SEC "Financial Reporting Series" To Focus On Early Identification of Risks to the Financial Reporting System

In remarks at USC's 30th Annual SEC and Financial Reporting Institute, SEC Chief Accountant Jim Kroeker announced that the SEC will launch a series of roundtables "to facilitate a balanced discussion of existing pressures or emerging issues in financial reporting." The roundtables, entitled the "Financial Reporting Series," are expected to be held three times per year. They will be open to the public, and webcast.

Objective: Early Identification of Risks
The objective of the Financial Reporting Series, said Kroeker, is to "assist us in our early identification of risks related to, as well as areas for potential improvements in, the reliability and usefulness of financial reporting to investors."

The first such roundtable, said Kroeker, is "expect[ed] ...to be held later this year," and will focus on "a topic such as the role of uncertainty in financial reporting and whether [the] right level of information about uncertainty is being provided."

It appears the Financial Reporting Series, focused on the early identification of risks to the financial reporting system, dovetails neatly into the role of the newest Deputy Chief Accountant to join the OCA team - Mike Starr.

As noted in the SEC's press release issued last fall when Starr, former Chief Operating Officer of Grant Thornton Int'l, was hired in the newly created position of Deputy Chief Accountant for Policy Support and Market Monitoring: "In this role, Mr. Starr will serve as the Chief Accountant's liaison on projects and activities to improve the quality of accounting and auditing policy decisions and to identify and address potential financial reporting weaknesses and risks. Mr. Starr also will advise the Chief Accountant and the Office on highly complex topics."

Series of Roundtables, vs. a Formal Panel
Kroeker pointed out the Financial Reporting Series roundtables will differ from a formal advisory committee or blue ribbon panel (which, for example, aim to seek a consensus view and issue formal recommendations on behalf of the group). However, similar to the use of the output of a more formal committee, "I expect that the Series will provide the Commission staff, as well as the FASB and the PCAOB, with useful information about emerging issues and changes in the business environment that affect each of our respective roles in the financial reporting system."

Although he did not use the term 'ad hoc,' it appears the flexibility offered by a roundtable series - i.e., by not bringing together a formal panel to hold multiple meetings, deliberate, debate for a consensus, and issue formal recommendations - offers the benefit of being less labor intensive for SEC staff (and for those who participate in the roundtables). Additionally, the roundtable format will enable the SEC to bring together different groups of experts each time, (vs. an advisory committee) depending on the subject matter.

FASB, PCAOB and Other Observers
As has been the case with past SEC roundtables and advisory committees on cross-cutting issues that impact financial reporting and auditing, the chairs of the FASB and PCAOB will serve as observers at the roundtables.

Kroeker added that other observers may include staff from the federal bank regulatory agencies. In addition, although the roundtables will be organized by the SEC's Office of the Chief Accountant, he added that staff from other divisions and offices may observe (or, in my view, potentially co-moderate) the roundtables from time to time, including staff from the SEC's Division of Corporation Finance.

SEC Chairman Mary L. Schapiro gave an early nod to the Financial Reporting Series in remarks at a Financial Accounting Foundation dinner last month, when she said, "I am also looking forward to the FASB’s and the PCAOB’s participation in the SEC staff’s new 'Financial Reporting Series.' This will be another opportunity to listen and learn — a series of roundtables designed to help all of us who are involved in the financial reporting system, identify risks related to the reliability and usefulness of financial reporting, as well as areas for potential improvements. We believe that the series will provide us, as well as the FASB, PCAOB and others, with useful information about emerging issues and about changes in the business environment that affect the financial reporting system."

Diverse Participants
Participants in the Financial Reporting Series roundtables, Kroeker said last week at USC, will represent a variety of groups included among the SEC's constituents.

"The approach will be one of inviting a cross section of capital markets participants," he said, "including investors, preparers, auditors, and others." He added the aim of the discussion was to "foster an informed dialogue on some of the most difficult financial reporting topics."


Shades Of Pozen Committee, Dodd-Frank
The Financial Reporting Series appears to have some roots in a similar cross-constituent group recommended by SEC Advisory Committee on Improvements to Financial Reporting (aka 'the Pozen Committee' for its chair, Bob Pozen; also known as CIFiR).

In the Pozen Committee's final report issued on August 1, 2008, Recommendation 2.3 included forming a Financial Reporting Forum, as follows:

Create a Financial Reporting Forum (FRF) that includes key constituents from the preparer, auditor, and investor and other user communities, to meet with representatives from the SEC, the FASB, and the PCAOB to discuss pressures
in the financial reporting system overall, both immediate and long-term, and how individual constituents are meeting these challenges. This may require the FASB to re-evaluate the roles and composition of its advisory groups or agenda committees....

In the detailed discussion of this recommendation later in the Pozen committee's report, it was noted that the scope of their suggested FRF would be broader than just FASB issues, "[W]e would not limit the proposed FRF’s purview solely to the work of the FASB. Rather, key constituents in the U.S. financial reporting system would meet with representatives from the SEC, the FASB, and the PCAOB to confer on immediate financial reporting needs and priorities system-wide. By identifying emerging issues, the FRF would give timely input on pressures affecting the financial reporting system, both immediate and long-term."

Like the Pozen Committee's recommended FRF, the SEC's Financial Reporting Series will include participation by representatives of the SEC, FASB and PCAOB; however, unlike the Pozen Committee's FRF, the agency representatives will serve in an observer role.
Also, like the Pozen Committee's FRF, there will be a variety of constituents from the financial reporting and auditing process (investors, preparers, auditors and others); but unlike the FRF, the Financial Reporting Series will not be a formal advisory group. (Potential conflicts of a formal FRF with other existing advisory committees were foreseen by some, as noted in the Pozen committee report; the SEC has avoided this problem by keeping the roundtables in more of an informal, ad hoc nature, rather than forming a formal advisory committee.)

In the main, by addressing emerging issues, including broad-based constituents from the private sector and regulatory community, and convening in public, the new Financial Reporting Series, based on Kroeker's description at USC, appears to implement the thrust of the Pozen Committee's recommended FRF, which called for a focus on, "Urgent matters in the U.S. financial reporting system [which] should be dealt with in a timely fashion, which may require the FRF to be convened both on a regular schedule and on short notice, as necessary. The meeting process should allow interested parties to raise issues in a transparent fashion."

Separately, an earlier version of the Dodd-Frank Act (the House version passed on Dec. 11, 2009) called for the formation of a "Financial Reporting Forum." As noted in our blog post at that time:

Financial Reporting Forum to make recommendations to Congress: A Financial Reporting Forum would be created, consisting of the Chairmen of the FASB, SEC,
bank regulatory agencies, and certain others to be appointed by the SEC (including a representative of a financial institution, a non-financial institution, auditors, and investors). The Financial Reporting Forum would meet at least quarterly, to: "discuss immediate and long-term issues critical to financial reporting," and would "issue an annual report to the Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters." [NOTE: An earlier version of this provision was submitted by Rep. Miller.] [Sec. 7417]

Although I don't believe the "Financial Reporting Forum" recommended in the earlier House version remained in the final Dodd-Frank Act, the common theme of involving representatives of the SEC, FASB and PCAOB, along with key constituents, to "discuss immediate and long-term issues critical to financial reporting" seems to be consistent in many respects not only with the Pozen Committee's recommended FRF, but also with the SEC's new Financial Reporting Series.

Additionally, I believe (before its too late, let me remind you of the disclaimer posted on the right side of this blog) that the new Financial Reporting Series can be beneficial to the SEC, PCAOB and FASB, given the responsibility of the Financial Stability Oversight Council which was included in the final Dodd-Frank Act.

As described by AICPA JofA Senior Editor Matthew Lamoreaux in his article, Financial Regulatory Reform Bill Clears Congress, when the final Dodd-Frank Act was signed by President Obama last year:

Accounting standards. The act gives the Financial Stability Oversight Council the duty to monitor domestic and international financial regulatory proposals and developments, including insurance and accounting issues, and to advise Congress and make recommendations in such areas that will enhance the integrity, efficiency, competitiveness and stability of the U.S. financial markets. The council may submit comments to the SEC and any standard-setting body with respect to an existing or proposed accounting principle, standard or procedure.

Stay Tuned
In his remarks at USC last week, Kroeker noted, "I encourage you to watch for public announcements of the sessions in advance through a press release or on a devoted Financial Reporting Series webpage on the Commission’s website."

Other Topics In Kroeker's Speech
Other major topics covered in Kroeker's speech, besides the Financial Reporting Series, included:

• Oversight of Standard-Setting: Convergence (IFRS and U.S. GAAP)




• Oversight of Standard-Setting: Private Companies (Note: some may consider it interesting that the SEC's oversight indirectly extends to private companies (in addition to public companies) through its oversight of the FASB.) In his remarks, Kroeker states: "I have also spent time understanding the report and recommendations put forward by a Blue-Ribbon Panel on Standard Setting for Private Companies. My focus in understanding those recommendations is to consider the nature and impact of any recommendations for private companies to apply accounting standards that may differ from those that public companies apply."
  
  He continues, "It is prudent, in my view, to carefully consider the nature of any differences and their effect on the capital formation process if private companies have to adopt a revised, and more stringent set of accounting policies in connection with preparing Commission filings to raise public capital. Further, it is important to understand why one might suggest a different standard for private companies."
  
  Kroeker concludes on this subject, "I support the approach taken by the FAF Trustees in carefully considering the advice from this panel as they strategically assess the financial reporting system for private companies. Further, I believe that in a number of areas additional research, study, and outreach, particularly to investors, would be warranted prior to implementing any significant change in the standard-setting structure applicable to nonpublic entities."
  




• SEC's Sarbox Section 404 Study - including a repeated call for PCAOB to publish findings of 'lessons learned' about auditor practices, from its inspections data




• Mitigating financial reporting risk - through PCAOB's announced consideration of potential changes to the auditor's reporting model, and through better audits




• Need for focus on PCAOB international inspections

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