Complexity in Our Financial Reporting System Bob Herz The views expressed in this presentation are my own and do not necessarily represent official positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations. 5-3-07 Baruch Financial Reporting Conference-(2) 1

5-3-07 Baruch Financial Reporting Conference-(2) What is Complexity Depends on one’s perspective (What makes your work more complex) Preparers and auditors What to do How to do it Costs and effort to do it Is it right (will it be second guessed) Users What was done Does it reflect the underlying economics Making comparisons between companies and over time 5-3-07 Baruch Financial Reporting Conference-(2) 2

5-3-07 Baruch Financial Reporting Conference-(2) Sources of Complexity Complex transactions and business arrangements Volume and detail of GAAP, GAAS, SEC rules and regulations Scope (including exceptions) Different measurement attributes Treatment alternatives and transition alternatives Rules and “bright lines” vs. principles Disclosure vs. recognition 5-3-07 Baruch Financial Reporting Conference-(2) 3

Why Complexity is Created Conflicting perspectives of different constituents Desire to reduce earnings volatility Desire for exceptions and special treatments to suit business objectives/structure transactions Desire for flexibility/options Desire for certainty in application Fear of second guessing by auditors/regulators/trial bar Evolutionary approach to standard setting Accounting vs. economics and finance Gaps in education and teaching of accountants Inability to handle a more principles-based system 5-3-07 Baruch Financial Reporting Conference-(2) 4

Consequences of Complexity Complexity in application for preparers and auditors Lack of transparency for investors/analytical/complexity Structuring opportunities which allow reported results to not reflect actual economics Rule-based and compliance-based mentality by auditors, preparers and regulators Increase in restatements The complexity and lack of transparency diminish public confidence in the financial reporting system, which could lead to market disruption. 5-3-07 Baruch Financial Reporting Conference-(2) 5

Measures Taken by FASB to Address Complexity FASB has been readdressing specific accounting standards that do not provide relevant and comparable financial information, e.g. Business combinations Share-based payments Pensions and OPEBs Lease accounting Revenue Recognition An improved conceptual framework would provide a more solid foundation to develop principles-based standards Many of the projects are or will be joint projects with the IASB 5-3-07 Baruch Financial Reporting Conference-(2) 6

Measures Taken by FASB to Address Complexity FASB has taken steps to stem the proliferation of new pronouncements from other standard setters, including the AICPA and the SEC staff FASB has undertaken a massive project to codify all existing accounting literature organized by subject matter Develop future standards in a more understandable, principles-based manner 5-3-07 Baruch Financial Reporting Conference-(2) 7

Will these FASB Actions Turn the Tide? Not on their own — accounting standards setting is only part of the issue Requires actions and changes by others Many “solutions” have been proposed including: Fair value accounting Return to transactions – based historic cost accounting Further use of technology Batch effective dates of changes in standards Revamp the reporting model Changes in SEC and PCAOB review and enforcement Litigation reform 5-3-07 Baruch Financial Reporting Conference-(2) 8

5-3-07 Baruch Financial Reporting Conference-(2) A Way Forward Establishment of a high-level committee or commission made up of representatives from all key constituent groups Needs broad support Commitment by SEC, FASB, PCAOB, as well as other governmental agencies and key policy makers. 5-3-07 Baruch Financial Reporting Conference-(2) 9

5-3-07 Baruch Financial Reporting Conference-(2) The Way Forward The committee would be chaired or co-chaired by an independent person or persons recognized for their experience, objectivity, and commitment to improving the reporting system. Committee members would need to check special interest agendas at the door. The committee would study the sources of complexity and the impact complexity has on transparency and quality of financial reporting. 5-3-07 Baruch Financial Reporting Conference-(2) 10

5-3-07 Baruch Financial Reporting Conference-(2) The Way Forward The committee would provide specific recommendations to the SEC, FASB, PCAOB and others. In developing these recommendations the committee should keep in mind the interrelated components of our financial reporting system and what a desirable future system might look like. Committee might continue on to monitor implementation of recommendations. 5-3-07 Baruch Financial Reporting Conference-(2) 11