After nine months of leaving the position vacant, the Securities and Exchange Commission has finally named a new chief accountant: Conrad Hewitt, a veteran of the Ernst & Young accounting firm and former top regulator for the state of California.
Hewitt will assume the post on Aug. 18, filling the slot that had been left open since Don Nicolaisen left the agency last October. Scott Taub, the SEC’s deputy chief accountant for several years, had been acting as chief accountant in the interim.
At the moment, Hewitt has no single full-time job, but instead chairs the audit committees of Pabst Brewing, North Bay Bancorp, Varian Inc. and several other companies. He spent much of his career at E&Y or its predecessor firm, Ernst & Ernst, and was managing partner of the firms’ northwestern offices from 1972 to 1995. He then served as California’s superintendent of banking and was a commissioner of the California Department of Financial Institutions from 1995 to 1998.
As chief accountant at the SEC, Hewitt will oversee accounting interpretations, international accounting matters, and professional practice issues, and will lead the agency’s work on implementing Sarbanes-Oxley’s internal control provisions, reducing complexity in accounting, enforcing compliance with accounting standards, and promoting the convergence of accounting standards under U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards.
Rhodes
“He’s got some big issues to address,” says Michael Rhodes, head of the corporate governance practice at accounting firm Citrin Cooperman & Co.
Possibly the most pressing issue for Hewitt will be the implementation of Section 404 to non-accelerated filers. Rhodes says Hewitt seems particularly well-suited for the work, given his role as audit committee chairman at several small companies and his experience at a Big 4 firm. “He knows what it’s like to be part of a small business and to be an auditor that has to address these issues … It’s a good balance,” Rhodes says.
Cunningham
Colleen Cunnigham, president of Financial Executives International, says her organization hopes Hewitt will address the perennial problem of complexity in accounting standards. “Preparers are having difficulty keeping up – to the point where otherwise very capable accountants are questioning every judgment they make,” she says. “All want to do the right thing and it is becoming increasingly difficult to figure out what that is.”
Hewitt said he is “delighted to once again have the opportunity for public service to protect investors” and noted that he looks forward to “a close working relationship” with the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.
“The challenges for accounting, both in the U.S. and throughout the world, have never been greater,” Hewitt said in a statement. “I’m confident that we will meet them.”
Groups Call For End To Quarterly Guidance
The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics are calling on Corporate America to reform its practices related to communicating with investors—and say an end to providing quarterly earnings guidance is the place to start.
“The obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the unintended consequences of destroying long-term value, which decreases market efficiency, reduces investment returns, and impedes efforts to strengthen corporate governance,” the groups said in a report issued last week.
Instead, the groups say companies with a strategic need to providing earnings guidance—usually ones in industries where profits can gyrate wildly quarter to quarter—should adopt guidance practices that incorporate a “consistent format, range estimates, and appropriate metrics that reflect overall long-term goals and strategy.”
The two groups issued a total of 18 recommendations in their report, targeting issuers, analysts, institutional investors, and asset and hedge fund managers that they say “could mitigate the current overemphasis on short-term performance.”
“Short-termism cuts across an enterprise and results in management actions—including reductions in research and development, and the forgoing of strategic investments—all in order to make the quarterly number,” said Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics.
Among the report’s recommendations: end the practice of providing quarterly earnings guidance; align executive compensation with long-term goals and strategies and with long-term shareowner interests; improve disclosure of asset managers’ incentive metrics, fee structures, and personal ownership of funds they manage; and endorse the use of “long-term investment statements” to shareowners that will clearly explain—beyond the requirements that are now an accepted practice—the company’s operating model (see box above, right).
In addition, the report said companies should educate institutional investors and their advisers on short-termism and their long-term fiduciary duties to their constituents, and support education initiatives for individual investors to encourage a focus on long-term value creation.
Quarterly guidance has come under fire in recent years, and some companies have dumped the practice in favor of providing other types of guidance or only offering annual forecasts. A survey released by the National Investor Relations Institute in April showed a trend among companies of moving away from quarterly guidance towards annual forecasts growing, with nearly half of all companies offering guidance preferring annual statements.
The NIRI survey of 654 companies found that two-thirds offer some type of earnings guidance, down from 71 percent a year earlier. The number of companies furnishing annual earnings guidance jumped sharply to 82 percent, compared with 61 percent a year ago. The number of companies providing only annual guidance also rose significantly, from 28 percent in 2005 to 43 percent today, while companies providing only quarterly guidance fell from 28 percent last year to just 13 percent today.
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