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Remarks at the 34th Annual Current Financial Reporting Issues Conference

Commissioner Michael S. Piwowar

New York, New York

Nov. 16, 2015

Thank you, Linda [Zukauckas], for that wonderful introduction.  I appreciate the opportunity to discuss a few thoughts on the current and future state of financial reporting with you this afternoon.[1]  As the conference brochure notes, this event was created by preparers for preparers.  As controllers and chief accounting officers for public companies, each of you plays a key role in ensuring that accurate and material financial disclosures are disseminated to the public and the markets.

The conference agenda lays out a very comprehensive set of discussion topics – revenue recognition, lease accounting, cyber-security, and updates from the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB), to name only a few.  These are important issues and I wish that my schedule would allow me the opportunity to listen to more of these sessions.  That being said, as a financial economist, I am not sure what I would do with all of the Continuing Professional Education (CPE) credits!

Like most of you, I am a not a lawyer.  Regardless of what you think about lawyers, the Securities and Exchange Commission (SEC) has been a lawyer-led agency throughout most of its history.  As far as I can determine, I am only the third Ph.D. economist to serve as a commissioner.[2]  With the departure last month of Commissioner Gallagher and the expiration of Commissioner Aguilar’s term, President Obama has nominated two outstanding individuals as their replacements – both of whom are also attorneys – and I look forward to working with them.  Perhaps in the not too distant future, we will see a certified public accountant (CPA) named as a commissioner.

I am pleased that you will be hearing from Jay Hanson, a member of the PCAOB, at this conference.  Jay has been a terrific partner to work with over at the PCAOB as both agencies strive for achieving a regulatory environment most conducive to producing high quality financial statements and audit reports.

My experience with financial statements has been principally as a user rather than a preparer.  I have used the information generated by corporate financial reporting for countless studies and other analyses throughout my professional career.  Financial reporting is crucial for evaluating corporate performance.  The use of generally accepted accounting principles (GAAP) strives to create consistent reporting that is comparable across different issuers and enhances analysis of such companies by the market.  Such analysis tends to result in better valuations of issuers and more efficient markets.  Hence, the benefits of accurate and high quality financial reporting are incalculable.

As a thought experiment, imagine a world where GAAP or other reporting standards did not exist – where management could develop its own numbers based on its own poorly-defined criteria.  Management might be tempted to create numbers that provide the illusion of performance but in reality are largely irrelevant to measuring the actual performance of that organization.  Reported numbers might be distributed for public consumption without clear disclosure as to how they were derived.  These numbers could also be touted in press releases and other public statements by management in order to paint a flawed view of the organization’s productivity and effectiveness.  But enough about the SEC’s enforcement statistics.[3]

Today, I would like to discuss three topics.  First, the future role of international financial reporting standards (IFRS) for financial statements filed with the Commission.  Second, improving the quality of interactive data filed in reports with the Commission.  Third, Commission efforts to improve corporate disclosures and my concerns that special interests have corrupted the disclosure process to the detriment of investors.

International Financial Reporting Standards

In February 2010, the Commission reiterated its view that a single set of high-quality globally accepted accounting standards will benefit U.S. investors and encouraged the convergence of GAAP and IFRS.[4]  Over time, the Commission expected that the differences between the two accounting regimes would become fewer and narrower.  To their credit, the FASB and the International Accounting Standards Board (IASB) have made strides towards achieving convergence in a number of areas, such as business combinations and consolidation as well as revenue recognition.  Work between the two bodies on convergence continues in the areas of lease accounting and credit impairment.

As recognized by the Commission since 1981, a single set of high-quality global accounting standards would facilitate cross-border capital formation while also providing investors with comparable and material information needed to make investment decisions.[5]  In 2007, the Commission adopted rules that permit foreign private issuers to file financial statements prepared in accordance with IFRS, as issued by the IASB, without reconciliation to GAAP.[6]  As a result, the United States represents one of the largest trading market for IFRS-reporting issuers in the world.  Regardless of what happens with respect to financial reporting for U.S. domestic issuers, IFRS has already played and will continue to play an extremely important role for U.S. investors.

In the February 2010 statement, the Commission directed its staff to develop and execute a work plan to enhance the understanding of the Commission’s purpose and public transparency in this area, with a goal of positioning the Commission to make a decision about the use of IFRS by U.S. domestic issuers.  The work plan was to consider specific areas and factors relevant to a determination as to whether, when, and how, the financial reporting system for U.S. domestic issuers should be transitioned to a system that incorporates IFRS.  Our staff delivered their final report on the work plan in July 2012.

Since delivery of the staff report over three years ago – and before the arrival of Chair White, Commissioner Stein, and myself – the Commission has not further addressed its efforts to achieve a single set of high-quality global accounting standards.  The February 2010 statement had contemplated a decision on IFRS as early as 2011.  In the meantime, the rest of the world awaits leadership from the United States and the SEC in particular.  Last month, I was in Tokyo meeting with members of the Japanese business federation, the Keidanren.  Their members expressed concern about the U.S. commitment to adopting a single set of high quality accounting standards and whether there were sufficient efforts currently being made by the FASB and IASB to achieve convergence.

The absence of public pronouncements, however, should not be taken as sign that the issue has not been subject to discussion, in full compliance with the Government in the Sunshine Act, among commissioners and staff about prospective paths forward.  Since his appointment in the fall of last year, our chief accountant, Jim Schnurr, has made tremendous efforts to move forward on the question of IFRS.

At the risk of front-running Jim’s panel tomorrow morning, I will re-cap three of the observations on IFRS that he made at an AICPA conference in September.  These observations were based on discussions with investors, preparers, auditors, and standard-setters.[7]  First, there is “virtually no support” for the Commission to mandate IFRS reporting for all issuers.  Second, there is “little support” for optional IFRS reporting for domestic issuers.  Third, there is continued support for a single set of high-quality, globally accepted accounting standards.

So what is my perspective on the IFRS issue as a commissioner?  Foremost, I believe that any requirement for IFRS financial reporting should be investor-driven, not regulator-driven.  In that respect, it is difficult to gauge investor demand for financial reporting under IFRS by U.S. domestic issuers.  How does one predict investor demand for IFRS reporting when it is largely not available in the domestic context?  For instance, twenty years ago, it was difficult to predict the demand for “smart phones” when the product was not available to the general public.  While there were entrepreneurs who could imagine various capabilities for smart phones, little was known about the extent of such demand or how it might grow over time.  Does anyone remember the Palm-Pilot or the Treo 600?  Today, it seems like everyone is constantly looking at their smart phones which appear to be fixed as permanent appendages to their hands.

Consistent with my investor-driven perspective, our chief accountant has raised an interesting and incremental approach that should provide further insight as to whether there is investor demand for IFRS reporting.  His idea – to allow, but not mandate, IFRS financial reporting as a supplement without reconciliation to GAAP – is worthy of serious consideration.[8]  It would take nothing away from investors who currently use and like GAAP, and any IFRS disclosure would still be subject to the antifraud provisions of the federal securities laws.  For preparers, it would lower the cost of providing IFRS financial reporting by eliminating the need for reconciliation to GAAP and potentially lower the barrier for companies to provide such reporting.  For standard-setters, it would allow the FASB and the IASB to complete their existing convergence projects and encourage them to continue to work collaboratively to identify additional areas for convergence in order to build upon what they have accomplished to date.

Finally, for the Commission, it would provide useful data on investor demand for us to analyze.  Of course, the specific details would still need to be worked out, but I think – eleven months after the idea was first broached – that the Commission should take this additional step forward.

Interactive Data

Turning to interactive data, public reporting companies have been required to file financial statement information in eXtensible business reporting language (XBRL) format for a number of years – for some companies, since 2009.  In implementing the interactive data filing requirements, the Commission adopted a staged approach that had the largest companies – those with a public float of $5 billion or more – being the first to comply in 2009, with other accelerated filers being subject to the requirement in 2010, and finally all other filers, such as smaller reporting companies, being subject to the requirement in 2011.  While I strongly support the Commission’s continued efforts to improve investors’ access to material information through the use of interactive data filings, I recognize that the move to XBRL reporting was not costless for public reporting companies.

Now that all filers have been subject to the interactive data filing requirements for at least four years, the Commission should undertake a retrospective review to assess whether these requirements are achieving their intended objectives and at what cost.  For example, the Commission, in its 2009 adopting release, suggested investors might download such information from corporate websites or the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system directly into spreadsheets and avoid having to pay third-party sources to obtain disclosures from annual and quarterly reports.[9]

Some of these hopes and aspirations have panned out while others have not.  At this point, I suspect that not many investors are flocking to corporate websites to download the latest interactive data filing.  Anecdotally, I have been advised by members of our Advisory Committee on Small and Emerging Companies that they receive very few hits on their corporate websites for this information.  Perhaps that is one reason why the committee concluded that the compliance burden placed on smaller reporting companies with respect to the XBRL filing requirement was disproportionately high as compared to the benefits.[10]

On the other hand, I have personally observed software demonstrations that  run interactive data filed with the Commission through a series of filters selected by the user.  The resulting analysis – the identification of companies that might be worth further investigation by an investment analyst or portfolio manager – is based on a review of all issuers through automated tools.  Hence, whereas it might not have been previously feasible for a single analyst to sift through the financial results of thousands of issuers that file with the Commission, interactive data now makes that possible.

Moreover, the Commission has taken efforts to make the data obtained through interactive data filings freely available for use by investors, academics, and the public.  At the end of last year, the Commission announced a program to provide such information into structured data sets and to post the data sets for bulk download on the SEC website.[11]  Each data set includes all relevant filings submitted for a particular quarter or year and includes the data as reported by filers – no changes are made to the information.  To date, the Commission has been posting data sets on a quarterly basis starting from 2009 through the current third quarter of 2015.[12]  I look forward to receiving feedback from users of the bulk data sets, including suggestions to improve this new program.

One significant concern has been the quality and accuracy of the information contained in interactive data filings with the Commission.  A bi-partisan letter signed by the Chairman and Ranking Member of the Securities, Insurance, and Investment Subcommittee of the U.S. Senate Committee on Banking, Housing, and Urban Affairs – Senator Mike Crapo (R-ID) and Senator Mark Warner (D-VA) – expressed such concern.[13]  Given that these financial disclosures are picked up and disseminated through various information channels, I share concerns that potentially materially inaccurate information is possibly being conveyed to the markets and could be affecting the prices of securities.

One suggestion to address problems with the accuracy of interactive data filings is to move away from the current model of filing the interactive data as a separate exhibit and move to in-line XBRL.  In that respect, there would be a single electronic document in which the XBRL data and tags would be embedded.  In-line XBRL has the potential to improve the accuracy of structured data, ease burdens on issuers, and facilitate easier review.  Currently, the Commission’s EDGAR system is not capable of accepting filings with in-line XBRL.  The Commission should move promptly to modify EDGAR to permit in-line XBRL and commence a voluntary pilot program to obtain more information about the costs and benefits of an in-line XBRL system.

Improving Corporate Disclosure

Finally, I would like to discuss improvements to our corporate disclosure requirements.  The Commission’s corporate disclosure regime does not provide easily digestible information about a company.  A couple of months ago, I was preparing to meet some individuals from a public reporting company with which I was not familiar.  With only minutes to go before the meeting I turned to my staff and asked “what do we know about this company?”  One of my advisers looked at me and said, “Well, we could look up its Form 10-K.”  This suggestion was met with a few moments of silence, followed by a smattering of laughter.

As you may know, staff in our Division of Corporation Finance has been working on a disclosure effectiveness project.  As described by Keith Higgins, the director of that Division, the purpose of the project is to eliminate duplicative disclosures while continuing to provide material information.[14]  As Keith further noted, “better disclosure” is the objective of the project and reducing the volume of disclosure is not – although hopefully this effort might ultimately reduce costs and burdens on public reporting companies.  The first concrete step of this effort was the release of a request for comment on certain financial disclosures required by Regulation S-X.[15]

While it is premature to discuss my specific thoughts on the disclosure effectiveness project, I want to reiterate the primary factor that will affect my decision-making with respect to disclosure:  materiality.  As Justice Thurgood Marshall wrote for a unanimous Court in the seminal case of TSC Industries v. Northway, “[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.”[16]

In deciding TSC Industries, the U.S. Supreme Court specifically rejected the view that a material fact was one that a reasonable shareholder might consider important.  The Court held that “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important” (emphasis added).[17] Justice Marshall expressed his concern that an unnecessarily low standard of materiality and the resulting fear of exposure to substantial liability may cause a company to “simply bury the shareholders in an avalanche of trivial information – a result that is hardly conducive to informed decision making.”[18]

Materiality is also reflected in the proper functioning of the financial markets.  In an efficient and informed market, investors can evaluate and make investment decisions that result in an accurate valuation of a security.  Accurate valuations of securities permit investors to appropriately allocate capital to those opportunities that are likely to achieve the highest return, given a particular set of risk tolerances.  To the extent that new, material information is introduced to the market, we would expect resulting variations in price as investors react and change their expectations with respect to future returns from holding a security.

Unfortunately, the disclosure regime of the federal securities laws has been hijacked in recent years by various special interests.  Let’s be clear, publicly-traded companies are already required to disclose all material information.  If any information that is not material is required to be disclosed under our rules and regulations, then that should raise serious questions as to what is driving the disclosure.

Our disclosure regime is supposed to serve investors, not special interests.  The Dodd-Frank Act is filled with special interest disclosure provisions that have nothing to do with helping investors.  Investors are rightfully outraged when corporate executives use the company’s resources to unduly enrich themselves at the expense of shareholders.  Investors should be equally outraged when someone else tries to use corporate assets to advance their own special interests.  It is simply wrong to use other people’s money to achieve their own personal gains at the expense of the shareholders.

The most recent example of the hijacking of our disclosure regime and shareholder assets is the Commission’s adoption of the median pay ratio disclosure requirement of Dodd-Frank.[19]  As I pointed out in my dissenting statement at the SEC open meeting on that rulemaking, the Dodd-Frank provision is literally a page out of a Big Labor playbook entitled “Working Capital: The Power of Labor’s Pensions.”[20]  The playbook contained a strategy to re-make the capital markets with a so-called “worker-owner” viewpoint.  The playbook clearly explained that the accomplishments of labor-shareholder activism are political rather than economic, and that they “carry union credibility in the face of declining union membership and bargaining power.”[21]  The Big Labor proponents of the median pay ratio disclosure requirement have acknowledged that the sole of objective of the disclosure is political – to shame CEOs.[22]

Another example is the conflict minerals disclosure requirement of Dodd-Frank.[23]  No one supports providing resources to armed groups in or around the Democratic Republic of the Congo that are engaging in violence, oppression, and human rights abuses.  Unfortunately, as former SEC Commissioner Dan Gallagher and I pointed out in a joint statement, the evidence is that the conflict minerals disclosure requirement has been profoundly counterproductive, resulting in a de facto embargo on Congolese tin, tantalum, tungsten, and gold, thereby impoverishing approximately a million legitimate miners who cannot sell their products up the supply chain to U.S. companies.[24]

Moreover, proponents of the Dodd-Frank provision have singled out publicly-traded companies – and only publicly-traded companies – to be forced to admit that their products are not “conflict free” unless they can prove their innocence through an extensive and costly audit process.  I am astonished that people believe it is appropriate to arbitrarily and capriciously penalize shareholders of publicly-traded companies – who are often retail investors who hold shares through mutual funds or are the beneficiaries of retirement plans – while giving significant cost advantages to privately-held companies whose equity holders tend to be the few and the privileged.

The first and most important step for the Commission to take to improve disclosure effectiveness is to stop the Commission from being used as a pawn of the union and social justice power brokers.  The focus on non-material, special interest disclosure provisions is a deplorable corruption of our mission to protect investors, to ensure fair, orderly, and efficient markets, and to facilitate capital formation.  Let us focus on making sure that material information, with a substantial likelihood of being considered important to reasonable investors, is quickly and efficiently distributed to the market.  More importantly, let us allow corporate controllers and chief accounting officers to focus your expertise and limited time where it belongs, on making sure that financial statements are accurate in all material respects for the benefit of all investors, not on spending enormous amounts of time and vast amount of shareholder resources on finding the elusive median worker or completing their conflict minerals audits.


Thank you, again, for providing the opportunity to speak with you today.  I would be pleased to take a few questions.


[1] The views expressed today are my own and do not necessarily reflect the views of the Securities and Exchange Commission or my fellow commissioners.

[2] The others being Charles C. Cox (1983-1989) and Cynthia A. Glassman (2002-2006).

[3] See Urska Velikonja, Reporting Agency Performance: Behind the SEC’s Enforcement Statistics, 101 Cornell L. Rev. (forthcoming 2016), available at; see also Michael S. Piwowar, Remarks to the Securities Enforcement Forum 2014 (Oct. 14, 2014) (discussing issues with current measurements of Commission enforcement efforts), available at  

[4] See Securities Act Release No. 9109 (Feb. 24, 2010) [75 FR 9494 (Mar. 2, 2010)].

[5] See, e.g., Securities Act Release No. 6360 (Nov. 20, 1981) [46 FR 58511 (Dec. 2, 1981)].

[6] Securities Act Release No. 8879 (Dec. 21, 2007) [73 FR 986 (Jan. 4, 2008)].

[7] James Schnurr, Remarks before the 2015 Baruch College Financial Reporting Conference (May 7, 2015) available at and  James Schnurr, Remarks at the AICPA National Conference on Banks and Savings Institutions (Sept. 17, 2015), available at

[8] James Schnurr, Remarks before the 2014 AICPA National Conference on Current SEC and PCAOB Developments (Dec. 8, 2014) available at

[9] Securities Act Release No. 9002 (Jan. 30, 2009) [74 FR 6776, 6777 (Feb. 10, 2009)].

[10] Advisory Committee on Small and Emerging Companies, Recommendation Regarding Disclosure and Other Requirements for Smaller Public Companies (Mar. 21, 2013), available at

[11] Press Release No. 2014-295 (Dec. 30, 2014).

[13] Letter from Senators Mike Crapo and Mark Warner to Chair Mary Jo White (Jul. 21, 2015), available at

[14] Keith Higgins, Shaping Company Disclosure: Remarks before the George A. Leet Business Law Conference (Oct. 3, 2014), available at

[15] Securities Act Release No. 9929 (Sept. 25, 2015) [80 FR 59083 (Oct. 1, 2015)].

[16] 426 U.S. 438, 445 (1976).

[17] An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.  Id. at 449.

[18] Id. at 448-49.

[19] Section 953(b) of the Dodd-Frank Act.

[20] Commissioner Michael S. Piwowar, Dissenting Statement at Open Meeting on Pay Ratio Disclosure (Aug. 5, 2015) available at

[21] Id.

[22] Commissioner Michael S. Piwowar, Statement at Open Meeting Regarding Municipal Advisors and Pay Ratio Disclosure (Sep. 18, 2013) available at

[23] Section 1502 of the Dodd-Frank Act.

[24] Commissioners Daniel M. Gallagher and Michael S. Piwowar, Joint Statement on the Conflict Minerals Decision (Apr. 28, 2014) available at

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