The blue-ribbon committee charged with advising the Securities and Exchange Commission on how to simplify financial reporting has published its preliminary ideas, including a call for the SEC not to rush adoption of XBRL technology.
The Committee to Improve Financial Reporting submitted its 12 “developed proposals” last week, and they are now posted on the SEC Web site. The most notable recommendation was that the SEC phase in mandatory use of XBRL in filing financial statements, starting with the 500 largest filers. All other large domestic filers would follow a year later, and the SEC would then evaluate the success of the technology before extending the mandate to other companies.
The SEC created CIFR last July to examine U.S. financial reporting system and find ways to reduce complexity and make financial information more useful to investors. The financial reporting community is likely to watch the group’s recommendations closely, since the SEC adopted many of the proposals a similar committee made in 2006 to help smaller public companies.
The CIFR recommendation on XBRL (eXtensible Business Reporting Language, also commonly known as “interactive data”) comes as the SEC staff prepares to propose a rule on that same subject for the SEC. Commission Chairman Christopher Cox, an avid proponent of the financial reporting language, wants to have a final rule for XBRL adoption in place by the end of the year. SEC staffers have suggested in public comments that the Commission would phase in any such requirement.
The draft report includes a separate statement from American Enterprise Institute Senior Fellow Peter Wallison, who was the committee’s lone dissenting vote on the XBRL recommendation. While the panel recommended the long phase-in period and furnishing, rather than filing, XBRL documents because of uncertainty about the cost of auditors’ assurance, Wallison objected. He contended that assurance can be done cheaply, and a go-slow approach “will constrain or limit the options” of the SEC to act if concerns about auditor assurance are resolved quickly.
“If the SEC concludes that it is not an expensive process, it can go ahead and implement our recommendation for mandatory XBRL on its own timetable,” Wallison said during CIFR’s meeting last week.
Pozen
Committee Chairman Robert Pozen, however, said the proposed two-year phase-in for larger companies would allow time for “experience to nail down the legal liability and [assurance] cost issues.”
“We wanted to go on record to say, at least at the beginning, we should go slow,” Pozen said.
When asked whether the proposed recommendation would restrict the Commission from moving more quickly if cost and assurance issues are resolved, committee observer John White, director of the SEC Division of Corporation Finance, said: “I don’t think there are any restrictions here, and I think we could move more quickly and may well do so.”
Among the group’s other recommendations:
Generally Accepted Accounting Principles be based on business activities, rather than industries;
existing alternative accounting policies should be eliminated where possible, and new projects shouldn’t provide additional options, except in rare circumstances;
investors should have more representation on standards-setting bodies, and the Financial Accounting Standards Board should conduct post-adoption reviews of significant new standards to address interpretive questions and reduce the diversity of practice in application.
CIFR also wants new interpretive guidance on correcting and evaluating the materiality of errors, based upon the perspective of investors. To reduce unnecessary restatements, the committee says materiality should be judged based on how an error affects the total mix of information available to a reasonable investor, based on a sliding scale considering both qualitative and quantitative factors.
It also recommended that the SEC adopt a framework for accounting judgments, and encouraged the Public Company Accounting Oversight Board to adopt a similar framework for auditing judgments.
While CIFR’s work so far has focused on substantive complexity, the standards-setting process, audit process and compliance, and the delivery of financial information, the committee plans to “identify and analyze some of the issues involved with the potential movement from a U.S.-based accounting regime to a global accounting system,” later this year, according to its report.
A revised version of the committee’s report to reflect edits and tweaks as a result of last week’s meeting is expected to be delivered to Cox and posted for comment on the SEC’s Web site shortly.
The committee’s next public meeting is slated for March 13 and 14. The group’s final recommendations are due to the SEC in early August, when its term expires.
Cox Outlines Ambitious Plans for SEC in 2008
Major changes to the SEC organizational structure and rules are coming in 2008, Chairman Christopher Cox says.
In a Feb. 8 speech to the Practising Law Institute, Cox laid out the Commission’s top priorities for 2008, which include completing several rulemakings and organizational reforms already in progress, as well as several new initiatives.
According to Cox, the most significant initiatives the SEC expects to complete in 2008 involve technology and globalized securities oversight. Mutual recognition, international accounting standards, and interactive disclosure “will all be the subjects of important rule proposals that will be presented to the Commission in late spring,” he said.
The staff has been working to develop a proposal that will establish an overall framework for mutual recognition, so U.S. investors can have direct access to foreign markets and foreign broker-dealers. At the same time, Cox said, the staff has been preparing amendments to Rule 15a-6, which governs U.S. investor contacts with foreign broker-dealers; that would ease some restrictions that hinder international commerce in financial services. Both proposals are expected to be considered early this year.
Cox
Following changes to its rules to allow foreign issuers to file their financial statements according to International Financial Reporting Standards and not reconcile them to U.S. GAAP, the Commission now also wants to let domestic filers submit statements in IFRS if they choose. Cox said the staff will formally propose an updated “roadmap” that lays out a schedule for that transition and milestones to be achieved along the way.
As expected, the Commission will also consider a rule to mandate that U.S. reporting companies use XBRL. Cox asked the staff last year to propose a rule related to the use of the interactive data technology, which already is being tested by about 60 companies under a voluntary SEC program. Many other countries are moving toward XBRL use as well.
A new special working group in the SEC Division of Enforcement will tackle the problems of suspected insider trading, securities fraud, and market manipulation by hedge funds and other large, non-public investors. On the sub-prime mortgage front, the Commission has created an agency-wide task force to investigate possible fraud or breaches of fiduciary duty involving collateralized debt obligations, the financial instruments based on sub-prime mortgage loans that are now causing so much trouble.
Meanwhile, the staff Office of Risk Assessment, created under former Chairman William Donaldson, will be expanded from four people to nine. The Commission will also get an updated software system this year, called the Phoenix, that will track every disgorgement, penalty, and other monies owed to the SEC and to investors.
For the full text of Cox’s speech, see the box above, right.
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