the trait of showing courage and determination
in spite of possible loss or injury
Mary Schapiro, recently confirmed chair of the SEC, responded to written questions posed by Senator Carl Levin (D-Michigan). Her comments show considerable insight into the workings of government regulation. Some are controversial. I believe they reveal a seasoned regulator who pretty much has things correctly figured out. I’m posting parts of her response that deal with accounting (after all, that’s all I care about). Very briefly, she discloses:
- She’s satisfied with the current relationship between the SEC and the FASB–that is, the FASB should continue to make rules free of political interference, even from Congress.
- She does not believe fair value accounting was a significant factor in the recent financial crisis. In other words, the accounting rule did not cause the crisis.
- She is not ready, at the current time, to delegate U.S. standard setting to the IASB.
- She believes that the series of annual exemptions should cease and that SOX 404 internal control requirements should be applied to small publicly reporting companies.
- She does not believe that inspection and regulation of foreign auditing firms should be delegated to foreign government regulators.
OK, all of this sounds great. It’s good enough to gain the benefit of the doubt.
The controversial statements are (1) she’s backing off from IFRS, and (2) she’s willing to lay onorous SOX provisions on smaller companies that probably can’t afford to implement them.
9. What is your view of the relationship between the SEC and the Financial Accounting Standards Board (FASB)? What is your view on whether Congress should legislate accounting rules?
Response: The SEC needs to diligently oversee the FASB to ensure that accounting rules are keeping pace with innovations in the markets and the needs of investors of clear, usable financial 4reporting. I believe that FASB needs to be shielded from outside economic and political pressures, and that they and not Congress should write accounting rules.
10. The SEC recently issued a report supporting the existing mark-to-market valuation rules, but recommending some improvements. What is your view of the current mark-to-market valuation rules?
Response: We know that certain banks were not presenting investors with the full picture of their financial health, utilizing off-balance sheet vehicles and other accounting methods. This was a disservice to investors as the integrity of the numbers is critical to their making smart investment decisions and to the smooth functioning of our markets. While there are a lot of different views on whether mark-to-market accounting contributed to this crisis, my personal view is that it was not a significant factor. As Chair, I will read the recent SEC report on this matter fully, talk with other regulators, and get their views as we move forward.
11. Do you believe U.S. banks have fully applied mark-to-market valuations to the structured finance transactions on their books, including asset-backed securities, credit default swaps, and CDOs? Do you believe inaccurate valuations are currently impeding U.S. credit markets? If confirmed, what actions would you take to insure accurate book valuations for U.S. banks?
Response: I am not in a position at this time to opine on whether US banks fully and appropriately applied mark to market valuations. See above.
12. Current SEC Chair Christopher Cox has indicated that he thinks the SEC should allow U.S. publicly traded companies to use international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB) instead of U.S. generally accepted accounting principles (GAAP) in their financial statements.
a. Do you believe the Sarbanes-Oxley Act allows the SEC to delegate the development of U.S. accounting standards to the IASB? If confirmed, would you try to advance such a proposal?
b. Section 404 of the Sarbanes-Oxley Act requiring auditors to review a company’s internal controls has still not be applied to publicly traded small businesses. If confirmed, would you allow Section 404 to take effect for small businesses without additional delay?
Response: When it comes to international accounting standards, it’s critical that these standards are converged in a way that does not kick off a race to the bottom. American investors deserve and expect high standards of financial reporting, transparency, and disclosure — along with a standard-setter that is free from political interference and that has the resources to be a strong watchdog. At this time, it is not apparent that the IASB meets those criteria, and I am not prepared to delegate standard-setting or oversight responsibility to the IASB.
Regarding, SOX 404, accurate, robust, and easy-to-understand financial reporting — and the internal controls that guarantee it — are critically important to investors and to the efficient functioning of our markets. Right now, we have a system where some issuers are complying with 404 and others are still exempt from it. It’s time that we bring uniformity to the system so that investors know what to expect from companies, while being sensitive to the needs of small businesses. I look forward to working with the small business community in making sure they have the tools they need to comply with 404.
13. What is your view of FASB’s accounting standard requiring stock option compensation to be treated as an expense on corporate financial statements? If confirmed, would you support efforts to change this standard? If so, what changes would you support?
Response: No, I would not support changing this decision.
15. What is your view of the relationship between the SEC and the Public Company Accounting Oversight Board (PCAOB)?
Response: In addition to its oversight responsibilities, the SEC should ensure that the PCAOB has what it needs to enforce the rules of the road for auditors.
16. Chairman Cox has indicated that he thinks the PCAOB should stop inspecting auditing firms in other countries and instead delegate its inspection authority to foreign oversight bodies where those firms are located. Do you believe the Sarbanes-Oxley Act allows the SEC to make this delegation? If confirmed, would you try to advance such a proposal?
Response: No, I do not; and no, I will not.
Debit and credit – - David Albrecht