Discussion Paper for Consideration by the SEC Advisory Committee on Improvements to Financial Reporting, 48700-48707 [E7-16772]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 164 (Friday, August 24, 2007)]
[Notices]
[Pages 48700-48707]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-16772]


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SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-8836; 34-56293; File No. 265-24]


Discussion Paper for Consideration by the SEC Advisory Committee 
on Improvements to Financial Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Request for comments.

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SUMMARY: The Advisory Committee is soliciting public comment on a 
discussion paper prepared by the Committee Chairman, Robert Pozen. The 
discussion paper provides a working outline, including a discussion of 
issues, views and potential consideration points that the Committee may 
evaluate.

DATES: Comments should be received on or before September 24, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/other.shtml); or
     Send an e-mail message to rule-comments@sec.gov. Please 
include File Number 265-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Federal Advisory Committee Management Officer, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. 265-24. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on its Web site (https://
www.sec.gov/rules/other.shtml). Comments also will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Questions about this release should be 
referred to James L. Kroeker, Deputy Chief Accountant, or Shelly C. 
Luisi, Senior Associate Chief Accountant, at (202) 551-5300, Office of 
the Chief Accountant, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-6561.

SUPPLEMENTARY INFORMATION: At the request of the SEC Advisory Committee 
on Improvements to Financial Reporting, the Commission is publishing 
this release soliciting public comments on the issues that the 
Committee proposes to consider. The Commission announced the 
establishment of the Advisory Committee on June 27, 2007.
    The Committee was officially established on July 17, 2007 with the 
filing of its Charter with Congress. The Charter provides that the 
Committee's objective is to examine the U.S. financial reporting 
system, with a view to providing specific recommendations as to how 
unnecessary complexity in that system could be reduced and how that 
system could be made more useful to investors. The Charter directs the 
Committee to consider the following areas of inquiry:
     The current approach to setting financial accounting and 
reporting standards, including (a) Principles-based vs. rules-based 
standards, (b) the inclusion within standards of exceptions, bright 
lines, and safe harbors, and (c) the processes for providing timely 
guidance on implementation issues and emerging issues;
     The current process of regulating compliance by 
registrants and financial professionals with accounting and reporting 
standards;
     The current systems for delivering financial information 
to investors and accessing that information;
     Other environmental factors that may drive unnecessary 
complexity, including the possibility of being second-guessed, the 
structuring of transactions to achieve an accounting result, and 
whether there is a hesitance of professionals to exercise judgment in 
the absence of detailed rules;
     Whether there are current accounting and reporting 
standards that do not result in useful information to investors, or 
impose costs that outweigh the resulting benefits (the Committee could 
use one or two existing accounting standards as a ``test case,'' both 
to assist in formulating

[[Page 48701]]

recommendations and to test the application of proposed recommendations 
by commenting on the manner in which such standards could be improved); 
and
     Whether the growing use of international accounting 
standards has an impact on the relevant issues relating to the 
complexity of U.S. accounting standards and the usefulness of the U.S. 
financial reporting system.
    The charter also directs the Committee to conduct its work with a 
view to enhancing financial reporting for the benefit of investors, 
with an understanding that unnecessary complexity in financial 
reporting can be harmful to investors by reducing transparency and 
increasing the cost of preparing and analyzing financial reports.
    Committee Chair Robert Pozen has drafted the discussion paper for 
consideration by the Committee. The Committee considered the discussion 
paper at its first public meeting held on August 2, 2007 and agreed to 
publish the discussion paper for public comment at that meeting. The 
full text of the discussion paper is attached as an Appendix and also 
may be found on the Committee's Web page at https://www.sec.gov/about/
offices/oca/acifr.shtml. The discussion paper identifies in general 
terms the issues, views and consideration points that the Committee may 
evaluate. All interested parties are invited to submit their views, in 
writing, on any or all of the subjects identified, whether some 
subjects identified should not be considered for any reason (such as to 
conserve resources, to focus resources on other, more critical 
subjects, or because of the limited length of the Committee's term) or 
on any other matter relating to the current U.S. financial reporting 
system that the Committee should consider addressing.
    General Request for Comment: Any interested person wishing to 
submit written comments on any aspect of the discussion paper, as well 
as on other matters relating to the Committee's work, is requested to 
do so.

    Authority: In accordance with Section 10(a) of the Federal 
Advisory Committee Act, 5 U.S.C. App. 1, 10(a), James L. Kroeker, 
Designated Federal Officer of the Committee, has approved 
publication of this release at the request of the Committee. The 
solicitation of comments is being made solely by the Committee and 
not by the Commission. The Commission is merely providing its 
facilities to assist the Committee in soliciting public comment from 
the widest possible audience.

    Dated: August 21, 2007.
Nancy M. Morris,
Committee Management Officer.

Appendix--Discussion Paper for Consideration by the SEC Advisory 
Committee on Improvements to Financial Reporting

By Committee Chair Robert Pozen \1\
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    \1\ This draft discussion paper was prepared by Committee Chair 
Robert Pozen. It does not necessarily reflect any position or 
regulatory agenda of the Commission or its staff.
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Draft dated July 31, 2007

Introduction

    This white paper is provided as an outline for consideration and 
discussion by the Securities and Exchange Commission's Advisory 
Committee on Improvements to Financial Reporting (CIFiR). The purpose 
of the document is to provide a working outline, including a discussion 
of issues, views and potential consideration points that the Committee 
could evaluate. Additionally, the outline is structured in 5 key areas 
that could serve as a model for organizing the work of the Committee 
into subcommittees.

Background

    The U.S. capital markets are the deepest and most liquid in the 
world. The acknowledged success of the U.S. capital markets, and their 
contribution to the nation's economic vitality, has been due in no 
small measure to the availability of relevant, reliable, readily 
understandable, and timely financial information. However, while the 
U.S. financial reporting system has become the most complete and well 
developed in the world, some parts of the system may not be fully 
aligned with changes in the economy, business operations, technology 
and investor needs, leaving room for improvement.
    The strength of the U.S. financial reporting system lies in no 
small part in its inherent checks and balances, including the different 
perspectives of participants in the markets--direct participants (e.g., 
companies and investors), regulators, independent standard setters, and 
other third parties (e.g., attorneys, accountants and auditors). But 
these different and sometimes conflicting perspectives have contributed 
to some of the problems in the system, including its extreme complexity 
and the resulting need to consider how the usefulness of reported 
financial information can be improved.
    The SEC has charged the Committee with examining the U.S. financial 
reporting system to identify ways to improve the system of financial 
reporting. In considering this mandate, the Committee will consider 
ways to both reduce unnecessary complexity and make information more 
useful and understandable for investors. More specifically, the 
Committee's charter identifies the following as areas of inquiry for 
the Committee:
     The current approach to setting financial accounting and 
reporting standards, including (a) The principles-based vs. rules-based 
standards, (b) the inclusion within standards of exceptions, bright 
lines, and safe harbors, and (c) the process for providing timely 
guidance on implementation issues and emerging issues;
     The current process of regulating compliance with 
accounting and reporting standards;
     The current system for delivering financial information to 
investors and accessing that information;
     Other environmental factors that drive unnecessary 
complexity, including the possibility of being second-guessed, the 
structuring of transactions to achieve an accounting result, and 
whether there is a hesitance by professionals to exercise professional 
judgment in the absence of detailed rules;
     Whether there are current accounting and reporting 
standards that do not result in useful information to investors, or 
impose costs that outweigh the resulting benefits; and
     Whether the growing use of international accounting 
standards has an impact on the relevant issues relating to complexity 
of U.S. accounting and reporting standards and the usefulness of the 
U.S. financial reporting system.
    As the Committee proceeds with its evaluation, it may wish to 
consider the financial reporting system in light of the needs of two 
primary groups--those who prepare the financial information and those 
who use the information--while taking into account the overall 
environmental impact of two secondary groups--those who opine on the 
information being presented and those who regulate our financial 
reporting system.
    Those who prepare financial information generally want:
     Clear instructions on what subjects to cover in financial 
reports;
     Not to be later second-guessed by regulators, litigants, 
etc. in situations where reasonable/good faith judgments were made;
     Financial reports to reflect the economic realities of the 
business, with enough flexibility to reflect the special situation of 
both the company and the industry;

[[Page 48702]]

     To reduce period-to-period volatility of earnings to the 
extent feasible (for example, in situations where the volatility is 
driven by changes in estimates but where such volatility has not 
resulted in a ``realized'' gain or loss); and
     To prepare required financial information at a reasonable 
cost, in terms of dollars and management time.
    Those who are users of financial information generally want:
     To understand the financial reports, at the level of 
detail that is desired by each type of user;
     To be able to rely on the integrity of the financial 
reports (and not be told later they were incomplete, misleading or 
actually wrong);
     The financial reports to reflect the economic substance of 
the business, regardless of technical rules;
     Financial reports to reflect, to the extent feasible, 
actual changes in market values from period to period; and
     The reports to be delivered in a format that makes it easy 
to compare one company to another.
    Those who opine on the specific financial information presented 
generally want:
     Clear instructions on what subjects to cover in financial 
reports;
     Not to be later second-guessed by regulators, litigants, 
etc. in situations where reasonable/good faith judgments were made;
     The financial reports to reflect the economic substance of 
the business; and
     To make a reasonable profit opining on financial 
information at a reasonable cost.
    Those who regulate the system generally want:
     A financial reporting system that provides protection to 
investors, promotes market efficiency and facilitates capital 
formation;
     Clear instructions on what subjects to cover in financial 
reports;
     To be able to rely on the integrity of the financial 
reports;
     The financial reports to reflect the economic substance of 
the business; and
     All of the above to be accomplished at a reasonable cost 
to society in relation to the benefits to be achieved.
    While the list of objectives above is only illustrative and 
certainly not all inclusive, one can observe that the objectives of 
those involved in our financial reporting system are consistent in many 
respects. All participants want clear guidelines that allow financial 
reports to be prepared and presented in a straightforward fashion, do 
not want financial reports to be subsequently deemed to be incorrect, 
want the financial reports to reflect the economic substance of the 
business, and do not want companies to spend too much money and 
management time on preparing financial reports.
    However, the Committee should recognize that some of the goals of 
participants within our financial reporting system may conflict. For 
example, preparers often want less volatility in earnings implying less 
fair value measures, while users generally prefer that more assets and 
liability reflect their current values. This places tension on the 
desire to have financial reports that reflect the economic substance of 
the entity. Further, users may prefer a uniform format that makes 
comparisons easy, while preparers may want special rules that allow 
them to present what they believe are the unique aspects of their 
industry or company.
    Upon conclusion of the Committee's work, the Committee will provide 
written recommendations to the Chairman of the SEC on how to improve 
the financial reporting system in the U.S. These recommendations may 
cover many aspects of the financial reporting system for the Commission 
to consider, including recommendations that involve the Financial 
Accounting Standards Board (FASB), the Public Company Accounting 
Oversight Board (PCAOB), and other appropriate organizations. In order 
to facilitate the Committee in forming these recommendations, the 
Committee will create subcommittees. The subcommittees will report 
their recommendations and advice to the Committee for full discussion 
and deliberation. The proposed subcommittees are listed below. 
Following that listing of proposed subcommittees is a proposal 
regarding their objectives and some preliminary topics the 
subcommittees may wish to consider.

I. Substantive Complexity
II. Standard Setting Process
III. Audit Process and Compliance
IV. Delivering Financial Information
V. International Coordination

I. Substantive Complexity

    This subcommittee will study the causes and impact of complexity on 
financial accounting and reporting standards, including: (1) 
Principles-based vs. rules-based standards; (2) inclusion within 
standards of exceptions, bright lines and safe harbors; and (3) the 
concerns of fair value measurement attributes and related earnings 
volatility. This subcommittee may wish to consider the following:

Principles-Based Standards

    Some commentators have suggested that the U.S. should adopt more 
principles than detailed rules as a way to reduce complexity. However, 
other commentators have argued that both preparers and users may prefer 
bright line rules to avoid second guessing in the U.S. regulatory and 
litigation environment. In considering the need for principles and 
rules, the subcommittee may wish to evaluate the recent efforts of the 
FASB to move to a more principles-based approach while retaining 
implementation guidance. As a reference point, the subcommittee may 
wish to begin with the SEC staff's 2003 report to Congress mandated by 
the Sarbanes-Oxley Act of 2002 on a principles-based approach to 
standard setting in the U.S., and the FASB's related response.

Competing Principles

    Complexity may be created not by the adoption of principles versus 
rules, but rather as a result of competing principles. For example, 
U.S. GAAP is not consistent on the appropriate measurement attribute to 
use for valuing financial assets and liabilities. In areas like 
financial assets and liabilities, there are two basic principles: Lower 
of cost or market, and fair value. The appropriate method to use in 
U.S. GAAP may be based on a specific industry, a specific transaction, 
a registrant expectation, or a registrant choice. To many it would be 
less complex to choose one approach, but many disagree which approach 
is most appropriate considering both relevance and reliability. More 
and more compromises are made, and these compromises lead to greater 
complexity as lines are drawn or judgments are made to delineate when 
one approach applies and the other does not. This subcommittee may wish 
to consider to what extent mixed measurement attributes (fair value 
versus historical cost) have increased complexity and reduced 
transparency, and what changes should be made within our capital 
markets to allow for more consistent measurement attributes.

Preparers vs. Users

    Complexity also may result from conflicts between the objectives of 
preparers and users. From the perspective of sophisticated users, 
financial reports would be more useful if they contained more segment 
information in multi-line businesses. However, most companies are 
reluctant to have more reporting segments because this may involve the 
disclosure

[[Page 48703]]

of competitively sensitive information. This subcommittee may wish to 
consider whether enhanced information would improve the usefulness of 
financial reporting in our capital markets.

Industry Specific Exceptions

    Many industries have successfully obtained special treatment or 
exemptions from general accounting standards from the FASB or the SEC. 
While such exemptions or special treatment increase complexity, they, 
in many cases, may help preparers within these industries present their 
financial reports in ways that, in their view, better reflect the 
economic substance of their businesses than the general standards. This 
subcommittee may wish to consider whether industry specific accounting 
or disclosure is useful to our capital markets.

Alternative Accounting Policies

    Currently, GAAP allows for entities to elect alternative accounting 
treatment for various transactions that may be economically similar. 
Most recently, the FASB issued SFAS 159, Fair Value Option, that allows 
companies to irrevocably elect to record certain types of assets and 
liabilities at fair value. This election is an instrument by instrument 
election. Other explicit options are currently present in U.S. GAAP. 
Providing companies with options may be a useful compromise when there 
are acceptable alternatives, but it makes it more difficult for users 
to compare companies. The subcommittee may wish to consider whether 
alternative accounting policies are useful to our capital markets.

Sensitivity Analysis

    Financial reports are currently presented in a way that may over-
simplify an issue with a complex range of results. In certain areas of 
accounting, the assumptions drive the results--for example, accounting 
for unfunded liabilities of defined benefit funds. Yet the range of 
permissible assumptions--for example, discount rates and mortality 
experience--is quite large. While sensitivity analyses are utilized to 
some degree, the subcommittee may wish to consider whether further 
sensitivity analyses would reduce complexity.

II. Standard Setting Process

    This subcommittee will study the standard setting process and may 
wish to consider the following:

U.S. GAAP Hierarchy

    Presently, all U.S. public companies must follow U.S. GAAP to be in 
compliance with applicable securities laws and regulations. Over the 
years, U.S. GAAP has been developed by many different recognized and 
unrecognized organizations. In the most recent past, these recognized 
organizations have included the SEC, the FASB, the Emerging Issues Task 
Force (EITF), and the American Institute of Certified Public 
Accountants (AICPA) Accounting Standards Executive Committee (AcSEC). 
For public companies, the authority to set GAAP resides with the SEC. 
The SEC has historically looked to private sector bodies to provide 
standards for financial reporting by public companies, and since 1973 
the FASB has been recognized by the Commission for this role, absent 
any contrary determination by the Commission. In addition, the SEC at 
times will develop interpretive application and disclosure guidance for 
public companies. The FASB also allows for the EITF, which is subject 
to its own oversight by the FASB and the SEC, to develop interpretive 
application guidance to existing U.S. GAAP.
    The FASB has undertaken a significant project to develop a 
comprehensive and integrated codification of all existing accounting 
literature organized by subject matter that would become an easily 
retrievable single source for all of U.S. GAAP. This project may 
provide a useful roadmap for identifying those areas in U.S. GAAP that 
could be simplified.

Characteristics of the FASB

    Currently in the U.S., accounting standards for public companies 
are established by the FASB, absent any contrary determination by the 
Commission, and the FASB is subject to oversight by the SEC. The Board 
consists of three members from public accounting, two from preparers, 
one from academia, and one user. While each member of the Board brings 
different experiences and perspectives, they are selected based on 
their expertise in financial reporting and are expected to make 
decisions based on what they believe will improve financial reporting 
rather than representing any one constituent group. All members of the 
Board must sever all ties and remain independent. The subcommittee may 
wish to consider the characteristics of Board members and the Board 
selection process.

FASB Standard Setting Process

    The FASB has an open due process through which the Board obtains 
input from many constituents, issues proposals and receives extensive 
further input in the format of comment letters and holds public 
meetings with constituents. The Board makes all decisions on its 
accounting standards in public through open debate prior to reaching 
conclusion. This process can take many years, but was designed to 
provide constituents maximum input into the decisions of the Board. 
Currently, a simple majority vote is needed to complete projects. The 
Board publishes all decisions via board minutes on its Web site and as 
a basis for conclusions within all significant standards.
    The FASB develops major standards based on a conceptual framework. 
This conceptual framework was designed by previous Boards to act as 
fundamentals on which future financial accounting and reporting would 
be based. The conceptual framework, however, is not complete and is not 
consistent with all of existing U.S. GAAP. To address these issues, the 
FASB currently has a major project on its agenda jointly with the 
International Accounting Standards Board (IASB) to improve the 
conceptual framework and to readdress some major accounting standards 
where the application is not consistent with the conceptual framework 
or does not provide sufficiently transparent financial reporting. Areas 
being considered in this joint project include pensions, leasing, 
liabilities and equity, revenue recognition, and financial statement 
presentation.
    Accounting standards resulting from the FASB process often leave 
open many questions of interpretation. The underlying reason for the 
need for interpretation generally results from either a 
misunderstanding of the stated principle or rule, or a concern that 
others will express a different view of the application of the 
principle or rule within the standard. The FASB staff offers a service 
to respond to inquiries, but exercises caution in answering some 
inquiries due to the establishment of precedent. Sometimes the FASB or 
FASB staff is asked to formally amplify or clarify a set of 
interpretive issues within an accounting standard. These 
interpretations were previously published as FASB staff question and 
answer documents with little Board oversight and no public comment 
period. Currently, these interpretations are primarily done through 
FSPs (FASB staff positions), which are discussed and

[[Page 48704]]

debated with Board members at a public meeting and exposed for comment.
    The subcommittee may wish to consider the process for setting 
standards and developing interpretations, including the FASB's voting 
procedures and the methods used by the FASB or the FASB staff to: (1) 
Set their agenda, (2) set their priorities, (3) deliberate, (4) 
communicate, and (5) respond to technical inquiries.

Interpretive Guidance--EITF

    In the mid 1980s, the FASB formed the EITF. The original charter of 
the EITF was to act as an advisory group to the Board to educate the 
Board on emerging issues so that the Board could decide whether 
interpretive guidance was necessary. Shortly after its creation, the 
EITF's charter was revised to allow for members of the EITF to develop 
authoritative interpretive guidance. The types of issues addressed by 
the EITF range from very specific to very broad, but are expected to be 
completed by the Task Force within one year. The EITF may only 
interpret existing standards and does not have the authority to amend 
or replace existing standards. Members of the EITF represent all 
significant constituents and include large and small preparers, large 
and small audit firms, and users. These members are volunteers and do 
not sever ties with their current employers or firms. The Chairman of 
the EITF is a member of the FASB staff and all documents produced for 
the EITF are developed by the FASB staff. A conclusion by the EITF is 
reached if not more than 3 members object. Currently, all conclusions 
by the EITF are exposed for public comment and are ratified by the 
FASB. This subcommittee may wish to consider the role of the EITF and 
whether that role should be changed to one of an advisory group.

Interpretive Guidance--SEC

    The Commission itself sometimes addresses accounting issues 
directly. In addition, SEC staff primarily through the Office of the 
Chief Accountant (OCA) communicates to the public in various forms 
about accounting issues, including staff accounting bulletins, letters 
to industry, speeches, and other educational material. These sources of 
information often are viewed by the SEC staff as confirmations of 
existing accounting standards, but have led to restatements by public 
registrants. The OCA also receives requests from specific registrants 
for pre-review of accounting issues. These requests are often 
considered by others in determining their own accounting policies.
    The SEC's Division of Corporation Finance reviews and comments on 
financial reports filed by public issuers that are not investment 
companies. The Division has a process for making its comment letters 
public upon completion of the review process. Through the Division's 
filing review process and its now more transparent process making 
comment letters publicly available on the SEC's Web site, the staff of 
Corporation Finance can have a significant influence on how accounting 
standards are interpreted.
    The SEC's Division of Enforcement, in the course of its 
investigatory and settlement negotiation processes, often explains the 
staff's views of a registrant's accounting conclusion. The Division's 
communications in this regard have been viewed by some as representing 
views applicable to all companies and not just with respect to the 
individual facts and circumstances involving the party involved in the 
particular enforcement investigation.
    This subcommittee may wish to consider the extent to which the SEC 
should publish interpretive guidance, as well as the communication 
methods used to describe the activities of the SEC or the SEC staff.

Interpretive Guidance--Other

    Many organizations, including large accounting firms and the AICPA, 
publish detailed educational material regarding accounting. These 
publications are widely used and presumed to be correct by their 
readers, but may turn out to be not always consistent or accurate. When 
an inconsistency or inaccuracy is discovered, the authors of the 
education material often seek clarity from the FASB or SEC staffs. This 
subcommittee may wish to consider whether the FASB or SEC should be 
involved reviewing or providing this type of guidance.

The Use of Cost-Benefit Analysis in Standard Setting

    Determining the costs and benefits of a new accounting standard or 
rule involves difficult predictions. Often, the true costs and benefits 
may not be able to be fully known or understood until after the new 
standard or rule is fully implemented. The processes and practices both 
pre- and post-issuance may differ among organizations that set 
accounting standards and rules. The subcommittee may wish to review the 
existing cost-benefit analysis practices of appropriate organizations 
to determine if changes should be recommended.

Existing Standards

    This subcommittee also may wish to consider whether to review two 
or three previously issued standards or rules to understand both the 
cost-benefit analysis that was utilized prior to the standard or rule's 
exposure to public comment and the cost-benefit analysis that was 
utilized prior to adoption of the standard or rule. This subcommittee 
may wish to review whether any changes by the standard setter as a 
result of a given cost-benefit analysis or for ease of implementation 
actually reduced the costs of application or increased the benefits. 
Finally, the subcommittee may wish to consider two or three existing 
standards and determine whether any changes might be made to the 
standards to reduce the actual costs of application or improve the 
benefit to users.

III. Audit Process and Compliance

    This subcommittee will study the current process of regulating 
compliance with the accounting and reporting standards and other 
environmental factors that drive unnecessary complexity, including the 
possibility of being second-guessed, the structuring of transactions to 
achieve an accounting result, and whether there is a hesitance on the 
part of professionals to exercise professional judgment in the absence 
of detailed rules. This subcommittee may wish to consider the 
following:

Financial Restatements

    A significant number of restatements have occurred in the U.S. 
financial markets over the past few years. Some have attributed these 
restatements to more rigorous interpretations of accounting and 
reporting standards by preparers, outside auditors, the SEC, and the 
PCAOB, while others believe the concept of materiality (and discussions 
regarding materiality in SEC Staff Accounting Bulletins 99 and 108) is 
applied too broadly. Many believe that this increased volume of 
restatements makes it more difficult for securities analysts and other 
users of financial information to determine the significance of a 
restatement. Further, some have expressed concern that the high volume 
of restatements could lead to an environment where users of financial 
reports begin discounting the importance of restatements (for example, 
if restatements are viewed to be routine).
    The U.S. Treasury has announced it is commissioning a study to 
determine why the volume of financial restatements has risen so 
sharply, and

[[Page 48705]]

this subcommittee should monitor the U.S. Treasury's work in this 
regard. This subcommittee also may wish to consider the reasons for an 
increase in restatements. For example, the subcommittee might consider 
whether the increase is a result of: (1) A broad application of the 
definition of materiality (including the application of materiality 
guidance in situations where errors do not impact the ``bottom line''); 
(2) more rigorous auditing or enforcement; (3) second guessing by the 
SEC, the PCAOB, or outside auditors; (4) increasingly detailed 
accounting standards; or (5) inappropriate application of standards by 
preparers/auditors. Further, the subcommittee may wish to consider 
whether there are alternative methods to communicate with the capital 
markets for certain types of accounting errors (including consideration 
of the potential for prospective methods to deal with making changes to 
historical accounting practices).

Use of Judgment

    Any move toward reducing complexity and increasing transparency 
should consider the role of preparer and auditor judgment as it relates 
to the reduction of prescriptive application guidance. For example, one 
approach to consider could be whether to expand the use of accounting 
and auditing standards that allow for more judgment in application. The 
subcommittee should also consider the role of disclosure in such an 
environment. For example, some have suggested that more latitude should 
be provided in standards, with the caveat that more disclosure is 
provided about the alternative(s) that were considered and why the 
selected alternative was applied. This subcommittee may wish to 
consider whether an increase in the use of judgment (elimination of 
bright lines and detailed application guidance) would result in 
increased usefulness of financial reports, including the potential 
impact on comparability. Furthermore, the subcommittee may wish to 
consider whether an increase in judgment on the part of preparers and 
auditors is impacted by not knowing or understanding how these groups 
will be judged by the SEC, the PCAOB or others.

PCAOB

    The PCAOB is required to inspect annually all registered public 
accounting firms that provide audit reports for more than 100 public 
companies, and at least triennially registered public accounting firms 
that provide audit reports for fewer than 100 issuers. Reports on these 
inspections have been produced in many cases more than one year after 
the completion of the inspections. Pursuant to the Sarbanes-Oxley Act, 
a portion of the results of the inspections are made available 
publicly, and certain nonpublic portions of the reports may remain 
nonpublic if the firm responds to the criticisms to the Board's 
satisfaction within a given time period.
    Similar to the FASB, the PCAOB receives requests for guidance on 
how audits should be carried out. In the case of internal control 
reviews, the PCAOB issued a series of questions and answers, which were 
generally well received. Nevertheless, these questions and answers were 
issued without advance notice or public comment, despite the fact they 
were intended to have general applicability.
    This subcommittee may wish to consider the PCAOB's inspection 
process and how the process impacts registrant and auditor behavior. 
The subcommittee may also want to consider whether this creates the 
need for additional auditing and accounting interpretive guidance, as 
well as the process on how such guidance is issued.

SEC--Corporation Finance

    The SEC is required to review filings by listed public issuers on a 
regular and systemic basis, as well as review all public companies 
required to file reports at least once every three years. These reviews 
may be time consuming and are conducted by the SEC Division of 
Corporation Finance. A perception may exist that consultation with the 
OCA does not generally occur unless the registrant requests such 
consultation. This subcommittee may wish to understand the process the 
SEC uses to review registrants' public filings, including the process 
for providing comments and the level of review and coordination with 
the various departments of the SEC. Furthermore, the subcommittee may 
wish to consider whether and how the process impacts registrant and 
auditor behavior and creates the need for additional auditing and 
accounting interpretive guidance.

SEC--Division of Enforcement

    The Division of Enforcement has broad authority to open an informal 
inquiry into a registrant's financial reporting or an auditor's 
application of professional standards with respect to registrant 
reporting. Formal investigations that provide subpoena authority are 
made only after approval by the Commission. The OCA is generally 
consulted before consideration by the Commission of a recommendation by 
the Division of Enforcement involving financial reporting or auditor 
misconduct. This subcommittee may wish to understand the process the 
SEC uses to open an enforcement investigation, including the level and 
timing of coordination with the various departments of the SEC. 
Furthermore, the subcommittee may wish to consider how the process 
impacts registrant and auditor behavior and affects the need for 
additional auditing and accounting interpretive guidance.

Audit Firms

    This subcommittee may wish to consider whether the behavior of 
audit firms creates or results in unnecessary complexity. For example, 
to promote efficient and effective audits, audit firms have created 
various tools and controls so that a uniform policy is applied 
throughout their organizations. These include checklists, audit 
programs, training, and networks of subject matter experts. These 
subject matter experts tend to view their particular issue as very 
important and may insist on a uniform national policy, even if the 
recommended approach is not applied uniformly in practice by others 
outside the firm. This subcommittee may wish to consider the impact 
that these practices have on promoting judgment and transparent 
reporting in the capital markets.

Sustainability of the Audit Profession

    Legal risks faced by audit firms and registrants clearly influence 
their behavior in preparing and auditing financial reports, including 
their willingness to exercise judgment and to show flexibility in 
applying accounting rules. With respect to audit firms, the U.S. 
Treasury has announced its intention to establish an advisory committee 
to study the sustainability of a strong and vibrant public company 
auditing profession. Treasury has announced that the committee is to 
study, among other things, the ability to attract and retain the human 
capital necessary to meet developments in the business and financial 
reporting environment; audit market competition and concentration; and 
the financial resources of the auditing profession, including the 
effect of existing limitations on auditing firms' structure. This 
subcommittee should be aware of how litigation and potential litigation 
influence behavior and may wish to consider the work of the Treasury's 
committee, but should not attempt to develop proposals that duplicate 
the work of that committee.

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IV. Delivering Financial Information

    This subcommittee will study the current system for delivering 
financial information to investors and accessing that information. This 
subcommittee may wish to consider the following:

Tiering of Information

    Different groups of investors exist in our capital markets and may 
have different needs for information from financial reports. The 
individual investor may be interested mainly in a journalistic outline 
of the key points about the progress of the business. By contrast, a 
sophisticated investor may be interested in a full discussion of 
management's choice of assumptions underlying the financial reports as 
well as a comparative analysis of particular financial indicators 
versus a peer universe. Many have suggested tiering the information 
with a journalistic summary at the beginning and more detailed analyses 
as the reader continues to read. Within the context of the Internet, 
this could mean a summary page, together with hyperlinks to more 
detailed information on particular topics.

Tagging of Information

    The SEC is engaged in a major project to introduce interactive data 
tagging technology for the informational content of financial reports, 
such as through the use of XBRL, so that users have the ability to 
quickly and easily focus on the important information they desire in 
these reports. Moreover, tagging of information may allow investors to 
customize their needs based on their desired level of detail. The 
tagging of information can be focused on performance metrics for 
carrying out the strategy of a specific company and could be designed 
along the lines of a balanced scorecard. The tagging of information can 
be organized into a variety of standard formats for key performance 
indicators (KPIs) organized by industry. An existing project for the 
development of these KPIs is being undertaken by a non-profit 
consortium on enhanced business reporting (originally started under the 
AICPA). The subcommittee may wish to study these developments and 
consider whether additional recommendations can be made to improve the 
usefulness of financial reporting in these areas.

Press Releases and Web Site Disclosure

    Press releases and corporate Web sites have become important forms 
of communication for many public companies. For example, some companies 
post or issue press releases to report interim and annual results and 
in doing so often release non-GAAP financial measures. These operating 
results are often issued well before the formal operating results and 
disclosure are required to be filed with the SEC, and they may contain 
additional information that is not required to be filed. Recently as a 
result of implementing the Sarbanes-Oxley Act, the SEC revised its 
rules and regulations concerning the public disclosure of non-GAAP 
financial measures, including in press releases and earnings webcasts, 
and whether press releases also must be filed versus furnished with the 
SEC. This subcommittee may wish to consider the underlying reasons why 
press releases and web disclosures--and the information contained in 
them--are used by our capital markets in order to determine if 
additional performance indicators would be useful for our capital 
markets. In addition, the subcommittee may wish to consider the 
experience of issuers with disclosure of non-GAAP information and the 
use of press releases and corporate Web sites in connection with their 
financial reports. The continued demand for these disclosures by 
issuers may suggest that the required formats for reporting financial 
information are not serving all the needs of preparers and users.

Legal Issues

    To provide various forms of communications that meet the needs of 
different investor groups, there may be a need to consider the legal 
liabilities for different types of information--e.g., MD&A versus 
audited income statements--and for the different communication methods 
used to provide them. For example, this subcommittee may wish to look 
at the experience with ``free writing'' in public offerings whereby 
issuers can communicate new developments or pieces of information that 
may not be included in the formal prospectus. Further, this 
subcommittee may wish to look at the various attempts to provide a 
summary prospectus in the mutual fund industry.

V. International Coordination

    This subcommittee should consider whether the growing use of 
international accounting standards has an impact on the relevant issues 
relating to complexity of U.S. accounting standards and the usefulness 
of the U.S. financial reporting system (for example, by identifying 
best practice employed internationally). As it relates to the 
acceptance of International Financial Reporting Standards, or IFRS, in 
the U.S. capital markets, the SEC has issued a proposing release to 
permit the use of IFRS by foreign private issuers without a U.S. GAAP 
reconciliation. In addition, the SEC has voted to issue a concept 
release on whether U.S. issuers should be allowed the choice to use 
IFRS to satisfy their SEC reporting requirements. The SEC expects to 
receive important feedback on these initiatives that could be 
considered by this subcommittee. Each of the four other subcommittees 
should consider whether there are areas or international best practice 
that should be evaluated by the international subcommittee for 
implementation in the U.S. financial reporting system. Given the timing 
of the expected comment letter process on the Commission's initiatives, 
and in order for the other subcommittees to identify areas of focus, 
the substantive research and analysis of this subcommittee will not 
begin until early 2008. While the nature of the items considered by 
this committee has not been fully developed, the subcommittee may wish 
to consider the following:

Standard Setting Approach

    This committee should consider whether there are ``best practices'' 
employed by the IASB in the standard setting process. For example, many 
believe the IASB takes an approach based more on principles rather than 
detailed rules, but the IASB, like the FASB, nevertheless does have 
conflicting principles and controversies based on volatility and the 
increased use of fair value. Many have observed that the accounting 
standards promulgated by the FASB are too lengthy. This is partly 
because the FASB includes in its standards not only the text, but also 
its history and the responses to significant comments on the initial 
proposal and implementation guidance. By contrast, IFRS generally 
include only the text in its accounting standards. The FASB has already 
started to work together with the IASB in formulating new accounting 
standards or revising existing standards in the hopes that future 
standards will be converged. The subcommittee may wish to consider a 
few examples where the FASB and the IASB are working together to 
determine if the process is effective and efficient to meet the needs 
of our capital markets.

Regulation

    The enforcement of accounting standards outside the U.S. may be 
quite different depending on the particular jurisdiction from the 
enforcement policies and practices within the U.S. The subcommittee may 
wish to consider these differences and determine whether the U.S. 
system could benefit

[[Page 48707]]

from any lessons from the foreign experience.
 [FR Doc. E7-16772 Filed 8-23-07; 8:45 am]
BILLING CODE 8010-01-P