What is wrong with current financial reporting standards?
Financial Accounts are meant to be a communication tool, but, as they become longer and more complicated, investors, lenders, creditors and management are losing confidence in them.
The audience who can use accounts is shrinking as the technical knowledge base required to access them becomes larger.
Accounts need to be brought into the 21st century, so that they can communicate effectively both backward looking and forward looking approaches to measurement, and the increases in uncertainty that result from including a mixture of measurement approaches.
The proximate causes of this are:
1. The technical terminology and length of the existing rule book are barriers to entry for anyone wanting to become involved in the creation of financial reporting standards.
As in any profession words develop their own technical meaning and there is a growing body of historical precedent which is relied on to develop new standards.
The detail required to be provided by financial reports can hide useful information.
2. Users are insufficiently integrated into the creation of financial reporting standards.
There are a few users (and this is slowly increasing) who do get involved, but since users are the primary audience they should be the people who are in the driving seat.
In the absence of sufficient users technical experts are setting the direction of travel and see every problem as requiring a technical solution.
3. Auditors encourage comprehensive standards that cover all eventualities, mitigating their risk, and increasing the length and complexity of standards.
Auditors want rules that specify in detail the information that should be included in financial reports. That way they do not have to exercise any judgement and cannot be found to be at fault if anything goes wrong.