By James Hamilton, J.D., LL.M.
By a voice vote, the House passed bi-partisan legislation requiring the Chairs of the PCAOB, the SEC, and the FASB to testify annually before Congress on accounting and auditing issues, beginning this year. The Promoting Transparency in Financial Reporting Act was passed in the 110th Congress as part of the Securities Act of 2008 (HR 6513), but was never taken up by the Senate. The current version, HR 2664, is stand-alone legislation introduced by Rep. Christopher Lee. The original bill was introduced by Rep. Geoff Davis, who is co-sponsoring HR 2664. After passage, HR 2664 was referred to he Senate Banking Committee.
The annual testimony mandated for the Chairs of the SEC, the PCAOB and FASB is a key part of the broader regulatory reform effort because it will help Congress in its drive to reduce the complexity and costs of financial reporting and to increase transparency for investors. According to Rep. Lee, faulty financial reporting, be it intentional or otherwise, played a role in the market turmoil by affecting investors' decisions. This issue rightly features prominently in ongoing discussions of regulatory reform frameworks, he said, adding that investor confidence will not be fully restored until there is a system supporting accurate and transparent financial reporting. (Cong. Red., Sept 9, 2009, p. 9359).
In the legislation, Congress specifically finds that the complexity of accounting and auditing standards in the United States has added to the costs and effort involved in financial reporting. In this regard, the bill mandates the SEC, FASB and the PCAOB to annually provide oral testimony to Congress on their efforts to reduce the complexity of financial reporting in order to provide more accurate and clear financial information to investors.The testimony must also discuss the reassessment of complex and outdated accounting standards. The agency chairs must additionally discuss how to improve the understandability, consistency, and overall usability of the existing accounting and auditing literature. Congress also wants information on how the development of principles-based accounting standards is progressing. In addition, there must be a discussion of how to encourage the use and acceptance of interactive data, as well as efforts to promote disclosures in plain English.
Legislative history indicates that the mandated annual hearings represent an assertion of congressional oversight of accounting and auditing standard setting; and will help Congress reassess complex accounting standards and improve the understandability of financial statements, as well as encourage the acceptance of interactive data. At the same time, the legislation will encourage US regulators and standard-setters to fulfill their own roles and initiatives to achieve greater transparency, promote greater uniformity, and reduce complexity in financial reporting, not only domestically but also globally.