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Hewitt Discusses Accounting Convergence, Complexity

In a speech at Baruch College, SEC Chief Accountant Conrad Hewitt talked about the international convergence of accounting standards and the complexity in financial reporting. Hewitt encouraged FASB and the IASB to continue with their efforts to converge their two sets of standards. There may be times when the two boards have to compromise on a reasonable solution, he said, rather than delay the adoption of a standard in the hope that perfection can be achieved.

One of Hewitt's top priorities is reducing unnecessary complexity in financial reporting. He cited a paper prepared by the CEOs of the six largest accounting firms which concluded that today's rules can produce financial statements that almost no one can understand, and such complex rules should be resisted and withdrawn.

Hewitt explained that unnecessary complexity can undermine the competitiveness of the capital markets and can impose significant costs on companies and auditors. The increasing number of restatements may be due in part to the difficulty auditors have in identifying and properly analyzing all of the pronouncements and interpretive guidance that relates to a particular transaction, he said.

Many of the restatements involve highly technical areas of the accounting literature such as embedded derivatives, according to Hewitt. The restatements may be due to an unintentional misapplication of complex rules, he said. Many are concerned that the high number of restatements dilutes public confidence in financial reporting.

Hewitt reported that he initiated a complexity project with the support of FASB and the PCAOB about two months ago. One alternative is to appoint an advisory committee to oversee the project, he said. Hewitt said it will require the buy-in of all participants in the financial reporting process to succeed in decreasing unnecessary complexity, such as refraining from entering into accounting-motivated transactions. These attempts only breed additional rules and regulations, in his view.

The convergence of U.S. and international accounting standards and the reduction of complexity has the potential to build on recent improvements in financial reporting and to help solidify the U.S. capital markets as the most transparent and reliable in the world, according to Hewitt.