SEC Chief Accountant Plans His Exit

The battle against backdating, a shrinking FASB, and a rush toward global standards framed Conrad Hewitt's two-and-a-half years at the commission.

Securities and Exchange Commission chief accountant Conrad Hewitt — after more than two years of an SEC term that saw the rapid push toward international standards, the downsizing of the Financial Accounting Standards Board, and the battle against stock-option backdating — will resign from his post in January.

Hewitt, 72, plans to focus on corporate governance after leaving the SEC, by serving on corporate boards and audit committees. At an industry meeting held last week, Hewitt also said that he and other SEC officials are currently involved in briefing the transition team of President-elect Obama.

“I suspect some [SEC officials] will stay on…but generally when we have a change of administration we have a change of senior officers,” noted Hewitt at the meeting sponsored by Financial Executives International. SEC Chairman Christopher Cox has long said that he would leave the agency at the end of the Bush Administration.

However, Hewitt pointed out that it is likely that the other four SEC commissioners will remain to finish out their terms. “So that provides a lot of continuity,” remarked Hewitt, especially with regard to fair value guidance because all four of the commissioners voted in favor of adopting the mark-to-market accounting rules in the wake of the current credit crisis.

Hewitt’s tenure is associated with huge leaps toward conversion from U.S. GAAP to international standards. When Cox was nominated as chairman in June 2005, the SEC had published a cautious plan for allowing foreign companies listed on U.S. exchanges to report in IFRS. By July 2007, the SEC had formally proposed such a move, and one month later also asked for comments on whether U.S. companies should also have that choice.

That put corporate America on notice that the timetable was accelerating. So did subsequent efforts to bring the International Accounting Standards Board in compliance with Sarbanes-Oxley — which would allow the SEC to recognize it as setter of “generally accepted accounting principles” — and the decision to downsize FASB, which currently sets U.S. standards, from seven members to five.

Then last week, Hewitt again promoted the creation of global accounting standards, but like Cox, was silent for the most part on providing guidance regarding how American companies should prepare for the conversion. Earlier this month, the SEC finally issued its long-promised roadmap for the mandatory adoption of international financial reporting standards (IFRS) by U.S. public companies, now proposed to occur by 2014.

Hewitt was not immune to controversy while at the SEC. He was the top accountant when the commission refused to sign off on FASB’s budget until its parent organization, the Financial Accounting Foundation, agreed to SEC demands for more say in the appointment of both FASB members and FAF trustees. Withholding the budget approval in exchange for more authority over appointees was seen as an encroachment by the SEC on FASB’s status as an independent standard setter.

The chief accountant also stepped into the credit-crisis fray last month, when he sent a letter to FASB stating the SEC position on allowing companies to delay writedowns on “perpetual preferred securities” that showed paper losses. Hewitt wrote, in answer to a number of inquiries from companies, that issuers may account for the perpetual preferred securities as debt, allowing them to postpone writing down any deterioraton of their value. The SEC’s interpretation added to the controversy over the virtues of fair-value accounting, which some critics have blamed, in part, for the global financial crisis and lending freeze.

He also publicly commented the lack of college-level accounting programs focused on international financial reporting standards. Hewitt has met regularly with professors to gauge their progress with IFRS education, and in September summed up their efforts by saying that, “I have to admit that they haven’t done a lot to date, but all of a sudden now they’re starting to get interested.” At the time, he predicted that the educators will more seriously incorporate the global standards in their courses within the next two years.

Less controversal — but still a project that was closely monitored by CFOs and auditors — was Hewitt’s involvement in the SEC’s Advisory Committee on Improvements to Financial Reporting. The group, led by investment manager Robert Pozen, issued recommendations this summer after spending a year trying to figure out the best path to reducing accounting complexity, while making corporate financial results more transparent to investors.

In addition, Hewitt issued a letter in 2006 that would act as guidance for corporate finance executives and auditors addressing the explosive issues of backdating of stock option grants.

Early in his career, Hewitt, a one-time captain in the U.S. Air Force, was a managing partner at Ernst & Young and its predecessor firm Ernst & Ernst. After a stint in public accounting, where he specialized in financial institutions and technology companies, he became the superintendent of banking for the state of California, and later California’s first commissioner of the Department of Financial Institutions. He also has served on 10 corporate boards, and was chairman of 10 audit and two compensation committees.

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