Securities and Exchange Commission Chief Accountant James L. Kroeker told leaders of the accounting profession that independent auditors will be expected to consider the interests of the investing public not just their audit clients when performing their duties.
The mission of his office will be to put investor protection at the forefront in all that we do, he said in an address to the American Institute of CPAs National Conference on SEC Developments.
Under his watch, you are likely to notice we will be more proactively seeking to understand and discuss the views of investors. Accountants should not be surprised when we ask you whether you have considered the perspective of the investing public.
Kroeker, who took over as SEC Chief Accountant in August, made it clear that he believes many members of the profession are doing just that.
I believe that the accounting profession has made great strides restoring investor confidence and the perception of what it means to be a Certified Public Accountant, he told the meeting. I believe that the vast majority of accountants are honest hard-working professionals who simply want to do the right thing."
And while auditors can expect to be treated professionally by SEC regulators, Kroeker told the AICPA members, You should not confuse professionalism with a notion of leniency. Those who fail to live up to their responsibilities and those who cause harm to investors or our capital markets can expect that we will take appropriate action, he said.
One specific area where Kroeker expects to find problems involves the use of creative off-balance-sheet accounting to mislead investors about overdue loans, underwater real estate holdings, and other underperforming assets.
While FASB recently finalized accounting standards to improve the accounting requirements for securitizations and other off-balance sheet arrangements, potential problems continue to loom in this area, he said.
I suspect that many balance sheets are still being weighed down by underperforming assets such as past-due loans, securities or real estate with declining values, he told the accountants. In this vein, the staff is unfortunately aware of potential structures designed and marketed to address assets where prices have and are expected to continue to show weakness by entering into creative off-balance-sheet structures, with little apparent transfer of risk.
To guard against such schemes, Kroeker called on auditors to be especially vigilant when evaluating the substance, or lack thereof, of elements of transactions included to achieve specific accounting results.
The chief accountant also alerted AICPA members to concerns that the global financial crisis may increase the potential for arbitrage or mischief that can result from different regulatory standards when you cross national borders.
This problem has highlighted the importance of developing, implementing and enforcing high-quality and consistent accounting standards around the world, he said.
The SEC has been pushing for such global standards, and issued a proposed roadmap to create a path for more widespread use of International Financial Reporting Standards in the U.S. The response to that proposal from accountants and other interested parties has effectively settled the issue of whether the U.S. should move toward international standards, Kroeker said.
We received over 200 comment letters on the proposed roadmap from a wide variety of market participants, and those commenters expressed widespread and strong support for the goal of having a single set of high-quality globally accepted accounting standards, he told the meeting.
Kroeker acknowledged that there are a number of issues yet to be ironed out a view echoed by AICPA Chairman Robert R. Harris during his opening address to the conference.
Aside from the roadmap itself, the biggest question that needs to be answered is what happens with private companies? Harris told the accountants.
In contrast to the 15,000 public companies registered with SEC, there are millions of small and midsized privately held companies in the U.S. many of which could benefit from the option of using IFRS instead of GAAP, cash or tax basis accounting.
Its a matter of what best suits their needs and those of their financial statement users, the AICPA chairman said.
The questions yet to be resolved, according to Harris, include what standards will private entities use? and who will write them?
The time has come to answer those questions, he told the conference. During my year as AICPA chairman, we intend to make some significant headway on private company financial reporting.
