The SEC Rules

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

“The guidance to take more of a risk-based approach is definitely the right direction,” agrees Sharon Tetlow, CFO of Cell Genesys, a San Francisco–based biotech company.

But Cox cannot be accused of taking a doggedly pro-business stance on every issue, however. Apart from the change on options disclosure, the new executive-compensation rules, which require a full accounting of all compensation elements, certainly didn’t win the commission any friends among highly paid senior executives. Furthermore, the SEC has declined to exempt small businesses from 404, despite heavy pressure from lobbying groups like the Chamber of Commerce.

What Will Congress Do?

What about Jenkins’s concern that the SEC’s increasing involvement with FASB opens the door to more direct interference by Congress? Thus far that hasn’t happened. A June hearing of Frank’s finance committee, dubbed “A Review of Investor Protection and Market Oversight,” failed to generate the fireworks predicted by the press. Instead, members of Congress seemed eager to solicit the commissioners’ views on the competitiveness of U.S. markets and a range of other financial topics. Cox fielded four hours’ worth of questions capably and earnestly, and acquitted himself better than many committee members, some of whom appeared to be merely grandstanding for their small-business constituents rather than truly grasping the complex regulatory issues facing the commission.

But Congress is the wild card in accounting oversight, and legislators haven’t been shy about promoting their own causes to the SEC. For example, at the June hearing, Frank pushed for a date on a proposal to allow shareholders to nominate directors on corporate proxy ballots, a pet project of his. Also in June, a group of House members sent a letter to the SEC asking it to look at the accounting treatment of subprime mortgages. “There are the dominos for you,” says Ciesielski of The Analyst’s Accounting Observer, referring to the letter about mortgage accounting. “Barney Frank will nudge the SEC, which will nudge FASB.” Despite the mutual respect demonstrated at the hearing, it is unclear how Cox will respond should Congress attempt to further its own agenda.

Politically motivated tweaking of accounting standards is cause for concern. Changing accounting rules to suit the prevailing wind in Washington could result in gross inconsistencies — a formula for abuse and economic disruption at worst, and a whole lot of work for finance folks at best.

Convergence Changes Everything

The SEC’s most significant move to date — to accelerate the push for a single set of worldwide, principles-based accounting standards — signals a dramatic shift that could, in the end, either increase the SEC’s influence or divert power away from any U.S. entity and toward the international business community. At the very least it will require systemic changes that far surpass anything mandated by Sarbox.

The issue of international convergence has simmered on accounting regulators’ back burner for years, and FASB and the International Accounting Standards Board (IASB) have been working steadily toward a unified system since 2002. But Cox has clearly made convergence a top priority.

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