During a lively panel on Day 2 of PLI’s
” conference, SEC Chief Accountant Paul Beswick
announced that a Staff Paper on Disclosures
is expected in the “next couple of months” and a related Disclosure Roundtable is expected to be held in the “late spring or early summer.”
Forward-Looking Disclosures and the ‘Dividing Line’ Between MD&A and Footnotes
Beswick noted that in the past few years, the FASB has been working on three projects relating to disclosures:
Beswick explained that the SEC staff is working on a paper about “what is the dividing line;” e.g., he said, “One of the things we are looking at is: [feedback saying that] “you are pulling too much forward- looking information from MD&A into disclosures.” He added, “We think the paper is important because we think you need a level set [of information].”
“I am hopeful the staff paper will be out in the next couple months,” said Beswick, “with the goal of having the disclosure roundtable in the late spring or early summer.”
[My two cents: see disclaimer
which appears on the right side of this blog: By definition, the MD&A section of the “financial reporting package” provided for the investor’s information is “Management’s” Discussion and Analysis
, (which is unaudited, as compared to the footnotes, which are audited); and not an outside auditor’s
discussion and analysis - although the PCAOB has considered such a concept as part of the auditor’s reporting model; and not an analyst’s
discussion and analysis, although private analyst’s discussion and analysis are sometimes available for some companies, particularly the larger companies, and part of the capital market system.]
As previously referenced by Beswick
at the Dec. 2012 AICPA National Conference on Current SEC and PCAOB Developments, the topic of disclosures involves not only geography within the entire “financial reporting package” but also legal liability, auditor/auditing considerations, and the “disclosure framework” generally (a project the FASB is currently working on); therefore, the SEC will engage with the FASB and PCAOB on this project as well. .
Beswick’s Plans Dovetail Paredes’ Concern About “Information Overload” and Complexity
The danger of information overload (also called disclosure overload), with respect to potentially adding, vs. removing risk from the capital markets, as described by Paredes
at the PLI conference, is as follows:
[D]isclosures have continued to pile up,6 with some of them being of questionable value. Much more is disclosed today than ever before, be it because of regulatory requirements, because investors demand certain information, or because companies, acting defensively, disclose more information to reduce the risk that they could be challenged in litigation for not having disclosed enough.7
The information overload concern is that investors will have so much information available to them that they will sometimes be unable to distinguish what is important from what is not. Too frequently, investors get overwhelmed or distracted, misplacing their focus on information that is only marginally useful. The goal of informed investor decision making is not advanced if investors overlook or do not take the time to study valuable information because there is simply too much information to try to engage it constructively. Investors are further challenged if the disclosures they receive are overly complex making it difficult to discern what the information that is considered means. Disclosures, after all, need to be understandable.8
The trouble with all of this is that when information is not processed and interpreted by investors effectively, investor decision making may not improve with additional disclosure. Ironically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions, in which case capital is allocated less efficiently and market discipline is compromised.
Footnote 6 in Paredes’ remarks above referenced a report published jointly by KPMG and the Financial Executives Research Foundation (FERF) – the research affiliate of FEI, entitled, Disclosure Overload and Complexity: Hidden in Plain Sight.
Paredes closed his prepared remarks on Day 1 of PLI’s SEC Speaks conference by calling for, “a top-to-bottom review of our disclosure regime.”
Other topics receiving lively interchange during this panel, in which the commentators included former SEC Commissioners Paul Atkins, Cynthia Glassman, and Aulana Peters, included the SEC’s plans with respect to International Financial Reporting Standards, anecdotal reports of the level of granularity of Public Company Accounting Standards Board inspections and possible pressure on audit firms (and audit fees) that may be related thereto, in addition to other topics.
Following is a summary of other topics covered during the accounting panel at PLI’s SEC Speaks conference.
Pre-Filing Consultations with OCA
Beswick opened the accounting panel saying, “I will start with a little bit of a plug for a very important function of OCA, and that is, giving advice to companies on a pre-filing basis, where people come to us before they enter into a transaction. I will tell you it often works better when you come to us [before the transaction] … it is important to get it right the first time; that speeds the process in dealing with our office.”
Beswick segued into this next section of his remarks by saying, “I won’t spend a lot of time on this … it would probably put this group to sleep… but as [you are mainly] securities lawyers, I have highlighted what I call the [FASB and IASB’s] ‘Big 3 ‘ convergence projects:”
- Revenue Recognition
- Leases, and
- Financial instruments
He continued, “There was [previously] some skepticism in the market whether [the FASB and IASB] would complete these projects [but they are now coming to fruition].”
He indicated there was “light at the end of the tunnel.” As to specific timing, Beswick noted:
Importantly, Beswick noted that the “Big 3” convergence projects would “fundamentally change” accounting. For example, he noted, “almost all leases will come back on-balance sheet; [therefore], as securities lawyers, you should be concerned about - I would encourage you to start talking to your clients about – how that will affect things like debt covenants.”
In addition, Beswick stressed the importance of preparing for SAB 74 disclosures relating to new accounting standards. He told the PLI audience, “I would strongly encourage you to get more active with your clients about, and start to discuss your SAB 74 disclosures.”
Beswick explained, “The goal of SAB 74 is to inform investors [of the potential impact of a standard] before the standards become effective.”
He added, “The FASB has [increasingly] done a pretty good job of providing summaries - I’ll call them ‘plain English’ summaries – that nontechnical accountants can understand. I’d encourage you to look at these plain English summaries.”
[NOTE: The brief (often 3-5 page) summaries published by FASB summarizing key points regarding newly published accounting standards are generally called “FASB in FOCUS” (FIF)” ]
Glassman queried, “will [any/all of] these [new standards] require companies to disclose on a rolling basis?”
Beswick replied, “Regarding transition decisions… [that is still being determined]. I am sure staff of the SEC will still have questions about 5-year tables, things like that; those sort of decisions will be made closer to the effective date.
Peters then asked, “I am sure the SEC has been close to these projects both on the international side and the domestic side; I would assume the SEC accounting hotline would be staffed with someone that would give immediate and ongoing advice [relating to these new standards]?”
Beswick swiftly responded, “Yes, we are following these [“Big 3” convergence] projects intently, so when these projects go final, we are in a position to provide whatever guidance we can.”
He added, “Also, FASB and the IASB are looking at what kind of guidance they can [provide], rather than just individual [audit] firms writing books about what they [companies] can do.”
Peters and Glassman, Pushing Beswick on the Status of IFRS: “Oooh, We’re Being Naughty!”
Gently tiptoeing into a question on the status of the SEC’s potential decision on whether, and when, the Commission may accept filings from U.S. registrants using International Financial Reporting Standards (published by the International Accounting Standards Board), or via the incorporation of IFRS into U.S. Generally Accepted Accounting Principles (U.S. GAAP), such as through an endorsement mechanism – possibly the FASB, as suggested in an SEC staff report as one possible route for the incorporation of IFRS into U.S. GAAP (the Commission has not yet reached a decision on this matter), Peters remarked on the status of the convergence projects:
“I think this is a huge achievement and I am pleased to see it happen. I just wonder if the fact that these projects are coming online soon bodes well for the prospects of coming online with IFRS.
“Do you see light there with this particular tunnel as well?”
Before Beswick could respond, Glassman added:
“What will it take to get to IFRS?
“What has to happen to get there?”
Peters and Glassman observed in good humor that by pushing this question on Beswick, “Oooh, we’re being naughty!”
Also in good humor, Atkins weighed in,
I was going to ask about Peek-a-Boo? (referring to the PCAOB). (Indeed, Atkins did weigh in on this later).
Beswick, in statesmanlike fashion, responded, “I will deal with part of the [IFRS] question now, and more later.”
He began, “I think this is an excellent way to get to convergence, [i.e., through completion of these projects.]”
“When we talk to investors and companies,” he added, “one thing we hear is that too much change at one time [is problematic for them]. They are very supportive of [the FASB and IASB] working through these projects, trying to get converged solutions, and then taking a step back after we get through these very fundamental projects and then saying, ‘What’s left?’”
“I think if FASB and the IASB do [a good job]… and the regulators [do a good job with respect to their role]…” said Beswick, “there is a good chance of getting to a high quality single set of global accounting standards.”
Sarbox Plus Ten: Financial Reporting Has Improved, Some Slippage in Internal Control Reporting
On the subject of the Sarbanes-Oxley Act, ten years later – particularly Section 404 of the Act on internal control reporting, Beswick observed, “I’d say overall financial reporting has improved in the last ten years: [with] better information, and higher quality information.”
Atkins Asks if PCAOB Pressure on Audit Firms is Causing Reversion to AS2
Atkins jumped in, “One thing we hear is that the PCAOB is putting too much pressure on audit firms to do minutia.” He added, “we repealed AS2 [PCAOB’s Auditing Standard No. 2)… and put in its place AS5; we [now] hear there is seepage in approach from AS2; I’d like to hear examples.”
Beswick replied, “We’ve heard that too; we’ve asked for examples; [but] we haven’t had a lot of real live fact-patterns.” He continued, “What we have heard we have traced back to AS5. We were big fans of AS5, this is an area we are always willing and open to hear about, we don’t want to revert back to AS2.”
Atkins responded, “This is an area where we hear billing is more at [the higher] AS2 [level]; hopefully with the COSO project you are going to be talking about, and maybe with discussions with the PCAOB, things will be better.
COSO Update Expected During First Half of 2013
On that note, Beswick segued into the COSO Internal Control-Integrated Framework (see www.coso.org
) which is referenced in the SEC’s rule relating to Management’s Report on Internal Control over Financial Reporting (Sarbox Section 404(a)) and in PCAOB’s AS5 (the auditor’s report on Internal Control over Financial Reporting, Sarbox Section 404(b)), and is the most commonly used internal control framework in the U.S., as well as a framework that is used in whole or in part in many countries around the world.
Beswick noted that COSO released the original Internal Control-Integrated Framework in 1992, and has recently been engaged in a process to update that framework. [NOTE: The current project to update the COSO internal control framework has its own website where the Exposure Drafts and comment letters are housed, at www.ic.coso.org
“From my staff’s perspective,” said Beswick,” we are very encouraged [COSO] took the time to [update the framework] to drive behavior.”
He added, “This is another project you should talk to your clients about, and your audit committees about.”
Peters concurred, saying, “I can’t agree more, my audit committees have used the COSO framework as a basis for the Enterprise Risk Management review; make sure everybody knows a new perspective is coming down the pike.”
According to a slide accompanying Beswick’s presentation, the COSO update is anticipated to be finalized in the “first half of 2013.”
More About IFRS
Moving right along, Beswick said, “I will quickly turn to IFRS.” He stated that his third upcoming slide would reveal the date the Commission would require the incorporation of IFRS as part of U.S. GAAP; the largely hushed audience, with a few guffaws, appeared to understand he was just using a little “securities law humor;” i.e., that no such decision had yet been made by the Commission, and that the Commission had not yet set a date to make a final decision on this matter.
Instead, Beswick briefly reviewed the recent history
of the Commission’s consideration of this matter, beginning with the 2010 Commission Statement
updating its 2008 “roadmap,” in which the Commission stated its support of a single set of high quality global accounting standards.
However, noted Beswick, “While a lot of people support a single set of high quality global accounting standards, there are a lot of questions about how you get there.”
He noted that the SEC staff completed their final Staff Report on the IFRS workplan
(outlined in connection with the Commission’s 2010 Statement) on July 13, 2012, observing that coincidentally the date of release of the report was his predecessor as Chief Accountant Jim Kroeker’s last day at the Commission.
Atkins observed the date of release of the SEC’s final staff report on IFRS was also Friday the 13th
, to which Beswick replied he also recalled it being Friday the 13th
. (Such is the friendly banter you hear at the PLI SEC Speaks conference!)
On a more serious note, Beswick continued, that the six key areas of the work plan covered in the staff report fell into groups of questions, with 4 in one group, and 2 in another: the main questions being: (1) whether to incorporate IFRS, and if so (2) how.
According to Beswick, “The takeaway [or conclusion the SEC staff came to as it completed its report] was that [although] we [initially] broke it into “whether” and “how” as separate decisions, [we learned that] those [decisions] are very intermixed.”
“People would say ‘yes, I would like to go to IFRS, provided….” and the “provided ….” was a series of “how” questions…,” said Beswick.
“The high level takeaways from the final Staff Report, from the staff perspective,” added Beswick, included: that “looking directly at the IASB seemed to be a little bit challenging, because, almost every other jurisdiction [other than the U.S.] has:
- “an organization, [that performs a role such as the European Financial Reporting Advisory Group (EFRAG).”
- Beswick added that lack of such a group in the U.S. “doesn’t mean staff isn’t supportive of moving to a single set [of high quality global accounting standards], you run into questions of how to get there.”
- “ Personally,” he said, “I think completing [being on the way to completing] the ‘Big 3’ convergence projects [discussed earlier in his remarks: revenue recognition, leases, and financial instruments] is a big step in getting there.”
- “Some sort of endorsement mechanism” [such as national standard-setting boards that are empowered to endorse IFRS for use in their country]”
Beswick emphasized that the SEC’s final Staff Report on the IFRS work plan included an introductory note that “the Commission has not yet made a decision, and additional analysis may be necessary.”
“From a staff perspective,” concluded Beswick on this topic, “IFRS is in our markets: there are almost 500 Foreign Private Issuers using [i.e., filing with the SEC in] IFRS, [thus] from a market cap standpoint, [the relevance of IFRS in the U.S. is growing.]”
He added, “Staff spends time … [and] the amount of time is increasing, as to Corp Fin reviewing IFRS filings; the Office of Chief Accountant’s [IFRS] consultations are up, and we are active participants in market groups and roundtables [on IFRS].
Turning topics to the PCAOB, Beswick noted “They got a lot accomplished in 2012,” and encouraged the PLI audience to go to the PCAOB’s website, www.pcaobus.org
Among items he highlighted were:
- The PCAOB’s informational release issued in August, 2012 aimed at informing audit committees how they should use PCAOB inspection results
- Inroads made in international inspections, in part because of the Dodd-Frank Act; getting access to international workpapers, and
- The SEC’s approval of PCAOB’s Auditing Standard No. 16, Communication with Audit Committees (AS16).
- Separately, Beswick noted the Commission’s approval of AS16 was “the first time the SEC made a determination under the JOBS Act, as to the nature of the standards and type of procedures the PCAOB was requiring changes, and how we think about cost-benefit analysis.”
Atkins added, “The issue about the PCAOB addressing non-inspected countries is important. Secondly, I am glad the Commission is examining issues about budget [with regard to PCAOB rules].” Atkins also referenced the Supreme Court case, Free Enterprise Fund v. PCAOB.
Beswick responded that the SEC recently approved the PCAOB’s 2013 budget
, that the Open Commission meeting included “a lot of good dialogue” with PCAOB Chairman Jim Doty, and that the archived webcast of that meeting was available.
He also noted that the Commission approved the PCAOB’s “six near-term priorities” from its 2013 Strategic Plan, including [NOTE: points listed below based on Beswick’s remarks and slide]:
1. Improving the timeliness, content, and readability of inspection reports
2. Improving the timeliness, content and readability of remediation determinations
3. Identifying audit quality measures
4. Enhancing processes and systems to improve analysis and usefulness of inspection findings
5. Enhancing the framework for the standard-setting process
6. Enhancing outreach to and interaction with audit committees
As to the PCAOB’s standard-setting agenda for the first half of 2013, Beswick referred to it as “very aggressive,” including standard-setting projects on:
- Related parties
- Reorganizing audit standards
- The auditor’s reporting model: how the auditor communicates: currently [the auditor’s opinion] is a pass/fail model
XBRL Discussion During Corp Fin Remarks
Also providing remarks during the Accounting Panel at PLI’s SEC Speaks conference were Division of Corporation Finance Acting Chief Accountant Craig Olinger, Division of Enforcement Chief Accountant Howard Scheck, and Division of Investment Management Chief Accountant Jaime Eicher.
One point we would like to add to our summary above, which focuses on the segment of the panel featuring OCA Chief Accountant Paul Beswick, is a brief discussion that followed during the Corp Fin session in which there was some discussion about the Commission’s use of eXtensible Business Reporting Language or XBRL.
Glassman asked Olinger, “To what extent will your office or any of you be involved in using appropriate groupings of industry by size or whatever to use XBRL to look at outliers?”
Olinger replied, “[That is an] initiative of RiskFin
[the Division of Risk, Strategy and Financial Innovation], and in the preliminary stage; [we have] had some discussions with RiskFin.”
Scheck said, “That is one of the things Enforcement is doing with RiskFin, we are working closely with RiskFin to look at outliers, and following up with RiskFin. [XBRL is] not a silver bullet, but we are excited about it, in using it going forward.
Peters asked, “is there a mandatory requirement for companies reporting on form 20-F to use XBRL?
Olinger answered, “If they are on U.S. GAAP, yes; if they are on IFRS, then no, because the IFRS [XBRL] taxonomy has not been worked out yet.”
Get the "Full Story" From PLI's SEC Speaks
Speeches given by SEC Chairman Elisse Walter and the other Commissioners on Day 1 of PLI's SEC Speaks conference have been posted to the SEC website on the speeches
tab. Some additioanal staff speeches from Friday and Saturday may be posted there later today as well.
The PLI SEC Speaks Conference is a "big deal" for securities lawyers and others who closely follow SEC reporting. If you missed this year's "SEC Speaks," an archived copy of the webcast will be available for purchase on their website in a few weeks. Check back to www.pli.edu
in a few weeks for more info.
SEC Chairman Elisse Walter Receives William O. Douglas Award
Since many SEC staff, past and present, attend PLI's annual SEC Speaks conference, timing of the event is coordinated with the Association of SEC Alumni (ASECA's
) annual dinner, which generally takes place at the close of Day 1 of the conference.
The recipient of the William O. Douglas Award at this year's ASECA dinner was SEC Chairman Elisse Walter.
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