LOGIN
MAIL
SEARCH
EBR: The new face of financial reporting
By Bill Sheridan
Statement Editor
Imagine a financial reporting model that's so transparent, it includes the very information a company's managers use to make their decisions. A model so clear that even individual investors understand and make better use of a company's financials. A model so flexible that it benefits everyone who uses financial reports — regulators, directors, managers, investors, analysts and CPAs alike.
Now stop imagining. The model is real, and it's coming soon to a business near you.
It's called Enhanced Business Reporting, or EBR. More than a decade in the making, EBR is being designed as a way in which businesses will build upon the current reporting model to give investors, creditors and managers better information that will help them make more informed decisions.
"Business executives use key performance indicators (KPIs) — retail sales per square foot, for instance, or whatever the appropriate measure might be — to make day-to-day business decisions," said Michael P. Krzus (pronounced "Cruise"), a director in the National Professional Standards Group at Grant Thornton in Chicago, and executive director of the AICPA's Special Committee on Enhanced Business Reporting. "If the investment community had access to industry-specific KPIs that were prepared using common definitions and guidelines, the decision-making capabilities of the investment community would be significantly enhanced."
What is EBR?
Simply put, Enhanced Business Reporting consists of two parts — enhancement and simplification, producing what Krzus calls "the right mix" of additions and subtractions.
"When I say 'the right mix,' I'm really getting at two different things," he said. "First, enhancement means adding critical information that's not currently disclosed — things like value drivers, key performance indicators and non-financial information about opportunities, risks, and management's strategies and plans.
"The second piece is simplification. It's a very open-minded and objective eye that looks at the current disclosure regime and asks, 'Are there redundancies that could be scaled back, or have any disclosure requirements become less useful or relevant to investors and creditors?'"
The roots of EBR took hold in the early 1990s, when concerns about the relevance and usefulness of financial reports began to surface. Worries were voiced that reporting models based on generally accepted accounting principles (GAAP) were not transparent enough.
In response, the American Institute of CPAs formed the Special Committee on Financial Reporting in 1991 to study the reporting process and recommend possible changes.
Three years later, the committee released Improving Business Reporting — A Customer Focus, better known as the Jenkins Report (named for the committee's chair, Edmund L. Jenkins, then a partner at Arthur Andersen and later the chair of the Financial Accounting Standards Board). The report's recommendations were met with resistance from business groups and others and, as a result, were never implemented. Time passed.
Ahead of its time
Then in 2002, with corporate scandals and restatements dominating the headlines, the AICPA formed the Special Committee on Enhanced Business Reporting. The AICPA charged that committee with developing a strategy to build on and improve the current reporting model to meet the information needs of investors and creditors.
With that objective in mind, the Special Committee adopted its mission statement — "to establish a consortium of investors, creditors, regulators, management and other key stakeholders to improve the quality and transparency of information used for decision-making."
Achieving that mission would require developing illustrations of EBR concepts. "We researched best practices," said J. Thomas Hood III, president and CEO of the Maryland Association of CPAs and a member of the Special Committee, "and we came up with examples of what EBR might look like."
Members of the Special Committee's Public Company Task Force developed illustrative, sample enhanced business reports that included a wide-ranging narrative about four components — the market, strategy, performance, and a financial component that addresses financial statements and segment analysis.
The sample reports can be viewed at www.ebr360.org/ContentPage.aspx?ContentPageId=8.
On a parallel track, the Private Company Enhanced Business Reporting Task Force (chaired by Harold Monk, managing partner of Davis Monk and Company in Gainesville, Fla.) is working on an effort similar to that of the Public Companies Task Force, but with a view to ensure that the requirements of EBR are scaleable for privately held companies. The Private Company Task Force will be the subject of a future article.
What's in it for us?
All members of the investment community undoubtedly want to know how they will benefit from such a reporting model, but Krzus says there's something in it for everyone.
"If management has better information, they can make faster, better decisions about allocating human and capital resources," he said. "For boards of directors, better information means that directors are able to provide a level of oversight that shareholders demand in today's environment. The better information investors have, the more efficiently and effectively they can allocate capital. And regulators can look at the capital markets and know they are functioning as efficiently and effectively as possible."
And CPAs? What's it in for them?
"I personally believe it's going to contribute to the value we provide and our relevance as a profession," Krzus said. "Perhaps it's new forms of assurance, or new subject matter on which to provide assurance. Understanding a business at the level of detail envisioned by EBR contributes to our ability to recruit the best and brightest to the profession. I think there are a number of areas in which it will be good for the profession."
Members of the committee aren't the only ones singing EBR's praises. In a speech delivered in December at the AICPA's National Conference on Current SEC and PCAOB Developments, SEC Chief Accountant Donald T. Nicolaisen offered his support to the concept as well.
"This effort represents the type of discussion and action that should be occurring in the marketplace as we all seek to continually improve the value of information for the sake of investors," Nicolaisen said.
Hard work ahead
Still, much of the work in developing EBR lies ahead. With its best practices identified, the Special Committee on Enhanced Business Reporting has turned its work over to the Enhanced Business Reporting Consortium (www.ebr360.org), an independent, international group that will include investors, creditors, analysts, management, directors, regulators and other stakeholders. The consortium's job will be to identify value drivers and performance indicators that can be used to develop EBR frameworks for various industries.
"Greater transparency in business reporting is needed to help strengthen our economy and protect investors," U.S. Comptroller General David Walker has said. "The Enhanced Business Reporting Consortium is working to develop the tools that companies can use to communicate the information that is most important to their stakeholders."
It will take time. Krzus estimates it will be at least two years before the product of the initial EBR working groups is put to practical use.
But the consortium has a high-powered list of partners who are committed to seeing that happen. Among them are the AICPA, the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the International Chamber of Commerce, NASDAQ, the Confederation of British Industry, the Open Compliance and Ethics Group and XBRL International.
The lineup serves as evidence of U.S. and international commitment to the project.
"What Enhanced Business Reporting tries to do is bring the state of the art to good, transparent business reporting -- built on a solid foundation of GAAP — to help investors and creditors make decisions," said Hood.
"Overall," Krzus added, "it's good for society."
This content has not yet been Rated.
To Rate content, please Login.