More Accounting Changes

It is now about six years since I retired from the Financial Accounting Standards Board (FASB) on September 30, 2010. In some ways, that marked the end of a major chapter in my career and life. For many years, much of my work (and life) revolved around accounting, auditing, and financial reporting issues and related policy matters: as the senior technical partner of Coopers & Lybrand (C&L) and PricewaterhouseCoopers (PwC), leading and serving on various professional committees and groups, as an accounting standard setter on the Emerging Issues Task Force (EITF) and the International Accounting Standards Board (IASB), and as chairman of the FASB.

Looking back, overall, it was wonderful — demanding but interesting and engaging, full of opportunities and challenges, working with terrific colleagues, and personally very satisfying. An article in The Economist on September 30, 2010, on my years at the FASB quipped, “Robert Herz has had a more interesting career than any accountant deserves.” Perhaps so, but the time had come to move on, and I was looking forward to a change and, most of all, being able to spend more time with my family. I explained my thinking in the following question and answer session with Mary-Jo Kranacher of The CPA Journal:²

The CPA Journal: First, let’s get the 800-pound gorilla out of the room: Some people were surprised by your sudden departure from FASB, especially given FASB’s full agenda and the sensitive timing for IFRS convergence efforts. Why did you choose this time to leave?

Robert H. Herz: Well, the FASB agenda has been very full since the first day I started there—or even before, with the Enron and WorldCom scandals, and of course with the big spotlight on financial reporting my first month at the FASB, during which the Sarbanes–Oxley Act took shape and was quickly passed. The agenda has been very full throughout my eight-plus years as chairman of the FASB. Certainly, it was really full during the financial crisis, and we had to vigorously respond to a number of reporting issues that emanated from that. And the successful completion of the Codification marked an important milestone. It was time to move on. To put it in perspective, I was at the FASB as chairman for more than eight years and before that I was a member of the International Accounting Standards Board. Together, that was just about a decade of accounting standards setting. That’s not counting the years I was on the Emerging Issues Task Force, chairman of the AICPA SEC Regulations Committee, chairman of the IFAC Transnational Auditors Committee, or a member of the FASB Financial Instruments Task Force from the late 1980s on. So, it’s been 20-plus years that I have been involved in standards setting. It’s been a wonderful experience, particularly the years at FASB and the IASB—two very good organizations with terrific people working on a very important mission. But I’m looking forward to different challenges and new experiences in life.

As I have discussed in this book, over my career and, in particular, during the last 15 years, there have been significant developments and changes in the financial reporting landscape, both in the United States and globally. In terms of accounting standards, the objectives of improvement and international convergence have been the driving forces behind many of the changes. Responses to reporting issues emanating from, and revealed by, crises and breakdowns in the financial system have also been an important source of change in accounting standards and in broader aspects of the environment in which financial reporting occurs.

I feel very privileged to have been an active participant in many of these developments. They gave me a deep appreciation for the dynamics of our capital markets and the broader financial system and for the many, often complex, challenges that policymakers face. It also reinforced for me the fundamental importance of sound accounting and reporting and transparency across the financial system to help foster the health and vibrancy of our capital markets and economy.

I also count myself very fortunate to have been able to work with many talented and dedicated professionals and to have met many interesting people, not only during my years as an accounting standard setter but throughout my career. That starts with the people I have worked with the closest, who, over much of the prior decade, were my fellow FASB and IASB Board members and the terrific members of our staffs, but also extends to many others who served as trustees of the Financial Accounting Foundation (FAF) and International Financial Reporting Standards (IFRS) Foundation, members of our various standard-setting advisory groups, and countless others who contribute to the accounting standard-setting process. I had the privilege to work with several Securities and Exchange Commission (SEC) chairmen and chief accountants and many others at the SEC; members and staff of the Public Company Accounting Oversight Board (PCAOB); several U.S. Treasury secretaries and their staff; senior officials at the banking regulatory agencies and the IRS; many members of Congress and their staffs; and many investors and other users of financial information, financial executives, and public accountants. The increasingly international aspect of our work also enabled me to work with and meet many very interesting people from around the world, including those at other major national accounting standard setters, foreign governments, and international organizations.

Ultimately, it is the people I have worked with and been able to meet that I think I will remember most about my years in the accounting profession and as a standard setter. As has been my good fortune throughout my career, I count many of these people as friends.

I suspect those who know me well would be very surprised if I did not end this book with some overall thoughts about my years in accounting standard setting and recommendations on the future of accounting standards and financial and corporate reporting. Indeed, in the time since I have left the FASB, I have been interviewed several times and have, through public speaking engagements and other venues, met with many people who seem genuinely interested in my thoughts on these matters. One such interview from October 2010 can be found in Exhibit 7.1. The questions I seem to be asked most frequently include the following:

Recently, I have been asked whether I believe that the United States has the best reporting system in the world and whether we are falling behind other countries in terms of enhancing and modernizing financial and corporate reporting.

Let me try to answer these questions. In doing so, I will try to be brief, so my answers will reflect those matters that seem the most significant to me as I look back and as I contemplate the future.

Stuart (2010)

On September 30, Robert Herz stepped down as chairman of the Financial Accounting Standards Board, leaving board member Leslie Seidman as acting chairman. Neither FASB nor Herz would comment on why he retired after more than eight years in the job, but it probably wasn’t due to any lack of popularity. Nearly all of those who worked with the 57-year-old Herz commend his blend of intellect and calm. Herz has done a “terrific job,” says Dennis Beresford, accounting professor at the University of Georgia’s J.M. Tull School of Business and a former FASB chairman himself. “He’s dealt with tough issues and tough board members — not all of them are easy to work with — and he’s been able to get the board to resolve some very difficult issues.”

“I don’t think there was ever a raised voice when Bob spoke,” says Mark Ellis, CFO of luxury goods retailer Michael C. Fina and a six-year veteran of the FASB small business advisory committee. “He truly had the intellect to understand both sides of an argument and explain the reasoning behind decisions made that both sides would understand and appreciate.”

In an exclusive interview with CFO, conducted via e-mail, Herz reflected back on his tenure at FASB and speculated about his future. The following is an edited version of the interview.

As you look back over your years at FASB, what do you think is your legacy?

I can point to the scores of pronouncements we issued, but I’m also very proud of many other things we did over the last eight years to improve accounting standard setting. Those included rationalizing the standard-setting structure in our country so that most pronouncements now come out from the FASB versus the four-legged stool of the FASB, AICPA, EITF, and SEC before. I’m also very proud of the codification effort, which has [created] a much better organized and more accessible set of U.S. GAAP literature.

We also significantly broadened our outreach to various constituencies through new advisory groups with investors and with small business and private companies. We strengthened our staff … and we stepped up our involvement with the accounting academic community by reinstituting an accounting academic fellowship program and through our Financial Accounting Standards Research Initiative.

We also did things to make the process more transparent and open, including making our standards available on the Web free of charge and audiocasting our meetings for free on the Web. Finally, and very importantly, there has been the whole international convergence effort.

Which accounting pronouncement made the greatest single improvement to the accounting literature during your tenure?

It’s hard to single out any particular one. [One] example of what I think was [a] good and interesting pronouncement [is] Statement 157. Before that standard there were many different definitions and approaches to fair value measurements. What that standard did was to provide a common definition of fair value, how to approach it in different circumstances, and standardized disclosures around fair value measurements included in the financial statements.

The second standard I’d mention is Statement 167, which is the recent changes to the guidance on consolidation of variable interest entities. What I like about that particular pronouncement is that it sets out clear principles and then provides a good set of implementation guidance, particularly in the form of examples.

When comparing U.S. generally accepted accounting principles and international financial reporting standards, it seems as though some rules will be impossible to converge, such as those that pertain to LIFO inventory accounting and revaluation of property, plant, and equipment [PP&E], among others.

There are a number of specific continuing differences between U.S. GAAP and IFRS that do pose challenges … but I believe that with continued [cooperation], solutions can be found. Sometimes the solutions may not just involve accounting answers. For example, in the case of LIFO inventory, the IRS is aware of this issue, and one solution might involve changes to the tax code. Regarding the revaluation of PP&E, FASB is now looking at the use of fair value for investment properties.

In 2003, you stated that FASB’s implementation of fair-value standards wouldn’t outstrip the ability of people to properly implement the concept. In hindsight, considering the liquidity crisis of 2008, do you think FASB met this challenge?

Just as many other parties did during the financial crisis, I’d [note] that we didn’t have an existing playbook for what many termed an “unprecedented” crisis. Nevertheless, I believe we dealt pretty vigorously with issuing guidance on how to deal with the challenges of fair-value measurements and impairments of financial assets.

You spent quite a lot of time on the hot seat before Congress, especially during the crisis. Would you say that during your tenure things got better, worse, or remained unchanged with respect to political influence over accounting standards and the independence of FASB?

While I was certainly on the proverbial hot seat during the financial crisis … I actually appeared many more times in front of Congress during the debate on accounting for stock options a number of years ago. I feel that things have gotten a little bit better over the last eight years. I believe that, overall, there’s been respect for our due process and the importance of it remaining thorough, objective, and as unbiased as possible.

What was the toughest battle you had to face?

I don’t like using the word “battle,” but the most challenging situation in terms of trying to improve the accounting in an important area related to accounting for employee stock options, in 2003–2005. Members of the high technology and venture capital communities strongly opposed our proposal to require the recording of compensation expense related to the granting of executive and employee stock options. They had many lobbyists and PR firms. It got so far as the House passing a bill that would have effectively blocked the expensing of stock options.

Fortunately, we also had very strong support from a number of quarters for making the accounting change. In the end, we were able to make that needed change, which was an important outcome for financial reporting.

Under current GAAP, there are individual revenue-recognition accounting rules for about 25 different industries. The joint FASB-IASB revenue-recognition exposure draft [ED] standardizes many of those rules. Still, with 25 industries arguing that they need specialized rules, how likely is the ED to remain in its current form?

I think the ED provides a good basis for a broad standard on revenue recognition. During the development of the ED, we and the IASB held a number of workshops with companies from around the world to beta-test a variety of different transactions and arrangements across different industries. [We wanted] to understand whether the model could be applied, and I think we generally found that it could.

That’s not to say that the exposure draft is perfect. Some challenging issues revolve around the definition of transfer of control, because that’s key to revenue recognition under the proposed model. [Another challenge is] around the cost side of the accounting, because we decided it was important to address the related costs in order to properly portray profit margins.

There are a few industries we’ve heard from for which the proposed model poses some challenges. And we’ve heard from some users that follow software companies that the model may provide for too much accelerated revenue recognition. But those are the types of things the boards will deal with in redeliberations.

Regarding lease accounting, do you think that in your lifetime that FASB will achieve Sir David Tweedie’s goal of flying on an airplane that’s on the balance sheet of the airline that owns it?

I think the answer is yes. We recently put out jointly with the IASB an exposure draft on lease accounting. Under the so-called right-of-use model proposed in the ED, the right to use the equipment—in this case the airplane—for a period of time would be shown as an asset, and a corresponding liability would be recorded for the present value of payments that are to be paid for that right of use.

I think that is a good approach, but again it’s out for comment, and the boards will benefit from the comments they receive and will carefully consider those comments in redeliberations.

If you look ahead five years, do you see U.S. accounting standards converged with the rest of the world’s?

That’s hard to predict. The SEC staff are currently working their way through a systematic work plan to look at a variety of issues relating to potential incorporation of IFRS into our reporting system. When they’ve completed that work plan, they will be able to go to the commission with recommendations on whether, when, and how to proceed regarding IFRS for U.S. public companies. In the meantime, I believe it’s up to the two boards to continue to work together toward developing standards that foster both convergence and improvement in reporting.

Do you have any plans to rejoin the IASB?

Well, I very much enjoyed my time on the IASB, and I have very much enjoyed working with our colleagues at the IASB. But right now I’m looking forward to new experiences and challenges. I’m 57, and as I look at people I admire, like Paul Volcker and Bill Donaldson, I see that they’ve contributed in many different ways over their distinguished careers.

So, while I certainly wouldn’t rule out returning to accounting standard setting at some point, right now I’m looking forward to doing new things. I’d like to do a bit of teaching, I’d like to serve on some corporate boards, and I already have been involved with some not-for-profit activities. And I also hope to find ways to continue to contribute to financial reporting, the capital markets, and the public interest.

Proud Accomplishments

I suppose just about everyone who undertakes public service does so because they want to contribute to the public good — to help make things better. Certainly, that was my reason for spending what has been a sizeable chunk of my career and life in accounting standard setting and related activities involving financial reporting. I view accounting and financial reporting to be a very important part of the fabric of the capital markets, financial system, and economy.

As I said in a speech at the AICPA 2002 National Conference on Current SEC Developments shortly after becoming chairman of the FASB:

Throughout my own career as an accountant, I have believed passionately in the importance of accounting and good financial and corporate reporting to the overall soundness of our capital markets … . It matters! Reporting is a bit like the air we breathe … as long as it’s clean, we kind of take it for granted. But bad reporting, misleading reporting, and fraudulent reporting is like dirty air. It pollutes and clouds—it threatens the health of all those around it and makes people want to stay away from the polluted area.

In the same speech, I outlined some of my thoughts about the elements of sound reporting and key challenges facing the reporting system.

And, we must regard reporting as an exercise in communication—good communication about performance, financial condition, prospects, and uncertainties and not as, on the one hand, an exercise in mere compliance or, on the other hand, an opportunity to spin, to paint a picture that is more flattering and appealing than the underlying reality. It means reporting that meets the needs of investors and other key users, that is operational, and that faithfully reflects the underlying business and economic realities. It means reporting that satisfies the key qualitative characteristics described in the FASB Conceptual Framework—relevance, reliability, neutrality, timeliness, and understandability. In an era of continuing globalization of business and capital markets, I think it means financial reporting that is comparable across borders. And I think it means looking for ways to modernize and upgrade the whole reporting model to replace some of the traditional but perhaps seldom used information with more meaningful information on cash flows, on key performance indicators and business value drivers and to better harness the power of technology in the reporting and data analyses processes.

These are lofty and, I believe, enduring goals. In assuming the role of chairman of the FASB, particularly at a moment in history when U.S. financial reporting was in the spotlight and being criticized, I felt both responsible and empowered to try to make forward progress toward these goals, knowing full well it would take a lot of hard work and, most importantly, a team effort involving my fellow Board members and our staff; the support of our trustees and colleagues at the SEC; and many, many other stakeholders in the financial reporting system. In Chapter 2, “Charting Course,” I discussed how we went about charting a course to try to bring about improvement in accounting standards and the standard-setting process, simplification in the U.S. standard-setting structure and literature of accounting principles generally accepted in the United States of America (U.S. GAAP), and international convergence.

So, almost 15 years later, where are we in achieving those objectives and in making progress toward the kind of reporting system envisioned in my 2002 speech? By we, I do not mean just the FASB but everyone with a stake in the financial reporting system because the mission and role of the FASB, as important as it is, is limited to the realm of accounting and financial reporting standards, with many other organizations also having key roles in the financial reporting supply chain.

Overall, I believe we collectively made significant progress in some areas but not in others. Certainly, through the spread of IFRSs around the world and ongoing convergence efforts in major countries, including the United States, there has been very significant progress in achieving greater comparability of reported financial information across the global capital markets. Although we have a way to go, the vision of common, high-quality international accounting standards is, I believe, much closer to becoming a reality than it was 15 years ago.

Very importantly, I also believe that new accounting standards and disclosure requirements in important areas have improved the overall relevance and transparency of reported financial information. There have been major new accounting standards on business combinations, employee stock compensation, consolidation of variable interest entities, fair value measurements, and pension and other postretirement obligations, and revenue recognition and lease accounting. There are richer disclosures in areas of particular interest to professional investors and financial analysts, perhaps most notably in regard to derivatives and other financial instruments and involvements with special purpose entities and other off-balance sheet arrangements.

I believe both the FASB and IASB have made important improvements in their standard-setting processes, including expanding and enhancing their outreach activities to stakeholders on proposals and emerging issues. In that regard, I take considerable pride in the many steps we took to proactively increase and broaden the input that FASB receives for investors and other users of financial information. If imitation is the sincerest form of flattery, then the FASB should feel flattered that the IASB, the SEC, and the PCAOB also established investor advisory groups. I also take great pride in our successful effort to develop FASB Accounting Standards Codification^TM that I believe was a major step forward in improving the overall usability of the U.S. GAAP literature. There has also been progress on utilizing technology in financial reporting through the development and use of eXtensible Business Reporting Language (XBRL).

Although not the subject matter of most of this book, I believe the SEC and the PCAOB have made significant progress in their areas of responsibility relating to the financial reporting system. To their credit, I also believe that companies and audit committees have worked hard to improve the quality of their financial reports, communications with investors, and internal controls over financial reporting and that audit quality has clearly improved from the pre-Sarbanes–Oxley Act of 2002 days.

Perhaps most importantly and notwithstanding the criticisms by some of accounting, auditing, and financial reporting relating to the financial crisis, the collective result of all these efforts is that overall public confidence in reported financial information seems to be higher now than it was after the reporting scandals of 2001–2002. For example, the sixth annual “Main Street Investor Survey” published by the Center for Audit Quality (CAQ) in September 2012 stated:

This year’s results suggest that confidence about domestic markets may have stabilized and perhaps even begun to rebound. In 2012, investors’ confidence in U.S. capital markets increased four percentage points, to 65 percent, after declining or remaining static every year since 2008. Investors’ ratings on two other key metrics—confidence in investing in U.S. companies and confidence in audited financial information—remained steady at 71 percent and 69 percent, respectively.³

Moreover, this level of confidence has continued with the CAQ reporting in September 2015 that 71 percent of investors surveyed in its ninth annual “Main Street Investor Survey” have confidence in audited financial statements.⁴

In regard to maintaining confidence in financial reporting, I take pride that we, with the strong support from the FAF trustees and many other parties, were, I believe, able to maintain the independence and integrity of accounting standard setting in the United States in the face of what were, on occasion, strong attempts to interfere with it through political means.

So overall, I believe there has been forward progress and that the financial reporting system is in a better place now than it was at the time of the reporting scandals in 2001–2002, both in the United States and internationally.

Opportunities for Further Improvement

Even in the areas where progress has been made, there is clearly still much to do in achieving the goal of common high-quality accounting standards around of the world; improving the relevance and overall usefulness of reported financial information and making it less complex and more understandable; achieving greater consistency across the global capital markets in the implementation of accounting standards and the quality of auditing, corporate governance, and regulatory oversight and enforcement of reported financial information; and to more fully harness the power of technology in financial reporting. So, all of these are works in process that I hope will continue to be pursued with focus and vigor.

In certain important areas relating to the reporting system, I don’t believe there has been much progress, including making financial statements less complex and more understandable and expanding corporate reporting to systematically include critical information on key nonfinancial performance indicators, business value drivers, risks, and uncertainties. However, in all fairness to me and my colleagues at the FASB and IASB, the expansion of financial reporting to encompass key nonfinancial information was generally beyond our reach. Nonetheless, this type of information, in my view, is critical to enhancing the wider realm of corporate reporting. However, what is in the purview of accounting standard setters is helping to make financial statements more understandable and less complex. In that regard and as discussed in Chapter 6, “Complexity,” I believe the disclosure framework project of the FASB and the SEC’s current disclosure effectiveness effort offer a real opportunity to make meaningful progress on these fronts.

Similarly, although there has been a marked and an important increase, particularly outside the United States, in the number of companies providing information on the environmental and social impacts of their activities through triple bottom line, sustainability, and corporate social responsibility reports that are based on the Global Reporting Initiative (GRI) Framework or AccountAbility AA1000 standards, as discussed further below, I believe there are significant opportunities to through the efforts of organizations such as the Sustainability Accounting Standards Board (SASB) to better focus the reporting of such information on the needs of investors and other providers of capital.

In my view, despite the growing use of XBRL in financial and regulatory reporting around the world, overall, there has been relatively slow progress in utilizing the power of technology in advancing financial reporting when compared with many other products and aspects of modern life.

So, the dreamer in me continues to envision a future in which we have a common corporate reporting system for listed companies and other publicly accountable entities that spans the major global capital markets and that, using the power of technology, provides high-quality financial and nonfinancial information on corporate activities in a systematic, consistent, understandable, and very timely manner. Imagine a global reporting system in which, for any listed company in the world, you can quickly access consistently prepared, comparable, and understandable financial and key nonfinancial performance information. In short, I continue to believe there are significant opportunities to improve the overall usefulness and usability of the financial statements and broader corporate reporting as products in the marketplace.

Many will say, with some justification, that this was an unrealistic vision one decade ago and remains so today, and I concede that the challenges and barriers to achieving such a system are formidable. Yet, I believe that powerful geoeconomic; geopolitical; technological; and global environmental, and social forces have been driving, and will continue to drive, corporate reporting in these directions. As I subsequently discuss, the ongoing work of the International Integrated Reporting Council and the SASB reflect these forces and themes.

Regarding my own leadership of, and contributions to, the FASB and to broader developments in financial reporting, I look back on these with an overall sense of pride. These were summed up in the FAF’s 2010 Annual Report by FAF Chairman Jack Brennan and FAF President and CEO Terri Polley who wrote:

Bob’s vision, leadership, and strong commitment to the goal of improving and converging accounting standards for the benefit of the global and US capital markets brought the FASB to a new level of excellence. His tenure at the FASB set the direction for the future of financial reporting, and we thank him for his leadership and considerable contributions to the organization and its mission during a critical period in the history of the US capital markets. We will always be grateful for his strong leadership of the FASB.

Commenting in the article October 1, 2010, article “Herz Closes the Books on FASB Tenure,” on CFO.com, Arnie Hanish, corporate controller at Eli Lilly, said I had “done a really fine job over the past eight years in leading FASB through a challenging period.” Mark Ellis, CFO of Michael C. Fina and a member of the FASB’s Small Business Advisory Committee said “Part of [Herz’s] legacy is that FASB is [now] such a vibrant organization and that the other members share Bob’s intellect and vision.” I appreciate those kind words and those of many others regarding my years at the FASB.

Changes in Financial Reporting — A Challenging but Necessary Process

Accounting and reporting are no different than other aspects of human endeavor; they are all subject to the natural laws of change. I believe that history teaches us that it is important to adapt and move forward or risk becoming irrelevant. Certainly, over the last 80 or so years, our reporting system has been subject to many changes that were made in response to changes in the economy and modes of business and finance, changes that may have been strongly opposed at the time but that now, with the benefit of hindsight, I believe most people would view as progress. For example, before the 1930s, many public companies did not report sales and cost of sales information, viewing that as highly proprietary information. Segment reporting was not common or mandatory until the 1970s. The FASB’s efforts over more than 15 years to develop and put into place improved standards on measuring and reporting obligations and costs relating to defined benefit pension and other postemployment benefits (OPEBs) was protracted and strongly opposed by major auto and other industrial companies that argued the liabilities were not real or too soft to include in financial statements. Indeed, the September 1989 issue of Business Week captured the firestorm over the FASB’s proposal on OPEBs in an article entitled “First Thing We Do is Kill All the Accountants.”

Some time in October, a little-understood group in Norwalk, Conn., will do something that could knock at least 25% off the annual profits of big industrial companies. It may also wipe out one-third of the net worth of all of Corporate America. This is no crazed band of financial guerrillas. This is the green-eyeshade crowd at FASB—the Financial Accounting Standards Board. And all it’s really trying to do is to get companies to ’fess up to what they are likely to owe for retiree health benefits. The likely sum is more than a trillion—that’s with a T—dollars.⁵

Yet, over 25 years later, I think most people would agree that the pension and OPEB liabilities were quite real and very significant in evaluating the long-term prospects and viability of the very companies that argued most vociferously against the accounting changes.

In this book, I have chronicled some of the major changes that have occurred in accounting and reporting over the past fifteen, some of which were quite contentious. Further significant changes in accounting standards and other areas relating to financial and corporate reporting are at hand, including new major accounting standards resulting from the FASB-IASB projects; new auditing standards emanating from the PCAOB; the use of XBRL and new technologies in the financial reporting process; and the potential movement to more integrated reporting that addresses a company’s performance and prospects across financial, nonfinancial, environmental, social, and governance dimensions and that better focus on the reporting of information that is material to investors and other providers of capital.

In short, as the worlds of business and finance change, accounting and reporting has needed, and will need, to continue to evolve and change to try to properly reflect these changes, and changes will continue to be made in response to identified problems and shortcomings in financial reporting. Moreover, controversy often accompanies change, both because change can be uncomfortable and disruptive and because those attempting to fend off or delay change often have a vested interest in maintaining the status quo.

That is not to say that all changes proposed by policymakers, including regulators and standard setters, are worthwhile or needed. Certainly, that is not the case. As Winston Churchill said, “There is nothing wrong with change, if it is in the right direction.” That’s why having a thorough, open, and objective standard-setting process that includes obtaining and carefully considering relevant input on the likely and potential costs, benefits, and unintended consequences of proposed changes; an effective system for post-implementation review of major standards, rules, and regulations; and mechanisms for surfacing and addressing emerging issues are so important in helping ensure that the financial reporting system progresses in the right direction.

However, the due process should not be so excessive that it unduly delays needed improvements in financial reporting. As I noted in Chapter 2, the FASB has been subject to criticism, particularly in times of crisis, in being too slow to address issues and improve accounting in key areas. The word glacial has sometimes been used by critics to describe what they perceive as an unacceptably slow pace of the FASB (as well as the IASB and other accounting standard setters). For example, in the wake of the Enron scandal, the cover story of the November 26, 2001, issue of Business Week comments “The pace of change at FASB tends to be glacial …. The slow pace means the standard setters sometimes fail to react to sudden changes in the market.”⁶ Similarly, as noted in Chapter 5, “The Financial Crisis,” we were criticized by some as not having responded quickly enough in the financial crisis to certain reporting issues, in some cases by the same people who, in other instances, argue that the FASB or IASB, or both, are moving too quickly and that added due process, including extensive field tests, are needed before finalizing changes in accounting standards, changes that may be favored by and viewed as overdue by investors.

Finding the right balance is not easy. More narrow issues and practice problems can be addressed more rapidly, but on major projects that involve potentially pervasive changes to the existing standards, extensive due process is usually needed in order to confirm the overall soundness and cost-benefit of proposed changes in standards. That process should not, in my view, seek to try to address every conceivable issue or guarantee ease of implementation of every aspect of a proposed new standard because to do so can unduly delay needed improvements in accounting standards and financial reporting. It can also result in introducing exceptions, compromises, and bright lines that add to the complexity of the standard and the resulting reporting and can dilute the overall effectiveness of a new standard. In that regard, I share some of the concerns of people such as former FASB Vice Chairman David Mosso in his book Early Warning and Quick Response: Accounting in the Twenty-first Century. In Chapter 7, “Standard Setting: Undue Process,” Mosso discusses what he views as a number of fundamental problems with the current accounting standard-setting process, stating, “The first one is excessive due process. The present form of due process causes delay beyond reason — it takes far too long to complete a standard-setting project. Serious accounting practice problems fester for years while standard setters wrestle with constituents over what is the best way to solve them.”

During my years at the FASB, I believe we were able to speed up addressing a number of issues. However, a number of major projects progressed more slowly, subject to very extensive due process, and continued to advance at a measured but deliberate pace since I left the FASB. Many probably view this as quite appropriate, especially on major projects that involve potentially very significant changes in financial reporting. However, some no doubt may view this as excessive due process and unacceptable delay in finalizing overdue improvements in key standards. In that regard, as noted in Chapter 6, “Complexity,” Mosso advocates the adoption of a wealth measurement model as the best way for accounting standard setting to escape what he characterizes in his book as the gargantuan maze of the current due process. As I have previously noted, I have some sympathy with Mosso’s diagnosis and his proposed solution and believe it could improve both the process of accounting standard setting and the overall relevance of the resulting standards and financial reporting. However, experience suggests to me that such a change is unlikely to occur in the foreseeable future and that even if it were to occur, it would not provide a panacea in resolving all current and future accounting issues or fend off criticisms of the accounting standard-setting process. Nevertheless and as I have tried to emphasize many times in this book, I do believe there is a real need to get on with the effort to improve the Conceptual Framework.

Some Words of Advice to Colleagues and Successors

So, with the benefit of the lessons I have learned from my many years of involvement in accounting and financial reporting and with a belief that continuing changes and improvements are inevitable and necessary, what advice would I give to those now charged with these responsibilities? Again, those who know me well know that I have some strong views on certain matters regarding accounting standards and financial reporting. I have already discussed some of these in earlier chapters of this book and will not expound further on them. Rather, in the spirit of providing constructive input to those now charged with key roles in the financial reporting system, I will offer a few high-level suggestions recognizing full well that the world has moved on since my time in accounting standard setting.

First, to my former colleagues at the FASB and the IASB, keep going! There are plenty of opportunities to improve existing standards. I had hoped that the two boards would continue to work together to complete the major MoU projects and to do them in a way that achieved convergence and genuine improvement in the standards. As discussed in Chapter 4, that occurred in regard to the revenue recognition project, but not in regard to other major projects where ultimately the boards were not able to issue converged standards. I also felt and continue to feel that that what were our joint projects on financial statement presentation and financial instruments with characteristics of equity were very important and in due course need to be worked on again. Some, if not many, of the types of changes that were being explored in the financial statement presentation project were supported by many users and the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR). In my view, the issues that were being addressed in the project on accounting for financial instruments with characteristics of equity continue to plague financial reporting, so I strongly believe these projects need to continue to be pursued. I am glad that both the FASB and IASB are now pursuing aspects of both of these, albeit separately and in a more limited scope than the projects we undertook a decade ago.

Now, I recognize that “the times they are a-changin,” and that there has been a change in the way the two boards work together. I also understand that many stakeholders are coping with lots of other challenges and priorities. In my view, although those considerations may affect the mode and pace of standard setting, they do not and should not detract from the need to develop improved accounting standards on the major areas previously cited. I commend the FASB for continuing to conduct periodic agenda surveys of stakeholders, consultations with your advisory groups, and agenda discussion documents in order to obtain broad input to help the Board prioritize the FASB’s technical agenda and to ensure that standards continue to improve and respond to changes in business models, the capital markets, the economy, and the needs of users of financial information.

Additionally and very importantly, consistent with my prior comments, I believe that fundamental conceptual issues and disagreements continue to hamper standard setting and financial reporting. So, I am glad that both boards are now looking at least some of these matters in their current conceptual framework projects. But I have some doubts as to whether these will actually address the fundamental issues forcefully and substantively or will just describe current practice. One thought, certainly not a new one, would be to convene a separate group, a la the Constitutional Congress that drafted the U.S. Constitution, to get on with the project under the oversight of the boards. Such a group might comprise, for example, former FASB and IASB members, members of national accounting standard-setting boards, and senior representatives of key stakeholder groups.

I am also glad that the FASB, together with other groups, is proceeding with the disclosure framework project that was started in 2009. In my view, this is a very important effort that is needed in order to better organize and streamline the financial statement footnotes, improve their content, make them more readable, and better facilitate the use of XBRL and other technologies.

To the commissioners of the SEC, I offer a few bits of advice. First, with regard to the path forward to potential use of IFRS in the U.S. reporting system, I continue to encourage you to provide greater clarity as soon as possible. As discussed at length in Chapter 4, this issue has undergone many rounds of examination and twists and turns as leadership of the SEC changed every few years. In 2011–2013, your staff conducted a very comprehensive work plan and obtained extensive input that should provide a good basis for making decisions and assessing what actions are needed to deal with the issues that have been identified. The FAF then provided input and suggestions on a possible approach. And the staff of the IFRS Foundation provided a thoughtful analysis of your staff’s findings. Your current Chief Accountant has proposed a possible approach to move forward in the short term. And further input from stakeholders has been obtained more recently. The time has come to be clear a on a path forward or if the matter is now off the table, be clear on that.

Personally, I still support continued convergence between U.S. GAAP and IFRS and favor an approach under which the FASB would undertake a systematic program to evaluate the differences between U.S. GAAP and IFRS and, as appropriate, propose incorporation of suitable IFRSs into U.S. GAAP.

Second, to the SEC and its staff, continue to try to implement the major recommendations of CIFiR. A lot of hard work and worthwhile thought went into that effort. Of all the recommendations, the one I that believed should be actioned sooner rather than later was establishing something akin to the Financial Reporting Forum envisaged by CIFiR. So, I very much welcomed and applauded the creation of a Financial Reporting Series of periodic public roundtables by the SEC staff that, akin to the recommendation of CIFiR, brings together representatives from the preparer, auditor, investor, and user communities with senior representatives of the SEC staff, FASB, and the PCAOB to, as stated in CIFiR’s Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission, “discuss pressures in the financial reporting system overall, both immediate and long-term.” I believe this type of ongoing forum can help surface issues in the reporting system more promptly; facilitate addressing them in a logical, coordinated, and effective way; and help provide overall strategic direction to the U.S. financial reporting system. It might also help the SEC, FASB, and the PCAOB decide whether and how best to address other key recommendations in the CIFiR report, including those relating to the judgment framework, to continuing to harness the power of technology in financial reporting to make financial reports more understandable and useful, and to expanding and enhancing the reporting of information on key performance indicators and elements of critical nonfinancial information. So, as discussed in Chapter 6, I am hopeful that the SEC’s current initiative on disclosure effectiveness will result in some meaningful reforms along these lines and, as discussed below, I have some concerns that the United States could fall behind other countries in terms of the quality of our corporate reporting system.

To the IASB, their trustees, constituents of IFRSs, and all who believe in getting to a single set of high-quality global accounting standards, I say be patient with the United States. I recognize the frustration among some that the United States hasn’t yet signed on to moving to IFRSs and that the SEC staff seems to come up with a new idea regarding this every few years. Please understand that without the United States, the system cannot be a truly global one. Also recognize that for the United States, which has long enjoyed a high-quality financial reporting system that has been an important component of our capital markets, a decision whether, when, and how to move to or toward international standards is a very important public policy matter.

To the trustees of the FAF, thanks for your service, and I wish you the wisdom of Solomon and the patience of Job in helping guide U.S. accounting standard setting through a challenging period from the reporting scandals of 2001–2002, through the convergence effort between the FASB and the IASB, the financial crisis of 2008–2009, and various attempts by special interest groups and politicians to influence the outcome of FASB standard setting projects. I have now been on both sides of the relationship between an accounting standard setting board and the body charged with support and oversight over the standard setter, the former when I was a member of the IASB and as Chairman of the FASB, and the latter as a member since 2011 of the Accounting Standards Oversight Council of Canada which oversees the Accounting Standards Board of Canada and Canada’s Public Sector Accounting Standards Board.

It’s a very important and sometimes challenging relationship because, on the one hand, the oversight body is charged with ensuring that the accounting standard setter is properly fulfilling its mission, while, on the other hand, it must guard against and refrain from meddling into the accounting standard setter’s decisions regarding its standard-setting agenda and the decisions it makes on accounting issues in its standard-setting projects. In order to foster accomplishment of the overall accounting standard-setting mission, the oversight body must protect the independence of the standard-setting body ensuring that that its activities are conducted without influence from or intervention by special interests, by politicians, or by the oversight body itself. That requires the oversight body to be proactive in helping articulate and, as needed, to strongly defend the independence of the standard setter.

But it cannot do so blindly. It requires that the oversight body appoint highly qualified individuals to the standard-setting board, that the standard-setting body is adequately funded and staffed, that the standard-setting activities are conducted through a thorough, objective, and impartial due process that includes systematically obtaining and carefully evaluating input from stakeholders, and that there are effective processes for dealing with due process complaints from stakeholders and post-implementation review of standards.

In short, providing effective oversight over the standard setting to help ensure it accomplishes its mission, while ensuring that this does not in any way, either in fact or appearance, compromise the independence of the actual standard-setting body can be challenging, but in my view is absolutely critical to both the quality and credibility of a standard-setting regime.

So, to current and future FAF Trustees, please understand why a number of former FASB Board members, including former FASB Chairman Dennis Beresford, former Board members Robert Swieringa and Edward Trott, and me felt it was important to formally convey our concerns over some of the wording (and mindset that such wording might indicate) in the December 2014 Working Draft of the FAF/FASB/GASB Strategic Plan (the Draft Plan) that seemed to inappropriately suggest that the FAF is involved in the actual setting of standards. For example, page 1 of the Draft Plan stated “The core principle of the strategic plan is that the FAF, the FASB, the GASB will be best-in-class in their roles, setting accounting standards of the highest quality …” (emphasis added).⁷ It was therefore very important, in my view, that wording in the final FAF/FASB/GASB Strategic Plan issued in April 2015 contained clarifying language delineating and affirming the respective roles of the standard-setting bodies and FAF Trustees and staff and that the FAF Trustees and staff (and for that matter IFRS Foundation Trustees and staff) avoid taking actions or engaging in activities that might be perceived as crossing the line into involvement in the actual standard setting.

To the countless individuals and many organizations that spend time and effort supporting and participating in the accounting standard-setting process, I also say THANKS. Broad participation by stakeholders is a major strength of the U.S. accounting standard-setting process, one that has served as a model for standard setters around the world, including the IASB. My only words of advice: keep up the support, input, and participation. The FASB and IASB will need to continue to draw upon it in addressing the many continuing challenges they face. Your support is also essential to being able to maintain private-sector accounting standard setting that operates in an independent manner in the public interest in the face of what can sometimes be significant pressure from special interests and political bodies.

Finally, to everyone involved in the financial reporting system, I recognize that, collectively, we have been through a lot of change over the last 15 years and that the potential for further significant changes in accounting standards, disclosure requirements, and modes of delivery of financial and corporate information is not, very understandably, a thrilling prospect for many. However, I think it is fair to say that without change, there can be no progress. As Benjamin Franklin said, “When you’re finished changing, you’re finished.” Jack Welch, former CEO of General Electric, put it more bluntly a few years ago in a trailer for CNBC, “If you’re stagnant, you’re dead.”

Is the United States the Leader in Financial and Corporate Reporting?

In Chapter 6, I discussed at length some of the complexities of the U.S. reporting system and the factors behind this. I noted that, in certain other parts of the world, the U.S. system is viewed as overly rules- and compliance-based, too complex, and as not promoting effective communication between companies and investors.

In contrast, I believe that most of us in the United States take it as almost an article of faith that we have the best reporting system in the world. From time to time, I have been asked for my views on the relative strengths and weaknesses of the U.S. reporting system versus those in other countries. The question has come in various forms, for example, do I believe that the United States is the leader in financial and corporate reporting or, as I discussed in my October 2015 column in Compliance Week, by an accounting doctoral student at a major U.S. university asking me why the United States is falling behind in financial reporting?

As I noted in that column, I was somewhat taken aback by the student’s question not only because the student questioned whether the United States is the leader in financial reporting, but did so in way that presumed it was an accepted fact that the U.S. reporting system is lagging behind those of other countries. That student said that, in his view, the United States has been slower than many other countries to adopt advances in reporting, specifically citing IFRS, expanded auditor reporting, and integrated reporting.

I have been involved in financial reporting for over 40 years, both in the United States and internationally and have regarded the United States as the clear leader. We led in the development of accounting and auditing standards and corporate disclosure requirements, which other countries and capital markets then looked to as the gold standard. Our SEC is the largest and I believe the most capable capital markets regulator in the world. These factors have, in my view, contributed significantly to the United States having the deepest, most liquid capital markets in the world and being viewed as a safe haven for investing in a turbulent world. Still the accounting doctoral student’s question and other recent questions and comments I have received regarding the U.S. reporting system led me to think further about this subject. Might there be some truth that we have been slow in recent years to embrace potentially positive changes and in modernizing our reporting system such that we might be falling behind?

So a few thoughts. First, I believe it is now widely accepted that vital aspects of our national infrastructure, such as highways, bridges, airports and passenger rail system, are in critical need of repair, rebuilding, and modernization. And while in the United States we have some of finest universities and hospitals in the world, overall, our education and healthcare systems seem to lag those in many other countries in terms measured costs and outcomes. So if we have fallen behind other countries in these key aspects of our national infrastructure, might that also be true in terms of our financial and corporate reporting systems? In that regard, I thought further about whether the three matters cited by the student, as well as other aspects of our reporting system relative to those in other countries, might be signs of the United States falling behind. And if so, why?

First, on IFRS, my view is that both U.S. GAAP and IFRS are high-quality sets of accounting standards, what I call “capital markets” accounting standards. While there are some specific IFRS standards I feel are superior to the corresponding U.S. GAAP standards, there are also cases where I believe the U.S. GAAP standards are better. So, overall, while I would like to see continued convergence between the two sets of standards — not just for the sake of convergence — but also in order to improve the comparability and quality of reporting internationally, I do not view our not having adopted IFRS as evidence that the United States is falling behind other parts of the world. Second, on expanded auditor reporting, while it is true that certain other countries, most notably the United Kingdom, have led the way on this and that the International Auditing and Assurance Standards Board and the European Union have been ahead of the PCAOB in requirements in this area, the PCAOB continues to consider this and I think we will soon see expanded auditor reporting in this country. And on integrated reporting, while it has become mandated in certain countries and voluntarily adopted by a growing number of companies around the world, as discussed in Chapter 6 of this book, I believe the SEC’s current initiative on disclosure effectiveness provides a real opportunity for enhancing and modernizing the SEC reporting system through adopting more of an integrated reporting approach to organizing and presenting financial and nonfinancial information and to more systematically incorporating material information on ESG issues in SEC filings. We will have to see how this effort by the SEC progresses and how any resulting changes stack up against those going on in other parts of the world. So on this important aspect of our reporting system, I feel the jury is still out as to whether we could find ourselves falling behind.

But there are other very important features of our reporting system where I believe are the best in the world. These include the quality of auditing and internal controls over financial reporting, having diligent audit committees, effective regulatory review and enforcement, and scrutiny of corporate information by investors and financial analysts. Although these are improving in other parts of the world, I feel strongly that the United States leads the world in these critical aspects of reporting.

And what about another matter on which I feel strongly, the use of technology in reporting? While the SEC was a relatively early adopter of XBRL, I feel that the effort has been adversely affected by the dual requirement to file both EDGARized and XBRL financial statements and by data quality issues. The adoption of “in-line XBRL,” which is used in certain other countries for regulatory reporting, may help solve these issues. On the other hand, it seems to me that the United States continues to be a leader in terms developing new applications for the preparation and consumption of financial information.

My conclusion from all this is that overall the United States has not fallen behind in financial and corporate reporting. And despite what I believe are lots of opportunities for us to improve and modernize our reporting system, I feel that overall we do have the best system in the world. However, I will concede that we may be a bit slower at times to adopt changes in reporting than has been so in certain other countries and jurisdictions. I attribute this, in part, to the extensive due process and stakeholder engagement that our standard setters and regulators are required to conduct before adopting major changes in our reporting system. That is very important to ensuring that proposed changes are likely to prove beneficial and cost effective. I also feel that concerns by U.S. companies, audit committees, and auditors over being second guessed and potentially becoming subject to enforcement actions and litigation can sometimes, very understandably, make them somewhat resistant to proposed changes in our reporting system. Similarly, although the enhanced focus on internal controls has been instrumental in raising the quality of reporting in the United States, it also increases the cost of implementing changes in accounting and financial reporting, which affects both the overall receptivity to change and cost-benefit analysis of proposed changes. And, of course, there are always vested interests that would prefer to maintain the status quo.

We must be open to potential changes that could improve the quality and effectiveness of our national infrastructures, including our financial and corporate reporting system. For in a world where other countries and regions are investing, innovating, and advancing in terms of critical elements of their infrastructure, including their reporting system, if we fail to continue to advance, we do risk falling behind.

So Now What, Bob?

Time has flown for me since I left the FASB in September 2010. When I left the FASB, my expectation was that I would continue to have opportunities to contribute to financial and corporate reporting, but as I previously explained, I was also very much looking forward to being able to do some new and different things. First, most importantly and consistent with my hopes and plans, I have been able to spend more time with Louise; our son, Michael, and his wife, Heather; and our daughter, Nicole, and her husband Cameron. In the Spring of 2014 we were blessed with the births of our first two grandchildren, Raelle (or as Louise and I call her “Ellie”) to Heather and Michael, and Jack to Nicole and Cameron. They arrived exactly six weeks apart and the two first cousins and their parents live only five blocks apart on the Upper West Side of Manhattan, close to where I have an office at Columbia University. We see them frequently. It’s wonderful!!

In terms of my other activities, I have had three primary criteria in deciding whether to take on a particular role: (a) I have to view it as substantive and a worthwhile expenditure of my time, (b) it has to be something I believe I will find interesting and enjoyable in terms of subject matter and the people I will be working with, and (c) I want it to be something in which I believe I can provide some value and also learn some new things. One of my first decisions after leaving the FASB was to join the faculty of Columbia Business School. It’s a part-time role that has me doing some lectures; advising students on course material and career planning; and working with faculty on research projects, papers, and symposia. It’s invigorating and satisfying and gives me a link back to my dad, who grew up opposite the Columbia campus on the Upper West Side of Manhattan and was a proud graduate of Columbia. It has also reunited me with Professors Trevor Harris and Stephen Penman, two of the six members of the accounting academic advisory committee we set up in the 1990s at C&L. (Katherine Schipper, who would later become my fellow FASB Board member, was also a member of that academic advisory committee.) I also continue to serve on the advisory board of the Manchester Business School in England.

Through May 2015 I also continued my not-for-profit activities as a trustee of the Kessler Foundation, which is dedicated to medical research and grant-making in the areas related to rehabilitation of people disabled by severe brain trauma and spinal cord injuries. I have also taken on roles on various advisory boards and as senior adviser to some promising private companies, including one called Workiva Inc. (formerly WebFilings) whose leading-edge, cloud-based product offering is very much in line with my view of making more and better use of technology in corporate reporting. WebFilings’ initial application was in the SEC reporting space enabling companies to prepare and file 10-Ks, 10-Qs, and other SEC documents with greater accuracy, less effort, and shorter cycle times. It quickly took off, with over 65 percent of the large accelerated and accelerated SEC filers now using it. The company then expanded the applications it offers to other complex reporting regimes, including regulatory filings, the stress tests, CCAR, Recovery and Resolution plans that banks need to prepare and file, ORSA reporting by insurance companies, internal control reporting and documentation, data collection and document preparation applications, all under the rubric of Wdesk.

The company changed its name to Workiva and in December 2014 it went public on the New York Stock Exchange. I am now a member of the board of directors of Workiva. It’s been terrific to be part of this journey from startup to public company with a great group of people and to see firsthand the power of technology in transforming various reporting processes.

In 2015, I joined the board of directors of itBit, the first regulated bitcoin exchange in the United States. Here too, I believe that the technology employed (what is called the “blockchain” and “open ledgers”) has the potential to change and transform aspects of the financial system.

When I left the FASB, I was hoping to serve on the boards of a few major companies where my experience and skills might add value, so I was pleased in June 2011 to join the board of directors of Fannie Mae, an organization at the heart of the United States housing finance system, to help address the challenges currently facing many homeowners and the overall housing market and to assist in the effort to build a sounder, more stable housing finance system in this country. My fellow board members have included Phil Laskawy, who chaired the board until he retired in 2014 and who I worked with on the National Steering Committee when he was CEO of Ernst & Young and in connection with the IASB because Phil served for many years on the IFRS Foundation; Denny Beresford (until March 2012), another former chairman of the FASB and whose wise counsel I sometimes sought in my years at the FASB and who I worked with on CIFIR; and David Sidwell, who I have known and worked with when he was at C&L, JP Morgan, Morgan Stanley, and as a fellow member of the EITF and CIFiR.

I also was pleased to join the board of Morgan Stanley in July 2012. During my career in public accounting, I had extensive experience auditing securities and investment banking firms, including Goldman Sachs and Shearson Lehman Brothers, and worked frequently with investment bankers in my Corporate Finance Advisory Services role. Joining the Morgan Stanley board has also afforded me the opportunity to work again with my friend and former partner and colleague Don Nicolaisen. One of the wonderful things about getting older is being able to renew working relationships with past colleagues while also being able to meet and work with new people.

With regard to financial and corporate reporting, I have been fortunate to have been sought out as a speaker at numerous conferences, something I have always enjoyed because it enables me to get out and meet with all sorts of people and groups around the country. I was appointed in 2012 to the Standing Advisory Group of the PCAOB, whose members include many former colleagues. I was pleased to be appointed to this group because I strongly believe that audit quality and public confidence in independent audits is absolutely critical to the proper functioning of the capital markets, the financial system and the economy. I am also a member of the Accounting Standards Oversight Council of Canada that oversees the establishment of accounting standards in Canada. That has reunited me with Trish O’Malley, a former colleague on the IASB; with Paul Cherry, who I worked with at C&L and PwC and when Paul chaired the Accounting Standards Board of Canada and I chaired the FASB; and with Bob Muter, another colleague and friend from C&L and PwC. Canada adopted IFRSs for its public company financial reporting starting in 2011 and has gone to separate “made in Canada” standards for private companies and not-for-profit entities. It has been fascinating to watch how this has been implemented in Canada and I believe the Canadian experience may provide some important insights for the U.S. financial reporting system. I continue as a member of the Financial Reporting Faculty Advisory Group of the Institute of Chartered Accountants in England and Wales. Since 2011 I have been also writing a periodic column on financial reporting matters for Compliance Week. And beginning January 2016, I serve on the Independent Investment Committee of UNOPS, the operating arm of the United Nations that manages major infrastructure and procurement projects around the world.

It is always satisfying and uplifting to have one’s career efforts and accomplishments recognized. While I was chairman of the FASB, I was included on various annual lists of the top 100 people in accounting, finance, and corporate governance. Although flattering, I think a lot of that comes with the position, but I was proud and quite touched to be named an Outstanding Alumnus and to receive an honorary doctorate from my alma mater: the University of Manchester in England. Soon after I left the FASB in 2010, I received the 2010 Berkeley Award for Distinguished Contributions to Financial Reporting from the Haas School of Business at the University of California Berkeley. In 2012, I was elected to the Accounting Hall of Fame as the 89th inductee into a group of leaders who helped shape the accounting profession and the development of accounting and auditing theory and practice from the early days of the profession over one century ago to the present.

Consistent with my continuing passion for trying to improve the broader realm of corporate reporting, I have become involved with a number of interesting and important initiatives, including what is known as integrated reporting. In July 2010, as chairman of the FASB, I participated in the initial meeting in London of what was then called the International Integrated Reporting Committee (now the International Integrated Reporting Council (IIRC)). The IIRC was established by the Prince of Wales’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) and includes representatives from major international corporations, investor groups, nongovernmental organization, global accounting firms, regulators, and accounting standard setters. The IIRC’s mission is explained on its website as follows:

At present a range of standard setters and regulatory bodies are responsible for individual elements of reporting. No single body has the oversight or authority to bring together the different elements that are essential to the presentation of an integrated picture of an organisation and the impact of environmental and social factors on its performance. Globalisation means that an accounting and reporting framework needs to be developed on an international basis.

In a nutshell, the vision is one of corporate reporting that brings together in an integrated fashion financial reporting, reporting on key nonfinancial performance indicators and value drivers, and reporting on a company’s efforts and impacts relating to corporate responsibility and sustainable development.

This is very much in line with the next generation of corporate reporting we envisioned over fifteen years ago in The Value Reporting Revolution: Moving beyond the Earnings Game, the book. I coauthored. Not surprisingly, this and related efforts have reunited me with two of my coauthors on that book: Dr. Robert Eccles of Harvard and David Phillips of PwC. A primary task for the IIRC and its working groups has been to develop an overarching framework for integrated reporting and to develop a strategy and path forward for making it a reality. This has involved a number of efforts, including a major pilot program by 140 companies from around the world, such as Coca Cola, Microsoft, and Prudential Financial from the United States; HSBC, Marks & Spencer, and Sainsbury from the United Kingdom; Volvo from Sweden; and Tata Steel from India. Also participating in the pilot program were approximately 25 organizations representing institutional investors from various parts of the world.

Beyond the pilot program, a growing number of companies are now publishing integrated reports. In some cases, such as for listed companies in South Africa, this stems from stock exchange requirements. In other cases, such as for companies in the European Union, new disclosure requirements relating to environmental and social matters have been the impetus for developing and issuing an integrated report. But even in the absence of stock exchange or legal requirements, a growing number of forward-looking companies around the world have adopted an integrated reporting approach in their annual reports. For those interested further in reviewing examples of such reports, I suggest you go the official website of the International Integrated Reporting Council at www.integratedreporting.org.

I have been dubbed an “ambassador” for the IIRC, and it has brought me in contact with many people involved in the burgeoning area of sustainability reporting, including those from the A4S project; the GRI; AccountAbility, an international organization that establishes standards and provides solutions relating to corporate responsibility and sustainable development and on whose advisory council I serve; the and many other organizations and individuals concerned with sustainability and the ongoing depletion and pollution of the world’s natural capital of key and finite resources. And, as discussed below, I became involved with the Sustainability Accounting Standards Board (SASB), first as a member of its advisory council and more recently as a member of its board of directors. Through these, I have become much more aware of the magnitude and severity of these threats to our ongoing economic, environmental, social, and planetary welfare; of the need for better measurement and reporting as part of the effort to address these critical issues; and of the challenges these issues can pose to the sustainability of individual business enterprises and why better and more focused reporting by companies on material sustainability issues is of growing importance to investors and other capital providers.

These issues and challenges were very forcefully explained by the Prince of Wales in his address to the A4S Forum he hosted on December 15, 2010, at St. James Palace in London.

Experts tell me that though over a billion people have no ready access to drinkable water and live on less than a dollar a day, we are still consuming, every year, 50 percent more of the planet’s natural resources than it can renew. In other words, we are living way beyond the Earth’s means. My Accounting for Sustainability project was established to address this issue—to ensure that we are counting everything that counts and measuring everything that matters … . It is clearly a daunting task to value and price natural capital and to broaden our accounting information and reports to include environmental, social and governance factors, while at the same time making accounts simpler and more comprehensible. But it is a task which cannot be ignored or shirked …. Ladies and gentlemen, if I may say so, if governments, businesses, the accountancy profession, regulators and standard-setters do not address the present limitations in our accounting information and reports, then it will be the greatest accounting failure that the world has ever seen … . If we don’t take the right decisions now, we will effectively lock our children and grandchildren into a very grim future and throw away the key … . Many people think that accounts and accountancy aren’t important, but information is power. And it is the responsibility of accountants to provide the best systems and information so that acting with the long-tem in mind, and serving the best interests of communities and the environment, can also be seen to be the right financial approach.

In this book, I have chronicled what is now my over 40 years in the accounting profession, from my early days as an articled clerk in England, through my years as auditor and the many other roles I had at Price Waterhouse, C&L, and PwC; my many involvements in professional activities; my years as an accounting standard setter; and the various roles and activities that now keep me busy and engaged. Over that period, there have been many changes in the accounting profession and in accounting, auditing, and financial reporting, and I have had the good fortune to have had a front row seat for many of these developments and the opportunity to be an active participant in helping shape some of them. Throughout, I have been proud to be the member of a profession that serves clients and the public interest with skill, knowledge, and objectivity. It has afforded me many opportunities to grow as a professional and person and instilled in me a deep belief in the importance of sound reporting to the proper functioning of capital markets and the economy. Moreover, it has convinced me that what you measure and report matters; that it affects behavior, actions, and outcomes; and that, therefore, it is critical that we measure and report on those things that do matter, in corporate reporting and beyond.

As one who has devoted a good bit of my career to better accounting and reporting and to an abiding belief in the power of transparency and that what you measure matters, the Prince’s words ring true, and his call to action demand attention. I am not a “tree hugger” or an environmental activist, just a citizen of this planet concerned about the welfare of future generations. So, as someone with a passion for helping bring about positive changes in accounting and reporting, the realm of integrated reporting and accounting for sustainability represents a new frontier of accounting changes.

Sustainability Reporting and the Sustainability Accounting Standards Board

This is where I ended the first edition of this book when it was published in 2013. Since then I have become further involved in these matters, most significantly through the SASB. The San Francisco-based SASB is an independent, not-for-profit registered 501(c)3 standard setting organization that was established in 2011 to develop industry-specific standards for voluntary use by companies in reporting material environmental, social, and governance (ESG) information in SEC filings such as annual reports on Form 10-K for U.S. filers and Form 20-F for foreign registrants. A growing number of investors and other stakeholders seem to want better and more standardized information on the impact of key ESG issues on the performance and sustainability of companies’ business models and their ability to generate (or to destroy) value over the longer term. For example, the 2014 survey of institutional investors by Ernst & Young, Tomorrow’s investment rules: Global survey of institutional investors on non-financial performance (2014), found that assessment of ESG issues “had played a pivotal role” in the investment decision-making process for 90 percent of the responding investors and 73 percent of the portfolio managers and research analysts responding to the 2015 CFA Institute’s Environmental, Social and Governance (ESG) Survey said they take ESG issues into account as part of their investment decision-making.

While many companies have responded to the call for greater transparency in this area by publishing annual “sustainability” or “corporate social responsibility” (CSR) reports, the information in these documents do not provide standardized metrics that focus on material issues in order to enable investors and other interested parties to properly assess trends, benchmark peers, and compare the performance of companies in identifying and addressing material ESG issues over time and across industries and sectors of the economy. As a result, it seems that investors are forced into engaging in unproductive and costly efforts to try to get the information they want. This is evidenced by the results of the 2014 survey of global institutional investors by PwC, Sustainability goes mainstream: Insights into investor views (2014), in which 89 percent of the responding investors said they request sustainability information directly from companies, 50 percent said they were “very likely” to sponsor or co-sponsor shareholder proposals related to sustainability issues, and two thirds said they would be more likely to consider this type of information if common standards were used. Thus, it is not surprising that the report, US Sustainable, Responsible and Impact Investing Trends 2014, published by the U.S. SIF Foundation found that $1 in every $6 under professional management in the United States incorporates “socially responsible investing” (SRI) strategies and that total assets and numbers of funds incorporating ESG criteria have rapidly increased from $1.01 trillion in 2012 to $4.31 trillion, in 925 distinct ESG funds, in 2014. And all indications are that investment in SRI strategies and funds continues to grow rapidly.

SASB represents a marketplace effort to respond to these investor needs. The founder and driving force behind the establishment of SASB was Dr. Jean Rogers, an over 20-year veteran of consulting on triple bottom line and sustainability issues. The creation of SASB was developed from an idea formulated by Jean in collaboration with the Harvard University Initiative for Responsible Investment (IRI) at the Kennedy School of Government and published in the 2010 paper From Transparency to Performance coauthored by Jean with Steve Lydenberg and David Wood of the Harvard IRI. Jean became and continues as the CEO of SASB, Steve was a founding director, and my long-time friend and colleague, Dr. Robert Eccles of the Harvard Business School served as the first chair of the SASB board of directors. Initial funding for SASB came from organizations and individuals interested in advancing the quality of corporate information on ESG issues and performance, most notably from the Bloomberg organization.

Nowadays (as March 2016), SASB has over 30 full time staff members, headed by Jean, and the board of directors is now chaired by former New York City mayor Michael Bloomberg, with former SEC chair, Mary Schapiro serving as the vice chair of the board of directors.

I first met Jean Rogers in 2010 when she reached out to me to discuss what was then her idea and proposal to create an organization to develop and issue industry-based standards for reporting of material sustainability information. I must confess that while I found the idea intriguing and provided her with my insights on standard setting, I also conveyed to Jean my skepticism, in a post financial crisis and recessionary environment, over the prospects for success of such an endeavor. Fortunately, a number of forward-looking individuals and organizations that embraced the vision of SASB stepped forth to help Jean establish it in 2011. Sometime after its establishment, I joined the SASB’s Advisory Council and since January 2015, I have been a member of its board of directors.

So much for a brief history of SASB and some of the key players. How does it actually establish standards and what do these standards cover? While the standard-setting process followed by SASB is somewhat different than those of the FASB, the IASB, and other bodies that set financial accounting and reporting standards, it is nevertheless, systematic, robust, and includes significant stakeholder engagement and input, as well as publishing proposed standards for public comment.

During the period from its establishment in 2011 through early 2016, the SASB developed what it calls “provisional standards” that identify information on ESG issues that are likely to be material and standardized performance metrics and disclosures on these issues for 79 specific industries across 10 broad sectors. In order to do this the SASB developed and trademarked its Sustainable Industry Standards Classification System or SICS of sectors and industries within each sector. The 10 sectors are: Health Care, Financials, Technology & Communication, Non-Renewable Resources, Transportation, Services, Resource Transformation, Consumption, Renewable Resources & Alternative Energy, and Infrastructure. Within each of the sectors there are approximately 5–10 industries. For example, the Health Care sector includes Biotechnology, Pharmaceuticals, Health Care Delivery, Health Care Distributors, Medical Equipment & Supplies, and Managed Care and the Transportation sector includes Automobiles, Air Freight & Logistics, Auto Parts, Marine Transportation, Car Rental & Leasing, Rail Transportation, Airlines, and Road Transportation.

In the first step in developing a provisional standard for an industry, the SASB research staff developed a “SASB Materiality Map” that enabled them to identify the relative likely materiality of specific sustainability issues in each industry. This provides a unique sustainability profile for each industry, illuminating the high priority sustainability issues facing a particular industry. Creating the map for each industry involved extensive review of relevant data, including evidence of stakeholder interest and evidence of financial impact of specific ESG and other sustainbility issues on companies in that industry. Source documents reviewed included Form 10-Ks, SEC comment letters, CSR reports, and analyst and media reports on companies in that industry. The issues were then ranked according to their relative significance in order to determine those issues that are likely to be material within a particular industry. By the way and importantly, in doing this analysis, the staff is guided by the U.S. Supreme Court’s definition of materiality as information that presents “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available”⁸ and by SEC guidance on materiality.

In the next step of the process, the SASB staff developed an “Industry Brief” that outlines the proposed set of material ESG and other sustainability issues and related strawman performance indicators and other proposed disclosures (what SASB terms “accounting metrics”) for that industry and convened an “industry working group” composed of a balanced cross-section of stakeholders including investors and financial analysts, representatives from companies in the industry, accountants, consultants, academics, and public interest officials with specific industry expertise to review and help refine the strawman indicators and disclosures. Industry working group participants reviewed and provided input, primarily via on-line surveys and through direct outreach by SASB staff to industry working group members, on the materiality of the issues and on the relevance, usefulness, and cost effectiveness of the strawman performance indicators and disclosures.

The SASB then reviewed the due process and outcomes of the industry working group with the SASB Standards Council. The Standards Council was comprised of approximately 15 people with extensive experience in sustainability issues across various industries, in standard setting, investing, financial analysis, and securities law. It was chaired by Dr. Jeffrey Hales of the Georgia Institute of Technology who served as a research fellow at the FASB in 2009–2010. The Standards Council reviewed the due process and quality of outcomes for compliance of the standard-setting process with American National Standards Institute (ANSI) guidance and SASB principles.

A draft provisional standard was then published on the SASB website, asking for public comment for a 90-day period. Comments were reviewed and, as appropriate revisions made and the provisional Sustainability Accounting Standards covering each of the industries in a sector were then published and made available to the public, along with “Industry Briefs” that provide additional insight into the standards for each of the industries. SASB standards are considered provisional for at least one year after their initial release. During this time, SASB welcomes and obtains feedback on the standard. While the standards are deemed “provisional,” they can be used by companies and investors and we certainly encourage their use.

When I joined the SASB board of directors in January 2015, the SASB was nearing the end of its process for developing and issuing provisional standards covering the 10 sectors and close to 80 industries. As described above, that process was an extensive and inclusive one. For example, as of August 2015, SASB industry working groups had included over 2800 participants from companies that totaled approximately $11 trillion in market capitalization and from investors with over $23 trillion of assets under management. Nevertheless, a key question was what further due process, if any, should be followed for lifting the “provisional” status of the standards, that is, in the parlance of an accounting standard setter such as the FASB and IASB, what should be the process for issuing a “final” standard and thereafter for revising standards based on issues that arise and stakeholder experience in using in them?

The SASB Board of Directors created an advisory committee to look at these issues and propose a model for the SASB’s standard-setting activities going forward. I chaired that committee. The model we developed was approved by the SASB Board of Directors and as of March 2016, was exposed in April 2016 for a 90-day public comment period in the form of a proposed SASB Rules of Procedure, together with a revised SASB Conceptual Framework document and some proposed changes to the SASB’s Sustainable Industry Classification System.

Under the proposed model, the Standards Council would be revamped from an advisory group into a nine-person voting body with ultimate responsibility and authority for SASB standards, including its standard-setting agenda, issuance of exposure drafts of proposed changes to SASB standards for public comment, and approval of all such changes. Approval of all such actions would require a majority vote of the Standards Council at public meetings that would be audio or webcast. Members of the SASB Council would be appointed by the SASB Board of Directors and would include a compensated Chair and eight other members with balanced representation from investors, corporate issuers and other stakeholders. A new five-person Standards Oversight Committee of the SASB Board of Directors would be established to provide oversight of adherence to proper due process by the Standards Council and SASB technical staff, including receiving and reviewing stakeholder complaints relating to due process. However, the Standards Oversight Committee would not interfere in technical agenda and standard-setting decisions of the Standards Council.

In order to “finalize” the SASB’s provisional standards, we proposed a codification process under which the new Standards Council would initially adopt the set of provisional standards and the SASB technical staff would, under the direction of the Standards Council, conduct a period of review and stakeholder engagement of these standards to identify proposed modifications which would then be exposed for public comment and review and approval by the Standards Council. The result would be the authoritative SASB Code of standards. Subsequent changes to the Code would effected through Updates, as and when necessary based on agenda setting resulting from ongoing monitoring of implementation of standards and stakeholder engagement, issuance of exposure drafts of proposed changes to standards for public comment, and review and approval by the Standards Council of all such changes to the Code.

I was pleased to have been able to draw on my own knowledge and experience in standard setting in contributing to developing the ongoing model for the SASB’s standard-setting activities. Those familiar with the processes and governance of the FASB and IASB will note some similarities between those and the model we developed for the SASB. Overall, I believe the SASB model incorporates some of the best practices of accounting standard setting while also carrying forward some features unique to the SASB and its stage of development. Also, very importantly, concurrent with the adoption of the new model for standard setting, we strengthened and reorganized the SASB technical staff along industry lines in order to provide enhanced industry knowledge, expertise, and focus to the standard-setting efforts.

OK, so that’s an overview of the SASB standard-setting process. What do the SASB standards look like and what sorts of issues, performance indicators, and other disclosures do they cover? For those interested in reading actual standards, I recommend you go to the SASB website and download a few of them, along with the SASB Industry Brief for that industry. But let me give an example from a particular provisional industry standard. First, I would note that each industry standard first describes the purpose and structure and the uses and limitations of SASB standards and provides generalized guidance on such matters as the disclosure of material sustainability topics in SEC filings, scope of disclosure, reporting formats, and timing of disclosures. Each standard then lays out and describes the material disclosure topics and related accounting metrics for that industry. So going to the provisional standard for Managed Care industry (within the Health Care sector), the standard lays out 6 sustainability topics deemed material to that industry including access to coverage, improved outcomes, and pricing transparency. For each of these topics, the standard then sets forth and defines a limited number of specific accounting metrics, for example for the access to coverage topic, the standard sets out the three accounting metrics, the first of which is the Medical Loss Ratio or MLS which is defined as medical costs as a percentage of premium revenue using the formula prescribed by the U.S. Department of Health and Human Services.

A few noteworthy points about the sustainability topics and accounting metrics in the SASB standards. First, because they focus only on issues that, based on the SASB process, are likely to constitute material information for companies in a particular industry, they do not cover the much broader universe of all ESG and other sustainability issues that may be of interest to some stakeholders, but which are not material from an investment perspective. So not surprisingly, on average a SASB industry standard addresses five topics and provides thirteen accounting metrics (about 80 percent of which on average are quantitative metrics). Second, about 70 percent of the topics addressed in SASB standards are subjects mentioned by companies in their SEC filings. However, more often than not the current disclosures are broad, vague, and use boilerplate language that does not provide information on the specific impacts of the issue on the company and the company’s performance in addressing them. Third, the SASB provisional standards are shaped by significant input among companies and investors participating in the process. Through August 2015, with more than 2800 participants in SASB industry working groups representing over $23 trillion in assets under management and $11 trillion in market capitalization, SASB had achieved over 80 percent consensus of stakeholders participating in the development of the provisional standards that the topics covered in those standards are likely to be material to a reasonable investor.

So What’s in It for Companies and Investors?

SASB and supporters of SASB believe that the SASB’s industry-specific approach and its focus on materiality results in a set of a standards and disclosures that will better enable investors and other interested parties to understand and evaluate the impact of ESG issues that really do matter to companies in each industry and to better gauge their performance in absolute terms and against their industry peers. In turn, that should help improve the quality of investment decisions and result, over time, in improved investment returns. Currently, investors are engaging in unproductive and costly means to obtain the information they want on ESG matters, bombarding companies with lengthy questionnaires. A result, companies report experiencing “questionnaire fatigue,” with employees and even an entire department engaged full time in responding to all these enquiries. Also, increasingly public companies are facing shareholder resolutions on ESG matters. So there are potential efficiencies to companies in terms of cost and effort from adopting SASB standards.

Moreover, as I have tried to emphasize in other parts of this book, in order properly manage something and the impact of your actions on it, you need to measure it. So the use of SASB standards should also help companies better focus on those ESG and other sustainability issues and metrics that matter, thereby helping them identify opportunities for cost savings, risk mitigation, and generating new streams of revenue, thereby over time improving their financial performance and value creation. Companies doing so may experience other important benefits in terms of enhancing their corporate reputation, raising employee morale and loyalty, and attracting long-term investors. The results of all of this should be improved corporate performance and better capital allocation across the economy.

In December 2015, SASB issued an Implementation Guide for Companies that provides companies with practical guidance on using SASB standards, including how to identify topics that are likely to be material to a company, selecting the sustainability accounting standards that best apply to their organization, effectively embedding the topics and metrics from those standards into core management and reporting functions, performance evaluation and benchmarking, and deciding on the appropriate channels for disclosing material sustainability information in their SEC filings. The Implementation Guide for Companies is available on the SASB website, www.sasb.org, as are various other tools and resources for companies and for investors and analysts.

While it remains to be seen whether over time there will be widespread voluntary adoption of SASB standards by companies that could lead to these desired outcomes, there is growing body of research that seems to support the potential benefits of focusing on ESG issues. For example, a 2012 Harvard Business School study by researchers from the Harvard and London Business Schools found that companies with clear environmental and social goals outperformed those without these goals by 47 percent between 1993 and 2010.⁹ A 2015 study by Morgan Stanley that analyzed the performance of over 10,000 mutual funds found that sustainable equity funds met or exceeded median returns of traditional equity funds during 64 percent of the periods examined and that over the longest time period analyzed (seven-year trailing returns from 2008 to 2014) the sustainable equity funds met or exceeded the median returns for five out of the six different classes of funds examined.¹⁰

Looking Back and Moving Forward