Summary of SEC CiFIR (‘Complexity Committee’) Meeting
March 13-14, 2008
Following are some highlights of the March 13-14, 2008 meeting of the U.S. Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting (CiFIR or the Pozen committee for chair Robert Pozen).
CiFIR heard testimony from three panels as summarized below:
· Investor representatives testifying generally objected to CiFIR’s recommendation that would allow quantitatively material items to sometimes be judged immaterial based on qualitative factors; they indicated they don’t want preparers (and auditors) deciding for them (the investors) that a quantitatively large item isn’t material from a qualitative point of view – they want to be given the information so they (the investors) can decide. The investor representatives also generally disagreed with CiFIR’s recommendation that certain errors be corrected and disclosed in the current period but not restated – they want to see not only that correction of errors has taken place, but also want to see restatements, so they can perform accurate historical trend analysis.
· Auditors on the panel recommended that CiFIR make a statement about disclosure requirements, and not just fall back on the current disclosure regime. For example, they suggested, the committee can look at recommendations in the comment letter sent by FASB’s Investors’ Technical Advisory Committee (ITAC), or at a minimum that CiFIR could encourage more robust disclosures around the existing requirements for disclosure of critical accounting policies and estimates
· Other than among the investors’ representatives, there seemed to be general support among the panelists testifying at this meeting, for CiFIR’s recommendations on materiality and restatements among the panelists.
Professional Judgment Framework (PJF):
· Scott Taub, former SEC deputy chief accountant Scott Taub said he supports having a PJF but would prefer to see the PJF as a policy statement or interpretation rather than a "rule" – and was concerned it may still be treated as a de facto rule. “It could become a burden to preparers who already thought they were doing a good job,” he added. Even worse, he said, was the risk of unintended consequences, e.g. if someone used a PJF that didn’t include all the steps in CIFIR’s PJF. “I have seen similar things before, and understand where these concerns come from,” he noted. “[The PJF] will only work if the various participants in the financial reporting process believe it will work,” said Taub. He added, “I’ll be very interested to see how the comments come out on this, if we wind up where a significant part of the market thinks it will fail or [be] done in bad faith, its not going to work; pushing a solution parties don’t believe in is probably not worth the effort.”
· Jonathan Chadwick, senior vice president and corporate controller of Cisco Systems Inc. testified that he is very supportive of CiFIR’s work and objective in reducing complexity in financial reporting. He said he supports a PFJ framework as “a principles-based approach to methodology of good decision-making, defining a reasonable person’s approach.” However, he cautioned, “[we] should not let it denigrate into a check the box [approach] through a rule.” Instead, he said, the PJF should be “embedded into accounting degrees, the CPA exam, and ongoing training and development, to maintain the spirit of what’s intended.” In addition, Chadwick noted, “Application of the PJF may require changes in mindset from a check list mentality to principles,” and that “a change in thought process will need to be supported by regulators in not needlessly second guessing.” He added, “We should be careful that application of the framework does not create new documentation requirements per se - it is substance we seek to improve, not simply form.”
· CiFIR member Ed McClammy, CFO of Varian, Inc. commented, “There will be a cost to implement this, I’m not surprised to hear large companies have things well documented, even mid-size companies, but you’ll have more cost come in with non-accelerated filers, [who will] probably have [to have] some documentation.” He added, “Having said that, I think this is one area where it’s well worth the cost to head in this direction.” McClammy also noted, “If we’re getting more principles-based, it’s important to have a framework and documentation behind it, this is a case where small companies will have to incur the cost.”
· Panelist Randy Fletchall, a partner with E&Y, said the American Institute of Certified Public Accountant's (AICPA) XBRL task force has been meeting with SEC and Public Company Accounting Oversight Board (PCAOB) staff on the issue of assurance on eXtensible Business Reporting Language (XBRL) information. He said there are various options, ranging from a "high" level of assurance (examination level) to a low level of assurance, and the amount of cost and effort would vary accordingly. He added, “One difficulty in gauging how quickly to mandate XBRL is the general level of lack of (understanding) of XBRL; there remains a lack of awareness and … understanding in the marketplace, and as a result, [there are a] wide range of views, [with] cost estimates ranging from trivial at one end, to an undertaking rivaling Sarbanes-Oxley. I don’t believe the latter is accurate, but right now, I don’t believe the cost would be trivial; the vast majority of public companies would approach [XBRL] as a standing start.” Therefore, Fletchall said, “I favor a phase-in, starting with larger public companies.” He emphasized, “I believe in the value of objective, independent assurance, [and that it] would no doubt add value by increasing the reliability and enhancing public confidence. While the extent [of assurance] still needs to be determined, the comments I made earlier on cost [of adoption of XBRL] apply equally to [cost of] assurance.” He added that assurance on XBRL “doesn’t seem likely now, particularly in a form that would be meaningful, [nor that the cost] would be trivial, especially to smaller companies, just because of the fixed cost of engagement.” That is why, said Fletchall, “I understand and support the position of not requiring assurance at inception, despite the [value of assurance].”
· CiFIR member Greg Jonas, of Moody’s Investors Service posed a question to Fletchall: “In hard copy financial statements, on the display and classification of information, we give the highest level of assurance, exam level.” Jonas continued, “Electronic tagging is exactly the same thing, it just is done in electronic format, if tags are wrong – just like an error on the face of the financial statements - that tells me, having any lower level of assurance on the tags is effectively fumbling the ball.” Jonas added, “most users will be dealing with electronic downloads, so it seems to me intuitively obvious we need the same level of assurance on electronic (tagged) information.” Fletchall responded, “I would not disagree with that,” but reiterated the highest level of assurance entails the most effort and cost.
· There was general consensus among panelists in favor of phase-in approach, if the SEC mandates XBRL, to require it of large companies first, and then smaller companies.
· Concern was expressed about the fact that XBRL-US tags and XBRL-international tags differ, and that if IFRS is ultimately permitted or required in the U.S., it may require a second XBRL implementation effort to implement XBRL-International tags. John Turner of XBRL-International said discussions are in early stages about converging tags, but noted the tags are based on the underlying set of GAAP (International Financial Reporting Standards (IFRS)) so in that convergence of tags theoretically relies in part on convergence of the underlying GAAP.
· Jeff M. Bodner, of Intel Corp., noted that reader software does not currently have the ability to read tables included in block tagged footnotes, and he believes that makes footnotes less useful to investors. XBRL-International's Turner said they have beta software being tested that combines use of html and XBRL that may address this problem.
· There was also debate about whether having a high number of tags (in the thousands) is good or bad, in terms of comparability, and whether in turn use of extensions (particularly customized extensions) was good or bad in terms of the tradeoff between management being able to tell its story, vs. facilitating comparability.
- The full CiFIR Committee will meet again in May (in Chicago) and then in July (in Washington, D.C.) These will be public meetings and webcast. The goal is to sign off on a final report (including some new recommendations being developed, discussed below) at the July11 meeting, which will be the final meeting of the committee. Committee Chair Pozen said he would like to be able to post drafts of the report prior to the July meeting.
- Subcommittees will meet in April; some will be taking testimony on their recommendations.
Recommendations in Development
Below are some of the significant new proposals (i.e. that go beyond the "developed proposals" contained in the Feb. 14 Progress Report posted for comment by the SEC).
- Subcommittee 1 (SC1), chaired by Susan Bies, is developing proposals on "chunking" information presented in the financial statements (e.g. operating, investing financing; realized/unrealized), proportionate recognition vs. bright lines (e.g. as applied to leasing), and recommendations relating to off-balance sheet entities and disclosure.
· Subcommittee 2 (SC2), chaired by David Sidwell, has set up a meeting in April to discuss with SEC staff (from the office of chief accountant, corporate finance and enforcement) to discuss with them “Conceptual Approach 2a” as shown in CiFIR’s Feb. 14 Progress Report – “that the SEC further clarify its role vis-à-vis the FASB, as well as its internal roles and responsibilities, to mitigate the risk of its actions unintentionally driving behavior by market participant.” Additionally, SC2 intends to have two meetings with Financial Accounting Standards Board (FASB) staff, and the subcommittee will focus at its meeting on April 10 on "design of standards" – putting words around how to design principles-based standards, and will also consider what role they can play in the international arena. They have been advised that rather than focus on governance issues already being addressed, to focus on the question of where interpretive guidance will come from, e.g. so there is not a U.S. version of IFRS, Japanese version of IFRS, etc. Additionally, the subcommittee may consider whether to provide some advice to FASB on prioritization of projects.
· Subcommittee 3 (SC3), chaired by Michael Cook, has invited former SEC Chief Accountant Lynn Turner, AFL-CIO Associate General Counsel Damon Silvers and former SEC Chairman Harvey Pitt to testify to the subcommittee in April, particularly on the proposed Professional Judgment Framework. Given there has been some feedback on what some viewed as CiFIR’s indirect endorsement of a safe harbor, Pozen indicated they may remove any mention of "safe harbor" from their final report, or they could conceivably make a statement recommending against offering a safe harbor, rather than simply suggesting the SEC determine whether to offer a safe harbor as stated in the Feb. 14 progress report. Issues raised in testimony before the committee at the March 13-14 meeting, noted above, will also be considered by SC3, including whether to add any linkage between disclosures – including specific items in MD&A and the financial statements, and elements of the PJF. Pozen encouraged SC3 to focus on "a rather specific proposal, whether we should loosen the existing rule for including non-GAAP information in MD&A.” Pozen added, “We’re hoping your subcommittee can focus on, to the extent issuers can not say in MD&A what they want to say about their company, and provide non-GAAP info in MD&A, [and] other things, we need to focus on that set of issues.”
· Subcommittee 4 (SC4), chaired by Jeff Diermeier, CFA Institute, will turn its attention to disclosure on corporate websites. Pozen noted some concerns were stated by newswire companies whether corporate websites will supplant them; SC 4 will hear from newswire services, the National Investor Relations Institute (NIRI) and others on this.
Prepared March 19, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI), based on listening to the webcast of the SEC CiFIR meeting. This summary does not represent FEI opinion unless specifically stated above.