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Introduction
Good morning. It is nice to be here again. This is the second time I have spoken to this conference. This year has past very fast. I always have an easy commute to this conference. I live three blocks away and can walk to this meeting. You should be congratulated for being here. Three days of continuing education is very important. I have two objectives for my speech today. First provide my views on various OCA initiatives in plain English and not to set any new GAAP. I am sure by the end of the day you or my staff will let me know whether I succeeded or not.
At the outset, I have the usual SEC disclaimer for all the SEC staff speaking at this conference. In plain English, the Commission disclaims responsibility for any statements of its staff and our comments, opinions, and observations are our own and do not necessarily represent the views of the Commission or others of its staff.
We have been very active in OCA this past year. Much busier then I ever imagined when I accepted this position. In the past year we have addressed the backdating of stock options, provided management with guidance for complying with section 404a of SOX, and worked with the PCAOB to issue AS 5 among other things. As you will discover my office has a number of initiatives that I hope to complete in the next twelve months.
This morning, I hope to briefly touch on four topics: (1) adopting release concerning the elimination of the reconciliation to US GAAP for IFRS as issued by the IASB, and the concept release to allow US companies the option to switch from US GAAP to IFRS, (2) the Advisory Committee on Improvements to Financial Reporting (CIFiR), (3) Extensible Business Reporting Language ("XBRL"), and (4) various other OCA projects. Because over the next three days you will hear detailed discussions of these topics from my deputies and other SEC staff, I will keep my remarks on a macro-level - Not setting any new GAAP.
Now turning to the Adopting release concerning the elimination of the reconciliation to US GAAP for IASB IFRS, and the concept release to allow US companies to the option switch from US GAAP to IFRS
Less than a month ago on November 15, 2007 the Commission approved an amendment that eliminated the requirement for foreign private issuers that file using IFRS as issued by the IASB to reconcile their financial statements to U.S. GAAP. This represents a small, albeit a significant, step towards a single global accounting standard.
The next step that the staff of the Commission is working on is the concept of allowing US issuers the option of filing their financial statements with the SEC using IFRS as adopted by the IASB. The SEC issued a concept release on August 7, 2007 asking for feedback on specific issues related to this idea.
This release addresses a core policy issue of what expanded role the use of IFRS should play in the U.S. public capital markets. As with any policy decision, such a determination includes giving due consideration to both the benefits and the costs.
In all of the Commission's work to date, a consistent premise has been that investors are better served by having available high quality financial information across issuers, regardless of their domicile. This aids investors in making informed decisions in allocating their capital among competing alternatives.
On November 6, 2007 the SEC and other international securities regulators issued a press release that announced an agreement between these regulators to work together with the International Accounting Standards Committee Foundation (IASCF) to propose certain changes to strength the governance structure of the IASCF. While the details of such an arrangement have not been worked out, this is a very important and significant step towards addressing concerns about the governance of the IASCF and their role as an independent global standard setter.
The Comment period on the Commission's concept release ended on November 13, 2007. We received approximately 80 comment letters on this release. My deputy Julie Erhardt will be giving you a flavor of the comments we received. We are holding public roundtables on this Thursday morning and next Monday morning December 17th. I hope you will be able to observe one or both of the public roundtables. We have an excellent group of panelists and I expect a robust discussion of the issues. You may watch it on the SEC website.
I encourage you to continue to follow the Commission's work on this initiative and provide us with feedback on this important matter.
My second topic is the Advisory Committee on Improvements to Financial Reporting (CIFiR)
Addressing complexity in financial reporting was one of my three priorities when I took this position. While we got started later than I would have liked, recently we have made significant progress. In August, the SEC announced the formation of the Advisory Committee on Improvements to Financial Reporting (or CIFiR). CIFiR is being chaired by Robert Pozen. Bob is joined by 16 bright individuals representing a variety of important constituencies in the financial reporting community. Tomorrow Bob will be providing you with more information on the work of CIFiR.
CIFiR will consider ways to both reduce unnecessary complexity and make financial statement information more useful and understandable to investors.
CIFiR has identified five areas of complexity and established five subcommittees to address these areas:
I have personally participated in some of the subcommittee meetings. I have been impressed with the thoughtful discussion and the amount of effort these individuals are putting into the process. The subcommittees presented to the full committee some tentative hypotheses at the November CIFiR meeting. The subcommittees are now validating their tentative hypothesis with constituents.
I anticipate the Committee will soon consider whether to release for public exposure a document that has some tentative conclusions and will request feedback on other significant issues. Obtaining feedback from outside constituents is an important part of the process. I know this is a busy time of the year for everyone but I strongly encourage you to provide CIFiR with feedback on this important initiative.
I encourage all of you to follow their efforts because their recommendations are likely to have a significant impact on the U.S. Financial Reporting System and you. You can view their progress on the SEC website and you can provide comments on any item that you are interested in.
XBRL
The next topic I would like to address is XBRL. XBRL will provide investors with useful financial statement information on an interactive data basis that is cheaper, faster, and better.
I believe that this new technology will be used throughout the world. To demonstrate our commitment to XBRL, the SEC has created a new Office of Interactive Disclosure. David Blaszkowsky is the new director. David spent a number of years with S&P. Presently, we are expanding our full-time staff in this new office. Plans are to expand the office to twelve so that XBRL will be available in the offices and divisions of the SEC to help the registrant, investor, and users.
Based upon the experience of over 50 volunteer registrants, the costs are not expected to be significant. One of the benefits experienced by some of the volunteers has been in the decreased hours of preparation of SEC filings. Also, along with the easier preparation of financial statements there will be less errors, easy analysis, benchmarking, financial modeling, etc.
On September 24th, Chairman Cox announced that the taxonomy containing 16,000 elements has been developed. The technical review of the taxonomy is complete and the taxonomies were exposed for pubic comment on December 5, 2007. You can test drive the new taxonomies on our website in three easy steps.
The plan is that some day the financial statements, footnotes, MD&A, accountant's report, and potentially other parts of the Form 10-K will be filed or furnished in XBRL with the SEC. The specific requirements or the timing of this change has not been determined but Chairman Cox has asked the staff provide feedback in the spring of 2008. Two issues the staff will be focusing on are (1) what level of assurance should be required on the tagging of data and (2) if using XBRL is mandated for registrants, what should the transition period be?
It still surprises me that a significant number of issuers are not aware of XBRL much less engaged in the process. There is a demonstration of XBRL on Wednesday of this conference. I hope you use the conference to learn more about XBRL and take what you learn back to your company or clients.
I am excited about XBRL's prospects. I hope everyone will embrace the technology. We would like to increase the number of participants in our voluntary filing program in 2008 and I hope you would consider joining our program.
Finally moving on to other OCA Projects
We have several other significant projects in OCA at the moment.
First the topic of materiality is one that has received increased scrutiny over the past several years. We know that some preparers and outside auditors believe the concept of materiality is applied too broadly. CIFiR, which I previously mentioned, is evaluating the application of materiality guidelines as to their effect on the number of restatements. I hope that CIFiR will have some preliminary recommendations in the near future.
Next, auditor independence is another area that the Office of Chief Accountant oversees. This is an area that I continue to receive feedback on from outside parties. The principal complaint is that the independence rules are complex and overly prescriptive. A practitioner is subject to many independence rules - SEC, PCAOB, AICPA, 50 states and the international ethics standard board. As a former auditor, audit committee member and chairman, and banking regulator I am well aware of this and understand these concerns. My staff is working to analyze all these various independence rules. I am very supportive of a move to a more principle-based approach to auditor independence that will decrease complexity and converge with international auditor independence standards. By gaining an understanding of the current similarities and differences we hope to engage in constructive dialogue going forward. Before I close I intend to put on my recruiting cap. Recently we announced our annual search for PAF candidates. We are looking for five PAF candidates. Through this search we hope to increase the number of PAFs who come from the corporate world. We currently have one PAF from Bank of America. We would like to increase that number. The program, which began in 1972, is a two-year program for accountants to rotate through the Office of the Chief Accountant. During their tenure in OCA, the PAFs work on important public policy matters impacting the financial reporting of public companies. There is no doubt in my mind that their experience at the SEC does make a difference. Please go to the SEC Website - Office of the Chief Accountant for more information.
Conclusion
In closing, the accounting and auditing environment is changing rapidly. When I give speeches to various organizations I am frequently asked what a regulator's expectation of us is. At times I think something that has gotten lost is that being a CPA means you are part of profession and not an industry. This means that CPA who fulfills the roles of a preparer, auditor, or even a regulator should hold themselves to a higher standard. You should always remember your purpose and strive to do what is right not what is easy.
Thank you for your time. It is a pleasure to be here. Please enjoy the rest of your conference.