Remarks at the Financial Accounting Foundation Trustees Dinner

Speech

Remarks at the Financial Accounting Foundation Trustees Dinner

Chair Mary Jo White

Washington D.C.

May 20, 2014

The relationship between the SEC and the FAF and the FASB is an extremely important one.  Two of my distinguished predecessors – Mary Schapiro and Elisse Walter – spoke at your dinner in 2011 and 2012.  Last year, shortly after I became Chair, I enjoyed attending your dinner, and this year I am honored to have the chance to address you.

This annual event provides us with the opportunity to reaffirm and calibrate our shared interest and focus on comprehensive accounting standards designed to provide users of financial statements with a clear understanding of a company’s financial position and operations.  That objective may sound dry and technical to some, but the importance of the work you do – and that the SEC and the FASB do together – cannot be overstated.  Consistently applied comprehensive accounting standards are essential to providing investors with the information that they need, which in turn instills confidence in our capital markets and encourages capital formation.

For almost 80 years, the Commission has looked to the private sector for leadership in establishing and improving U.S. GAAP.  The impact of high quality accounting standards to both strengthen and steady the capital markets can be attributed, in large part, to the private sector standard-setting process overseen by the Commission.  And for more than 40 years, the FASB has been that private sector standard setter.  This long history of coordination and collaboration between the SEC and FASB has served investors and our markets well.

Tonight, I want to highlight some of the projects that we do together that demonstrate the importance of your work and the value that I and my colleagues at the SEC place on our relationship with FASB and the FAF.

The Importance of Accounting Standards


At its core, financial reporting, using accounting standards adopted by the FASB, is a critical component of communication between a company and its investors.  Financial reporting can and should provide investors with a clear picture of a company’s financial condition – information that investors need to make an informed investment or voting decision.  And, as I will discuss later, these standards must be enforceable, and in fact, enforced.

The Work of the FASB


The FASB is currently engaged in a number of important standard-setting projects, which are focused on improving financial reporting.[1]  And as you know, the staff in the Office of the Chief Accountant actively monitors FASB standard-setting projects and continues to work with the FASB as these projects move toward completion.

But the work is not done when the standards are set.  In fact, in many ways, the work, for you and for us, really just begins when the standard is adopted.  Implementation of new standards provides an opportunity, particularly during the transition period, to monitor and, if necessary, provide guidance that promotes consistency.  And consistent application of accounting standards is fundamental to the efficacy of the standards and, more importantly, to maintaining fair and efficient capital markets.

FASB’s new standard on revenue recognition, which is part of its work on the convergence projects with the International Accounting Standards Board (“IASB”),[2] is a significant example of this effort.  This project on one of our most fundamental and critical standards is a true success for both FASB and the IASB.

Consistent implementation and application of the new revenue recognition standard will require careful consideration of the questions that we all know will arise during the transition from the old standard to the new one.

To strengthen this effort, the FASB has created an implementation group of stakeholders to serve as a resource to address implementation issues as the transition to a new revenue recognition standard occurs. [3]  I strongly support this initiative.  Implementation of any new standard is a collective effort and one that needs thinking from a cross-section of affected participants – preparers, auditors, investors, regulators, users, and other stakeholders – as well as from members of the IASB and FASB.

And the SEC has an important a role to play.  The staff will actively monitor implementation of the new standard to help limit inconsistencies in application and will also seek out the views of investors, issuers, auditors, the PCAOB and others.  The staff’s work supporting FASB’s implementation effort is only one of many ways where the interaction between the SEC staff and the FASB helps both organizations further our core missions.

IFRS

Since I have mentioned one of the international convergence projects, let me turn for a minute to a topic that may be on your minds – IFRS.  As you know, since 2007, the SEC has permitted foreign private issuers to report under IFRS without requiring reconciliation to U.S. GAAP.  Today, over 500 companies representing trillions of dollars in aggregate market capitalization report to us under IFRS with no reconciliation.  And the SEC staff enforces those standards.  By any measure, we have thus demonstrated a major commitment to the use of IFRS in our markets.

But, the question remains – what about domestic issuers?  As I am sure you are all aware, partly because you have heard me say it before, during my first year at the Commission, we have been intensely focused on making meaningful progress towards completing the statutorily mandated rulemakings from the Dodd-Frank and JOBS Acts.  And that is still a major goal.  But, considering whether to further incorporate IFRS into the U.S. financial reporting system has also been a priority for me.  And, it continues to be.

In 2011, when Chairman Schapiro spoke to you, she said this about IFRS: “[W]e are also looking closely at the question of incorporating IFRS into the financial reporting system for U.S. domestic companies.”[4]  And in 2012, then Commissioner Walter, speaking to you shortly before the publication of the Staff’s final report on the IFRS Work Plan, said that she “continue[d] to believe that high-quality, converged standards are vitally important to serving the best interests of investors in the increasingly global capital markets.”[5]  They also said three other important things: first, the interests of U.S. investors would remain front and center as the Commission considers IFRS; second, the FASB would remain front and center as the ultimate standard setter of accounting standards for U.S. companies; and third, the role the United States plays in the development of global standards must be an important consideration.

I strongly agree with these sentiments.  But there are other questions we are being pressed to answer by, among others, our international regulatory and accounting counterparts.  They want to know whether, and, if so, when and how is the United States – and more particularly the SEC – going to incorporate or otherwise speak again as a Commission to the issue of further incorporation of IFRS into the domestic capital markets.

The Commission last spoke on these questions in February 2010 when it said that: “…a single set of high-quality globally accepted accounting standards will benefit U.S. investors and that this goal is consistent with our mission…”[6]  That remains true today and I have made it a priority for the Commission to position itself to make a further statement on this very important subject, now that we have six years of experience working on the priority convergence projects with the IASB and over six years of experience with foreign private issuers filing IFRS-prepared financial statements without a U.S. GAAP reconciliation.

I cannot answer these questions tonight – while we continue to consider the issue.  But they are important to answer and I hope to be able to say more in the relatively near future.

Enforcement


Turning back to the SEC and FASB work on accounting standards, it is important to spend a few minutes discussing enforcement of the standards.  The SEC enforces U.S. GAAP as developed by the FASB to ensure that issuers are meeting their financial reporting obligations under the federal securities laws.  Enforcement happens primarily in two ways.  First, the Division of Corporation Finance promotes consistent application of FASB’s standards through its review and comment process.  When Corp Fin believes that a company could enhance its disclosure and improve its compliance, they issue comments advising the company to revise its disclosure.  Second, the Division of Enforcement acts when there has been financial reporting wrongdoing.  Of course, the Division of Enforcement’s responsibilities are much broader than financial reporting fraud, but I believe it is a core area of investor protection that I have re-emphasized since becoming Chair.

As an example of the Division of Enforcement’s work in this area, the Commission recently charged a company with misleading investors about significant financial setbacks and using improper accounting that artificially boosted its financial performance.[7]  The improper accounting was related to the improper application of FASB’s accounting standards on business combinations that allowed the company to exceed analysts’ expectations in a quarter where it was otherwise announcing bad news.  This is precisely the type of activity the SEC staff must be on the lookout for when reviewing filings or a tip or complaint.

To directly focus the Division of Enforcement’s expertise and experience, including its accountant staff, on financial reporting violations, the Division, in July 2013, formed the Financial Reporting and Audit Task Force.  The Task Force is increasing Enforcement’s emphasis on securities law violations involving the preparation of financial statements, issuer reporting, disclosure, and audit failures.  A key part of the success of this effort has been the time and attention the Task Force has paid to developing a deeper understanding of the current state of financial reporting, including how FASB standards are being implemented, particularly in areas we know are susceptible to fraudulent financial reporting.  The Task Force, with the assistance of our Office of the Chief Accountant, is also looking ahead and around corners to identify additional areas where financial reporting fraud may be likely to occur, and focusing on internal controls related to the areas we identify as being susceptible to financial reporting fraud.

Another area that is vitally important to ensure proper application of FASB’s standards is the role of auditors, who are very important gatekeepers in our markets.  As the Supreme Court said thirty years ago, auditors play a crucial role in the financial reporting process and serve a “public watchdog” function.[8]

In addition to the Commission’s role in enforcing compliance with standards promulgated by the FASB for issuers of financial statements, we also enforce the standards of the PCAOB for auditors.  And, the Enforcement Division has launched its “Operation Broken Gate” initiative, which seeks to identify auditors who do not carry out their duties in accordance with professional standards.  Here, the Division of Enforcement has been investigating the quality of audits to determine whether the auditors missed or ignored red flags; whether they have maintained proper documentation of the work performed; and whether they have complied with applicable professional standards.

These efforts are directed to ensure that auditors satisfy their role as “public watchdogs.”  And we have already seen impressive results.

In multiple actions, we have, where appropriate, barred auditors who did not meet their professional obligations from practicing before the Commission and sought disgorgement of the fees they received for their related work.[9]  We are continuing to look for auditors who are not meeting their professional obligations and working closely with the PCAOB to ensure that enforcement resources are maximized and used effectively to address auditor misconduct and improper professional conduct.  The PCAOB’s actions in this space, both in its enforcement and inspections programs, are an integral part of the regulatory landscape involving auditors.

Rulemaking

Just as the FASB is busy with its standard-setting agenda, we have a full plate of rulemakings at the Commission.  Many of our upcoming rules are Congressionally-mandated, and completing those and all of our core rulemakings is a high priority.  These rulemakings include complex policy objectives and, in some cases, involve new and novel areas for the Commission.  And I am pleased that we continue to make significant progress.  I would like to just mention a few of our rulemakings that have particular relevance to the FASB.

One such project is our closely-watched and much discussed proposal related to money market funds.  Among the many important issues raised by this rulemaking is the potential impact of the proposals on the continuing treatment of money market funds as cash equivalents for financial reporting purposes, either as the result of a floating NAV or a potential fee or gate.[10]  We are carefully considering the comments received on this issue and other issues raised by commenters as we develop final rules.

In a joint rulemaking with other agencies, we re-proposed rules in August 2013 related to risk retention in offerings of asset-backed securities – one of the mandated rulemakings under the Dodd-Frank Act.[11]  In the initial proposal, the agencies received significant comment on the proposed rule’s potential impact on accounting consolidation.  Specifically, commenters questioned whether the requirement to hold specific vertical or horizontal pieces of the portfolio would result in the sponsor having to consolidate the securitization in the sponsor’s financial statements.  To address the concerns raised about consolidation, the agencies, in the reproposal, have provided flexibility in the vertical and horizontal pieces held by the sponsor.  As we and the other agencies move to adoption, we will settle on a path forward on this question.

We have also been busy with rulemaking under the JOBS Act.  Among others, we have published proposals related to Regulation A+ and Crowdfunding.[12]

Regulation A+ is the name we have given to the JOBS Act rulemaking that seeks to expand the use of the existing securities offering exemption that allows companies to annually raise up to $5 million without registering the offering with the SEC.  Regulation A+ will, among other things, increase the offering threshold to $50 million and add new investor protections necessary for the expanded exemption.

Crowdfunding also is a JOBS Act rulemaking designed to broaden the existing securities offering exemptions – this one is designed for emerging companies and start-ups looking to raise smaller amounts of capital using the internet.  These proposals have garnered significant attention, and we continue to analyze the issues that commenters have raised.

Both of these rulemakings raise important questions that will resonate with you about how we will be treating a start-up or a small cap company.  Questions like – what should the threshold be for requiring a start-up or small cap company to have audited financial statements?  Should the accountant for a start-up or a small cap company be registered with the PCAOB?  Should we mandate accrual-based accounting or should companies relying on these exemptions be allowed to use cash-based accounting?  As we work to develop final rules, we must be mindful of the dual goals of protecting investors and facilitating capital formation.  I know this is an area that you are watching closely in the Private Company Council, as it considers the appropriate accounting choices for private companies as compared to public companies and whether those choices have impacts on capital raising and the pathway to becoming a public company.[13]

Disclosure Effectiveness


Another important area of focus for us is our Disclosure Effectiveness Project.  Full and fair disclosure is essential for our capital markets to thrive.  It is important for us to consider whether the information companies are currently required to disclose is the most useful information for investors and whether the information is being provided at the right time and in the right way.  Our Disclosure Effectiveness Project is intended to make sure that investors are being well-served by the disclosures they receive.

In December 2013, the staff issued a JOBS Act-mandated report on Regulation S-K that provides the staff’s recommendations for a review of corporate disclosure requirements.[14]  And I have directed the staff to undertake a comprehensive review of the disclosure requirements and make specific recommendations for updating the requirements.

In connection with this project, the staff will ask investors, companies, legal and accounting professionals and other market participants to share their views about the improvements that could be made to our disclosure requirements for the benefit of both investors and companies.

The SEC staff has begun this important initiative.  Accountants in both the Office of the Chief Accountant and in the Division of Corporation Finance are actively involved and will work with the FASB to identify ways to improve the effectiveness of disclosures in corporate financial statements and to minimize duplication with other existing disclosure requirements.  I know the FASB is itself exploring this topic by looking at the framework used by FASB to consider disclosure requirements in the standard-setting process.  One area of focus involves the notes to the financial statements.  And I look forward to the insights FASB can provide.

Although it is not part of the Disclosure Effectiveness Project, I also have asked the staff to examine the existing audit committee report to make it more useful to investors.  The audit committee plays a critical role in financial reporting oversight, and investors have expressed interest in increased transparency into the audit committee’s activities.  The audit committee reporting requirements have not changed significantly in a number of years and I think it is time to take a look at whether improvements can be made.

So there is a lot to be done on a lot of important issues.

Thank you for inviting me to speak to you tonight.  We are proud of the longstanding relationship we have with the FAF and FASB, and hope that you feel the same way.  Because accounting standards adopted by the FASB are the core of the financial reporting required by the federal securities laws, a strong relationship between the SEC and FASB is vital.  Continuing development of robust and effective accounting standards that are enforceable and result in good financial reporting is our common bedrock.  Investors benefit tremendously from our collaborative relationship, and I look forward to continuing and enhancing that relationship in the future.

Thank you.



[1] For more information on the FASB projects, see generally http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220137074.

[4] Mary L. Schapiro, Chair, U.S. Securities and Exchange Commission, Remarks Before the Financial Accounting Foundation’s 2011 Annual Board of Trustees Dinner (May 24, 2011), available at http://www.sec.gov/news/speech/2011/spch052411mls.htm.

[5] Elisse B. Walter, Commissioner, U.S. Securities and Exchange Commission, Remarks Before the Financial Accounting Foundation’s 2012 Annual Board of Trustees Dinner (May 22, 2012), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171490524.

[6] See SEC Release No. 33-9109, Commission Statement in Support of Convergence of Global Accounting Standards (February 24, 2010) [75 FR 9494] (March 2, 2010), available at http://www.sec.gov/rules/other/2010/33-9109.pdf.  The staff issued its Final Report on the Work Plan in July 2012; see Work Plan for Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Final Staff Report (July 13, 2012), available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf.

[7] See Litigation Release No. 22968, SEC v. CVS Caremark Corp, (Apr. 8, 2014), available at http://www.sec.gov/litigation/litreleases/2014/lr22968.htm.

[8] See U.S. v. Arthur Young & Co., 465 U.S. 805 (1984).

[9] See, e.g., Press Release, SEC Charges Three Auditors in Continuing Crackdown on Violations or Failures by Gatekeepers (Sept. 30, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539850572.

[10] See SEC Release No. 33-9408, Money Market Fund Reform; Amendments to Form PF (June 5, 2013) [78 FR 36834], available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.

[11] See SEC Release No. 34-70277, Credit Risk Retention (Aug. 28, 2013) [78 FR 57927], available at http://www.sec.gov/rules/proposed/2013/34-70277.pdf.

[12] See SEC Release No. 33-9497, Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act (Dec. 18, 2013) [79 FR 3925], available at http://www.sec.gov/rules/proposed/2013/33-9497.pdf; and SEC Release No. 33-9470, Crowdfunding (Oct. 23, 2013) [78 FR 66427], available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf.

[14] See Report on Review of Disclosure Requirements in Regulation S-K as Required by Section 108 of the Jumpstart Our Business Startups Act (Dec. 20, 2013), available at http://www.sec.gov/reportspubs/special-studies/reg-sk-disclosure-requirements-review.pdf.


Last modified: May 21, 2014