This profile is the latest in a series of weekly conversations with executives at U.S. public companies who are currently involved in establishing and developing compliance programs. An index of previous conversations is available here.

You are ‘director of technical accounting and reporting’ at Microsoft. Walk us through what that means.

I’m responsible for answering questions within Microsoft on technical accounting items from the GAAP side. I’m also the primary liaison to the standards-setters … I work closely with them on new pronouncements, and with the SEC on things they’re working on. Mostly I’m the technical resource here at Microsoft. I’m also involved in our external reporting and our 10-Q and 10-K earning reports.

How did you come to be on the special committee for enhanced business reporting?

It really began with Microsoft’s work in XBRL. We became aware of work that Pricewaterhouse (now PricewaterhouseCoopers) had been doing on the precursor of enhanced business reporting, which they called “value reporting.” We got involved in that group, and were looking to see if we could take a leadership role and change the way we know financial reporting—which really hasn’t changed substantially since The Securities Acts of the 1930s.

And how long have you been on the committee?

The AICPA special committee started in 2002, so it’s been about three years now. We’re trying now to convert from a special committee to a consortium approach where there will be different stakeholders: investors, preparers, regulators, auditors.

Give us an example of why all this is necessary. How is financial reporting today not painting a full picture?

A good example is intangible assets. We’re still struggling with the best way for a company to report those assets, whether they’re acquired or internally generated. We’re somewhat in a quandary; if we try to fit it into our financial reporting model, we have debates on what costs should be capitalized and how that cost should be measured subsequently … We’re looking more at reporting this valuable information in a framework different from the current model; maybe it’s better expressed by key performance indicators such as employee turnover.

Is the demand for this coming from investors or regulators?

I think it’s both. Demand is there from the user community, of getting better information about what’s important to a company. I also think you see hints of this from the SEC. First was their recent release on management’s discussion and analysis; they talk about focusing on trends, what’s important to the company, and strategies. You also see it in speeches from the chief accountant indicating that … accountants really haven’t changed all that much over the years. We’ve gone from a manufacturing economy to an information economy, and it seems that the accounting profession is stuck in the manufacturing economy and not moving forward with different things.

What we’re trying to do as a consortium is to have a market-driven approach where the supply chain works together, in lieu of what would eventually would be a regulatory solution.

But do executives really want to do this? They’ll be spending their own money for public good.

I think it’s going to be demanded. These are the types of things that drive value, so there’s going to be demand from the investor side. There could be some concerns over increased litigation or disclosing sensitive information, and we’re trying to work that out through the consortium. But everyone we talk to agrees that something needs to change in financial reporting, that the model we have now is outdated; it’s just how to go about that change. I think executives are receptive to the need to report different types of metrics … and really to have an independent, market-driven answer to that rather than a regulatory answer.

Can we really set broad standards for this new sort of reporting? After all, a company like Microsoft is radically different from, say, General Motors.

That’s to be worked out, and it’s going to be difficult. We see more of a two-tier approach: there will be metrics that are company specific, and then also we’ll try to set up industry working groups to work across industries and get comparable information. We’re balancing the old issue of relevant information with information that’s comparable; those are two different purposes you’re trying to serve there.

Since companies are so different, it is going to be difficult to get a standard framework that runs across all companies for a specific performance indicator, but I hope we can do some standardization. Internet clicks, for example—what would that really mean? How should you measure that? But a lot will be company specific, where it will talk about the value drivers for a certain company.

Might those metrics ever contradict quarterly financials? Could they cloud investors’ perceptions of short-term gain and long-term strategic planning?

That’s one of the main challenges we have, and it’s why we try to get investors heavily involved in this process. It’s not just the company saying, “Here’s what we’re going to report,” and it’s not just investors saying, “Here’s what we want.” It’s working together to change that mindset. One thing we look at is the short-term focus that we have on financial results, and that will take a mind change. That’s what we’re working on, changing the landscape of how people think about things.

For instance, another good example is research and development. You can increase your research, but that means possibly decreased earnings … We’re trying to show the value of metrics on how efficient you are in R&D or maybe what an increase in R&D may indicate, rather than a bottom-line net income number for the quarter.

Now, of course we’re going to have net income, but we can supplement that with key performance indicators that may look at long-term value creation.

Do you have any timeframe for developing this idea?

It’s going to be a long-term effort. In the short-term, of course a lot of people are focused on Sarbanes-Oxley and Section 404. I think realistically we’re talking about an evolving process … I’d say we’ll be working on this for five or 10 years in the future.

Well, about Sarbanes-Oxley—has that helped or hindered your efforts to spread the gospel of enhanced reporting?

I don’t know that I can say it’s done either. It has taken the focus off of enhanced business reporting. Even before the scandals, you seemed to get a sense of this being an initiative that the SEC was driving, and that was before the scandals and the outgrowth of compliance. We’re trying to focus it not on compliance, but on how you think about reporting …

It has helped in that there’s a lot of focus on financial reporting and it goes all the way up to the C-suite. I think it’s hurt in the amount of resources and focus shifted to the compliance process of documenting controls. That really gets away from thoughts about enhanced business reporting.

We’ve been viewing this through a U.S.-focused lens. Aren’t some European countries moving toward this already?

There are, and we have European counterparts working with us. It’s stronger in the United Kingdom right now … One different thing they’re looking at in Europe is the “triple bottom line,” or sustainability reporting, which gets into social and environmental items. There is a new requirement in the U.K. that gets into social and environmental matters that they’re really struggling with. We’re not looking those matters per se; we’re looking more at improving business information.

We can’t help but wonder: While this all sounds good, ultimately it boils down to a company stepping forward to go down this road first. Won’t it be hard to make that happen?

It’s an issue, and I think it’s all about leadership. The vast majority of people we talk to say something is wrong with our financial reporting model—you’re hard-pressed to find someone who says it isn’t an issue somehow. Everyone realizes it’s a problem, and that’s why we want this consortium approach … I hope it doesn’t come to, and we’re trying to avoid, forcing people to do this. I think people will see this is the way to go, and that the profession needs to change and embrace some experimentation.

I hope it doesn’t come down to drafting a few companies to start the process. We want to get the momentum that it’s the right thing to do.

Thanks, Bob.

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