Speech by SEC Chairman:
Remarks Before the Financial Accounting Foundation’s 2011 Annual Board of Trustees Dinner
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
May 24, 2011
Thank you, Jack, for that kind introduction.
I would like to thank the Financial Accounting Foundation for inviting me to be here this evening.
It’s a pleasure to be among so many distinguished accounting professionals and others who share my strong belief that high-quality standards and transparent financial reporting are critical for investors and necessary for maintaining confidence in our capital markets.
Investors need to be our primary focus — and their needs must be taken into account — as the boards here tonight adapt standards and reporting practices to reflect the ongoing changes in the financial world.
It wouldn’t surprise me if most people outside the world of finance think that accounting is a pretty static discipline. I’m sure they understand that computers make things easier now, and the numbers are a whole lot bigger than they used to be. But I think there’s a misperception that the accounting profession is still putting figures into columns in just about the same way its been done since the adding machine was invented.
You, more than anyone, know that this is not the case. Accounting, like every other tool of modern finance, progresses at a rapid pace. Companies find new ways to conduct business and manage cash. Financial analysts discover new ways of measuring a company’s financial health or more creative ways to disperse or take on risk. Markets evolve in ways that demand continuous attention to measurements and performance predictors.
These are largely good things. They make markets more efficient and give entities and investors better ways to monitor performance or risk. My focus, as Chairman of the SEC, is ensuring that the information needs of investors remain paramount as the reporting process and the standards that govern reporting evolve.
Of course, this is a priority that has been embraced by the Financial Accounting Foundation and by the FASB and the GASB for almost four decades. And we thank you for your tireless effort to ensure that accounting standards both reflect current financial realities and support the efficient allocation of capital by ensuring that investors can be confident and informed.
I believe that the effort to inform investors and bolster confidence is particularly important today, when:
- Investors are still wary after a decade of scandals and crises.
- The financial markets are global — investors are evaluating firms based, audited, and working in every country in the world.
- And the sheer size and complexity of the financial markets is placing a tremendous strain on organizations charged with ensuring that the numbers firms report, reflect the information that investors need today.
The Importance of High Standards and Investor Confidence
Here in the U.S., the prominence and reputation of our capital markets are directly linked to our ongoing commitment to high-quality, accurate financial reporting. And, by reducing uncertainty regarding an issuer’s economic fundamentals and prospects, we are helping to minimize the cost of capital to growing firms.
Nonetheless, at the SEC, we have heard from investors that they are not as confident as they could be, and they have areas in which we all could expect more from accountants, from accounting standards, from regulators and from those who provide assurance though the audit process.
I believe that, when your customer asks for more, especially after the challenges of recent years, you need to listen.
And, in fact, the SEC and FASB are listening Not only that, we are acting. To give you just one example, investors have been calling for better accounting standards and more transparent disclosure of the risks to which entities are exposed through off-balance sheet transactions. The FASB responded with a major standard-setting initiative for the accounting of financial asset transfers and consolidation, including elimination of the exemption for so-called “qualifying special purpose entities.”
The SEC is acting, as well, with a monitoring strategy for the new standards that includes guarding against attempts at circumvention, relaying our findings to the FASB, and conferring with the FASB regarding further refinements that may be needed.
This monitoring effort is very similar to an FAF initiative that is putting in place an evaluation process for other new standards as they are introduced. We’ve learned that even well-considered first efforts don’t always work as planned. And we’ve learned that, rather than declaring a problem solved and moving on, both the SEC and the FAF need to take stock of the effectiveness of new standards and identify needed changes before a crisis reveals an unexpected weakness.
I am also looking forward to the FASB’s and the PCAOB’s participation in the SEC staff’s new “Financial Reporting Series.” This will be another opportunity to listen and learn — a series of roundtables designed to help all of us who are involved in the financial reporting system, identify risks related to the reliability and usefulness of financial reporting, as well as areas for potential improvements. We believe that the series will provide us, as well as the FASB, PCAOB and others, with useful information about emerging issues and about changes in the business environment that affect the financial reporting system.
However, solid financial reporting standards are only the beginning. Those standards have to be met. So, the SEC also is applying lessons the financial crisis taught us about the role of the independent auditor.
For example, when investors ask for greater transparency, it stands to reason that the SEC, FASB and PCAOB should all be listening and responding. The relationship between accounting standards, robust application of those standards and high quality audits of the results, underscores the need for close coordination between these three institutions.
And so, I believe the PCAOB’s examination of the auditor’s reporting model is particularly important to our efforts to better understand whether there remains information that investors need, but which they are not getting from auditors today.
Of course, there will always be opportunities to improve reporting through development of new standards. But it is equally important to ensure that existing standards — supported by robust accounting, complete disclosure and accurate verification by auditors — are effectively supporting investment decisions, as well.
As investors of all sizes move back into the markets, our effort to ensure high-quality, accurate financial reporting will move forward on all fronts.
Global Accounting Standards
Of course, this is not a purely domestic effort.
Accounting and financial reporting standards are essential to efficient allocation of capital everywhere in the world — from London to Los Angeles, from Atlanta to Osaka. And so, as we work to improve domestic accounting standards and the way in which they are supported, we are also looking closely at the question of incorporating IFRS into the financial reporting system for U.S. domestic companies.
The SEC staff is considering a number of factors. But let me be clear up front: our primary consideration is, and will continue to be, the best interests of U.S. investors.
In the mean time, we consider the ongoing work of the FASB and the IASB together to develop and improve financial accounting standards to be of vital importance.
I have been pleased that the members and staff of both the FASB and IASB are prioritizing projects in areas most in need of improved global standards, including revenue recognition, leases, financial instruments, and insurance.
And I am pleased that this effort is marked by rigorous procedures, including pre-implementation reviews and outreach. While performing research and conducting field studies take time and demand patience, they are important elements of due process and they are the key to effective results that will eventually lead to high-quality, converged standards.
As the FASB moves into the phase of final deliberations on many of the highest priority projects, let me encourage you not only to look at these reviews and field studies, but to evaluate carefully the feedback and extensive comments received on the proposals, as well. I encourage you — as you work to make informed decisions within a thicket of competing views — to give particular weight to the opinions of the investors whose needs must remain at the center of this debate.
Looking forward, I believe the FAF and FASB will continue to play a substantive role not only in achieving the promise of high-quality global accounting standards but also — should the Commission decide to move forward with incorporation — in helping to maintain those standards, as well.
Funding for the GASB and IASB
In addition to the quality of its board and staff, one reason the FASB is able to maintain its position as a world leader is the independent and stable funding it has received, through the issuer accounting support fee, since enactment of Sarbanes-Oxley.
And this brings me to a third area in which I believe change would benefit investors: stable funding for other standard-setting boards.
The Governmental Accounting Standards Board establishes standards that state and local governments may elect to use when raising funds through issuance of municipal securities. And it is a leader in studying how well those standards work. Just last week, the FAF announced that GASB has commissioned an independent study on the purposes of financial accounting and reporting by state and local governments.
Designed to examine how GASB guidelines and standards help investors assess the accountability of local governments and their offerings, it is a timely reminder of the important and unique role that GASB fills.
I am pleased that the Dodd-Frank Act recognized the importance of sufficient and stable resources by authorizing the Commission to require a national securities association to fund the GASB by establishing an annual fee. The Commission recently directed FINRA to establish this fee which will strengthen the independence of the GASB as the Trustees will no longer need to solicit contributions from the very people who must apply the standards that the GASB develops.
Yet another important standard-setter, the IASB, lacks an independent and assured source of funding, as the IFRS Foundation has no authority to impose funding requirements. The threats of interference during the financial crisis serve as a continued reminder of the importance of financial independence for the IFRS Foundation and the IASB.
I know from my role as a member of the Monitoring Board that the trustees of the IFRS Foundation are working closely with regulatory and other public authorities and key stakeholder groups to explore more stable funding mechanisms. Until then, however, funding for the IASB will remain a challenge. And so the SEC’s staff continues to evaluate short-and long-term options for assisting the IFRS Foundation. I would like to thank the FAF and its leadership for their continued input and support on this important issue.
In a financial world of constant change and competing interests, it is perhaps more important than ever that investors be represented and their interests reflected in the standards being written by the FASB and the GASB.
Lingering results of the financial crises underscore the need to protect investors: with increasingly informative accounting standards; with scrupulous application of all standards, old and new; and with robust auditing that ensures accuracy.
A global economy in which billions cross borders with a click of a mouse demands accounting standards that cross borders with equal ease.
And, a financial accounting board setting standards on which investors rely in a global financial marketplace measured in the hundreds of trillions of dollars, should not have to rely on voluntary contributions.
The financial world is always evolving. But, since its founding, FAF members have worked hard to ensure that this world of constant change is anchored in values that never do: integrity, transparency, and objectivity. This commitment has always been important to investor confidence and efficient markets — they may be more important than ever today. I thank you for this commitment. And, as the SEC works to respond to investors’ needs in today’s markets and tomorrow’s, I look forward to continuing our work together on their behalf.