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Accountants and Capital Markets in an Era of Digital Disruption: Remarks to the Institute of Chartered Accountants in England and Wales and BritishAmerican Business

Commissioner Kara M. Stein


Sept. 9, 2015

Thank you, Robert [Hodgkinson] for that kind introduction.  Thank you, also, to the Institute of Chartered Accountants in England and Wales (ICAEW), as well as BritishAmerican Business for sponsoring this event. I am delighted to be in London and with you this morning.  

Before I begin my remarks, I must note that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (Commission or SEC), my fellow Commissioners, or members of the staff. 

It is privilege to speak to you this morning in the Chartered Accountants’ Hall.   As many of you know, in 1880 Queen Victoria granted a Royal Charter to the Institute recognizing professional accountants.  Shortly thereafter, this hall became your home.[1]  While walking in this morning, I noticed the frieze depicting accountants and their role in the arts and commerce, including agriculture, mining, shipping, manufacturing, the railways, and education.  I always find it interesting to note how many aspects of modern life have been, and continue to be, influenced by the accounting profession. 

But I am not here today to speak to you solely about history – however interesting that may be.[2]   Instead, this is a keen setting to examine how, in an era of tremendous technological change, accountants – and those who utilize that same training in other roles – can be leaders in moving capital markets and our economy forward.    

From the Industrial Revolution and the emergence of corporations to the growth of railroads to the rapid developments in today’s technology, the accounting profession has played an important role in the development of modern capital markets.  In the 1880s, creditors hired British chartered accountants to come to the U.S. to audit railway management reports.  It is easy to understand why.  When an investor puts money into a far off corporate enterprise, the auditor is an independent accounting professional who serves as the eyes and ears of the investor.  In conducting an independent audit, the accountant facilitates trust between management and investors.  Through understandable and comparable reports, accounting facilitates investment and corporate development. 

This close linkage between accounting, investment, and economic growth means that the public has a real interest in a strong professional accountancy.  In fact, the Royal Charter I noted earlier specifically references public interest as a reason underlying its drafting.[3]  In the U.S., the legislative response to the Great Depression, which included the creation of the SEC, also encouraged development of independent audits as a way to inform and protect investors and to provide confidence in capital markets.[4]

So what does that mean for us today?  How can a profession so important for public trust, a profession that enables global investments and, by extension, the health of our capital markets and our economy, evolve to meet new and different challenges?  More specifically, what does it mean in an era of tremendous digital disruption? 

Technological change is rapidly transforming business models, all but eliminating traditional borders.  Some have called this a “digital disruption” or “disruptive change” because of the speed and intensity of the changes. More and more data, available nearly instantaneously around the globe, both connects us and overwhelms us. 

The changing landscape is transforming our financial markets as well.  Investors, and others, are accessing and analyzing massive amounts of information from sources, like social media, unimaginable just a few years ago.  This new data may be empowering investors to make smarter investment decisions.  At the same time, technology exposes new risks.  A glitch could leave investors and markets frozen for minutes or hours, flood the market with millions of erroneous orders, or upset an initial public offering.  A cyberattack could undermine an exchange or imperil a derivatives clearinghouse.  Technology can enhance transparency and confidence in the market or it can rapidly erode it. 

The accounting profession, with its history in reporting and providing assurance, is uniquely situated to respond to these changes.  By creatively leading in these new arenas, accountants, I believe, can provide value to investors, companies, and regulators.  

Specifically, I believe there are certain opportunities in this data-driven world for accountants to lead and provide new approaches to the traditional disclosure space, including by enhancing financial reporting overall, by rethinking certain aspects of audits, and by providing investors transparent, straight-forward information about the stability of a corporation.  In addition, I believe there are also new opportunities for accountants to help firms protect themselves, and thus investors, by understanding new technology and its uses in the cybersecurity world, and effectively relaying that information to companies, investors, and regulators.  Together, accountants can help our capital markets respond to the challenges of an increasingly borderless world and new, disruptive business models.

I am hopeful that the ideas I put forward today will be received in the spirit in which I offer them – with a view toward upholding a vision of the public accountant as an agent of the public interest, instilling trust and confidence in our capital markets. 

Opportunities for Accessible, Transparent, and Reliable Data

As I have just noted, market participants of all types produce and utilize colossal volumes of data.   Investors, dealers, rating agencies, and regulators consume more and more data in order to make decisions.  Yet, if that data is opaque, unreliable, or not useful for decision making, what good is it?  Accountants’ expertise in summarizing and presenting information – that is, data – makes them ideally suited to play a crucial role in ensuring the reliability and accessibility of the data that now drives our capital markets. 

Gaps in Financial Reporting

I want to start out by examining financial reporting.  Financial reports remain the primary way that corporate management communicates with investors regarding companies’ current positions and results.  But core financial reporting has changed little over the years and may be ripe for disruption. 

Many of the world’s most “disruptive” businesses rely heavily on intellectual and human capital, rather than assembly-line machines and other traditional assets.  For example, many tech start-ups have no real “assets.” Rather, they have ideas and an app.  As a result, investors in these innovative companies find themselves facing an increasing gap between the market value of an enterprise and its tangible net assets. 

Similarly, more and more investors are demanding information, including non-financial information, about social and governance concerns.  In response, many companies have begun providing what I will call “sustainability reporting,” or, essentially, information on economic, environmental, social, and governance matters.  Some of these reports are being combined, or integrated, with traditional financial reports in an effort to address some of these informational gaps.   

Despite these new demands by investors, current financial reporting standards – whether under U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International Financial Reporting Standards (IFRS) – provide little information about a company’s intellectual assets or its sustainability.  Accounting standards need to evolve to meet the needs of investors in the digital era.  Isn’t it time we updated our metrics to provide this type of important information to investors?  Wouldn’t investors – and companies, through increased investor confidence – benefit from having that information audited or evaluated by independent accountants? Are there other assurances that accountants could provide?

Accounting Standards in an Era of Borderless Business

On the topic of accounting standards, for a number of years there has been an effort to find a globally accepted, single-set of high-quality financial reporting standards.  In an era of borderless business and instantaneous movement of data, there is a certain attractiveness to this vision.  The challenge, however, is that the practicalities demonstrate the overwhelming challenges of it.   Quite frankly, it often feels like we are searching for the Holy Grail.  But I am not sure it is there.  The process of convergence of local accounting standards to eliminate differences, where possible, has been an important and productive process, but I question whether it has, at all times, truly contributed to improved quality. 

I think we should go back to first principles.  Information provided to investors must be relevant, reliable, and timely, to be decision-useful.  How that is achieved may vary across cultures and reflect deeply entrenched political and economic structures.  And that is appropriate – indeed, unavoidable.  Advances in communications, technology, and data analytics can contribute to improvements in financial reporting, and this too can help bridge those gaps.  The key in my mind is not necessarily to converge for the sake of convergence, but rather to expand timely access to information and provide for understanding differences.  For example, companies should use common taxonomies to provide up-to-date, accessible, and transparent information to investors.  This is where reporting and standards can be reimagined in the new digital world.  Let’s think seriously:  how should the delivery of information change in the digital age?  How should investors access information?  Should it be pushed to them every few months, or should it be available on-demand?

Structured Data

Further, technology can enhance both the delivery and usability of financial reports.  Most companies keep their financial reporting data in structured databases.  However, the data is often presented to investors and financial statement users in an unstructured manner.[5]  It is my understanding that all U.K. companies are required to file corporate tax returns using inline XBRL.  This means that the document is presented with structured data embedded within it, so that it can be read easily by both humans and machines. 

The SEC has played an important role in advancing the presentation of structured data for investors, such as through XBRL.  Yet the Commission has yet to require inline XBRL reporting for U.S. listed companies.  This contributes to poor data quality for investors and extra costs for companies.  Today’s data-driven markets are simply demanding more.   

As the SEC modernizes its disclosure system, it is important that each disclosure document be presented in a manner that can be effectively and efficiently used in today’s modern capital markets, with an independent accountant providing assurances to investors and market participants about its accuracy and fair presentation.  The importance of this structured data for accountants is clear, and the SEC needs to follow your lead and adopt measures, such as requiring the use of inline XBRL, for financial reporting and for other data-centric reports.  This is where your comments can be tremendously helpful to us.  Tell us how it has benefited your capital markets and your investors.  Where has it let you down?  And where is it driving change with new business models and new opportunities?  


In addition to reimagining financial reports overall, I think it is important to take a specific look at ways to enhance the accessibility and transparency of audits.  In many ways, the U.K.’s Financial Reporting Council (FRC) has moved ahead of the pack, by adopting requirements for both audit committees and auditors to provide additional, clear information about their processes.  As you know, under these requirements, both audit committees and auditors must include certain important items, such as a discussion of the assessed risks, the scope of the audit, and the materiality assessments for the audit.[6]  However, and importantly, audit committees and auditors also are encouraged to innovate by providing an expanded or original presentation of financial reporting and the audit process, ideally improving accessibility and transparency.  This was a bold move in light of industry and corporate concerns, but it also provides an opportunity for auditors to engage with investors and explain how accountants consider investors’ interests in their audits. 

Perhaps one of the more important communications to investors is a description of how the auditor approaches materiality.   Materiality is a measure auditors use to determine what is important to an investor  – anything over the materiality threshold may be important to investors, while anything under the materiality threshold is unlikely to be of concern.  Accordingly, investors should understand how the auditor makes that determination and how it changes over time and in particular circumstances.

Recent studies have examined the new package of reporting and concluded that “[t]he U.K.’s new auditor and audit committee reporting requirements are associated with a significant improvement in audit quality without… significant incremental costs.”[7]  Further, despite the new requirements, there was no delay in communicating with investors. 

Sounds like a win-win to me, and a way to encourage ongoing enhancements to traditional disclosures; another way to lead.  Unfortunately, the U.S. has not yet required this transparency in and accessibility to audits.  The SEC did, however, recently request comment on possible improvements to audit committee reporting.  As the SEC starts to contemplate these issues, I would invite those of you who have already been through the process to share your experiences and to respond to our request for comment.  I believe much more can and should be done.[8]  Here, you have provided us with leadership, and we need to follow.

Going Concern

I have one final point on the topic of where accountants can lead in addressing new transparency needs in our changing capital markets.  That deals with going concern – or the viability of a corporation to continue its operations over the next year.  To that end, the financial crisis exposed fears that auditors were remaining silent about going concern issues, when they should have been sounding the alarm.  For example, many questioned the issuance of unqualified audit opinions for firms that collapsed or were bankrupt shortly after a report’s issuance indicating that the company was viable.  Essentially, investors and others wanted to know why the auditor did not bark. 

The issues are complex because they deal with uncertainties and future events, but investors and creditors expect the auditor to raise concerns when a firm’s survival is in question, thus providing important transparency.    

In the U.S., the auditor has both legal and professional obligations to assess a company’s ability to continue as a going concern.[9]  U.S. law mandates that audits include a going concern evaluation, a requirement that came about after thousands of savings and loans associations, the U.S. version of the building societies, failed in the 1980s.  But does an auditor have the right incentives to do so?  How does one evaluate a firm’s viability?  And for what period of time?  Should so-called stress tests be part of an auditor’s assessments? 

This is an area that is ripe for disruption, and again, in light of the success of expanded audit reports, accountants should lead the way.  Accountants and auditors can and should be doing more in the area of viability assessments, transparently reporting on them, and providing investors with an early warning.  Current disclosures, if they are triggered, are mainly binary. Shouldn’t firms and auditors provide a thorough discussion of the material risks and how those risks are being addressed?  

Opportunities Related to Cybersecurity

Technology and borderless business are changing not just the types and forms of data and information that capital market participants need, but also the risks that these market participants face.  These risks are unimaginable to those who stood in this Hall in 1880. 

As a result of these changes, cybersecurity has become one of the most significant issues affecting investors, corporate issuers, and financial institutions – really just about everyone in the financial marketplace.  Last year, the SEC convened a roundtable to discuss how cyber-threats were challenging the capital markets.  The panel discussions focused on the cybersecurity landscape overall, issues in market systems, risks in broker-dealers, investment advisers, and transfer agents, and the complexities concerning public company disclosures for investors. 

Hard work is ongoing to try to get ahead of these risks, but problems will persist.  Just last month, the United States criminal authorities and the SEC announced litigated actions against a brazen international network of alleged cybercriminals and stock traders.  Thirty-two traders and hackers collaborating from around the world contributed to an elaborate scheme to obtain confidential information related to corporate announcements and traded on that information before the information was released to the public.  The hackers, working from overseas locations, invaded the servers of newswire services and obtained news releases before they were public.  The hackers then passed the information on to an international network of stock traders who would then buy or sell securities that were the subject of the news releases prior to the information being made public.  The SEC estimates that the traders made over $100 million in illicit profits.[10]

Stealing nonpublic information is nothing new, but this latest case disrupts what we typically characterize as “insider trading.”  Insider trading was once the purview of the “insiders” in the financial markets:  those connected to key facts and secrets who passed information to golf buddies, drinking buddies, friends, or relatives.  We now face a whole new battleground that could fundamentally reshape the risks that investors and market participants face.  To date, much of our approach has been to rely on broad principles to improve systems integrity for certain key market participants.  But who is checking to see whether those are working?  And what about the broader array of market participants?

As with other areas I have talked about, I believe accountants, with their experience integrating data, can play a leadership role in helping us address the risks of cybersecurity.  Audit committees, too, can play an important role.  Indeed, more and more companies are turning to their audit committees to develop the deep knowledge necessary for handling cybersecurity and for providing appropriate governance and oversight both to prevent problems and to deal with the inevitable. 

This is a brand new area and requires creative thinking.  What role should accountants play in addressing cybersecurity risks?  How should companies communicate with investors and creditors about how cybersecurity specifically affects the enterprise?  This is a challenge that, unfortunately, is not going away.  Let us try to tap the innovation, professionalism, and credibility of auditors and accountants to renew the confidence that investors have in our markets and companies.

Thinking Further

Changes in capital markets are creating new demands on, and opportunities for, leadership by the profession, and I have discussed just a few of those opportunities.  But there are many other possibilities.  For example, in an era of ultra-fast trading, should the auditor report closer in time to when a company announces its earnings?  Are there other areas where investors would be aided by certain assurances from an auditor? Are there other ways that investors can directly interact with auditors?

I would be remiss, though, if I did not ask you – both accountant and non-accountant alike – to think specifically about the relationship between accounting and compliance culture.  Nearly every week, the Commission meets to consider whether it should authorize enforcement actions against firms and individuals.  As I have witnessed, corporate culture, tone at the top, and incentives can have long-lasting and significant impact on individual actions throughout the organization.  Unfortunately, as we all know, unethical behavior can spread quickly and have serious negative implications on an organization. 

In the U.S., every public company auditor is required, by law, to report likely illegal acts that have a material impact on the financial statements when detected during the course of an audit.  The public company auditor must ensure that appropriate remedial actions have been taken by management or the board of directors.[11]  In fact, the International Auditing and Assurance Standards Board (IAASB) is currently soliciting comment on an auditor’s ethical obligation to report when encountering non-compliance or suspected non-compliance with laws and regulations.[12]

Here is another area where accountants and auditors can provide leadership.  How does the auditor consider culture in assessing risks?  How should this consideration be reported to the audit committee?  How can culture and risk be transparently communicated to the audit committee?  Or to investors?  This may seem awkward at first, but fundamentally, it is the same role they play in other contexts – being the conduit enhancing trust between investors and management. 


A lot has changed since the early 1880s.  But just as the industrial revolution drove and accelerated growth, the digital revolution is driving change.  Accountants have a unique role to play in our capital markets.  With this role comes the responsibility to move forward with strategies to help businesses, investors, and regulators in an increasingly digitally disrupted world.  Accountants can and should be driving innovations to enhance transparency, accessibility, accountability, and to promote further trust in the integrity of our capital markets. 

Yet, despite all the change, at the end of the day, some things remain constant.  This Institute represents a special heritage – a commitment to the public trust that you bring to wherever you work, be it in accounting, management, as investors, or in other capacities.  I want to again thank the ICAEW and British-American Business for inviting me to speak with you today, and I look forward to your feedback on these issues.   


[1]            An Overview of the ICAEW (Sept. 2, 2015), available at

[2]           London has played an important part in the history of accounting.  Not only is this a hallowed Hall where some of the founders of the accounting profession worked, but it is also home to the first female chartered accountant, Mary Harris Smith.  Having studied accounting from the age of 16, Mary Harris Smith worked as a public accountant and established her own practice in 1888. During this same year, she applied to join the Society of Incorporated Accountants and Auditors. After being rejected multiple times because she was a woman, the Society finally named her an Honorary Fellow. In 1919, The Sex Disqualification (Removal) Act was passed making it illegal for the ICAEW to bar women from membership. Mary Harris Smith renewed her application and became the world's first woman Chartered Accountant at the age of 72.  See “Notable ‘Female Firsts’ in Accounting,” National Association of State Boards of Accountancy, available at

[3]               “That in the judgment of the Petitioners it would greatly promote the objects for which the said societies have been instituted and would also be for the public benefit if the members thereof were incorporated as one body as besides other advantages such incorporation would be a public recognition of the importance of the profession and would tend to gradually raise its character and thus to secure for the community the existence of a class of persons well qualified to be employed in the responsible and difficult duties often devolving on Public Accountants.” Royal Charter of the 11th May 1880, available at

[4]           In the U.S., the accounting profession firmly established itself as fundamental for creating and sustaining trust and instilling confidence in the capital markets.  In 1933, when legislators in Congress were hashing out the details of securities regulation in the U.S., they specifically questioned how corporate accounts should be examined.  Skeptical legislators believed that government employees should examine and audit corporate accounts.  However, Colonel A.H. Carter, the President of the New York State Society of Certified Public Accountants and senior partner of the firm Deloitte, Haskins & Sells, testified passionately in a hearing in 1933 about the role of the profession in the regulation of the capital markets:  “[We] audit the corporate controllers. [The corporate controller] is in the employ of the company. He is subject to the orders of his superiors. He is not independent.... We know the conditions of the accounts; we know the ramifications of the business; and we know the pitfalls of the accounting structure that the company maintains….[Public Accountants should be empowered to audit the accounts] because it is generally regarded that an independent audit of any business is a good thing.”  When U.S. Senator Alben Barkley asked Col. Carter "who audits you?", Carter replied "our conscience."  See Securities Act, Hearing on S. 875 Before the Senate Comm. on Banking and Currency, 73rd Cong., lst Sess. 58 (1933). 

[5]           XBRL stands for eXtensible Business Reporting Language. It is a form of data tagging using XML designed for financial information. It uses computer ‘tags’ for financial information to make the data machine readable and publishes libraries called taxonomies.  Inline XBRL enables the embedding of XBRL data within a human-readable file. This allows a single file to provide both a human-readable view of a business report and the related XBRL data. A valid XBRL instance document may be recreated from the Inline XBRL document.

[6]           Financial Reporting Council, International Standard on Auditing (UK and Ireland) 700: The Independent Auditor’s Report on Financial Statements (June 2013), available at

[7]           Lauren Reid, Joseph Carcello, Chan Li, & Terry Neal, Impact of Auditor and Audit Committee Report Changes on Audit Quality and Costs:  Evidence from the United Kingdom, Aug. 17, 2015, available at; Lauren Carse Reid, Joseph V. Carcello, Chan Li, Terry L. Neal, Are Auditor and Audit Committee Report Changes Useful to Investors?  Evidence from the United Kingdom, July 29, 2015, available at 

[8]           Possible Revisions to Audit Committee Disclosures, SEC Release No. 34-75344, available at

[9]           Section 10A of the Securities Exchange Act of 1934, 15 U.S.C.§ 78j-1(a)(3) requires, “an evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year.” 

[10]         See SEC v Arkadiy Duboyoy (D.N.J. filed Aug. 10, 2015) available at; see also Matthew Goldstein & Alexandra Stevenson, Nine Charged in Insider Trading Case Tied to Hackers, N.Y. Times DealBook, Aug.11, 2015, available at

[11]         See Commission Release No. 34-38387, IMPLEMENTATION OF SECTION 10A OF THE SECURITIES EXCHANGE ACT OF 1934, available at; see also The Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (1995).

[12]     Proposed Amendments to the IAASB’s International Standards, available at

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