SEC suggests 25 steps to reduce complexity

Accounting standards criticised for being 'obscured by dense language, detailed rules, and numerous exemptions'
Written by Penny Sukhraj
Accountancy Age, 20 Aug 2008
The US regulator has called on standard setters to change their approach in the design of accounting rules after criticising standards whose objectives are sometimes 'obscured by dense language, detailed rules, and numerous exemptions.'
The comments in a report – compiled by the Securities and Exchange Commission's Advisory Committee on Improvements to Financial Reporting – detail recommendations which can be implemented by the SEC, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.
The committee called for improved rules on off-balance sheet accounting and fewer situations where alternative accounting standards exist for the same transaction.
Companies have also been told to provide better disclosure to investors about what portion of their earnings constitutes cash or accrued income based on historic cost accounting and what portion represents unrealised gains or losses based on fair value estimates.
The committee's report included recommendations about the use of technology to benefit users, which were proposed in May, so as to allow investors access to important information faster, more reliably and at a lower cost. US companies will be required to provide such interactive data as early as next year.
Addressing concerns about the complexity of company filings, the Advisory Committee recommended the inclusion of a short executive summary at the beginning of a company’s annual report that would describe concisely the main aspects of its business and its key performance metrics.
The committee also made a call for more investor participation in accounting standard setting by increasing investor representation on the FASB and Financial Accounting Foundation (FAF).
The SEC committee has also made recommendations to reduce the creation of more US GAAP rules, in support of the FASB's efforts to complete the codification of all authoritative accounting literature into one document.
The committee also called for increased correction of accounting errors and more disclosures about those corrections to investors but warned that the correction of every accounting error should not automatically result in a lengthy process of restating financial statements for several prior years.
The committee said that in the 'dark period' during restatements when companies generally cease filing current financial reports, companies usually do not provide investors with much information. The committee said it believes that restatements of prior years should be undertaken for the correction of accounting errors that are material to current investors.
SEC chairman Christopher Cox commended the work of the advisory committee. He said: 'I have asked the commission staff to immediately begin analysing these recommendations, and to prepare regulatory actions based on them wherever appropriate.'