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Cox and Atkins Are Keynote Speakers at AICPA Conference

Chairman Christopher Cox, in videocast remarks at the AICPA's national conference on SEC and PCAOB developments, outlined the SEC's efforts to make accounting less complex and suggested an examination of ways to eliminate barriers to entry for new competitors in the large company auditing market. Cox acknowledged that the challenge to changing the concentration in the market for large public company auditing services will require a lot of study and careful consideration, but said that genuine competition is essential to the proper functioning of any market.

Cox advised that the SEC is encouraging a national effort to make accounting less complex and is joined in the effort by the PCAOB and FASB. He asked for recommendations for making the rules more clear, straightforward and transparent. The complexity of modern financial transactions often requires detailed regulatory requirements, he said, but the accumulation of detail over time has created so much complexity that it has begun to reduce its usefulness.

Cox said that FASB, with the SEC's support, is reassessing the transparency of a number of major standards and is planning to codify all of the existing literature to provide related GAAP material in one place. FASB is also trying to slow the proliferation of new pronouncements from multiple sources, according to Cox.

Given the depth and breadth of the accounting profession, Cox said it is a remarkable state of affairs that the Big Four firms audit 80% of all public companies in the U.S. The numbers imply that there are significant barriers to entry, he said, with so few firms available to perform such a critical role in the capital formation process. As regulators, Cox said the SEC has a stake in seeing that its rules promote, rather than restrict, competition. If a quadropoly has emerged, he said it is fair to question whether it is because of the way the rules are written. He suggested that there may be a way to rewrite the rules to eliminate barriers to entry for new competitors in the large company audit market. Meanwhile, there are many medium and small accounting firms that provide high quality audit services, he said. Audit committee members can find that information on the PCAOB's Web site.

Commissioner Paul Atkins also spoke at the AICPA conference, where he said that many of the challenges affecting the accounting profession are due to litigation risks and costs. People are afraid to act without precise guidance, he explained, so they seek explicit rules from standard setters and regulators. While President Bush and Congress have taken steps to address litigation costs, Atkins said the problem has been decades in the making and is not subject to easy solutions.

Atkins noted that accounting issues are often not black and white. Regulators must not bring enforcement actions over reasonable differences of opinion about the application of GAAP, he said. An enforcement investigation can take a heavy toll on its subjects, he added, even if no enforcement action is ultimately brought. Atkins said that the regulatory environment should not be one that relies on informal guidance as a basis for enforcement action. The SEC has a wealth of talent, he said, but the preferred approach of an SEC accountant should not be viewed as a binding law unless it is formalized through Commission action.

Enforcement action should not be built around staff pronouncements, Atkins continued. If the SEC believes that everyone should follow a particular approach, Atkins said it should be established by a rule or standard that has been subject to notice and comment. He criticized staff accounting bulletins because they are more like accounting rules than interpretations of existing standards. Staff pronouncements can fundamentally change market practices, he said, citing SAB 101 as an example.

Some standards, even if adopted through a notice and comment process, can be overly prescriptive, according to Atkins. He pointed to the PCAOB's Auditing Standard No. 2 as one example of an overly prescriptive standard that may rob accountants of the ability to apply their professional judgment.