Remarks before the 2014 AICPA National Conference on Current SEC and PCAOB Developments
Chief Accountant, Office of the Chief Accountant
Dec. 8, 2014
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the Commission.
Good morning. Thank you Christine [Davine] for the introduction. It is a pleasure to be with you, and I am honored to be addressing you today as the Chief Accountant. Having attended the annual AICPA National Conference on current SEC and PCAOB Developments on a number of prior occasions, I have always found the dialogue to be extremely beneficial, particularly as we reflect upon significant milestones during the past year and plan ahead for the challenges and opportunities that await us in the coming year.
As always, I must begin with a reminder that for me and for the SEC staff speaking at this conference, the views expressed are each speaker’s own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.
Now I would like to spend a few minutes discussing a topic that I know is of interest to many of you – IFRS. In May of 2014, Chair White spoke to the Financial Accounting Foundation and highlighted that having the Commission focus on IFRS was, and would continue to be, a priority for her. Chair White noted that international regulatory and accounting constituents continue to want clarity on what action, if any, the Commission will take regarding the further incorporation of IFRS into the U.S. capital markets, and she was hopeful that the Commission would be able to provide that clarity sooner rather than later.
Since 2007, the Commission has allowed foreign private issuers to report under IFRS without reconciling to U.S. GAAP. These issuers are clearly a significant component of the U.S. capital markets, making up trillions of dollars in aggregate market capitalization. However, while the experience thus far with foreign private issuers has been positive in my view, I would like to emphasize that the regulatory considerations for foreign private issuers are different than for domestic registrants. Therefore, while historical knowledge gained related to the use of IFRS by foreign private issuers has proven to be useful, any recommendation with respect to our domestic registrants will need to be made independently of those made for foreign private issuers.
When I arrived at the Commission two months ago, Chair White asked me to take a hard look at where the staff had been on the issue and make a recommendation to her as to the path forward. Before discussing where the OCA staff is and where I hope to lead us in the near future, I would like to emphasize a couple of points. I strongly support the overarching goal of providing investors with high quality decision-useful information to allow for informed investment decisions that facilitate capital formation. And, as the Commission envisioned in its statement in 2010, we continue to strive for high levels of comparability, as is practical, between financial information provided for domestic and international issuers. While these goals remain at the forefront, Chair White and I both recognize that any continued uncertainty around IFRS results in uneasiness for investors across the globe. Therefore, it is a priority of mine to bring a recommendation to the Commission in the near future with the hope of resolving, or at least lessening, this uncertainty.
In addition, while previous efforts by the staff provide me with a starting point, I do not have a pre-determined view of an approach, and I am open to continued dialogue surrounding the best ways to further these goals. That said, I think it’s important to reflect on what we’ve learned over the past several years, as I believe this frames the current thinking and any potential path forward.
I feel privileged to be coming into this complex area with an extensive base of staff work that provides us with a strong foundation as we continue this journey. I would like to acknowledge the work of my predecessor, Paul Beswick, who led the efforts to compile the IFRS work plan that was completed in 2012. This work plan was the result of a significant effort by our staff which produced an informative and insightful synopsis of potential paths forward and pertinent considerations on the role that IFRS might play in the domestic financial reporting environment.
During this journey, various constituents also have been asked for their views related to the desirability and feasibility of a full movement, optional or otherwise, to IFRS for domestic issuers. Therefore, most of the feedback we have received has been provided to us with a full movement ‘end game’ in mind. Based on what we have heard to date, it appears that U.S. constituents generally are not supportive of full adoption for a variety of reasons, including legal issues and general cost-benefit concerns, among others. Those concerns will certainly be considered in my analysis. US constituents have also raised similar issues with a broad-based option. These issues include legal impediments, practical challenges, and an impact on comparability that does not currently exist in the domestic reporting environment.
So where does that leave us? As we focus our efforts on any potential paths forward, we are looking for feedback regarding other alternatives that might or should be explored regarding any further incorporation of, or alignment with, IFRS for domestic issuers. With this mindset, the pros and cons of any alternatives must necessarily start with what interest exists for further IFRS incorporation and what impact it could have on our reporting system, and therefore how it would affect investor protection.
As one example, we understand that some domestic issuers may, now or in the near future, prepare IFRS-based financial information in addition to the U.S. GAAP based information that they use for purposes of SEC filings. However, regulatory constraints may dissuade some issuers from providing this information, as current SEC rules would consider IFRS-based information to be a “non-GAAP” financial measure for a domestic issuer. Should IFRS-based information continue to be considered “non-GAAP” financial measures subject to the requirements for such measures, or should it be thought of differently? Under this line of thinking, issuers that do not believe IFRS-based information would be beneficial to investors would not be forced to undertake what we understand to be, in some cases, significant implementation costs.
But that’s just one example. I am hopeful that my remarks today will serve as a starting point for the continuation of this journey with you over the next few months. Based on the progress of our collective efforts, I am hopeful to be in a position in the coming months to commence discussions with the Chair and the Commissioners about the different alternatives for potential further incorporation of IFRS and the related issues/concerns of each alternative with the objective of reaching a recommendation on what, if any, further incorporation or use of IFRS by US registrants would be permitted or required. And, of course, any rulemaking proposal that the Commission decides to consider would be subject to the normal notice and comment process.
In the meantime, I would like to express my support and gratitude for the efforts of both the FASB and the IASB on the development of converged high quality accounting standards. The issuance of the revenue recognition standard in May of this year was a significant step in communicating to the capital markets that converged standards are possible. I commend the boards for this achievement and encourage them to continue to work towards converged standards, including on lease accounting, where we have the same basic model and it would seem a missed opportunity to not remain converged on such a broadly applicable topic. Whatever the ultimate result is with respect to IFRS in the U.S., the boards should continue to strive where practicable for aligned high-quality global standards.
Staying with the topic of the new revenue standard, while the issuance of the standard marked a significant milestone in the convergence efforts of the FASB and IASB, it is by no means the end of the journey. Successful implementation of the new standard will be critical to ensuring comparable, high quality financial reporting for investors.
Since the issuance of the standard, the Staff has been actively monitoring the collective implementation efforts through ongoing discussions with a variety of stakeholders and attendance at various meetings and conferences that address the new standard. As the new Chief Accountant, I want to assure you that the implementation of the standard in the United States in a timely and consistent manner will continue to be a priority for me and my Staff.
Broadly speaking, I might categorize implementation efforts into two buckets. First are the questions on how to apply the guidance to particular fact patterns, the “accounting” phase if you will. Second are the necessary process and systems changes necessary to produce information consistent with the accounting conclusions, the “process” phase. We have heard that many companies would understandably like to finalize their accounting assessment and to commence their process-related implementation efforts, especially if the company would like to apply a retrospective transition method. We recognize that in order to advance implementation in a timely and consistent manner, preparers will need answers to their accounting questions.
We understand from speaking to various parties that there are a variety of accounting questions that range from questions that may require additional action by the standard setters to questions that appear to be more educational and simply need clarification as to what the intentions of the boards were when drafting the standard. It is our understanding that a number of the concepts that exist in current revenue guidance were carried over into the new standard, although the wording in the new standard removes some of the specificity that currently exists in the Codification. In these cases, some preparers may be asking if the accounting has changed even though the boards did not intend, or expect, to change current practice. I would hope that many of these questions can be disposed of quickly, and the standard setters can focus on the more novel interpretive questions that are arising in applying certain of the principles introduced in the new standard.
As with all new standards, our focus, and I hope a focus of the FASB and IASB jointly, will be on consistent application of the new standard with a view towards promoting comparability. In my view, well defined principles should yield consistent results when applied to a similar set of facts and circumstances. If there is significant diversity in practice for similar transactions, then it raises the question as to whether the principles in the standard are adequately articulated; and disclosure is not a substitute for comparability. I am optimistic that the FASB and IASB will jointly address the implementation questions as we continue to seek convergence. To assist in this effort, the Staff will consider what, if any, additional guidance is needed from the FASB or the Staff to ensure that the needs of U.S. investors are being met.
I want to clarify that the Staff respects reasoned judgments, but where significant diversity in practice exists, we seek to eliminate that diversity. Comparability is a hallmark of U.S. financial reporting, and I believe that it is in the best interests of all parties to identify and address potential diversity in practice on the front end of the implementation effort, as doing so should avoid significant costs of narrowing practice after adoption for preparers and avoids the lack of comparability for users.
To that end, the boards’ Transition Resource Group has identified and begun to address a number of these implementation issues. Certain of the issues raised could have a significant and widespread impact. For instance, we understand that unresolved questions regarding the identification of performance obligations and the accounting for licenses is placing some stress on being able to implement the standard by its current effective date. I believe it is critical for the FASB and IASB to address these and other unresolved questions, especially as they evaluate the effective date and assess whether additional time may be needed to address implementation matters.
Finally, it is imperative that investors understand how the guidance will impact a registrant’s financial statements, including the impacts that extend beyond reported revenue amounts. Throughout the implementation process, I encourage registrants to maintain open dialogue with their investors regarding anticipated changes and the potential impacts of adopting the new standard.
The role of the independent standard setter
I now want to emphasize how important an independent standard setting process that is focused on the needs of investors is to the capital markets. The quality of financial information is paramount to the confidence of investors and the formation of capital. While financial reporting may also be relevant to other users, I believe the development of U.S. GAAP must remain focused on the needs of investors.
The Commission has consistently looked to the private sector for leadership in establishing and improving U.S. GAAP. Since the 1970s, the FASB has been that private sector standard setter. Part of the reason a private sector standard setter has been so important is because the work they do is focused on the objective of setting accounting standards that provide neutral, decision-useful information, free from political or other pressures or objectives. I believe the Sarbanes-Oxley Act strengthened that independence, and I believe that this independence has resulted, and continues to result, in better accounting standards.
Independent accounting standard setting is critical to encouraging a financial reporting system that is robust and responsive to the needs of investors. But investors must have confidence in how those standards are set. Open due process, including thoughtfully considering the input and views of those who participate and play a role in our capital markets, is critical to the standard setter in fulfilling their mission of establishing and improving financial accounting and reporting standards. However, standard-setting that is focused on other objectives, or on the winners or losers that might result from the provision of neutral decision-useful information, would impair the confidence investors have.
As we reflect on the recent issuance of the revenue recognition standard and look forward to the issuance of several other major standards, the standard setting process will again be at the forefront of discussions among a variety of stakeholders. I would like to take this opportunity to reiterate my support for the independent standard-setting process. A credible and independent standard-setting process is in the interest of investors and is critical to the broader capital markets.
PCAOB Standard Setting Activities
While on the topic of standard-setting, I’d like to turn to standard-setting at the PCAOB. Since its formation, the PCAOB has maintained an aggressive standard setting agenda. Significant projects have been on the PCAOB’s agenda to update existing audit and quality control standards for several years.
Consistent with past remarks made by my predecessor, I believe that the most effective way to improve audit quality is to update the standards that directly address auditor performance incorporating both the knowledge the PCAOB has gained through inspections and the public information available on restatements and other relevant data. Over the last several years SEC Chairs, Commissioners, Chief Accountants, and my Deputy Chief Accountant for the Professional Practice Group, Brian Croteau, whom you will hear from shortly, have all publicly encouraged the PCAOB to accelerate the pace of standard setting. Notwithstanding these efforts, some of the most important projects to update auditing and quality control standards that are on the PCAOB’s agenda simply have been moving too slowly.
Considering the lack of progress on a number of projects, I have questioned what might be the root cause or causes with respect to the PCAOB standard setting process. Accordingly, Jim Doty and I have discussed the need to work together with the other PCAOB Board Members to take a fresh look at the PCAOB’s standard setting process with a focus on what improvements can be made to the timing of a project from inception to adoption of a standard or termination of a project. I am optimistic that working together the PCAOB can begin to reduce the significant standard setting backlog.
Reconsideration of Audit Committee Disclosures
The last topic I would like to address relates to audit committees. Audit committees play a critical role in providing oversight over, and serving as a check and balance on, a company's financial reporting system. Earlier this year, Chair White asked the staff to examine the existing audit committee report to seek ways to make it more useful to investors. She observed that the audit committee reporting requirements have not changed significantly in a number of years and that it is time to take a look at whether improvements can be made.
From my perspective, the increasing desire by investors to hear more from audit committees is understandable given the important role that audit committees play. The Sarbanes-Oxley Act resulted in significant changes to the role and responsibilities of audit committees, yet, as Chair White observed, SEC disclosure requirements for audit committees have not changed since 1999. Some of the public comment letters received by the PCAOB on their projects related to audit transparency and the auditor’s reporting model have made general or specific suggestions for SEC consideration on how to improve existing audit committee disclosure requirements. We’re also cognizant that changes in the roles, responsibilities, and disclosures by audit committees have been afoot in other jurisdictions for some time.
Meanwhile, some audit committees have taken their own initiative to evaluate how to enhance their disclosures and have included disclosures that go beyond the requirements in our existing rules. While practice is inconsistent in this regard, these efforts may be partially responsive to investor desires.
OCA staff has been working closely with staff from our Division of Corporation Finance and others throughout the Commission to consider our existing disclosure requirements, current audit committee disclosure practices, and publicly available observations and commentary. This is an area I’ve devoted substantial time to since my arrival, and I look forward to further developments in this area.
I appreciate the opportunity to share my remarks to you today at this important conference. Thank you for your attention, and please enjoy the rest of the conference.