"What's that, again?"

Dec. 21, 2004

Financial disclosure urgently needs another look.

Tension between regulators and the regulated in the U.S. is about as inevitable as taxes and death. Think about your--or your company's--attitude toward OSHA. Or the Environmental Protection Agency. Or the Commerce Dept. folks who handle export licensing. Or the IRS. Or the FASB. The FASB, you ask? What's a FASB. Well, the private-sector, Norwalk, Conn.-based, seven-member Financial Accounting Standards Board (FASB) writes corporate accounting rules in the U.S. For months now manufacturers, other non-financial corporations, and banks have differed rather dramatically with the FASB over whether earnings statements should reflect the fair market value of financial contracts known as derivatives. (The value of a derivative security is tied to some other kind of asset--such as a stock or a bond--and hence the name.) Significantly, whether derivatives should be accounted for in the ways the FASB is proposing and whether the data will result in investors being better informed are only two of the issues in the current debate between the regulator--the FASB--and the regulated--businesses. There is an underlying issue that goes beyond derivatives--and it has been a point of contention between the FASB and corporations for many years. The issue is disclosure. Companies that produce goods and services in a highly competitive world understandably want to limit the amount and content of information that goes beyond their office and factory walls. But, at the same time, people and institutions--including a whole lot of corporate pension plans--that are being asked to invest in a company, or retain their investments in a company, deserve an accurate profile of that company. Talking to writers, users, and outside observers of U.S. corporate accounting rules does not suggest there's much of a basis for reconciling the quite different perspectives of the regulators and the regulated. For example, what exactly constitutes "adequate" information? Chances are that what's adequate to the regulator is way too much for one of the regulated. Similarly, what's adequate to one of the regulated is likely to be woefully inadequate in the eyes of a regulator. Why do CFOs and regulators like the FASB need to take a new look at disclosure? Why do both need to broaden their perspectives and re-examine some of their traditional arguments? Because when it comes to investing corporations, tradition is about to be shaken in ways it has not been before. The issue of the adequacy--or inadequacy--of financial disclosure is going global. In a world where capitalism in one form or another is commonplace, can--or should--companies headquartered in countries outside the U.S., be allowed to trade their stocks in the U.S. while retaining their home-country--and allegedly inadequate--accounting standards? It's not an academic question. And the answer will help define the international accounting standards that surely are to be proposed. And what about the standards? Should it be assumed that U.S. standards will be--or should be--the benchmark for writing new rules? Should there be a set of interim accounting rules for countries and companies new to capitalism and for which sophisticated data- management systems are a someday prospect rather than today's reality? Is there something businesses could contribute to answering such questions out of their own international financial information management experiences. What kinds of data, for example, do they use in taking the measure of foreign competitors or potential merger partners? Derivatives may seem to be of concern only to those who deal in the arcane world of corporate finance. But with the estimate of the value of derivatives in use at least in the high hundreds of billions of U.S. dollars, it's tough to argue that they don't need to be accounted for if their volatility can significantly affect a company's performance. International financial accounting rules promise to be an even more complex issue. But in their own interest and the interest of their present and future shareholders, companies need now to be asking themselves the new hard questions of disclosure--disclosure in the context of competitive world where competition will become even more intense.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.