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Wednesday, May 18, 2011

Does Accounting System Need a `Hard Shake'?

During the Oct. 5-6 meeting of the Financial Accounting Standards Advisory Council, Ralph Ferrara, managing partner of Dewey & LeBoeuf LLP, asked the question: "Does the system need a hard shake?"

We "continue to take this rusting superstructure and add to it," Ferrara said, expressing frustration that more out-of-the-box solutions are not being offered.

His question came after a half-day of debate and discussion over the joint FASB and IASB project to completely revamp financial statements, and in some ways was an odd one. As FASB member Leslie Seidman observed in response, if there was ever a cage-rattling proposal, the financial statement presentation project may be it. Financial statements would look very different than they do today if the plan under discussion were implemented.

And the charge to FASB's main advisory council by Chairman Dennis Chookaszian was to consider what the financial statement of the future should look like. On a similar line, FASB Chairman Robert Herz invited the participants to start with a clean sheet of paper. He asked the group to consider whether the market "would buy the product" if there were no existing requirements to produce financial statements. "Is it meeting a real market demand?"

But, as is perhaps inevitable in a discussion among a group of more than 30 professionals with discrepant constituencies--investors, analysts, financial statement preparers, academics, regulators -- who want different things from the discussion, the invitation to sky-is-the-limit conjectures on a better way of approaching financial reporting was honored mostly in the breach.

So, while there was some discussion, for example, of doing away with the 10-Q (not required on an international basis in any event), and perhaps moving to continuous reporting (investor representatives were in raptures), such flights of fancy kept running into practical issues. The SEC's Jenifer Minke-Girard said there were some interesting take-aways for the SEC, but asked, `if you do away with the 10-Q, then what?' Others suggested that there has to be something that forces company management to review performance on an interim basis. Steve Rogers, president of Dominion Resources Services, warned that there are issues with continuous reporting.

"The inertia in the system is unbelievable," observed FASB Chairman Herz.

What's a standard setter to do? What are your thoughts? — Susan Webster, Managing Editor, Accounting Policy & Practice Report

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