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model in response to the information needs of users. After completing a three-year
study of the financial reporting system in the United States, in 1994 the AICPA
Special Committee on Financial Reporting issued its final comprehensive report
(202 pages) and summary report (20 pages), entitled Improving Business Report-
ing”A Customer Focus: Meeting the Information Needs of Investors and Credi-
tors. As part of the AICPA™s broad initiative to improve the value of business
information and the public™s confidence in the financial reporting process, the
study examined the relevance and usefulness of business reporting and the inde-
pendent auditors™ association with that type of reporting. The Committee set forth
these recommendations with respect to four broad categories:

1. Improving the Types of Information in Business Reporting
Recommendation 1: Standard setters should develop a comprehensive model of
business reporting indicating the types and timing of information that users need
to value and assess the risk of their investments.
Recommendation 2: Improve understanding of costs and benefits of business
reporting, recognizing that definitive quantification of costs and benefits is not
2. Financial Statements and Related Disclosures
Recommendation 1: Improve disclosure of business segment information.
Recommendation 2: Address the disclosures and accounting for innovative fi-
nancial instruments.

American Institute of Certified Public Accountants, Meeting the Financial Reporting Needs of the
Future: A Public Commitment from the Public Accounting Profession (New York: AICPA, 1993), pp.
3“4. Also see the AICPA Special Committee on Financial Reporting report, The Information Needs of
Investors and Creditors (New York: AICPA, 1993).
132 The External Users of Accounting Information

Recommendation 3: Improve disclosures about the identity, opportunities, and
risks of off-balance-sheet financing arrangements and reconsider the accounting
for those arrangements.
Recommendation 4: Report separately the effects of core and non-core activities
and events, and measure at fair value non-core assets and liabilities.
Recommendation 5: Improve disclosures about the uncertainty of measurements
of certain assets and liabilities.
Recommendation 6: Improve quarterly reporting by reporting on the fourth quar-
ter separately and including business segment data.
Recommendation 7: Standard setters should search for and eliminate less relevant
3. Auditor Association with Business Reporting
Recommendation 1: Allow for flexible auditor association with business report-
ing, whereby the elements of information on which auditors report and the level
of auditor involvement with those elements are decided by agreement between a
company and the users of its business reporting.
Recommendation 2: The auditing profession should prepare to be involved with
all the information in the comprehensive model, so companies and users can call
on it to provide assurance on any of the model™s elements.
Recommendation 3: The newly formed AICPA Special Committee on Assurance
Services should research and formulate conclusions on analytical commentary in
auditors™ reports within the context of the Committee™s model, focusing on users™
needs for information.
Recommendation 4: The profession should continue its projects on other matters
related to auditor association with business reporting.
4. Facilitating Change in Business Reporting
Recommendation 1: National and international standard setters and regulators
should increase their focus on the information needs of users, and users should be
encouraged to work with standard setters to increase the level of their involve-
ment in the standard-setting process.
Recommendation 2: U.S. standard setters and regulators should continue to work
with their non-U.S. counterparts and international standard setters to develop in-
ternational accounting standards, provided the resulting standards meet users™
needs for information.
Recommendation 3: Lawmakers, regulators, and standard setters should develop
more effective deterrents to unwarranted litigation that discourages companies
from disclosing forward-looking information.
Recommendation 4: Companies should be encouraged to experiment voluntarily
with ways to improve the usefulness of reporting consistent with the Committee™s
model. Standard setters and regulators should consider allowing companies that
experiment to substitute information specified by the model for information cur-
rently required.

American Institute of Certified Public Accountants, Improving Business Reporting”A Customer
Focus, Meeting the Information Needs of Investors and Creditors (New York: AICPA, 1994),
Developments in Business Reporting and Assurance Services 133

Recommendation 5: Standard setters should adopt a longer term focus by devel-
oping a vision of the future business environment and users™ needs for informa-
tion in that environment. Standards should be consistent directionally with that
long-term vision.
Recommendation 6: Regulators should consider whether there are any alterna-
tives to the current requirement that public companies make all disclosures pub-
licly available.
Recommendation 7: The AICPA should establish a Coordinating Committee
charged to ensure that the recommendations in this report are given adequate con-
sideration by those who can act on them.63

As a result of the Special Committee™s report, standard setters, regulators, pro-
fessional organizations, professional practitioners, and academicians need to focus
their attention on the points of view on the Committee™s recommendations. This
report has a wealth of information concerning the business reporting model and a
comprehensive illustration of the Committee™s recommendations. Audit commit-
tees should review these recommendations, with particular emphasis on the ele-
ments of the Committee™s model of business reporting relative to the current
model of financial reporting. Additionally, they should discuss the implications for
independent auditors.
Recognizing that audit committees have oversight responsibilities for the exter-
nal audit process, it is desirable to review the Special Committee™s form of report
that would be issued by the independent auditors. To improve the independent audi-
tors™ communications about their role and responsibility, the Committee attempted
to articulate an illustrative audit report. This type of report is shown in Exhibit 3.1.
The Committee™s proposed audit report is different in several ways from the
standard independent auditors™ report. First, the introductory paragraph mentions
“core earnings” and the audit of the five-year summary of business data and other
descriptions. Additionally, the auditors are expressing their opinion on these pre-
sentations as opposed to only financial statements. Second, the auditors would be
required to substitute the word presentation for financial statement in the scope
paragraph. Finally, the auditors would be required to express two opinions with re-
spect to both financial and nonfinancial data.
Notwithstanding the FASB™s current model of financial reporting, the Special
Committee has offered 20 recommendations and a comprehensive model of busi-
ness reporting. In fact, the Committee goes beyond the full disclosure principle
with a requirement for disclosure of nonfinancial data. Of course, the major ob-
jective is to minimize information overload within the cost-benefit constraint.
Moreover, the Committee has broadened the attest function with respect to seven
sections of the annual report, as noted in the proposed auditors™ report. Regarding
flexible auditors™ association with business reporting, the Special Committee rec-
ommends that the AICPA Special Committee on Assurance Services and the Au-
diting Standards Board pursue the subject of alternative levels of assurance within
the Committee™s reporting framework. In sum, the Committee™s report is a signif-
icant step in the continuous process of improving financial reporting; however,
many preparers of financial statements would argue that the cost of implementing
134 The External Users of Accounting Information

Exhibit 3.1 Report of Independent Accountants

This example illustrates the form of report that would be issued if the independent ac-
countant had been engaged to render an opinion on the entire FauxCom annual report, al-
though this may not always be the case.
We have audited the accompanying consolidated balance sheet of FauxCom, Inc. as of
December 31, 1993, and 1992, and the related consolidated statements of core earnings
and net income, cash flows, and stockholders™ equity for each of the two years in the pe-
riod ended December 31, 1993. We also audited the five-year summary of business data,
the description of information about management and shareholders, and the scope and de-
scription of the Company™s businesses accompanying the financial statements. These fi-
nancial statements, five-year summary and descriptions are the responsibility of the
Company™s management. Our responsibility is to express an opinion on these presentations
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the information presented is free of material misstatement. An audit in-
cludes examining, on a test basis, evidence supporting the amounts and disclosures pre-
sented. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of FauxCom, Inc. as of December 31, 1993, and 1992, and
the results of its operations and its cash flows for each of the two years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles. It is also
our opinion that the five-year summary and descriptions referred to above are fairly pre-
sented, in all material respects, in conformity with the applicable standards.
As part of the audit, we also performed such audit procedures as we considered neces-
sary to evaluate management™s assumptions and analyses and the preparation and presen-
tation of the information in the following sections of the annual report:
• Current year review
• Management™s analysis of financial and non-financial data
• Opportunities and risks, including those resulting from key trends
• Management™s plans, including critical success factors
• Comparison of actual business performance to previously disclosed forward-looking in-
• Broad objectives and strategies
• Impact of industry structure on the Company
In our opinion, the accompanying sections described above are presented in conformity
with the respective standards of presentation, and management has a reasonable basis for
the underlying assumptions and analyses reflected in the aforementioned sections.

February 15, 1994
Boston, Massachusetts

Source: American Institute of Certified Public Accountants, Comprehensive Report of the Special
Committee on Financial Reporting (New York: AICPA, 1994), p. 184.
Developments in Business Reporting and Assurance Services 135

the recommendations would be prohibitive. Moreover, it is reasonable to expect
that many nonpublic companies, particularly small companies, would have diffi-
culty with the Committee™s proposals.
In 1995, the AICPA established the Financial Reporting Coordinating Com-
mittee to coordinate actions taken on the recommendations made by the Jenkins
Committee. Although the Coordinating Committee held a symposium (fall 1996)
to continue the discussion of Jenkins Committee™s Comprehensive Model for
Business Reporting, the debate between the financial statement preparers and
users about the aforementioned recommendations continues. However, the Audit-
ing Standards Board has issued a Statement on Standards for Attestation Engage-
ments (SSAE) No. 8, Management™s Discussion and Analysis (March 1998), in
response to the Jenkins Committee™s recommendations. Therefore, financial state-
ment preparers and users can engage the accounting profession to provide assur-
ance on the elements of the Comprehensive Model for Business Reporting.64
In 1994, a Special Committee on Assurance Services (Elliott Committee) was
established by the AICPA to study and report on the current and future assurance
needs of all users of both financial statements and nonfinancial information for de-
cision making. After completing a three-year study of the attestation and assurance
processes in the United States, this Special Committee completed its work at the
end of December 1996. Similar to the previously mentioned Financial Reporting
Coordinating Committee, an Assurance Services Committee was formed by the
AICPA to follow up on the findings and conclusions made by the Elliott Commit-
tee and communicate new assurance opportunities for AICPA members. The con-
cept of assurance services includes all attestation services with a particular
emphasis on enhancing the quality of information through individualized services
for decision-making purposes.
As a basis for developing the new concept of assurance services, the Elliott
Committee studied such research areas as users™ needs for information, mega-
trends impacting such needs for information, information technology affecting
the use of information, and practitioner competencies needed to provide the nec-
essary assurance on the aforementioned information.
Based on the above research areas, the Elliott Committee developed business
plans for six initial assurance services, including:

• Risk Assessment. This service assures that an entity™s profile of business risks
is comprehensive and evaluates whether the entity has appropriate systems in
place to manage those risks effectively.
• Business Performance Measurement. This service evaluates whether an en-
tity™s performance measurement system contains relevant and reliable mea-
sures for assessing the degree to which the entity™s goals and objectives are
achieved or how its performance compares to its competitors.

For further discussion regarding an examination, review, or an agreed-on procedure engagement, see
SSAE No. 8. Also see James L. Craig, “The CPA Journal Symposium on Recommendations for Im-
proving Business Reporting,” CPA Journal 65, No. 1 (January 1995), pp. 18“27; Daniel J. Noll and
Jerry J. Weygandt, “Business Reporting: What Comes Next?” Journal of Accountancy 183, No. 2
(February 1997), p. 59.
136 The External Users of Accounting Information

• Information Systems Reliability. This service assesses whether an entity™s in-
ternal information systems (financial and nonfinancial) provide reliable infor-
mation for operating and financial decisions.
• Electronic Commerce. This service assesses whether systems and tools used in
electronic commerce provide appropriate data integrity, security, privacy, and
• Health Care Performance Measurement. This service provides assurance about
the effectiveness of health care services provided by health maintenance orga-
nizations (HMOs), hospitals, doctors, and other providers.
• Elder Care Plus. This service assesses whether specified goals regarding care
for the elderly are being met by various caregivers.65

Finally, audit committee members should be aware that, in September 1997,
the AICPA and the Canadian Institute of Chartered Accountants implemented an
electronic commerce service called the CPA Web Trust (a seal of assurance for on-
line customers that a business adheres to standards for disclosure, transaction in-
tegrity, and information protection). See the AICPA web site, www.aicpa.org, or
the Committee™s report, which is available on CD-ROM.66
Indeed, there is little doubt that the AICPA™s call for action will further impact
on the duties and responsibilities of audit committee members.
In October 2002, the General Accounting Office (GAO) issued a report entitled
Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses,
and Remaining Challenges. The GAO reported that a number of well-publicized
announcements about financial statements restatements by large, well-known pub-
lic companies have erased billions of dollars of previously reported earnings and
raised questions about the credibility of accounting practices and the quality of
corporate final disclosure and oversight in the United States.67
In sum, the GAO™s principal findings were:

• The number of restatements due to accounting irregularities grew signifi-
cantly”by 145 percent”from January 1997 through June 2002.
• The 845 restating companies identified by the GAO had restated their financial


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