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The Subcommittee undertook its study of users' needs for information solely to support the Committee's work and not to study users' needs for information per se. In setting the scope of its study, the Subcommittee considered the scope of the Committee's overall work and practical constraints over the resources and time available to the Subcommittee. This section addresses the scope of the Subcommittee's study of users' needs for information and the nature and reasons for limits on that scope.

The Subcommittee limited the scope of its study about users' needs to only certain users. Specifically, the Subcommittee focused on professional investors and creditors, and their advisors, who follow fundamental approaches and who cannot compel the company to produce the information needed for analysis. The Subcommittee further restricted its focus to users' evaluations of only certain reporting entities-specifically, to for-profit entities. Those limitations are discussed below.

Investors and Creditors The users of external reporting are a highly diverse group. Various dimensions capture that diversity, such as the many reasons why users rely on external reporting. The following summarizes some of those reasons:

Type of Reason for Using External User Reporting

Investors Helps with investment-related decisions

Creditors Helps with credit-related decisions

Management and Helps with decisions about Board Members managing the business

Employee Groups Helps with understanding of compensation policies and the reporting entity's ability to increase compensation

Competitors Helps evaluate competitive strengths and weaknesses and business strategy

Regulators Helps assess compliance with regulations

Academics Provides data for research

Auditors Helps understand reporting practice

The Press Provides data for articles

Users Concerned Helps assess the reporting With Various entity's involvement in areas of Social Causes concern with various social issues

The above list is not comprehensive. No doubt there are many more reasons why users use external reporting than listed above.
The full Committee has decided to focus on improving external reporting for purposes of helping users with investment and credit decisions and to not consider other reasons for improving external reporting. It did so for three reasons.

First, the AICPA Board formed the Committee primarily to address concerns about the relevance of external reporting in making investment and credit decisions. The Committee decided to adopt the same focus to meet the Board's expectations.
Second, the traditional focus of external reporting has been to assist users in making investment and credit decisions, thereby helping ensure that capital is allocated efficiently and effectively. The Committee viewed the traditional role of external reporting as serving a critical function and saw no reason to change that traditional focus of external reporting through its work.
Third, the Committee's resources and time were limited. Thus, the Committee decided to focus on the traditional role of external reporting in assisting investors and creditors rather than spending its resources to improve external reporting for other users.
The Subcommittee limited the scope of its work to the information needs of investors and creditors consistent with the Committee's direction.

Professional Users
The Subcommittee focused on the information needs of professional users rather than nonprofessionals who use external reporting to make decisions for their personal benefit and not as part of their employment. The Subcommittee agreed to focus on professionals for four reasons.
First, the Subcommittee believes that professionals have more extensive needs for information than nonprofessionals. The Subcommittee specifically considered whether nonprofessionals have a need for more summarized or condensed reporting compared to professionals, and if so, whether focusing on professional investors would overlook that difference in information needs. The Subcommittee noted the results of studies performed over the years indicating that nonprofessionals reject the idea of summarized or condensed reporting on their behalf. Thus, in general, external reporting that satisfies the information needs of professionals will also satisfy the information needs of nonprofessionals. The Subcommittee noted that the 1987 survey by SRI International, Investor Information Needs and the Annual Report, supports that conclusion.
Second, the percentage of total capital available for investment that is controlled by professionals has increased dramatically over the last two decades. That trend has resulted in part from the popularity of mutual funds that have served to concentrate large amounts of capital under the control of relatively few professional investors. Because of that concentration, professionals are more likely to determine the prices of securities than are nonprofessionals. Since the Committee's mission related to external reporting serves the broader goal of ensuring the efficiency and effectiveness of capital allocation, the Committee should study the information needs of professionals who drive that allocation.
Third, many non-professionals rely on the advice of professionals such as analysts, brokers, and others in making decisions. Further, because of the increasing complexity of the marketplace and the accelerating pace of change, nonprofessionals may rely increasingly on professionals for advice. Thus, professionals often heavily influence the decisions of nonprofessionals, even though they may not make the decision themselves.
Fourth, professionals, because of their training and full- time focus, should be better able to articulate their needs for information and the reasons for those needs than should nonprofessionals. Further, professionals are more likely to document their procedures and the information they use and to write about those procedures and information needs and uses than are nonprofessionals. Thus, professionals offer more information about their needs for information than do nonprofessionals.

Approaches to Decision Making

Not all investors and creditors use external reporting to help with their investment and credit decisions. The type of approach used in making the investment or credit decision determines whether the investor or creditor requires information found in external reporting. For example, some approaches require no company-specific information or company-specific information of the type that is outside the scope of external reporting. Examples of approaches that do not require information from external reporting include:

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Approach Used in Making Types of Information Investment or Credit Required to Support the Decisions Approach Used

Index fund approach whereby The identities of investors and creditors seek securities necessary to to duplicate the performance mimic the performance of an index, such as the of the index S& P 500

Approaches that predict Historical patterns of future price changes for prices for specific securities based on securities historical patterns of security prices or historical correlations of security prices to certain phenomena. Those approaches often use charts and graphs as tools to understand those historical patterns and correlations.

Technical approaches that Number of a particular predict short-term changes security sold short, in the supply or demand of margin position for a particular securities as a security, purchases or means to predict changes in sales of a security by the prices of those insiders, and other securities leading indicators useful to predicting changes in the supply and demand for securities

Approaches that use Predictions of changes predictions of changes in in interest rates interest rates as a means to predict changes in the prices of debt securities

On the other hand, other approaches require extensive amounts of company-specific information of the types commonly found in external reporting. Examples of those approaches include:
1. Fundamental approaches that seek to value a security by assessing the amount, timing, and uncertainty of future cash flows or income that will accrue to that security
2. Anticipation approaches that predict an entity's short- term earnings, changes in earnings, and changes in trends of earnings as a means to predict short-term changes in the prices of its securities.
The Subcommittee decided to focus on investors and creditors who follow fundamental approaches because other approaches generally do not require information from external reporting and would be mostly irrelevant to the Committee's work. One exception is the anticipation approach, which requires information from external reporting to predict short-term earnings. However, because of the short-term focus of the anticipation approach, it is reasonable to believe that the information needs of that approach are either the same or a subset of those of the fundamental approach. Thus, the Subcommittee concluded that it would gain little incremental benefit from a separate study of investors and creditors who follow the anticipation approach.

Advisors
The Subcommittee considered whether to also focus on users of external reporting who advise investors and creditors, even though they are not investors or creditors themselves. Those advisors include analysts, brokers, accountants, portfolio strategists, industry consultants, and others. The Subcommittee concluded that advisors often serve an integral role in the investors' and creditors' decision- making process. Further, it noted that certain advisors, particularly analysts, are among the most important users of external reporting. Thus, the Subcommittee decided to also focus on the advisors to investors and creditors, particularly analysts, to the extent that their approach to developing advice requires information from external reporting.

Ability to Compel Delivery of Information Needed for Analysis
Some investors and creditors can compel entities to deliver the information they need for analysis. Examples include investors with large ownership, investors and creditors with sufficient bargaining power, such as venture capitalists, bankers when considering an initial loan to risky credits, and rating agencies. On the other hand, other investors and creditors cannot compel the delivery of information. They must rely on mandated reporting, the willingness of the company to provide information, and sources outside the company for the information they need to make decisions.
The Subcommittee concluded that the purpose of mandated external reporting is first to serve the information needs of those who cannot compel entities to deliver the information they need for analysis. Those who can compel the production of information can generally help themselves. Thus, the Subcommittee concluded that it should focus on investors and creditors who cannot compel entities to deliver information.
Although the Subcommittee's focus is on those who cannot compel, it nevertheless decided to include in its study of information needs those who can compel, such as representatives of the rating agencies. It did so for two reasons. First, it is reasonable to believe that the information needs of both groups are similar. For example, the Subcommittee expects that a rating agency and a company's bondholders have similar needs for information about the company, particularly since the rating agency is evaluating the company on behalf of the bondholders.
Second, investors and creditors who can compel the delivery of information may offer particular insights about the types of information that may be useful to others but that is not currently part of mandated external reporting and should be considered for inclusion.
For-Profit Entities
The Committee decided to limit the scope of its work to the external reporting of for-profit companies and has excluded from its consideration reporting by not-for-profit organizations and governmental entities. It limited its scope solely because of practical constraints on the time and resources available to complete the work. The Committee nevertheless believes that external reporting by not-for- profit organizations and governmental entities is of critical importance. It hopes that the Committee's recommendations related to reporting by for-profit companies will assist others in recommending improvements in the reporting by not-for-profit organizations and governmental entities.
Consistent with the Committee's overall scope, the Subcommittee decided to limit its study to the information needs of users in evaluating for-profit companies.

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