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Speech by SEC Staff:
Remarks before the 2008 AICPA National Conference on Current SEC and PCAOB Developments


Conrad W. Hewitt

Chief Accountant
U.S. Securities and Exchange Commission

Washington, D.C.
December 8, 2008

As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC staff.


Good morning. This is the third time I have spoken at this conference and it is a pleasure to be here with you again. As you may be aware, on November 25, 2008 I announced I was leaving the Commission in January. I would like to spend my allotted time, and the deputies will excuse me if I run over a little, on what has happened over the last 2 years and some lessons learned. I have two goals for my speech today, issue no new GAAP or GAAS and hopefully leave you with some things to think about.

I have the usual SEC disclaimer for all the SEC staff speaking at this conference. In plain English, as a matter of SEC policy our comments, opinions, and observations are our own and do not necessarily represent the views of the Commission or its staff.

When we last met in December 2007, my office was focused on lifting the reconciliation to U.S. GAAP required for foreign private issuers. Also, we were considering comments received on a concept release to allow US companies the option to switch from US GAAP to IFRS. We were also focused on the Advisory Committee on Improvements to Financial Reporting work on improving financial reporting and reducing complexity. At the time, I thought that significant progress on these initiatives alone would require a superior effort by my staff. What I didn't know was that my office would take on a new initiative on top of these - the current credit crisis.

Achievements of the Office of the Chief Accountant

I could not be prouder of what my office has achieved over the past several years. The dedication of my deputies and senior advisors is commendable and the hard work of the entire staff of OCA made these achievements a reality.

When I first accepted the position of Chief Accountant, I had a number of goals that I wanted to accomplish. I hope you agree that we have made great progress in recent years.

As many of you know, before coming to OCA I spent a good deal of my time serving on audit committees. As an audit committee member and chairman, I found that the cost incurred to comply with AS 2, including both internal costs and additional audit fees, to be onerous. That being the case, I put revising AS 2 and issuing guidance for management at the top of my list.

Both AS 5 and the SEC's management guidance helped reduce much of the unnecessary cost associated with earlier compliance with SOX 404. Both were important achievements of this office along with the PCAOB and the Division of Corporation Finance and set the tone for the last two years.

The next initiative began in July 2007 when CIFiR was established. CIFiR was tasked with providing recommendations to decrease complexity in financial reporting while still protecting investors' interests. The Committee members represented a diverse group of prominent individuals who provided a fresh perspective on the use of financial reporting.

CIFiR completed its work in August 2008 and published 25 recommendations. CIFiR made clear, what I already believed to be true, that straight-forward, understandable, and balanced financial reporting provides investors with the best information. OCA will be working with the Commission to address these recommendations in the coming months — so stay tuned.

One of the recommendations mentioned in CIFiR's final report is XBRL or Interactive Data. I was not aware of what XBRL was when I arrived at the Commission, but when the Chairman explained his vision for XBRL, I could easily envision the benefit it could provide to investors. I believe XBRL will transform how investors access financial information in an easy to use format. You will be able to compare companies' financial data using your own models or formats.

The Roadmap to IFRS

Now, turning to IFRS, I would like to discuss with you an initiative that has an even greater potential to shape the future of this profession. In my opinion, this initiative represents what I believe to be the most important accounting policy decision ever made by the Commission. I don't make that statement lightly.

Good financial reporting is at the heart of our disclosure-based system of regulation. Moreover, a high quality set of accounting standards is the underpinning of good financial reporting. U.S. GAAP has served the U.S. markets well over the years. However since the formation of the IASB in 2001, another set of accounting standards - IFRS - has been rapidly accepted across the world. As you know, IFRS is now required or permitted in over 100 countries around the world. In all of the Commission's work to date, a consistent premise has been that investors are better served by having available high quality financial information across issuers, regardless of their domicile. This aids investors in making informed decisions in allocating their capital among competing alternatives.

When I arrived at the SEC, I inherited a roadmap from my predecessor for lifting the reconciliation for foreign private issuers. I did not have to continue with the roadmap however, with my experience in the international business world and after learning more about IFRS, I saw the importance of moving to a single set of high-quality global accounting standards. I fully embraced this concept.

I made lifting the reconciliation a focus of my office's efforts. In 2007 these efforts culminated in the Commission allowing foreign private issuers to file financial statements prepared using IFRS without a U.S. GAAP reconciliation. This was a small but significant step in moving the U.S. to IFRS.

The next step towards accepting IFRS in the U.S. was initiated on August 27, 2008. On that date the Commission voted to publish for comment a proposed roadmap for the potential use by U.S. issuers of financial statements prepared in accordance with IFRS as issued by the IASB. This roadmap sets forth seven milestones that the Commission will consider in making a decision for the mandatory use of IFRS by U.S. issuers. I will let my staff discuss the details of these milestones later at this conference. The roadmap also provides for the possible "early use" of IFRS by U.S. companies in certain circumstances.

We heard from many parties through the comment letter process on the concept release, and our three roundtables on the issue. Most parties agreed that if the U.S. is to move to IFRS, we need to work towards a date certain. A date certain to change over to IFRS from U.S. GAAP would allow U.S. public companies to begin to plan for this endeavor. As proposed in the roadmap, the Commission would look forward to considering in 2011 as to whether to mandate the filing of IFRS financial statements by U.S. companies beginning with their 2014 fiscal years, which is only six years from now.

The early use of IFRS

As I noted earlier, the roadmap contains a proposal that would permit the use of IFRS by a limited number of eligible U.S. issuers, independent of any Commission consideration of a mandated transition.

The key to this eligibility is enhancing comparability for investors. Only an issuer of a certain size and whose industry, when considered on a global basis, uses IFRS as the basis of financial reporting more than any other set of accounting standards, would be eligible to use IFRS in its Commission filings.

The objective of early use is to identify those categories of U.S. issuers for whom the use of IFRS would promote comparability amongst global competitors. The release asks a number of questions and we are hoping to receive useful feedback during the comment period that will inform the staff so it can make an informed recommendation to the Commission. We are certainly looking forward to receiving your comments. Please stay tuned as we continue down this road.

The Current Credit Crisis

The events of the last 18 months have changed the world and accounting forever. This change has been for the worse in the short-term and the long-term effects are as of yet unknown. The current credit crisis has unleashed a veritable alphabet soup of financial terms into the general public, for example SIV, CDO, CDS, and OTTI just to name a few.

The current credit crisis has been used by some as a basis for suggesting that fair value is the cause of or a significant contributing factor to the current financial reporting environment. OCA has been dealing with the challenges on a number of fronts.

One of the steps to address these challenges was our commencement of a study on "mark-to-market" accounting, which requires companies to measure investments at fair value. Congress in the Emergency Economic Stabilization Act, which was signed into law by President Bush on October 3rd, mandated this study. Through this study we will focus on:

  • the effects of accounting standards on companies' balance sheets,
  • the impact accounting standards have had on bank failures,
  • the impact fair value accounting standards have on the quality of financial information provided to investors,
  • the FASB's process for developing accounting standards,
  • the alternatives to Fair Value Accounting Standards, and
  • the advisability and feasibility of modifications to Fair Value Accounting Standards.

OCA is leading the efforts to conduct this study in close consultation with the Secretary of Treasury and the Board of Governors of the Federal Reserve System. The study is required to be completed within 90 days of the enactment of the Act. Jim Kroeker, one of my deputy chief accountants, is the project director for this very important study.

The Commission has hosted three roundtables since July during which a broad range of market participants discussed fair value accounting standards, ways in which fair value accounting could be improved and the transparency of financial reporting. Panelists discussed their experience with fair value, or "mark-to-market" accounting, and the challenges they face in applying the accounting standards. Panelists generally agreed that fair value accounting increases transparency and provides relevant financial information. However, some of the panelists shared their views on how difficult it was to implement fair value accounting in the current market environment. These roundtables are intended to provide us with valuable insights from investors, companies, and other market participants that are affected by the current market conditions.

Although we are still working on the study and have formed no conclusions I would like to remind you of some remarks I made at the University of Southern California SEC and Financial Reporting Institute's 27th Annual Conference last May. In those remarks I commented that while I believe the use of fair value has its limitations for certain transactions, I believe that, as it relates to the type of financial instruments that we are dealing with in the context of the current credit crisis, fair value has better informed investors than historical cost or a smoothing method would have. We have heard from investors and many preparers that the use of fair value has provided a level of transparency that is needed particularly in the current market place. While fair value also introduces volatility, I believe that when this volatility reflects the underlying change in the economics of a transaction, investors are better informed. Since those remarks last May a lot has happened that we will need to consider when preparing our study.

Concluding Thoughts

In closing I would like to leave you with a few farewell thoughts. The accounting and auditing profession has never been more exciting. My staff and I have been at the center of some of the most critical issues facing our capital markets. Having worked with them, I am sure that the staff of the Office of the Chief Accountant will be up to the task of addressing the issues in the upcoming months and years. I have enjoyed working with Bob Herz, Chairman of the FASB, Sir David Tweedie, Chairman of the IASB, and PCAOB Chairman Mark Olson. I think they are all doing a very good job in this difficult environment and you should all take comfort that they continue to serve in their respective roles.

Throughout my 50 plus year career that included working at a bank in Peoria, Illinois, the Air Force, Partner at Ernst & Young, Superintendent of Banks and then the First Commissioner, Department of Financial Institutions - State of California, Audit Committee Member including Chairman, and finally Chief Accountant of the SEC I have had a number of meaningful experiences. If you take anything from my experiences, please remember the following:

  1. Never fear taking on something that you had not planned for,
  2. Be positive about changing your career,
  3. Surround yourself with good people and reward them appropriately, and
  4. Plan for the future but realize you may be subject to unforeseen changes and events.

Moving on to the future of accounting and auditing, I always tell my audiences that you are involved in a fast changing accounting and auditing environment. My personal opinion is this level of change will continue for the next 5-10 years. If I could leave you with a final piece of advice from someone who has been in the profession for a while, I would suggest that you remember to take an active role in your education. I have always been a strong believer in education — a very important factor for a successful career.

I also wanted to thank the AICPA for the opportunity to speak 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, three 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. Obviously you can tell by my remarks I believe that the AICPA is a great organization.

Finally, as is the case every year, I would like to highlight that we are looking for our next group of Professional Accounting Fellows or PAFs. Last year I even put on my recruiting hat, literally. We are currently looking for 4 PAFs to join our office in the summer of 2009. During their time with us, PAFs work on important public policy matters like those we have discussed today. Their experiences while in OCA will undoubtedly be some of the most memorable they have during their career. Please go to the SEC-Website for more information on our PAF program and the application process.

It has been a pleasure and an honor to speak to you again and serve as your Chief Accountant. Our profession continues to be exciting and challenging. The issues being debated today will form the foundation for our profession's future and hopefully will benefit those that follow us in their careers.

Please enjoy the rest of the conference and thank you for taking the time to listen.


Modified: 12/18/2008