Improving Financial Reports

We noted at the outset that the accounting function in the final analysis is an arbiter of wealth and power-determining who gets rich or poor. This is true because the data contained in financial reports dictates the flow of capital toward efficient enterprises. While there is a constant effort to improve financial reports we stand on the threshold of major developments in this area. At one level the accountant's preoccupation with historical data is yielding to a concern for the future. This change in focus is seen most clearly in the growing resolve to include forecast data in financial reports. The United Kingdom has already taken this step. In the United States, the SEC announced on February 2, 1973 that it planned to relax its prohibition against earnings forecasts in published financial statements. In making the announcement the SEC noted that forecast data was being distributed on a selective basis and that publication would result in a more equitable distribution of this type of information. The announcement followed public hearings on the subject which were held between November 20 and December 12, 1972. Douglas Carmichael has surveyed attitudes on forecast information in financial statements and reports that while "little sentiment exists for requiring the publications of forecasts," there is support for a voluntary approach. In a talk before the New York State Bar Association, January 27, 1972, William J. Casey, as chairman of the SEC, noted that the "securities markets are essentially markets for discounted future incomes and that investors are future oriented." Obviously the forces of change are moving in favor of forecasts in financial reports.

Change beckons in other areas of financial reporting which have long eluded measurement. Current value reporting is one such area. Fifty years have slipped by since Henry W. Sweeney and later Joel Dean brought attention to the distortions which result from ignoring the impact of price-level changes (inflation and recession) on earnings and financial position. In 1969 the Accounting Principles Board issued its Statement No. 3 entitled Financial Statements Restated for General Price-Level Changes, which recommended that price-level statements be issued as supplements to the regular financial reports. But even the achievement of price-level adjustments is but a bus stop on the road to the more elusive objective of reporting financial affairs on the basis of current values. The distinction between the two is that the former excludes price appreciation and other factors which impact on values beyond changes in the general purchasing power.

For the first time in history, we have reached the point where a majority of the working population in the United States and other advanced countries is delivering services rather than producing goods, thereby creating an economic condition which has been characterized widely as the post-industrial society. With respect to the future development of this type of society, Toffler notes: "We can thus sketch the dim outlines of the super-industrial economy… Agriculture and the manufacture of goods will have become economic backwaters, employing fewer people... The service sector, as defined today, will be vastly enlarged, and once more the design of psychological rewards will occupy a growing percentage of corporate time, energy and money."



Human inventory is critical in service industries, and accountants have been foremost in attempts to measure and report on the effective utilization of persons within work organizations. From these efforts has emerged the specialty of human resources accounting.

Years may pass before human resources accounting is an integral part of financial statements. But many of the ingredients in financial reports which we now take for granted had such humble beginnings. A few firms appear willing to give more information than is required-to venture beyond the requirements of disclosure. As the utility of the new information is proven, more firms subscribe to the procedure. Ultimately the demand for such information is strong enough to prompt action by regulatory bodies.

At a more basic level, the objectives of financial reporting have been the subject of extensive deliberation by a select study group operating under the aegis of the AICPA. In fact, this study group was set in motion in March 1971 as a parallel effort to the "Wheat group" on establishing financial accounting standards. The study group on the objectives of financial statements under the chairmanship of Robert True-blood rendered its findings on October 1973. TheTrue-blood Report will not have the immediate impact of the Wheat Report but its effects will be felt over the long term.

The report recognizes that the basic objective of financial reporting is "to provide information useful for making economic decisions [and that it] applies within a broad economic environment." "An economy," the study notes, "is organized to strive for efficient allocation of resources. This allocation is affected by government action and by private actions in the marketplace, or some combination of the two. Both kinds of actions involve economic decisions and require financial information."

The supporting objectives of financial statements, according to the report, include the following:

1. To serve primarily those users who have limited authority, ability or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise's economic activities.
   
   
2. To provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows to them in terms of amount, timing, and related uncertainty.
   
   
3. To provide users with information for predicting, comparing, and evaluating enterprise earning power.
   
   
4. To supply information useful in judging management's ability to utilize enterprise resources effectively in achieving the primary enterprise goal (of increasing its monetary wealth over time to maximize the amount of cash flow to its owners).
   
   
5. To provide factual and interpretive information about transactions and other events which is useful for predicting, comparing, and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.
   
   
6. To provide information useful for the predictive process. Financial forecasts should be provided when they will enhance the reliability of users' predictions.
   
   
7. With respect to governmental and not-for-profit organizations-"to provide in-formation useful for evaluating the effectiveness of the management of resources in achieving the organization's goals. Performance measures should be quantified in terms of identified goals.
   
   
8. To report on those activities of the enterprise affecting society which can be determined and described or measured and which are important to the role of the enterprise in its social environment.

In reaching these objectives the report stated a strong preference for a professional as opposed to political process, i.e., continued active involvement by the private sector in establishing accounting policy. A number of the conclusions if not premises of the True-blood Report would have been heresy to many accountants a few years ago but they are now received with general acclamation. Yes, accountants are continuing to make progress in the never-ending process of improving the institutions of financial reporting.