Speaking of accounting

The international accounting industry is re-examining accounting principles to make financial statements more useful to investors. The SEC and the Financial Accounting Standards Board are in global discussions, with the goal being the convergence of U.S. generally accepted accounting principles and international financial reporting standards. An Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission adopted a final report and issued 25 recommendations to the SEC on July 31.

While many of these efforts will be very helpful to accountants, I do not expect them to have a significant impact on the usefulness of financial information to investors. The reason is simple. The concept of plain-English disclosure is underused in financial statements. It is possible that 30 years of writing disclosure documents for issuers and underwriters have clouded my vision, but I believe that relatively simple changes can dramatically improve financial reporting.

First, as the advisory committee and other linear thinkers have long recognized, it will help to have the GAAP accounting policies centralized. When the SEC, FASB, the American Institute of Certified Public Accountants, the Emerging Issues Task Force, Public Company Accounting Oversight Board and others all have their fingers on accounting policies, only a small group can confidently claim to know what GAAP is and where to find it. Once the principles that constitute GAAP can be easily found and studied, the pool of clear thinkers and writers available to write financial statement disclosures in plain English will be dramatically increased.

The SEC introduced plain-English disclosure to registration statements in January 1998. The initial reaction of many securities lawyers was total outrage. How could you possibly explain complex ideas in simple English? The true difficulty in the plain-English rules became clear in subsequent drafting sessions. Not all authors of disclosure documents could write. Not all of them understood what they were writing about. Hiding behind incomprehensible jargon gave the appearance of understanding. The SEC's comment letters with 300 comments related to plain-English disclosure finally caused all of us to think more about what we were trying to say and to say it clearly.

When drafting financial statements, too little attention is sometimes paid to explaining in concise English exactly what is being reported, and too little success is achieved even when attention is paid. Even the first recommendation of the advisory committee to the SEC reads: "Avoidable complexity caused by the mixed attribute method should be reduced in the following respects: ... "

Trust me, the two bullet points I omitted do not help. They urge that FASB not expand fair-value accounting until "FASB completes a measurement framework to systematically assign measurement attributes to different types of business activities." Wouldn't we be better off if we told investors what framework we used and why, disclosed the results of that measurement and let analysts and investors decide whether our approach was reasonable?

No doubt such recommendations can be helpful. Yet before that, we can fix the problem with disclosure. If you explain why you are doing what you are doing and if similarly engaged businesses are accounting for transactions in a different way, say that and disclose why you chose your method and the effects of using the other method.

It requires more thought and more analysis, but is not that what we are supposed to do?

It would be nice if everyone in the world used the same accounting principles, and the SEC's movement to U.S. issuers' use of IFRS, if combined with retention of specific guidance, may be very helpful. I happen to be a big fan of statements of broad policy followed by bright-line tests and specific rules. While complying with the rules, we could also make sure the policies were being met and what additional disclosure might be necessary. Concerned about whether a financial instrument is debt or equity? Disclose its terms. Disclose why you decided to call it debt or equity. If someone disagrees, they can make adjustments.

Lawyers, accountants and business majors can be taught to write clearly. If Steven Hawking could write the history of the universe in plain English, or sort of, we can figure out how to write accounting disclosures that people can understand -- even M&A lawyers.

Vince Pisano is a partner in the securities and capital markets practice at Paul, Hastings, Janofsky & Walker LLP.