Companies Exasperate SEC Accounting Chief

He chides them for citing accounting standards that "few people understand" in their financials and for their puzzling apathy on IFRS.
David McCannJuly 17, 2009

A high-ranking accountant at the Securities and Exchange Commission took a pair of swipes Friday at the corporate community, showing frustration over the response to two major accounting standards initiatives.

The SEC’s Division of Corporation Finance has been receiving a “surprisingly” large number of questions recently on the new codification of accounting standards, noted Wayne Carnall, the division’s chief accountant. What most people want to know, he said, is whether they have to amend existing filings, so that references to specific standards using the old numbering system are replaced with references to their new groupings by topic under the codification, which took effect July 1.

The answer is that they don’t. Only filings made for periods ending after September 15 must refer to the standards as they’re newly codified. But what Carnall finds bothersome is that the question needs to be asked at all. “You should not be making references to specific standards that very few [users of financial statements] understand,” he said. Disclosures can be greatly improved and simplified by clearly expressing the concept the preparer is trying to communicate, as opposed to citing a standard.

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Carnall spoke during a panel discussion of complexity in financial reporting hosted by the American Institute of Certified Public Accountants. He said that when it comes to simplifying financials, while “standard setters and regulators can do a lot,” the onus is also on individual filers and their auditors. “Don’t write documents just to protect yourself from litigation or to satisfy a regulator,” he said. “Think about the user.”

His second beef had to do with the number of comment letters filed about the SEC’s roadmap for U.S. adoption of International Financial Reporting Standards after its release last November. A total of 240 letters were received, about half of them from registrants. Carnall called that level of response “disappointing.”

“Only about 1% of the companies in the United States that would be impacted by this change, if we were to adopt it, decided to comment. I thought that was a surprisingly low number,” he said.

He noted that a pair of Financial Accounting Standards Board staff positions issued in March on what he called a “relatively small, narrow item” — valuing assets in illiquid markets — got 700 comments in a 15-day comment period. “Yet,” he said, “on a proposal to change the reporting framework in the United States we got 120 comments” from public companies during a 120-day comment period.

Meanwhile, FASB chairman Robert Herz, also on the panel, drew a distinction between “avoidable” and “unavoidable” complexity in financial reporting. Some complexity is a given because “the world of business and finance is not simple, and not getting any simpler, and you’ve got to have reporting that faithfully tries to report that; you can’t just dumb it down.”

But, he added, there’s plenty of needless complexity built into accounting rules because of “particular needs, biases, special treatments, exceptions, options, and different models for similar things.”

Herz’s counterpart on the Canadian Accounting Standards Board, Paul Cherry, said there’s no doubt that clearer, simpler standards can be written, but a myriad of conflicting interests stand in the way. “Whether [less complexity] will prove acceptable to the business and regulatory communities is a huge and important question that won’t be answered for years,” he said.


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