When Carol Stacey was a chief accountant at the Securities and Exchange Commission, part of her job was educating companies on how to comply with the regulator’s rules. Problem was, some people have what she considers an undue fear of calling the SEC staff.

” I think there are misconceptions about how exactly the SEC operates, especially in terms of its review staff.”- Carol Stacey, the SEC Institute

In fact, she tested this theory at a recent conference in her new role as a vice president at the SEC Institute, a 24-year-old, self-funded group that is unaffiliated with the commission. A continuing-education organization, the institute each year conducts 150 workshops and conferences aimed at CFOs and their staffs, along with general counsels and audit firms, focusing on how public companies can best meet SEC filing requirements.

During one institute session about the internal-control provision of the Sarbanes-Oxley Act, Stacey asked how many people would call the SEC if they had questions. Hardly anyone raised a hand. But when asked who would be willing to call her — a personable professional who spent more than 11 years at the SEC, the last five as the chief accountant for the Division of Corporation Finance — three-quarters of the room answered in the affirmative.

In an interview with CFO.com, Stacey laughed about the thought that her former coworkers will receive more phone calls because she’ll be traveling around the country encouraging CFOs and their staff to call the SEC as they prepare their filings. But she takes the matter seriously. “The staff is there to help,” she says. “I think a lot of people have realized over the last few years that it’s better to get things right before you send it in.”

Stacey also talked about other misperceptions that corporations have of the SEC, as well as the many issues facing the commission, such as pressure to define materiality and deal with the widespread use of International Financial Reporting Standards outside the United States.

What will you be covering over the next year?
The SEC Institute has created all sorts of workshops for specific topics. The new management guidance for Section 404 will definitely be one. We cover everything from basic financial reporting to FAS 133, which is accounting for derivatives and hedging. We’re also creating workshop on business combinations and fair value. From feedback we’ve gotten, it’s pretty clear people need more guidance on fair value. It’s also an area that I want to understand better because valuation standards are fairly nonexistent. When I talk about standards, there are all sorts of methodologies, and I think that’s where we need to concentrate on, make sure we understand them and if they’re appropriate to what we’re trying to value.

As the Financial Accounting Standards Board and the International Accounting Standards Board work on converging their standards, and the SEC toys with the idea of giving U.S. companies the choice between IFRS and U.S. GAAP, could we see huge changes in accounting in the near future?
As far as international convergence, we all have to keep a close eye on that. But I don’t know whether there are going to be dramatic changes or not. For the most part, the companies that are interested in adopting IFRS — on the U.S. side at least — have overseas subsidiaries that already use IFRS, or they may be smaller companies whose competitors use it. From the U.S. side, the population that’s going to adopt IFRS is probably going to be fairly limited. However, as we move toward a global set of standards, there are a lot of people who need to get up to speed on what’s happening.

Has that education already begun?
The student population has very limited exposure to IFRS. When I did my master’s degree about 12 years ago, I had one class on international accounting and it was just a basic overview. Academia needs to get ready for that, as well as the audit community. There are a lot of auditors at the Big Four well-versed in IFRS, but not all of the line partners are ready for it, never mind the staff. The companies that want to adopt it are well underway in understanding IFRS.

At the SEC Institute, we haven’t yet started offering conferences on IFRS. Most of the workshops I’ve seen have been overseas; they haven’t really started yet in the U.S. markets. We’ll see when we start offering those — I don’t think it’s a matter of if.

What will drive the adoption of IFRS in corporate America?
There has to be a need for it. There has been a demonstrated need, but not among every issuer. In 2009, you’ll probably see a discrete set of issuers that want to adopt IFRS. I think that’s why the commission started with a concept release on this. Whether they will go to voluntary adoption of IFRS or limit it to a certain population of issuers is an open question. It depends not just on whether the issuer and auditor community is ready, but is the investor community ready too? Investors often struggle with understanding U.S. accounting standards, never mind a whole new set of standards. The proposing release for foreign private issuers to come into the U.S. market with IFRS not reconciled to U.S. GAAP will help us understand exactly how ready the U.S. market is.

The SEC recently formed the Advisory Committee on Improvements to Financial Reporting to tackle complexity in financial reporting. Did you see us going down this road when you were an accounting student?
It definitely did seem simpler back then. The business world was simpler. A lot of the complexity over the last decade has been added in part due to the complexity in finance transactions. There were still levels of complexity. For instance, pooling of interest existed, and that has been viewed by a lot of people as extremely complex and rules-based. I don’t think you realize [the complexity] until you get out into the real world and start auditing and trying to understand what companies are doing to account for those transactions.

How did we get to this level of complexity?
The world of finance has gone far — there are some amazing transactions that have been created to mitigate risk and do some other important things. Accounting for that is not easy, unfortunately, so I don’t think you’re going be able to eliminate it totally. But the question is can you eliminate some of the unnecessary complexity? The complexity is added by people wanting the answer to every question, which adds a lot of the rules to the standards that aren’t really necessary.

How can financial reporting be simplified?
People can go a long way by just understanding that judgment is going to be required. If a standard comes out that’s principles-based without a lot of rules that you check the box off on, then you have to use your judgment to apply it. And when you’re auditing it and you’re reviewing it, you have to accept that there are judgments involved.

Issuers will have to understand it will take the SEC staff and the regulators a while to get used to allowing companies to use their judgment, and they will have to realize two things: A) their judgment has to be reasonable; and B) they have to resist the urge to use accounting transactions just to get a desired result. It’s going to take a lot from both sides to get used to this, but I think it can happen.

Will the SEC ever issue something resembling a bright-line definition for materiality?
I think the staff of the SEC and potentially the commission itself will look at some other areas of materiality, as the staff has already talked publicly about doing. There are some areas that people struggle with all the time, like if you find an error in a quarter, what’s material to a quarter versus a year? That’s one area the staff is looking seriously at and they’re talking to some groups from the outside to get their views. I wouldn’t be surprised to see the staff come out with something along those lines.

So far it’s been staff-level guidance in the form of staff accounting bulletins, and I wonder if the commissioners are thinking at some point about whether they need to provide guidance themselves. There have been so many calls for them to do something.

Why not define materiality with a rule-of-thumb test, such as an error representing 5 percent of net income would call for a restatement?
Obviously that’s the easiest thing to do, but when it comes to down to analyzing what’s material to an investor, it’s more nuanced. The SEC has had some cases in the past where people have used that strict 5 percent and manipulated below that line to achieve a result that they want to use. That shows you that maybe 5 percent just isn’t the right level. It’s not bad as a starting point, but I think that the commission guidance that has come out so far has been fairly principles-based. When you look at materiality, you have to look at the facts and circumstances of each case.

What would new guidance look like?
The qualitative factors in, for instance, SAB 99, suggest to investors that if you somehow trip one of these qualitative factors, it’s material. A lot of people have struggled with that because the qualitative factors are mainly geared toward a small error being qualitatively material. And there are other situations where you could have a quantitatively larger error that’s immaterial and it could be for various reasons, such as it’s a break-even year. But there are no good quantitative factors that address that in SAB 99, so the SEC could step back and say they need more robust materiality guidance that really covers a lot more fact patterns that the one that SAB 99 covers. Maybe they won’t issue a new definition per se but more helpful guidance to help people in different situations.

Has the SEC has been more active lately, particularly under chairman Christopher Cox’s leadership?
I know it seems to be more active. Part of that is after Sarbanes-Oxley the staff increased its size quite a bit. The Division of Corporation Finance doubled the size of its accounting staff because it now has to review all the issuers once every three years. A lot of it has to do just with the increase in the number of comment letters going out and the increase in the work that the SEC has to do after Sarbanes-Oxley was passed. Also, the SEC is more in the public eye. It gets a lot of visibility now on Capitol Hill and elsewhere, so they’ve taken on a lot of projects that people have some serious views on.

What were some unrealistic perceptions companies had while you were at the SEC?
I’ve often been asked, “If we don’t receive a comment letter, does that mean that everything’s fine?” And I wonder, based on questions like that, if there’s a perception that the staff looks at everything. I think there are misconceptions about how exactly the SEC operates, especially in terms of its review staff.

The staff does not look through every filing. They have a selective review process that they’ve had in place for a long time. When they look at an issuer, they may look at this year’s 10-K, 10-Qs, and 8-Ks and maybe last year’s 10-K. But they’re not going to look at every filing because the 10-Ks are fairly comprehensive.

For the most part, issuers and CFOs are pretty realistic about the staff. They realize the filings are their own. It’s hard for the staff just looking clean at the filing to really have the knowledge that the insiders have to make sure that the investors are getting the information they need. That’s really up to the issuers and the CFOs to do.