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Highlights From SEC Speaks

Following are some highlights from remarks by the SEC Chief Accountant on IFRS and other matters, selected highlights from remarks of Corp Fin’s Acting Chief Accountant and IM’s Chief Accountant, from the Division of Risk Fin, and others during Day Two of the PLI SEC Speaks Conference 2/25/12). Some additional highlights from Day One of the conference (Commissioner’s remarks) can be found in our live tweeting at Click to ‘follow’ our twitter account; or sign up to receive email updates from the FEI blog by emailing us at and write “Sign up” in the subject line.

RiskFIN: More Money Being Raised in Reg D Filings Than IPOs;
Public vs. Private ‘Increasingly Gray”
Kathleen Hanley, Deputy Director,  Division of Risk, Strategy and Financial Innovation (aka RSFI or RiskFIN), noted that in studying small company IPOs, the RiskFIN found that “the amount of capital raised through Reg D …exceeds the public IPO market.” (That is, in pulling data from all sources of capital raising, as explained by Hanley, the SEC found that the amount of  capital raised via private capital financing, public debt, and Rule 144, disclosed in accordance with – and based on data from, Reg D filings, exceeded the amount of capital raised through public equity markets/IPO’s based on data from Registration statements and related filings.)
 “This area of public vs. private is becoming increasingly gray over time,” Hanley observed, adding “the Commission is looking at ways we can be responsive to these trends in capital raising; this information will help inform the Commission’s decisions on ways to [assist] smaller public companies.”
Referring to various recent recommendations of the SEC Advisory Committee on Small and Emerging Companies, Hanley noted, “There is a recommendation of our small company advisory committee that
we provide an ‘on-ramp’ for smller public companies,  for next three years [after going public], have lower reg[ulatory] requirements… so the burden on smaller companies is lower.
RiskFIN is taking a look at, in conjunction with the Division of Trading and Markets, ways to improve market quality; a number of initiatives on the threshold, [including] what does it mean to be a ‘smaller public company,’ said Hanley.

She also noted that the U.S. Treasury Department “put forth an IPO trends task force” to study claims that there was a ‘crisis’ or excessive drop in smaller company capital formation in the U.S., and that the Treasury task force “recommended a number of different ways to handle this crisis.” However, she added, “when we look at our sample here … we do not see a general fleeing of U.S. companies from the market.” Rather, as noted above, the SEC staff found that more capital is being raised through the private equity and public debt markets, than via public equity IPOs. 

Accounting Panel: Chief Accountant
Summarized below are some highlights from SEC Chief Accountant Jim Kroeker’s remarks during the Accounting
Panel at PLI SEC Speaks Saturday morning, Feb. 25, 2012.

PCAOB/Auditing Standards Issues

SEC Chief Accountant Jim Kroeker observed “there is a lot going on both on the accounting front, and in the auditing space.” Noting he only had 12 minutes during the morning panel on Accounting, he said he would highlight two items during that panel: one with ‘more practical application’ [PCAOB/auditing standards] and one that is more of a ‘policy issue’ [the SEC’s consideration of IFRS, detailed further below].

Auditor Independence: Private Co’s Going Public
Kroeker stated he wanted to “Highlight for those who advise management, or play a direct role: the SEC and PCAOB independence requirements are broader than those of the AICPA applying to private companies.” He added, “As the economy continues to grow, [including] private equity access to capital markets, an auditor providing services under the AICPA’s independence rules may not be independent under the SEC’s independence rules.” He noted that is “an issue that can be dealt with in preplanning, if access to public capital is something you are interested in… [there is a need to take a look at, e.g.], an audit firm assisting with tax notes would not be permitted under SEC rules, or looking more broadly at services provided to affiliates…  reminder that we take these issues seriously, we are available for consultation, but independence is the cornerstone of the value of the third-party audit; when these issues come up and they could have been addressed through preplanning, [you’ll find] a less sympathetic ear.”
PCAOB Concept Release on Independence/Auditor Rotation
Kroeker then commented on “The PCAOB’s Concept Release on independence, objectivity, and skepticism, [including] whether or not the idea of mandatory auditor rotation would increase independence.”
“In my personal view,” said Kroeker,” the value of audits have increased since the late 90s and early 2000’s, as example, during financial crisis, hardly a day went by when I didn’t have someone saying, if we could just get the auditors to back down from writing down values ... [people complaining about] too rigorous audits .. I think there have been improvements to objectivity and skepticism by auditors; that notwithstanding, the PCAOB continues to see audit deficiencies at a rate that
indicates there is room for improvement.”

Kroeker observed, “[What] troubles me, we see things [that say], “we want to be your trusted business partner... trusted business advisor,”  “if you hire us, we will provide a reduced audit footprint.” He noted concern with what those statements mean, vis-à-vis auditor independence, and warned, “to the extent we continue to see audit deficiencies – or, more alarming to me - auditors aligning themselves with the view of management as opposed to shareholders - there are things that can be done, this proposal is one.”  
He characterized this matter as “an important public policy debate,” adding “stay tuned.”
Auditors' Reporting Model
“Another significant policy matter/concept release the PCAOB has issued,” said Kroeker, “is on the question of whether or not more can be provided in the context of the audit [auditor’s opinion].” He noted, “For more than a century, people refer to the ‘pass/fail model’ [of the auditor’s opinion],” adding, “the PCAOB has done significant outreach on the idea of whether there should be an Auditor’s Discussion and Analysis (AD&A), like Management’s Discussion and Analysis (MD&A); or, more narrowly, whether an ‘emphasis’ paragraph should be required.”
Noting “the [PCAOB’s] comment period closed few months ago,” and that the PCAOB had conducted a number of
public roundtables on this issue, Kroker said that the PCAOB “is taking onboard that information, I think it will move forward on a more focused and refined proposal.”

He then offered “a couple words of encouragement in this space,” including his view that the longstanding “pass/fail” model has “tremendous” value in “provid[ing] investors reasonable assurance.” He appeared to emphasize that the various opinion paragraphs provided by the auditor, such as the opinion on internal controls, could not be looked at in a vacuum, and appeared to emphasize the significance of an auditor providing a straightforward opinion on the reasonableness of the financial statements in conformity with GAAP (I am paraphrasing here – as always, please see the disclaimer posted on the right side of this blog - what I got out of Kroeker’s commentary in which he gave some props to the current pass/fail
model; I interpreted his remarks as supplying a bit of a counterweight to those who argue that the pass/fail model of the auditor’s opinion does not allow for sufficient nuances or information to be communicated to investors, that some believe
could, and should, be directly expressed by the auditor, vs. information communicated directly by management.)
Former Commissioner Aulana Peters, appearing to support an enhanced auditor’s reporting model, said, “I think what investors want is some meat on the bones.” 
Kroeker replied, “Reasonable assurance about compliance with GAAP – has significant value – some people are saying, can the auditor provide more around sensitivity of the numbers, or around the quality of some numbers.”

Peters continued, “I think that is definitely one area where the investors want more [information].”

Kroeker closed this particular topic by noting, “There are other policy initiatives, including updating auditor communication, [on which the PCAOB’s] comment period ends next week.”

Chief Accountant: IFRS Update

The following bullet points are verbatim (based on my notes in listening to the webcast of PLI’s 2012 SEC Speaks) from what the speakers, including SEC Chief Accountant Jim Kroeker, and former SEC Commissioners Aulana Peters and Cynthia Glassman, said during the discussion of the SEC’s upcoming decision on IFRS, in the Accounting Panel on Saturday morning Feb. 25.

SEC’s Framework May Contain “Endorsement” Mechanism

  • Notwithstanding there are challenges, I am personally optimistic about the potential to bring IFRS into the U.S. financial system
  • I'm optimistic  we can develop a Framework; we are hopeful to provide Commission a
         final workplan in a few mo’s, more than a couple, less than many
  • That’s about as specific as I’m going to be; that got picked up as more specific than
         what I intended it to be
  • One idea is a Framework that would:
    •  keep in place FASB,
    • allow for significant US voice in financial reporting;
    • clearly demonstrate  commitment to moving toward or incorporating a high quality set of standards in the US, if those standards are indeed high quality
    • consider cost of moving [to IFRS], and
    • considers notion of keeping US GAAP, if for no other reason than US GAAP is embedded in almost every level of federal, state … requirements
  • How do you accomplish all those objectives in a Framework ...
    •  I think there is a way to consider endorsement of IFRS

    • A mindset of taking the FASB [to look at] standard by standard, if the IASB has a high quality standard, and then

    • Can we adopt that [IFRS]  standard into the U.S. Codification [FASB’s Accounting Standards Codification, which constitutes U.S. GAAP) & make improvements [to that
            standard] only if necessary for investor protection and the U.S. capital

  • Majority of jurisdictions [as  noted in SEC staff’s 2010 report] take one of two approaches
    •  Converging with IFRS or
    • Taking IFRS and endorsing with or without modification

    • Very few jurisdictions look directly to IASB and “adopt” those standards; it was enlightening for   us to look at how IFRS are used around the world
“High Quality” Not the Sole Purview of One Board
  • One thing we’ll have to be  more transparent about in our final workplan report; the standards are
         probably equally high in some areas …
  • And there are areas where  U.S. GAAP may provide more quality, specificity...

  • There are [some] standards
         in IFRS; one recent answer I heard from many investors on offsetting of
         derivatives ... FASB concluded report net, IASB more rigorous std of
         showing gross, investors told us 2 get more gross…

  • It isn't all or nothing
One System Makes Sense

Former Commissioner Cynthia Glassman:
  • No system is perfect,  neither GAAP nor IFRS, but …
  • I do think for the interest of global companies and for investors it really makes sense to
         have one system
  • I would urge that you do that & reasonably soon; whatever we do if we move to IFRS it will take a  lot of time, effort by co’s
 Time to Act
Former Commissioner Aulana Peters
  • I agree with that analysis and Cynthia’s analysis, we are part of global economy, transnational transactions.     
  • We’ve got to get off the dime on this one.
Errors, Loss Contingencies


Following are a couple of highlights from the remarks provided by Corp Fin’s Acting Chief
Accountant, Craig Olinger.
Errors vs. reclassifications
  • If a company changes from an accounting policy that is not acceptable under GAAP, to one that is acceptable, that is not a reclassification, that is a correction of an error; if we see one of those classified as  reclassification, we will question that.
  • In the IPO space, [we have seen an ] issue recently about an  error discovered;  GAAP requires a fairly elaborate set of error correction disclosures, the question in the IPO context, how long does the company have to keep putting those disclosures as amended  documents prior to filing the IPO, we found mixed practices out there,   came to the conclusion that in an IPO, just like any filing, error correction disclosure should continue to be included in the company’s financial      statements until the company makes its next annual financial statement  update; that applies to domestic filers, Foreign Private Issuers (FPIs),  FPIs making confidential IPO filings, and  so forth.
Loss Contingencies
  • Reminder that it’s still out there: what Corp Fin staff  really is doing is seeking compliance with [FASB Standards, in FASB’s  Accounting Standards Codification (ASC)] ASC 450, accounting requirements, disclosure requirements.
  • In our comment process, [we are] not trying to break new  ground, just trying to get compliance with standards that have been out there for so long.
JAMIE EICHEN , DIV. OF INV. MGMT: Fair Value and 3rd Party Pricing Services
Highlighted below is one particular point made by Jamie Eichen, Chief Accountant, Division
of Investment Management, this comment references an earlier speech by member
of staff of Office of the Chief Accountant which applies generally, not only to
investment advisers.
  • Jason Plourde said at the 2011 AICPA conference … management has the responsibility
         to make sure a price (from a pricing service) is still a fair value price
         in accordance with GAAP.

  • You  might have to look at due diligence of the pricing service

  • Also, you have principal officer certifying; make sure you are comfortable with
         those prices

  • Some recent enforcement actions for advisers getting into trouble where blindly
         relying on prices from pricing services; relied on price where pricing
         service may not have updated their pricing model timely.

Posted: 2/28/2012 9:35:19 AM by Edith Orenstein | with 0 comments
Filed under: Auditor independence,auditor rotation,Aulana Peters,correction of an error,Craig Olinger,Cynthia Glassman,error correction,fair value,FEI blog,Jamie Eichen,Jim Kroeker,Kathleen Hanley,loss contingencies,loss contingency,SEC Speaks,FASB,GAAP,IFRS,PCAOB,PLI,reclass,reclassification,RiskFIN,SEC,skepticism,AICPA

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