the Committee were:

Ray Ball, University of Rochester

• Structure and Process Subcommittee was charged with assessing the environment for business reporting and changes in the environment necessary to facilitate improvement in business reporting.
  The following persons participated in research projects for the Committee:

Louis Harris, chairman, LH Research, Inc. ; Telephone survey of 1,200 users of business reports, which gathered data used as a check against information previously obtained from and about users of business reporting. Robert J. Bricker, professor, Case Western Reserve University Gary J. Previts, professor, Case Western Reserve University Thomas R. Robinson, University of Miami Stephen J. Young, Case Western Reserve University ; Research that inferred information needs from data in analysts' reports on companies and industries. Paul M. Healy, professor, Massachusetts Institute of Technology Krishna G. Palepu, professor, Harvard University ; Research that inferred information needs from data companies voluntarily provide to investors.

Paul A. Pacter, professor, University of Connecticut

; Research sponsored by the FASB on the information needs for disaggregated information. In addition, as discussed in chapter 2, the Committee formed two discussion groups that included various types of investors and creditors.

THE COMMITTEE'S PROCESS OF REACHING CONSENSUS ON CONCLUSIONS

AND RECOMMENDATIONS

Reaching consensus on conclusions and recommendations began with the work of subcommittees. They determined the issues to consider in consultation with the Committee. They prepared papers on the issues, considered the evidence presented, and debated the issues based on that input. After reaching tentative conclusions, each subcommittee presented them and the evidence to the Committee. The Committee then reviewed and discussed in detail the work of the subcommittees in reaching tentative conclusions.

Once the Committee reached its own tentative conclusions, it continually reviewed them based on new evidence or new reasoning and modified them as the evidence or reasoning required. The Committee's process of developing recommendations included three key procedures: identifying the benefits and costs of decisionuseful information, identifying types of information that could provide significant benefits to business report users, and developing criteria that limit costs in cases in which costs could be significant. Those procedures are discussed in chapter 4. The Committee's goal was to develop an integrated package of recommendations to improve business reporting that the entire Committee would be able to support.

A tentative conclusion was incorporated into the package of recommendations if a substantial majority of the Committee members agreed to support it. Nevertheless, the Committee's process of reaching consensus emphasized the package rather than individual recommendations. The Committee goal of reaching consensus was consistent with the Committee's role as a study group developing recommendations, in contrast to the approach used by standard setters, such as the FASB.