Changing of the guard at FASB, SEC and FRC

With a new leader on the way for the FASB, speculation abounds whether incoming Chairman, Russell Golden, will take the venerable standard setter in a new direction. His predecessor, current Chairman Leslie Seidman, came to power at a time of controversy, upon the sudden retirement of Robert Herz in 2010. Back then, the FASB under Herz, pushing for strict fair value accounting by banks after the financial crisis, met stiff resistance from banks and Congress. After his retirement, the FASB refocused their approach somewhat.

Seidman was recognized by Jeffrey Diermeier, chairman of the Financial Accounting Foundation Board of Trustees, for setting “a high standard as a champion of excellence and independence.” Though only Chairman for three years, Seidman has been on the Board the maximum ten years allowed, so must step down. Following a similar path as Seidman, Golden started out on the FASB staff in 2004, later serving as technical director and chairman of the Emerging Issues Task Force, before being appointed to the Board in 2010. Currently serving a second term extending through 2017, Golden could be reelected through 2020.

Golden has stated that his main priorities will be convergence with global standards and private company accounting standards. Echoing his predecessor’s resolve for high standards, Golden emphasizes “putting the interests of investors first; working to make financial reporting as clear, transparent and useful as possible; and never losing sight of the balance between costs and benefits.”

Though joint work with the International Accounting Standards Board (IASB) on revenue recognition, leases and financial instruments is winding down, and despite the fact that the United States has not yet decided whether to adopt IFRS, the FASB was nevertheless named a founding member on the IASB’s new Accounting Standards Advisory Board (ASAF). With representation worldwide from twelve national accounting standard-setters and regional bodies with an interest in financial reporting, the ASAF was formed to provide a more direct channel for offering technical advice and feedback to the IASB. How Golden approaches this new opportunity may foretell the FASB’s future reputation on the world accounting scene.

In April, the SEC confirmed Mary Jo White as SEC Chairman. As the first former prosecutor in that role, the expectation would be for renewed emphasis on vigorous enforcement. Indications are that more attention will be paid to occurrences of accounting fraud. After the inexplicable failure of the SEC to detect the massive Bernie Madoff fraud, the agency restructured operations to enhance detection. White can assure that follow-through continues in this area.

White is pushing ahead to complete the Dodd-Frank regulations, and has recognized the need to take an international focus in rule making. Seeking to add efficiency to cross border regulation, the agency has proposed “substituted compliance” in the derivatives domain. White acknowledges that “we live neither in a ‘my way or the highway’ world nor a world of whole-cloth acceptance of another jurisdiction’s regulatory regime. It builds on the SEC’s ongoing efforts toward cooperation and collaboration with foreign authorities…”

How White relates this attitude toward international accounting standards could prove enlightening. She points out in a May 1 speech that the SEC has been accepting IFRS based financials in filings by foreign private issuers, without U.S. GAAP reconciliations, since 2007. Also, she touts the active engagement by the FASB with the IASB, but then cautions that “the promise of global accounting standards fades if there is not consistency in their application, implementation, and enforcement.”

China will also continue to be a challenge, with the ongoing dispute over auditor workpapers from Chinese company audits. That struggle is not likely to go away since, as White notes “we have brought numerous cases against China-based issuers involving market manipulation, accounting and disclosure violations, and auditor misconduct among other charges.”

Meanwhile, in the United Kingdom, Baroness Hogg has announced that she will step down as chairman of the Financial Reporting Council (FRC), Britain’s regulator of the accounting profession and financial reporting. Though her three year term was completed in April, a successor has not as yet been named. Hogg has served on the FRC almost nine years in total, including a three year stint as Deputy Chairman as well.

Hogg’s stature has grown over her tenure, defending the accounting profession at times, while maintaining the necessary independence of a regulator. She served during the financial crisis and afterwards, restructuring the agency into a more responsive, yet efficient and effective organization.

In the debate over mandatory auditor rotation, Hogg favors retendering, concerned that in certain sectors “there may be only a couple of firms capable of doing the audit. In those sectors, rotation would be simply a matter of revolving doors, with no real competition or incentive to offer superior quality.  Even where three or four major firms are in play, we think it would be inimical to competition and quality to restrict choice by excluding the incumbent.” She defends the role that audit committees have to take seriously their responsibility for conducting a responsible retendering process. We’ll have to wait and see how her successor will respond.