The View from America 

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The View from America

10 Questions with the U.S. Securities and Exchange Commission’s Chief Accountant.

FROM: MAR-APR 2007 ISSUE | BY RAMONA DZINKOWSKI

Anticipating a call from the Washington-based U.S. Securities and Exchange Commission (SEC) has been known to incite fear in some accountants. But not Conrad Hewitt, CPA. Last summer, the distinguished leader and former chief financial regulator for the State of California answered a personal call from the SEC with pleasure. “I’m delighted to once again have the opportunity for public service to protect investors,” said Hewitt in response to the news he’d been named the SEC’s chief accountant.

His mission is to maintain the integrity and strength of the market in an era of unprecedented global competition. Prior to joining the regulator, Hewitt’s experience as the chairman of several public company audit and compensation committees saw him working with large auditing firms to implement the Sarbanes-Oxley Act (SOX) in the private sector.

In his current role, Hewitt has a unique view of the profession. He oversees accounting interpretations, international accounting matters and professional practice issues. He also leads the SEC’s work on implementing SOX’s internal control provisions, reducing complexity in accounting, enforcing compliance with accounting standards, and promoting the convergence of accounting standards under U.S. GAAP and International Financial Reporting Standards. Here are some of his views on topics prompting discussion in the accounting profession.

Can more interpretive guidance and principles-based standards work in the U.S. under the current environment of ultra-conservatism in public accounting?

It remains to be seen but I think we all want principles that reflect the accounting economic substance of transactions. Maybe over the years the rules have overtaken the principles. There are a lot of forces driving the desire for more and more guidance. It is clear that accountants, and I’m talking about management accountants – accountants in companies – not just public accountants, are motivated these days to make sure their method of accounting is acceptable.

It is interesting because not more than six to eight years ago, accountants felt anything that wasn’t specifically prohibitive was okay, meaning overly aggressive interpretations of the literature emerged. Now it is in the other direction. Accountants think anything that isn’t specifically permitted must be wrong. This results in some overly conservative interpretations.

I believe, and my staff does too, that the right answer is between these extremes. Accountants need to become more comfortable applying the literature in ways that are consistent with the underlying principles and the economic substance of transactions to provide transparent information to investors.

The Financial Accounting Standards Board (FASB) has decided to require companies to report on future pension liabilities or projected benefit obligations. But according to pension actuaries, projecting future salary increases doesn’t belong on the balance sheet. How do you see this debate unfolding?

FASB issued projected benefit obligations as phase one of the pension project. It is a continuation of the measurement adopted in FASB Statement No.87 ( Employers’ Accounting for Pensions) many years ago, except it was disclosed in a footnote. The debate back then was about the appropriate measurement attribute. It was a long one and I anticipate there will be significant discussion during phase two of this project. When FASB added pensions to its agenda, it stated that measurement questions would be handled in phase two. The objective was to get the current measurement on the books and out of the footnotes, where it has been for many years. I see this debate as similar to the one that was held concerning stock options.

Do you see an eventual convergence of international securities regulations?

Securities regulators around the world have been working together for over 20 years. The International Organization of Securities Commissions is constantly trying to find an effective means to regulate the markets and eliminate differences in regulation. The question is how can this be done without harming investor protection? That is not easy to do. I think we will always have differences, but the theme is to protect the investor.

What role will adopting XBRL play in restoring investor confidence?

XBRL seems like a logical and efficient process to accumulate data, and it has the potential to automate tasks that must be done manually to access and analyze data. Comparison across companies and industry lines should be easier and investors will have the ability to review and consider more information in a timely manner. We expect investors at all levels of the market should be able to benefit.

Do you foresee a time when companies that are not XBRL compliant will come under greater scrutiny than XBRL-compliant companies?

That is difficult to say at this point in time. I expect companies using XBRL might have a larger following in the investment community than those not using XBRL. It depends on the cost of adoption for small and mid-cap companies versus large cap companies. If the cost is low, then I’m sure everybody will use it, but if the cost is high, some of the small public companies might not benefit from it.

There is a need for specific “how to” guidance beyond the Committee of Sponsoring Organizations of Treadway Commission (COSO) framework in implementing Sarbanes-Oxley 404. What are the key considerations for the SEC?

We know there is a need for this guidance and it is an important project for us. The Public Company Accounting Oversight Board (PCAOB) is working diligently to amend Auditing Standard No. 2 (AS2) and to integrate changes into the new AS2 guidance to improve efficiency. Changes in the amendments will ensure the audit of internal controls is focused on the high-risk areas more so than the low-or moderate-risk areas. The results should be internal control reporting benefits without unnecessary, excessive costs.

What is the role of the SEC in minimizing the negative impacts of auditor concentration in the accounting industry?

We are concerned about the negative impact stemming from the fact that there are so few large auditing firms. In my career, I started with the Big 8, then I retired with the Big 6, and now there is the Big 4. But the market dynamic has had a lot to do with that change. U.S. companies doing business overseas have changed the marketplace and how you audit, what capital you need to audit, and the capabilities you need to audit. We are interested as to whether our rules and regulations contribute to this.

What do you see as the role of the SEC in restoring investor confidence?

In the current marketplace in the United States, investors seem to be well served with a lot of information. It’s important to remember that there will always be a situation in which a specific company does not abide by regulations, or law, or accounting principles, or pronouncements. We can’t always prevent that. Just by the sheer number of companies out there, it is going to happen.

Can you comment on the SEC’s top priorities?

Staying abreast with what’s going on with FASB’s current projects is a high priority of ours. We are also working with the PCAOB on amending AS2, and working with the International Accounting Standards Board on the convergence of International Financial Reporting Standards and U.S. GAAP.

What do you see as the role of the professional accounting associations in achieving the SEC’s priorities?

We work closely with the accounting associations and accreditation bodies. They have been very cooperative and I see it almost as a partnership. Our priorities are very similar. As for training, things change over the years. For example, I remember when statistical sampling came into vogue in auditing. That was a big change and people had to be trained on how to use statistical sampling. I see items like that evolving all the time. To me, training for accounting and finance personnel should be a high priority for everybody.

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Ramona Dzinkowski is a Toronto-based economist and business journalist.