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U.S. Securities and Exchange Commission

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


James L. Kroeker

Deputy Chief Accountant, Office of the 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 Staff.


Good morning. It is truly a privilege to speak with you this morning during a time of great focus on our profession. Over the last year the important role we all play in our capital markets has been evident. I think all of you would agree that this has been a memorable year, with the promise of more to come.

Although my time this morning is limited, I would like to spend the next few minutes reflecting on how I have seen our profession’s contribution to the capital markets evolve in recent years. The role our profession has played during the current market turmoil has crystallized with me the important responsibility of accountants’ as information gatekeepers to the investing public. In that light, I’d like to discuss a few important lessons, or maybe more appropriately reminders, that I think are valuable to reflect upon when looking at the events of the past year or so.

Accounting as a Profession

The first lesson that the recent financial reporting challenges caused me to reflect on is the importance role accountants play as professionals. To begin, I would like to share some thoughts on what I believe distinguishes a profession. In my mind, key characteristics of a profession that distinguishes it from a trade are the degree of expertise, knowledge, and judgment its members are expected to exercise. The amount of judgment invested in our profession, and the confidence others have in that judgment, are importance elements in establishing and maintaining the trust society places in us as professionals. It is our obligation as a profession to rise to the occasion to fulfill that responsibility.

Since our profession began, we have always been asked to exercise professional judgment. When to accrue a liability is one of the first basic judgments we teach young accountants in school. Over time, as we obtain knowledge, experience, and develop and refine “tools,” accountants become comfortable in practice making such judgments — with confidence that our judgment is sound.

In recent years, we, as a profession, have been asked to extend our expertise, including the level of judgment we are required to exercise, into new areas. We have also been challenged by the task of exercising judgment as we endeavor to develop and refine the tools we need. As the use of fair value measurements began to noticeably extend in the early 1990s, and particularly with the introduction of highly structured investment products, accountants were put in a position to not only estimate the current fair value of a wide range of securities; but also, in some cases, evaluate how the fair value of a security would be impacted by an uncertain future. Derivative accounting standards put in place in the early part of this decade further extended the judgment of accountants to the valuation of another set of complex financial instruments. These instruments, which sometimes contain a myriad of risks and uncertainties, have required accountants to make fair value judgments that extend the expectations of our profession.

History books are filled with events that could never have been foretold. That being the case, I can understand why accountants are uncomfortable with judgments that require us to make and assess estimates that incorporate expectations of future events.

In my experience, accountants are ordinarily much more comfortable dealing with judgments, and accept others’ judgments, when there is a historical basis from which to draw knowledge in making assessments. Consider, for instance, the way most of us approach a sales return reserve. Although the estimate of future sales returns is forward looking, in many cases it is appropriate to base that estimate, at least in part, off of established past history.

For certain fair value measurements, past history, if even available, may not provide a sufficient basis to form an expectation of future experience. Without historical information, accountants are sometimes faced with the challenge of cataloging and evaluate expectations of future events based on uncertain forecasts. If investors need this information, we should endeavor to provide it, with the understanding that it extends the boundaries of our profession. Moreover, we all should expect that our understanding of these measurements will mature and improve over time.

The extension of the bounds of judgment in our profession is ongoing and may be unsettling to some. However, I believe that the trust placed in us to make those judgments is a testament to the importance others place in our profession. During the course of recent work on mark-to-market accounting, many investors have told us that the fair value information they current receive is not only useful, but important to transparency in an uncertain environment and to maintain confidence in financial reporting. For our profession to continue to prosper, we must be responsive to these fundamental objectives on which our profession is based.

To be responsive to investor needs, we must continue to enhance the tools at our disposal to make the challenging judgments presented to us based on available and relevant information. We also must do what we can so that our judgments are balanced and neutral to fulfill our role as gatekeepers to the investing public.

Responsiveness is enhanced by collaboration between investors, preparers, auditors, regulators, and standard setters. Market participants, I believe, accept the fact that these judgments can be challenging, which is why they place their trust in us to navigate them. There will continue to be challenging issues associated with judgments about fair value and other aspects of financial reporting. These challenges should be expected, and we should rise to that challenge as a profession by focusing our efforts on collaboratively resolving them.

The Importance of Investor Confidence

The second lesson, or reminder, is the importance of investor confidence. Our profession has always been associated with independence and neutrality. That is, as gatekeepers of financial information, we have always strived to provide a balanced perspective of the financial information we are charged with maintaining. Independence and neutrality are ingrained into the fabric of our profession. These two characteristics are not separate objectives, but rather are characteristics that nurture one another.

A sometimes overlooked aspect of the independence of our profession is the important role of the independent standards setter. Standard setting that solicits input and feedback from all interested parties, yet places the interests of no particular special party above the needs of those relying on the standards, fosters neutrality. Neutrality is what we strive for to increase the credibility of the financial information we provide.

In turn, neutrality fosters investor confidence in the independence of our profession. Our independence and neutrality is reinforced by the production of neutral and balanced financial reporting. We cannot forget that investor confidence is at the heart of, the necessary ingredient of, market efficiency and capital formation. Our profession’s greatest asset is its reputation for independence and neutrality in the service of the public interest, and we should be vigilant in its continued development, support and defense.

The issues we as a profession confront in the current global crisis, particularly related to fair value accounting, have garnered national and international political attention. They have tested our profession’s resolve to remain independent and neutral in the service of the public interest. Domestic and international attention also has resulted in a renewed focus on the critical independence of those entrusted to develop the accounting standards that we apply and audit.

Efforts to understand and timely address real world challenges that have been tested by the current crisis– be it off-balance sheet accounting, fair value measurements, or other-than-temporary impairments — are just a few examples of the concrete measures standards setters have undertaken to address current issues. Not only is it fundamentally important to support the critical independence of these bodies for investor confidence, that confidence also is dependent upon the standards setters’ ability to respond timely to real world challenges.

Independent accounting standard setting is integral in fostering a financial reporting system that remains robust and is responsive to the needs of investors. Just as important, investors must have confidence in those standards and how they are set. Open due process, including thoughtfully considering the input and views of investors, and the many others who participate and play a role in our capital markets, is critical to the FASB and IASB in fulfilling their mission of establishing and improving financial accounting and reporting standards.

Investors in our capital markets have benefited in the past, and will continue to benefit in the future, from both FASB and IASB expertise and careful judgment. We must draw upon this expertise as we continue to consider the important reporting issues arising from the global economic crisis. An independent standard setter is best positioned to develop unbiased financial reporting standards that foster investor confidence and financial transparency. We cannot forget that investor confidence is at the heart of market efficiency and capital formation.

Study on Mark-to-Market Accounting

As you are most likely aware, the Commission is currently conducting a congressionally mandated study on “mark-to-market” accounting. In conjunction with the study, and as a follow up to our July 2008 roundtable on fair value accounting, the Commission held two public roundtables this fall. These roundtables were very valuable in gaining insights from investors, companies, and other market participants affected by current market conditions. Additionally, to promote openness in connection with the study, we requested public comment and received more than 150 responses providing valuable input on the topic of mark-to-market accounting

While the topic of fair value fosters significant debate, to put it mildly, I wanted to focus for just a few moments on areas where I believe there may be a general level of consensus. Although our study is ongoing, the input we have received to-date makes clear that there is room for improvement in the current accounting and reporting framework. For example, there appears to be general agreement that investors could be better served by a more stream-lined model for addressing impairments of assets that are not held for trading purposes. Most agree that the current framework for impairment can be challenging to apply, and the utility of information to investors can be improved.

As a second example, investors have clearly indicated a view that the current concept of mark-to-market accounting increases the transparency of reported financial information, and they have indicated how important this has been to them in the current environment. However, where inactive or illiquid markets exist for a given instrument, we have heard from many that additional training and tools would be helpful as preparers and auditors address front-line issues. As a last example, and in line with one of the recommendations of the SEC’s recent Advisory Committee on Improvements to Financial Reporting, we have again heard about the importance of fostering an environment where reasonable judgments are both developed and respected.

As I mentioned earlier, collaboration on these difficult issues will be critical. It is my hope that our study will provide insight as we address these important issues in the near-term.

Concluding Comments

Although my time this morning was limited, it has been a privilege to be able share my perspective of how our profession has responded to recent events as we fulfill our critical responsibility to the capital markets. Responsiveness to the needs of the investing public reinforces our position as a key contributor to society. Although we will undoubtedly be asked to address challenges in the upcoming reporting season, I am proud that our profession has garnered the confidence of others to take on these challenges.

I look forward to working with you all as we continue to address the most pressing issues affecting our profession.

Thank you again for taking the time to listen.



Modified: 12/08/2008