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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Current Developments in the Office of the Chief Accountant
Foundation for Accounting Education


Donald T. Nicolaisen

Chief Accountant
U.S. Securities and Exchange Commission

New York State CPA Society
Tuesday, September 14

It's a real privilege for me to be here with you today. The has a long tradition of speaking up on important issues affecting our profession and fostering an open and candid dialogue. While we may not always agree, I can assure you that I welcome a thoughtful and fulsome dialogue. It is through this process that we learn from each other, and I am the first to admit that I don't have all the answers. So I welcome and encourage all of you — whether you are an investor, work for a registrant, a private company, or an audit firm with one or a thousand audit clients — to express your views on the topics I will cover in the next few minutes.

Before I continue, let me make the usual SEC disclaimer. The remarks I make today are my own and do not necessarily represent the views of the Commission or its staff.

The focus of my comments today will be on several of the key initiatives I am working on at the Commission, and, at a more macro level, I will touch on some of the factors that I believe are likely to influence the future direction of financial reporting.

Before I get into specifics, I'd like to make a few comments about the role of the Chief Accountant, our profession and state regulation of CPAs.

The Role of the Chief Accountant:

My job is to help ensure that the millions of investors in our capital markets can make investment decisions on the basis of timely, relevant, reliable and complete information that is understandable and embraced by investors. This underlying principle — investor advocacy — forms the bedrock of all decisions that I make — including formulating and executing OCA's agenda, considering new standards from the FASB or PCAOB, or the content of speeches such as this one.

The Accounting and Auditing Profession:

Recently the CEO of a major U.S. institution stopped by my office to encourage the continued strengthening of our financial reporting processes. He observed that investors remain skeptical of reports by management and that the reputation of the independent auditor hasn't yet recovered sufficiently to alleviate those fears. Now you can agree or disagree with this comment, but one thing is for certain. This profession has undergone and continues to undergo dramatic change. Investors and the public are demanding more — holding management, board members, accountants, lawyers and others to higher ethical standards, and looking for quality and transparency in financial reporting. I am encouraged by the positive steps our profession and others have taken to regain investor confidence, but I believe there is still much to do.

For the profession, it's about:

  1. Demonstrating an unwavering commitment to ethics, integrity and professionalism,
  2. Rewarding high quality audit work,
  3. Promoting education and strong technical expertise, and
  4. Attracting the best and brightest to the profession.

The audit profession is unique — serving the public interest first and foremost. That is a significant responsibility, and it's important that the auditor understand the needs of investors. Also the audit profession is now subject to a unique regulatory structure. The Sarbanes-Oxley Act created the Public Company Oversight Board. Accountants that audit the financial statements of SEC registrants must register with the PCAOB, undergo periodic inspections and, if warranted, PCAOB investigations and sanctions.

The PCAOB recently released its first limited inspection reports of the Big 4 firms. The inspection process is a critical function of the PCAOB and, under the Act, the PCAOB has been given unprecedented access into the firms. The goal of these reviews is to improve audit quality, and thereby enhance financial reporting and the integrity of our markets. Though I was disappointed with the findings of the reports, it is important to keep in mind that this is the first such inspection and that it covers a period of time during which the firms have been undergoing significant change. The reports indicate that each of the Big 4 firms needs to improve, and I suspect that will be the case in many smaller firms as well. It is my hope that all PCAOB registered firms will take the findings in their reports seriously and make a concerted commitment to systematically improve the quality of their audits over the longer term. And, as part of that process, I believe that the firms should be more open and transparent to investors about how their organizations function. Investors and other members of the public are the firms' ultimate clients and, if the firms are ever going to convince those clients that they are doing all they can to protect investors' interests, then the firms have to be willing to let them know how they operate and how they make significant decisions when auditing company financial statements and internal controls. This also includes disclosing to the public problems or deficiencies discovered in their own firms, for example, in the PCAOB's inspection process. I particularly appreciated the initiative taken by KPMG in providing a summary of the PCAOB's non-public findings to their people and to their clients.

The Commission has developed a productive working relationship with the PCAOB. For example, in June, the Commission approved the PCAOB's standard on audits of company internal control over financial reporting. The requirement to provide management's assessment of the effectiveness of internal control over financial reporting and the accompanying attestation under the PCAOB's standard will be required for the first time for fiscal years ended after November 15, 2004 for accelerated filers and for fiscal years ended after July 15, 2005 for smaller issuers and foreign private issuers. This is a major change in practice, and the efforts required to comply should not be underestimated by anyone.

Of all of the reforms in the Act, I believe that the internal control requirements may have the largest effect on improving the accuracy and reliability of financial reporting. It is for that reason that it is absolutely critical that we get the internal control requirements right. In fact, it's so important that I am willing to defer other initiatives, at least temporarily, to ensure that management and their auditors to put the appropriate emphasis on these requirements and to get them right the first time around.

We are doing a lot in the standards-setting and rulemaking arenas, and I know that there is a concern with overload. But, I believe we must improve investors' access to, understanding of, and trust in financial information. Every one of us in the financial reporting chain — standard-setters, auditors, regulators, preparers, users, analysts, the press, and the AICPA with its more than 300,000 members — can and must do better. I should also mention here that I believe that the NASBA, the state boards, and the state societies have an important role to play in restoring investor trust.

State regulation of CPAs:

Several months ago, Bob Colson asked me whether it was time for more consistent regulation of CPAs at the state level. This is an area where I readily admit that I don't have all the answers, but I do think that this issue deserves an open and candid debate. And I would very much appreciate your views. I suspect that what whether a CPA's license is in New York or California, or Texas or Vermont, makes very little difference to the investing public. What the public is looking for is the assurance of a CPA's report on an audit of financial statements. While all states have the goal of licensing only accountants' who can meet the public's expectations, the difference in licensing requirements across the states does add complications. The Uniform Accountancy Act (UAA) hasn't worked well enough to encourage licensing authorities to pursue a consistent approach. On one hand, it's in the best interest of the investing public to have uniform, national qualifications for CPA licensure; on the other hand, the states clearly have an interest in licensing professionals who practice within their borders.

One aspect of the licensing requirements that should be discussed is the state law provision on continuing professional education. In my 36-years of experience practicing in a large accounting firm, and now — even more acutely — in the cases that cross my desk at the Commission, I have seen examples of professional skills fading over time. It's important to participate in CPE seminars and to be familiar with new FASB and PCAOB standards. Maybe there should be tests at the end of CPE programs, or a competency requirement tested periodically, or a required progression of professional credentials. As I mentioned, this is an area where I don't have all the answers or for that matter all the questions, but I believe we need to ensure that professional proficiency and expertise grow with time and experience.

We're at a unique juncture in the history of the CPA profession, and uniform licensing requirements is a legitimate issue to consider. That being said, a debate of this issue should be structured around the need to preserve the states' legitimate interest in licensure while serving the national interest as it relates to CPAs' importance to the investing public.

The Financial Reporting Process:

As the dialogue on this issue continues, we should keep in mind that the financial reporting process is undergoing a period of accelerated change. I believe that financial reporting is broader than just the financial statements and the footnotes required by GAAP. It includes various disclosures in filings with the SEC, including MD&A, key performance indicators and other non-GAAP measures and disclosures. These disclosures are essential to an understanding of financial performance, especially as we struggle with a mixed attribute model that uses historical costs, lower of cost and market, and fair values. One of my predecessors at the Commission, Walter Schuetze, suggested that financial statements should distinguish clearly between historical costs, opined on by auditors, and fair values, which may require other skills to verify. Whether you agree with Walter or not, his intent is clear. We need to improve investor understanding. I appreciate his willingness to make suggestions, and I equally welcome your views.

I believe that the current process of accounting standard-setting could be improved by focusing more on the underlying objective of the accounting that is being addressed. Similar transactions should receive similar accounting. The IASB and FASB have begun this process. However, further work is needed to clearly identify and articulate the principles or objectives underlying each standard. This will not be easy, as the issues that remain unresolved are complex. There are no easy answers.

Objectives-oriented standards do not stop with the articulation of objectives. Other important attributes of objectives-oriented standards include:

  • A clearly-defined scope;
  • Avoidance of scope exceptions;
  • Avoidance of bright-line tests; and
  • Sufficiently detailed implementation guidance (including real-world examples as much as possible).

The International Arena:

The FASB and IASB support moving toward a single conceptual framework that would be used by both Boards. The work of these two Boards, and other national standards setters involved in the IASB process, is an important part of building and maintaining an effective global financial reporting infrastructure. I also support global convergence. It's in the best interest of investors.

Tagged Data:

I know many of you are familiar with HTML, the Hypertext Mark-up Language that lies behind our personal and business homepages. More general mark languages are available to support structured data bases (e.g., XML and XBRL). The Commission recently issued a press release indicating that we are assessing the benefits of using tagged data and its potential for improving the timeliness and accuracy of financial disclosure and analysis of Commission filings. In addition, the staff is considering whether to recommend that the Commission accept voluntary supplementary filings of financial data using data gathering and analysis tools such as XBRL.

Properly used, tools such as XBRL have the potential to provide investors and analysts with information more quickly and at lower cost.

I encourage you to follow the discussion about the use of tagged data and provide us with your thoughts. If the Commission initiates a voluntary program, discuss with your clients the costs and benefits of participating in the program and helping the Commission frame its future policies and practices in this area. We need to know how the use of tagged data might impact all registrants — large and small.

Small Business:

Our consideration of how data-tagging impacts small companies is a reflection of a broader program that recognizes the importance of small companies in our economy. Small business is an area that I have spoken about in the past, and an area you will hear me speak about even more in the future. Small business plays a vital role and has long been a growth engine for our economy. During the Commission's Sarbanes-Oxley rulemaking initiatives, we received many comments focusing on the increased burden that the proposed rules would place on smaller-sized public companies. I have heard similar concerns expressed about the impact of some of the FASB's proposed standards, such as its exposure draft on accounting for stock options. As a general matter, I believe that small business should be expected to adhere to these same general standards and principles to the extent that they have like transactions. However, the burden to smaller companies is disproportionate and needs to be appropriately weighed against the protection of investors. For example, I have encouraged the private sector to consider developing an internal control framework designed specifically to address small business needs. This balancing act is something that I will continue to closely monitor, and it is also an important consideration for the FASB and the PCAOB. Clearly, we all need to strike the right balance.

Accelerated Periodic Reporting Deadlines:

And finally, the Commission released in late August a proposal to temporarily postpone, for one year, the final phase-in period for acceleration of periodic report deadlines that apply to accelerated filers. Under the proposal, the current deadline for accelerated filers would remain at 75 days for an additional year and at 40 days after quarter end for quarterly reports. The accelerated filing phase-in period would resume for reports filed for fiscal years ending on or after Dec. 15, 2005. I welcome your input on this proposal. The public comment periods ends on October 1. So please, if you have a point of view on this, send us your comments.

** *** *** *** **

As you can tell from my remarks, I believe we can do better. Other professions and industries have embraced an impressive number of diagnostic test tools and measures, use of technology, and a willingness to push traditional boundaries. You are free to disagree with me, but I don't believe we've kept pace. The quality of the audit must be enhanced. We have to improve standard-setting. We have to more broadly embrace technology. We have to adopt a less critical attitude toward change and embrace new ideas and concepts. We have to have a global view. My goal in working at the Commission is to improve the quality, timeliness and cost effectiveness of information available to investors. Improvement is not perfection so, as we continue down this path, I don't want us to get bogged down. Let's make good, lasting changes that demonstrate the pride we have in our profession and justify a return of CPAs to one of the country's most trusted professions. A profession that understands its role will meet the challenge.

Thank you.



Modified: 09/15/2004