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SEC and PCAOB Officials Address Accounting Standards

Speaking to the American Institute of Certified Public Accountants, SEC Deputy Chief Accountant Scott Taub described some of the issues that have arisen at the Office of the Chief Accountant. Specifically, Taub addressed the complexity of accounting standards and how involved parties could improve the process.

Taub said that, although the SEC has stressed principles-based accounting, several factors have lead to increasingly complicated standards. Once cause for complexity is a desire by accounting firms for more guidance from regulatory agencies. Firms want certainty in accounting rules, Taub said. As a result, when the SEC and other standard setters issue guidance with regards to a particular issue, accountants request specific examples as to whether their situation fits the general guidelines.

Taub also noted that available exceptions to certain rules tend to make accounting standards more complex. Although the purpose of these exceptions is to facilitate transactions, some companies take advantage of such exceptions when they are not actually qualified to do so, which can lead to restatements, Taub said. According to Taub, between 15 and 20 percent of restatements are caused in part by the misapplication of exceptions due to their complexity.

Another cause for complexity in accounting standards is the use of structured transactions. In Taub's view, accounting for some of these transactions seems to be designed specifically to get around rules that a company finds inconvenient. When the SEC "shuts the door" on a certain type of structured transaction, it often causes firms to push the boundaries of the rules, Taub said. He described companies where, even though the action taken by the firm is not specifically prohibited under the SEC's rules, it is still wrong because the company is "actively working to impede transparency."

Taub said that several parties have a role to play in improving the accounting industry's standards. Standard setters and regulators should emphasize principles-based accounting over detailed and specific guidance and should respect reasonable differences in judgment. He emphasized that preparers should use professional judgment about what method accurately portrays the economics of a transaction, as opposed to trying to support a "pre-chosen answer." He stressed that firms should voluntarily disclose all relevant information, even when it is not required. As an example, he said that a lot of information about accounting procedures that is relayed to the board of directors should also be given to investors, even though doing so is not mandatory. He also urged auditors not to request guidance on every issue and instead use professional judgment in order to reduce the complexity of accounting standards.

Taub also addressed the issue of options backdating, which he described as "lying." He said that the issue is one of the most difficult that he has encountered since joining the Commission and said that the SEC is currently pursuing over 120 investigations regarding options timing. In response to a question about the perception of section 404 as a revenue source for auditors, he said that he believes that such a perception exists and that it harms the profession, but he also believes that auditors are more likely to do more work under section 404 out of a fear of penalties than out of a motivation for more revenue.

Jennifer Rand, Deputy Chief Auditor of the Public Company Accounting Oversight Board, also addressed the AICPA conference. She discussed the upcoming revision to Auditing Standard No. 2 and the PCAOB's four point plan for 2006.

Rand described revising AS2 as the Board's top priority. Although she declined to give a timeline for the release of the revised standard, she said that the new standard would incorporate key concepts from the May 2005 guidance and would also clarify certain definitions, including "material weakness." Other possible amendments include clarifying the auditor's role towards management assessment and allowing for the use of experience gained in prior years.

Rand said that the Board would be releasing new guidance for small companies. She stressed that the PCAOB would not be issuing a new standard for small companies, but rather non-authoritative guidance following the AS2 revision.

Amanda Maine