As reported in the FEI Financial Reporting Blog, a CFO.com article by David McCann captured some recent remarks made by Wayne Carnall, the SEC Division of Corp. Fin. Chief Accountant.  In response to questions about whether firms would have to amend existing filings to make specific references from the legacy body of GAAP literature consistent with the new Codification, Carnall said they don’t.

What I found particularly interesting is that Carnall went on to say “You should not be making references to specific standards that very few [users of financial statements] understand,” he said. The McCann article goes on to say:

Disclosures can be greatly improved and simplified by clearly expressing the concept the preparer is trying to communicate, as opposed to citing a standard…[Carnall] said that when it comes to simplifying financials, while “standard setters and regulators can do a lot,” the onus is also on individual filers and their auditors. “Don’t write documents just to protect yourself from litigation or to satisfy a regulator,” he said. “Think about the user.”

The standard setters also go in their two cents, with McCann reporting the following comments from the FASB and the Canadian ASB chairmen:

Robert Herz, also on the panel, drew a distinction between “avoidable” and “unavoidable” complexity in financial reporting. Some complexity is a given because “the world of business and finance is not simple, and not getting any simpler, and you’ve got to have reporting that faithfully tries to report that; you can’t just dumb it down.”

But, he added, there’s plenty of needless complexity built into accounting rules because of “particular needs, biases, special treatments, exceptions, options, and different models for similar things.”

Herz’s counterpart on the Canadian Accounting Standards Board, Paul Cherry, said there’s no doubt that clearer, simpler standards can be written, but a myriad of conflicting interests stand in the way. “Whether [less complexity] will prove acceptable to the business and regulatory communities is a huge and important question that won’t be answered for years,” he said.

The distinction between “avoidable and unavoidable” complexity is an important one, and I think one that could be informed by empirical research. What are the different sources of complexity? And how do we separate what is avoidable and from what is unavoidable?

I imagine the distinction should be linked to decision usefulness, where removing avoidable complexity would enhance, or at least does not detract from, decision usefulness.

But the point I want to make here is simply that these are important issues that smart people (like my fellow academics!) should be thinking about!


Disclaimer: The views expressed here are my own and do not represent positions of the Financial Accounting Standards Board. Positions of the FASB are arrived at only after extensive due process and deliberations.