“Let’s fight for honest accounting, clear financial statements, and full disclosure of all essential facts. Let’s fight anyone who seeks the assistance of a certified public accountant in the issuance of any kind of misleading statement. Let’s fight for easily understood accounting terms. Let’s fight weasel words. Let’s fight bunk whenever and wherever it appears.”
- October 1937 Robert H. Montgomery, What Have We Done, and How?
The SEC and FASB have a major challenge in dealing with convergence with international accounting standards. Among other things, the SEC will have to wonder how it can exercise a level of influence over the IASB similar to what as it has over the FASB.(41)
Part of the convergence deliberations is whether or to what extent accounting standards should be highly detailed as they have largely been to date in the U.S. (“rules-based” principles) or instead should be “principles-based” standards that lay out general principles without the same level of detail and with more reliance on the application of judgment.
Both the IASB and the FASB face the issue of “big GAAP/little GAAP” – establishing GAAP for nonpublic companies. In 2009, the IASB released a simplified version of IFRS for small and medium-sized entities (SMEs). In May 2012, the Financial Accounting Foundation established the Private Company Council (PCC) to improve the process of setting standards for private companies.
This Gallery has briefly reviewed the evolution of the collaborative efforts of the SEC and the private sector to develop authoritative accounting standards and the relationship of the SEC with the private sector. Until 1973, the public accounting community was the “private sector.” Concerned over the appearance of independence issues of private sector members, the AICPA sponsored studies that resulted in an independent FASB, which then assumed the role of the private sector. While separate from the AICPA and the firms, the accountants still provided most of the members and financial resources of the FASB prior to the Sarbanes-Oxley Act of 2002 (S-Ox).
The emphasis of the Gallery has been on the SEC and the private sector before S-Ox, which substantially removed the accounting community from participation in setting standards applicable to public entities and their auditors.
While the FASB is not a federal agency, S-Ox provides for its funding through assessments against public entities. S-Ox also established The Public Company Accounting Oversight Board (PCAOB) to oversee public company audits and auditors. No more than two of the five PCAOB members may be CPAs. Only one PCAOB member in 2012 has substantive public accounting experience; three are attorneys. Previously, the profession had been self-regulated by the Public Oversight Board.
The AICPA’s Auditing Standards Board establishes standards for audits of nonpublic entities and recently has substantially converged its standards with standards of the International Auditing and Assurance Standards Board (IAASB). The PCAOB has worked to establish separate standards and has shown little interest in collaborating with other auditing standard setters or in convergence with international standards. Thus, the PCAOB is taking an entirely different approach to the private sector than did the SEC.
It is an irony that public accountants provided the solutions for many years, but are now systematically excluded from standards setting. Standard setters now strive to assure that the accounting community cannot appear to have significant influence, much less control, over processes.
Will the post-Sarbanes standards-setting structures “get it right”? Only time will tell.
(41) In July 2012, the SEC staff issued a report analyzing and evaluating issues regarding International Financial Reporting Standards (IFRS) in the United States. However, the report contained no recommendation for action by the SEC and notes that additional analysis is necessary before any Commission decision can be made.
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