SEC Advisory Committee on Smaller Public Companies

SEC on Materiality, 404, XBRL and More
November 9, 2005
FEI Summary

Securities and Exchange Commission (SEC) chairman Christopher Cox, various SEC commissioners and senior staff have expressed their views recently on topics ranging from an upcoming Staff Accounting Bulletin on materiality, to expansion of the use of XBRL and other technologies, greater use of plain English (plain language), convergence of international accounting standards, and Sarbanes-Oxley Section 404.

Links to recent speeches posted on the SEC website and topics addressed in those speeches appear below.

Chairman Cox, remarks at 12th XBRL International Conference, Nov. 7.

  • In my tenure as Chairman of the Securities and Exchange Commission, I intend to bring our system of corporate disclosure and financial reporting into the 21st century…every appointment I make as Chairman will be consistent with this vision of tapping the possibilities of interactive data.
  • Interactive data could make it possible for issuers to reduce the cost of substantiating the numbers that appear in their financial statements. It would assist regulators in maintaining the integrity of the markets.
  • The global debates over the 'right' way to do accounting might never be settled. We may never have a global accounting Esperanto. But if the development of taxonomies for data tagging progresses sufficiently, some day in the future it may well be possible for the users of financial information to render it according to any accounting regime they choose: US GAAP, IFRS, or any other system.
  • I'd especially like to thank those of you who have provided feedback to the Commission during our [XBRL] Voluntary [filing] Program. We need your continued support. Going forward, the single most significant way you can help is to participate in the XBRL filing program at the SEC. Keep in mind that the program isn't limited to registrants that file reports with the SEC. We are anxious to receive XBRL documents of any kind, both for our own internal assessment, and for publication to the market at large via our website. And keep providing us with feedback on your experiences. The comments we receive will be instrumental in determining the next steps in our implementation of XBRL disclosure.
  • If you haven't seen it, the latest opportunity for your feedback is in the form of a Request for Information that the SEC issued last month. We're looking for specific information on XBRL-enabled software, and we'd very much appreciate your views."

Click here for Chairman Cox's complete speech.

Commissioner Glassman, remarks at the Plain Language Association 5th International Conference, Nov. 4

  • "As a Commissioner at the SEC, whose mission is to protect investors and maintain the integrity of the securities markets, I believe disclosures to investors must be clear to be effective.
  • …[I]t is clear that there is a difference in goals of the disclosing parties and the recipients of those disclosures. …In my view, limiting the liability of the entity making disclosure is the wrong emphasis. Instead, the focus of disclosure should be to enlighten investors. In order for the Commission to protect investors best, the goal must be to provide investors with access to clear, concise, and accurate information to enable them to make good investment decisions. …This is best achieved through plain language disclosures that make the message clear. Clear disclosures are also critical to maintaining the integrity of the securities markets.
  • The Commission understands it is a serious challenge to write what are essentially legal documents in a way that is clear to the non-legalese speaking public"
  • I believe companies can make better use of their Management, Discussion and Analysis, or MD&A, to inform investors. Specifically, management can better explain a company's financials, using plain English to provide a narrative explanation of the material elements of a company's financial condition and results.
  • Further, the time and effort required to extract financial details from a full set of financial statements may lead investors to rely substantially on summary data, resulting in an incomplete or even misleading picture of the company's operations. Given the importance of providing investors with a complete picture of a company's finances, the Commission is working to make that financial information more transparent and useful to investors [and] has been testing financial data tagging technology through a voluntary program that allows reporting companies to submit their reports to the Commission using XBRL…I look forward to seeing progress on this exciting initiative."

Click here for Commissioner Glassman's complete speech

Commissioner Atkins, remarks before the European Parliamentary Financial Services Forum, Oct. 26

  • "Europeans and Americans need to work together to ensure that regulatory solutions are enhancing, not inhibiting, worldwide economic integration. …Only through cooperation with and, when appropriate, deference to other regulators can we address these conflicts. I am committed to ensuring that the voices of all affected parties, not only U.S. interests, are part of the debate that shapes, and, if necessary reshapes, American regulations.
  • …[O]ne issue on which we need to continue to work together is accounting standards. …I understand that European companies are concerned about continuing to bear the costs of reconciliation to U.S. GAAP on top of switching to IFRS. But, I am optimistic that Europeans and Americans can work together to eliminate this long-standing requirement in accordance with the "roadmap" laid out earlier this year, contemplating a 2007-2009 timeframe of mutual recognition. I am confident that the need for reconciliation will disappear as all of us gain experience with IFRS in practice. Because of differences in culture, legal systems, and especially liability regimes, true "equivalence" - however that term is defined - may be an illusory goal. Thus, I prefer to state our goal as one of mutual recognition.
    • The April recommendation of the Committee of European Securities Regulators (CESR) that companies using U.S. GAAP need to add significant disclosure, in both narrative and numeric form, comparing U.S. GAAP to IFRS has created uncertainty for U.S. companies. Audit firms and market participants have been interpreting this recommendation as requiring a full reconciliation of U.S. GAAP to IFRS, even though the proposal itself says that such a reconciliation is not needed. I hope that - and understand from my European counterparts that - this is a misunderstanding. I also am hopeful that the European Commission, when it makes the final decision with respect to reconciliation for issuers using U.S. GAAP, will not depart from historical precedent by imposing a reverse reconciliation requirement.
  • The non-U.S. corporate community has expressed concern over the tremendous cost of litigation in the U.S. Many within the U.S. are likewise calling for litigation reform. …Regulators also need to be mindful that the disclosures that we require might someday form the basis for litigation. It is incumbent upon us to give clear guidance about what companies must disclose so that they are not subjected to retroactively-imposed disclosure obligations through enforcement actions and private litigation.
  • There are many positive aspects to Sarbanes-Oxley Act and the SEC's implementation efforts over the past few years. ….The most problematic aspect of the Act is Section 404.
    • The emphasis on good controls over financial reporting is laudable.
    • It is indisputable that everyone greatly underestimated the costs involved in the 404 process. When the SEC first released its implementation rules for 404, we estimated that the aggregate costs would be about $1.24 billion or $94,000 per public company. Unfortunately, we quite a bit. Actual costs incurred for 404 compliance, according to surveys, were some TWENTY times higher than estimated costs. In the SEC's defense, we made this estimate before the Public Company Accounting Oversight Board released its 300-page Auditing Standard No. 2 to govern the 404 process.
    • To help contain the costs of Section 404, I believe that the SEC should review whether the PCAOB's Auditing Standard Number 2, which has been the focus of most of the criticism of the Section 404 process, is a workable standard. The sheer length and tone of this standard, combined with a fear by accountants and companies that their professional judgment will be second-guessed and that they will thus be subject to increased liability for those judgments, have contributed to an excess of caution and an emphasis on needless detail. We and the PCAOB in May issued clarifications that the standard of "reasonableness" really does mean reasonable -- it does not mean absolute or certain or perfect.
  • We cannot legislate morality and ethics in any profession, but at the same time, we cannot have a successful, sustainable free market system without morality and ethics. The culture of a firm - especially the tone from the top - conveys a great deal throughout the organization as to whether ethical misdeeds will be tolerated.
    • For those of you from the private sector, to the extent that you think changes in your corporation or industry are necessary, do not wait for a regulator to tell you to make them. I would encourage you to work with your colleagues to design efficient, effective solutions and preventive measures of your own. As a supporter of the free market, it distresses me when business people do not react to perceived problems using a principle-based approach to guide the conduct of their organization and the industry. Too often, however, it seems that market participants look instead to regulatory solutions, which they can manipulate to their benefit and the detriment of their competitors.
  • …[L]awmakers and regulators cannot be faulted for missing important issues if they were not brought to their attention when the laws and regulations are drafted. Please participate in our consultation process on rules - the SEC is legally bound to take comments into account and explain why we accept or reject them. We take this obligation seriously and look to investors, regulators, and corporations outside the U.S. for information and insights about unique challenges that our rules may pose for them. By representing your own interests effectively, you help us to protect U.S. investors and maximize their opportunities to participate in the global economy."

Click here for Commissioner Atkins' complete speech.

Division of Corporation Finance Chief Accountant Carol Stacey, remarks at the Practising Law Institute's 37th Annual Institute on Securities Regulation, Nov. 4

  • Revenue recognition…is easily the most important thing in most companies' financial statements. That's how they make their money. And that's what investors really want to know…It's probably also the number one best seller in enforcement, so keep that in mind…You need to make sure that your companies have a robust accounting policy as to how they recognize revenue.
  • Arriving at the fair value of stock options --a topic that was the subject of Staff Accounting Bulletin No. 107 (SAB 107) earlier this year--is not easy. ...What we are expecting…is that companies apply a reasonable fair-value estimate and that they make that in good faith….There's a lot of angst about what assumptions companies are using, what model they use. We don't prefer a particular model. ... What we really want is to make sure [companies]…make a good faith effort at this.
  • For those of you who follow the commission's activities, you've probably heard about something that's new in the materiality arena, which is how to quantify errors…SAB 99 talked about how to analyze errors, and whether financial statements need to be restated.
    • [W]e have learned that there are some diversities of practice surrounding how you actually quantify the error to begin with, before you even get to the SAB 99 analysis.
    • …[W]e have a project under way to try to help companies understand how to do that…And it's a dual approach. There are some companies that have ... the Iron Curtain method, versus the rollover method, which basically look at, alternatively, either materiality in relation to the balance sheet or in relation to the income statement. We actually think you need to look at materiality as a whole when you're quantifying it.
    • That's what this guidance is intended to do…It's been called 'SAB 108,' although there is no SAB that's been issued yet in this area. We are hopeful to get this guidance out ... soon, in order for it to be helpful for companies really just cleaning up their balance sheets."
    • We understand there are a lot of accruals that are left out there that are no longer needed and that are discussed with the audit committee every period. We just want companies to clean it up once and for all, and we intend to provide a mechanism for that in this [SAB].

Highlights of Carol Stacey's speech above are based on article by Phyllis Diamond in BNA Daily Report for Executives, Nov. 9, 2005. As of Nov. 9, the speech had not been posted by the SEC

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Prepared Nov.9, 2005 by Edith Orenstein (, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.

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