Risk & Compliance

How Do We Reduce Misstatements?

The SEC's deputy chief accountant relays feedback on what all stakeholders can do to help financial reporting.
Helen ShawNovember 27, 2006

While you’re making lists for the holiday season, here’s one more to consider: Suggestions from corporate financial executives about how to cut down on the number of restatements. Earlier in the year, the Securities and Exchange Commission asked executives to submit ideas that would help squelch the mushrooming restatement trend. The suggestions flowed in, and last week, at a meeting sponsored by Financial Executives International, SEC Deputy Chief Accountant Scott Taub announced some of the more popular ones.

While most respondents blamed restatements on complex accounting and financial reporting rules, Taub asserted that most restatements were tied to simple human errors. Indeed, Taub said that 55 percent to 60 percent of the errors triggering recent misstatements were “simple misapplications of [generally accepted accounting principles] or books and records problems.”

Nevertheless, the litany of suggestions from Corporate America were more focused on big picture items, such as pushing principles-based rules. Those ideas included:

• Replacing or rewriting complex standards, such as leasing and derecognition;

• Pushing standard setters to develop principles-based rules; and

• Replacing standards that produce non-transparent information, such as the rules used for pension accounting and reporting.

Other suggestions were aimed directly at regulators, said Taub, and included:

• Requests for regulators to accept reasonable differences in judgment;

• An effort to stamp out accounting-motivated standards (because companies will always pay experts to design policies that circumvent bright-line standards); and

• A call to impose regulations only when needed.

Taub also provided suggestions for preparers and encouraged them to continue building expertise in their firms. “In the last few years, companies made investments in accounting staff and it’s been showing,” commented the SEC accountant. He also suggested that accountants and auditors use more professional judgment by considering all unbiased information that is available. Additionally, he insisted that conference goers should “voluntarily improve disclosures. Don’t wait for regulators to require it.”

Taub also recommended that auditors should use more professional judgment when making decisions, rather than backing away from such principle-based practices. “I hear auditors support something because they believe they’re less likely to be sued over it,” he declared.