Jim Kroeker has been overseeing accounting interpretations, professional practice issues, and international accounting matters at the Securities and Exchange Commission during a time of rapid economic change.
He took over the job of Chief Accountant after the January 2009 retirement of his former boss, Conrad Hewitt. Mr. Kroeker joined the SEC as Deputy Chief Accountant in February 2007 from Deloitte & Touche, where he had been a partner in the firm's National Office Accounting Services Group. He also served as a practice fellow at the Financial Accounting Standards Board, where he helped develop accounting guidance.
Mr. Kroeker guided the day-to-day operations of the Office of the Chief Accountant during the recent economic crisis. He led efforts to address various aspects of the crisis, including steps to improve off-balance sheet accounting standards and conduct a congressionally-mandated study of fair value and mark-to-market accounting standards.
He talked with WebCPA about the status of the SECs roadmap for convergence of accounting standards, the prospects for the Public Company Accounting Oversight Board as the SEC awaits a Supreme Court decision on the PCAOBs constitutionality, and other matters.
Mr. Kroeker asked us to remind readers that the SEC as a matter of policy disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This interview expresses Mr. Kroekers views and does not necessarily reflect those of the Commission, or other members of the staff.
What can you tell us about the status of the IFRS roadmap?
Weve been turning our focus back to the proposed roadmap. The staff has spent innumerable hours over the late summer, throughout the fall, and now the beginning of this year turning our attention to the 200-plus comment letters. Its not that the volume of comment letters is extraordinary, but the depth of thought is particularly impressive. Weve talked about how to address the structural, operational, and transitional issues raised by those comment letters. The staff has been working on developing a work plan to address all those issues. What does that mean in terms of timing for some kind of public follow up? Im hopeful that its in early 2010.
Why are the SEC Commissioners taking such a long time to approve or reject the roadmap? Are there political differences among the Commissioners holding up the decision?
I dont think thats an issue. I think were all making sure that were diligent and deliberate. For a good part of last year, in the depth of responding to a financial crisis, the Commission also was re-energizing the agency as a whole, responding to changes in enforcement structure, working on regulatory reform, and reinvigorating the staff. So the Commission hasnt been without a significant number of priorities in which to respond. The comment period on IFRS ended in April, and the staff has been working on an appropriate response. This is an important issue, and were going to be responsible in the way we approach it.
Do you think FASB and the IASB are working together more effectively now that theyre meeting on a monthly basis?
I do. Ive been very encouraged by the reports I hear from members of both Boards, and Im particularly encouraged when I talk to the staff at both organizations. Even at the staff level, they seem much more optimistic about their ability to bring issues to the Boards and get clearer direction. They also now actually have the ability to hear the thinking of their counterparts. Im hopeful that it will be much more likely that theyll come to a consensus on a common high-quality solution. That isnt necessarily going to be the case on all issues, but I think it certainly increases the prospects.
Have they made the kind of progress they had committed to? There doesnt seem to be that many new standards coming out from them lately.
I think the proof will come over the next nine months. One of the other things that Ive been particularly optimistic about is they had their announcement in November that talked about their shared commitment to goals and their successes to date. But probably as important as anything in that document was a detailed listing, project-by-project, of what they expect to work on, when they expect to work on it, and what they think the deliverables are. If you look at that, there is an awful lot of deliverables that theyre expecting over the next six to nine months. Thats where well see the real results as to whether or not they are achieving the milestones they are setting out for themselves. The other thing thats encouraging to me is they have also committed to keep that updated, so if there is, in fact, slippage against the milestones, theyre going to update folks as to where they think they are and why.
Do you think they will meet the goal of agreeing on most of the main issues by June 2011?I am cautiously optimistic. It is an important milestone for which they need to press. That doesnt mean that they should finalize a standard based upon a date if, in fact, they are not confident that they have a standard thats an improvement to financial reporting. However, I think they also need to have an aggressive, but realistic, deadline. From what Im hearing, they continue to be, and therefore I continue to be, optimistic that is a goal they can reach, at least with respect to the core of those standards. Part of it will also be the input they receive. Theyre going to come out with exposure drafts. It will be interesting to see the comment responses. Ive already started to hear in the system some commenters saying you may be able to get this done, but it is a lot of change for the system to absorb.
So maybe its moving too fast in some ways?
That can be an issue, I think. It doesnt tell me that FASB or the IASB should slow down, but in their projects they have to think about how to phase in the standards in a way that is responsive to the needs of the capital markets. There you have difficult issues. Lets just say they can have them all done, the perfect standards, with a bow, on June 30, 2011. Do you then say all of these must be implemented on whatever they pick as the transition date? Theyre obviously not going to make them require implementation immediately, but do they then call for effectively a big bang to implement all of them at one point in time? Or do they say, Hey, theres actually some phase-in? I think they will have to explore the trade-offs there.
What do you think about the new blue-ribbon panel that is being set up for private company standards? Is your office going to be involved with that effort?
It is something that well pay attention to. Obviously we have the congressionally given responsibility to establish financial reporting standards, including GAAP, for public companies, but well certainly pay attention to the blue-ribbon panel, and work and coordinate closely with FASB as theyre thinking through those issues. It has an impact on other things within our responsibility, like capital formation.
What is going to happen to the PCAOB, and the SECs relationship to it, if the Supreme Court sides with the plaintiffs in the case challenging the PCAOBs constitutionality?
Were obviously following the case very closely, and well work closely with the PCAOB, regardless of the outcome, to determine an appropriate response. However, Im certainly not in a position to speculate on what the outcome might be. Therefore, it makes it difficult to say how it would change our relationship, if at all, with the PCAOB.
The Justice Department recently lost some cases it worked on with the SEC involving stock options backdating, notably with Broadcom. Is this area turning out to be troublesome for regulators, and do you think the SEC will change its approach?
Regarding the underlying accounting, I think the accounting literature at the time was, and what exists today continues to be, clear. Dating a stock option as of a date in the past, but then accounting for it as if it was not granted in the past, wasnt an acceptable practice under the accounting standards that existed then or the accounting standards that exist today. How that plays out, in terms of proving an individuals conduct or engagement in various backdating schemes in a prosecution, is a question that the Department of Justice would be better able to answer.
The status of the financial regulatory reform effort seems to be uncertain in the Senate right now. How would you like to see that turn out, especially with regard to the accounting profession?Obviously weve done a lot of thinking about what weaknesses in accounting standards have been identified, either through the financial crisis or otherwise. The standard setters have been working diligently on much of that, even prior to when the depths of the crisis unfolded. For example, off-balance sheet accounting was something that we had pushed very hard on here, including in a letter that we sent to FASB in January of 2008. Congress later very wisely asked us to do a study of mark-to-market or fair value accounting. The report for that study had a number of recommendations to FASB, some of which are at the core of why theyre looking at the accounting for financial instruments comprehensively. So I dont think its necessary to incorporate an overhaul of financial reporting into legislation. The standard setter, with our oversight, has already been looking at those issues. But I think its wonderful to see the bill in the House effectively acknowledge that there is an independent standard setter that is responsible and must continue to be so in responding to those issues.
Are you concerned about the exemption from Sarbanes-Oxley 404(b) auditor sign-off requirements for smaller companies in the House version of the legislation?
Our Office of Economic Analysis did a study focusing on the implementation of the auditing reforms through AS5. What we heard from investors is that they get a lot of additional comfort from an auditor coming in and looking at managements assessment of the effectiveness of their internal controls, not unlike the comfort they get when a company reports on its own financial statements but has an auditor then come in and take that independent and objective look at financial reporting. Our Chairman has written a letter to the leadership in the House Financial Services Committee that stressed effectively the same points. Its an important reform that was put in place in a previous crisis. The Commission was clear in its last deferral of the requirement that the auditor attestation is an important safeguard, and the Commission does not expect to further defer that requirement.
You said in one of your speeches that you want auditors and preparers to consider the interests of investors more. How do you see that playing out in terms of accounting and auditing standards?
You should enter into your business transaction and then look at what is the best way to faithfully present this to investors. Thats something were going to continue to ask when we get people seeking our views on accounting reporting issues. Its something that does permeate how the FASB thinks about financial reporting issues.
What are your main goals this year?
One will be to continue to work closely with FASB and the IASB to facilitate not only getting to converged solutions, but to make sure those converged solutions are recognizably higher quality than the solutions that we have in place today. Another would be to continue to build on our collaborative and collegial relationship with the PCAOB as they tackle the challenges that they have risk assessment, the confirmation process, really the blocking and tackling of auditing as theyre looking at what, if any, changes, improvements, and modernization ought to be done with those standards. Its on all fronts in terms of accounting and auditing. Theres a lot going on.