Don’t believe the hype about divisiveness at the Securities and Exchange Commission. The increasingly common occurrence of split votes along party lines is a byproduct of Congressional mandates, notably through the Dodd-Frank Act, that wedge social issues into the disclosure regime at the expense of materiality. That’s the word from Commissioner Michael Piwowar who touched upon those issues, IFRS standard setting, and XBRL adoption during a talk at the 34th Annual Current Financial Reporting Issues Conference this week in New York City.
We break down both his prepared remarks and comments made during a question and answer session that followed.
Shaping the Commission
The SEC, Piwowar pointed out, “has been a lawyer-led agency throughout most of its history.” To his knowledge, he is only the third Ph.D. economist to serve as a commissioner. “Perhaps in the not too distant future, we will see a certified public accountant (CPA) named as a commissioner.”
“The biggest structural issue is that I’m the only non-lawyer on the Commission,” he added. The response when asked what the ideal composition would be: “It’s easy, three economists and two accountants.”
“It would be great to have accountants who ask probing questions,” Piwowar explained. “As an economist, I tend to think of things a little bit differently and that allows me to ask a lot of questions. That scares people, which is a good thing. We want our regulators, including me, to be a little uncomfortable. A comfortable regulator could be a dangerous regulator.
Nevertheless, he praised President Obama’s nominations of Lisa Fairfax, a law professor at George Washington University, and Republican Hester Peirce, senior research fellow at the Mercatus Center, to replace departed commissioners Luis Aguilar and Daniel Gallagher. Both await Senate confirmation.
On the Future of IFRS
It has been roughly three years since Commissioners have had substantive discussions about adopting international financial reporting standards (IFRS) and achieving a single set of global accounting standards. “The rest of the world awaits leadership from the United States and the SEC in particular,” Piwowar said.
His perspective is that any requirement for IFRS financial reporting should be investor-driven, not regulator-driven. “In that respect, it is difficult to guage investor demand for financial reporting under IFRS by U.S. domestic issuers,” he added. “How does one predict investor demand for IFRS reporting when it is largely not available in the domestic context?”
Chief Accountant Jim Schnurr, he said, has raised “an interesting and incremental approach” that could provide insight as to whether there is investor demand for IFRS reporting: allow, but not mandate, it as a supplement without reconciliation to GAAP.
“It would take nothing away from investors who currently use and like GAAP, and any IFRS disclosure would still be subject to the anti-fraud provisions of the federal securities laws,” Piwowar said. For preparers, it would lower the cost of providing IFRS financial reporting by eliminating the need for reconciliation to GAAP. The Financial Accounting Standards Board and International Accounting Standards Board could work collaboratively to complete their existing convergence projects and identify additional areas for convergence.
“The Commission should take this additional step forward,” he said.
On Interactive Data
The Commission should undertake a review to assess whether public company requirements to file financial statement information in the eXtensible business reporting language (XBRL) requirements are achieving their intended objectives and at what cost, Piwowar said. “I suspect that not many investors are flocking to corporate websites to download the latest interactive data filing,” he said, adding that members of the SEC’s Advisory Committee on Small and Emerging Companies say they get very few hits on their corporate websites for this information.
That committee concluded that the compliance burden placed on smaller reporting companies with respect to the XBRL filing requirement was disproportionately high as compared to the benefits. On the other hand, while it might not have been previously feasible for a single analyst to sift through the financial results of thousands of issuers that file with the Commission, interactive data now makes that possible.
A significant concern is the quality and accuracy of the information contained in interactive data filings, Piwowar said. One suggestion to address reliability is to move away from the current model of filing the interactive data as a separate exhibit and move to in-line XBRL, where a single electronic document is embedded with data and tags. “In-line XBRL has the potential to improve the accuracy of structured data, ease burdens on issuers, and facilitate easier review,” Piwowar said. Currently, the EDGAR system is not capable of accepting filings with in-line XBRL and the Commission “should move promptly to fix that.”
Improving Corporate Disclosures
Aside from various efforts underway to streamline the SEC’s disclosure regime, Piwowar wants a back to basics approach that focus on materiality and not the various social causes that have seeped into the process.
“Unfortunately, the disclosure regime of the federal securities laws has been hijacked in recent years by various special interests,” Piwowar said, citing the Commission’s adoption of the median pay ratio disclosure requirement of the Dodd-Frank Act and conflict minerals disclosure requirements as examples. “The first and most important step to improve disclosure effectiveness is to stop the Commission from being used as a pawn of the union and social justice power brokers. The focus on non-material, special interest disclosure provisions is a deplorable corruption of our mission.”
Piwowar’s concern is that this new breed of regulation will continue to distract the Commission’s from its core responsibilities. Already, Congress is at work to require additional disclosures for “whatever pet idea they have, or whatever special interests are talking to them about,” among them political spending, climate change, human trafficking, and child labor.
On Commission Discord
Piwowar took umbrage at the suggestion that a lack of consensus among Commissioners—usually along party lines—is either a new or unreasonable development.
Most of the 3-2 votes in recent years were connected to rulemaking mandates of the Dodd-Frank Act and “once we clear out those rulemakings, I think you will see a lot more consensus-based rulemaking,” he said. Until that day, “there is a conscious effort among the commissioners to try to work together across party lines.”
As the Commission’s sole Republican until Gallagher’s replacement is confirmed, Piwowar may have to build more than a few bridges. “I can’t play man-to-man, I have to play zone defense at this point,” he said. “If I want to try to get anything done, I have to work across party lines.”