Mary Jo White, the chairwoman of the US Securities and Exchange Commission (SEC), extended a collegial hand during her keynote speech at an American Institute of CPAs conference of standard-setters in Washington on Dec. 9. But she made clear there were changes to be made and concerns to address.
White emphasized that the audience of preparers, auditors, audit committee members, and CPAs plays a big role for the SEC, investors, and the markets.
âYou, together with the standard-setters and the regulators, have a vital stake in ensuring that our capital markets remain the safest and strongest in the world â and we all share the responsibility,â she said.
Cautioning that regulators' speeches during the conference may seem like âpreaching,â White said their goal is to engage with attendees in a mutual responsibility for reliable, high-quality financial reporting.
âIt is a weighty responsibility that constantly requires the very best efforts of all of us,â she said. âInvestors and our capital markets deserve and demand no less.â
White broke down that shared responsibility into five categories: preparers, auditors, audit committees, standard-setters, and regulators.
Here are the highlights of her remarks in each category.
While indicators point to improved financial reporting under the internal controls over financial reporting (ICFR) requirements of the Sarbanes-Oxley Act, discussion continues about unnecessary testing and documentation and why, White said. She declined to describe the nature of ongoing discussions about the concerns the SEC is observing, but White said any challenges to the operations of ICFR must be addressed so the controls âremain the strong bulwark of reliable financial reporting that [they have] become.â
Non-GAAP measures also warrant attention, she said, to ensure that rules are followed and to determine if the rules are adequate âin light of current market practices.â While non-GAAP measures are allowed, there are indications they are used a great deal and may be confusing, White said.
Preparers' finance and legal staff, as well as audit committees, should question the use of those measures.
Describing auditors as the âkey gatekeepersâ of preparers' reports, White noted that investor confidence in audited financial statements and independent auditors is high, and there's been a decrease in restatements since Sarbanes-Oxley. She credited the improved audit quality to the Public Company Accounting Oversight Board's (PCAOB) inspections and improved auditing standards.
But there are still too many companies and their auditors who have not fulfilled their responsibilities under securities laws and professional standards. She noted that PCAOB inspections have found significant deficiencies in ICFR audits, assessment of material misstatement risks, auditing accounting estimates, and work done by firms other than the signing firm in cross-border audits.
âWe have also just recently brought two enforcement cases against national accounting firms and their partners for missing or ignoring red flags,â White said. âSuch failures are totally unacceptable.â
The growing workload that faces audit committees may âdiluteâ their ability to focus on their key responsibilities, such as oversight of independent auditors and reporting to shareholders, White said. She questioned the effectiveness of directors who serve on multiple boards and audit committees.
Selecting audit committee members who only meet the âtechnical requirements of financial literacyâ may not be sufficient to understand reporting requirements or challenge management on major decisions, she said.
Committees must be able to assess how ICFR is put in place and how non-GAAP measures are used, and select the proper auditor. She noted that the SEC is keenly focused on committees' reporting to shareholders.
Confidence in financial reporting can't exist without confidence in the underlying standards and why they were developed, White said.
âSetting a standard must be informed by all relevant viewpoints â¦ without regard to how it might change the behavior of market participants or regulators,â she said.
White noted that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have worked since 2002 to develop a set of converged, globally accepted accounting standards. While several projects did not result in a common standard, the FASB and the IASB have had some success in converging US GAAP and International Financial Reporting Standards (IFRS) in âseveral major areas,â such as revenue recognition.
IFRS continues to be a focus of SEC work, and more than 500 foreign private issuers representing trillions of dollars of aggregate market capitalization report to the SEC using international accounting standards, which the commission reviews in the same way that it reviews GAAP applications, White said.
âWith respect to the issue of possible further use of IFRS in the United States, as I have said in the past, I believe it is important for the commission, as a commission, to make a further statement about its general views on the goal of a single set of high-quality global accounting standards â a topic that the commission itself has not spoken on since 2010,â she said.
SEC staff also has prepared a recommendation about the possibility of allowing domestic issuers to give IFRS-based information as a supplement to GAAP financial statements without reconciliation.
âThis proposal has the potential to be a useful next step,â she said.
A key area of emphasis is the SEC's disclosure effectiveness initiative, including a review of regulations S-K and S-X. A request for comment was issued in September on Regulation S-X requirements. Other review products will emerge next year on Regulation S-K, as well as technical changes concerning financial statement disclosures and improved tools on the SEC's website.
The transportation bill enacted by Congress earlier this month contains SEC-related provisos, including one for more modern and simple disclosures. The bill also requires the SEC to review Regulation S-K requirements, report its findings to Congress, and propose a rule to put the recommendations in place.
âThe goal of the staff's initiative is to make disclosure more effective, which is not only about reducing volume and complexity, but also considering whether investors need more information in certain areas,â White said. âWhile in some cases it may be beneficial to reduce volume and complexity to help investors better focus on important matters, you will hear from our staff in Corporation Finance that there are other areas â foreign tax disclosure is one â where the staff believes that more disclosure would help investors.â
She also said the agency has been closely scrutinizing âthe gatekeepers of financial reporting, continuing to hold accountants, auditors, and audit committees accountable in appropriate circumstances.â
In September, the SEC charged BDO USA LLP and five of the firm's partners for dismissing red flags and issuing false and misleading audit opinions about a client's financial statements. It was the SEC's first nonindependence case against a national audit firm in six years and the first in which a national audit firm made admissions.
Earlier this month, Grant Thornton LLP and two of its partners agreed to settle charges that they ignored red flags and fraud risks while doing deficient audits of two public companies that resulted in accounting-related enforcement actions.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.