The Securities and Exchange Commission’s Investor Advisory Committee (IAC) in September recommended that the commission review the Financial Accounting Standards Board’s (FASB) standard-setting process in part because it was concerned that the board was too focused on simplification projects that lower costs of applying the standards while neglecting what some investor advocates want. And some IAC members said that the SEC’s Office of the Chief Accountant (OCA) should be very active in overseeing the FASB.
With Gary Gensler as chair of the SEC, it seems that OCA has been listening to those investors. Gensler has been emphasizing the investor protection part of the SEC’s tripartite mission unlike his predecessor, Jay Clayton, who emphasized capital formation and efficient markets.
This “means first and foremost, what we are charged with is ensuring that investors have information that will allow them to understand the risks that they are taking with an investment decision. We are not about telling management how it should run a company. We are not about telling investors what they should or should not invest in. We are at the end of the day a disclosure agency,” SEC Acting Chief Accountant Paul Munter said on Nov. 3, 2022, during the Accounting for an Ever-Changing World conference, a joint conference of the FASB, the IASB and “The Accounting Review,” a publication of the American Accounting Association.
The SEC also oversees the Public Company Accounting Oversight Board (PCAOB), and Munter said that the commission is “very active” in overseeing both boards.
Munter: ‘Healthy Tension’ Between SEC and FASB
“With respect to the FASB, I view [our] oversight as a proactive activity. I don’t see it as a passive activity. I certainly don’t see it as a perfunctory activity. I think it is a substantive activity, but it necessarily has to respect the independence of the standard setting process,” Munter said. “So, there is inherently a bit of tension in any kind of oversight. And there is—I will call it—a healthy tension between us and the FASB.”
He said OCA regularly engages with the trustees, the Financial Accounting Foundation, FASB Chairman Rich Jones, board members and the staff.
“If you talked to them, they may tell you that they hear more from us than they want to,” Munter said. “But we are very proactive in both by directly feeding to them the things that we are learning about whether it is through consultations or other input that we have that might be areas where standard-setting could be an improvement and an appropriate way to respond to those issues.”
Munter said that OCA staff is also engaged with the FASB as it make progress on its technical standard-setting projects while trying to make sure that the accounting board maintains its independence.
“So, we have regular dialogue throughout a standard lifecycle,” he said. Further, OCA is also engaged with the FASB as it carries out its post-implementation reviews (PIRs) of its standards because the SEC gets questions from companies and auditors about implementing revised accounting standards in practice.
He noted that the Sarbanes-Oxley Act of 2002 authorized the SEC to recognize an accounting-standard setter with responsibility to establish GAAP, and in 2003, the FASB was recognized as such rulemaker.
“When the SEC recognized the FASB, … we identified some key facets to that. The standard-setter has to consider the need to keep its standards current, to reflect changes in the business environment,… have procedures to ensure prompt consideration of changes in accounting principles necessary to reflect emerging issues and to the extent necessary and in the public interest, to consider the extent to which… international convergence is appropriate,” he said.
However, in looking at the mission of protecting investors, “implicit in that recognition is that the investor needs are the starting point for standard-setting,” he said. “It’s focusing on what are the needs of investors, what kinds of standards would lead to improvements in the quality of the information that investors receive and therefore lead to more efficient decisions by investors.”
His remarks at the conference were not unusual given that he has already suggested publicly some standard-setting projects that the FASB should consider in February. For example, he was not on board with the FASB’s project on accounting for goodwill, which has been a complex topic for a long time. And in June, the FASB unsurprisingly ended up dropping the project. Nevertheless, a moderator at the conference asked “what are your thoughts on the FASB’s decision to remove goodwill project from their agenda?”
Munter: ‘I have a lot of Engagement with the FASB’
“They know a lot about my thoughts actually,” Munter responded. He repeated what he said in the statement in February.
“So, this goes back to the question of the case for change,” Munter said. “You heard in the previous panel on the leasing that implementation of that was and probably for some still is a major undertaking. I would argue that that was a necessary undertaking because it results in better information being made available to investors.”
Goodwill is an entirely different matter.
He guessed that about 100 people were present at the conference, and if a survey was conducted, about 45 would say it should be an amortization model, another 45 would say it would be an impairment model while 10 would be undecided.
“You are gonna get a pretty divided room no matter which of those avenues you pursue. And I think what the board heard is that investors weren’t clamoring for a change either with respect to the accounting model for goodwill,” he said. “And so when you put those factors together, is the case for change there? I think it is a much more difficult argument in the light of that evidence that the case for change exists.”
The moderator then asked about how much pressure he applies on the FASB.
“I am just trying to think about what we mean by pressure,” he said, briefly pausing.
“I have a lot of engagement with the with the FASB. One of things I didn’t mention in my remarks is when the FASB did its agenda consultation process, not only did it ask about specific projects and what was top of mind that, as I mentioned, fit into their agenda decision-making. But they also asked about whether there are process improvements that the board could be taking to improve its standard setting process and got a lot of good feedback on that as well,” he said. “So, I would say, without calling into question the priorities and objectives of those who came before me, people made decisions in good faith at the time, I am focused on the here and now. And I think if you were to ask Rich, he would, I think agree with me that he focused on what is it we can do to improve the quality of the information that investors receive as the objective of the standard setting process. I would say that’s the focus of our dialogue, engagement, etc.”
This article originally appeared in the November 7, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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