On May 21, the Securities and Exchange Commission’s Chief Accountant, James Kroeker, testified on behalf of the SEC before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the U.S. House Committee on Financial Services. Mr. Kroeker discussed the status of the following accounting and auditing standards matters the SEC is working on with the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB).
- Repo 105 Transactions and Off-Balance Sheet Accounting. The Lehman Brothers Examiner’s Report highlighted Lehman’s accounting for so-called “Repo 105” transactions (which are contracts to sell a security today and to repurchase that same security at a date in the future for a set price) as sales rather than secured borrowings. This treatment resulted in artificially reducing Lehman’s reported liabilities. Based on the responses to the SEC’s letters to 19 large public companies requesting information about their use and accounting of Repo 105 transactions, the SEC determined that inappropriate practices are not widespread. However, the SEC has requested several companies to enhance disclosure regarding their accounting of Repo 105 transactions and expand disclosure of off-balance sheet arrangements beginning in their Form 10-Qs. Additionally, the FASB is engaged in a broader standard-setting initiative with respect to the recording of assets and liabilities in securitization structures and other special purpose type entities.
- Global Accounting Standards. In connection with its continued consideration of global accounting standards and convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards (IFRS), the SEC has initiated a work plan to study the scope of, timing of and approach to changes necessary to effectively incorporate IFRS into the financial reporting system for U.S. issuers. There are also ongoing convergence projects between the FASB and IFRS involving financial instrument fair values, revenue recognition, leases, debt vs. equity, and financial statement presentation with the goal of developing high-quality, common accounting standards.
- Interactive Data (XBRL). The three-year phase-in of the SEC’s interactive data rules, which require the submission of financial statements and notes to the financial statements in a format known as eXtensible Business Reporting Language (XBRL), is proceeding on schedule. While approximately 500 companies have submitted XBRL-encoded financial statements to date, additional companies must begin complying with the XBRL rules with their Form 10-Qs for June 2010, with the remainder beginning with their Form 10-Qs for June 2011. The XBRL list of tags has already been integrated into the FASB’s Accounting Standards Codification, making it possible to navigate from financial statements filed with the SEC to the underlying accounting standards, and to navigate from an accounting standard to where it has been applied in practice, enabling the FASB and the SEC to better monitor how standards are being applied in practice.
- PCAOB Developments. The PCAOB’s inspection program includes inspections of non-U.S. registered public accounting firms. However, due to the PCAOB’s lack of explicit legal authority to share information with foreign accounting regulators, the PCAOB has been hindered in its efforts to gain access to non-U.S. accounting firms and their audit work papers. As a result, the PCAOB has not been able to perform many of the required inspections of registered accounting firms in these foreign jurisdictions. The SEC supports the U.S. House’s version of the regulatory reform bill that would allow the PCAOB to share certain information with audit regulators in foreign jurisdictions. Additionally, the SEC believes that clarification of the PCAOB’s oversight of auditors who perform audits of broker-dealers will improve the quality of such audits and strengthen investor protection and broker-dealer compliance.
- Internal Control Over Financial Reporting. The final phase-in of the requirement under Sarbanes-Oxley Section 404 to have auditor attestation of internal control over financial reporting is proceeding on schedule. This requirement will be effective for non-accelerated filers (registrants under $75 million of public float) beginning for fiscal years ending on or after June 15, 2010.
Click here for the full text of the testimony of the SEC’s Chief Accountant.