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US Securities and Exchange Commission

Investor Advisory Committee Recommends SEC to Review Current Accounting Standard-Setting Practices

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The Securities and Exchange Commission’s (SEC) Investor Advisory Committee (IAC) on Sept. 21, 2022, unanimously voted to recommend that the commission review U.S. accounting standard-setting practices.

The advisory panel’s recommendation comes as some investors have been dissatisfied with the Financial Accounting Standards Board (FASB), which under the auspices of the SEC, sets accounting rules that companies should use in the United States.

Among other proposed reforms, the advisory panel is requesting that the SEC establish an Advisory Committee on Accounting Modernization to assist the FASB’s standard-setting.

The Financial Accounting Foundation (FAF) oversees the FASB. But the SEC, as the regulator of the $100 trillion capital markets, has ultimate authority to oversee accounting standard-setting. The commission has enforcement powers and charges public companies for misconduct when they do not properly follow accounting rules, while the FASB just sets standards.

In writing accounting standards, the FASB balances the needs of investors as well as the costs of implementing the rules for companies, which can be tricky.

However, some investor protection advocates, such as the Alliance of Concerned Investors and other investor groups, in recent years have been criticizing that the FASB has been ignoring investor concerns while spending too much time on accounting simplification projects that mainly benefit companies and their external auditors.

Moreover, they have been concerned that the board has been too slow in writing accounting standards that keep pace with changes in market and business environments.

“For example, unrecognized intangibles was added to the FASB agenda in 2001,” said IAC member Colleen Honigsberg, a professor at Standard Law School. “After 20 years, this project still remains on the FASB agenda.”

Accounting rules are written so that investors and analysts will have the ability to properly assess the financial conditions and outlook.

But “it appears that a significant portion of the FASB’s limited time and resources are spent on fine-tuning narrow standards rather than addressing more pressing accounting issues, such as cash flows, intangibles, financial statement presentation, labor cost accounting, segment reporting, and measurement of the financial impacts of climate change and energy transition,” according to the recommendation.

Thus, the IAC wants the SEC to establish a separate financial reporting committee to help with the FASB’s work.

The panel is also worried about independent standard-setting. The Inflation Reduction Act of 2022, enacted in August, imposes a new 15 percent corporate minimum tax based on “adjusted financial statement income” for certain large corporations.

“Throughout the history of accounting standard-setters, the SEC has gone to great lengths to remove political influence from financial reporting,” the recommendation states. “By basing taxes on adjusted financial statement income, however, the Act runs the risk of negating decades of efforts to remove political interference in accounting standard-setting…. Given this threat to FASB’s independence, we recommend that the Committee consider how best to support FASB and ensure that it remains politically independent.”

Because there is a significant backlog of high-priority accounting topics that need to be addressed, such as intangibles and key performance indicators, the IAC said the accounting modernization committee should consider potential improvements to those areas.

Moreover, the IAC said that the committee should consider how the FASB could improve its technical understanding of companies’ internal data structure. The IAC pointed to the Data and Technology Task Force of the Public Company Accounting Oversight Board (PCAOB), which supervises accounting firms that audit public companies. And the IAC believes that the FASB could set up a similar task force to better understand companies’ technological capabilities.

The IAC also wants the SEC to require the FASB to study the costs of delayed rulemaking on critical topics to investors and incorporate those costs in its cost-benefit analysis when promulgating standards.

In addition, the advisory panel said that the FASB should create a single searchable database that would be free to the public.

Honigsberg said it costs $1,197 to buy an annual “professional view” subscription. There is a free “basic” view, but it does not offer full functionality and advanced navigation. By contrast, the PCAOB standards are free.

SEC Commissioners’ and FASB Chairman’s Views

The commissioners seemed to have different views about the recommendations.

SEC Chair Gary Gensler, who emphasizes the importance of investor protection while also promoting efficient market and capital raising, seemed to support the IAC’s views.

“I welcome your recommendations for ways to enhance, in a manner consistent with the Sarbanes-Oxley Act, the responsiveness of our nation’s accounting standards to changing business practices—including by making the Financial Accounting Standard Board’s accounting standards readily available and searchable for the public at no cost,” Gensler said at the IAC meeting.

Congress passed the Sarbanes-Oxley Act in 2002 in response to large accounting scandals.

By contrast, Commissioner Hester Peirce, who prefers free market policies, seemed concerned.

The FASB has “a number of items on its technical and research agendas that respond to investor concerns. Should that fact be reflected better in the recommendation?” she asked.

“The draft recommendation related to the FASB rightly underscores the importance of the independence of the accounting standard setter. It also identifies as examples of ‘pressing accounting issues,’ ‘measurement of the financial impacts of climate change and energy transition,’” she said. “These issues invite controversy. What can the Commission, as a steward of FASB’s independence, do to ensure that efforts to modernize do not become efforts to politicize FASB?”

Separately, FASB Chairman Richard Jones reportedly said during an FAF meeting in August that “there is no elected body that has the right to speak for investors” or “any of our other stakeholders.”

He noted that not all investors have the same views, and the board tries to gather all the different views during outreach.

In the meantime, during the IAC meeting, Honigsberg thanked the FAF and the FASB for their recent engagement with the committee.

“We also want to note that we’re really grateful that they reached out to us regarding this recommendation,” she said. “We had a really thoughtful discussion with them, and we very much hope that we can we can continue to engage with them going forward.”

Another IAC member, Cambria Allen-Ratzlaff, managing director and head of investor strategies with JUST Capital, said she fully supports the recommendations.

“And we hope that they’re viewed as moderate—they are quite moderate—and hopefully well taken,” Allen-Ratzlaff said. “Again, as Colleen mentioned, we absolutely support the independence of the FASB, absolutely appreciate their outreach. And we know that they are working on trying to incorporate more investor input into their process. But I think, you know, really what the issue is here is that it’s been, you know, almost 50 years, and there‘s still a lot of items that are lingering on the agenda that, you know, is well overdue.”

 

This article originally appeared in the September 23, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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