Speech by SEC Commissioner:
Remarks Before the Institute of
European Affairs
by
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
Dublin, Ireland
September 29, 2006
Thank you, David. Céad mile Fáilte! TEáthas orm bheith anseo. Gura
maith agaibh go léir inniu.1 It is an honor to be part of an Institute of
European Affairs program. I appreciate the work that the IEA is doing in
conducting research and publishing on a vast array of current Irish and
European policy issues. Also, of course, in putting together forums like
this one. Let me start by saying, as I am required to do, that the views I
express here are my own and do not necessarily reflect those of the
Securities and Exchange Commission or my fellow Commissioners.
It is truly a pleasure to be with you today in Dublin. I may well be
the first SEC commissioner to give an official speech here. But, given
Ireland's vibrant economy and its importance in the world and US markets,
I am confident that I will not be the last.
Having been impressed from afar at the rapid economic growth that
Ireland is experiencing, I am enjoying the opportunity to witness the
Celtic Tiger's economic boom first hand. I am pleased that the U.S.,
through its citizens, corporations, and capital that come to work here,
has been welcomed to participate in Ireland's prosperity. The ties between
today's Irish and American economies are a natural phenomenon in light of
the historically close relationship that our two countries have enjoyed.
The Irish-American relationship was born through waves of immigration from
Ireland to the U.S. Irish immigrants left for the U.S. at a time of severe
economic hardship for Ireland. Today, quite to the contrary, the strength
of the Irish economy is attracting a wave of immigrants from other parts
of Europe and the world. It is particularly exciting for me, an SEC
Commissioner, to see the financial services sector among those that are
thriving in Ireland.
Wise economic and regulatory policies seem to be one of the keys to
Ireland's economic success. The Heritage Foundation and Wall Street
Journal annually rate nations according to their level of economic
freedom.2 For 2006, Ireland came in third, behind only
Singapore and Hong Kong, and ahead of the United States, which ranked
ninth. A white paper issued by the Irish government in 2004 is indicative
of Ireland's commitment to economic freedom. The paper, entitled
"Regulating Better," set forth six basic, but critically important
principles of better regulation: necessity, effectiveness,
proportionality, transparency, accountability, and consistency.3 Underlying the promulgation of these principles
was an understanding that a nation's regulatory framework has a very
fundamental impact on its competitiveness.
The principles set forth in the white paper are ones to which
regulators outside of Ireland would do well to pay heed. So too should
regulators be guided in their actions by the following words from the
White Paper:
In terms of assessing the need for regulation in
an economic context, it is important to assess carefully whether or not
the existing situation can be resolved through market mechanisms. Clear
criteria should be used to determine whether circumstances justify
regulation of particular markets.
Direct intervention by Government
always requires careful consideration. The State should avoid the
"regulatory impulse" whereby it adopts programmed, default responses to
situations that arise, to the exclusion of other possible solutions.4
The SEC, in the course of its seven decades, has too often fallen prey
to the "regulatory impulse" - jumping to respond with rule-based solutions
to any and every problem without checking first to see whether the market
might have a better way to solve the problem. Fortunately, the tide is
changing in the U.S. also. The SEC's current chairman, Christopher Cox, is
taking steps to ensure that the regulations that we adopt meet that
standard. Recently, for example, he directed the SEC's General Counsel to
carry out a "top-to-bottom review" of the Commission's process for
assessing the economic ramifications of its rulemakings.5 Processes designed to better invite and
incorporate the insights of those outside the agency will help to
determine whether new rules are necessary and, if they are, will help to
generate effective, efficient rules.
Because the effects of regulatory actions often spill over their
national borders, it is critical that we seek the insights of all of the
parties who will be affected by our rules. That is why I appreciate forums
like this in which I can hear from people outside the U.S. about how our
rules can be improved. In addition to hearing from those of you who are
investors or are among those regulated, I am looking forward to hearing
from my counterpart regulators. Particularly, I must tell you that both
Ireland and the EU are currently well served by EU Internal Market and
Services Commissioner Charlie McCreevy. Commissioner McCreevy brings a
welcome, thoughtful outlook on regulatory issues, and is a genuine
pleasure to work with. This is very important to the SEC, because we need
to work with and understand the concerns of our fellow regulators,
particularly here since the European and American economies are so tightly
linked.
The need for a cooperative, mutually respecting regulatory approach has
been underlined by the merger negotiations between Euronext and the New
York Stock Exchange. The contours of the relationship between regulators
are still being worked out. Toward that end, Chairman Cox visited Lisbon
earlier this week to meet with the Chairman's Committee of the Euronext
regulators. I am confident that we will devise solutions that embody the
principles of better regulation that I discussed a moment ago.
Frankly, I find speculation about regulatory turf fights much less
interesting than consideration of the strategic business and economic
reasons of why the New York Stock Exchange and Euronext are looking to
combine. The global capital market is certainly becoming more integrated,
but one cannot deny that differences among regulatory regimes affect
business decision making.
Some have argued that increased regulatory costs in the U.S. are
driving European issuers back to their home markets. In the last four
years, more than forty European companies have taken this step.6 Others may well consider following suit if the SEC
eases its rules that govern the deregistration process.
The SEC is actively considering amendments to its deregistration rules.
In short -- I dare not bore you with too much detail -- under our current
rules a foreign issuer may terminate its registration only if it has fewer
than 300 U.S. shareholders. In December of last year the Commission
published for comment a proposed rule that would offer additional ways for
foreign issuers to deregister.
We received more than fifty comment letters, many from European
companies, in response to our proposal. Many comment letters urged the SEC
to liberalize the deregistration rules even more than it had proposed to
do. A frequent theme was that "qualified institutional buyers," whose
expectations and needs are radically different from those of retail
investors, should be excluded when counting U.S. shareholders.
Alternatively, commenters requested that the SEC increase the maximum
percentage of U.S. shareholders that a deregistering company is allowed to
have.
We are now considering whether and how to modify the proposed approach
in light of the comments that we have received. The need for flexibility
for issuers must be balanced, of course, against the needs of American
equity investors. In my mind, the proper approach will allow issuers to
deregister unless their shareholder base includes a large number of U.S.
residents who have availed themselves of the U.S. markets, and thereby
bargained for the protections afforded by U.S. registration. We take your
concerns about the proposal seriously. We are diligently working to devise
an approach that takes them into account without compromising our
obligation to protect the interests of American investors.
Calls for liberalization of our deregistration rules intensified in the
aftermath of Sarbanes-Oxley. The real culprit seems to be Section 404 of
the Act. As you know, Section 404 requires management to complete an
annual internal control report and requires the company's auditor to
attest to, and report on, management's assessment. Despite its worthy
objectives, implementation of that section has produced many unintended
consequences, at great cost and tribulation for companies in the U.S. and
abroad. The costs, frankly, took everyone by surprise.
The SEC is committed to addressing those implementation problems. As
evidence of this commitment, the SEC has hosted two roundtables over the
past two years to hear what went wrong and how the process can be
improved. In addition, the SEC has given smaller companies and foreign
issuers more time to comply with Section 404 requirements. Most recently,
we granted relief from Section 404 to accelerated foreign private issuers
that are not large accelerated filers by extending for a year the deadline
for an auditor's attestation report. The auditor attestations will first
be required in annual reports for fiscal years ending on or after July 15,
2007. These companies must include management assessments of internal
controls in their annual reports filed for their first fiscal year ending
on or after July 15, 2006.
We also proposed to extend the filing deadlines for non-accelerated
filers, both foreign and domestic. Under the proposed extension, they
would have to file their management assessments for the first time for
fiscal years ending on or after December 15, 2007 and the auditor's
attestations on those assessments would first be required for fiscal years
ending on December 15, 2008. We also proposed transitional relief for
newly public companies, including foreign private issuers listing on a
U.S. exchange for the first time. A newly public company would not be
required to provide either a management assessment or an auditor
attestation report until it has previously filed one annual report with
the Commission.
In announcing this most recent package of Section 404 relief, the
Commission estimated that 60% of the approximately 1,200 foreign private
issuers will benefit from the Section 404 relief.7 The remaining foreign private issuers are "large
accelerated filers," to which both Section 404 requirements already
apply.
Many of the problems associated with Section 404 stem from the audit
standard adopted by the Public Company Accounting Oversight Board to
govern the auditor's role in opining on an issuer's internal controls. The
PCAOB is the body that is responsible for overseeing audits of U.S.
issuers and the auditors that carry out those audits. The PCAOB was
established as part of the Sarbanes-Oxley reforms to oversee U.S. public
company audits. It is not a governmental entity - although it might look
that way from the nature of the powers it possesses -- but rather is
subject to the oversight of the SEC.
The PCAOB's audit standard has made it difficult for auditors to employ
professional judgment in assessing internal controls and caused them
instead to use a time-intensive, deep-in-the-weeds approach. We hear too
many stories of excessive documentation, bottom-up audits, and overly
conservative material weakness determinations. The resulting process
diminishes the risk of being second-guessed, but does so by foreclosing
the use of reasoned judgment.
The PCAOB is working now to revise the relevant audit standard so that
it is shorter, simpler, and allows for more efficient application. Our
office of Chief Accountant, under the able leadership of our new Chief
Accountant Conrad Hewitt, is working with the PCAOB on revising the audit
standard. The process for overseeing the work of the PCAOB is not without
its limitations, which make it difficult for the SEC to shape the PCAOB's
final standard with the degree of precision that I would like.
Nevertheless, I am committed, if necessary, to employing all of the SEC's
oversight tools to ensure that the standard gets fixed.
Importantly, the SEC is simultaneously working on guidelines of our own
for company management. Absent such guidance, companies have been at the
mercy of their auditors and have incurred great costs in satisfying
seemingly unreasonable demands from auditors operating under the
constraints of the PCAOB's unwieldy audit standard. By providing
management with guidance of its own, we hope to restore a healthy balance
to the process.
Let me turn finally to the issue of accounting standards. With the new
EU-wide mandatory application of International Financial Standards, this
is an important period in the history of accounting. Accordingly, as
European companies transition to IFRS, many on both sides of the Atlantic
are watching. This is the time during which the groundwork must be laid to
ensure high-quality standards and consistent application of IFRS across
all of the nations in which it is used.
Many are working to ensure the success of IFRS. The International
Accounting Standards Board, under the strong leadership of Chairman Sir
David Tweedie and Vice Chairman Tom Jones, is working to achieve and
maintain consistently high-quality standards with input from the full
range of interested parties. Issuers, of course, are on the front lines
and face the most difficult challenge of applying IFRS consistently and
appropriately in their particular circumstances. I hope that companies are
working together in this effort with other similarly situated
companies.
Accounting firms also play a critical role in helping to achieve
consistent application of IFRS across clients, industry groups, and
national borders. To do this, they need to be internally consistent and
talk to one another so that differences of interpretation do not develop
firm-to-firm. National regulators need to resist the impulse to develop a
nationally specific version of IFRS. International organizations - CESR
and IOSCO in particular - are facilitating consistent application through,
among other things, the development of databases of IFRS decisions by
members.
We at the SEC, for our part, are actively participating in the efforts
to establish IFRS as a viable and reliable set of accounting standards.
Our staff is currently reviewing the filings of foreign issuers that have
filed using IFRS. These filings will enable us to assess IFRS. It is one
thing to see a theoretical standard, and quite another to see how it is
applied across a broad range of companies.
I have never believed that it is necessary to impose a single set of
accounting rules on all participants in the global marketplace in order to
allow competition across borders. In fact, due to differences in culture,
legal systems, and liability regimes, true equivalence in accounting
standards may be an impractical objective, at least in the near future.
What is critical, however, is that accounting standards be clearly stated
and evenly applied by all nations and companies adopting those standards.
Moreover, financial reporting standards must be implemented in such a way
that they succeed in serving their intended purpose of protecting
investors.
The coherent consistent application of IFRS is an essential
prerequisite to the elimination of the reconciliation requirement in the
United States. It will take us some time to assess how IFRS is being
implemented and enforced, but I am optimistic that we will complete our
assessment, well within the 2009 goal for reconciliation, and be able to
determine that the reconciliation requirement is unnecessary. Our new
Chief Accountant, Conrad Hewitt, is committed to working to achieve this
objective as quickly as possible.
I am keenly aware that shareholders ultimately bear the costs of
reconciliation - like many of our regulations - and these costs are
considerable. For this reason, I am very interested in what appears to be
growing European sentiment against requiring reconciliation for U.S.
issuers that currently use GAAP in their EU filings. Requiring U.S.
companies to reconcile their U.S. GAAP financial statements to IFRS would
undermine our efforts towards mutual recognition by senselessly diverting
attention and energy from our shared, transatlantic objective of making
sure that IFRS succeeds. U.S. GAAP is already an established standard that
has proven itself to investors over time. The need for reconciliation
disappears when IFRS shows itself to be, like GAAP, a consistently
applied, high quality set of accounting standards. It is in everyone's
best interest to achieve the elimination of the reconciliation requirement
as quickly as possible.
In the meantime, the SEC will work with its European counterparts to
improve financial reporting for the benefit of investors everywhere. Just
last month, the SEC and the CESR issued a joint work plan, which sets
forth goals for cooperation between the regulators.8 The work plan focuses on the development of high
quality accounting standards and achieving consistency and quality for
IFRS. The plan sets forth practical ways of bringing this about through
formalizing transatlantic channels by which information and experiences
with IFRS and US GAAP are shared and specific implementation matters are
discussed. The work plan, which will help to form a vital, transatlantic
working relationship between regulators, grew out of a meeting between
CESR Chairman Arthur Docters van Leeuwen and SEC Chairman Christopher Cox
last December.
The deepening of the cooperation between the SEC and CESR is a very
constructive development that will positively influence accounting and
auditing practices in the U.S. and in Europe. In addition, both GAAP and
IFRS are likely to be improved through the efforts of the Financial
Accounting Standards Board and the International Accounting Standards
Board.
The FASB and IASB are working to eliminate differences between U.S.
GAAP and IFRS consistent with their Norwalk Agreement, the principles of
which were reaffirmed in a Memorandum of Understanding entered into
earlier this year.9 The FASB and the IASB have committed to work
toward a common set of high-quality accounting standards. Although this is
a long-term goal, I have heard encouraging reports about the level of
cooperation between the two accounting boards. Indeed, some look to the
level of cooperation between the two accounting boards as a model for
European and American cooperation more generally. Perhaps we have Tom
Jones to thank for this, since, in addition to his work at the IASB, he
has served as a trustee of the Financial Accounting Foundation, which
oversees FASB, and as a member of FASB's Emerging Issues Task Force.
You have been a very patient audience. I welcome your continued active
involvement in our issues, including your questions and comments. My phone
and office are always open to you, if you are inclined to pay for an
international call or fly to the U.S.! I now look forward to hearing Tom
Jones and then would be happy to respond to any comments or questions that
you might have for me.
Endnotes
http://www.sec.gov/news/speech/spch092906psa.htm
Modified:
10/13/2006 |