I took a high level look at the recommendations of the SEC chartered Advisory Committee on Improvements to Financial Reporting. The committee brought together a group of professional users and preparers of financial statements (fss), as well as regulators and auditors.

They were tasked by the SEC with examining the current US financial reporting system, with the intention of making recommendations that would improve the usefulness of financial information to investors, while decreasing its complexity to investors, preparers and auditors. It’s clear that much hard work and effort were directed at the project by many qualified professionals.

To accomplish their objective, a focused model of the principal problems that users and preparers of fss are encountering is essential. But it’s absent from the committee’s report. I was looking for the “what’s wrong”, from a systemic view, to be clearly framed before any of the “we recommend” part of fixing things got done. Everyone’s aware the current model struggles to provide meaningful information concisely, clearly and without a mountain of effort but it’s imperative to articulate and frame the failing elements, to get consensus among its constituents on what’s wrong.

Plot where financial statements are breaking down mechanically at conveying information such as risk and value (for users). Similarly, identify where and why preparers are bogging down and getting their hands tied by overly elaborate rule matrices. Without consensus among preparers, users and regulators on this kind of framework, solutions will be long in coming and lack change that is focused on what’s broke. The report becomes a hailstorm of recommendations without this kind of discussion.

From another angle, if recommendations 1.4 & 1.5 (pp. 9) were the only two that got adopted and were executed, they would go a long way to accomplishing the bulk of all the recommendations. These two build in consistency in authoring the rules, interpreting them and make convergence of rule making agencies (SEC/FASB/IASB) functionally possible, rather than a bridge too far.

As it is, these organizations have vastly different cultures, incentives and constituencies to align well for the kinds of recommendations the committee is targeting. The SEC is under Congress’s jurisdiction and beholden to investors and public companies for making daily, actionable policy decisions that keep the markets fluid with information. The FASB is a private body whose interests are in taking the necessary time to set standards that shape long term business practices.

Clear, concise rulemaking will naturally occur if you refrain from check-the-box bright lines and seek to unravel the root economics and present them transparently. The committee understands this and refers to it frequently. Note that needed clarity and simplicity should not result in dumb-downed guidance that is slave to a lowest common denominator of understanding.

My doubts about the effectiveness of the committee’s approach and recommendations come from working knowledge of how the relevant agencies have historically operated, their staffing turnover and manpower limitations and the logistical mountains that would need to be climbed to implement and execute the compendium of recommendations.

“The Battleship” always comes to mind. It was a years long project undertaken by SEC staff in the 90’s to restructure the library of securities laws and rules that ended up beached on the rocks and then scrapped as unworkable.