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Atkins Says SEC Must Be Responsive to Capital Markets Reports

In a speech in Dublin, Ireland, Commissioner Paul Atkins said the SEC cannot and must not ignore the recommendations of three recent reports on the U.S. capital markets. He said the reports can inform the SEC of whether it has struck the right balance between investor protection and market competitiveness. Atkins also took aim at the "coalition of contrarians" who contend that the U.S. capital markets are fine and need no recalibration. Atkins believes the SEC is duty-bound to analyze, understand and respond, if warranted, to the recommendations that pertain to the Commission.

Atkins said those who see no need to react to the capital markets reports cite a research paper which they believe contradicts the findings of the policy groups. Atkins believes the research on which they rely is flawed, but he is happy that the debate is taking place in strong market conditions. Atkins said regulators must examine the costs they impose on market participants through regulations and to make sure the costs do not exceed the benefits.

Government actions cannot be viewed in isolation, according to Atkins. In the increasingly interconnected global financial services sector, Atkins said governments need each other's cooperation and assistance to fight fraud, manage risk and maintain low costs and efficiency. He credited the Irish government's approach in a 2004 white paper which established a principle to avoid the regulatory impulse to adopt programmed, default responses to situations that arise, to the exclusion of other possible solutions.

While the findings of the policy groups in the U.S. were unique, Atkins noted that they had a common thread with respect to SEC-related issues. Each report recommended quick and substantial changes to section 404, he said, as well as streamlined regulatory processes based on meaningful cost-benefit analyses. The reports also called for the members of the President's Working Group to work together to bring transparency and predictability to the enforcement process.

Atkins also discussed the move toward eliminating the reconciliation requirement for international financial reporting standards. The process is well on its way, he said, but filings made in accordance with home country versions of IFRS could jeopardize the goal of quickly ending the reconciliation requirement. He urged national regulators to resist the impulse to develop nationally-tailored versions of IFRS. Once the SEC recognizes IFRS as an acceptable set of standards for foreign companies to use in their U.S. filings, Atkins suggested there would be no reason not to permit IFRS for U.S. companies as well. "If nothing else, this could add some long-absent accountability to the standard setters themselves," he said.

Atkins noted that two of the capital markets reports called for a convergence of auditing standards along with accounting standards. In his view, auditing standards are more important than accounting standards from an investors' perspective. This goal is part of the PCAOB's mission, he said, and one the SEC must ensure it is working to meet.

Atkins reported that the SEC and the PCAOB have received numerous comment letters in response to the proposed guidance for management under section 404 and proposed Auditing Standard No. 5. Many commenters have called for the elimination from proposed AS5 of many "shoulds" and "musts," he said, which are "prescriptive vestiges" of Auditing Standard No. 2. Commenters have also sought changes with respect to significant deficiencies, scalability, material weakness and reliance on the work of others. Atkins said that management, auditors and the PCAOB's inspection staff must come to terms with the fact that the section 404 landscape is changing in a way that demands a new approach in carrying out their respective roles.

Atkins added that the SEC recognizes that time is of the essence. If the SEC and the PCAOB are not able to make the changes quickly, they may determine that further extensions are needed.