18(c). Resistance to Change
[Context] The AIMR report's introduction to the section entitled "Summary of Important Positions and Guide to Future Actions" begins and ends as follows:
Much of this report relates to the present state of the art and implications for future developments in financial reporting. Righfully, so do most of the positions stated in this section . . . [T]hey all build on positions taken by AIMR in the past . . . [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 12, and 18(d)] [AIMR/FAPC92, p. 59]
We expect the positions set forth below to build on the precedents of the past. That does not prevent them from breaking new ground, but they do not introduce significant inconsistencies with previous AIMR positions. To the extent that they do establish new stances those are largely the result of the changing world that we describe earlier in this report. [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 12, and 18(d)] [AIMR/FAPC92, p. 60]
Those two paragraphs introduce the following summary of a position taken by the Committee.
Cost/Benefit Analysis from a User Viewpoint
The benefits of producing financial statement information should exceed the cost of producing it. That is an axiom often cited by financial statement preparers in opposition to a proposed change in financial reporting practice. We not only do not object to that precept, we support it strongly. Our objection is to how it is portrayed by others. [Also included in 1(d)] [AIMR/FAPC92, p. 63-64]
We believe it is the owners of business firms who both reap the benefits and bear the costs of improvements in accounting and disclosure standards. The financial managers of business firms act simply as agents of the owners. In that regard, it is the current and potential shareholders and their financial advisors who should best be able to advise standard-setting and regulatory bodies as to the proper balance of costs and benefits associated with their proposals. [Also included in 1(d)] [AIMR/FAPC92, p. 64]
This position is corollary to the overall stance of AIMR, all other investors, and other users of financial statements. Financial statements are prepared and disseminated to provide the information that free financial markets need to operate. Users are the customers to be served. They also pay for the benefits they receive, albeit indirectly. Sometimes financial statement users are accused of being "free riders," receiving all of the benefits of financial reporting and paying none of the costs. The illogic and untruth of that statement must be apparent to anyone who makes the effort to analyze it thoughtfully. If not, then this report has failed to meet one of its goals. [Also included in 1(d)] [AIMR/FAPC92, p. 64]
[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of structure and process.
Committee/Staff/Observer
. . . One last question in this area of resistance to change: assuming that you agree that the final recommendations of the Special Committee represent improvement in external reporting at acceptable cost, what channels could the Committee use to achieve broad-based support from investors for its recommendations? [TI 3/17, p. 64]
Participant I-12
My experience has been that we have all these organizations, the AIMR, the New York society, but from the viewpoint of analysts, the most potent arena comes through the splinter groups. All the banking analysts belong to a splinter group, the chemical analysts, the auto analysts, etc. [TI 3/17, p. 65]
Participant I-5
I agree. [TI 3/17, p. 65]
Participant I-7
There is one body and one body only and that is the SEC. I headed one of the AIMR's subcommittee for over 20 years, and 18 of those 20 years we have been going after better segment reporting; in fact, no company could get an award if they didn't report under FAS 14. But the SEC did not put any teeth in the group in terms of forcing the requirement and there just wasn't any change. If you're going to try implementing change, you're going to need the SEC. [Also included in 3(a)] [TI 3/17, p. 65]
Committee/Staff/Observer
The AIMR now has a report about changes in financial reporting and they've asked for comments from anybody, including analysts, by the end of this month. Do you have a feel as to whether or not any of the splinter groups will respond to the AIMR? Do they know about the report? [TI 3/17, p. 65]
Participant I-12
It's highly likely that that report is on my desk but I don't remember having seen it. [TI 3/17, p. 65]
Participant I-16
I think you're greatly overestimating what AIMR represents. AIMR is not like the AMA or the ABA; 99.9% of analysts couldn't care less about what the AIMR is doing. [TI 3/17, p. 65]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of structure and process.
Committee/Staff/Observer
Question 16. If the Special Committee is to make recommendations that they think represent improvements, particularly founded on things you have said to us, we need to have a better understanding of how the world might receive those so we wouldn't encounter the same level of resistance that accompanies any suggestion for change. [TC 3/11, p. 64]
Committee/Staff/Observer
We have concluded as a committee that an important part of our process will be to not just study and make recommendations but to figure out what to do about those once they've been made, to make the likelihood of implementation greater and to, if possible, assure implementation. So we're looking at the process which you might characterize as a change management process and what we need to do to improve the prospects for changes once we get to the end of the road without at this point in time speculating about what the end of the road is. And so we would like to have your perspectives on where you see the hurdles, the resistance factors, what are we going to encounter, where will the resistance come from that we will inevitably encounter in this process? [TC 3/11, p. 64-65]
Participant C-17
I think the most obvious one is that we can outline an ideal world but it imposes cost. And especially in today's environment that will be very fiercely resisted. In addition to cost, whenever you're asking for more disclosure, there may be management resistance. [TC 3/11, p. 65]
Participant C-14
Management may have the opinion that more disclosures and more information is against their competitive advantage. For example, in the case of legal liabilities, I know they don't even like to tell us numbers in confidence because once they do that, they set themselves up for that number being used by whoever's trying to sue them. [Also included in 2(d)] [TC 3/11, p. 65]
Participant C-5
The resistance will come from management due to cost factors. The transitional procedures will be important. For example, you could have differential standards and then a migration procedure over a period of time that would initially establish a goal, would establish interim disclosure procedures or a standard at a midpoint. By using the differential standard framework for private companies, small companies, negotiated lenders, private transactions, by having some different disclosure standards what you really are doing is not changing the standards but you're forcing certain populations to migrate as they grow. That would be one possibility. The other is over the passage of time you might cut the thresholds and force people to migrate accordingly. The other aspect is this concept of levels of assurance associated with the disclosures. I can accept less assurance on certain items. And that hopefully obviously would translate into cost; less assurance, less liability, therefore less cost if we assume that the big component of this is the litigation issue. We hear all the time about the small end borrower shifting to review, shifting to compilation. They are using a migration already and they're transitioning backwards. [Also included in 2(d) and 18(b)] [TC 3/11, p. 65-66]
Committee/Staff/Observer
We have a migration process for change when you make changes gradually over a period of four or five years. What does that do to you as users in terms of comparability? We've heard you say you want ten years restated of information when there is a change and every time you have a change it causes you to have to retrain your people and maybe adapt your systems. How do we solve the preparer resistance by going to a migration problem and create one for you? [Also included in 2(c)] [TC 3/11, p. 66]
Participant C-5
Well, some of this is scope. Obviously if you're talking a Fortune 500 company, you apply the standards on almost a consistent basis but I'm talking more scale, size of company issues. We train junior analysts off the senior people so the senior people work the biggest companies. That passes down. You've got your own internal transition process. We don't train somebody who has a year on the job in the current accounting conventions because they really are irrelevant for the cases they're analyzing. We already accept that fact because we're getting tax returns and we're getting review statements now. We're living with less disclosure and differential statements even though you don't have different standards. [Also included in 2(c)] [TC 3/11, p. 66]
Participant C-11
I think if the information (the disclosure) is better than it's been, the user is certainly going to welcome it. The problem is that different situations may require different clarifying information. We talked today as well as in the past about the inventory questions and receivables aging questions. We've talked certainly about a quarterly and annual segment reporting needing to be better. You mentioned the problem of once you report something, it's therefore a permanent fixture and that's certainly what the preparers always say. I think the public and really the SEC has to do what they have said they do do and that's be flexible but I think they have not always done it. If a company reports something and it's useful at that time but it may not be needed in the future, not to require it is something. I think if they did what they said they want to do, and that is to provide a flexibility in terms of what gets reported, you would have a better environment for dealing with different situations that come along in different companies. That's definitely needed so that the preparers can be a little bit more comfortable. [TC 3/11, p. 66-67]
Committee/Staff/Observer
[Participant C-11], you mentioned that if the information is better, the users will welcome it and I think that's encouraging. Do you think that for users there will be a reasonably clear consensus about what is better? Or is it likely that we will find as much resistance on the user side of the equation as we do on the preparer side of the equation? [TC 3/11, p. 67]
Participant C-11
It would depend on the information. And what came to my mind is we're getting after the fact almost much better disclosure on the nature of where loan loss problems are in banks. I glanced at the new [name deleted] report yesterday and there's an incredible breakdown of where the real estate problems are for the first time. So users certainly are going to welcome that. At the same time, I think you will find users to have very negative feelings about some of the implications of the accounting changes that people are proposing. So I have to say it would depend on what's being proposed. [TC 3/11, p. 67]
Participant C-2
I would like to go back to the idea of differential standards; there may be a very different view in terms of that, particularly for smaller institutions where we may depend on information that's accumulated by trade associations and so forth where they may not screen out who adopts something early or where companies may be in that process. It has the potential to severely disrupt comparability. And that is an important tool that I think has to be considered. [Also included in 2(c)] [TC 3/11, p. 67]
Participant C-8
I agree. A lot of smaller end companies are not going to make radical changes and we're going to spend a lot more of our time trying to reanalyze the information and bring it back to being comparable. [Also included in 2(c)] [TC 3/11, p. 68]
Participant C-10
In terms of resistance to reporting, preparers don't want to disclose more because of competitive information content. Even the lawyers when they have a road show say they can't leave the slides. Or they'll leave the slides, copies of the slides with four of the key pages left out and so all the analysts are sitting there writing as fast as they can when those pages are flashed on the screen. The point I'm making here is I think the companies hide behind this thing and it's not anywhere near as major an issue as they would like to make it sound. [Also included in 2(d)] [TC 3/11, p. 68]
Participant C-13
I just wanted to respond to what [committee/staff/observer] said about gradual change. We think that the transition periods are too long now. It's going to be 20 years before [two companies'] numbers are comparable because of the decision they made on FAS 106. [Also included in 2(c)] [TC 3/11, p. 68]
[Context] Responses to the postmeeting questionnaire to the March 17, 1993 Investor Discussion Group meeting.
QUESTION 20
The Special Committee believes there could be resistance to effecting change in external financial reporting. Some of the sources of that resistance to change were briefly discussed at the meeting.
a. In your opinion, which of the following groups are most likely to resist change in financial reporting? For each suggested group, please indicate:
H High level of resistance
M Moderate level of resistance
L Low level of resistance
High Moderate Low
Preparers of financial reports 2 1
(management)
Board of directors 2
Creditors 2
Investors 2
Auditors 2
Standard setters 1
Regulators (including the SEC) 2
Others. Please specify:
Participant I-11: Academics
Comments Participant I-16: The amount of resistance depends upon the specifics of the changes.
Participant I-11: I think the level of resistance will vary according to whose ox is being gored - but generally I think it will be highest amont managements and lowest among users (at least if we are talking about changes that enhance disclosure). I suspect the strongest reactions pro and con will come from regulators and academics, who often have non-economic agendas in these matters.
[PMQI 3/17, p. 35-36]
[Context] Responses to the postmeeting questionnaire of the March 11, 1993 Creditor Discussion Group meeting.
QUESTION 20
The Special Committee believes there could be resistance to affecting change in external financial reporting. Some of the sources of that resistance to change were briefly discussed at the meeting.
a. In your opinion, which of the following groups are most likely to resist change in financial reporting? For each suggested group, please indicate:
H High level of resistance
M Moderate level of resistance
L Low level of resistance
Participant C-5: Depends on direction and degree.
H-8,M-3
Preparers of financial reports (management)
H-3,M-6,L-2
Board of directors
Participant C-12: Should be low, but many are too close to management.
H-1,M-6,L-3
Creditors
H-1,M-4,L-5
Investors
H-4,M-4,L-2
Auditors
H-2,M-7,L-2
Standard setters
H-2,M-5,L-4
Regulators (including the SEC)
H-1
Others. Please specify:
Participant C-11: Bad question. Answer should depend on what changes are being proposed.
Participant C-5: Analysts.
[PMQC 3/11, p. 33-34]