by Ken Rankin
Washington -- Securities and Exchange Commission chief accountant Donald T. Nicolaisen served up a clear warning to the profession, stressing that pre-Enron “business as usual” audit practices will draw heavy fire from his agency.
In an address last month to the American Institute of CPAs’ National Conference on Current SEC Developments, Nicolaisen said that accountants who “fail to recognize that our profession is changing, and that each individual and firm must embrace a culture that champions the interests of investors, should not be surprised if they become the focus of disciplinary action” at the hands of the SEC.
“I care too much for investors and the integrity of the accounting profession to let those who cannot — or will not — adhere to the spirit, as well as the letter, of the Sarbanes-Oxley Act inflict further harm to either our capital markets or our profession,” he said in his maiden address to the annual conference.
Calling compliance with the letter and spirit of Sarbanes-Oxley the profession’s “last chance to prove itself,” Nicolaisen told accountants at the meeting that “we have an obligation to the next generation of CPAs to leave behind a legacy of integrity, quality, professionalism and an ever-improving financial reporting model.”
To accomplish this, he called on accountants to help corporate audit committees to faithfully exercise their responsibilities, and to provide honest and constructive feedback to standards-setting bodies, such as the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.
Nicolaisen also lauded the recent FASB proposals on inventory costs, earnings-per-share calculations and exchanges of non-monetary assets that seek to bring U.S. accounting standards toward convergence with international standards.
While Nicolaisen was urging accountants at the conference to embrace the changes already adopted by Congress and the profession’s standards-setters, his top lieutenant was warning them to brace for even more fundamental change in the years ahead.
SEC deputy chief accountant Scott A. Taub told attendees that last summer’s SEC staff report calling for a shift from the current rules-based system to principles-based accounting has drawn a universally positive response from the profession.
But after considering the practical problems associated with such gear-shifting, Taub predicted that much of the profession’s support for principles-based accounting may quickly evaporate.
“If we are to truly move to a system that relies on principles and objectives with some implementation guidance but not bright lines and detailed rules, everybody will need to get comfortable with making accounting choices based not solely on what the rules say, but on what provides the most transparent, useful information,” he said.
Under a principles-based approach, auditors will “need to get more comfortable telling clients that certain accounting treatments are unacceptable, even in the absence of literature that specifically says so,” he said.
Similarly, the profession will have to brace for a different enforcement strategy from the SEC. “A system with less detailed guidance will, obviously, result in more situations in which different companies make different judgments with the same set of facts,” Taub explained.
The SEC understands this, and has “no intention of punishing those who make good- faith efforts and reasonable judgments,” he said. “But with less bright-line guidance, we will need to adapt to enforcing a different style of accounting standards — we will need to ask different questions, evaluate explanations in different ways, and accept and live with different interpretations of the principles, where multiple interpretations each make sense.”
