The Securities and Exchange Commission (“SEC” or “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, individual Commissioners, or of the author’s colleagues upon the staff of the Commission.

Introduction

Good morning and thank you Melanie [Dolan] for the kind introduction. It is a pleasure to be with you for the third time, and now in my role as Chief Accountant of the SEC.

Before I continue, let me remind you that for me and all of 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.

We share a vital interest in maintaining the strength of the U.S. public capital markets, which function best when investors have confidence that their investment decisions can be made with the benefit of credible and reliable financial information. This is not new.

It was Joseph Kennedy, the first Chairman of the newly-formed Securities and Exchange Commission, who spoke to the importance of financial information in an address on November 15, 1934 at the Boston Chamber of Commerce, when he repeated the words of President Roosevelt on the passage of the Securities Act of 1933:

“If the country is to flourish, capital must be invested in enterprise. But those who seek to draw upon other people’s money must be wholly candid regarding the facts on which investors’ judgment is asked.”[1]

These are words that speak to the important public interest that preparers, auditors, audit committee members, regulators, and others serve in meeting investor needs for accurate, honest financial information. This high quality financial information is the lifeblood of our capital markets, enabling domestic and foreign companies alike to obtain funding to support and grow their businesses, creating investment opportunities, jobs and other benefits for the U.S. economy.

Our markets are strong. In 2015 alone, businesses raised $2.27 trillion of funding in the U.S. capital markets and, by one estimate, the U.S. capital markets accounted for 42% of the global bond market and 40% of global equity market capitalization.[2]

Yet notwithstanding the strength, there is more to do, and so in my remaining time with you today, I would like to discuss several areas that both reinforce and advance our shared, weighty responsibility to maintain high quality financial reporting in our capital markets.[3] I will then close with some thoughts regarding the role of preparers, audit committees, auditors, and standard-setters in the current environment.

Update on OCA

Before going further I would like to also acknowledge some recent changes in the SEC’s Office of the Chief Accountant (OCA). It was announced recently that Jim Schnurr is retiring from the agency. I want to thank him for his strong leadership and broad expertise in financial reporting and the capital markets.

I also want to welcome Marc Panucci as the new Deputy Chief Accountant leading the Professional Practice Group (PPG), and thank Marc’s predecessor, Brian Croteau, for his many years of excellent leadership and accomplishments on behalf of investors.

In addition, I want to acknowledge that IOSCO recently announced[4] that it had selected Jenifer Minke-Girard of our staff to become the new vice chair of IOSCO’s Committee on Issuer Accounting, Audit and Disclosure, which is known as Committee 1. I am pleased that with Jenifer’s appointment the OCA staff will continue to play a leadership role for the committee, given that Julie Erhardt recently “timed out” of her role as chair of Committee 1 after almost 10 years of outstanding leadership.

Advancing high quality financial reporting

Preparers

Turning now to preparers, high-quality financial reporting starts with you. You are the ones who make the often difficult and nuanced decisions and judgments required to meet the objectives and principles of US GAAP or IFRS. Investors look to you to evaluate, challenge, and ultimately address transactions, judgments, and risk areas with accurate and informative disclosures. Effective internal control supports your work.

Internal Control over Financial Reporting (ICFR)

We are routinely reminded through our interactions with investors that they continue to believe that strong and effective internal controls and audits are an important component of the ability of companies to communicate credible financial reporting information in order to raise the capital needed to operate, grow and compete.

In 2011, OCA studied the impact of the reporting requirements for ICFR and recommended to maintain the existing investor protections of Section 404(b) of the Sarbanes-Oxley Act[5] for accelerated filers, while also encouraging activities that have the potential to further improve both the effectiveness and the efficiency of Section 404(b) implementation.[6] Among those activities are useful, ongoing discussions, which the SEC staff has been observing, about how companies comply with SEC guidance and the PCAOB’s auditing standards[7] on topics such as risk assessments, documentation, and testing of controls.

I am very pleased to see the continued attention that ICFR assessments will be given during this conference. While I will try not to get ahead of Marc Panucci or Kevin Stout’s remarks later in the conference, it is hard to think of an area more important than ICFR to our mission of providing high-quality financial information that investors can rely on. If left unidentified or unaddressed, ICFR deficiencies can lead to lower-quality financial reporting and ultimately higher financial reporting restatement rates and higher cost of capital.

Over the next several years, updating and maintaining internal controls will be particularly important as companies work through the implementation of the significant new accounting standards. Companies’ implementation activities will require careful planning and execution, as well as sound judgment from management, which leads me to new GAAP standards.

New GAAP Standards

I collectively refer to the implementation of the new revenue recognition, leases, financial instruments, and credit losses standards as “new GAAP standards.” This is a financial reporting topic that deserves close attention, both to make sure that the implementation is done timely and with useful transition disclosures and to ensure the application of the standards, once implemented, is appropriate.

We need to be frank about any challenges and address them to the extent appropriate. But, when applied, the financial reporting under the new GAAP standards should achieve the objectives the standard setters identified so that investors see the benefits from the changes.

Revenue recognition

Revenue is one of the single most important measures used by investors in assessing a company’s performance and prospects, regardless of a company’s industry, the nature of its securities, or the capital markets it accesses. Revenue impacts key analytical ratios and bottom line earnings. Although often a complex area, companies cannot afford to get the accounting wrong.

The standards, including the disclosures, are an important step forward in financial reporting, both domestic and foreign, and when implemented, they are designed to enhance the comparability of companies’ reported revenues.

Revenue implementation status

The changes in standards will impact all companies, and even if the extent of change for a particular industry or company is slight, the disclosures necessary to explain the changes—and when implemented, to describe revenue streams—may not be. Investors and OCA staff will be looking for increased disclosures in 2016 filings and during 2017 about the significance of the impact—whether quantitative or qualitative—of revenue recognition, among the other new standards, when those standards are adopted in the future. In addition, companies may find it helpful to investors to incorporate a discussion of the anticipated effects of the standard into their investor outreach activities to foster timely absorption of the information by market participants.[8]

Timely implementation of the new standard is important. Since my remarks at this conference last year when I said the overall state of readiness may be lagging, clear progress has been made by preparers, but there is more to do. For example, in a recent survey of public companies released in October,[9] eight percent of respondents still had not started an initial assessment of the new revenue recognition standard, while the others were still assessing (75%) or implementing (17%).

Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information. Successful implementation requires companies to allocate sufficient resources and develop or engage appropriate financial reporting competencies.

In addition, as the AICPA and other industry task forces continue their important work as part of the revenue standard’s implementation, I urge task force members to complete their work expeditiously but without compromising quality. It is important to bring closure to the issues identified through this process.

OCA activities

OCA continues to be available and is consulting with companies as they finalize their technical accounting positions so that companies can advance in their implementation efforts. Jenifer Minke-Girard will provide an overview of our accounting consultations activities in her remarks, and other OCA staff will discuss specific consultation matters, including those involving new GAAP.

The staff in OCA, in forming our views, considers first the nature, design, and economic substance of the transaction, then the:

• language in the standard and the related basis for the standard setters’ conclusions;
• implementation discussions, such as those at the TRG; and
• objectives expressed in the standard for consistency and comparability.

In doing so, we start with the terms of the arrangement — the contract with the customer and proceed from there. It is important for companies to fully understand their existing or planned transactions and arrangements and be able to clearly articulate their basis for their proposed accounting under the new standard. We engage in dialogue with companies so that we can understand all of this information — the facts and circumstances and the company’s analysis as to how the new standard applies.

With new lease, financial instruments and credit losses standards awaiting required adoption in the years after revenue recognition, companies need to also begin to assess and implement those other new GAAP standards to meet the adoption dates.

Non-GAAP Reporting

Turning now to non-GAAP reporting, good practices in this area begin with preparers. Good reporting practices also place a premium on audit committee member understanding of the company’s non-GAAP policies, procedures, and controls.

Last year at this conference Chair White spoke about non-GAAP reporting, highlighting that the area deserved close attention so that the measures convey relevant and useful information. Since then the staff in the Division of Corporation Finance and OCA developed and released new Compliance and Disclosure Interpretations (C&DIs)[10] to provide additional guidance on non-GAAP disclosures. The staff has also engaged with registrants and their advisors on non-GAAP measures, and substantial progress has been made in addressing the problematic practices. However, there is more progress for companies to make, for example, in the evaluation of the appropriateness of the measure and its prominence, as well as the effectiveness of disclosure controls and procedures.

Audit committee members should seek to understand management’s judgments in the design, preparation, and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies. These discussions will require an understanding of the company’s business model and how it is managed.

For example, it is important to keep in mind that businesses operate in uncertain environments. If non-GAAP adjustments replace that business reality with smooth earnings over time, accelerate unearned revenues, or defer incurred expenses, those adjustments and disclosures should be evaluated closely under the C&DIs.

Valuation practices

I would like to also acknowledge and encourage timeliness and quality in the ongoing important work to continually enhance valuation performance standards, credentialing, quality assurance, governance, and related matters, which are designed to further buttress high quality valuation practices.

Audit Committees

Turning now to audit committees, you as committee members are a critical gatekeeper in the chain responsible for credible, reliable financial reporting.

Audit committees must stay current on emerging issues, whether financial, control, or disclosure related, through continuing education and other means. In addressing certain important issues, some audit committees may need expert advisors as they carry out fully their responsibilities.

Audit committees of listed companies have clear oversight authority and responsibility over the external auditor, which promotes auditor independence and greater alignment of the auditor’s interests with those of investors.^[11]

The audit committee helps set the tone for the company’s relationship with the external auditor. Auditors are in a unique position to provide feedback to the audit committee about management, the company’s processes, accounting policies, and internal control over financial reporting, among others. This oversight of management’s activities is crucial for investor protection, and it is important for both auditors and audit committees to keep and maintain the direct relationship they share.

While I was an audit engagement partner, in addition to addressing the communications required by the auditing standards and audit committee charter, I found the following types of questions from audit committee members helpful in generating a dialogue:

• If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
• If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
• Is the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
• Are there any recommendations that you as the auditor have made and management has not followed?

Audit committees should not underestimate the importance of their role overseeing the external auditor. Auditors are accountable to the board of directors through the audit committee, not to management.

The audit committee responsibilities include the authority and responsibility to directly oversee auditor engagement terms and compensation. In doing so, audit committees should work with other board committees as needed to monitor that important corporate objectives, such as cost reduction plans, are not unintentionally implemented in ways that would be at cross purposes with management meeting their financial reporting responsibilities or the external auditor’s appropriate audit scope, engagement terms, and compensation. The design and operation of some of management’s procurement policies and processes may be inappropriate if applied to the auditor selection, retention, and compensation decisions.

I encourage audit committees to be proactive in providing voluntary disclosures in the audit committee report, especially in describing how they execute their oversight responsibilities. I am encouraged by the trends in audit committee voluntary reporting.[12] For instance, in a recent survey 82% of audit committees of Fortune 100 companies disclosed in 2016 that the audit committee is responsible for appointment, compensation and oversight of the external auditor.^[13] This has increased significantly from 42% just four years ago.^[14]

Auditors

Of course, audit committees don’t audit—auditors do. Auditors are the key gatekeepers for high quality financial reporting, protecting investors by providing reasonable assurance that issues are promptly identified and addressed. Maintaining the strength of financial reporting depends on thorough and objective audits performed by auditors who are independent, skeptical, and who apply the diligence needed to meet PCAOB standards. Investors expect and depend upon rigorous audits.

Independence

Auditors play a vital role in the capital markets, in part, because of their impartial and objective judgment about financial reporting—reinforced by their independence. An auditor would impair its independence any time it runs afoul of the “general standard” of independence or any one of a non-exclusive list of prohibited relationships and non-audit services.[15] Given the central role of independence in the auditor relationship, OCA monitors the application of SEC rules and guidance closely through consultations and cases.

Representatives from the Division of Enforcement will discuss later two recently-settled Commission enforcement actions brought under the general standard of independence that deserve review by auditors in considering the adequacy of their own policies, procedures, training, and other quality controls in relation to the circumstances, remedial steps taken and required undertakings.[16]

In light of these cases, audit committees also should consider whether any enhancements by management are needed to corporate governance, policies, and procedures to help deter costly independence issues from occurring.

Lastly on independence, as I noted earlier, we are in a period of significant accounting change, and auditors may be asked to provide input or feedback as management makes changes to accounting policies, processes, and controls. Investors benefit when auditors and management engage in dialogue regarding new accounting standards, as it may positively impact audit quality and the quality of financial reporting. However, auditors should recognize that there are boundaries to their involvement as companies implement new accounting standards. Determining the extent to which an auditor can provide accounting advice to its audit client requires professional judgment and common sense. Auditors should never act as management or be involved in decision-making; otherwise, the auditor could later be put in the position of auditing what is essentially his or her own work. However, auditors can still provide their knowledge and point of view during the transition period, as long as they are mindful of the independence rules.

Public Company Accounting Oversight Board (PCAOB)

Let me now turn to the important work of the PCAOB with whom we work closely to achieve our shared goals on behalf of investors.

A cornerstone of investor protection is the independent audit of financial information. The mission of the PCAOB is an important one in protecting investors by establishing auditing and related professional practice standards. I commend the PCAOB for its ongoing, continuous improvements to its inspection program and believe that inspections, as well as the PCAOB’s enforcement activities, have played a key role in maintaining and enhancing the quality of independent audits. In addition, to maintain and, where necessary, strengthen the quality of external audits, it is also essential to ensure that auditing standards are sufficiently strong, comprehensive, and responsive to new and emerging risks. In this regard, the PCAOB is designed to bring expertise and a variety of perspectives, including of its advisory groups, to the task of setting appropriate auditing standards and overseeing the practice of auditing public companies and SEC-registered broker-dealers.

I was pleased with the PCAOB’s decision to implement a new research agenda.[17] An important objective of the new research agenda is to provide transparency and encourage input into the areas that the PCAOB is considering for future standard-setting or other regulatory action. You will hear more on this from Marc Panucci later today, but I believe that the topics included illustrate the importance of having a research agenda, and this has been a positive result of the PCAOB’s review of its standard-setting process.

It also helps to ensure that those projects that warrant standard-setting are added to the standard-setting agenda. Careful consideration of the PCAOB’s own regulatory experience, academic research, and stakeholder perspectives about the audit implications of these topics can help the PCAOB assess whether to pursue a standard-setting project and, if so, help to inform the project scope.

Under its revised standard-setting approach, the PCAOB has continued to update its auditing standards. For example, the PCAOB has made significant progress on its project to consider updating the standard auditor’s report,[18] which is a project that has been of interest to many investors. Finally, the PCAOB should continue to work towards advancing and finalizing other important and challenging projects on its standard-setting agenda, including auditing accounting estimates.[19]

Lastly, this year the PCAOB has also launched a post-implementation review program for its standards, which is another important element of the PCAOB’s efforts to draw upon past experiences to help continue to fulfill its statutory mission. I commend the PCAOB for its efforts and its commitment to high-quality auditing standards.

Standard-setters

Let me now turn to the importance of standard setters to high quality, reliable financial reporting.

In a fundamental sense, good financial reporting cannot occur without strong accounting standards designed by independent standard setters to produce transparent, neutral financial reporting.

While the Commission retains the ultimate standard-setting authority for financial reporting in the U.S. public capital markets, it has consistently looked to the private sector for leadership in establishing and enhancing high-quality accounting standards.

A private sector standard-setter is best positioned to promulgate accounting standards free from undue influence, whether commercial, political, national, or financial, so that investors’ continue to rightly place a high degree of confidence in not only the accounting standards but also the process by which they are developed.

Setting a standard must be informed by all relevant viewpoints, but the standard must ultimately provide objective, representationally faithful, and neutral information about relevant economic activities useful for investor decisions, even if those decisions change the economic activities of market participants.

Investors benefit from the expertise and careful judgment of the FASB in its role as the designated accounting standard-setter for U.S. GAAP, [20] as they do from the International Accounting Standards Board (IASB), whose IFRSs may be used by foreign private issuers in filings with the SEC without reconciliation to U.S. GAAP.[21]

I commend the Boards for their significant progress over the past decade to enhance financial reporting in a number of priority areas such as business combinations, leases, revenue recognition, fair value measurement, and credit losses.

However, both Boards should continue to regularly identify the needs of users and respond in a timely manner, particularly since business models and transactions are not static and the pace of change will continue. The Boards’ advisory groups and technical agenda consultations are vital to timely input regarding where current standards are missing, unclear, or produce financial reporting results that do not serve investors well.

Conducting objective, thorough, and reflective post-implementation reviews of major accounting standards serves an important role in ensuring that the objectives of standard-setting projects are achieved.[22]

International Financial Reporting Standards in the U.S.

I want to also touch on the topic of the use of IFRS in the United States.

IFRS is very significant for both U.S. investors and companies.

U.S. investors, in making their investment decisions, continue to rely on financial reporting by companies that operate globally, whether those companies are U.S. multinational companies with foreign subsidiaries or foreign private issuers that report here in the United States. Today, U.S. investors invest directly in securities of approximately 525 foreign private issuers with a market capitalization of approximately $7.3 trillion as of September 2016[23] that apply IFRS in filings with the Commission.

Many U.S. companies, particularly those with global operations, also continue to have an ongoing interest in the quality of IFRS. For example, U.S. companies frequently look abroad for potential targets and investees that use IFRS. In addition, U.S. multinational companies with foreign subsidiaries may be permitted or required by other countries to apply IFRS for statutory financial reporting requirements for their non-U.S. subsidiaries. U.S. companies also enter into transactions with non-U.S. companies and other stakeholders who are required to use IFRS financial statements; still others prepare management information using IFRS. As a result, knowledge and understanding of IFRS, including similarities and differences between U.S. GAAP and IFRS, are highly relevant to stakeholders evaluating transactions and related financial reporting obligations.

Because IFRS is very significant to both U.S. investors and companies, the U.S. has a strong interest in monitoring the quality of IFRS standards, as well as the quality of their application. OCA staff monitors the development of IFRS standards and interprets their application through the OCA consultation process, making IFRS integrated into all aspects of our work.

On the question of possible further use of IFRS for domestic issuers, I believe that for at least the foreseeable future, the FASB’s independent standard setting process and U.S. GAAP will continue to best serve the needs of investors and other users who rely on financial reporting by U.S. issuers.

That said, I strongly encourage the FASB and IASB to continue to work together to eliminate differences between their standards where such efforts will strengthen the standards and be in the best interests of investors in the U.S. public capital markets, as well as in other markets. I believe that both the FASB and the IASB will benefit from continued collaboration as both Boards continue to eliminate differences as a means of achieving progress towards the objective of high-quality accounting standards in the U.S. and globally.

I also believe it is worth continuing to consider the proposal that Jim Schnurr described at an earlier conference of allowing domestic issuers to provide IFRS-based information as a supplement to GAAP financial statements.[24]

Evolution of Technology

Next, I want to look ahead at how technology affects how investors and other users view and manage financial information.

Julie Erhardt will be speaking more about OCA’s plans in this area later this morning, but I will start the conversation with an anecdote.

In the last year, the SEC’s website received over 7 billion page views — which is more than some major media sites. The SEC delivered two petabytes of data through the site, which by today’s standards is enormous. Over the past month, there have been more than 50,000 views of EDGAR filings per day from mobile devices. This suggests to me that market participants are seizing on opportunities to gather information from filings available on EDGAR. Anecdotally, I also sense that some of those participants then aggregate, normalize, and distribute the information as a service to investors and others.

With these opportunities and the benefits of those efforts also come risks, and complex ones. As financial information is collected from financial statements, then changed, and later distributed across a range of platforms, there are ongoing considerations for investors, companies, auditors, and information intermediaries. I believe there are a number of pieces in the changing landscape to consider together—and only in doing so can we discern how the nature and extent of involvement by each of those who are vital to a well-functioning financial information supply chain should evolve.

In addition, the evolution of technology and its effects on financial reporting have implications on the education and skills required of those entering the accounting profession.

Forward progress in the accounting profession

Finally, I want to acknowledge the broader environment in which we are all working and look ahead with the accounting profession. We are living in a time of significant change. I’ve already discussed some accounting and auditing changes, which is the typical focus of this conference, but now I am talking about change in a much broader context.

• We are living in a period of global economic change — for example, large central bank balance sheets, negative interest rates, and increasing public and private sector obligations.
• We are living in a period of demographic change — for example, baby boomers are retiring, millennials are assuming greater roles and influence, and our population is broadening.
• We are living in a period of technological change — for example, advances in artificial intelligence, big data, mobile devices, pervasive interconnectivity, cybersecurity risk, and virtual reality.
• And, of course, we are living in a period of institutional change, not just in the U.S. but in other countries that are home to significant capital markets.

New tools, new competitors, new challenges, and new opportunities have created a transition for all of us. Even as we advance the high quality information in the capital markets, it is critically important to understand and maintain focus on the core principles that will move us forward even further, and to continue to act in accordance with them.

Having fair, orderly, and efficient capital markets that facilitate capital formation while protecting investors, is a pillar of the U.S. economy, and the quality and performance of the U.S. economy supports and facilitates many of America’s other strengths, as well as public policy initiatives.

But keeping true to fundamental principles is not just important for those of us as regulators, but for all of us who play important roles in maintaining our system of credible financial reporting that supports our capital markets and their participants. I will go even further in saying we all have important roles in upholding and contributing to the principles of accurate, honest information that are fundamental to the strength of our country and society.

I am a CPA. I am here at one of the largest conferences where we as licensed CPAs gather. As CPAs, we should challenge ourselves and each other to consistently keep ethical behaviors—objectivity, integrity, trust, and, most importantly, independence—that underpin the lasting value of our profession. Even as we work to ensure the public remains confident in the ethics, professionalism, and services of CPAs, we must also position ourselves and future generations of accountants and auditors to innovatively identify and solve the challenging and complex issues facing the evolving public interest. We do so best with a workplace that is reflective and inclusive of the global communities in which we serve—different people, different cultures, and different perspectives.

Indeed, Chair White has reinforced the value of diversity on company boards and in organizations generally,[25] and has also noted that diversity “brings with it a richness and variety of experiences and perspectives that benefit companies and shareholders.”[26]

I hope that the profession will also continue to lead in the capital markets by promoting those values of ethics and diversity as we together foster the efficient functioning of our capital markets, which depend on continuous flow of reliable financial information.

Closing

It has been my pleasure to speak at this conference. In our time this morning, I have tried to give you an overview of the long-held support for high quality financial information that underpins our U.S. public capital markets, our shared responsibility for strong financial reporting and ways that we can all contribute, and to highlight some paths forward as the accounting profession maintains its relevance to all stakeholders.

Senior members of the Commission and OCA staff will talk more about these and other issues over the next three days. As you listen to the discussion of various financial reporting issues, it is important to keep in mind that we are trying to engage transparently and proactively with you on our shared responsibility for high quality, reliable financial reporting, which requires the very best efforts of all of us. Investors and our capital markets deserve and demand no less.

I look forward to joining the end of day Q&A panel to address questions or feedback you may have.

Thank you for your time.