SEC Speaks Seminar Examines Accounting and Auditing Issues

Accounting and auditing issues took center state at the recent Practising Law Institute’s SEC Speaks conference in Washington, D.C. SEC Chief Accountant Conrad Hewitt said his key areas of focus are on auditor liability, convergence, the SEC's guidance for management under section 404 and the PCAOB's proposed standard to replace Auditing Standard No. 2 on internal controls.
The problem with auditor liability has no easy solution, in his view. Some countries have introduced the concept of a liability cap or limited liability. Mr. Hewitt referred to the European Commission's recent paper outlining four possible ways to protect the audit industry. On the issue of international convergence of accounting standards, he is pleased with the progress that has been made on the steps outlined in former Chief Accountant Donald Nicolaisen's roadmap. The eventual elimination of the reconciliation requirement has the potential to lower costs for issuers, he said.
Former SEC Chairman Harvey Pitt said it is constructive and courageous to speak out on auditor liability. He believes the SEC may have the ability administratively to have an impact. Pitt supports the move to a more principles-based system of accounting, but questioned its impact on liability. Liability may increase with less specificity, he said.
Noting that the PCAOB's proposed Auditing Standard No. 5 is very important, Mr. Hewitt said that he is interested in the feedback the PCAOB receives on its proposal. Smaller companies reportedly pay up to five times proportionally what larger companies pay to comply with the section 404 requirements. Mr. Hewitt hopes the upcoming guidance will help the 4,500 smaller companies that are coming on board with the requirements.

Former Commissioner Aulana Peters noted that the IASB is on a two-year track to convergence and asked whether the SEC would rethink its three-year roadmap on reconciliation. It would be helpful if the SEC, FASB and the IASB were on the same timetable, she said. Conrad Hewitt believes they are all on the same timeframe. Perhaps companies can be given the option to use IFRS or GAAP, he said. Europeans want to stay with their principles-based standards, but the U.S. is still rules-based. He indicated that it is going to take a couple of years.

John White, the Director of the Division of Corporation Finance, emphasized that there is a question of whether the U.S. users of financial statements are ready for a parallel system of financial statements without reconciliation. He believes the 2009 goal is workable, while something faster than that would be difficult. The SEC has a plan to reach out to the user community in the near future, he said.

Chief Accountant Hewitt advised that the staff is looking at all of the angles and working with the largest accounting firms to obtain their views. He added that there are likely to be just as many lawsuits with rules-based standards as with principles-based standards.
Zoe-Vonna Palmrose, the deputy chief accountant in the Office of the Chief Accountant, noted that the changes in the PCAOB's proposed standard on auditing for internal controls reflect what the PCAOB said was its intent all along. Still, she said the revisions are an important psychological change. Small companies were overwhelmed by the stories they have heard about implementing the section 404 requirements.