Day 1 – The Rest of The Gang: Robert Pozen

Bob Pozen was the first day luncheon keynote speaker for Compliance Week 2008, charged with updating us on the progress and preliminary conclusions of the SEC Advisory Committee on Improvements To Financial Reporting.

His opening comments mentioned that Chairman Cox had come to him originally with the request to Chair a committee focused on reducing financial reporting complexity and was thinking of calling it “Committee to Reduce Financial Reporting Complexity” or some such nonsense. Bob Pozen says he told Chairman Cox that, maybe, that didn’t tell the whole story and so a new and improved Committee title was christened.

After hearing Chairman Cox’s own update on the progress of this Committee at the US Chamber of Commerce meeting in April, I am not surprised that Cox comes off again as focused primarily on making things easier for his corporate constituents, rather than focusing on investors’ needs. As others said many times during the conference with regard to risk management and FCPA, sometimes there’s complexity because the transactions are complex.

Necessarily so? Maybe, maybe not. And, sometimes, complexity exists only to obfuscate the true nature of the transactions, such as in off-balance sheet vehicles and daisy chain securitization sequences that help everyone lose contact with who owns the risk. And in these cases, we need to make sure there’s enough complexity in the reporting to help investors find the truth.

I remember when, as my responsibilities for financial accounting and financial reporting grew during the first ten years of my own career, it was increasingly irritating to hear that “senior management” wanted less detail and more summary, couldn’t handle the detail, weren’t interested in the details, and that detail was my job not theirs. Even though the businesses I was involved in were large, complex, fast moving, and sometimes icky, it seemed that the higher up you went, the more luxury you felt you deserved in not having to get your hands dirty with the detail.

Well, I’m here to tell you that business is messy.

Big business is even messier.

Global business is messy in multiple languages and sometimes doesn’t translate well.

If you can’t do the detail, don’t do the deal.

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.

To achieve the Committee’s goals, between 14 and 18 members will be appointed who can effectively represent the varied interests affected by the range of issues to be considered such as officers of public companies; board and audit committee members of public companies; accountants and securities lawyers who provide professional services to public companies; and investors, among others.

The Committee’s charter would direct it to consider the following areas:

1. 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;

2. 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;

3. 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;

4. 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 recommendations and to test the application of proposed recommendations by commenting on the manner in which such standards could be improved); and

5. 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.

Here’s some highlights from Bob Pozen’s speech.

At the end, I will repeat my question to him and his very unsatisfying and rather dismissive answer to me.

(By the way, why are Bob Pozen’s speeches as Chairman of this SEC Advisory Committee presented on his firm’s template and with their logo? Seems wrong to me… )

On restatements: (A hot topic at the conference. See Scott Taub post.)

All errors, other than clearly insignificant errors, should be promptly corrected and disclosed in the current period
In the “dark period” during the restatement process (e.g., 1-2 years), investors receive little information
Therefore, prior period financial statements should be restated only if the error is material to current investors

On accounting judgement: (Haven’t they been using any up until now???)

Increased role of judgment
Fair value estimates
Principles vs. rules

Policy statement, not “safe harbor”

Disciplined consideration of factors
Material facts of transaction
Alternative accounting views
Review relevant literature
Known diversity of practice
Documented rationale for alternative chosen

On delivery of reported information (AKA XBRL)

XBRL: Gradual implementation
Furnished, not filed
No auditor assurance

Executive summaries
At front of 10Ks and 10Qs

More use of corporate websites
Advantage of hyperlinks
Call for legal clarification

Off-balance sheet rules:

Easily avoid consolidation under current rules
Voting control test
Risk/reward test

Proposal: Require independent holder of substantial equity to have governance role

Disclosures by sponsor
Informal and formal obligations
Likelihood of future consolidation

Other comments:

Go slow on fair value
Suggestion for division of income statement into realized and unrealized income (???!!!###???)
Elimination of bright lines such as with regard to lease accounting

Conclusions:
CIFiR is focused on administrative solutions (no legislation)
Financial restatements and accounting judgment are high priorities for SEC
Fair value is controversial: Division of income statement is compromise
FASB will endorse process proposals of CIFiR
International convergence is going to be a lot tougher than expected

Unfortunately, I didn’t hear much of the rest of the speech after I heard the first set of comments about restatements being only necessary if the error impacts current investors.

My question:

Mr. Pozen, I write a blog called , re: The Auditors focused on the business of the Big 4. My question is about restatements.

I want to make sure I heard you correctly. The committee believes that only current investors are relevant when determining whether to restate, even though restatements can quantify the potential claims for clawbacks of bonuses based on false numbers, for example, or other employee benefits based on reported profits and can also provide the basis for claims on behalf of shareholders via class action lawsuits?

Pozen’s response: Well, I can see what blogs you’ve been reading. Ha Ha Ha.

My recommendations are regarding required to restatements to the public, to be filed with the SEC. There is nothing to prohibit companies from quantifying this type of information internally for the reasons you mentioned. It would be the job of the Compensation Committee of the Board of Directors to determine of there was a cost-benefit to doing so.

Hmmm… So we all know how that’s going to turn out.

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Day 1 – The Rest of The Gang: Robert Pozen

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