The SEC Rules

Five years after Sarbanes-Oxley, the SEC is flexing its regulatory muscle as never before.

In fact, it has. Last spring, the SEC refused to approve FASB’s budget until the Financial Accounting Foundation, FASB’s parent organization, agreed to let the agency review board nominees, propose its own candidates, and interview candidates during the selection process. The SEC claims that Sarbox requires it to certify the board every year, and former chairman Harvey Pitt says both he and his predecessor, Arthur Levitt, provided input on candidates. But the commission only occasionally suggested board members or raised objections to those whom FASB chose. Under the new agreement, the SEC “goes a great deal further in its involvement in the selection process,” says Edward Trott, a retiring board member.

Former FASB chairman Edmund Jenkins is also worried about the change. “I am very concerned that this new protocol provides the basis for Congress — which has the responsibility to oversee the SEC — to get more directly involved with FASB. I think it’s a step in the wrong direction,” he told CFO in March.

“It is eminently clear that the SEC is insisting on a seat at the table during the process through which FASB members are nominated,” says Scholes, the former SEC attorney. “What is not as clear is how the SEC will use that seat.”

Better for Business

The appointment of Cox, a former Republican congressman, led the business community to hope the new regime would ease the regulatory headaches created by Sarbox and by the previous SEC chairman, William Donaldson.

To some degree that hope has been realized. Last December, for example, the SEC announced a change to its newly issued rules for disclosure of executive compensation. The new rules aimed to provide investors with an easy-to-read table that would show a single compensation number — fully loaded with the value of perquisites, salary, and bonus — for companies’ five highest-paid executives each year. But just before Christmas, the SEC stated that instead of reporting all stock options granted an executive in a given year, companies need only disclose in the table the options vested in that year. (The total value of all grants must be detailed in a separate location.) While the commission said it had changed its rule simply to be consistent with the treatment of options under accounting rules, governance watchdogs were outraged. House Financial Services Committee chair Barney Frank called it a Christmas gift to the business community.

Then, in May, the SEC answered the chorus of calls for relief on Section 404 by releasing new guidance for managers on how to document and test their internal controls, together with the revised version of AS2. Both stressed a more risk-based, top-down approach aimed at reducing companies’ cost of compliance.

So far, finance executives are pleased with the steps Cox has taken to clarify 404 compliance. “We’re moving in the right direction,” says Ted French, CFO of Textron. “I’m pleased that the SEC is saying, ‘We did put some inefficiency into the system, but let’s get back to looking at the big risks.’ We seem to be moving back toward sanity.” French says that, by following AS5 and the SEC’s new guidance on 404, as well as its own improved audit planning process, Textron was able to reduce its internal-compliance workload by 21 percent and cut its audit cost by 12 percent.

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