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FROM: SEP-OCT 2007 ISSUE | BY GUNDI JEFFREY
While accounting bodies throughout the world argue over principles-based accounting versus rules-based accounting, and if and when to adopt international financial reporting standards, Professor Miklos A. Vasarhelyi says forget about all that. GAAP in any guise has had its day and we really need something substantially different, something in tune with today’s business environment and today’s technology.
“If the financial reporting system was being built from scratch today, it would look very different, given the fundamental changes in the drivers of financial reporting.”
Dr. Vasarhelyi, a KPMG professor of accounting information systems at Rutgers Business School in New York, recently aired his views at a seminar in Beijing co-sponsored by CGA-Canada and the Rutgers Executive MBA Beijing Program, and in a brief interview with CGA Magazine.
“GAAP is obsolete and anachronistic,” he says, explaining “it was developed to measure a physical asset-based company at a time when technology consisted of pen and paper. Now, companies use computers and databases to run their businesses, there is much more information available, and the incremental cost of providing it is close to zero due to the great strides in technology.”
Also, users of financial reports today are not unsophisticated and can easily process complex financial information, Vasarhelyi adds. “Users are financial intermediaries, such as analysts, fund managers, and institutional investors whose main problem is a lack of information, not information overload.” These users “should have the opportunity to process data as they see fit, rather than having to accept a one-size-fits-all method chosen by a company or by accounting standards.”
Vasarhelyi was the only academic on the Special Committee for the Enhanced Business Reporting Model (EBRM) established by the American Institute of Certified Public Accountants to rethink financial reporting after the collapse of Enron and Arthur Andersen in 2000. That committee eventually morphed in 2004 into the Enhanced Business Reporting (EBR) Consortium, which describes itself as “a consortium of stakeholders collaborating to improve the quality, integrity, and transparency of information used for decision making in a cost-effective, time-efficient manner.”
In 2005, the EBR released for public comment a comprehensive information framework to help companies better communicate with their investors and other key audiences about business strategy and current and expected performance. That effort calls on companies to disclose extensive information about the sources of their values: their business environment, strategic planning, resources, and processes. These, in turn, can be measured numerically through various financial and non-financial performance measures, permitting assessment of the quality, sustainability, and viability of a company’s cash flows and earnings.
Vasarhelyi and Michael G. Alles, an associate professor also at Rutgers, are hoping to complement this and other initiatives on reforming financial reporting by drawing on the capabilities of new and different technologies to transform the reporting process with new ways of measuring company performance that can subsequently be incorporated into a comprehensive new model of business reporting.
Vasarhelyi explains that, while businesses have always had to measure and monitor their activities, paper-based information technology – in the form of accounting journals and ledgers – has had to rely on pre-filtered and aggregated measures, which were typically recorded after a significant time lag. “Modern information technology uses converging computer and networking tools to capture business process information at its source and in the unfiltered and disaggregated form, which makes it possible to measure and monitor business processes at an unprecedented level of detail on a real-time basis.”
Not to say that, under the new way of reporting, companies would no longer prepare income statements and balance sheets, or that they would not retain their centrality in reporting. “But the question is whether users should be restricted to one perhaps self-serving method of aggregation and condensation, or whether they should be allowed to better see how reports were created in the first place, thus allowing them to make informed judgments as to whether the statements can be accepted at face value, or whether it is more appropriate to use the data underlying the reports as inputs into their own models of firm performance.”
If firms are forced to link data from their operations to their financial results, and users are allowed access to a substantive amount of the information available, Vasarhelyi concludes, “aberrations like Enron simply cannot occur.”
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