18(d). Investor and Creditor Involvement in Setting Accounting Standards
[Context] The following brief summary of the topic "The Standard-Setting Process," is from the "Executive Summary" of the report the AIMR's Financial Accounting Policy Committee (FAPC):
Several topics are covered in this section. First is our assertion of support for the continued development of globally acceptable accounting standards. That support is accompanied by a discussion of the problems that we expect will be encountered in the quest for worldwide standards. [Also included in 18 (a) and 18(e)] [AIMR/FAPC92, p. x]
Second, we express our support for the standard-setting process in the United States and for the FASB as an institution. We provide refutation to many of the criticisms directed against it. We do not believe the FASB is to blame for many of the complications in financial statements today, nor do we believe that it has issued too many standards too quickly. We disagree with those who say its standards are too theoretical, that the cost of implementing them is too great, or that the FASB is inimical to the interests of financial statement preparers. Rather than following due process too little, we believe the FASB follows it too much. The reasons supporting these beliefs are set forth in the report. [Also included in 18 (a) and 18(e)] [AIMR/FAPC92, p. x]
Finally, we emphasize the needs of financial statement users in the standards-setting process. We argue that users of financial statements are also the owners of the enterprises being reported upon, and it is the users who, in addition to receiving the benefits, ultimately bear the cost of providing financial reports. We suggest that user viewpoints be incorporated in the standard-setting process through their direct participation as members of the FASB, in addition to the current practice of their providing written comments and oral testimony. [Also included in 18 (a) and 18(e)] [AIMR/FAPC92, p. x]
[Context] It indicates the scope of the discussion of the topic and lists the report's major recommendations, providing an introduction to the following excerpts from the report.
A Note on Field Testing
AIMR's Financial Accounting Policy Committee has on several occasions communicated directly to the FASB its support of field testing in the standards-setting process. Field tests can be enormously helpful in identifying implementation problems that neither preparers nor users of financial statements could have anticipated at the conceptual level. We commend those enterprises and their auditors who have volunteered their time, funds, and effort to test proposed standards in the past and we encourage others to participate in the future. [AIMR/FAPC92, p. 51]
AIMR also is enthusiastic about the prospect of financial analysts participating in field tests. We believe that we could add a heretofore absent dimension. To date, field tests have concentrated on the feasibility of preparer implementation of proposed new accounting methods. Analysts would be able to comment on the value of the information generated by those methods. They could also recommend the forms of presentation that would best serve effective dissemination of the information contained in the data. Specifically, they could provide expert opinion as to how well the new methods create knowledge that is useful to the process of valuation. [AIMR/FAPC92, p. 51]
If investment professionals were to participate in field tests, safeguards would be needed to protect the confidentiality of the information being generated. The first of these is Section II. C. of the AIMR Code of Ethics.20 Only AIMR members who would not find field test information useful in their trading or related activities could participate. Eligible testers would include a variety of working analysts as well as other AIMR members, such as academics and others not currently or directly participating in capital market transactions. Additionally, there are undoubtedly many circumstances in which additional practicing analysts could participate without having to know the identity of individual field test firms or (sometimes) their industry affiliation. Finally, there would have to be ways to assure the business enterprises participating in field tests that the safeguards were operative and effective. [AIMR/FAPC92, p. 51]
AIMR has long been an active participant in the standard-setting process, both in the United States and internationally. It has presented its views in writing and in testimony more frequently than any other organization of financial statement users. Frank Block, long-time member and former chairman of the Financial Accounting Policy Committee (FAPC), served a term as FASB board member. Patricia McConnell, current chairman of the FAPC, is a member both of the Board of the International Accounting Standards Committee and the Financial Accounting Standards Advisory Committee (FASAC) that advises the FASB on matters it has currently and prospectively under consideration. Gerald I. White, former long-time chairman of the FAPC, serves on the IASC Advisory Board as well as frequently presenting the views of and serving as spokesman for financial analysts on financial reporting matters. George H. Boyd III of Kidder, Peabody & Co. currently occupies the "financial analyst chair" as a trustee of the Financial Accounting Foundation, the organization that sponsors and supports the FASB. Financial analysts almost always are represented on task forces organized by the FASB to prepare discussion documents on agenda items. Financial analysts from the United States frequently have served on IASC steering committees (similar to FASB task forces). [AIMR/FAPC92, p. 51-52]
With the exception of the one full-time FASB member, all individual analysts cited above serve as volunteers and render their services to the standard-setting process in addition to, not as part of their regular work as analysts, money managers, research directors, academics, etc. Their dedication is commendable. Furthermore, they have the task of representing, with both time and funding in meager supply, the majority of professional users of financial statements. Their views deserve to be heard, even though they are outnumbered and outspent by the legions of business firms, industry and business policy associations, large auditing firms, and professional associations of accountants, many of which have full-time paid staffs to research and advocate their views on financial reporting matters. . . . [AIMR/FAPC92, p. 52]
Need for User Viewpoints in Standard-Setting Bodies
Only once has the Financial Accounting Foundation appointed to the FASB an individual from the community of professional financial statement users. Even then, he was one of the few FASB board members who served only one term. By contrast, the International Accounting Standards Committee includes two financial analysts as members of the board and several others on its advisory committee and various steering committees. As a result, financial analysts and investment managers often feel alienated from the standard-setting process in the United States, "the beggar at the feast" as one prominent investment manager stated.23 We observe FASB members being selected from the ranks of auditing firms, business enterprises, academia, and government. Every realm, save one, seems to provide board members. [AIMR/FAPC92, p. 54-55]
Most practicing financial analysts are neither accounting technicians nor theorists. They do not have the time, given the demands of their work and the limited (but vital) role financial reporting plays in it. Some might say that is a reason not to appoint a financial analyst to the FASB. But it is more a reason to make such a selection. First, we must keep in mind that the primary purpose of financial reporting is to provide information that is valuable to financial statement users; it is not merely to produce reports that comply with a variety of arcane requirements nor to provide employment to accountants. Therefore, those who use financial statements should have a major voice in determining their form and content. [AIMR/FAPC92, p. 55]
Second, financial statement users have perhaps the paltriest resources with which to lobby the FASB or otherwise present their views. As we point out above, we feel badly outspent and outnumbered in the "due process" activities of the FASB. The effort that we do expend is with the goodwill and forbearance of generally demanding employers and is dependent on the willingness of individual investment professionals to relinquish a certain amount of their personal or leisure time to further the interests of their fellows. [AIMR/FAPC92, p. 55]
Third, there is compelling need for at least one member of the FASB to provide a point of view that is totally absent from the board's inner workings now. We are well aware that board members are required to sever all ties with their previous employers and that members are to act in the interests of the board's entire constituency, not as representatives of special interest groups. An investment professional appointed to the board also would have to adhere to those terms and we would expect no less. Still, all persons are the sum of their experiences. It is baffling to us that the Financial Accounting Foundation allows the FASB to carry on year after year missing the background and experience of at least one financial statement user. We cannot imagine anything more pertinent or germane to the Board as it strives to fulfill its mission and put into practice the tenets of its conceptual framework. [AIMR/FAPC92, p. 55]
__________
Much of this report relates to the present state of the art and implications for future developments in financial reporting. Rightfully, so do most of the positions stated in this section. Before presenting them, however, we must note that they all build on positions taken by AIMR in the past. For many years, the AIMR's Corporate Information Committee (CIC), SEC Liaison Committee (SECLC), and Financial Accounting Policy Committee (FAPC) have spoken often and forthrightly in presenting our views and those of our predecessor association, the Financial Analysts Federation. [Also included in 1(d)] [AIMR/FAPC92, p. 59]
The Financial Accounting Policy Committee "maintains contact with both private and public sector accounting groups that establish accounting standards to assure the needs of investors are communicated and included as standards are promulgated." Its primary activity is to react to initiatives from those bodies. The extent of that activity can be noted from Appendix A, a list of the letters of comment produced and sent by the FAPC over a five year period ended April 1, 1992. In addition to its comment letters, the FAPC issues broad position papers on financial reporting and accounting matters. It also has sponsored research on accounting matters, the most recent being quarterly segment reporting. It was commissioned by AIMR to draft this report. [Also included in 1(d)] [AIMR/FAPC92, p. 60]
The SEC Liaison Committee is the subcommittee of the Financial Accounting Policy Committee that takes responsibility for AIMR relations with the Securities and Exchange Commission. Appendix B contains a list of its communications with the SEC over the period February 2, 1989 through April 10, 1991. The major work of the Corporate Information Committee is to evaluate the quality of financial reporting and to designate awards to firms that excel in meeting their reporting obligations. Each year, the committee publishes a lengthy report of its findings together with a description of its activities and criteria for selection. Copies of that report are available from AIMR.26 [Also included in 1(d)] [AIMR/FAPC92, p. 60]
__________
[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
Question 15 deals with barriers to improving external reporting. Why are investors not more actively involved in the process of setting accounting and disclosure standards? The meeting materials offered some possible reasons. [TI 3/17, p. 63]
Participant I-16
Lack of expertise relative to the profession and internal financial executives, lack of resources compared to internal financial people, and less at stake than internal financial people. [TI 3/17, p. 63]
Participant I-12
As analysts, we take the statements as given. We're relying on these statements because our primary interest is the future. It's only been over the last decade or so that we've begun to wake up to the fact that we might be able to have some kind of impact. Very few of my colleagues are aware that this Special Committee is in existence and operating. [TI 3/17, p. 63]
Committee/Staff/Observer
Yet for years the AIMR has sponsored the annual evaluation of corporate reports, taking hundreds of analysts thousands of hours to participate in that effort, which is solely directed toward improving external financial reporting. [TI 3/17, p. 64]
Participant I-12
That's right. I know that the AIMR has a relationship with the accounting profession and the FASB. But the groundswell that it takes from analysts just hasn't been there; I suspect it's partly because we have so many demands on our time. The AIMR research is done in the context that the accounting principles can't be changed, that they are predetermined. The focus is getting companies to give us more in terms of sense and feel. [TI 3/17, p. 64]
Participant I-16
The profession that we represent is not really after goodness and truth. The objective of [my firm] is to beat [the other firm]. We're in a relative performance game. If I'm one of five managers on an account and I come in second, I'm going to have that account next year; if I'm first I'm going to get some more money; if I'm fifth, I'll lose the account. Whatever the rules of the game are, as long as it's a level playing field, it's O.K. It's not my major concern; my major concern is spending my time to beat their brains out. [TI 3/17, p. 64]
Participant I-5
An analyst is supposed to be looking and watching what is happening, not influencing events, but interpreting those events. An analyst's job is not to make things happened. [TI 3/17, p. 64]
[Context] Responses to the postmeeting questionnaire to the March 17, 1993 Investor Discussion Group meeting.
QUESTION 20
b. Why are most investors and other users of external reporting not actively involved in the process of setting accounting standards and, thus, in the process of improving external reporting? Is it because users (please mark as many choices as are appropriate):
1.Have a vested interest in
maintaining the status quo so as
not to change the nature or the
relevance of their functions?
2. Feel uncomfortable discussing 3
technical accounting with standard
setters because many users are not
accountants?
3. Feel that the standard setters 1
do not listen to the views of
users?
4. Believe that certain trade 1
organizations, such as the AIMR and
the RMA, adequately represent their
interests?
5. Something else. Please Participant I-9: We do not get
describe: paid to do it. We rely on and
expect auditors to do this for us.
c. What channels could the Special Committee use to achieve broad-based support from investors for its recommendations?
Participant I-9: Give illustrations of how recommendations would have prevented investment fiascos- i.e. [names deleted] years ago, etc.
Participant I-11: I think these discussion groups provided an excellent forum for communication between the profession and the user community. Perhaps "standing" groups or future ad hoc groups could help. Perhaps, too, these groups provided a foundation for future "networking" between the accounting profession and the user community. (One Special Committee member commented to me that the Committee discovered its members discovered they'd had little contact with financial analysts. The reverse is true as well. For my part, I now feel I know several of the Committee and staff well enough to call with a question, comment, or problem. Perhaps the most valuable result of these meetings is the creation of those sorts of relationships - and perhaps the most important objective should be to reinforce and extend them.)
[PMQI 3/17, p. 36-37]
[Context] Responses to the postmeeting questionnaire of the March 11, 1993 Creditor Discussion Group meeting.
QUESTION 20
b. Why are most creditors and other users of external reporting not actively involved in the process of setting accounting standards and, thus, in the process of improving external reporting? Is it because users (please mark as many choices as are appropriate):
2 1. Have a vested interest in maintaining the status quo so as not to change the nature for the relevance of their functions?
9 2. Feel uncomfortable discussing technical accounting with standard setters because many users are not accountants?
4 3. Feel that the standard setters do not listen to the views of users?
3 4. Believe that certain trade organizations, such as the AIMR and the RMA, adequately represent their interests?
4 5. Something Else.
Please Describe:
Participant C-13: Time pressures are such that, though important, these concerns assert a lower priority than the press of day-to-day activities.
Participant C-12: (A) Takes too much time, and I don't know how. (B) Many user organization share too many constituencies to agree, e.g., we have analysts in 1) Credit, 2) Corporate Bond Research, 3) Equity Research, 4) Corporate Finance, and 5) sales and trading. There's no way to reach a consensus for a "[investment banker] view".
Participant C-5: Not organized, sufficiently with completely common interests (silent majority).
Participant C-17: Are rarely asked or perhaps informed of involvement of special interest groups such as RMA.
Participant C-9: Unaware of opportunity for dialogue.
c. What channels could the Special Committee use to achieve broad-based support from creditors for its recommendations?
Participant C-8: With respect to the surety industry, we would recommend trying to build support through invoking our trade associates:
Surety Associates of America
100 Wood Avenue South
Isalin, New Jersey 08830-0424
Floyd Provast - President
Participant C-13: As many as can be devised!
Outreach to user groups - forums, seminars, etc.
Achieve widespread popular business press coverage.
Identify industry leaders who agree with the committee's recommendations, and solicit their support, etc.
Participant C-14: Publish the results of these meetings with names and organizations of participants to show that the ideas come from practitioners. Include a response form. Do a road show. Include volunteers (I would go) - on a tour of a dozen or so cities to hold seminars on needed changes and solicit support. Invite preparers/auditors/creditors, etc.
Participant C-12: Extend the current Discussion Group. Modify/simplify this type questionnaire for the broadest possible audience. Start with the top 100 banks, top 100 insurance companies, top 100 fund managers, etc. By maintaining a list of respondents over time, you could develop an efficient means of obtaining widespread feedback/participation.
Participant C-11: The Special Committee is the first thorough attempt by the AICPA to actually listen to users, and to understand how they use statements. The fact that this wasn't done before has carried the barrier between users and accountants to be present, and the resulting lack of a common language of communications or trust. Do more of this - as much as you can - even after the Committee report is done.
Participant C-5: User group forums.
Participant C-4: Industry association endorsements - CFMA - SAA - FMA - other. Do survey of users to provide support, release results to AICPA, assoc., etc.
Participant C-17: AICPA could set up a standing Creditor group representative of the industry to it can review and prepare recommendations.
Participant C-9: Distribute "Requests for Comments" to key industry groups and practitioners to elicit response.
[PMQC 3/11, p. 35-36]
[Context] Letter sent to the FASB Chairman by an analyst.
Along with short memories, . . . analysts might sometimes be accused of having short attention spans. Consider that a typical sell-side analyst may have to cover between ten and thirty stocks in some degree of detail; buy-side analysts, probably more but in lesser detail. Analysts are frequently trying to distill a multitude of variables down to the least number of salient facts, either appealing or unappealing (read: "buy" or "sell"). Consider the plethora of newswires and other information that bombards them: they must simplify continually and in so doing, develop short attention spans or be forever lost. [Also included in 1(a)] [R.G. ASSOCIATES, p. 1-2]
Now contrast this mindset with that of the Board - where due process counts and projects can gestate for years. Not that there is anything wrong with that - . . . it's the right way to do things and . . . many others [would think so too] (probably the corporate users who are most immediately affected by Board decisions). It's in direct contrast to the analyst's mindset, who is amazed that it takes the Board so long to finish a project that seems to have such an obvious solution (to one who is accustomed to oversimplifying). Long before the Board has finished a project, the analyst has already moved attention to other more pressing matters. Thus, the Board becomes vulnerable to analyst impressions that the only thing that gets them moving is outside political pressure. [Also included in 1(a)] [R.G. ASSOCIATES, p. 2]
So far, all [that has been] done is to illustrate what . . . is a common analyst impression of the FASB and explain why . . . it exists; [it is uncertain] how to fix it. It may be irreconcilable; neither parties' nature is likely to change in the future. The fundamental difference in attention spans is a result of the way each party does business. [The FASB] already recognize[s] this because you mention[ed] . . . that responding to proposals simply has to be a lower priority for users rather than preparers. About the only suggestion [that can be] offer[ed] is to increase the user involvement - and keep it - earlier in the process. The only way . . . to do that is to get [FASB] people into the field more often, and . . . there is a cost to that - in terms of both time and money. [Also included in 1(a)] [R.G. ASSOCIATES, p. 2]
Pretend for a moment that the AIMR does not exist. . . . How would the FASB go about getting input from the analyst community? If [the FASB] think[s] this way, [the Board] might discover new ways of gathering analysts' opinions. [R.G. ASSOCIATES, p. 2]
If memory serves correctly, there is a directory of investment firm research directors published by Money Market Directories, out of Charlottesville, VA. [I]t contains the names and addresses of about 400 directors of research - both buy-side and sell-side. If they were approached properly, they would probably delegate an appropriate analyst to provide . . . user input. What would be the incremental cost of obtaining this directory and sending Statement exposure drafts on a continuing basis to these user types, along with a letter soliciting their views? . . . [T]his would be a fairly cheap way of getting a broader range of analyst views. [R.G. ASSOCIATES, p. 2]
[The FASB] can't rely on the AIMR to represent the entire analytical community; if the AIMR didn't exist, ways to obtain analyst input could be found. . . . It's unfortunate that the user community won't step up and provide it on its own. The Board should recognize that the situation won't change without taking some steps of its own. . . . Look at the involvement displayed by the public accounting profession; it runs the gamut from small firms to international firms and it is influenced by their clients as well. . . . [I]f the Board desires this kind of involvement depth on the user side; unfortunately, it must be cultivated. . . . [I]t can be done successfully, though, and at a minimal cost. It might even enhance the performance of the technical staff by exposing them to more points of view. [R.G. ASSOCIATES, p. 2]
In the end, much of what the Board decides is based on judgment. As you point out, the answer that might please the largest number who choose to write on a particular project won't always be consistent with your mission. I don't think you would be running much of this risk even if you were wildly successful in harvesting greater analyst feedback. However, in any endeavor that involves judgment, better information should result in better decisions. [R.G. ASSOCIATES, p. 3]