Excerpts From Past SEC Speeches On Accounting
Nov. 13, 2009
FEI Summary

Following are some excerpts from some past speeches of Chairmen and Chief Accountants of the U.S. Securities and Exchange Commission, on the subject of accounting standard-setting.

[NOTE: For perspective, the Financial Accounting Standards Board was formed in 1973, and was expressly formed as a full-time, independent board, taking over the duty of accounting standard setting from the AICPA's Accounting Principles Board or APB. Another point referenced directly (or indirectly) in some of the remarks below is a debate that ensued in the 1970s over whether or not to require  'current cost' or inflation-adjusted accounting information in addition to, or instead of, historical cost information.] 

From May 19, 1972, in a speech entitled Toward Common Accounting Standards, delivered in Paris, France, SEC Chairman William J. Casey said:

Finally, in looking at the long-term evolution of accounting, I believe that just as we moved from primary emphasis on guiding management and reporting to owners, and from there to informing investors, and from there to assisting in the decisions of potential investors, we will in the future increasingly expect the accounting process to assist in the decisions needed to establish and seek national economic and social goals.

May 7, 1973, in a speech entitled General Thoughts on the Accounting Environment and Specific Thoughts on Accounting for Lease Financing, SEC Chief Accountant John C. ("Sandy") Burton said:

Looking at the accounting environment in general, it is quite apparent. that significant changes are brewing.  In the first place, they are most evident in the area of setting accounting principles where a new body is, now in existence: The Financial Accounting Standards Board (FASB). We at SEC are very confident that it will improve the standards of accounting measurement in a significant fashion. We believe this because we think it is institutionally more appropriately structured for dealing with problems facing it than was the old Accounting Principles Board (APB). The APB was originally designed by a committee that was convinced that research would produce Truth and that the only thing that would be needed after accounting research was done was a body to simply anoint the truth that had become apparent. Therefore, they established a part-time large body which would come together occasionally to perform this anointive task. In the 15 years since 1958 when the APB was created, it has become apparent that while research may be the hope of the future in fuel generation and energy shortage, it does not seem to have the same prospect in the area of financial accounting measurement. Accordingly, it was necessary to develop a body which will be more appropriately structured to perform the required quasi-legislative function than was the part-time APB.

There are a number of areas which deal with financial measurement where people are deeply involved, because their pocketbooks are deeply involved; "and there is nothing more emotional than money: So that it seems very likely that as the new Board gets underway;  those that find themselves ill at ease with its initial exposure drafts will probably bring the same kind of pressure to bear as they brought against the APB. And I don't think the fact that the members of the FASB are not current practitioners of accounting is going to shield them from this pressure to any great . . extent. Nevertheless, I am optimistic that they will be able to move expeditiously....

It is certainly the intent of SEC and the accounting staff of the SEC to work with the new [FASB] Board as we have worked with the APB. I have characterized our relationship as one of mutual nonsurprise where we both must advise the other of how we are thinking and what we are doing. The SEC does not view itself as being in a position of absolute authority and the FASB as working for it. We think that authority exists for both parties and in this particular situation, the responsibilities of both parties are better served if we work together.  If we find ourselves in an adversary posture, we  will be involved in  a situation which in game theory is called a negative sum game--one in which there is a negative total payoff. We both know this. And therefore it seems very likely that we will be working effectively with the Board. The first steps have already been taken. The Board has met with SEC .. The SEC staff has established relationships with various members of the Board, various subcommittees, and we are optimistic that this relationship will work  effectively and will improve standards of accounting measurement.

Nov. 11, 1959, in a speech entitled, Accounting: Changing Patterns, SEC Chief Accountant Andrew Barr said:

The impact of the requirements of regulatory agencies upon the development of accounting and auditing, whether for good or evil, has been the subject of discussion by experienced practitioners, present and past members and employees of such agencies, teachers and students....

As an English judge said many years ago when business was far less complex than it is today, 'The ascertainment of profit is in every case necessarily a matter of estimate and opinion. '"

This quotation expresses a point of view necessary to an understanding of financial statements, yet it is difficult to explain to laymen and to some accountants. This difficulty may be an indication that the profession may have over-stressed the importance of accounting principles and failed to emphasize independent objective judgments. The same accountant, in an address on December 6, 1933, before the Illinois Society of Certified Public Accountants here in Chicago, 4/ expressed the view that "there is reason to fear that responsible people will re-fuse to accept the unfair liability imposed on them by Congress under the Act, and will continue to refuse until juster provisions are enacted." He also said that he would "be extremely sorry if the effect of the Securities Act should be to place the distribution of securities and all the work attendant on such distribution in the least responsible hands." By some time in 1934, after some experience with the Commission and its staff, 5 these fears seem to have been dispelled, at least to a considerable extent.

Mr. May was an important witness in the hearings on the Securities Exchange Act of 1934. In these hearings his objections to a uniform system of accounting were developed after his opening remark that "The fact of the matter is that accounting, especially industrial accounting, is essentially a matter of judgment, and you cannot put judgment in strait-jackets." His testimony questions critically the results to be obtained by such regulation as getting "a superficial uniformity which is not real. " Elsewhere, Mr. May expressed the hope and expectation that the SEC would "not be led astray by the deceptive promise of uniform accounting, * * *," and would "no doubt use all its great influence to bring about by voluntary action as great a degree of uniformity in different industries as is obtainable, and will insist on consistency from year to year in the accounting of each corporation subject to its regulation." Whether these opinions were influential at the time or not in convincing the Congress that more could be accomplished by cooperative action. than by rigid control, the Securities Acts as enacted were ex-pressed in terms of general authority over accounting and have been implemented by regulations specifying the form and content of financial statements but not in terms of a uniform system of accounts.

Oct. 18, 1999, in a speech entitled Quality Information: The Lifeblood of Our Markets, SEC Chairman Arthur Levitt said,

Financial reporting is a language, just like German, English, or Spanish. It is the language that companies use to talk to investors. It is what people use everyday to decide where to invest their hard earned dollars for financial security and future opportunity. These decisions can be hard enough. But try it in a language you don't understand, and it becomes all but impossible. Even worse, misleading.

If anyone doubts the disparate effects that different accounting practices can have, consider the case of Daimler-Benz. Under German accounting standards, Daimler reported a profit of 168 million Deutschmarks in 1993. Under U.S. GAAP, the company reported a loss of almost a billion Deutschmarks for the same period.....

 Progress in establishing worldwide accounting standards is already well underway....

But it has never been more clear that it's not enough to have a group reach compromises on a set of accounting rules and label them "international standards." The standards themselves must be high quality. By that I mean useful to investors in a way that provides transparency, consistency and comparability in the way companies report in a global capital market.

The process that produces these standards is equally as critical...

Finally, any global financial reporting system must include an infrastructure that extends beyond the standards and the standard setters. This infrastructure includes high-quality auditing standards, strong international audit firms with effective quality controls, profession-wide quality assurance, and meaningful regulatory oversight.

Nov. 10, 2000, in a speech entitled The Future is Now, SEC Chief Accountant Lynn Turner said,

What people too are often saying when they argue that the FASB does not listen, is that the FASB did not give them the answer they wanted, that they did not "obey". In those cases, I challenge both the constituent and the FASB to sit back and say, does the standard faithfully represent the economics of the events and transactions being reported on, in a consistent, comparable and verifiable fashion? For example, are those airplanes on the balance sheet of the company that is flying them and getting all the benefits from them?

The Business Roundtable said it very well in a recent comment letter they sent to the SEC:

"We believe the following:

That the strength and stability of U.S. capital markets is critical to the strength and stability of world markets and economies;

That the strength and stability of U.S. capital markets is due in part to the strength and quality of U.S. generally accepted accounting standards, which have been supported by a high quality financial reporting infrastructure that includes: high quality auditing standards, high quality auditing firms with effective quality controls, profession-wide quality assurance, due process and active regulatory oversight; and That investor confidence in U.S. capital markets is based on "perception," as well as reality."

...I believe that high quality accounting standards must be practical and operational, not only in the literature, but in the real world. In fact, I believe we must be able to apply a "litmus test" to each new accounting standard: that it must be operational at all levels, from the CFO, controller and accounting staff who have to implement the standards in practice, to the auditors who have to attest as to whether the company has correctly applied the standards, to enforcement bodies such as the SEC and similar securities regulators around the globe, who are charged with reviewing financial filings and judging whether such filings follow the standard.

And the need for accounting standards to be practical in application applies across all industries, so that the CFO of a bank, the Controller of an airline, and the front-line accountant at a retailer all can understand and apply the accounting standard in a correct and consistent manner. Conceptually pure (or even impure, for that matter!) standards that are not verifiable, operational and practical just do not serve our investing public.

Prepared Nov. 20, 2009 by Edith Orenstein, director, Accounting Policy Analysis and Communications, Financial Executives International. This summary does not reflect FEI opinion unless specifically noted above.