Speech by SEC Staff:
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Good morning. Thank you for asking us to be here with you. I enjoyed an easier commute this morning than most of you probably did as I live only two blocks from the hotel and so I was able to walk here.
At the outset, I have the usual SEC disclaimer for all the SEC staff speaking at this conference. In plain English, our comments, opinions, and observations are our own and do not necessarily represent the views of the Commission or others of its staff.
This is my first time at this Conference. I am pleased to see that it is so well attended and that so many of you are interested in continuing education. I have always been a strong believer in education — a very important factor for a successful career. Although this is my first time here, I want you to know that I have been a supporter of the AICPA for many years — more years than you want to know. In fact, two years ago the AICPA awarded me an “honorary member” certificate. After 40 years, you too can earn this distinction. This means that I no longer have to pay annual dues to the AICPA. I believe that this is a worthwhile personal goal for all of you — being an honorary member, not avoiding dues. The AICPA is a great organization.
This morning, I hope to briefly touch on six topics: (1) the Professional Accounting Fellow (“PAF”) Program in my office (2) the SEC’s management guidance proposal for management’s internal control assessment, (3) the planned revisions to Auditing Standard No. 2, (4) Extensible Business Reporting Language (“XBRL”), (5) certain international issues, and (6) various other OCA projects. Because over the next three days you will hear detailed discussions of these topics from my deputies and other staff, I will keep my remarks on a macro-level --- at the 30,000-foot level or maybe even the 50,000-foot level.
Speaking of my deputies, I want to publicly acknowledge the outstanding work of my deputy for accounting — Scott Taub, who will be leaving us in January. Scott has been a tremendous help in my transition. Thank you Scott.
The Professional Accounting Fellow (“PAF”) Program
First, I would like to discuss with you the PAF program — a very important program for my office and the SEC generally. The program, which began in 1972, is a two-year program for young accountants to rotate through the Office of the Chief Accountant. We currently have nine PAFs in the office. During their tenure in OCA, the PAFs work on important public policy matters impacting the financial reporting of public companies and work closely with the accounting and auditing profession. The program is an outstanding opportunity for public service to investors, for personal development, and for career advancement. I personally have had graduates of the PAF program working for me in public accounting and their experience at the SEC does make a difference. Last month we announced our annual search for PAF candidates. Through this search we hope to increase the number of PAFs who come from the corporate world. I encourage each of you to help us recruit PAFs. If any of you are interested in becoming a PAF, please contact us.
Interpretive Guidance for Management’s Evaluation of Internal Controls Under Section 404
The SEC is currently working on a proposal to provide guidance to management for its evaluation of internal controls as required by section 404(a) of the Sarbanes-Oxley Act of 2002. Last May, the SEC issued a concept release. In response to that release, we received over 150 comment letters, many of which I have reviewed and found to be extremely helpful. Some of the comment letters contained suggestions for revising AS2, which we passed on to the Public Company Accounting Oversight Board (“PCAOB”).
The SEC’s management guidance proposal is designed for efficient and effective evaluation of the internal control system by management. It is principles based and is not one size fits all. The guidance is very flexible and scalable, and is designed with small and large companies and simple and complex companies in mind. The proposed guidance sets forth a top-down, and risk-based evaluation approach. This approach encourages management to exercise judgment in designing and conducting an evaluation appropriate for the company’s individual circumstances. Also, the approach should help to determine the appropriate level of documentation to support management’s assessment.
We want management’s evaluation to be self-reliant and independent of their external auditor. Management should use their business judgment in the evaluation process. It is management’s responsibility to determine the internal control design and level of testing appropriate for their company.
This Wednesday, December 13th, the Commission will hold an open meeting on this proposal. Once the proposal is released for public comment, I ask that you take the time to review it and provide comments. Your comments will be very important to us.
Revisions to AS2
As the SEC works to issue management guidance, the PCAOB is working to revise AS2. Congress, companies, and investors want change. We collaborate daily with the PCAOB to ensure that these projects proceed in a coordinated manner. Both the SEC and PCAOB have the same goals, including considering the benefits of section 404 with the associated costs.
The revised standard will likely emphasize several important points. Most importantly, it will be a principles-based standard with less of the prescriptive requirements contained in AS 2. This should better allow the auditor to focus on the most important matters. Included in the expected changes to the new standard are revisions to the definitions of significant deficiency and material weakness as well as additional guidance on integrating the audit of internal control over financial reporting with the audit of the financial statements. The proposed standard will also provide direction on how to scale the audit for smaller companies. The PCAOB will be providing additional guidance on considering and using the work of others in order to clarify how and to what extent an independent auditor may use the work of others to reduce the work the auditor otherwise would have to perform.
The final standard will be subject to SEC approval. You will hear more about this from the chairman of the PCAOB, Mark Olson, and his staff.
Another very important project for the SEC that my office is working on is XBRL. In September, the XBRL US nonprofit corporation was established as a vehicle for this important project. The SEC entered into a $5.5 million contract with XBRL US as part of its $54 million investment to modernize the EDGAR system — a vintage system from the 1980s. In a collaborative effort, the Financial Accounting Foundation has undertaken to invest approximately $3 million to fund the development of XBRL for financial reporting purposes. The AICPA, Federal Reserve, FDIC, and International Accounting Standards Board Foundation are also very interested and involved in this project and its development.
XBRL is a dynamic, real-time search tool with interactive capabilities. By “tagging” each piece of data that currently resides on forms filed with the SEC that data becomes portable and can be moved to wherever the user chooses to take it, together with any other data the user deems significant to the investment decision. At the heart of this project are “taxonomies,” which define, identify, and record each piece of data. I analogize taxonomies to bar codes.
In March 2005, the SEC started a voluntary program for companies to submit filings in XBRL format. From that program, we will carefully study the costs and benefits of using XBRL, especially for small companies, and evaluate any issues associated with reporting in this new format. Although the SEC is encouraging companies to join the voluntary program, it has not mandated the use of XBRL. Currently, over 50 companies are participating in the voluntary program with very good results.
I expect XBRL will benefit investors, analysts, and others by potentially providing long-term cost savings, more reliable and accurate data, and better access to data.
My predecessor, Don Nicolaisen, laid out what is commonly referred to as the “Roadmap.” The Roadmap sets forth the milestones toward eliminating the need for the US GAAP reconciliation requirement for foreign issuers who list in the US capital markets and who prepare financial statements using International Financial Reporting Standards (“IFRS”) by 2009 or possibly sooner.
Currently, the FASB and the International Accounting Standards Board (“IASB”) are working on 11 joint projects. These projects include items such as business combinations, consolidations, revenue recognition, and a conceptual framework. I am pleased with the progress being made so far.
This Roadmap is very important because it considers the efficiency of the US capital markets and the effects on investors, and lowers costs to issuers relative to the current reconciliation requirements. The SEC staff is reviewing the foreign registrant’s financial statements, which will help us better understand the differences and application of IFRS.
Other OCA Projects
We have several other significant projects in OCA at the moment. First, the complexity of financial reporting is a significant issue that we hope to address, together with the FASB.
Second, as part of its oversight function under Sarbanes-Oxley, the Commission approved the PCAOB budget for 2007 last week. Also under the umbrella of our oversight function of the PCAOB, next year, we will again undertake an inspection of certain aspects of the PCAOB’s operations.
On another topic, in conjunction with other securities regulators in IOSCO, the staff at the Commission is beginning to survey the landscape of independence requirements, in an effort to compare and contrast the auditor independence requirements in various jurisdictions throughout the world. By gaining an understanding of the current similarities and differences we hope to engage in constructive dialogue going forward.
Lastly, there is a concern about the litigation, regulatory, and prosecutorial risks faced by the public accounting firms. We do not want to see another Arthur Andersen situation, but recognize there is no easy solution to this issue.
In closing, the accounting and auditing environment is changing rapidly. You are fortunate that you are attending a conference where you can learn more about these major and important changes.
Thank you for your time. It is a pleasure to be here. Please enjoy the rest of your conference.
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