SEC panel to scrutinize financial reporting

WASHINGTON — The Securities and Exchange Commission is setting up an advisory committee on financial reporting to scrutinize the high number of financial restatements by public companies, according to Robert Pozen, who will head the committee. The advisory committee will examine “fundamental issues about how the whole financial reporting system is designed and delivered,” said Mr. Pozen, who is chairman of Boston-based MFS Investment Management Inc. “What we’re trying to do is get the system to be more useful to investors and more understandable by preparers and auditors who are doing this stuff,” he said. About one-tenth of publicly traded companies issued financial restatements last year, Mr. Pozen said. “That’s a sign we’re not communicating very well what the standards are,” he said. About half of the restatements are for matters that credit-rating agencies don’t consider material, Mr. Pozen said. SEC Chairman Christopher Cox announced June 27 that the advisory committee on improvements to financial reporting was being formed to study the causes of complexity in the U.S. financial reporting system. The group is only the third advisory committee the SEC has set up over approximately the past decade, SEC chief accountant Conrad Hewitt said. The committee is to report its recommendations to the agency in about a year, he said. The group is to have about 15 members, Mr. Hewitt said. Only Mr. Pozen has been announced, but Jeffrey Diermeier, president and chief executive of the CFA Institute in Charlottesville, Va., confirmed that he has accepted an invitation to serve on the committee. He would not comment further on what he would like to see the group consider. The committee’s mission encompasses a number of areas, including accounting and auditing standards, Mr. Hewitt said, and it crosses territory — such as banking, commodities and securities — governed by different financial services regulators. Members of various fields, including preparers and users of financial statements, are to be on the committee, he said. In addition to examining restatements, the group will look at ways to provide financial summaries that are useful to most retail investors, while including Internet links for analysts and others who want more-detailed information, Mr. Pozen said. Promotion of extensible business reporting language, or XBRL, has been a chief focus of Mr. Cox. The SEC has encouraged operating companies to file financial statements using XBRL interactive systems, in which tagged data can be used to compare similar data for other companies. On June 20, the agency approved a voluntary system for mutual funds to report their risk-return summaries using the system, as well. A better way Mr. Pozen said that a better way of giving companies and investors guidance also needs to be developed, ensuring that any SEC guidance be given prospectively rather than retroactively. The relationship between U.S. and international accounting systems needs to be examined, he said, as well as whether the United States should move from the current rules-based system to a more principles-based accounting system. The committee is not likely to focus on eliminating quarterly guidance — something Mr. Pozen has advocated in the past, he said. It also will not deal extensively with the controversial issue of auditor liability. However, Mr. Pozen said, “we’re now asking auditors to exercise more judgment. If they exercise their judgment, and they get zinged, you can be sure they’re not going to exercise their judgment.”