Friday, July 24, 2009

Yin-Yang Time For Regulators, Standard-Setters

Regulators (including the SEC and PCAOB) and standard-setters (including FASB and the IASB) may want to take a page from the ancient Chinese philosophy of Yin-Yang as they move to align seemingly disparate forces in upcoming initiatives. (NOTE: Today's post falls under the 'my two cents category; this may be a good time to remind you of the disclaimer which appears in the right margin of this blog.)

Case in point: The need for the SEC to reconcile input from its new Investor Advisory Committee (IAC) - slated to hold its first meeting on Monday, July 27 - with input from preparers or issuers; and the need for FASB to consider a wide range of constituent input in its recently announced Disclosure Framework project. One would assume there may be some level of interaction between and among the above two initiatives at the SEC and FASB; in fact, FASB noted in its July 8 announcement of its Disclosure Framework project that part of the impetus for the project was the recommendation of an SEC advisory committee (CIFiR, referenced further below), and FASB stated that the project would look at aspects of the SEC disclosure framework (e.g., MD&A) as well as the disclosure framework under GAAP. FASB Chairman Robert Herz, in announcing the new project, added that, "Many constituents have expressed concerns about so-called ‘disclosure overload. While clear and robust disclosures are essential to informative and transparent financial reporting—a critical component in maintaining investor confidence in the markets—improving the way such disclosures are integrated can help decrease complexity.

Yet another county heard from on the subject of complexity is the Global Accounting Alliance (GAA), consisting of the AICPA and 10 of its international brethren, which issued a report in Dec. 08 entitled, Getting to the Heart of the Issue: Can Financial Reporting Be Made Simpler and More Useful? GAA held a roundtable last week, reported on in this article in, and in articles in here and here (the second article of which says GAA plans to issue another report this fall.)

On top of this, regulators, standard-setters, legislative bodies and others will soon receive the final report of the FASB-IASB Financial Crisis Advisory Group (FCAG). Steven Bouvier reported in BNA yesterday, in his article entitled, Co-Chairman of IASB Crisis Advisory Group Outlines Guiding Principles of Coming Report (BNA sub req'd):
The report of the [FASB-IASB FCAG] is set to contain some 20 recommendations organized around four broad principles, FCAG Co-Chairman Hans Hoogervorst told a July 6 gathering of the International Accounting Standards Committee Foundation trustees and monitoring board representatives. Publication of the group's report is imminent, following a closed meeting July 10 in New York that focused on drafting. ...
Hoogervorst, who co-chairs the group alongside former SEC Commissioner Harvey Goldschmid, identified the four principles around which FCAG has based its recommendations as:
• support for both boards' recent work on financial instruments accounting,
• acknowledgement of the limitations of financial reporting, and
• the two interrelated principles of due process and accountability.
Read our summaries of FCAG meetings here, here and here, and see a related column I wrote which appears in the current issue of FEI's Financial Executive Magazine, entitled, Standard-Setting and Sovereignty. (Note: you will be prompted to create a free login account to read articles online if you are not an FEI member.)

How might the concept of yin-yang help the regulators and standard-setters in considering recommendations of disparate groups ? Consider this: "The concept of yin-yang is used to describe how seemingly disjunct or opposing forces are interconnected and interdependent in the natural world, giving rise to each other in turn...yin and yang are complementary opposites within a greater whole. Everything has both yin and yang aspects, which constantly interact, never existing in absolute stasis." (source: wikipedia)

If the above definition seems too lofty, then consider this excerpt from "How practicing leaders can manage paradox, dilemma and polarity," a post by George Ambler in his blog, The Practice of Leadership. (Ambler is a Senior Consultant for Gartner in South Africa; his blog is his own.) Ambler writes:
James C. Collins and Jerry I. Porras in their book Built to Last talk about how leaders get caught in what they call 'The Tyranny of the Or,' the belief that you cannot live with two seemingly contradictory ideas at the same time, that you can have change or stability, you can be conservative or bold, you can have low costs or high quality, but you can never have both. They found that successful, visionary companies all operate in what they call “The Genius of the And,” the ferocious insistence that they can and must have both at once.

....This concept of duality has been around for many years [in the] concept of Yin and Yang... which describes 'two primal opposing but complementary forces found in all things in the universe.'"
The bullets below describe some particularly relevant aspects of yin-yang highlighted by Ambler, which I believe have resonance to modern-day standard-setting. Think of yin (or yang) as, e.g. issuers or preparers, and yang (or yin) as investors or users of financial reporting and disclosure more generally. (NOTE: Yin is traditionally described as darkness, and yang as light; I am not ascribing either one to any particular party, the point is simply that they are broadly viewed as opposing forces.)
  • Yin and Yang are interdependent. One cannot exist without the other. For example, day cannot exist without night. Light cannot exist without darkness.
  • Yin and Yang can be further subdivided into Yin and Yang.
  • Yin and Yang consume and support each other. Yin and Yang are usually held in balance-as one increases, the other decreases. However, imbalances can occur.
  • Yin and Yang can transform into one another. At a particular stage, Yin can transform into Yang and vice versa.

The need for balance

I believe the SEC will face a challenge ahead, in reconciling recommendations from its Investor Advisory Committee (IAC) with considerations of the issuer community. The IAC, formed with a finite life in accordance with the Federal Advisory Committee Act (FACA), would become a permanent committee of the SEC if draft legislation entitled the Investor Protection Act of 2009 - part of broader financial regulatory reform - is passed by Congress and signed into law.

This point about the need for balance was also commented on by Broc Romanek in his July 13 post in blog:

How many federal agencies have permanent advisory committees? This could set a bad precedent - and even though investors may have been under-represented by those that regularly approach the SEC in the past, the SEC has heard plenty from investors over the past few years. The creation of a permanent committee may swing the pendulum the other way so that the investor perspective dominates the SEC's view of the world.

In the long run, the much more likely result is that regularly meeting with an advisory committee would simply be a waste of time. I like the idea of roundtables on specific issues where all sides are represented - as well as the normal comment process on rule proposals - for the SEC to obtain all the outside input it needs. I'm not a big believer in conducting more meetings as a way to find solutions to problems.

One of the key phrases Romanek uses above with which I most strongly concur is the benefit of roundtables "where all sides are represented." To me, that is the beauty of committees like the Pozen Committee, more formally, the SEC Advisory Committee on Improvements to Financial to Financial Reporting (CIFiR), which included investor representatives as well as issuer representatives and others, and had observers from FASB, IASB, the PCAOB and Treasury.

Another positive example of giving potentially disparate interests a seat at the same table (instead of convening two distinct firewalled tables) would be the roundtables conducted jointly by the SEC and PCAOB in 2005 and 2006 on implementation issues arising under the then-new SEC and PCAOB rules issued under Sarbanes-Oxley Section 404; those roundtables included participants such as issuers, auditors, investors and others. Additional examples of advisory groups with diverse representation would include the U.S. Treasury Department's Advisory Committee on the Auditing Professional (ACAP) - which published its final report in Oct. 2008, and the PCAOB's Standing Advisory Group (SAG). (Note: PCAOB announced yesterday that they will meet on Tues. July 28 to consider a final standard on Engagement Quality Review, and a Concept Release on Requiring the Engagement Partner to Sign the Audit Report.)

Summing up, I'm not saying the SEC, FASB, PCAOB and IASB should go out and redesign their offices using Feng shui or anything, but it will be interesting to see how they may apply the principles of Yin-yang in seeking harmony (or at least balance) among the diverse interests within and among their constituencies as they move forward in rule-making and standard-setting.

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1 comment:

Edith Orenstein said...

Some related news, care of FEI member David M. Morris of MORRIS Consulting, who serves on the Consultative Advisory Group (CAG) of the IAASB: IFAC G20 Accountancy Summit Issues Renewed Mandate for Adoption of Global Standards - see IFAC press release issued today: