We think it’s time to confront and fix the lack of timeliness in financial reporting. This black mark has existed for ages, but no one dared to do anything about it as long as statement preparers and auditors dominated standard-setting.
WHAT IS TIMELINESS?
Consider these definitions:
- Timeliness (noun) — the quality or state of occurring or being done at a favorable, opportune, or appropriate and relevant time (Oxford English Dictionary).
- Timeliness (qualitative characteristic) — having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it is (Statement of Financial Accounting Concepts 8, par. QC29).
Although the Financial Accounting Standards Board’s definition reflects the OED concept by focusing on getting reports into users’ hands before they make decisions, it goes beyond by acknowledging that information has a “shelf life” because its usefulness declines as time passes.
We suggest that this shelf life is shaped by users’ demands for fresh data, which is driven in turn by how frequently they make decisions. If we’re right, financial reports have an incredibly short shelf life because their users make decisions in the context of capital markets that rapidly respond to information from many diverse sources.
Since market participants collectively make literally millions of decisions every day, they have a huge demand for information about today and a rapidly declining demand for information about yesterday, last week, or last month, and certainly no demand for years-old facts. They need to know what’s true now, not what used to be true (or maybe never was true). We’re sure the obsession with analysts’ forecasts of the next period’s earnings proves that investors demand the most recent intelligence.
This growing demand for timeliness means that everyone should stop and assess the current situation in financial reporting. We suggest they consider the following four points.
UNTIMELY REPORTING FREQUENCY
After the 1929 crash, the New York Stock Exchange required its listed companies to start providing unaudited quarterly reports. We note that the grossly primitive information technology of 85 years ago was able to support this frequency.
Three decades later, the Securities and Exchange Commission required public companies to file quarterly unaudited reports. Even though computers were growing more powerful and prevalent, the commission didn’t shorten the existing reporting interval by even one day.
Jumping from then to today, we wonder whether we’re the only people who see a gaping gulf between the reporting frequency supplied by the accounting and management professions and what the markets demand. After all, information processing and distribution technologies have improved literally a million-fold over the last 50 years!
What’s going through everyone else’s minds about timeliness? Apparently not much. Instead, we believe that regulators, auditors and managers are profoundly oblivious to the markets’ exploding demand for more timely information.
As we see it, the reporting interval desperately needs to be shortened and we have no patience with anyone who says once a quarter is still good enough. They just don’t comprehend the consequences of their indifference.
Many will thoughtlessly assert that greater frequency would lead to more volatile stock prices, which is poppycock because volatility is the result of the markets’ uncertainty. Instead, more frequent reporting of useful information will reduce volatility, not increase it.
We also give no credence to complaints about preparation costs. As we explain momentarily, the complainers have not fully assessed the status quo’s detrimental effects on users’ costs and the cost of capital for reporting companies.
Bottom line, there is no valid argument for retaining quarterly reporting. Because that frequency doesn’t deliver timely information, it must be greatly increased. Now.
UNTIMELY REPORT CONTENTS
If you’re an early riser, you’d consider your newspaper’s arrival at 5 a.m. to be timely.
But if it reported 10-day-old news, you’d find its contents to be completely untimely and useless.
Or what if a news channel reported an aggregation of outdated and new facts intermingled with made-up stories and biased predictions? Surely it would fail to build an audience because everyone would find this hodge-podge to be out of touch with reality.
Now, keep these examples in mind as you contemplate the contents of GAAP financial statements. An honest appraisal shows they report this mélange of outdated and other dubious items posing as if it’s information:
- Historical costs are mixed with book values based on unverifiable allocations.
- Amounts reported for receivables and payables are present values found by applying original discount rates to past predictions of future cash flows.
- Bizarrely, assets must be written down when their current market values are less than their cost-based book values, but are never written up.
In fact, most everything in today’s financial reports consists of untimely and otherwise useless information. Just whose demands are served by reporting this ghastly GAAP gobbledygook?
Now consider this point: If we accountants receive higher than average compensation delivering this mess to the markets, how much more could we earn by actually meeting their demand for timely and useful information?
Surely it’s time to report observed market values and abandon measures based on past events, assumptions, allocations and predictions. Doing so will increase timeliness and enhance usefulness.
Again, there’s no legitimate controversy here. Everyone should embrace these truths and run, not walk, to be among the first to report genuinely timely information.
UNTIMELY STANDARD-SETTING
Undergirding our thoughts is the incontrovertible fact that the demand for more timely financial information is both huge and unserved by GAAP. Ironically, though, the standard-setting process isn’t creating timely changes in practice.
Why do FASB, the International Accounting Standards Board, and the SEC act as if they don’t realize their purpose is to help accountants and managers supply more useful reports? To get to the point, why do they take forever to do what needs doing right away?
Here’s an easy example: As soon as SFAS 13 on lease accounting was issued in 1976 to fix flaws in the APB’s opinions, everybody knew it was deficient because its loopholes allowed devious managers, accountants and auditors to create off-balance-sheet financing. Over several decades, FASB fruitlessly issued a plethora of standards patching those holes. When Enron collapsed in 2001, Congress grilled accountants about OBSF and instructed the SEC in Sarbanes-Oxley to prepare a report on that topic. When it was delivered in 2003, it estimated a stunning $1.25 trillion of unreported lease debt.
Alas, instead of acting promptly, FASB waited two years to start and then joined itself at the hip with the IASB to develop a joint standard. After 10 more years and two exposure drafts (with the second one now over two years old), it finally seems possible that 2015 will see a new standard that addresses (but doesn’t eliminate) the scourge that’s diminished GAAP-based statements’ credibility since the middle of the 20th century. It’s not just leases, either. Reform is also needed for cash flows, pensions, depreciation, inventory, income taxes, etc., ad infinitum.
Why has FASB been so slow? Before Sarbanes-Oxley, it couldn’t rock the political boat because it depended on managers for funding. Even though that law empowers the board to be financially independent through an accounting support fee, FASB waited only 50 days after its enactment to sign the Norwalk Agreement and committed to reaching consensus with the IASB, which is still funded through corporate “donations.”
In summary, the obviously pressing need for timely reforms means that FASB’s old prolonged process is not necessary, acceptable or defensible.
Here’s a simple recommendation: As an institution, the board must realize its fiscal chains are off and get busy creating a great many improvements.
TIMELY RESTATEMENTS
Our fourth point asserts that all new standards must be applied retroactively when companies report comparative prior-years’ results originally prepared under old standards. Doing so is essential for providing users with timely data points for revising their trend lines. It would also end the sticky ethics dilemma created by forcing companies to re-report information that is now officially sub-standard.
For example, SFAS 141 was good because it eliminated pooling of interest accounting, but it was bad because it applied only to new combinations that occurred after June 30, 2001. As a result, the decayed remains of old poolings were left on many companies’ statements, and many are surely still there to this day.
Of course, it would be disastrous if the new leasing standard failed to require lessees to recognize all pre-existing off-balance-sheet liabilities.
It’s also obvious that retroactive restatements create preparation costs. However, not incurring them (one time) imposes vastly greater costs on multitudes of users for years and years as each of them must try to discern useful facts. Of course, their efforts and uncertainty create demand for higher returns to cover their costs and remaining risk. Because the reporting companies incur higher capital costs, retroactively restating is actually the much less expensive option.
As we see it, no one should trust any cost-benefit analysis of compliance costs that fails to consider users’ costs and preparers’ benefits.
IT’S PAST TIME
Our analysis shows that financial reports don’t arrive often enough; their contents are out of date when they arrive; the process for fixing those problems takes forever; and new standards don’t fix past financial statements when they’re re-published in comparative presentations.
It’s as if everybody involved from the accounting side thinks the markets have all the time in the world and don’t mind waiting for new information. Of course, they’re worse than totally wrong.
It’s obviously way past time to make timeliness the hallmark of the financial reporting system, instead of an enormous black mark.
Paul B. W. Miller is a emeritus professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors’ views are not necessarily those of their institutions. Reach them at
