Accounting Observer > Public Blog - Atkins: More Than Just Sarb-Ox Complaints

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Atkins: More Than Just Sarb-Ox Complaints

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	4/23/2007 7:48 AM
SEC Commissioner Paul Atkins delivered a speech last week at a conference co-sponsored by the American Enterprise Institute and the Brookings Institution; classic Atkins stuff, like this rhetorical monologue on Section 404 examinations: ...Take, for example, the debate around the implementation of Sarbanes-Oxley section 404. Most people have now concluded that Audit Standard 2 of the PCAOB has been a failure Ã¢â‚¬â€ the costs exceed the benefits, especially to smaller companies. However, I still hear people say in this debate that "If you cannot afford to do a real 404 review, you should not be a public company." If that is true, who should make that decision? Politicians, regulators, or bureaucrats? Or investors? In fact, our actions in calibrating the standards for management, accountants, and lawyers in performing internal control reviews and assessments create barriers to entry to some number of companies. Some may decide that going public is not worth it and others may decide to go public elsewhere. Is that good for investors?... Fair question, that one about "who should make the decision to be a public company." It should be answered by the managers of the company who are deciding to turn ownership over to the general investing public at large - who are the new bosses after an IPO. Are they ready to have systems in place to report faithfully to the new owners of the company? They should be - and that's all the law asks of them. They're in the best place to make that decision. Is it good for investors if such managers go elsewhere? Well, they sure aren't hurt if managers who won't be basically responsible to them (that is, who won't take steps to ensure faithful reporting to them) aren't part of the investment landscape. There's a different angle in his speech as well, and a very ironic one. He argues that Staff Accounting Bulletins (SABs) are subject to review under the Administrative Procedure Act - something that would dramatically impede the SEC's ability to widely disseminate their positions on application of accounting problems they've observed in practice. SABs are the result of observations by SEC reviewers and the Office of the Chief Accountant; sometimes they deal with new standards (see SAB 107); sometimes they deal with problems observed in practice over many years (see SAB 108). They are always the result of observed reporting issues, and they are issued in order to keep all registrants on the same page, accounting-wise. They're not loved by companies, because they can force them to change things. Putting them into an Administrative Procedure Act would slow down their issuance even further. Atkins' take: ... I have no opposition to our staff's attempting to explain or apply an SEC rule or accounting standard to a current situation. Staff guidance can provide very helpful advice to all participants in the capital markets. Such guidance can be issued faster and is particularly appropriate to situations with a unique set of facts and circumstances. But sometimes staff pronouncements can fundamentally change existing market practices. For example, Staff Accounting Bulletin No. 101 (SAB 101) addressed in depth various aspects of revenue recognition. The final guidance required registrants to reflect the adoption of SAB 101 as a change in accounting principle, similar to the adoption of a new FASB standard. With all of the attributes of rulemaking from the perspective of affecting the marketplace, it is difficult to argue that such pronouncements are not rules and should not be subject to the requirements of the Administrative Procedure Act. SAB 101 was nothing new: it was a compendium of revenue recognition issues pulled from existing accounting literature, and a description of the SEC's take on various misapplications of them. Not all companies had to "change accounting principles" to comply with it, and those that did, probably weren't employing the proper principles in the first place. Sounds like another front is being opened in the battle to tamp down fair reporting to shareholders.

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