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Quality of Financial Reporting

General Electric Company. b. Quality of Financial Reporting. FEI/AICPA April 26, 2001. Financial Reporting Quality -- Starts with Standards.

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Quality of Financial Reporting

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  1. General Electric Company b Quality of Financial Reporting FEI/AICPA April 26, 2001

  2. Financial Reporting Quality -- Starts with Standards “To be acceptable, IASC standards must include a core set of accounting pronouncements that constitute a comprehensive generally accepted basis of accounting; The standards must be of high quality -- they must result in comparability and transparency, they must provide for full disclosure; and the standards must be rigorously interpreted and applied.” SEC Chairman Arthur Levitt, May 9, 1997

  3. Corporate Quality -- Measured with “Six Sigma” • Six Sigma is a highly-disciplined quantification of “defects” • Each process in the operation is measured to determine “process capability” • Ultimate objective is “design for six sigma” -- that is, the total errors permitted by processes are tolerable (six sigma) • Six Sigma has been widely adopted because, unlike “zero defects” and “try harder” sloganeering, Six Sigma works….

  4. What Is Six Sigma? s PPM 6 3.4 } 5 233 } 4 6,210 } 3 66,807 } 2 308,537 Defects per Million Opportunities Process Capability (Distribution Shifted ± 1.5s)

  5. PPM 1,000,000 100,000 10,000 1,000 100 10 1 7 1 2 3 4 5 6 Benchmarking Six Sigma Performance IRS – Tax Advice(Phone-In) Doctor Prescription Writing RestaurantBills Payroll Processing Wire Transfers Airline Baggage Handling PurchasedMaterial Lot Reject Rate Best-in-Class Average Company DomesticAirline Flight Fatality Rate(0.43 PPM) Sigma Scale of Measure When No One Has Adverse Incentives, Average Company Is 3s to 4s

  6. Automation is mandatory -- no manual process is better than 3.5 sigma Simpler is higher quality -- key premise of “design for six sigma” or “design for manufacturability” is simplicity Once six sigma is implemented for a process, control with constant, straightforward measurements is crucial Keys to Achieving Six Sigma

  7. Simple 20 Paragraphs Few Decisions Observable Measurements Uses Existing Resources In-House Capable Complex 245 Page Standard Numerous Decisions Calculated Measurements Add Significant Resources Outsourcing Required Characteristics of Complex Accounting Standards Each Decision, Measurement, ResourceConstraint Adds Opportunities for Error

  8. FAS 133: What Is a Derivative?

  9. Today’s financial statements… …reflect industrial era assets • Inventory • Machinery • Buildings • Land

  10. Post-industrial enterprises… …run on intangible assets • Information • Research …which are not in the financial statements

  11. Shift in assets… Intangible Assets Tangible Industrial era Information era

  12. GAAP contribution to investor information Investor information Financial statements 1900 year 2000

  13. Loss of “market share” Investor information Other sources Financial statements 1900 year 2000

  14. Where should the next dollar be spent? • Seeking additional precision in GAAP financial statements? • Enhancing the more relevant information not in financial statements?

  15. The search for additional precision may be pointless • Financial statements are a very abstract historical description of a complex, rapidly changing entity • No amount of accounting or auditing effort can overcome this reality “You can’t take a sharp picture of a fuzzy object” [Joseph Grundfest]

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