Assessing the CIFiR committee's run at complexity.

• Author: DiFabio, Christine
• Position: Washington insights - Advisory Committee on Improvements to Financial Reporting

Once again, it's time to take a good look at Washington efforts surrounding the complexity crisis in financial reporting. In a column last October, this writer examined the highly lauded formation of the U.S. Securities and Exchange Commission's (SEC) Advisory Committee on Improvements to Financial Reporting (CIFiR).

At that time, the committee was just "getting its feet wet" and developing approaches with the goal of recommending a solution--actually, several solutions. And now, a short few months later, the committee has issued its first set of recommendations, which were exposed by the SEC for public comment (the comment period ended March 31).

The committee must be commended for its mammoth efforts and preliminary achievements in releasing these recommendations. This panel has been tasked with examining the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors. By the nature of what it is trying to accomplish, the solutions or recommendations, in my opinion, are likely to be as controversial as the accounting complexities they have sought to correct.

Four Distinct Perspectives

The recommendations were developed in a subcommittee structure formed to tackle complexity from the following perspectives: substantive complexity, including studying the causes and impact of complexity on financial accounting and reporting standards; the standard-setting process; audit process and compliance; and delivery of financial information.

The interim recommendations of CIFiR are many and include a move away from industry-specific guidance, focusing instead on business activities and the elimination of alternative accounting policies, as well as an increased participation of the investor in the standard-setting process. The recommendations also call for post-adoption reviews of new standards issued and a reduction in the number of parties that either formally or informally interpret GAAP.

CIFiR also recommends the development of materiality guidance in the evaluation of errors, the formation of judgment frameworks for use by auditors and preparers, as well as a phased-in mandatory adoption of extensible Business Reporting Language (XBRL). Many of these items are not completely new and have been debated informally in various arenas for several years.

But now, as these topics have been enveloped within formal recommendations, they have gotten additional priority...