Speech by SEC Commissioner:
Remarks Before SEC Speaks
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
February 8, 2008
Thank you, John. Good afternoon. It is a great pleasure to be with you today.
SEC Speaks showcases the talent and professionalism of the Commission staff like no other forum. I want to join my colleagues in commending the staff for their dedication and service to the SEC.
They are truly the heart of this agency.
At the outset, I need to make the required disclaimer that the views I express here are my own, and not necessarily those of the SEC or my fellow commissioners.
With that, let me make effective use of that disclaimer and begin by talking about the elephant in the room.
Actually, the three elephants in the room.
That is — IFRS, XBRL, and CIFIR.
You didn't think I was referring to the current composition of the Commission, did you?
As you all know, Commissioner Annette Nazareth left the SEC last week after a tremendous career at the agency. Prior to her service as a Commissioner, she held a number of senior positions at the SEC — Senior Counsel to then-Chairman Arthur Levitt, Interim Director of the Division of Investment Management, and Director of the Division of Market Regulation [now, and once again, the Division of Trading and Markets].
Annette was a trusted and well-respected colleague. She left her mark on the Commission like few have, and she will be greatly missed.
Thus, with Annette's departure, there are now only three remaining commissioners — and two vacant seats.
It is not uncommon for the SEC to have fewer than its full strength of five commissioners for limited periods: for instance, there were only three commissioners for a six-month period at the beginning of President George W. Bush's first term; and in the mid-1990s there were only two commissioners, Chairman Levitt and Steven Wallman, for more than six months.
I am, nonetheless, often asked what having only three Commissioners — all of the same party — will mean for the Commission's agenda in the year ahead.
My answer is: I hope not much — because there is much to be done.
The Commission's important mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation does not change when there is a shorthanded Commission, even one with three members of the same political party.
Indeed, we all share the same commitment to faithfully fulfill our public oaths of office and effectively work to achieve the agency's vital mission.
As you all have heard today in great detail from the numerous staff presentations, the Commission has an ambitious agenda for the year ahead in many important areas.
This afternoon, I would like to briefly highlight three broad initiatives that reflect the Commission's ongoing efforts to improve the nature, quality, and usefulness of financial reporting for investors.
The initiatives are: the ongoing global accounting convergence efforts, eXtensible Business Reporting Language or XBRL, and the forthcoming report of the SEC's Advisory Committee on Improvements to Financial Reporting (CIFIR).
All three are part of a broader vision for the future of global financial reporting and are necessary complements to each other in key respects.
While 2007 was a watershed year in pursuit of that vision, I believe the year ahead may prove equally significant.
Last November, the Commission voted to eliminate the U.S. GAAP reconciliation requirement for foreign private issuers reporting under International Financial Reporting Standards as issued by the International Accounting Standards Board. This step represented an important milestone in the continued progress on global accounting convergence and the move toward a single set of high-quality international accounting standards.
As a corollary to eliminating the reconciliation requirement, the Commission also issued a concept release soliciting comments on whether U.S. companies should have the option of filing financial statements in accordance with IFRS.
A roundtable in December further explored the implications of providing such a choice.
While there is broad consensus on the desirability of seeking convergence between US GAAP and IFRS in furtherance of a single set of global accounting standards, there remain important considerations about how quickly and how best we can get there.
Of note from the roundtable, and the comments received on the concept release, was the widespread view that convergence would be best served by establishing a plan and timetable for a mandatory move to IFRS.
There was also discussion concerning whether allowing early adopters to move to IFRS would further necessary steps toward convergence and ultimately, a single set of high-quality accounting standards.
I anticipate that the Commission will continue to actively consider these issues in the coming months as we attempt to identify next steps on the road to global accounting convergence.
The Commission also made considerable progress in promoting and developing the capability of XBRL. As you may know by now, XBRL provides a standardized approach to tagging the financial information included in company reports and promises to give investors quick access to the information they want in a form they can easily use.
It also promises to let companies prepare their financial information more quickly, more accurately, and for less cost. XBRL has been a major priority for the Commission under Chairman Cox and I support his strong leadership on this initiative.
2007 was a breakthrough year for XBRL in many ways.
Over four dozen public reporting companies now voluntarily participate in the Commission's XBRL pilot program.
A new GAAP taxonomy was completed, and there is an ongoing public review, which began on December 5.
The Investment Company Institute developed and completed a taxonomy for the risk/return summaries in mutual fund prospectuses. Last August, the SEC adopted a rule allowing funds to test the taxonomy voluntarily. Nine fund complexes so far have submitted their risk/return summaries in XBRL format.
Across the globe, some of the world's largest economies — Australia, China, India, Japan, and the United Kingdom — have made, or announced plans to make, XBRL reporting mandatory.
Here in the U.S., the SEC is on a path to parallel these efforts and make the world's capital markets truly global and interconnected.
The Commission has created a new Office of Interactive Disclosure to coordinate an agency-wide disclosure modernization program based on interactive data and will, in the first half of this year, consider laying out a roadmap for the adoption of interactive data by U.S. reporting companies.
Seeking to address longstanding concerns over U.S. GAAP complexity, last year the Commission chartered the Advisory Committee on Improvements to Financial Reporting.
The Committee's objective is to examine the U.S. financial reporting system in order to make financial information more useful to investors, while reducing the complexity of the financial reporting system to companies, auditors, and investors.
The Committee's membership is truly distinguished. The seventeen members — representing investors, public companies, broker-dealers, audit committees, auditors, attorneys, and regulators — include a former chairman of the Financial Accounting Standards Board, a former governor of the Federal Reserve Board, a former SEC commissioner, current and former chief executives of global accounting firms, and chief financial officers of major corporations.
The chairman of the Committee, Robert C. Pozen, is a familiar name to many of you. Bob is currently chairman of MFS Investment Management. He also teaches at Harvard Business School and was formerly vice chairman of Fidelity Investments. Before that, he was Associate General Counsel of the SEC. The Commission would be hard-pressed to find a chairman with more integrity, credibility, and wide-ranging talent than Bob Pozen.
The Pozen Committee is scheduled to issue a progress report next week representing its work to date. A draft of the report, and all of the materials related to the Committee, may be accessed at the Commission's website, www.sec.gov.
The Committee will issue a final report with recommendations to the SEC later this year.
I am pleased by the Committee's consensus-oriented approach. Chairman Pozen intends to recommend only those policy changes that have both widespread support among Committee members and also a legitimate chance of being implemented at the regulatory level without the need for any legislative action.
Without prejudging the contents of the Committee's final report, I will say that I am confident that its recommendations will be given great weight and consideration by the Commission.
I would like to briefly discuss just a few highlights from the draft report. It is particularly important, in my view, that the scope of the Committee's work contemplates and complements the Commission's ongoing work in support of global accounting standards and XBRL.
Thus, the work of the Committee will also help ensure that the broader vision of financial reporting for investors is being achieved.
As the Committee notes in its draft report, financial reporting is the lifeblood of the securities markets.
Fundamentally, investors need timely, accurate, and useful information in order to make sound decisions.
Unfortunately, over time, U.S. GAAP has become obfuscated by exceptions to general principles, bright lines, detailed rules, and too many sources of interpretation.
As a result, users have difficulty understanding the economic substance of a transaction or event and the overall financial position and results of a company, and preparers can have difficulty properly applying GAAP.
The Pozen Committee accurately identifies some of the principal sources of this substantive complexity in GAAP, namely, exceptions to general principles and bright lines.
The Committee notes that exceptions, such as industry-specific guidance and alternative accounting policies, create complexity because they deviate from established standards that are applicable to most companies.
Certain bright line standards also contribute to complexity because they require drastically different accounting treatments on either side of a bright line.
The Committee suggests that additional investor representation on standards-setting bodies is vital to reducing complexity.
Indeed, the Committee strongly underscores its belief in the preeminence of the investor perspective when considering the design and administration of an effective system of financial reporting.
The Committee notes the problems associated with the proliferation of sources of authoritative accounting guidance in GAAP and recommends that the Commission coordinate with FASB to clarify roles and responsibilities regarding the issuance of interpretive guidance.
The Committee also recommends that the Commission focus on registrant-specific guidance and establish internal procedures to ensure that all sources of accounting guidance issued from the various divisions and offices are reviewed and approved by the SEC's Chief Accountant.
And, importantly, the Committee recommends that the FASB should continue to serve as the single standards-setter for all authoritative standards in GAAP.
Another critical issue addressed by the Pozen Committee is the frequency and magnitude of financial restatements that have occurred in the U.S. in recent years. The Committee notes that, above all, companies need to focus on reducing errors in financial statements. Any errors should be promptly corrected and disclosed.
At the same time, restatements that do not provide important information to current investors may be unnecessary and can be costly for companies and auditors, reduce investor confidence in reporting, and create confusion in the analyst community.
Establishing an appropriate definition of materiality is vitally important. While recognizing that both qualitative and quantitative factors are relevant to such a determination, the Committee suggests that just as quantitatively small errors may be qualitatively material, so also may quantitatively large errors be qualitatively immaterial to reasonable investors.
That is to say, qualitative factors can either enhance or diminish the significance of a quantitative error, and materiality judgments are best made by looking at the totality of factors from the perspective of a reasonable investor.
Finally, I would like to briefly discuss the concept of professional judgment. It is one of the key themes of the Committee's work and perhaps one of the most important and challenging.
As the Committee appropriately recognizes, accounting standards and practice increasingly require the use of judgment.
Further, international accounting standards have fewer rules and less guidance than US GAAP and as we continue toward convergence with the more principles-based standards of IFRS, we must strive to create an environment that facilitates the use of such judgment.
The Committee offers for consideration two "developed proposals" intended to ensure that reasonable accounting judgments made in good faith are not inappropriately second-guessed by regulators.
I find both ideas very intriguing and look forward to giving them serious consideration.
Despite the Committee's expected consensus or near-consensus recommendations, I can appreciate that some proposals may still raise particular concerns by some parties.
It is my expectation that the Commission will remain keenly focused on ensuring that investor interests remain paramount and that we achieve the overarching goals of the Committee's work to reduce complexity and improve financial reporting for investors.
Thank you again for the opportunity to appear today.