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Bringing Financial Statements Into Focus

As Chairman of the Financial Accounting Standards Board (FASB), I agree with the main thrust of "Fuzzy numbers" (Cover Story, Oct. 4) -- that further significant improvements are needed in corporate financial reporting and disclosure. As evidenced by our very full agenda at the FASB, this includes the accounting standards in a number of areas.

You correctly point out the importance and necessity of the use of judgment and estimates in accrual accounting and the challenges they pose for investors and others seeking to understand and use reported financial information. Existing accounting standards and Securities & Exchange Commission rules require extensive disclosures in many areas involving the use of estimates. Somewhat surprisingly, the article does not discuss the key role that the required Management's Discussion and Analysis is supposed to play in highlighting "critical accounting estimates."

Recent and proposed accounting standards directly address many of the issues cited, including accounting for restructuring costs, fair value measurements, and enhanced disclosures on pension costs and on the impact of mergers and acquisitions on reported results. Other suggestions you mention are being considered in our major project with international standard setters to revamp income and cash flow statements. With regard to the recommendation that FASB revise the periods presented in quarterly and year-to-date financial statements: SEC rules cover such requirements.

Robert H. Herz, Chairman

Financial Accounting Standards Board

Norwalk, Conn.

Spot-on with "Fuzzy numbers!" It is not your first story showing how erratic the annual and quarterly profit figures are. When will we learn that the more capital-intensive and the longer the time frame for investments, the fuzzier are the reported periodical earnings? Audited generally accepted accounting principles (GAAP) earnings have so little meaning left that, even without deliberate fraud, they remain misleading. Is there an alternative? Yes. Companies are already forecasting cash flows. Aren't these more relevant than current profit reports? Why not require companies to publish a range of discounted cash flow (DCF) values with a list of assumptions as well as the tools to vary the DCF value if the assumptions vary? Accounting standards can be achieved if auditors verify the validity of the forecast systems, check for biases -- intentional or not -- and show how the figures are quantified. It is still a forecast and nobody will be deceived into thinking it is absolutely accurate. A regular postmortem will allow investors to judge the managerial ability of the executive. Current financial statements don't do that.

Reported profits have been shown to be too arbitrary and too easily manipulated and certainly not directly relevant to investors. This defeats their purpose. It is about time our primary investment tool should be well-researched forecasts published by each company. Let us scrap these failed fuzzy profit reports.

Alfred Gans

Brisbane, Australia

As a preparer of financial statements for the past 16 years, I read "Fuzzy numbers" with great interest. Asking to simplify a cash-flow statement is somewhat analogous to asking a neurosurgeon to simplify brain surgery. Companies do transactions and issue financial instruments that didn't even exist 16 years ago, when the current format was introduced. They're also more global, introducing currency translation. Updated guidance on the treatment of these new instruments and a revisit of the definition of a cash equivalent may indeed be needed.

Every manufacturing company should be required to disclose operating earnings with better clarity and stricter guidance on what goes into operating earnings. The SEC should revisit the S-X rules related to the income statement and tighten up the rules on what should be disclosed and condensed.

I also agree with Robert Herz, who does not want to force more rules and regulations on the preparers due to all the new requirements from FASB, SEC, and Congress that we are currently trying to implement. Quite frankly, Sarbanes-Oxley has sucked all the oxygen out of the room in this regard. We are very tired.

Jim Guilfoyle, Director

Corporate Accounting, Consolidation,

and External Reporting

Cummins Inc.

Columbus, Ind.

There is a critical need to make sure corporate reporting is understandable and readily comparable within the same industries. Moreover, corporate reporting needs to be more relevant to investors and simplified to eliminate redundant and stale requirements. Enhanced Business Reporting is one of the answers to the problems raised in the article that does not require new laws or regulations.

Mike Starr

Grant Thornton LLP


Could David Henry not have found one company that adheres to best practices and successfully improved or maintained transparency in financial reporting? Among the members of Financial Executives International are chief financial officers who insist on unbiased, reliable, and verifiable representations of events that can be readily compared with other periods and other companies. They write in plain English, without jargon, and distill lengthy statements into clear, concise tables understandable at a glance.

Colleen Sayther Cunningham

President and CEO

Financial Executives International

Florham Park, N.J.

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