Speaking at the AICPA’s annual conference on SEC and PCAOB developments, SEC Chairman Jay Clayton proclaimed that audit quality drives good performing capital markets. "To the extent you want to have capital markets that perform well over time, a high-quality audit is essential," he stated. Clayton was joined by SEC Chief Accountant Wesley Bricker for a conversation moderated by Center for Audit Quality executive director Cynthia Fornelli that touched on a broad range of subjects, including technology, Brexit, global accounting and auditing concerns, and human capital.
Joint SEC-PCAOB statement. Fornelli asked about the "unprecedented" joint statement released Friday afternoon by Clayton, Bricker, and PCAOB Chairman William Duhnke, which discusses information access challenges with respect to U.S.-listed companies that have significant operations in China. The statement outlines cooperation and coordination efforts undertaken by the SEC with international regulators to address barriers to information, such as laws involving data protection, privacy, confidentiality, bank secrecy, and state or national security laws. The statement notes that both the SEC and the PCAOB have reached agreements with IOSCO and foreign regulators and law enforcement to facilitate the sharing of information and inspections findings.
However, there remain significant obstacles when it comes to China, the statement explains. In particular, business books and records related to transactions and events occurring in China are required by Chinese laws to be kept and maintained there. China’s state security laws also have been invoked to limit foreign access to China-based business books and records and audit work papers. In addition, the PCAOB is currently restricted from inspecting audit work and practices of PCAOB-registered firms in China, which have audited 224 unique issuers with a combined market capitalization of over $1.8 trillion, according to the statement.
Bricker said that the joint statement emphasizes information-sharing in a way that is important for securities analysts to understand. Clayton added that the complexity in pulling together financial statements for global companies is hard to overstate. A fundamental part of being the primary regulator for a global public company is being able to draw information from all jurisdictions, he said. While there are good reasons for restrictions on the dissemination of information, they should be allowed to work through those in a way that allows the primary regulator and firms to be comfortable that they are doing their jobs, Clayton said.
Cybersecurity and technology. Fornelli asked what companies can do to address cybersecurity risks. Clayton advised that while he is not qualified to tell any company what particular steps they should be taking, the SEC is seeing an appreciation of cybersecurity issues in the boardroom, including adding increased expertise on cybersecurity.
Regarding technology in general, Bricker said that technology can be an ally of good financial reporting and good auditing in many instances; however, it can also be an opponent. It is important not to go to a lower-quality reporting system just because it has been automated, he warned, which can deprive the market of the human intelligence behind financial reporting and auditing, such as good judgement and professional skepticism as well as good communication. We must understand what technology’s limitations are, as well as its risks, Bricker advised.
Clayton agreed, stating that the human element underlying financial reporting is just as important today as when he started in the industry. The increase in technology has not led to a decrease in the need for human capital. "I defy someone to develop a technological system that can synthesize the differences" in the various reporting systems around the world, Clayton remarked.
Brexit. When asked about the impact of Brexit, Clayton noted that there has been a wide range of disclosures companies are making in anticipation of Brexit. Some include very granular details, he said, such as how Brexit may affect the company’s supply chain, its distribution channels, and its investments. Other disclosures are more general. He observed that the companies that have made more specific disclosures about the impact of Brexit are more concerned about it than those that have simply disclosed it as a general risk.
SEC perspectives. Both Clayton and Bricker emphasized having a diversity in perspectives from the staff at the SEC. Bricker said that the SEC is bringing together individuals trained in accounting, law, and economics; individuals with academic and professional backgrounds; auditors and preparers; and individuals who are in different places in their careers. Clayton noted that the SEC’s draft strategic plan has three broad goals. Goals one and two involve prioritizing the needs of Main Street investors and effectively allocating the Commission’s resources in recognition of developments and trends in the U.S. capital markets. The SEC’s third goal, he explained, is investing in its people by enhancing its analytical capabilities and human capital development. Bricker quipped that while he might prefer an all-accountant SEC, it would actually be terrible, because it takes a broad perspective of the capital markets to limit the Commission’s blind spots.
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