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AAA asks: what do users require of financial reporting?

Author: ICAEW Insights

Published: 24 Aug 2021

As part of the annual meeting of the American Accounting Association (AAA) held in August 2021, an esteemed panel of commentators asked what users really require of financial reporting.

“The genesis of this panel is the Information for better markets conference last December, which arose partly in response to issues that arose in the UK about recent corporate collapses,” said panel moderator Robert Hodgkinson, Senior Strategic Adviser at ICAEW. “We challenged ourselves to look at the situation as a system as a whole, including preparers, users and regulators, as well as auditors.”

For that event, ICAEW commissioned four papers that interrogated different elements of the financial reporting system, one of which was put together by Beatriz Garcia Osma, Professor of Accounting at University Carlos III de Madrid. This was discussed by the panel at the AAA annual meeting.

Along with Garcia Osma, the prestigious AAA panel included: Jeff Mahoney, General Counsel at the Council of Institutional Investors; Brandon Rees, Deputy Director of Corporations and Capital Markets for the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); and Mary Barth, Professor of Accounting, Emerita, at the Stanford University Graduate School of Business.

Garcia Osma, referring to the paper she prepared on user engagement, said: “Engagement in the paper was defined as direct actions that try to target the company, the managers, the directors to change corporate financial reporting. She said there is very little engagement by accountants in this matter, and it could be argued that this is because the capital markets have already shaped financial reporting in a way that is probably more efficient than user engagement can achieve.”

Asking the question

She questioned whether we need to re-think who the users of financial reports are, and what company information is for. “The other topic that could be of interest is new ways to use information – that is information used by perhaps different users in different ways,” she said, adding that reading financial statements on mobile phones is a case in point. “How does that delivery channel impact on decision-making?” she asked. “We have evidence that the annual report has grown five or six times in the last 20 years, yet there is evidence that suggests that the number of downloads of annual reports is low compared with what we would expect. To what extent is information that is being produced overly complex, and not necessarily addressing the information needs of users?”

Shaping financial reporting

Mahoney at the Council of Institutional Investors commented that users’ involvement in shaping financial reporting was a topic he had considered frequently during his 13 years at the Financial Accounting Standards Board.

He said that, in the near term, we will see greater user engagement shaping financial reporting for two reasons. The first is the new Chairman – Gensler – of the US Securities and Exchange Commission’s (SEC’s) focus on being responsive to investor needs. The second is that US investors are energised by Environmental Social and Governance (ESG) disclosures. “I believe that energy around ESG reporting by investors will likely continue and have spill-over effects with respect to greater engagement by investors on accounting related issues, particularly with respect to accounting standards that overlap with things like climate risk and human capital,” said Mahoney.

This topic matters to all users

Rees of the AFL-CIO reminded us that working people are all financial statement users and this topic matters to them all. “First, of course, there are financially sophisticated workers who evaluate the financial statements of their employers when deciding whether to accept a job offer, or whether to sell their equity compensation,” he said. “Secondly, working people in unions are also users of their employers’ financial statements when negotiating. This can include negotiations over broad-based equity compensation or profit-sharing plans, or even private companies where financial statements are not necessarily publicly disclosed. The third, and most important way that working people are users of financial statements, is as investors through their retirement savings.”

He reminded us that there is over $20tn in total US retirement plan assets, that's an amount roughly equal to the size of the US economy as measured by GDP. “These assets are the deferred wages of working people. Their retirement security depends in large part on there being high quality audits of the companies that they're invested in,” said Rees.

“We see financial reporting as a retirement security issue, as well as being important for overall economic growth and economic stability. However, in my experience, there has been relatively little investor engagement with companies, or with standard-setters, on financial reporting,” Rees added.

Who are the users?

Barth from Stanford University said that we need to be clear who we are including as users. “My sense is that this term is used more narrowly inside the system than some think it is, or wish it were,” she said. “Financial Accounting Standards Board’s (FASB’s) conceptual framework makes it clear that, although information in financial statements might be useful to many, outside providers of financial capital – investors, lenders and other creditors – are the primary users to whom financial reporting is directed.” She added that this focus is not an accident: the authority behind the FASB standard is derived from the Securities Acts and is delegated to the FASB by the SEC.

Nevertheless, as the framework explains, she said, there are many stakeholders with many information needs, and a single set of general-purpose financial reports cannot meet them all. She conceded that sometimes these needs are in conflict so, to make progress, standard-setters need to follow a clear objective. However, she said that the belief persists that focusing on information that meets the needs of equity and debt investors should serve many of the needs of other users, but clearly, not all of them.

The second point Barth raised is that standard-setters are keen for input from users. “Standard-setters talk about users’ needs because financial reporting is a public good that is overseen by regulators and enforced through auditing and law,” she said.

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Does more auditor reporting mean better reporting

One standard will not solve the climate crisis 

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