Pre-eminent:
- "surpassing all others" (Compact Oxford English Dictionary);
- "having paramount rank, dignity, or importance" (Merriam-Webster's Online Dictionary).
I have interrupted composing a post that will solve all of the problems of securitization accounting to bring you this: my latest discovery of a plain English word that has been mutated beyond recognition by some group promoting their particular brand of financial reporting. I found it in one of my favorite blogs, Edith Orenstein's FEI Financial Reporting Blog, which reported on how the decamping SEC Advisory Committee on Improvements to Financial Reporting (CIFiR) zapped the perfectly good 'pre-eminent' with a massive dose of gamma rays:
One item on the list of 9 changes was to insert a new footnote … to define what CIFIR means by 'investor preeminence" as that term is used in Recommendation 2.1, which says, in part: "Therefore, investor perspectives should be given pre-eminence15 by all parties involved in standards-setting."
Footnote 15 states: "We recognize the need for balance among all parties involved in the standard-setting process. We do not intend to suggest by this recommendation that investor input trumps all others. Instead, in cases where constituent views cannot be reconciled, we believe that all the investor perspectives should be afforded greater weight."
Pozen explained in describing the change at the meeting, "Not that it [investor perspectives] always wins, but it has greater weight."
{bolded text in original; italics and line breaks supplied by yours truly}
Well, if Footnote 15 is what CIFiR actually means, would it not have been more straightforward to state it that way in the main text, instead of relegating a mutated definition to a footnote that few will read? The main text could then state what CIFiR supposedly intends to say: Therefore, investor perspectives should be given greater weight. Yuk.
And, come to think of it, 'perspectives' and 'inputs' are just two weasel words masquerading for needs. Maybe auditors and issuers have perspectives and inputs, but investors have those and needs for information to boot. It makes me more than a little uneasy that the committee could not plainly acknowledge investors' needs for information, for those are the raisons d'etre for the SEC, FASB and the whole financial reporting ball of wax.
That's why this key element of CIFiR's report should have been written thusly: Therefore, the needs of prospective investors for information are pre-eminent.
Period. The only relevant considerations for establishing financial reporting rules are (1) the value of information to prospective investors, and (2) the costs of producing information. Auditors, issuers and regulators may provide input and perspective, and they do have needs; however, CIFiR should have made it clear they understood that the information needs of prospective investors should be the only needs that count. If CIFiR, for whatever reason, needed this eleventh-hour qualifying footnote, they should have also given us at least one itty bitty sniff of an example that can counter the notion underlying the plain English from which they now distance themselves. They didn't, because they couldn't.
Yet, despite CIFiR having regurgitated the same clear-as-mud financial reporting objective that hoplessly complicates everything, Chief Accountant Conrad Hewitt appears to have fallen over himself to thank the members of CIFiR for helping to provide guidance on simplifying the financial reporting system. I'm not going to dismiss everything that CIFiR did as vacuous, because they certainly provided constructive input in a number of areas (some others, not). But in this most critical and fundamental respect, they chose to muddy the same waters that they themselves had clarified -- just hours before getting out of Dodge. When I get around to evaluating some of the other recommendations, for example error materiality and restatements, it will be with a sense of skepticism honed sharper by this goal-line fumble.
And by the way, Chairman Pozen's gratuitous explanation for that Footnote 15 helps not at all; if investor perspectives always get greater "weight" when differences cannot be reconciled, doesn't the revised language also mean that inestors always "win"? If not, there must be some other secret ingredient to the policy making recipe (like who paid whom) that Pozen thinks is the real pre-eminence.
It's a shame -- if not one of the greatest financial tragedies of our time -- that financial reporting could be so much simpler if this one core principle, investor pre-eminence, were faithfully observed. I will have more to say about this in my next post when I discuss the mess that is securitization accounting. I can't wait.
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