The Securities and Exchange Commission ("SEC" or "Commission"), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, individual Commissioners, or of the author's colleagues upon the staff of the Commission.
Good afternoon and thank you Christine (Davine) for the kind introduction.
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. Let me also express a word of gratitude to the entire OCA team for their work in providing advice to the Commission regarding accounting and auditing matters arising in the administration of the federal securities laws. I want to also acknowledge their valuable assistance in preparing me to make today's remarks, including Sylvia Alicea, Emily Fitts, Ying Compton and Duc Dang.
The livelihood of every American depends in a meaningful way on how well accountants do their jobs.
When accountants do their jobs well by producing high-quality financial information, that information energizes our capital markets, enabling domestic and foreign companies alike to obtain funding to support and grow their businesses, creating investment opportunities, jobs and other benefits for the U.S. economy.
But, when they do not, economic outcomes suffer, since the decisions are no better than the information on which they are based -- if the numbers are wrong, the decisions are wrong, and our economic future is placed at risk. Investors depend on reasonable estimates and accurate numbers.
The credibility of financial statements most likely has a direct effect on the price investors are willing to pay for a company's securities.
As a result, this audience – preparers, auditors, audit committee members, and their advisors – is a very important one for the SEC. Investors, issuers, and the markets all depend on the work you do and the judgments you make – and how well you do both. You, together with the standard setters and the regulators, have a vital role in ensuring that our capital markets remain the safest and strongest in the world – and we all share the responsibility.
So, in my remaining time with you today, I would like to discuss several areas that both reinforce and advance credible financial reporting through thoughtful implementation of new GAAP standards and effective internal control over financial reporting (ICFR).
Advancing credible financial reporting
Let me now turn to implementation of the new revenue standard. This area deserves close attention, both to make sure that the standard is implemented appropriately and timely and to ask whether the appropriate transition disclosures are being made so that investors and other market participants have sufficient time to absorb the anticipated effects of the new standard.
Timely implementation of the new revenue standard is important. Since my remarks in December 2016 when I said the overall state of readiness may be lagging, progress has been made, but there is still more to do.
Revenue is one of the single most important measures used by investors in assessing a company's performance and prospects, regardless of a company's industry, the nature of its securities, or the capital markets it accesses. Revenue impacts key analytical ratios and bottom line earnings. Companies cannot afford to get the accounting wrong – it deserves close attention by preparers, audit committees and auditors.
The standard, including the disclosures in accordance with the standard, is an important step forward in financial reporting, both domestic and foreign, and when implemented, it is designed to enhance the comparability of companies' reported revenues.
Implementation is underway
In the encouraging column, some public companies have indicated that they plan to apply the new revenue standard in preparing their first quarter 2017 financial statements, as permitted by the transition guidance in the new standard. Other public companies have provided transition disclosures about the status of their implementation planning, including information to assist investors in assessing the significance of the impact that a standard will have on the financial statements of the registrant when adopted as required by 2018.
In the worrisome column, however, some companies need to make significant progress this year in their implementations. In a survey of public companies released in October 2016, eight percent of respondents at that time had not started an initial assessment of the new revenue recognition standard, while an overwhelming majority of the others were still assessing the impact.
Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information. Successful implementation requires companies to allocate sufficient resources and develop or engage appropriate financial reporting competencies.
Successful implementation requires the engagement of senior management throughout an organization. If there are individuals within your organization that underestimate the efforts required, or the overall importance of a successful implementation of the new revenue recognition standard, you might consider sharing some of our staff remarks on the topic.
Given the importance of implementation, OCA staff continues to actively monitor the profession's transition efforts including the FASB and IASB's Revenue Transition Resource Group ("TRG") and the AICPA's Financial Reporting Executive Committee, among others, to identify the nature and volume of implementation questions and views on those questions.
I am pleased that of the 108 submissions to the TRG, none of those issues remain open. The FASB has published minutes of the TRG discussions as a non-authoritative resource for preparers and auditors to understand the application of the core principles within the revenue standard. In addition, the AICPA and other industry task forces are bringing closure to the submissions identified through their processes, with related non-authoritative papers available on their website.
The staff in the Office of the Chief Accountant (OCA) has also received consultation requests from registrants on their particular accounting policies for revenue recognition under the new standard. In forming its views, the staff in OCA considers the nature, design, and economic substance of the transaction (including the terms of the contract with the customer) and then the:
- language in the standard and the related basis for the standard setters' conclusions;
- implementation discussions, such as those at the TRG; and
- expectation that the standard will result in improved consistency and comparability.
A common topic of consultation has been on whether the particular registrant is a principal or an agent in a revenue transaction. The determination impacts whether an entity reports revenue on a gross or net basis.
While presentation is just one aspect of the new revenue standard, it highlights several key themes as we think about implementation.
One, a company must support its presentation – whether gross or net – according to the core principles in the standard, so that investors can understand the nature of the revenue transaction. The new revenue standard does not eliminate all of the judgment required in this area of financial reporting.
Often, this judgment will require a careful evaluation of the detailed information regarding the nature, design, and economic substance of the arrangement; the relevant accounting and reporting issues raised; the conclusions reached (and basis for those conclusions); planned disclosure about the accounting; and any audit committee views on management's accounting and financial reporting conclusions.
Two, the guidance has changed. Today's revenue recognition guidance is primarily a risk and rewards based model, while the new standard is focused on control. While registrants may determine that – as a result of applying the new guidance – the presentation of revenue is the same as under today's revenue guidance, the evaluation will need to be based on the new standard, which has new concepts.
For example, the basis for determining whether a company is the principal or the agent in an arrangement will require, among other things, the entity to identify the "specified good or service" being provided to the customer and the "performance obligation" in the contract. Those are new concepts to be applied in determining whether a registrant controls the specified good or service before it is transferred to a customer.
Three, additional judgments may be needed in applying the new standard, and in some cases those judgments may necessitate changes to internal control over financial reporting.
In the consultation requests OCA staff received, registrants had "rolled up their sleeves" to identify and evaluate the implications of differences in contract terms and the substance of their business arrangements in supporting their accounting policies.
Particularly since the principal versus agent assessment is often fact-specific and judgment-based, I caution companies against any overreliance on benchmarking to their peers' accounting policies. Benchmarking may be an element of, but is not a substitute for, management doing the work needed to support its own accounting policies, especially in this area.
OCA staff will continue to respect well-reasoned, practical judgments when those judgments are grounded in the principles of the new revenue standard. However, I again want to emphasize the necessity of preparers fully understanding the underlying transaction, including the registrant's specific facts and circumstances and contractual terms, and then faithfully applying the standard. For preparers who continue to finalize their accounting policies to adopt the new revenue standard, OCA continues to be available for consultation, as needed.
Four, I encourage companies to provide useful disclosures to investors with appropriate investor education on the impact of adoption of the new standard.
The disclosures required by the new standard are designed to allow an investor to understand the revenue arrangement and the registrant's role in it. The pertinent facts and related judgments related to a principal versus agent assessment should be disclosed so that investors can understand the arrangement.
Speaking of disclosures, the SEC staff has long advised in Staff Accounting Bulletin No. 74 (SAB 74; Topic 11.M)  that companies should provide transition disclosures to investors of the impact that a recently-issued accounting standard will have on its financial statements when that standard is adopted in a future period.
If a company does not know, or cannot reasonably estimate the expected financial statement impact, that fact should be disclosed. But, in these situations, the SEC staff expects a qualitative description of the effect of the new accounting policies, and a comparison to the company's current accounting to aid investors' understanding of the anticipated impact. It should also disclose the status of its implementation process and significant implementation matters yet to be addressed. 
From a preliminary look at recent Forms 10-K and 10-Q filings, a number of companies have enhanced their transition disclosures, although for others there is still more work to do.
For example, some companies indicate that the impact of the new revenue standard is not expected to be material. The changes in the new standard will impact all companies. Even if the extent of change for a particular company is slight, the related disclosures to describe revenue streams may not be. The scope of the new standard addresses not only amounts and timing of revenue but also new, comprehensive disclosures about contracts with customers, including the significant judgments the registrant has made when applying the guidance. Accordingly, the basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation, and disclosure for revenue transactions.
Advancing effective internal control over financial reporting
Over the next several years, updating and maintaining internal controls will be particularly important as companies work through the implementation of the significant new accounting standards. Companies' implementation activities will require careful planning and execution, as well as sound judgment from management, as I have mentioned earlier in illustrating areas of judgment in the new GAAP standards.
Management's ability to fulfill its financial reporting responsibilities significantly depends on the design and effectiveness of ICFR – controls designed to provide reasonable assurance that the company's financial statements are prepared in accordance with GAAP.
As a matter of background, since 1977, U.S. public companies have been required to devise and maintain a system of internal accounting controls to provide ''reasonable assurances'' that "transactions are recorded as necessary to permit preparation of financial statements" in conformity with GAAP.
In 2002, the Sarbanes-Oxley Act required that management of public companies assess the effectiveness of the company's internal control over financial reporting. The Act also required a public company's auditor to attest to, and report on, management's assessment of its ICFR.
The Commission then specified that the management assessment should be based on a "suitable, recognized, control framework that is established by a body or group that has followed due-process procedures, including the distribution of the framework for public comment."
This brief background brings me to an acknowledgement of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is the body that follows due process procedures in developing and maintaining the Internal Control – Integrated Framework commonly used by management of public companies. COSO is sponsored through a joint initiative of five private sector organizations and publishes frameworks and guidance on internal control, including for smaller public companies.
It is hard to think of an area more important than ICFR and the related assessment frameworks to our shared objective of providing high-quality financial information that investors can rely on.
Lessons learned over time
While numerous lessons have been learned over time, I would like to capture a few as companies are implementing the new revenue standard.
- The new revenue standard may require changes to relevant business processes and the control activities within them. However, it might also require a refresh of the other components of internal control over financial reporting, including professional competence. Expectations related to the control environment and the other components of ICFR are reflected in the principles of the COSO (2013) framework.
- An aspect of the COSO framework emphasizes the importance of being able to attract, develop and retain competent individuals in alignment with the financial reporting objectives. All companies must have appropriate resources to evaluate revenue arrangements and properly apply the principles of the new standard. While those resource needs might be satisfied, for example, through a designated accounting policy function or through a relationship with a qualified service provider, having resources with sufficient training and competence is fundamental to the effectiveness of a company's overall control environment. With a general movement towards more principles-based accounting frameworks, companies need to assess and continually reassess the impact to their existing accounting and financial reporting competencies and make adjustments as appropriate to their training, retention, and recruitment programs.
- As I mentioned, the new revenue standard will require judgments. This highlights the importance of another element of a company's control environment — setting the right "tone at the top" and expectations for responsible conduct throughout the organization. Appropriate tone at the top is the foundation for the consistent application of the sound judgments required by the new standard. Management should consider whether the existing controls support the formation and enforcement of sound judgments or whether changes are necessary.
- Companies may also need to consider any changes they may make to their established business practices as they transition to the new standard. For example, companies may amend or tailor their contracts with customers. Application of the new standard, including preparation of the required disclosures, may also require gathering and analyzing new information and sharing such information with relevant parties. Management should consider whether its reporting systems are designed to accurately capture the effects of changes to customer contracts and other information required for compliance with the new standard and ensure the integrity of such information throughout the financial reporting process. Therefore, it will be important to take a fresh look at the information and communication component of ICFR and the related controls over a company's information technology.
- And last but not least, it is important to keep in mind that the effectiveness of any changes to internal controls are predicated on a comprehensive and timely assessment of risks that may arise as a result of applying the standard. Such risks may exist at various levels and in different areas of a company and their appropriate identification and assessment may require involvement of management and employees from both the accounting and financial reporting function and other functional areas of a company.
These are just some areas of ICFR that may be impacted by the transition to the new revenue standard. However, they highlight the importance of taking a holistic view of the potential effects that the new standard may have on ICFR.
Recent experience with disclosures
Another point related to ICFR is consideration of disclosures. Investors tend to incorporate disclosure of ICFR deficiencies in the price they are willing to pay for a stock. For example, companies disclosing material weaknesses are more likely to experience increased cost of capital, and to face more frequent auditor resignations and restatements. Recent academic research suggests:
- Companies disclosing internal control deficiencies have credit spreads on loans about 28 basis points higher than that for companies without internal control deficiencies;  and
- After disclosing an internal control deficiency for the first time, companies experience a significant increase in cost of equity, averaging about 93 basis points. 
Remediation of ineffective ICFR tends to be followed by improved financial reporting quality, reduced cost of capital, and improved operating performance. For example,
- Companies that have remediated their prior disclosed internal control deficiencies exhibit an average decrease in market-adjusted cost of equity of 151 basis points;  and
- Remediating companies also experience increases in investment efficiency and in operating performance, suggesting that accounting information generated by effective ICFR is more useful for managerial decision-making. 
A disclosure of material weaknesses, combined with demonstrating progress toward remediation, can provide investors with information about the company's ability to function as a public company. Some companies, for example, voluntarily disclose material weaknesses in their registration statements along with their plans for remediating those weaknesses. 
More recently, there have been useful discussions about the importance of ICFR among the Public Company Accounting Oversight Board (PCAOB), investors, the audit profession, and preparers, which the SEC staff keenly observed. If left unidentified or unaddressed, ICFR deficiencies can lead to lower-quality financial reporting and ultimately higher financial reporting restatement rates and higher cost of capital.
It has been my pleasure to speak with you today. In our time together, I have provided thoughts on how we can continue to provide investors quality financial information for their use in making investment and voting decisions.
Before I conclude my remarks and open it up for a few questions, I would like to acknowledge the work of preparers, since high-quality financial reporting starts with you. You are the ones who make the decisions and judgments required to meet the objectives and principles of US GAAP or IFRS. Investors look to you to evaluate, challenge, and ultimately address transactions, judgments, and risk areas with accurate and informative disclosures. Effective internal control over financial reporting supports your work and the oversight of your audit committees.
Our capital markets are among our nation's most spectacular achievements -- they're the envy of the world. Those markets – and the credibility of financial reporting that underpins them – enable investors to provide their capital to the companies who need that capital to operate, grow, and compete, both domestically and internationally.
I appreciate the opportunity to speak with you today. Thank you for your attention.
 See Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments, December 5, 2016 — Wesley R Bricker, Chief Accountant – Office of the Chief Accountant, available at,
 See PwC, 2016 Revenue Recognition Survey: Readiness update, impacts and remaining challenges (2016), available at http://www.pwc.com/us/en/audit-assurance-services/accounting-advisory/revenue-recognition-survey.html.
 Remarks before the 35th Annual SEC and Financial Reporting Institute Conference, June 9, 2016 — Wesley R. Bricker, Deputy Chief Accountant – Office of the Chief Accountant, available at https://www.sec.gov/news/speech/bricker-remarks-35th-financial-reporting-institute-conference.html.
 Also, as a matter of reference, we previously shared our consultation themes from registrant consultations regarding the existence of a contract, application of the contract combination guidance and application of the 'impracticability' exception when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting adoption of the new revenue standard. See Remarks before the 2016 Baruch College Financial Reporting Conference, May 5, 2016 — Wesley R Bricker, Deputy Chief Accountant – Office of the Chief Accountant, available at https://www.sec.gov/news/speech/speech-bricker-05-05-16.html.
 Staff Accounting Bulletin (SAB) Topic 11.M, Disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period, available at https://www.sec.gov/interps/account/sabcodet11.htm#M
 See Minutes of the Emerging Issues Task Force (EITF) Meeting on September 22, 2016, SEC Staff Announcement, available at http://www.fasb.org/cs/ContentServer?pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176168580761 .
See also Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments, December 5, 2016 – Sylvia E. Alicea, Professional Accounting Fellow – Office of the Chief Accountant, available at https://www.sec.gov/news/speech/alicea-2016-aicpa.html.
 See Section 404 of the Sarbanes-Oxley Act of 2002, Rules 13a-15 and 15d-15 of the Exchange Act, and Item 308 of Regulation S-K.
 See Section 13(b)(2)(B)(ii) of the Exchange Act.
 See Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Release No. 33-8238 (June 5, 2003), available at https://www.sec.gov/rules/final/33-8238.htm.
 The five sponsoring organizations are the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), The Institute of Internal Auditors (IIA), and the Institute of Management Accountants (IMA), identified at https://www.coso.org/Pages/default.aspx .
 Coates, J. and S. Srinivasan, SOX after Ten Years: A Multidisciplinary Review, Accounting Horizons, 28(3): 627-671 (2014).
 See Kim, J., B. Song, and L. Zhang, Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures, The Accounting Review 86(4): 1157-1188 (2011).
 See Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney, and R. LaFond, The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity, Journal of Accounting Research 47: 1-43 (2009).
 See Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney, and R. LaFond, The Effect of SOX Internal Control Deficiencies and their Remediation on Accrual Quality, The Accounting Review 83: 217–250 (2008) and Felix, R., and A. Wilford, Does it Pay to Remediate? An Analysis of the Internal and External Benefits that Result from Remediation, University of Baltimore, working paper (2007).
 See supra note 14.
 See Cheng, M., Dhaliwal, D., Zhang, Y., Does Investment Efficiency Improve after the Disclosure of Material Weaknesses in Internal Control Over Financial Reporting? Journal of Accounting and Economics 56(1): 1–18 (2013) and Feng, M., Li, C., McVay, S., Skaife, H., Does Ineffective Internal Control Over Financial Reporting Affect a Firm's Operations? Evidence from Firms' Inventory Management, The Accounting Review 90: 529–557 (2015).
 See Cory A. Cassell, Linda A. Myers, and Jian Zhou, The Effect of Voluntary Internal Control Audits on the Cost of Capital, (2013) available at SSRN: http://ssrn.com/abstract=1734300 (finding that, among non-accelerated filers from 2004 to 2010, six percent voluntary complied with Section 404(b)).