American Institute of CPAs chairman Richard Caturano told an audience of CPAs at the AICPA’s Conference on Current SEC and PCAOB Developments in Washington, D.C., that the Institute is committed to engaging with regulators.
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The opening day of the conference Monday included speeches by SEC commissioner Luis Aguilar, Public Company Accounting Oversight Board chairman James Doty, SEC acting chief accountant Paul Beswick and other top officials and accounting industry leaders, such as Center for Audit Quality executive director Cindy Fornelli.
Caturano noted that he is almost two months into his term as AICPA chairman. "More than ever, I’ve come to recognize that what’s key to the CPA profession moving forward is the ability to embrace change," he said. "We’re living in an era marked by complexity and flux—in our economy, in financial reporting and auditing, and in the regulatory environment. I know my own firm is focused on building a culture that embraces these changes and looks for the opportunities they present. I’ve always believed that’s what CPAs do. We must proceed with this mindset on behalf of the profession as a whole, so that it will continue to thrive in tomorrow’s business landscape."
He observed that just a few years ago, auditing was being called a commodity. "You don’t hear that anymore," said Caturano. "Auditors are being scrutinized more closely than ever, and are taking on more responsibility. That needs to be reflected in the value placed on audits, one of the most important services for businesses and the capital markets. Within this environment, a financial reporting model based on relevance, reliability and transparency is more critical than ever. The investor community is also demanding stronger internal control, assurance at all levels of a company’s business, and stronger risk oversight protocols."
Aguilar talked in his keynote speech about how investors feel uneasy with the capital markets in the aftermath of the financial crisis and how it is important for accountants to help restore that sense of trust. “Obviously we need to turn that trend around,” he said. “It is clear that if you want people to invest in the capital markets, you have to work to make the capital markets trustworthy.
"I know that the AICPA shares this perspective," he added. "As an organization responsible for setting professional and ethical standards for accountants, the AICPA is the public representative of a rigorous and noble profession. As financial statement preparers and auditors, I count it as a special responsibility to help make sure that the capital markets are trustworthy. You are important gatekeepers. Your professional training and experience prepares you for this role, and whether you work in industry or public accounting, your clients and colleagues look to you for guidance. Investors count on you as well. They look to make sure that they get the information they need to make good investment decisions. The work of the accounting profession is critically important to investors and absolutely central to capital formation.”
Aguilar talked about the importance of the audit profession as well, citing research from the SEC’s Office of the Chief Accountant that assessed the effectiveness of audits of internal controls. “The study concluded that financial reporting is more reliable when the auditor is involved with internal control assessments, and that investors generally view the auditor attestation as beneficial,” he said. “In particular, the study found evidence that auditor testing of internal controls has generally resulted in the disclosure of control deficiencies that were not previously disclosed by management. Auditor testing also appears to have had a positive effect on the quality of financial reporting generally.”
However, Aguilar acknowledged that recent legislation like the Dodd-Frank Act and the JOBS Act have exempted many smaller companies from the Sarbanes-Oxley requirements for audits of internal control.
“I am concerned that the rollback of Section 404(b) would be harmful for both investors and for capital formation,” he said. “Uncertainty regarding the accuracy of financial reporting is likely to damage investor confidence. This could actually reduce demand for the securities of those companies, raising their cost of capital, and harming, rather than helping, the market for IPOs.”
Aguilar noted that researchers had found that companies that voluntarily comply with Sarbanes-Oxley Section 404(b) experience a lower cost of capital, including a decline in the cost of equity and debt capital in the first year.
SEC acting chief accountant Paul Beswick followed Aguilar’s presentation and discussed topics such as the convergence efforts between the Financial Accounting Standards Board and the International Accounting Standards Board. “I will acknowledge that there is a certain amount of standard-setting fatigue,” he said. “On some level, that is quite understandable as the boards have been working on these projects for the better part of a decade. I am hopeful that the boards are in the final stage of completing these projects. As the boards work through the remaining issues on the convergence project, I am encouraged about the level of convergence in the revenue and leasing projects that the boards have been able to achieve to date. When thinking about the status of the financial instruments project, I think some perspective is important. As I’ve frequently mentioned, 18 to 24 months ago, it was called almost unthinkable by some that the boards would be able to reach substantial agreement in classification and measurement of financial instruments, yet today the boards are a lot closer than many of you would have guessed.
Beswick noted that the feedback of the CPA profession would be particularly helpful in this area. However, he also cautioned against trade organizations developing their own implementation guidance ahead of the authoritative guidance from the two boards. He observed that keeping implementation consistent is of paramount importance and the SEC is already trying to coordinate with other securities regulators across the globe. “First to press isn’t always the best thing,” he said. “I’m getting the sense from some trade organizations and others that they are trying to be the first to press with their implementation guides to individual convergence projects. I would caution everyone to be thoughtful and deliberative in their approach to nonauthoritative implementation guides.”
He acknowledged that there also needs to be more coordination between FASB and the IASB and their task forces on issuing interpretive guidance.
Dangers of Expanding Consulting Practices
Beswick also warned against accounting firms expanding into other businesses, saying it could damage the image of auditor independence.
“As a profession, accountants have a duty to act with integrity, objectivity and high ethical standards,” he said. “This is the hallmark of our profession. Revenue and profit pressures at an accounting firm can give rise to conflicting incentives, but the accountant’s obligation to the public trust cannot change.