Current SEC and PCAOB Developments

Introduction

As you well know, what I am going to tell you today are my views and are not necessarily those of anyone else at the PCAOB. I want to talk to you about you and the environment of change that we are in today and how these changes have affected and are affecting the accounting profession.

Change is inevitable. Cars break down, computers become obsolete, friends grow apart, and companies fail. As a general rule, change tends to make us uncomfortable – not just as accountants, but as people. It’s a bit messy and unpredictable. But there is a positive side to change. Change creates opportunities. Indeed, the accounting profession has been a beneficiary of recent changes. Sarbanes-Oxley has placed a big spotlight right on the accounting profession.

Accountants are hot!

Let’s face it folks. Today, accountants are sexy. That’s right, we’re hot!

How do you know for sure that you’re hot? Anyone that reads People magazine knows the answer to that. You are hot when they write about you all the time, good or bad. Everything that this profession now does is under a spotlight – good or bad. And the bad stuff somehow always seems to be a bit more tantalizing. And so with a big spotlight on us, most everything we do is under scrutiny. Do you want to be known for hitting a hotel clerk with a phone or helping orphans around the world? Either way, the story is likely to get printed, because inquiring minds want to know.

But just because someone is hot, they are not necessarily in control of their own destiny. Being hot, by itself, does not mean much. Basically, it simply means that you can stop being hot. Staying power requires substance. While being hot is about the present, the future has always belonged to those that have the courage to recognize their particular limitations and conviction to make the best of their situation.

Wilma Rudolph

In 1940, Wilma Rudolph was born the twentieth child of a poor family in Clarksville, Tennessee. At the age of four, Wilma was diagnosed with polio and was told by the doctors that she would never walk again. Her family could not afford good medical care, but Wilma and her mom did not give up. With absolute determination, Wilma worked to be able to walk, religiously working at physical therapy. By the time she was eight, she was able to walk with the aid of braces on her legs. A couple of years later she was able to walk using the aid of special shoes. At twelve, in spite of her limitations she insisted on playing basketball with her brothers.

And, at the age of twenty, Wilma Rudolph won three gold medals at the 1960 Olympics, setting a new world record in the 200-meter and winning her third gold medal with a sprained ankle.

History is filled with examples of those that were disadvantaged in some way or another, but by overcoming their particular limitations, they achieved greatness. Such individuals were able to turn their weaknesses into their greatest strengths. Their limitations may have made them unique, but by overcoming them, they became stronger than everyone else and emerged as leaders in their particular field with little or no competition.

The Current State of the Accounting Profession

Wilma Rudolph was truly an extraordinary individual, but some of you may be thinking: “Interesting story, but so what? What does it have to do with the accounting profession?” Well, in several significant respects the accounting profession is Wilma Rudolph.

Four years ago, this profession was in crisis. And, almost immediately upon the passage of the Sarbanes-Oxley Act, the brunt of the impact of the Act was thrust upon it. And yet, the profession did not resist what the Act required of it; instead, it courageously and without hesitation accepted the challenges that the Act required it to make. The profession did not shy away from its problems, but faced them head-on and in so doing has become stronger. Of all those that were responsible for the financial reporting problems of the last few years, the accounting profession is one group that has had the guts to say that it made mistakes but also has quietly gone about making the changes that Sarbanes-Oxley required it to make.

Today, because of those actions, the profession finds itself in a unique situation where many outside of the profession have been awakened to the significance that this profession has.

The Importance of Communication

In 1799, a French engineer in Napoleon’s army occupying Egypt uncovered an ancient Egyptian stone monument that came to be called the Rosetta Stone.

The stone is inscribed with a decree written by the priests of Memphis in 196 B.C. But what is most significant about the Rosetta Stone is that the decree is written in three different languages, including ancient hieroglyphics and Greek. Using the Rosetta Stone, scholars were able to translate the ancient hieroglyphics thereby opening a door of discovery into the mysteries and wonders of the ancient Egyptians.

Today, the Rosetta Stone rests in the British Museum in London, standing as a testament to the importance of communication.

In its purest form, accounting is communication. It is the language of business, and as accountants we, as least for the most part, understand it. However, to many others, accounting is about as unintelligible as hieroglyphics, and the accounting profession as a whole is about as mysterious as the ancient Egyptians.

Now, with so much focus being placed on the accounting profession, it is critical that we find ways to bridge this gap and open a door that will allow non-accountants to better understand what we do and why.

There are many outside the accounting profession that have only recently awakened to the significance that this profession possesses. And, some of those are wary as to how the profession will use its influence. We must not disregard such concerns, but find ways to address them.

To the extent that such concerns raise legitimate issues, we should react accordingly and make appropriate changes, and to the extent that they are not, we should not ignore those concerns, but explain in clear terms why they are not valid.

Through communication – by being open to the views of others and responding to them in terms that they will understand the profession can help demystify what it does and allow others to more fully appreciate its true value.

Complexities of Financial Reporting

A former leader of the accounting profession that truly understood the importance of communication was Leonard Spacek. Leonard Spacek was a great communicator. If you are not familiar with his works, I highly recommend them. What is most poignant about his writings and speeches is that much of what he wrote and spoke about is highly relevant today.

A favorite topic of his was the complexities of financial reporting. Speaking to the Financial Analysts Federation, Leonard Spacek said:

“We have made financial reports so complicated with different and unexplained ways to account for the same item, that either [the investor] must, if he can, go through a very laborious reasoning or he must jump at conclusions that are just as likely to be erroneous as proper. …You … in the financial analysis field are the interpreters of this complexity of accounting, and even you in your most sophisticated analyses are often operating on guesswork. The hardest questions the public accountant has to answer are – what quality has he added through his attestations? To what is he attesting?”

Obviously, the problems created by the complexities of financial reporting are nothing new. Leonard Spacek spoke these words nearly forty years ago, and yet the problem has only gotten worse since then. Unfortunately, today the complexities associated with financial reporting are so familiar to us that we virtually accept them as a given. This is a trap that we may have fallen into years ago, but from which we must find an escape. Getting out of this trap will not be easy and will require a concerted effort by many.

It will most likely require significant changes and will take a substantial amount of time; however, I propose to you that there are things that we can do immediately to start affecting positive change. It requires getting back to basics in how we view financial reporting. What good is financial reporting if it is not useful to the financial statement reader?

We must not be willing to accept something as being OK, just because it has been the status quo for some time. In that regard, I commend the FASB and the SEC for their interest in addressing this issue and the FASB in recently agreeing to take on the tough issues of pension and lease accounting. These are steps in the right direction. But it will take more than FASB or the SEC; it will take virtually everyone involved in order to correct this problem. For example, we must put an end to the need for FASB to continually come up with a new rule to address the latest end run around existing standards.

Professional Judgment

This leads me to a somewhat related, but separate area where we should to focus our attention. That is the area of professional judgment. Professional judgment is what the accounting profession is all about and yet we have a tendency to seek out rules as if somehow rules can serve as a legitimate substitute for professional judgment.

There is a simple truth that there is no rule against doing the right thing, and often we know what the right thing to do is. And in no stretch of one’s imagination is the absence of a rule ever a good excuse for doing the wrong thing.

When I was in high school, a motivational speaker came to the school and told us a number of things about life. At the time, I didn’t understand much of what he said, but one thing he said stuck with me. He said there are two kinds of people in the world, princes and princesses and frogs. The major difference between a prince and a princess and a frog is that princes and princesses play the leading roles in their own movies while frogs play bit parts. We should not settle for bit parts.

And yet our dependence on rules has the effect of pushing us toward bit parts. We have a starring role to play. Approximately 52 percent of the US population, as investors, depend upon us to ensure that financial reporting of public companies is fair and accurate. And the profession has an effect that far exceeds the realm of financial reporting for public companies. In the various starring roles that accountants collectively play, this profession affects the life of virtually everyone in the United States and beyond. All of us have a responsibility to hold ourselves to the highest standards as professionals, regardless of what the rules may or may not allow.

Looking for Ways To Improve

Today, we are also in unique position to affect positive change, not because of a new-found significance or notoriety, but because of what we do every day. We are the experts in what we do, and as such there is no one better than us to find ways to improve upon what we do. But to do that we must be mentally prepared. As Louis Pasteur once said, “Where observation is concerned, chance favors the prepared mind.” Such is the true essence of serendipity.

In 1886, John Pemberton, a pharmacist, created a syrup that he intended to use for medicinal purposes. The concoction never made it as a medicine, but today people drink it a billion times a day and call it Coca-Cola. Separately, a 3M researcher tried and failed to improve adhesive tape and instead created a semi-sticky adhesive. Yet, some four years later another 3M employee found this semi-sticky adhesive useful for keeping his bookmarks from falling out of his church choir hymnal. Today we call it Post-it notes. And the list goes on and on.

These are examples of serendipity, which is simply the discovery of something good by accident. As to the examples of serendipity that I just gave you it is its accidental nature that are most often focused upon, because that is a quality that makes it appear magical and therefore is the most intriguing. And yet, the far more important aspect of these examples is not really accidental at all. Serendipity occurs when there is someone there to recognize the unintended consequence and understands how to put it to good use.

No one is better prepared or situated to see the possibility for improvements than the profession itself. The profession must be self-motivated and proactive in approaching financial reporting if we were ever to break the continuous cycle of repeated problems. We cannot afford to wait until the problem becomes so great that there is simply no other alternative but to make a sudden dramatic change. And, we cannot afford to wait for others to fix our problems. As professionals, it is our responsibility.

What Can I Do?

Some of you may be saying to yourself, OK, great, but he is not talking to me. I am. I am talking to all of you as the professionals that you are. In fact, when it comes to new ideas, fresh minds actually have an advantage, especially when considering old problems, because they do not so readily accept the notion that a solution is unobtainable. There is a solution to virtually every problem, although sometimes the solution requires unconventional thinking or considering something that was previously believed too difficult or too insignificant.

Albert Einstein was an unknown patent clerk when he shook the world with his Theory of Relativity. And, we all know Graham Bell as the inventor of the telephone, but the reality is the telephone was actually invented by a German school teacher named Phillipp Reis. What Alexander Graham Bell did was perfect Reis’s telephone. Reiss’s telephone transmitted hums and whistle, but not speech. Although Bell made a number of changes, he got the Reiss telephone to transmit speech principally by moving a screw by 1/1000th of an inch. That 1/1000th of an inch is the reason no one today has ever heard of the Reis Telephone. Small improvements can make a big difference.

Summary

Today, the accounting profession is in the spotlight and many outside of the profession are now more aware than ever of the important role it plays. But there is much yet to do. I have great faith that this profession has what is takes to address these challenges. And, in so doing, make this profession even stronger and more significant than it already is.

Thank you.