Remarks before the AICPA National Conference on Banks & Savings Institutions

The Importance of Financial Reporting and Auditing, Domestically and Internationally

Thank you for the kind introduction. I am honored to have the opportunity to speak at this conference.

Before I begin, let me remind you that the views expressed today are my own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.[1]

Let me also note that Marc Panucci and Kevin Vaughn from the office will be participating in a panel later today on accounting and auditing matters. I would also like to thank Lauren Alexander and Nipa Patel in preparing me to make today's remarks.

Given the background of the attendees of this conference, it takes no convincing that domestic and international accounting and auditing are critically important to our capital markets. The proper functioning of our capital markets depends on a regular supply of high quality financial information that enables investors, lenders, and other providers of capital to make well informed decisions.

Among the diverse information available to investors in our capital markets, audited financial statements play a uniquely valuable role. An independent audit provided by an external auditor furthers the credibility of financial statements and reinforces investor trust to improve the fairness and efficiency of our capital markets and increase capital formation.

Because of the importance of accounting and auditing (both domestically and internationally), all stakeholders involved in the financial reporting system must contribute towards the collective goal of delivering high quality information to investors. With this objective in mind, I will start my speech today by discussing the role and responsibility of the Securities and Exchange Commission (“SEC” or “the Commission”) and more specifically, how the Office of the Chief Accountant (“OCA”) uses the various levers in our system to achieve this important goal.

As Chief Accountant, I have the privilege to lead the SEC's Office of the Chief Accountant and serve as the principal advisor to the Commission on accounting and auditing matters arising in the administration of the federal securities laws. Within OCA, we fully leverage our diverse experience, talents, and skillsets to foster useful financial information that is comparable, verifiable, timely, and understandable by the millions of investors and others who participate in our capital markets.

Maintaining the integrity of the financial reporting system

The financial reporting system involves many stakeholders playing different but interconnected roles in a process designed to address the financial disclosure needs of investors. The strength of our financial reporting structure relies on the rigor of all parts of this system.

OCA plays an important role in this financial reporting system. We have invested our time and resources in the following key priorities:

• Proactively engaging with participants in every phase of the financial reporting structure, including with management and audit committees of issuers, their auditors, and investors, regarding expectations for effectiveness and quality;
• Advising on key rulemaking initiatives within the SEC such as the amendments to the “Loan Rule”[2] and authoring staff guidance such as SEC Staff Accounting Bulletin (“SAB”) No. 118[3] ;
• Overseeing the Financial Accounting Standards Board's (“FASB”) accounting and reporting standard-setting activities;
• Assisting the Commission in overseeing the Public Company Accounting Oversight Board ("PCAOB") in its role of enhancing the quality of audit services for public companies and brokers and dealers;
• Addressing very challenging and complex consultations regarding U.S. GAAP and International Financial Reporting Standards ("IFRS") accounting and reporting standards, and auditor requirements, including independence consultations;
• Participating in the monitoring of the IFRS Foundation's activities and fostering high-quality international accounting and reporting standards; and
• Participating as a Co-Chair in the work of The Monitoring Group, which is a group of international financial institutions and regulatory bodies committed to advancing the public interest in areas related to international audit standard-setting and audit quality.

As you can tell, these are very significant areas and we must use our resources most efficiently in order to meet these priorities on a global basis.

To expand on these areas, today I would like to discuss the following significant topics:

1. Standard setting oversight
2. Implementation of FASB standards
3. Implementation of PCAOB standards
4. SEC rulemaking
5. International activities
6. Preparing for what’s next

I. Standard setting oversight

FASB

As you may know, the Commission has designated the FASB to serve as an independent, private-sector accounting standard setter.[4] OCA advises the Commission on its continued recognition of the FASB as the accounting standard setter and has a long history of collaborating with the FASB as it develops accounting standards, and this collaboration is imperative to preserve the integrity of the financial reporting system.

The FASB’s approach to standard setting functions most effectively when stakeholders from across the financial reporting system provide timely and thorough feedback, for example, on proposed standards, and I encourage all stakeholders to provide such feedback. OCA continues to actively oversee the standard-setting process by participating in or observing FASB meetings and engaging in regular dialogue with the FASB and its staff to share insights and perspectives on a variety of matters. As I reflect on the past couple years, I would like to commend the FASB for its work in assisting in the implementation of the standards that to date have been implemented (such as leases and revenue), and on its current standard-setting work, including its projects on the transition from LIBOR and accounting for debt and equity. I will address each of these areas later in greater detail.

PCAOB

The Commission’s oversight of the PCAOB is established by the Sarbanes-Oxley Act, which among other things, includes the appointment of its Board members, approval of the PCAOB rules and standards, and the approval of its budget. I often view the relationship with the PCAOB as a partnership. From OCA’s perspective, we work every day to support the PCAOB’s mandate to improve audit quality – said differently, we both share the goal of improving audit quality.

It has been almost a year since the new PCAOB Board published its strategic plan and we have watched closely as the Board and its staff begin the execution of the strategic plan and many of its transformation initiatives.[5] I anticipate many of the Board’s initiatives will, as expected, take time to complete. However, we are already starting to see the benefits of the new focus – for example, the new strategic plan emphasizes proactively engaging with preparers, audit committees, investors, and the audit profession, among others, to drive enhanced transparency in fulfilling its mission. As another example of the benefits of the Board’s new focus, I will spend more time discussing the specifics of its implementation process, including the PCAOB’s approach to the implementation of critical audit matters (“CAMs”). These are just a couple of the illustrations of the many ways the organization is transforming.

Simply put, I believe the PCAOB is executing against its strategic plan and I applaud its efforts. I look forward to additional progress to come.

II. Implementation of FASB standards

As I noted earlier, OCA actively participates in standard setting and plays a critical role in the implementation of new FASB standards. OCA works closely with the FASB throughout the standard-setting process and this participation underpins the integrity of the financial reporting system. I would like to reflect on a few of the new standards, each of which is in a different phase of implementation, and highlight how OCA has worked collaboratively with various stakeholders throughout the process to help develop the best results for investors.

Revenue

Many stakeholders made a tremendous effort to implement the new revenue standard,[6] and to date, we have seen significant progress on the implementation of this standard. I commend the work of preparers and others that have contributed to various industry task forces and forums to address questions on revenue recognition, measurement, presentation, and disclosure.

As you may know, the objective of the revenue standard is to establish principles to report information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The standard is a significant milestone in financial reporting in that it is largely converged with international guidance, and it also eliminates complex, detailed, and disparate revenue recognition requirements for specific transactions and industries that existed in US GAAP. Importantly, it also provides enhanced disclosures to users of financial statements. I view these benefits as significant for investors.

OCA has helped advance implementation of the new revenue standard over its multi-year implementation by:

• Addressing consultations on revenue matters from registrants and other divisions and offices throughout the Commission;
• Actively monitoring implementation groups such as the sixteen AICPA Revenue Recognition Industry Task Forces;
• Participating in a wide variety of meetings with preparers, industry groups, investors, other regulators, and accounting firms to provide insights into application issues; and
• Delivering over 20 published speeches and participating in panel discussions with the goal of sharing the results of our consultations to create transparency across the profession.

Investors tend to focus on revenue and registrants regularly consult on the most challenging of revenue related questions given its significance to the financial statements. Our office receives more questions on revenue recognition than on any other accounting topic. We have been actively engaged on these consultations and I note that, in many cases, well-reasoned judgments have been necessary to implement the revenue standard. We have consistently respected and not objected to well-reasoned judgments that entities have made in applying the standard and we will continue to do so in revenue and in other areas of accounting.

Forming well-reasoned judgments typically involves a lot of effort and underscores the importance of a robust implementation process. I would observe that for many companies, a robust implementation process includes adequate and advance planning, a focus on contractual terms and areas of judgment, and a thorough evaluation of controls. In addition, the implementation process works particularly well when stakeholders identify and raise questions early and keep investors informed with SAB 74 disclosures.[7] I would expect these observations would be useful as stakeholders think about implementing other new standards.

Our role in revenue has shifted from addressing questions before registrants implemented the revenue standard to answering post-implementation questions and assisting the Division of Corporation Finance in its ongoing review of registrants’ financial statements and disclosures. The Division of Corporation Finance process for asking questions on revenue (both on recognition and measurement and on disclosures) has been thoughtful. We look forward to continued engagement on these issues with our colleagues in the Division of Corporation Finance.

Leases

I would also like to discuss the implementation of the new leases standard.[8] Many public registrants have adopted the new standard as of January 1, 2019, so we are in the early phase of post-implementation. The leases standard will improve financial reporting about leasing transactions by generally requiring lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by leases. I view the enhanced reporting of leases on the balance sheet as a significant improvement for investors.

I would like to applaud stakeholders, including preparers and audit firms, for their proactive involvement in the implementation process to date. The FASB did not have a Transition Resource Group for leases, and therefore, stakeholders’ active engagement on implementation questions has been critical as companies have applied and prepared to apply the new requirements.

In addition to stakeholder engagement, the FASB maintained active engagement during implementation. For example, the FASB issued guidance to address questions on transition to the standard, land easements, and narrow-scope amendments for lessors.[9] In all of these cases, the FASB reached practical solutions that were cost-effective for preparers without sacrificing information for users of financial statements. The FASB’s proactive engagement on leases implementation highlights the strength of our financial reporting ecosystem responding in a time of transition. I applaud the FASB’s efforts in this area.

OCA has focused and will continue to focus on leases implementation, including through:

• Actively engaging on questions about the leases standard, including having addressed those related to the scope of the standard, transition, and certain lessee and lessor costs, which have been the subject of recent SEC staff speeches;[10]
• Participating in meetings with preparers, industry groups, investors, other regulators, and accounting firms to provide insights into application issues; and
• Delivering a number of published speeches and participating in panel discussions.

I would encourage preparers to continue to consult with us on leases questions, especially as they turn their focus from adoption to the ongoing accounting for leases under the new guidance.

Current expected credit losses

The current expected credit losses standard is on the horizon and we have observed much progress to date on implementation.[11] The standard is effective in 2020 for many companies. These companies are in the process of implementing the standard and stakeholders are proactively engaged in the process.[12] It is evident that companies are making good progress; for example, OCA has had many productive discussions with stakeholders, including financial institutions, other regulators, audit firms, and industry groups, and I encourage everyone to stay engaged as we approach the standard’s effective date. In addition, there are a number of forums that have discussed implementation questions, including:

• the FASB’s Transition Resource Group, which has held meetings to address implementation questions;[13] and
• the AICPA Depository Institutions Expert Panel and the AICPA Financial Reporting Executive Committee, which have been addressing both accounting and auditing issues.[14]

I also understand that the FASB plans to perform more outreach on the new standard in the near future with a diverse group of stakeholders across the country. I support this effort and encourage stakeholders to participate.

OCA has received consultations on the new standard[15] and continues to discuss implementation questions, and I would encourage stakeholders with questions to continue to consult with our office.

As noted in my remarks about the new revenue and leases standard, a robust implementation process involves adequate time. Time is necessary to develop new accounting policies and internal accounting controls, execute systems changes, and form well-reasoned judgments. Also, as noted earlier, OCA has consistently respected and not objected to well-reasoned judgments that entities have made in applying new accounting standards and we will continue to do so in credit losses and in other areas. The lessons we and stakeholders have learned from the recent implementation of others standards can certainly be applied as companies implement the credit losses standard.

III. Implementation of PCAOB standards

Auditor’s reporting model

Shifting now to audit standard setting, I would like to discuss the Auditor’s Reporting Model (“ARM”), and specifically how the PCAOB and OCA have responded to the process of implementing CAMs. CAMs are effective for large accelerated filers for audits of fiscal years ending on or after June 30, 2019.[16]

Of course, we currently are in the middle of implementation. To date we have observed significant progress in implementation. The objective of the new standard is to enhance the relevance and usefulness of the auditor’s report by providing additional and important information to investors.

To date the work around the implementation efforts has gathered appropriate constituent feedback through the PCAOB’s outreach. Some of the meaningful examples of how different groups contributed to the process are:

• Certain audit firms have shared and the PCAOB staff has reviewed firm methodologies in an attempt to be proactive and preventative.
• The PCAOB is engaging with audit committees and investors to educate them on the changes in advance of implementation.
• Firms, management, and audit committees are engaging in “dry runs,” which have provided an early opportunity to evaluate some of the potential concerns. Early feedback from such “dry runs” has been positive.

The PCAOB has issued several forms of guidance based, in part, on the feedback received. OCA staff have been involved throughout the project. We provided input at every stage of standard-setting, advised the Commission on the approval of the standard, and now we are closely monitoring the implementation of the standard. We are looking forward to seeing the results of implementation on the standard.

Estimates and specialists

The estimates and specialists standards were adopted by the PCAOB Board last December and approved by the Commission on July 1 of this year.[17] The estimates standard replaced three existing standards that set out requirements for auditing accounting estimates with a single, uniform, risk-based standard. The specialists standard provides separate requirements for auditors’ use of a company specialist, auditor-employed specialist, and auditor-engaged specialist.

As noted earlier, monitoring the implementation of a new standard has always been a priority for OCA, and this focus continues in our monitoring of the adoption of the estimates and specialists standards. Many commenters encouraged the continued focus on anticipating and monitoring issues related to implementation. In fact, the PCAOB has already started this proactive approach for estimates and specialists, for example, by releasing additional guidance on the estimates and specialists standards on August 22, 2019.[18]

As you can see, given the importance of the FASB and PCAOB activities to the financial reporting system and our capital markets more broadly, OCA dedicates significant resources to working with the FASB and PCAOB on implementation of new standards to ensure investors receive high quality information.

IV. SEC Rulemaking and OCA work, specifically around independence

In addition to our role with respect to standard-setting by the FASB and the PCAOB, OCA brings its insight and expertise in advising the Commission on rulemaking, for example, amendments to the accelerated filer definition, Rules 3-05 and 3-10 of Regulation S-X, and Disclosure Update and Simplification (DUSTR).

As OCA staff has consistently noted, investor confidence in financial reporting is highly dependent on auditors’ commitment to maintaining independence in both fact and appearance. Auditor independence lies at the very foundation of the profession and is necessary to reduce threats to auditors’ objectivity and lend credibility to the fair presentation of the financial statements.[19]

The objectivity and impartiality of the auditor underpins the reliability of the auditor’s audit report that it issues. As a result, I believe that monitoring the independence of the auditor is essential. Auditor independence needs to be understood by company management, audit committees, and audit firms. Each needs to understand the SEC[20] and PCAOB auditor independence[21] rules. Management and audit committees need to be aware of how an auditor independence violation may affect the company’s required SEC filings.

On June 18, 2019, the Commission adopted amendments to its existing auditor independence requirements.[22] These amendments are intended to more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats, and thus focus the analysis on those borrowing relationships that are important to investors.[23]

As another example of our continued focus on auditor independence, I also want to bring to your attention that OCA also recently revised its frequently asked questions (“FAQs”) surrounding the Commission’s Rules on auditor independence.[24] The revised FAQs provide selected staff guidance in applying the Commission’s independence rules by:

• Reorganizing the FAQs to align specific topics with the structure of the Independence Rules to make them easier to navigate;
• Removing transition FAQs as they were no longer needed; and
• Adding ten new FAQs and making substantive changes to certain existing FAQs principally based on our consultation trends since the last update of the FAQs.

Looking ahead, in adopting the Loan Rule Amendments, the Commission also noted responses to its invitation to provide comment on other aspects of auditor independence rules. In conjunction with that feedback, the Chairman has directed the staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential future rulemaking.

We are actively working on those recommendations and I look forward to continued engagement from all stakeholders as we proceed with this important work surrounding auditor independence.

V. International landscape

OCA has also been very actively engaged in promoting quality among public companies’ financial reporting and auditing globally. This international lens is foundational to OCA and we wanted to highlight a couple of very important areas where we continue to focus.

The Monitoring Group

This past July, I had the honor of being appointed as the Co-Chair of The Monitoring Group[25], along with Ana Maria Martinez-Pina Garcia, Vice-Chairperson of the Spanish securities regulatory body, the CNMV.[26] The Monitoring Group is a group of regulatory and international financial organizations committed to advancing the public interest in international audit-related standard setting. The Monitoring Group's work is conducted with a view toward promoting international audit quality in order to strengthen confidence in the audit of financial statements.

The Monitoring Group will continue to work collaboratively with the organizations involved in the overall structure for setting international audit-related standards, such as for example, the Public Interest Oversight Board (“PIOB”), the standard-setting boards, and the International Federation of Accountants (“IFAC”), among others.

Within this structure, we will work together to continue to strengthen the international audit-related standard-setting system that exists today.

The Monitoring Board

With respect to international accounting standards, the Monitoring Board was created in 2009 to “provide a formal link between the IFRS Trustees and public authorities” to enhance the public accountability of the IFRS Foundation.[27] The Board includes international capital markets authorities responsible for setting the form and content of financial reporting.

We of course continue to actively engage with the Monitoring Board (for a number of reasons, including that we have issuers in our markets applying these standards). In this role, we support other securities regulators and international stakeholders as they monitor the use of IFRS in jurisdictions and carry out their mandates regarding investor protection, market integrity, and capital formation. We look forward to our continued engagement in this important area.

VI. Preparing for what’s next

We operate in an environment that can change quickly because of new technology, regulation, or other factors. Some changes are expected, while others are unexpected. I would encourage stakeholders to be proactive, consider the changes to financial reporting that are expected, and be ready to respond. I will highlight a couple of such changes.

Transition from LIBOR

One change we are anticipating is that global capital markets are expected to move away from LIBOR as a benchmark.[28] Recent market developments have brought into question the long-term viability of LIBOR, and currently the use of LIBOR is expected to be discontinued in 2021. This move away from LIBOR as a benchmark could have a significant effect on financial markets, and not surprisingly, there has been a focus on the financial reporting implications.

In response to this change, the Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and OCA recently issued a joint staff statement on LIBOR transition.[29] I would encourage stakeholders to consider this statement as they identify and address the risks related to the LIBOR transition.

The FASB also launched a project to address potential accounting concerns expected to arise from the transition. The FASB has acted timely to address the accounting implications of transitioning to a new reference rate. The FASB recently issued a proposed ASU that would provide temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.[30] Last year, the FASB also issued an ASU that allows for the Overnight Index Swap (“OIS”) rate based on SOFR (collectively, “SOFR OIS”) to be designated as a benchmark interest rate for hedge accounting purposes.[31]

In addition, the International Accounting Standards Board (“IASB”) recently issued an Exposure Draft, Interest Rate Benchmark Reform, which addresses various hedge accounting issues in the period leading up to the replacement of an existing interest rate benchmark.[32] The IASB also recently added a project to its agenda to assess the potential financial reporting implications when an existing interest rate benchmark is replaced with an alternative interest rate, i.e. replacement issues.[33] I would encourage stakeholders to consider the proposed guidance from both the FASB and the IASB and provide comments.

Stakeholders, including preparers, auditors, and regulators, have begun to address some of these potential accounting considerations and related disclosures. OCA encourages the ongoing discussion and analysis of questions in this area and is available to continue to address consultations. As an example, OCA staff has already provided views relating to the impact of the expected discontinuation of LIBOR on the application of hedge accounting.[34] We stand ready for continued consultation in this area.

FASB’s project “Distinguishing Liabilities from Equity”

Another expected change on the horizon is a project on the FASB’s standard-setting agenda to improve the accounting guidance on distinguishing liabilities from equity, and I am looking forward to seeing this project come to fruition. With this effort, the FASB is seeking to improve understandability and reduce complexity in the accounting for instruments with both the qualities of liabilities and equity without sacrificing high-quality information for financial statement users.

The accounting guidance in this area continues to be a challenge for preparers to apply and the FASB has received feedback that stakeholders find it overly complex and internally inconsistent. The accounting for these instruments has also been a source of frequent financial statement misstatements.[35] I expect the FASB’s proposed guidance would make targeted improvements to the guidance in this area, and the changes may affect a large number of entities, so we encourage stakeholders to actively participate in the FASB’s standard-setting process. It would be especially helpful for stakeholders, including users of financial statements, to provide feedback as this project develops since it aims to reduce complexity without sacrificing meaningful information. OCA will be following this project closely and believes it has the potential to improve the financial reporting of liabilities and equity.

Audits of Brokers and Dealers

I would like to next discuss the auditing and attestation requirements for brokers and dealers registered with the Commission. Certain brokers and dealers registered with the Commission are required to file an annual report containing financial statements audited by an independent public accountant in accordance with PCAOB standards.[36] In addition to audited financial statements, Commission rules generally require brokers and dealers to file certain compliance or exemption reports in accordance with the financial responsibility rules.[37] These reports also require the examination or review, as applicable, by an independent public accountant in accordance with PCAOB standards.[38] It is important to note that the financial responsibility rules are designed to provide safeguards with respect to the custody of customer securities and funds.[39] Thus, I believe having auditor involvement provides important protection for investors who entrust their cash and securities with brokers and dealers.

The Commission’s Chairman, Jay Clayton, has noted that a one-size-fits-all approach may not work in this space and has emphasized the importance of the scalability of regulation in this area.[40] Similarly, I believe that regulation is best when the requirements imposed are commensurate with the risks it seeks to allay.

Section 104(a) of the Sarbanes-Oxley Act gives the PCAOB the authority to establish a program to inspect the audits of brokers and dealers. To date, the PCAOB has conducted an interim inspection program of all auditors of SEC-registered brokers and dealers.[41] While I commend the PCAOB for its diligent work with respect to its interim inspection program, I am particularly encouraged that Chairman Duhnke has stated publicly that the Board will consider the need for a permanent inspection program in the near-term.[42] I support the Board in its efforts to evaluate this important program with a mindset that is consistent with the underlying goals established in the financial responsibility rules. As part of its evaluation of the permanent inspection program, I would expect the Board to consider what is best for investor protection, including consideration of the best uses of its (PCAOB’s) resources when considering the risks to investors and the cost/benefit analysis related to any potential changes.

Said differently, I would expect the PCAOB to consider scalability and accordingly that the same answer may not apply to every broker and dealer as the risks may differ based on certain types of brokers and dealers. Of course, as the Board evaluates any potential changes to its program with respect to auditors of brokers and dealers, OCA will advise the Commission, in consultation with other SEC staff, on the need for potential changes to the Commission’s regulations in order to harmonize the two regulatory regimes.

Closing

The areas I have discussed today demonstrate the depth and breadth of OCA’s role across the financial reporting system globally. We are privileged to have this role and we will continue to work in the manner described above. This system could not be effective without the hard work and care of financial reporting that comes from those of you who play different roles in the overall financial reporting ecosystem. As such, I thank you for your commitment.

As I step back, I am proud of the strength that this system has demonstrated to date. This strength gives me confidence in the system’s ability to tackle what is to come. One thing that I am certain of is that I know we will need to continue to work together to provide investors with the high-quality financial information they need to make well-informed decisions. Thank you for your time today.