Shapiro’s veiled threat to the accounting profession

Ultimately, the SEC has the ability to (at least indirectly) change accounting standards, and change the standard setters. So, when Mary Shapiro, the SEC Chairperson, starts to make even veiled threats, it quickly gets accountants’ attention. In a speech on May 25, 2010, Shapiro said:

At the SEC, we have heard from investors that they are not as confident as they could be, and they have areas in which we all could expect more from accountants, from accounting standards, from regulators and from those who provide assurance though the audit process.

I believe that, when your customer asks for more, especially after the challenges of recent years, you need to listen.”

Shapiro did not say what she intends to do about this problem, or even precisely who needs to change. But apparently she thinks that the SEC and the accounting standard setter (the FAF) are doing their job. According to Shapiro:

The SEC and FASB are listening. Not only that, we are acting. To give you just one example, investors have been calling for better accounting standards and more transparent disclosure of the risks to which entities are exposed through off-balance sheet transactions. The FASB responded with a major standard-setting initiative for the accounting of financial asset transfers and consolidation, including elimination of the exemption for so-called “qualifying special purpose entities.”

The SEC is acting, as well, with a monitoring strategy for the new standards that includes guarding against attempts at circumvention, relaying our findings to the FASB, and conferring with the FASB regarding further refinements that may be needed.”

Shapiro’s speech did talk about the need for better funding, which is one of her favorite topics. Perhaps the introductory comments quoted above were just a different way of stating her well-known desire for better funding. In case she was hinting at something else, my guess is that Chairman Shapiro would like to see additional transparency on the inspection reports of the PCAOB. Currently, these reports largely remain private. Investors would like to know more, but the large accounting firms have been successful (so far) in lobbying for the status quo.

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