Having been involved in accounting for over 30 years, I have seen quite a few changes in accounting requirements, all enthusiastically introduced to “help the reader understand the financial status of a company better.”
I have to say that I believe the opposite is happening. Reading (interpreting) accounts is getting harder to do, as more and more intricate rules are introduced. In just the last 20 years, we have seen significant changes, including the introduction of stock compensation standards, revised fair value accounting, rewrites of revenue recognition rules, to name just a few. The changes have become intricate and mind-numbing.
There’s little sign of it stopping; although recently the FASB announced it will be focusing on reducing complexity and promoting simplification in its accounting standards, the Board has taken no meaningful action to date to do so. Board members have stated they want to simplify how inventory is measured and eliminate the need to disclose extraordinary items from income statements, but these pale into insignificance when compared to the revamped revenue recognition rules and the new operating lease accounting rules likely to be introduced too.
The bottom line is that unless you have a sophisticated understanding of accounting, you probably are unable to fully understand the accounts and what they mean to the health of the business. I don’t believe I am the only one who thinks the rules are going too far, and I understand sophisticated accounts! Every time I listen to a public company announce its quarterly financial results, I hear the CEO or CFO announce their earnings, and then they follow it with a pro-forma result, usually described as an “adjusted EBITDA,” which is to them a more meaningful result to disclose to their investors. Absolutely every company will back out stock compensation costs and other non-cash charges to get to a baseline cash-based result. Observers who trend these revised numbers on a quarterly basis can probably get a more meaningful trend of financial performance of the company and can make more meaningful decisions affecting their investment than if they tried to follow along with the pure GAAP figure.
I’m not saying cash-based accounting is the way to go. That is accounting at its simplest but that, too, doesn’t give a true picture of a company’s financial health. The reality is a simplified disclosure process is in desperate need. Maybe if this was introduced, companies would stop releasing pro-forma results, and I wouldn’t keep being asked to interpret accounting results into meaningful information. Seeing the proposed new rules on the horizon, it looks like it’s going to get worse before it gets better, which is unfortunate.
Until we see more progress, I expect to hear more and more complaints that financial statements are becoming more difficult to interpret. That to me is doing the U.S. accounting profession a major disservice.
Stephen Ambler is a director at RoseRyan, where he manages the development of the firm’s “dream team” of consultants. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at Nasdaq-listed companies.