Remarks at the 2016 AICPA National Conference on Current SEC and PCAOB Developments
Julie A. Erhardt, Deputy Chief Accountant, Office of the Chief Accountant
Dec. 5, 2016
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 at the Commission.
Good morning. I am grateful to be in Washington, D.C. today and to have the opportunity to speak at this conference. The focus of my remarks this morning will be on technology. I will speak about technology because I believe it is a factor—along with other factors such as accounting standards, the corporate governance model, and the broader securities regulatory framework—that affects the preparation and distribution of financial statements for use by investors.
In my remarks on technology I will cover the following three aspects:
- Technology as a factor that affects the preparation and distribution of financial statements for use by investors.
- The effects of technology on management’s presentation of a company’s financial statements to investors; and
- The effects of technology on other marketplace participants’ presentation of a company’s financial information for use by investors.
I will then conclude with what these three points convey to me. Of course, these remarks will be my own, and thus they do not necessarily reflect the views of the Commission, the Commissioners, or other members of the SEC staff.
Technology Affects Preparing and Distributing Financial Statements for Use by Investors
It is not always easy to see how technology is a factor affecting a company’s financial reporting because its effects are often difficult to see unless looked at over a period of time. But looked at over a period of time, the effects of the changes can be startling. For example, looking at the timeframe of my involvement in the accounting profession, I fondly recall the controller—her name was June—of one of my former audit clients. While a bit unusual even for that time, June prepared her company’s financial statements by manually tabulating the amounts of the journal entries that she had written on paper in beautiful long hand. These sheets of paper were bound together in what was called a “ledger book”, which when it lay open was as wide as June’s desk!
While June’s situation is a reminder of how far technology has come in preparing a company’s financial statements, I have a second recollection about the distribution of a company’s annual reports to the marketplace. I recall the time when if a person wanted to obtain several companies’ annual reports, then he or she might request them from a major business publication such as the Wall Street Journal, Financial Times, or Forbes. These news services offered annual report services that allowed interested parties to obtain company annual reports from them, of course by mail. Now company annual reports are available on the internet, and the information within them may be directly downloadable as well.
Hopefully these two anecdotes have served as good reminders that changes in technology are indeed a factor that affects both preparers and consumers of financial reports. Now let me now move to my second and third points.
Technology Affects Management’s Presentation of Company Financial Statements
For the last 7 years the SEC’s rules and regulations have required that U.S. issuers submit their financial statements to the SEC in two ways:
First, the financial statements are filed in “traditional” format; that is, as words and numbers on a page. The traditional format is intended to serve the needs of investors, and others, who want to read and analyze the information as historically they have, on paper.
Second, the financial statements are filed in “modern” digital format; that is, containing bits and bytes type information, or “tags.”  The modern digital format is intended to serve the needs of investors, and others, who want their computers to collect and analyze the information, facilitating the comparison of financial performance across companies, reporting periods, and industries.
While technology is the linchpin that allows for this modern digital conveyance of financial information, I think this technology, or tags, are more easily referred to than fully understood. For example, consider the new upcoming globally converged accounting standard on revenue recognition. Upon implementing this standard, one U.S. company may decide to label the revenue line item in its income statement as ‘sales’, while another labels this line item as ‘revenue’, and yet a third overseas company labels this top line as ‘turnover’. While the underlying amounts are derived from converged accounting standards in all three cases, the labeling of the amount in the traditional financial reporting format occurs in three different ways. I don’t think this is a shortcoming of accounting standards, because standard setting does not set out to standardize every aspect of financial reporting.
When reading and comparing the traditional format income statements of these three companies, investors would likely discern that the three different labels for revenue nonetheless describe the same thing, but a computer compiling information does not have this skill unless the digital format income statement reports them, or in other words they are tagged, alike. But in practice will these three amounts be formatted digitally in differing ways in order to be true to the differences that exist in their traditional income statement rendering, or will they be formatted digitally all in the same way to be true to their underlying converged derivation? In other words, where should the nuances of traditional financial statement formatting be forgone for purposes of the more comparative analysis across companies that digital formatting facilitates, and in what situations should these nuances be retained for the sake of adequately capturing for investor needs the nuances that management created in developing its traditional reports in the first place? I will not try to answer this question today; however, it does remind us that accounting is part art and part science. Accordingly, a point for consideration is how technology may fully capture and communicate the best of both aspects.
Technology Affects Marketplace Participants’ Presentation of Company Financial Information
I think the technological linchpin for marketplace participants’ to become involved in presenting company financial information—beyond the accumulating and mailing of company annual reports that I already mentioned—was the movement to commercial use of the internet. Commercial use allowed registrants to set up their own websites, on which they could make their annual reports easily accessible to any outside party, for free. This expanded internet use also made company financial information more easily accessible from the SEC’s own EDGAR filing system. Thus a low cost, readily accessible supply of financial information was born.
With this trove of freely accessible financial information, it is understandable that parties outside of a company would seize the opportunity to accumulate, present, and distribute it to investors and others with the goal of adding insight and usefulness to their investment decisions. You can probably best picture this outcome if you think about what information you have at your disposal when you purchase an airplane ticket today. With airplane tickets, third parties accumulate and aggregate flight schedule, price, and availability information from a number of airlines and present it all in one place in a way that helps you to quickly determine what would be the best alternative for you. When it comes to third parties’ accumulation and aggregation of company financial information, which could just as easily be the aggregation of revenue or earnings per share information as opposed to the prices of airplane tickets, the objective for users of that information is along the same vein.
Of course, just as with a particular airline whose routes and fares are accumulated, aggregated and distributed on a third party’s website, a particular company whose financial information is being likewise presented by a third party has an interest in having its information presented accurately and fairly. On the one hand, a company’s management has little incentive to take over this role by outsiders because they perform it at presumably minimal or no cost to the company. On the other hand, if management has concerns about the quality and completeness of the information that a third party provides then taking additional steps may justify the additional cost. So let me finish by asking those who work at companies, do you know how the financial information provided by third parties compares with the financial statements that your company filed with the Commission? Are there risks or opportunities that management or the company’s audit committee should consider? I would also ask auditors, are you curious how the financial information provided by third parties compares to the financial statements that you audited?
Let me conclude by observing that my comments were in the form of observations and questions rather than conclusions. This could rightly beg the question from you: “Now what?” Let me respond with three thoughts.
First, my observation that technology affects the preparation and distribution of financial statements for use by investors is not unique to the United States. I know from my experience working with securities regulators overseas that the digital formatting of financial statements has traction to varying degrees in the public capital markets of other countries. In this regard, I note that the Trustees of the IFRS Foundation recently announced the Foundation’s intentions to further take up the matter of digital reporting. I think the U.S. accounting profession could contribute to this international conversation.
Second, I think a matter for the U.S. accounting profession to consider is what we have learned from our experience with the combination of management’s traditional paper formatting and modern digital formatting of financial statements over the past 7 years. We could begin with the insights of the dedicated group of professionals who have held the laboring oar on digital formatting during this time.
Third, I would like to better understand the work of marketplace participants in presenting company financial information. I would approach this from the standpoint of a securities regulator who seeks to understand both the risks and opportunities to enable and protect investors in the public capital markets. I think that companies, auditors and investors may share my interest in this topic; approaching it from each of their respective vantage points.
Thank you very much for your attention.
 See Financial Accounting Standards Board, Steering Committee Report Series, Business Reporting Research Project: Electronic Distribution of Business Reporting Information (2000) (“Electronic Distribution of Business Reporting Information”), p. 47, available at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1175801856611.
 See Interactive Data to Improve Financial Reporting, Release No. 33-9002 (Jan. 30, 2009) (“Interactive Data Adopting Release”), available at https://www.sec.gov/rules/final/2009/33-9002.pdf, as corrected by Release No. 33-9002A (Apr. 1, 2009), available at https://www.sec.gov/rules/final/2009/33-9002a.pdf.
 See Interactive Data Adopting Release.
 See Electronic Distribution of Business Reporting Information, p. viii.
 See IFRS Foundation, Trustees’ Review of Structure and Effectiveness: Feedback Statement on the July 2015 Request for Views (2016), p. 6, available at http://www.ifrs.org/About-us/IFRS-Foundation/Oversight/Trustees/Trustee-reviews-of-structure-and-effectiveness/2015-Review-of-Structure-and-Effectiveness/Documents/Review-of-Structure-and-Effectiveness-Feedback-Statement.pdf.