FASB chairman Robert Herz: 'complexity impedes transparency'.

• Author: Heffes, Ellen M.
• Position: FinancialREPORTING - Financial Accounting Standards Board - Interview

Robert H. Herz, Financial Accounting Standards Board (FASB) chairman, recently spoke with Financial Executive's Executive Editor, Ellen M. Heffes, on a variety of subjects. These included convergence, International Financial Reporting Standards (IFRS), FASB standard-setting, smaller public and private companies and Herz's "pet" subject, complexity. Some of his comments follow. For the complete text of his comments, and a review of current FASB projects, go to www.fei.org/mag/articles/11-2005_fr.cfm.

Heffes: Let's start with a "pet" subject of yours: complexity. Talk about complexity.

Herz: I have been very vocal about it and will continue to be very vocal about it. Our system, in my view, is not only too complex, but it's a complexity that impedes transparency. We've been trying to do some things on our part towards simplification, including our major codification project.

We are also trying to make our standards more understandable and readable, but I will tell you that there are powerful forces at work in the reporting system that continue to cause complexity and reduce the understandability and overall usefulness of reported financial information. These involve some fairly embedded cultural, behavioral, institutional and structural issues in the system.

For example, we continue to get a constant flow of demands for detailed rules, bright lines and "safe harbors" that are prompted by the fear of second guessing and litigation. We see a mentality that avoids the exercise of professional judgment, which makes it very difficult to move to a more principles-based system.

We also get regular requests by individual companies and industry groups for special exceptions and special accounting treatments, and we continue to see (although less of them, but I think the Securities and Exchange Commission (SEC) continues to see) the use of purely accounting-motivated transactions to burnish reported financial results.

So, we're trying to do our part to reduce complexity, but my message is that this is something beyond just the FASB or even the SEC. It's an issue that I think all parties need to get together and say. "How are we going to deal with this complexity problem?"

But different people see the problem differently. For their part, preparers are understandably frustrated over the cost and effort of trying to understand and follow the myriad of standards, rules and regulations, costs of training and implementation, disclosure overload and the...