SEC Seeking More Holistic Approach to Regulation, Greater Emphasis on Financial Reporting Quality

Chris Gaetano
Published Date:
Dec 10, 2018
The Bricker Blueprint

SEC Chair Jay Clayton (left) and Chief Accountant Wesley Bricker hold up the "Bricker Blueprint" for high-quality financial reporting and audits. They spoke at an AICPA conference on current SEC and PCAOB developments.

Securities and Exchange Commission Chair Jay Clayton and Chief Accountant Wesley Bricker, during an AICPA conference on current SEC and PCAOB developments, outlined their approach to financial regulation, which emphasizes greater reporting quality as well as a more holistic process—one in which regulators and the entities they oversee understand themselves as part of an integrated system working together to produce high-quality financial data.

At the start of their talk today—the first of the three-day conference—Bricker and Clayton referred to a printout of what they called the "Bricker Blueprint," which the chief accountant said conveys an "integrated system involving players across the system that need to coordinate, share information and work together in order to produce outcomes at the end that are high quality: high-quality financial reporting and high-quality audits." 

Bricker said that this approach means increased coordination with bodies such as the International Forum of Independent Audit Regulators, the Financial Accounting Standards Board, the International Accounting Standards Board and others. Such coordination also includes the Public Company Accounting Oversight Board (PCAOB), which Bricker said understands and appreciates the broader vision he has for the financial reporting ecosystem. 

"I think it's valuable [that] each board member sees themselves as playing an integral role in a cohesive, ultimately corporate, perspective on how to advance audit quality," Bricker said. "I think their orientation has been very impactful as they developed and updated their strategic plan, one that identifies in the first instance prevention of failures as being an important part of their work."

This approach has led to an increased coordination between the two bodies that hadn't been present before. While the PCAOB had always been under the SEC's supervision, Center for Audit Quality Executive Director Cindy Fornelli, who was moderating the discussion, noted that this SEC has displayed an "unprecedented" level of collaboration with the board, as exemplified by a recent joint statement between the two bodies on audit challenges with respect to U.S. listed companies with significant Chinese operations. Clayton outlined his motivations for increased collaboration bluntly: 

"In a world of limited resources, we get more the more we coordinate," he said. 

The joint statement also fits in with Clayton and Bricker's view that the profession, and the regulators overseeing it, must take on a more international perspective, given how often U.S. companies operate at a level that crosses multiple jurisdictions. It emphasized that external audits of multinational companies require a greater level of global coordination, as does regulatory oversight of international financial reporting and auditing. The key to this all is information sharing, according to Bricker, who said that when there are obstacles to gaining insights into corporate data, they can increase uncertainty, which has an effect on the regulatory market. Clayton said that this perspective is reflective of how the economy has changed over time. 

"The complexity of pulling together financial statements for global companies is hard to overstate, but a fundamental part of being the primary regulator for a global public company is being able to draw from all those jurisdictions," he said.

The statement said that, despite this goal, efforts with Chinese regulators to improve information access and audit inspections are ongoing but have not met with satisfactory progress. While Clayton understood the need for restrictions, he emphasized the importance of seeing the bigger picture.

"There are good reasons for information dissemination restrictions," " added Clayton. "We have them, other countries have them,  ... but the broad issue is something people should understand, and when it comes to getting access to a particular jurisdiction, we need to continue working through these things. ... It was important for us to give that overall picture and then discuss the significance of an issue we can continue to work on today."

Bricker emphasized that the SEC intends to follow up on this issue over the coming years, saying that "this was not a statement that plays out the issue and walks away." 

This broader, more holistic view of the financial system comes as part the SEC's emphasis on strengthening what Bricker said were more front-end reporting matters.  He said that a fundamental question of financial regulation is: "At what point in the overall process do you build in quality?" Sometimes, he said, regulators have viewed the audit process as the answer to that question, the idea being that this creates just a single point of correction in the system that enables other problems to be detected. 

"I think that is a more narrow view than what I have," said Bricker. "I think it takes a more comprehensive look. I think [the Sarbanes-Oxley Act] was [an improvement] because of a comprehensive view of how to strengthen financial reporting and audits by looking at the very start of the process ... and building that the whole way through [while] also strengthening the audit process and also resources for accounting standards."

Bricker also said that sometimes this has become a question of how audit firms themselves can play a role in this process, and how different designs might lead to better outcomes. While he agreed that firm governance and structure is important, he said just as important is getting good advice to board members from a variety of outside perspectives that can help limit blind spots and provide an overall broader perspective. 

Clayton also pointed to the need for management to understand the value of high-quality financial reporting, before the audit even enters the picture. The best way to drive behavior, he said, is to align incentives. Quality financial reporting and audits drive good performing capital markets, and to the extent that a company wants to have capital markets performing well over time, it should also work hard to ensure that its reporting and auditing process perform well too. 

Non-GAAP Numbers Can Play Important Role 

The pair also seem to be express a softer view of non-GAAP reporting than previous commissioners held. In a 2015 speech, former SEC Chair Mary Jo White expressed concern that the use of non-GAAP measurements could be a source of confusion for investors and other financial statement users, and she called for more prudent use of the figures. The former chief accountant, James Schnurr, made similar remarks in a 2016 speech, in which he said he was troubled by the extent and nature of non-GAAP measures. This viewpoint eventually led to an SEC crackdown on what it believed were some of the more problematic uses, such as those employed by electric car company Tesla
Clayton, conversely, said that non-GAAP measures play an important part in the financial reporting landscape by providing a view on how the business views itself. 

"Why do we have non-GAAP measures and [key performance indicators?] So investors can understand how management looks at the business, how is management measuring performance in addition to GAAP numbers," he said. 

To both Clayton and Bricker, the question is not the degree to which there are non-GAAP versus GAAP figures in the financial report but, rather, how those non-GAAP figures are derived. Bricker said that he constantly hears from investors that they want more information, not less, but he said quality must be built into that information. He said companies recognize this, and so have been thoughtful in developing "tailored policies" that, he said, can help reinforce the quality of non-GAAP reporting with a good balance of controls to reinforce the integrity of the numbers as they are put together. This, he said, means that the numbers present a complete and accurate representation consistent with how management understands its own business. 

Clayton added that, to this end, non-GAAP figures must have a similar steadiness in reporting as GAAP figures, observing that investors are more frustrated by inconsistent metrics than they are by the presence of such metrics in the first place. This means, too, that if they change how they calculate a metric, they need to communicate that to investors. 

"Let's make sure changes in those numbers are consistent with how management operates the business and evaluates the business," he said. 

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