Risk & Compliance

Death by Committee?

As SEC and Treasury Department committees on financial reporting and auditing near their conclusions, it looks like the former may be more fruitful...
Vincent RyanSeptember 1, 2008

Sir Barnett Cocks, a clerk in the UK’s House of Commons, once provided this cynical definition of a committee: “a cul-de-sac down which ideas are lured and then quietly strangled.”

As two high-profile advisory groups — the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting (CIFR) and the Treasury Department’s Advisory Committee to the Audit Profession (ACAP) — put the finishing touches on their final reports at press time, that metaphor may be all too apt.

The CIFR, headed by Robert Pozen, backed away from the notion of a “professional judgment framework” that would outline how companies should determine and document their accounting decisions in order to prevent second-guessing by regulators. Instead, the committee is asking the SEC to issue a statement of policy articulating how the regulator evaluates the reasonableness of accounting judgments. The framework “was an unrealistic goal,” concedes committee member Dennis Beresford, a professor of accounting at the University of Georgia, but the alternative “will still lead to higher-quality judgments.” Likewise, the committee was also watering down its proposed new “executive summary” section for 10-Ks and 10-Qs by removing a number of required disclosure items.

The trade-off for being less prescriptive? Several CIFR-championed ideas will likely find their way into formal regulatory guidance. That could be good news for CFOs. None of the recommendations alone is likely to reduce accounting costs significantly, but the total package should make financial reports “somewhat easier to prepare,” Beresford says.

The ACAP may fare less well. Headed up by former SEC chairman Arthur Levitt and former SEC accounting chief Donald T. Nicolaisen, the group struggled with philosophical disagreements from the outset. A key point of contention: liability relief for auditors. The committee’s alternative to a cap on auditor liability — creating a government mechanism for saving audit firms on the brink of financial failure — looks to face many hurdles. The very act of triggering such mechanisms could cause clients to leave an audit firm in droves, notes Joseph Carcello, director of research at the University of Tennessee’s corporate-governance center.

The ACAP arguably had the tougher mandate. But there was another difference between the two committees: the ACAP had two chairmen, while the CIFR had one. In the end, Treasury Secretary Henry Paulson may have put one too many tasks in two too many hands.

Surveying the Field

What will ultimately come out of the SEC and Treasury advisory committees on financial reporting and auditing?

Good Bets

• Expanded definition of materiality
• More disclosure of the use of historic cost vs. fair-value accounting
• Performance-based feedback for FASB
• Avoidance of bright lines in future FASB guidance

Even Money

• Executive summary for 10-Qs and 10-Ks
• Public disclosure (by audit firms) of key indicators of audit quality and effectiveness
• Clarification of the auditor’s role in detecting fraud

Long Shots

• Reduction in the use of industry-specific accounting guidance
• “Go slow” on fair value
• Amendment of 8-K disclosures to require that auditor changes be “characterized appropriately”
• Government safety net to prevent loss of a large auditing firm
• Granting of federal jurisdiction to claims regarding audits of public company financial statements

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