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Companies around the world need to change the way they report financial information to investors so capital markets and economies can function more efficiently, the six largest international accounting firms said.
The firms touted the benefits of a “brave new world” in financial reporting in a 24-page report being released to the public last week. They proposed a single set of global standards that would be easier for regulators in any country to enforce, as well as the more timely and meaningful release of corporate data, some of them non-financial, to investors.
“Consistency in business reporting standards, audit standards and enforcement of audit standards is necessary to support a global economy with the lowest cost of capital,” the CEOs of PricewaterhouseCoopers LLP, KPMG International, Deloitte Touche LLP, Ernst & Young LLP, Grant Thornton LLP and BDO International said in the report.
Investor confidence in auditors was shattered after Arthur Andersen LLP was implicated in Enron Corp.’s 2001 collapse and WorldCom Inc. went bankrupt in an $11 billion accounting fraud. The U.S. auditing process now is overseen by the Public Company Accounting Oversight Board, a federal body created by the Sarbanes-Oxley Act of 2002.
While the accounting profession has made “significant strides, we can’t rest simply on Sarbanes-Oxley or the changes we’ve made so far,” Edward Nusbaum, CEO of Chicago-based Grant Thornton, said in an interview. “We have a responsibility, and we need to step up to the plate and speak out on the issues that impact accounting and financial reporting and capital markets.”
In the short term, the firms said in their report, they want to speed up the development of a single set of international accounting standards that should allow the disclosure of more non-financial information to investors.
The report suggested that a retailer reporting strong earnings growth might also want to inform investors that it’s failing to attract repeat customers. In another example, the report said investors might value differently a company reporting flat sales if they knew more about its pending patents.
“Investors want professional judgment to be fully exercised,” the report said. “This is not possible in an environment under a set of accounting rules that risk turning auditors and financial management into ‘box checkers.’ ”
The Financial Accounting Standards Board, the Norwalk, Conn.-based organization that writes U.S. accounting rules, and its European counterpart are working on a single set of standards for the profession. “We are making progress on convergence,” said FASB spokesman Gerard Carney.
When it comes to uncovering fraud, auditing firms face “barriers” including the “expectations gap” between what investors demand and what can be done at reasonable cost, according to the report. Some laws and regulators even inhibit companies from making disclosure more useful, the firms said.
One possibility the report raised is letting investors or board members decide the intensity, and thus the cost, of forensic audits.
It also proposed penalizing individuals for faulty audits, rather than entire firms. Arthur Andersen collapsed after it was charged with obstruction of justice for shredding documents at Enron.
The accounting firms said they plan a series of discussions with corporate officials, regulators and investors to elicit their views on the proposed changes.
