Panel Testifying To CIFiR Split On Role Of Non-Authoritative Guidance
May 2, 2008
On May 2, 2008, two panels of experts testified before the U.S. Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting (CIFiR). The panels focused on recommendations presented by CIFiR subcommittee 1 (substantive complexity) and subcommittee 2 (standard-setting). At a previous CIFiR meeting on March 13-14, summarized here, testimony was taken on the recommendations of subcommittee 3 (audit process and compliance) and subcommittee 4 (delivering financial information).
Panelists split on role of non-authoritative guidance
Proposal 2.4 in CIFiR's Feb. 14 Progress Report recommended that: "The number of parties that either formally or informally interprets GAAP and the volume of interpretative implementation guidance should continue to be reduced."
Panelists at CIFiRs May 2 meeting were split on the extent to which non-authoritative guidance (e.g., interpretive guidance published by audit firms, or interpretive guidance in SEC staff speeches) - on balance - is helpful in enhancing understanding of a standard or narrowing divergence in application, vs. the extent to which it may drive confusion over the level of authority of such guidance or overly restrict reasonable interpretations and judgments.
· Mark Bielstein, of KPMG said, “I would probably not fully support some of your observations about the non-authoritative guidance that may be issued by accounting firms and others, if that guidance is good guidance - obviously the issuers think it is or we wouldn’t do it.”
· Ben Neuhausen, of BDO Seidman, said, “I think non-authoritative guidance is a symptom of complexity in the authoritative standard… preparers and practitioners want the guidance because they find the authoritative standards very hard to read, very hard to understand, very hard to apply, and they want non-authoritative guidance to help them apply the standards.” He continued, “If there is a problem with non-authoritative guidance, the solution lies in simplifying the authoritative standards, not in trying to reduce the number of people issuing non-authoritative guidance.
· Linda Bergen, of Citigroup, said, “Where we have trouble is where there is conflicting guidance among the Big 4 firms, or white papers written by groups we never heard of." However she noted they "contribute to our understanding of what are appropriate… accounting standards. “
· David Sidwell, chair of CIFiR subcommittee 2, noted, the Center for Audit Quality (CAQ) – affiliated with the AICPA - is a good forum, for identifying issues and seeing if everyone engaged in the financial reporting process is comfortable with a particular issue or position. However, he noted, “If FASB has a strong view it should jump in and be the leader of providing that guidance. There is a very strong but informal network today; we would try to see some formalization of that process.”
· Lynn Turner, former SEC chief accountant, said, “I think the [audit] firms have done a tremendous job of putting out information.” He added when he was a CFO, “I tried to get information from (the audit firms) I don’t know why anyone would want to take that away.” He noted, “From time to time, we constantly saw where 4 of 5 firms would [have] one answer, another firm another answer, totally off the reservation; the firms used the EITF to bring the one firm back to the reservation.” Separately, he said, “We all have access to digital search systems now, what is and isn’t authoritative, anyone that can run a computer with what is now 4th grade literacy on a PC can do it.”
· Denny Beresford, former FASB chairman and CIFiR member, responded that Turner’s observation about searchability may be true with respect to authoritative literature, but “not everybody has access to all the accounting firm” literature.
· Ed McClammy, CFO, Varian Inc. and CIFiR member added, “It’s hard enough for large companies to keep up with SEC speeches, [non-authoritative] GAAP - but for small and mid-sized companies to keep up is totally impractical; the thought was, it should come through one voice through the SEC, if you look at one source, you have their feelings.”
· CIFiR Chair Robert Pozen said, “I don’t think our recommendation is to stop [audit] firms from publishing [non-authoritative guidance], but to make clear it is not authoritative. You do have groups like AICPA’s Center for Audit Quality (CAQ), when they put out things, that’s a little less clear cut as to what their status is, then it’s not ‘the [audit] firm’, its somehow the [audit] ‘industry’.
· Joe Grundfest, former SEC commissioner and CIFiR member, contrasted how audit interpretations worked out between auditors and clients are not always subject to sunshine, whereas court interpretations in the legal system are. However, he also noted “In common law, the vast majority of cases wind up being settled, [it is] too expensive and dangerous to go to trial, so everyone is inferring whe[re] the law will go.”
EITF – enhance or disband?
· There were also varying views among panelists as to the continuing value of FASB’s Emerging Issues Task Force (EITF), weighing the extent to which it enhances understanding or resolves issues vs. its possible contribution to complexity. Some wanted to enhance EITF, while one panelist suggested disbanding it.
· Former SEC Chief Accountant Lynn Turner argued for disbanding EITF, saying: “If you look at the red books today (i.e. the red covered EITF books published by FASB), they’re thicker than the actual standards, yet there’s not a single word in [CIFiR’s recommendations] about the EITF; there is no one that has [added] to complexity like EITF.” He stated, “I recommend once and for all you put the EITF to bed and out to pasture,” adding, “As long as you leave the EITF in place you will not reduce complexity or get rid of myriad of rules.”
· John Stewart, of Financial Reporting Advisors, said he was surprised to hear Turner say this, as he believes the EITF plays an important role in providing timely guidance.
· KPMG's Mark Bielstein noted the timeliness of EITF guidance has been somewhat diminished by newer due process procedures added.
Enhanced Comment Letter Review Process Could Help Avoid Implementation Issues, Revisions of Recently Issued Standards
· A number of panelists indicated FASB may be able to help constituents avoid some implementation issues from new standards, and possibly help cut down on revisions to recently issued standards, by enhancing the comment letter review process. Other panelists said FASB’s comment letter review process was sufficient.
· Linda Bergen, of Citigroup, noted that sometimes comment letters raise concerns which were previously considered by FASB during development of the Exposure Draft, and FASB sometimes concludes, "no new points were raised, let’s proceed to the final standard." Instead, Bergen suggested, FASB should reconsider those points.
· Ben Neuhausen, of BDO Seidman, said he agreed with Bergen, noting, “We cited in our comment letter [to CIFiR] a number of cases where the FASB has significantly revised or deferred provisions in newly issued standards and we think in many of those cases, those issues were raised in the comment letters; it’s just that somehow the importance of the comment or significance of the issue wasn’t recognized when the standard was issued - it only became clear after the final standard came out. Somehow, a better process of analyzing those comment letters would have picked up on some of these issues on a more timely basis.”
· John Stewart, of Financial Reporting Advisors, noted, “There is problem with the several do-overs, where FASB could have done a little more work how operational it is.” He added, “If the preparers can’t do it, it isn’t going to help anybody.”
· Jeff Mahoney, general counsel of the Council of Institutional Investors (CII), said, “As a former FASB staffer I have to disagree with Linda’s [Bergen] comments on comment letters. I think the FASB, by and large, does an outstanding job in their analysis of comment letters, and considering those comments and making changes to the proposals based on those comments.” He added, “I think if you compare FASB to others, I won’t name any names, but I think as far as reviewing comment letters and making changes to proposals, I think the FASB does a pretty good job.”
Standards Have To Be Implemented by Human Beings; Conceptual Purity vs. Usefulness
· John Stewart commented about the importance of operationality of accounting standards - that they have to be capable of being implemented by human beings.
· Kevin Conn, of MFS Investments, commenting on the role of users of financial statements in the standard-setting process, said, “their points of view should be a part of the dialogue, absolutely.” He added that usefulness in allocating capital vs. conceptual purity have to be balanced.
Herz Comments on CIFiR Recommendations in World of Increasing Convergence
- CIFiR chair Bob Pozen, introducing FASB Chairman Bob Herz, noted he hoped that Herz would be able to say he "supports" or "endorses" CIFiR’s recommendations.
- Without stating whether he supports or endorses CIFiR’s report, Herz said, “I think that from our perspective all of the report is relevant, particularly the work of subcommittee 1 (substantive complexity) and subcommittee 2 (standard-setting). “ He added, “We agree with the thrust of many of the key recommendations: the preeminence of users… the notion of trying to get to a single standard setter; many of the recommendations relating to substantive complexity, optional methods, competing models.”
- IFRS: Herz encouraged CIFiR to think about its working presumption about the status quo of U.S. GAAP vs. International Financial Reporting Standards (IFRS) in the U.S. and FASB’s (and IASB’s, SEC’s) related role thereto. Acknowledging the SEC and FASB have been on a parallel track during the life of the CIFiR committee in terms of considering a major move to IFRS in the U.S., he noted that CIFiR’s recommendations, while good, could be very "path dependent" in terms of implementation. “I just wanted to alert you to that,” said Herz, “because I think that if I were a voting member of this group, I would probably say, of course you’re going to know a little more, June, July, if that is the path we seem to be going down, to have a report that is premised on another path may not be ideal, it could be a little bit awkward.”
- Greg Jonas, of Moodys Investors Service and a CIFiR member, encouraged CIFiR to take a position regarding how the interpretive function for IFRS should work in the global arena. “I think the most important issue in all of financial reporting infrastructure is the one that Bob (Herz) has teed up,” said Jonas. “I have not heard anyone articulate a vision for what the end state might be between the national standard setters and the global standard setter, and if groups like ours don’t take that fundamental question up, who does?” He emphasized, “Everybody else is so concerned with the day-to-day and the politics of immediacy - necessarily so - that they form groups like ours, to try to give a vision for the way forward that is longer than tomorrow, but kind of puts a stake in the ground for the goal,” he noted, adding, “I was hoping that we could be a catalyst for getting people talking about that end game, and not just interim steps along the way.”
- Pozen responded to Herz’ and CIFiR members’ comments that CIFiR had struggled with this issue but could not anticipate the end result or timing of the SEC’s anticipated "roadmap" and related rulemaking to considering permitting IFRS in the U.S. He asked the subcommittees to "bulk up" their recommendations such that they could be applied if there is a move to IFRS, and asked for more discussion of a view regarding standardization of an interpretive function for IFRS, vs. permitting an international "smorgasbord" of interpretations of IFRS.
- Users: Herz said he heard some users sense a disconnect between CIFiR’s stated pre-eminence of users, vs. some of their other recommendations. For example, he said, some users thought CIFiR’s cost-benefit discussion, recommendations regarding materiality and restatements, and recommendations regarding fair value reporting were troublesome. He noted some users and some preparers are asking for more – not less - fair value reporting. As to CIFiR’s recommendation regarding fair value reporting - “'Caution’ I agree with,” Herz said, “‘moratorium’ I think would be a little bit unwise.”
- Education and training: Commenting on improvements to financial reporting overall, Herz said, “To me it boils down to a couple of important and related things.” First, he said, “If accounting is supposed to reflect the "economic substance" or economic reality, and its supposed to be meant for the users, the consumers of the information, I think we need to question to what degree our current accounting education system and training system provide a good enough grounding for accountants in the modern era,” he said. He continued, “My own belief is you ought to learn economics, both macro and micro, before you start getting into the debits and credits, and all the rules, and all of that. I also think you should learn to understand financial analysis, security valuation, and business valuation. “Herz indicated there is pushback from some constituents when changes are proposed that go beyond what they learned, and encouraged CIFiR to further recommendations in this area.
- Panelist Brooke Richards, of American Express, shared similar views. "It’s good to have training for accountants and everyone in the profession it touches, to learn to look at the spirit of a standard, take a step back, apply common sense, [consider] what is the principle, and apply that," she said. "I may be a bit utopian," she added, "but at least it's worth the effort." Richards added, that FASB has improved in its efforts to write principles-based standards.
Additional highlights from the May 2 CIFiR meeting (including discussion of fair value reporting, "chunking" of income, industry-specific guidance, cost-benefit analysis, the role of users, and more) are posted in a summary available to FEI members only.
Prepared May 20, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI) based on listening to the webcast of the CIFiR meeting. This summary does not reflect FEI opinion unless specifically stated above.