Companies that try to stay on top of the ever-changing regulations coming out of Washington may have to shift gears under the new Securities and Exchange Commission leadership. Incoming chair Mary Schapiro — the Democrat whose nomination by the Senate was approved last week — plans to slow down some of her predecessor’s pet projects, and speed other proposals that Republican predecessor Christopher Cox had allowed to fall by the wayside.
For example, she plans to require that small publicly traded companies comply with the auditor-attestation requirement of the Sarbanes-Oxley Act — which they’ve been able to avoid since the law was passed nearly seven years ago. “Right now, we have a system where some issuers are complying with 404 and others are still exempt from it,” Schapiro said in written responses to several questions by Sen. Carl Levin. “It’s time we bring uniformity to the system.”
In her letter, which the Michigan Democrat’s office released on Friday, Schapiro gave further detail on her leanings as chairwoman of the SEC than she did during her testimony before the Senate Banking Committee earlier this month.
Among her disagreements with Cox is his implication that the Public Company Accounting Oversight Board could trust foreign inspectors to oversee auditing firms that review the financial statements of companies listed on U.S exchanges. Prompted by Levin whether Sarbox allows the SEC to delegate oversight to foreign oversight bodies and whether she would push through a proposal to do so, Schapiro simply answered, “No, I do not; and no, I will not.”
Schapiro also said that she favors a slowdown of the U.S. adoption of global accounting rules and indicated she would support higher capital requirements, the registration of hedge funds, proxy access, and say-on-pay proposals.
To be sure, Schapiro has more pressing demands in her first weeks in office. She has indicated that her highest priorities are helping the Obama administration reform the financial regulatory system, and fixing the internal enforcement issues at the SEC, which have been criticized for failing on several occasions to notice Bernard Madoff’s alleged $50-billion Ponzi-style fraud. Schapiro, whose last day as head of the Financial Industry Regulatory Authority was Friday, had yet to be sworn in as SEC chairman as of Monday morning.
As for Sarbox, Schapiro indicated that she will check in with small businesses to make sure “they have the tools they need to comply with 404.” Under Cox, the SEC’s so-called non-accelerated filers have received several one-year reprieves from fully following the internal-control provision of the act. As it stands, companies with a market capitalization of $75 million or less will have to provide attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.
Since companies began complying with Sarbox earlier this decade, they have taken issue with the costs associated with Section 404(b), which governs how auditors review internal controls. In response, the SEC has been conducting a cost-benefit study of Section 404. The regulator has surveyed more than 2,000 companies and recently extended the deadline for responses from January 16 to the end of this week.
Under Cox’s regime, both small and large public companies would have likely had to quickly get up to speed on a new set of accounting rules. Last year, before the financial crisis exploded fully, he had promoted a timeline for all companies to adopt international financial reporting standards by 2016. The approval of such a roadmap would put the U.S. in line with more than 100 countries that have made similar requirements of their listed businesses.
However, the publicity surrounding the plan has fizzled in recent months, as the SEC went into crisis mode after the collapses of the largest U.S. investment banks, and as Cox neared the end of his tenure. He left the SEC last Tuesday without any public fanfare. Democrat commissioner Elisse Walter has been designated as acting chair.
In between the release of the proposed IFRS roadmap — which is open for public comment through Feb. 19 — the International Accounting Standards Board’s integrity as a rule-maker has been seriously questioned. In the fall, the board caved to pressure by banks and country leaders to change a provision to one of its rules, making a fair-value standard more like U.S. GAAP. The action made IASB chairman contemplate resigning and put a dent in the SEC roadmap’s progress.
In her responses to Sen. Levin, Schapiro said that she wouldn’t yet entrust the IASB with dictating the accounting rules for U.S. companies. “I am not prepared to delegate standard-setting or oversight responsibility to the IASB,” she wrote. In her view, the global standard-setter has not shown it can deflect political pressure. She has also said she has concerns about the quality of the rules and the timeline’s pace.
Finance executives are also hoping for a slowdown. On Friday, Financial Executives International asked the SEC to extend the comment period for the timeline to early April. In her letter, Christine DiFabio, FEI’s vice president of technical activities, said that the IFRS transition “represents a transformation impacting a company’s entire organization and must be considered carefully.” So far, 20 people have publicly commented on the timeline, including DiFabio and finance executives at United Technologies, Honeywell, Northrop Grumman, and Raytheon.
Under the current rule-making system, Schapiro told Levin, FASB should be free of economic and political influences. At the same time, she believes the SEC should “diligently oversee” the board to make sure they’re keeping up-to-date with changes in financial products and investors’ needs.
Moreover, on the issue of fair-value accounting, Schapiro says she believes the rules did not play a “significant factor” in the problems in the financial markets. Still, she said she is unprepared to say whether banks properly applied mark-to-market valuations to their assets.