Regulators Call for More Transparency, Less Complexity
The Securities and Exchange Commission (SEC) is seeking help from the accounting industry to simplify the rules that may be partly to blame for the corporate scandals of recent years, the SEC chairman said Monday.
The SEC, working with the Public Company Accounting Oversight Board (PCAOB) and the Financial Accounting Standards Board (FASB), is undergoing a “major national effort to make accounting less complex,” said SEC Chairman Christopher Cox, at the American Institute of Certified Public Accountants' (AICPA) annual meeting in Washington, D.C. “The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules.," Cox said. "Criminal conduct could be concealed in a thicket of detail.”
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He outlined what is being done: “First, FASB, with our support, is reassessing specific standards in major areas where rules fail to provide transparent information. Second, FASB is trying to codify all of the existing literature, in order to establish a single source for all GAAP material. And third, in order to do that, FASB is trying to contain the proliferation of new pronouncements from multiple sources.”
Another pressing matter faces the industry, he said: the market domination of the Big Four, which audit 80 percent of all the public companies in the U.S.
Cox said: “Is this intense concentration in the market for large public company auditing services good for America? If you believe, as I do, that genuine competition is essential to the proper functioning of any market, then the answer is no.”
Cox said the SEC may consider rewriting the rules to eliminate barriers that keep smaller firms away from auditing large companies.
Cox feels these initiatives will require more help from accountants. “These improvements will help you better serve the public, and your clients. And they'll let you focus your efforts on what really matters.”
FASB Chairman Robert H. Herz, who addressed the conference Tuesday, echoed the concerns Cox had expressed about the complexity of the rules and the need to improve transparency.
Herz said thousands of pronouncements now make up U.S. generally accepted accounting and auditing standards, SEC rules, interpretations, regulations and other guidance.
“Many, including some members of the FASB, believe that the current system has engendered a check-the-box, form-over-substance approach to accounting, auditing and reporting by preparers, auditors and regulators, sapping professionalism and increasingly necessitating the involvement of technical experts to ensure compliance.”
Transparency suffers because it is so difficult to understand the financial statements and to make comparisons between companies, he said.
Herz feels it's time to stop observing the problem and start solving it. Herz suggested a thorough analysis of the factors that cause complexity and impede transparency before looking at possible solutions. “I believe the status quo is neither accceptable nor sustainable.”