In defense of disclosures.

• Author: Breeden, Richard C.
• Position: Viewpoint

When it comes to corporate reporting, everyone has an opinion. Businesses contend that reporting standards are too complicated and costly, or that they create burdens that handicap them in international competition. The user community complains that financial statements aren't transparent enough and in some cases are inconsistent. Even foreign companies get their two cents in by lobbying for exemption from U.S. reporting rules. But we all share responsibility for the financial reporting system and how it should evolve, and the experience of the last 10 years comes down squarely on the side of more disclosure.

The entire savings and loan debacle refutes the argument that keeping an institution's financial condition secret is the best way to keep the public happy. In the lingering aftermath of that disaster, it's very difficult to say that we need less accountability for corporate performance. And that's what less disclosure means. While facing the music regularly may be intensely unpleasantat times, on the whole it has important benefits for the market and the country. That doesn't mean we have to toss out our entire financial reporting system, as some observers seem to suggest. These "futurists" argue that the current reporting system makes the U.S. capital markets too short-sighted. Presumably, if we change the financial reporting system, that will change, too. First of all, I don't buy the notion that the markets are capable of only short-term vision. No biotechnology company in the nation could raise a nickel if that were the case.

But even if this "short-term" view is part of our investment culture, that's not necessarily negative. Innovation, flexibility and creativity are some of the most endearing qualities of American life and culture. Trying to turn us into a people with a Teutonic or Japanese perspective is probably not feasible. We're American, so legal, accounting and business systems should suit our business outlook.

Another school of thought holds that financial reporting is too narrow. Admittedly, our system examines cash flows in a fairly defined context, and clearly many nonfinancial performance measures go beyond what the current reports capture. In the quest to make the reporting system broader and more meaningful, people often rally around the principle of disclosure because it's something on which they can easily agree. But how and what to disclose are issues that don't get as much attention.

THE RIPPLE EFFECT

We can...