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At the Financial Reporting Institute Conference last week
SEC Commissioner Walter and Chief Accountant Paul Beswick addressed the
necessity for high quality financial reporting, the application of
international accounting standards or IFRS and the work of the Public Company
Accounting Oversight Board. Commissioner or PCAOB. Elisse B. Walter, Keynote
Luncheon Speech, 32nd Annual SEC and Financial Reporting Institute
Conference, Pasadena CA. (May 30, 2013) (here); Paul
Beswick, Chief Accountant, Remarks at the 32nd Annual SEC and
Financial Reporting Institute Conference, Pasadena, CA. (May 30, 2013) (here). What was
not addressed is the significant decline in Commission enforcement actions
involving issuer financial fraud.
Commissioner Walter and Mr. Beswick stressed in their
remarks the importance of the international accounting standards. As
Commissioner Walter stated: "We are seeing this dynamic play out in the FASB
and IASB priority Convergence projects . . . This progress is a positive
development, with both the FASB and the IASB showing great skill in working
together to create common standards that will effectively serve investors the
world over . . . I continue to look forward to a day when there is one set of
global accounting standards, and we are taking a number of steps in that
direction at the SEC . . . "
Chief Accountant Beswick echoed the Commissioner's
statements, emphasizing the point that international standards are critical to
U.S. investors: "[T]he reason that IFRS matters to the U.S. is that the U.S. is
heavily invested in companies that prepare their financial statements using
IFRS." There are currently 450 foreign private issuers who file reports with
the Commission using IFRS without reconciliation to U.S. GAAP." Similarly,
about 40% of the financial institutions reviewed by the large financial
institutions group in the Division of Corporation Finance use IFRS. Overall
there are untold amounts of capital invested through mutual funds and direct
financial investments in jurisdictions that require or permit use of IFRS.
Accordingly, the Commission staff closely monitors and participated in the
development of these standards.
The Commissioner and the Chief Accountant also stressed
the important work of the PCAOB in this area. Since the creation of the Board
in 2002 in the Sarbanes-Oxley Act, over 2,300 audit firms have registered with
it. Mr. Beswick noted its success in establishing cooperative arrangements with
its foreign counter-parts: "So I'll start by acknowledging the significant
progress the PCAOB has made in reaching new cooperative agreements and
developing stronger relationships with a growing number of non-U.S. regulators."
Although the recent MOU establishing a framework for making audit work papers
available with the Chinese counter parts of the Board was not mentioned, it
clearly represents a significant development (here).
Commissioner Walter emphasized two points she would like
to see the Board focus on in the future. The first centers on "updating and
maintaining their performance standards and quality control which have the most
direct effect on how audits are performed. High quality audit standards that
set clear expectations for auditor performance are absolutely critical to our
A second priority for the Board, according to
Commissioner Walter, should be inspections: "[E]xpanding the PCAOB's ability to
perform inspections in certain jurisdictions outside the U.S. . . " should be a
key focus. In this regard the recent MOU with PRC officials may be most
significant since it holds the promise of continued talks which might result in
What was not mentioned is enforcement. While standard
setting is clearly important, effective implementation requires consistent
enforcement. Over the years financial fraud has been a critical focus for the
SEC. In recent years, however, the number of actions brought in this area has
significantly declined, according to a report issued earlier this year by
Cornerstone Research (here).
The decline in financial fraud cases could be based on
the success of the Sarbanes Oxley and the Board. At the same time, that point
seems difficult to fully harmonize with the findings in the same Cornerstone
Report that about 60% of the securities class actions being brought center on
financial and related disclosure issues. Concerns raised by that finding are
bolstered by the fact that a significant number of CFO's who responded to a
recent E&Y survey stated that they would be willing to engage in improper
conduct to win business for the firm (here).
These factors suggest that if accounting principles are going to accurately
reflect the substance of transactions, enforcement by the SEC continues to be
Recent reports that the agency may again be focusing on
financial fraud and is developing a computer program to read the tags on Edgar
filings, seems to recognize this point. While searches on a computer are a good
start, they are not enough. Someone has to analyze the financial data and
conduct what are often difficult investigations. That takes expertise and
dedication which requires time to develop. Now is that time. Before the next
scandal emerges - and history tells us there will be one - the SEC has the
opportunity to get ahead of the curve. Now is the time to form a specialty
group focused on financial fraud, develop the expertise and make rooting out
financial fraud a priority.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
firstname.lastname@example.org). Webcast nationally by the ABA and available in other
Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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