Microsoft Word - TQ HSFC Accounting and Auditing Testimony 3.28.2012

Statement

of the

U.S. Chamber

of Commerce

ON: “Accounting and Auditing Oversight: Pending Proposals and Emerging

Issues Confronting Regulators, Standard Setters and the

Economy”

TO: The Subcommittee on Capital Markets and Government Sponsored

Enterprises

DATE: March28, 2012

The Chamber’s mission is to advance human progress through an economic,

political and social system based on individual freedom,

incentive, initiative, opportunity and responsibility.

The U.S. Chamber of Commerce is the world’s largest business federation,

representing the interests of more than 3 million businesses of all sizes, sectors, and

regions, as well as state and local chambers and industry associations.

More than 96 percent of the Chamber's members are small businesses with

100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet,

virtually all of the nation's largest companies are also active members. We are

particularly cognizant of the problems of smaller businesses, as well as issues facing

the business community at large.

Besides representing a cross-section of the American business community in

terms of number of employees, the Chamber represents a wide management spectrum

by type of business and location. Each major classification of American business --

manufacturing, retailing, services, construction, wholesaling, and finance – is

represented. Also, the Chamber has substantial membership in all 50 states.

The Chamber's international reach is substantial as well. It believes that global

interdependence provides an opportunity, not a threat. In addition to the

U.S. Chamber of Commerce's 115 American Chambers of Commerce abroad, an

increasing number of members are engaged in the export and import of both goods

and services and have ongoing investment activities. The Chamber favors

strengthened international competitiveness and opposes artificial U.S. and foreign

barriers to international business.

Positions on national issues are developed by a cross-section of Chamber

members serving on committees, subcommittees, and task forces. More than 1,000

business people participate in this process.

Chairman Garrett, Ranking Member Waters and members of the Capital

Markets and Government Sponsored Enterprises subcommittee. My name is Tom

Quaadman, vice president for the Center for Capital Markets Competitiveness at the

U.S. Chamber of Commerce. The Chamber is the world’s largest business federation,

representing the interests of more than three million businesses and organizations of

every size, sector and region. I appreciate the opportunity to testify before the

Subcommittee today on behalf of the businesses that the Chamber represents, which

are investors themselves in our economy.

We are here to discuss the current issues facing the accounting profession and

accounting and auditing standard setting.

Effective financial reporting and internal controls are an important priority for

the U.S. Chamber of Commerce and one of the reasons why the Chamber established

the Center for Capital Markets Competitiveness in 2007. In order for businesses to

grow over the long-term they need to be able to access capital in financial markets

domestically and abroad. The conveyance of reliable and relevant financial

information to investors is an important part of that capital formation process.

Similarly, businesses are investors and active market participants themselves.

Companies must mitigate risk through derivatives transactions and raise cash to

ensure continuity of operations and accommodate growth. As active participants in

the debt and equity markets, companies, like other investors, must have access to

reliable and relevant financial data that facilitates efficient analysis and decision-

making.

Therefore, the work of the Financial Accounting Standards Board (“FASB”),

Public Company Accounting Oversight Board (“PCAOB”), and the Securities and

Exchange Commission (“SEC”) to ensure usable, reliable, and relevant financial

reporting are critical to our free enterprise economy.

If the United States is to create the 20 million jobs that it needs to revive the

economy over the next decade, financial reporting must play its crucial role of

accurately, reliably and efficiently reflecting relevant economic activity. Some

advances have been made in improving accounting and auditing standards. But

unfortunately, over the last two decades, we have also seen ill conceived initiatives.

Some of these were not just bad policy. They were efforts to redirect accounting and

auditing standards to advance agendas rather than providing investors and businesses

with useful information.

Dialogue between regulators, the accounting and auditing professionals who

prepare financial data and the investors who use and rely upon it—including

American business—is critical to keeping changes and refinements to auditing and

accounting standards on track toward serving their vital purpose. The Fair Value

accounting crisis was brought about, in part, by a lack of communication between

FASB and the business community. A lack of dialogue deprived FASB of useful

information and critical facts. Consequently, this led to flawed standards that

prevented financial reports from realistically measuring economic activity.

In this context, the Fair Value accounting crisis was merely a symptom of a

larger communications problem—one for which we think FASB has taken efforts to

correct through regular and meaningful dialogue with stakeholders. However, we are

concerned that the PCAOB is currently facing a similar communications challenge.

To elaborate, we have worked with Financial Accounting Foundation

Chairman Jack Brennan and FASB Chairman Leslie Seidman to facilitate continuous

on-going communications regarding standards development and other issues of

importance to accounting. I believe that these communications have been helpful and

fruitful during this critical phase of the FASB convergence projects with the

International Accounting Standards Board (“IASB”). The objective is not to create

standards that pick winners or losers in our free enterprise system, but rather to insure

that the standards are reflective of real world activities and provide investors and

other users of financial reports with the relevant, reliable and useful data needed to

make informed decisions and compete on a level playing field.

Are all of our concerns addressed in these communications? Of course not.

Are there bumps in the road? Yes. For instance, we believe that a reversal by FASB

and IASB of current lease accounting standards could dramatically spike costs for

companies and weaken a leasing market worth trillions of dollars. Yet, we continue to

work with FASB to solve the problem. By giving stakeholders their voice in the

process, FASB has developed a level of trust that insures a collaborative partnership

to share relevant facts to inform the development of standards. This benefits

everyone and ensures that the evolution of accounting and auditing standards remains

focused on its specific role in our system of free enterprise.

The dramatic improvement in communications with the Financial Accounting

Foundation and FASB has made the convergence projects less contentious than they

could have been and facilitated world class standards that can help advance capital

formation globally. This benefits businesses, investors, and our economy. The

increased communication efforts and process to solicit input, facts, and feedback can

serve as a model for the PCAOB in improving its processes and the deployment of

the resources at its disposal—the majority of which come from public companies.

This is important because the PCAOB appears to have embarked on an agenda

that is leading far afield from its specific, but important, mandate to regulate auditors.

For example, the concept releases on mandatory audit firm rotation and auditor

discussion and analysis have the Chamber concerned that the PCAOB is engaged in

mission creep. It is leaving the realm of audit regulation and crossing the threshold of

regulating corporate governance, a subject area that has been left to state corporate

law and the Securities Exchange Commission. Moreover, the PCAOB should clarify

that their recent proposal for auditors to understand executive compensation is for

risk assessment rather than trying to regulate corporate governance.

Let’s take a look at the history of mandatory audit firm rotation debate:

 Congress, in debating Sarbanes-Oxley, explicitly declined to enact

provisions requiring mandatory firm rotation;

 The General Accounting Office has twice reviewed and rejected the

need for mandatory firm rotation;

 Academic studies have demonstrated that mandatory firm rotation may

harm companies through higher costs and increased incidence of

undetected fraud;

 The PCAOB has failed to provide information through the inspections

process demonstrating a need for mandatory firm rotation;

 Over 90% of commenter’s to the concept release have opposed the

concept of mandatory firm rotation; and

 The majority of investors commenting on the concept release also

opposed mandatory firm rotation.

The PCAOB’s failure to demonstrate any need for mandatory firm rotation –

much less a rationale that outweighs the cogent and consistent concerns raised about

it by investors, businesses and government entities that have rejected the concept

leads us to question why valuable resources, time, and monies are being spent on this

project. They can be better deployed for many other worthwhile endeavors. Indeed,

statements that this issue will be worked on a year from now open the PCAOB to

potential criticism that a predetermined objective exists even if there is no record to

support it. A similar zeal to reach a result in the absence of supporting facts or

analysis caused the D.C. Circuit Court of Appeals to vacate the SEC’s proxy access

rule.

Such a result is neither good for the PCAOB nor for financial reporting as a

whole.

Last month we wrote to the PCAOB and SEC with concerns that the PCAOB

does not have enough dialogue with the business community, and we have proposed

the creation of a Business Advisory Group to work with the PCAOB from the outset

along the lines of the dialogue that now exists with the FAF and FASB. Such

dialogue can prevent concept releases being opposed by 92% of the comments

submitted and allow a more constructive focus on workable standards tied to the

PCAOB’s mission. A wide range of input and discussion can only enhance the ability

of the PCAOB to prioritize issues within its purview and address them in a thoughtful

and balanced manner.

Other innovations, which we will discuss in greater detail, such as the use of a

cost benefit analysis can also assist the PCAOB and stakeholders in determining the

importance of issues and the efficacy of proposed solutions in relation to the costs

and burdens they impose.

To summarize, for the past twenty years we have seen financial reporting move

from one crisis to the next. Numerous studies have been conducted with solutions

seldom implemented. Standards have been written, not to reflect economic activity,

but in search of a holy grail of purity that is simply unobtainable and sometimes

counterproductive to good and lawful economic activity. During this time we have

seen:

1. A steady decline in the listing of public companies in the United States; and

2. American companies eschewing the traditional form of public company

financing and consciously avoiding the American capital markets to raise capital

through private markets.

Despite these indications of serious problems, financial reporting policies in the

United States are still the best in the world. But our competitive advantage as the

preferred destination for capital formation is eroding. We cannot wait to address the

issues and correct the problems if we want to ensure our capital markets remain

efficient and attractive for years to come.

The following are among the reforms that need to be taken to retain our

primacy:

 Financial Reporting Forum: A FRF should be formed and made up of the

SEC, FASB, PCAOB, financial regulators, investors (broadly defined), and

businesses and its mission should be to identify and propose solutions to

problems before they reach the crisis stage. This will also provide a mechanism

to allow for appropriate coordination amongst regulators and input from

investors and businesses. Congressman Gary Miller had an amendment to

create an FRF that became a part of the House passed financial regulatory

reform bill. The Miller amendment was stripped out by the Dodd-Frank

Conference Committee.

 Materiality for Investors: The SEC, FASB, and PCAOB should develop

standards of materiality for investors, as well as the scope of outreach to the

investor community. This will provide perspective on various accounting and

auditing issues such as the need for restatements on the one end, while framing

the picture for input on the front end of standard setting.

 PCAOB, FASB, and Regulator Coordination: A formal, ongoing, and

transparent dialogue should be created to consider the auditability of

accounting standards. This would allow for the auditing of accounting

standards to work in conjunction with standard development. It would also

provide for the identification and resolution of issues that arise in practice. A

similar process should be created to ensure that regulators have an

understanding of standards and that different entities are not working at cross

purposes. The era of “not my problem” needs to end.

 Administrative Procedures Act and Federal Advisory Committee Act:

Recognition should be made that both FASB and PCAOB can have an

enormous impact on the economy. Accordingly, FASB and PCAOB should

abide by the same rules of procedure as required by the Administrative

Procedures Act. In its standard setting activities, it should be required to

consider the effects of its proposals “on efficiency, competition and capital

formation” as the SEC is required to do and provide meaningful cost-benefit

analysis so that it is mindful of the downstream effects of its proposals.

Additionally, any advisory groups FASB and PCAOB form should be balanced

in representation, open in process and follow the mandates for transparency

and open deliberation reflected in the FACA.

 Formal Pre and Post Implementation Review by FASB: Standards should

be field tested and put through a rigorous process to identify unintended

consequences both before and after implementation. This process should

include the following:

1. Establishing a nine month period, following the finalization of the

convergence projects, for FASB and IASB to work with all financial

reporting stakeholders to identify transition issues and issue an

implementation plan;

2. Establishing an Implementation Issuer Advisory Group made up of

large cap, mid cap, and small cap public companies and appropriate

private company representation to advise FASB and IASB on the

transition issues and implementation plan;

3. Holding a series of roundtables, in conjunction with the appropriate

regulators, for all stakeholders to have a voice in identifying issues and

developing an implementation plan;

4. Committing to procedural transparency through adherence to the

Administrative Procedures Act and the cost-benefit analysis required for

significant rulemakings, as well as disclosure policies established by U.S.

financial regulators in the wake of the Dodd-Frank Act rulemaking;

5. Consulting with appropriate financial regulators; and

6. Developing a formal implementation and post-implementation process

as proposed by CIFiR.

 PCAOB Business Roundtables and Formation of Business Advisory

Group: In the coming weeks the Chamber and other trade associations will

call upon the PCAOB to hold a roundtable and form a business advisory group

to understand the role of companies as investors and their views on enhancing

audit quality and other issues under the PCAOB’s purview. Such a group

should be transparent and follow the standards of FACA.

 PCAOB Audit Advisory Group: To provide for current, relevant expertise in

the standard setting process and facilitate the identification and resolution of

issues that arise in practice, the PCAOB should form an audit advisory group

composed of public company auditors.

 Cost Benefit Analysis: In developing accounting and auditing standards,

FASB and PCAOB must conduct a cost benefit analysis for investors and

businesses before moving forward with a proposal. Standards should also

show a justification for market efficiency and capital formation.

 Less Reliance on Prescriptive Rule Making: Hand-in-hand with the

appropriate use of judgment is avoiding a system that is overly prescriptive in

the formulation and application of standards and rules. The danger of an ever

increasing number of rules and regulations by which audit firms are required to

operate and auditors are required to apply has a danger of limiting the

perspective of audit firms and auditors by displacing the application of

principles and the exercise of judgment. This has the potential to create a

system that has a one size fits all approach and check the box mentality that is

at odds with the ever evolving dynamics of change inherent in our economy

 Global Standards: The SEC, FASB, and PCAOB should work towards the

convergence of accounting and auditing standards to create a global system that

will benefit investors from around the world. This convergence must create

quality standards and should not adhere to a strict timeline to achieve that goal.

Additionally, the SEC, and the Administration should continue efforts to

achieve the international recognition of inspections.

 Liability: It should be recognized that large, medium, and small audit firms

are needed, just as our economy needs large, medium, and small financial

institutions. However, the unique aspects of the industry and the potential for

catastrophic failure because of liability require a serious effort at liability

reform, as has been accomplished in other jurisdictions or for other industries

here in the United States.

 Ban Mandatory Audit Firm Rotation and keep the PCAOB focused on

its mission: This is not a matter of auditing regulation. This is a matter of

corporate governance outside of the PCAOB’s realm. Congress should stop

this effort in its track and refocus the PCAOB on its core mission.

The Chamber believes that these reforms would have dramatic benefits and

provide a resiliency that was lacking during the financial crisis. All stakeholders would

have the ability to provide input to FASB and PCAOB in an open and transparent

manner. Standards would be improved and accounting and auditing would be on the

same page. The same would be true of the regulators who, with the standard setters,

would have a better feel for the overlap and interplay of seemingly disparate yet

interconnected disciplines.

Finally, let me discuss the Chamber’s positions on H.R. 3503 (the

“Westmoreland Bill”) and the draft bill banning mandatory firm rotation (“the

Fitzpatrick Bill”). We have serious concerns regarding the Westmoreland bill on

public disciplinary proceedings. First, the current system is one commonly used for

regulatory proceedings—it is the same system that the Federal Elections Commission

uses for alleged campaign finance violations. Second, these proceedings affect the

auditor and the company. Inappropriate disclosures regarding disciplinary

proceedings will impact the equity value of a company, harming shareholder value for

investors and a business’s capital base. We believe in strong even-handed

enforcement and would like to have further discussions with Congress to achieve this

goal.

The Chamber supports independent standard setting, however we believe that

recent proposals on mandatory firm rotation, audit committee communications and

proposals on an auditor discussion and analysis and executive compensation clearly

are outside the bounds of audit regulation and entering corporate governance as

discussed before. The Fitzpatrick bill reaffirms the line of demarcation, as established

in Sarbanes-Oxley, that the PCAOB’s jurisdiction is limited to that of an audit

regulator, while corporate governance and executive compensation reside with the

SEC or state corporate law.

***

Auditors would be empowered to use their best judgment to impose integrity

and accountability into the system. Global standards and cross-border cooperation

will increase the ability of investors to understand a global marketplace, and for

regulators to better provide for safety and soundness.

If we want to have transparent financial disclosures, the regulators and standard

setters need to be transparent themselves. They need to focus on disclosures that are

relevant and rational, and useful to investors, including business. The Chamber urges

you to:

 Mandate more rational and efficient procedures at the standard setting bodies

with a particular emphasis on improving their transparency and accountability;

 Keep these entities focused on their narrow, but important roles. Do not

permit them to become overlapping and redundant bureaucracies that

perpetuate a bloated administrative state that stifles the creative energies of its

citizenry with excessive red tape;

 Empowering the stakeholders of these entities by ensuring they can engage in

meaningful dialogue and get reasoned analysis to support new accounting and

auditing standards;

 Address the ominous and growing liability issues that threaten the depth of our

auditing and accounting professions.

All of these reforms are critical next steps to aligning financial reporting policy

with America’s economic prosperity in the 21

century economy.

As you move forward to make these reforms, recognize that the purpose of the

financial reporting system is not to eliminate all risk from economic endeavors. Risk

is inherent in our free enterprise system. It is a necessary element for innovation and

the growth opportunities our economy needs to thrive. While we can try to

strengthen the system, we must recognize that rational and enforceable financial

reporting policies are designed to help stakeholders evaluate risks through the many

different perspectives they may have of it. Such a system properly conceived as a

means to an end and not as an end in itself will help spur long-term economic growth

and job creation, and the Chamber is willing to work with any and all parties to make

that a reality.

I will be happy to take any questions that you may have.