Kotz, Khuzami, Walsh Testimony Posted for Senate Banking Hearing re: Madoff

Moments ago, Senate Banking Committee Chairman Chris Dodd opened the committee's hearing on: Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance. Testimony has been posted on the SEC website for SEC Inspector General H. David Kotz, and for the Robert Khuzami, Director of the SEC's Division of Enforcement & John Walsh, Acting Director, SEC's Office of Compliance Inspections & Examinations (OCIE). Also scheduled to testify: Harry Markopolos. All testimony will be posted on the hearing website linked above. [UPDATE 5:17 pm: The Association of Certified Fraud Examiners (ACFE) has posted Markopolos' testimony here.]

Compliance Week is live-blogging the hearing here.

G-20 Finance Ministers Issue Progress Report, Next Steps In Advance of Pittsburgh Summit

As a lead-in to the G-20 meeting set to take place in Pittsburgh on Sept. 24-25, at which President Barack Obama will host the leaders of nations representing 85% of the world's economy, the G-20 Finance Ministers and Central Bank Governors held a meeting in London on Sept. 4-5. At the conclusion of the Sept. 4-5 meeting, the following documents were released:

• Communique on the Global Plan for Recovery and Reform
• Progress Report on the Actions of the Washington (11/08) and London (4/09) G-20 Summits, and
• Declaration on Further Steps to Strengthen the Financial System.

Accounting Convergence One Among Many Issues
Convergence of accounting standards is one among many issues in the G-20 progress report and declaration. Other issues relate to credit rating agencies, corporate governance (including board oversight of risk and compensation), executive compensation, countercyclical measures, prudential regulation, regulation of systemically significant institutions, non-cooperative (tax) jurisdictions, and more.

The topic of accounting convergence is treated more narrowly (i.e. scoped to specific transactions) in the short-term declaration vs. the longer-term progress report. Topic number 6 in the declaration notes the importance of striving toward:

Convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the IASB is encouraged to take account of the Basel Committee guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group; and its constitutional review should improve the involvement of stakeholders, including prudential regulators and the emerging markets.

In comparison, the longer term, more widely scoped progress report addresses the G-20 leader's prior calls (at the 11/08 and 4/09 G-20 Summits) as follows under Item 87 of the Washington Action Plan:

• Action plan text: "Accounting standard setters should take action to make significant progress towards a single set of high quality global accounting standards by the end of 2009."
• Progress made (note the language "converge with or adopt" - emphasis added): "In addition to the specific international convergence activities noted above, nearly all FSB jurisdictions have programmes underway to converge with or adopt the standards of the International Accounting Standards Board by 2012."

Besides convergence, there are various other steps in the topic of Accounting in the progress report to the Washington Action Plan, including reducing complexity, addressing off-balance sheet transactions, increasing involvement of stakeholders, including prudential regulators, in setting/overseeing the establishment of accounting standards, enhancing disclosure relating to complex financial products, and more.

Props to WSJ which provided links to the G-20 doc's next to the article which appeared in yesterday's WSJ, G-20 Sets Broad Bank Pact : Finance Officials Still Working on Likely Sticking Points, Such as Bonus Caps, by Stephen Fidler and Laurence Norman.

Other commentary on IFRS and Accounting: Lagarde, Pounder

More commentary relating to the G-20 generally and accounting specifically can be found in the article, G20: ECB Noyer: Uniform Accounting Key To Stronger Regulation, by Gabriele Parussini, Dow Jones Newswires (via Nasdaq website).

Separately, I highly recommend (reminder: see disclaimer on the right margin of this blog) Bruce Pounder's recent post in his IFRS in Perspective blog, (a fellow blogger in AccountingWEB Bloggers' Crew), specifically his Sept. 6 post on: One Set of Standards vs. One Standard-Setter.

Promoting Transparency In Financial Reporting Act Up For Vote In Congress

[UPDATE 9.9.09: The PTFRA bill passed the House today, see press release issued by Rep. Chris Lee (R-NY), sponsor of the bill http://bit.ly/x521p]

Congress is set to reprise this week its earlier passage of the Promoting Transparency in Financial Reporting Act. (The House passed the bill in prior sessions, but the bill was never acted on in the Senate). Currently numbered H.R. 2664, the bill would, among other things:

[R]equire annual oral testimony before the [House] Financial Services Committee of the Chairperson or a designee of the Chairperson of the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board, relating to their efforts to promote transparency in financial reporting.

Specifically, as described in H.R. 2664, the PTFRA would require that, beginning in 2009, and for five years thereafter, annual testimony of the SEC, FASB and PCAOB Chairmen (or their designees) would be provided to the House Financial Services Committee on "their efforts to reduce the complexity in financial reporting to provide more accurate and clear financial information to investors, including

1. reassessing complex and outdated accounting standards;
2. improving the understandability, consistency, and overall usability of the existing accounting and auditing literature;
3. developing principles-based accounting standards;
4. encouraging the use and acceptance of interactive data; and
5. promoting disclosures in ‘‘plain English’’.

According to The Weekly Leader published by the House Majority Leader's Office on Sept. 3, the PTFRA is among bills to be voted on this week under the House's Suspension rules. (Hat tip to Capitol Hill Reports which reported on the upcoming vote as well.)

Virtually identifical versions of the bill were passed by the House during previous sessions of Congress under the Bush administration but were never voted on in the Senate.

The bill, originally introduced by Rep. Geoff Davis (R-KY) concurrent with a Congressional hearing on Fostering Accurancy and Transparency in Financial Reporting (March 29, 2006 hearing of the Subcommittee on Capital Markets, House Financial Services Committee). (See FEI Summary of the hearing; then-FEI President & CEO Colleen Cunningham testified at the hearing, as well as FASB Chairman Robert Herz, PCAOB's then-Acting Chairman Bill Gradison, and SEC's then-Acting Chief Accountant Scott Taub, in addition to others).

A brief history of the bill appearing in Rep. Davis' bio notes that

The bill would increase Congressional oversight of financial reporting by requiring the government agencies responsible for securities and accounting standards to testify ... on steps they are taking to improve financial reporting regulations. The bill passed the House in both the 109th and 110th Congresses, but has yet to be considered by the Senate.

The bill has been reintroduced in the 111th Congress by Rep. Christopher Lee (R-NY) and is co-sponsored by Rep. Davis, Rep. David Scott [D-GA], Rep. Michael Castle (R-DE) and Rep. Adam Putnam (R-FL).

What Might The Testimony Say?
Among developments which the FASB, PCAOB and SEC Chairmen could potentially include in their testimony, if the bill were to become law, are:

1. Reducing complexity: FASB's final standards issued earlier this year, such as FAS 166 and 167 amending FAS 140 and FIN 46R on securitization and consolidation (e.g. consolidation of what used to be called QSPEs) reassessing complex and outdated accounting standards; and FASB and IASB's efforts to amend financial instruments standards - with one of the goals being to 'simplify' the accounting (although, as noted in some earlier posts in this blog, some constituents believe some of the proposed 'simplifications' such as a move to fair valuing a broder populations of financial instruments, particularly those that are not actively traded, would not necessarily be a 'simplification.')
2. Increasing understandability, consistency, usability: At least on the consistency front, FASB's Codification was launched on July 1 as the single source of U.S. GAAP. Since the Codification is still so new, various parties are debating its 'usability,' and some have questioned the two-tiered subscription structure in which basic access and some rudimentary search functionality is free, but users are charged to have access to the Professional View of the Codification, which provides more sophisticated search functions. Some who have commented on this two tiered subscription structure include Professor Bob Jensen, and Broc Romanek of TheCorporateCounsel.net blog. Separately, FASB launched earlier this summer a new project on the Disclosure Framework, which, according to this FASB press release, has the goal of considering certain SEC (e.g. MD&A) and FASB disclosure requirements holistically.
3. Principles-based: FASB and the IASB have been aiming to issue principles-based accounting standards; (some say both board's have largely done so historically, although many characterize FASB standards as historically being relatively more rules-based than IASB standards, potentially, in part, due to the differing litigation environment in the U.S.)
4. Interactive reporting: SEC's final rule approved last year mandates that public companies provide exhibits to their filings to include financial reports and certain related information tagged with interactive data, specifically eXtensible Business Reporting Language or XBRL. (The interactive data rule comes into effect this year with the largest public companies, and is being phased in over a three year period by company size). See also the report issued by the SEC last year on its 21st Century Disclosure Initiative, although some aspects of that report may be more or less on hold as the new administration tackles various pressing matters.
5. Plain English: FASB's Disclosure Framework Project mentioned above, and some of the recommendations in the final report issued last year by SEC's Advisory Committee on Improvements to Financial Reporting. See also SEC's new Investor Advisory Committee, formed earier this year, their ultimate recommendations could potentiall relate to all 5 of these areas. The PCAOB also recently announced it will form an Investor Advisory Committee as well.

My two cents (I reminder you of the disclaimer which appears in the right margin of this blog): The dual aim of promoting transparency and reducing complexity in financial reporting will be important features to consider in all of the above initiatives and those that will follow. Also, assessing the testimony provided under the PTFRA will require an analysis of substance over form, e.g. what does it mean when someone says initiative XYZ will increase 'transparency' vs. lead to information overload; how does initiative ABC simplify something or make it more understandable to users of financial statements, how has the goal of reducing complexity been considered alongside the goal of increasing transparency, etc. Separately, I believe Congress would be performing a legitimate oversight function by requiring annual testimony from the Chairmen of the SEC, FASB and PCAOB on these matters, and this form of oversight can be done in an informational way (more of a carrot than a stick), thereby avoiding impinging on the independence of any of the above agencies/organizations. As always, we invite comments to be posted on these points or other matters of interest with respect to the blog.