RegulationAccounting StandardsAn American invasion

An American invasion

Will the SEC ever accept principles over rules?

Will the Security and Exchange Commission
only be satisfied that it has protected US investors when it has questioned
every item in financial statements and examined every audit of them?

UK companies that are SEC registrants, upon filing their
IFRS
accounts with the US regulator, are facing detailed letters of enquiry from the
SEC, which has taken on a phalanx of new staff just to deal with IFRS.

At the same time, one of the newest regulators on the block, the
PCAOB, is checking the
audits of the same financial statements through the powers given to it under
Sarbanes-Oxley,
including examining elements of SEC registrant audits carried out by non-US
audit firms.

There are undoubtedly substantive issues in financial reports that regulators
rightly examine, but the SEC would do itself an enormous favour by concentrating
on the important issues and ignoring the trivial. Detailed questions of
disclosure pushes one to the view that the SEC does not trust audits and is
incapable of exercising judgement in its approach to regulation.

By contrast, our Financial Reporting
Review Panel
has ramped up its examination of listed company accounts –
facing the same new IFRS regime – but it has done so in a way that focuses on
the important issues in what has generally been agreed to be a risk-based,
proportionate manner. Where widespread problems of a less serious nature are
found, the FRRP has simply reminded companies of relevant requirements,
carefully avoiding interpreting the standards, which would risk rule-setting.

Hopefully SEC will get the message that it is early days for the new IFRS
regime and time is required to let things bed down. This should not obscure the
point, however, that principles-based accounting standards mean judgements will
always have to be made on how to recognise, measure and disclose a wide variety
of items in the financial statements. If the SEC starts to require only one
approach in a particular area, those principles will be fundamentally
undermined.

The SEC is particularly exercised by the presentation of ‘non-GAAP measures’,
a catch-all phrase that seems to encompass any explanation or figure that
doesn’t exactly match up to the accounts. As long as proper reconciliations and
explanations are given, investors will often gain rather than lose. It would be
ironic if companies stopped presenting such information in their US filings,
while leaving them in their annual reports, thus disadvantaging US investors.
It’s hardly an outcome the SEC should welcome.

Kathryn Cearns is Consultant Accountant at Herbert Smith LLP

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