Accounting Standard Setting: Need to Value Views of Investors and Investor Organizations
A recent podcast series by the Financial Accounting Standards Board (FASB), The Investor Perspective, examines the objective of financial reporting — providing information useful to investors in their capital-allocation process — and the consequent importance of investor perspectives in the standard-setting process.
To encourage investor involvement in the process, the FASB has included investors on its advisory committees, appointed FASB board members with investment experience, and retained investor liaisons as members of its staff.
Diversity of Investor Community Presents Challenges
The podcast discusses the challenges of gaining investor perspectives on financial reporting issues. That’s because the investor community is diverse and fragmented — made up of accounting analysts, equity analysts, lenders, amongst others — and there is no “typical” investor. Hence, investor views are not homogenous.
CFA Institute has long recognized that it is easier for standard setters to gain input from preparers of financial statements (i.e., corporate managers). The preparer community is more cohesive and therefore has organized itself to respond to standard setters’ calls for comments on proposals, generally presenting aligned views. The preparer community acts in unison, actively pushing its agenda. As a result, the standard-setting process appears heavily (or overly) influenced by this community.
Because of this influence, it has been our experience that the views of corporate managers often have trumped those of investors. CFA Institute has on numerous occasions expressed its concerns over this on issues such as the disclosure framework and private company standards.
Importance of Listening to Investors
Cultivating feedback from the global investment community is difficult. But when standard setters do receive investor feedback, it is essential that they act on it, or risk diminishing the desire of investors to engage or participate in the standard-setting outreach process. We articulated this point in our comments to the FASB on the classification and measurement of financial instruments, which highlighted that a majority of CFA Institute members who responded to our survey supported the use of fair value as the measurement basis for financial instruments. Meanwhile, the approximately 150 investors/financial statement users the FASB spoke to during its outreach on the issue preferred a mixed measurement model, along with disclosure of the cash flow characteristics of financial instruments.
Our concern is that the resulting FASB proposals, while using a mixed-measurement model, failed to provide investors with the second — and possibly most essential — element of their request. Investors we spoke to who preferred a mixed-measurement model indicated that they wanted the disclosure in order to perform their own valuations and sensitivity analyses of such financial instruments.
Importance of Extending Outreach to Investor Organizations
We suggest standard setters continue to build relationships with different types of investors. But it is necessary to recognize that investor organizations, such as CFA Institute, can greatly help standard setters to overcome their primary challenge of gaining investor insights. Such investor organizations have a broad investor base and understand investor perspectives and their approaches to financial analyses. Furthermore, investor organizations have the capacity to monitor detailed standard-setting and technical-accounting developments and translate accounting standards into investor language.
We urge the FASB to heed the views provided by a broad spectrum of information intermediaries, including investor organizations and investment decision makers. Moreover, it is important for standard setters to demonstrate that they are fulfilling their mission of providing investors with information useful to investment decision making. One of the best ways to achieve this is to listen to and act upon the requests of investors.
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