Cindy Fornelli is executive director of the Center for Audit Quality, a Washington-based public policy organization serving investors, public company auditors and the markets.
by Cindy Fornelli
Prodded by the economic crisis, contributed to by events and actions both here and abroad, the new Congress and the new administration are taking a hard look at our financial regulatory framework. They will dramatically increase the odds of getting it right if they can do three things:
Put investors first.
Protect independent standard-setting.
Of all parties with a stake in the regulatory framework, no one is more important than the person who puts his or her cash at risk by investing in the capital markets. Investors are the foundation of our financial system, and their confidence in the integrity of the markets is absolutely essential. That confidence has been shaken by recent events, with disastrous consequences for our economy.
At the Center for Audit Quality, we’ve spent a lot of time listening to investors. As part of a comprehensive effort to improve financial reporting, we solicited suggestions from investors and other market stakeholders during a national Public Dialogue Tour that included stops in 10 cities, from Boston to San Francisco. The overall themes were consistent at every stop.
The market participants we met in our coast-to-coast tour were clear that they don’t want more information, they want more relevant information. They would like to see historical information presented with clarity and comparability; they called for forward-looking information; and they called for disclosures that could help inform projections on a company’s future operations.
A number of dialogue tour participants proposed adding a “plain English” executive summary to annual reports. Others suggested that “click-down” online technology could let users control how deeply they delve into a particular company’s public reports. We also found considerable support for more complete and understandable disclosures on executive compensation.
In short, investors have made it clear that they want more transparency.
Corruption and malfeasance thrive in the shadows and wither in the sunlight. Bad things can happen when no one is watching, or when those watching — regulators, directors, shareholders and auditors — cannot get accurate and timely information.
We learned that lesson during the corporate scandals earlier in this decade. Now, the excesses and fraudulent activity that contributed to our current economic troubles have given us another reminder that good corporate governance starts with transparency.
Transparency gives investors, regulators and other interested parties the information they need to understand the finances and operations of a company or other business entity.
Some proposals for additional transparency would require significant changes to the current regulatory system — for example, requiring public disclosure from investment entities that now operate outside the regulatory system. Others, however, could easily be implemented within the existing regulatory framework.
Whatever Congress decides to do with the regulatory framework, lawmakers should seek to ensure that the standard-setting process is free from political interference.
We all know that there is no way to fully immunize standard setters from political pressure, just as there is no way to construct a regulatory system that can prevent all fraud. But the difficulty of achieving a goal doesn’t diminish the goal’s importance.
The financial markets and financial instruments have become increasingly complex. Setting appropriate regulatory standards requires considerable expertise. Standards should be determined with care, applied with consistency and changed when facts — not political pressure — warrant adjustments.
No one is suggesting that standard-setters and regulators shouldn’t be accountable. They should have a clear mandate to serve investors and suffer consequences if they fall short. And they should not be subjected to political interference on behalf of special interests as they seek to fulfill their mandate.
We are in the midst of challenging times, but challenges are usually a powerful catalyst for change. We are much more likely to get positive change if the Obama administration and the 111th Congress prioritize what is best for investors, promote transparency and try to keep politics out of the standard-setting process.
As the president himself has stated, “I think we have to restore a sense of trust, transparency and openness in our financial system.” I couldn’t agree more.