The SEC Rules

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

One possible future for FASB: a friendly merger of equals with the IASB. The international accounting regulator will unquestionably play a greater role in the future of U.S. accounting if IFRS take hold, and the board has worked extremely closely and amicably with FASB on convergence thus far. A blended standards board could eventually serve as the sole author and interpreter of the new rules.

Five years after the passage of Sarbanes-Oxley, the SEC has asserted its dominance over the other accounting regulators and has played a leading role in moving the challenging concept of global convergence to the top of each agency’s agenda. By pushing for a principles-based approach, it has also raised questions about the very nature of corporate accounting in the United States, and added its considerable weight to a process that may literally redefine the system. Five years from now, companies could find themselves playing by a profoundly different set of rules — or perhaps without any rules at all.

Kate O’Sullivan is staff writer at CFO.

Who Rules Accounting?

the Securities and Exchange Commission

Under chairman Christopher Cox, the SEC has taken a leading role in the creation and enforcement of accounting rules.

the Financial Accounting Standards Board

Led by chairman Robert Herz, the board is trying to maintain its long-held independence while the SEC moves more aggressively onto its turf as a standard-setter.

the Public Company Accounting Oversight Board

Formed under Sarbanes-Oxley to audit public accounting firms and improve audit quality. Newly drafted Auditing Standard No. 5 is its attempt to bring Sarbox audit costs down. Headed by Mark Olson.

the International Accounting Standards Board

The London-based creator of international financial reporting standards is chaired by David Tweedie and is working closely with FASB on developing a single international accounting system.

Big Four: The major accounting firms still play a significant role in providing input to FASB and the PCAOB, but suffered damage to their reputations during the various accounting scandals. Together with the next four largest firms, founded the Center for Audit Quality this year to give voice to their point of view.

the American Institute of Certified Public Accountants

Professional organization that represents its members’ views to regulators and sets standards for private-company audits. Has seen its role in the public-company arena diminished post-Sarbox as FASB was named official setter of GAAP and the PCAOB now conducts all public-company audit reviews. — K.O’S.

The Problem with Principles

The business community has been near-unanimous in voicing its desire to move away from the byzantine complexity of U.S. generally accepted accounting principles (GAAP) to a more principles-based accounting system, and many corporate pundits have called for the adoption of international financial reporting standards (IFRS) as a possible solution. But do executives really understand what they’re wishing for?

“A lot of folks are critical of FASB and the rules-based system that U.S. GAAP has evolved into,” says Laura Phillips, former deputy chief auditor at the Public Company Accounting Oversight Board. “People think that if they can report in IFRS, that would be a way to take a giant step forward, away from rules-based complexity. That may or may not be the case.”

In fact, a CFO survey last year found that 17 percent of respondents were unfamiliar with the concept of principles-based accounting. Comment letters to the Securities and Exchange Commission in response to its new guidance on Sarbanes-Oxley compliance suggest that to a large degree business leaders aren’t sure what they are getting — or what, precisely, they want.

The letters are full of requests not only for a principles-based orientation, but for more guidance as well. For example, MetLife chief accounting officer Joseph Prochaska Jr. writes, “Certain qualitative and quantitative thresholds would be helpful to maintain the spirit of the law. A principles-based approach will not necessarily eliminate the need to provide future interpretive and implementation guidance.”

Others clamor for more-detailed examples of how the law should be implemented. Sharon Tetlow, finance chief at biotech firm Cell Genesys, says she would have liked more specific definitions of important terms, including “materiality.” “The problem remains that each of the Big Four accounting firms can come up with materially different definitions of things like materiality. We were hoping they would have fixed that,” she says.

This disconnect highlights a potential stumbling block as regulators work toward the possible adoption of IFRS. “The rules-based approach in this country is very well ingrained,” says Steven Scholes, a partner at McDermott Will & Emery. “There are going to have to be a lot of changes in how people think before we see a principles-based approach take hold here.” — K.O’S.


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