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Policy

5 Ways the SEC Wants to Improve Financial Reporting


by Morgan Hunsaker

In a recent speech, the SEC’s Wesley Bricker focused on the audit industry and the growing investor skepticism towards audit firms.

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Chief Accountant of the Securities and Exchange Commission (SEC) Wesley Bricker highlighted ten ongoing areas the agency is emphasizing to improve financial reporting. Five of the ten areas that he highlighted were audit-related: auditor independence, talent, audit regulation, audit firm governance, and independent audit committees.

“Independence is fundamental to the credibility of audit reports and investor confidence in them,” Bricker shared at the 18th Baruch College Financial Reporting Conference. “The judgment auditors make in the course of their audit work must be objective and impartial. The auditor independence rules and standards must be reviewed over time to ascertain whether they meet the needs of evaluating auditor independence in a changing environment.”

In May, 2018 the SEC proposed amendments to auditor independence standards regarding lending relationships and, given the importance of this area and its growing attention worldwide. this is an area that will continue to be heavily scrutinized.

Bricker commented on the recent reports and recommendations regarding the audit profession in the United Kingdom, stating “regarding regulating the audit market, the U.K. has recently issued several reports with varying objectives.  In my view, some recommendations have limited use in a U.S. and international context; they might, in fact, present risks to audit quality and investor interests in those contexts…I am concerned about national approaches that structurally intertwine private sector and public sector responsibilities –blurring the lines of responsibilities and accountabilities of each and adding additional undefined, and multilayered, incentives.”

Another area was talent. There is clearly concern about the quantity and quality of students who are choosing to study accounting, and that in order for our financial reporting system to continue to adapt and improve, the accounting profession must be appealing to the upcoming workforce.

“Perhaps the biggest challenge and focus area facing the auditing profession, and to some extent accounting more generally, is an apparent decline in the attractiveness of auditing, particularly to students,” Bricker told the audience.

Bricker framed his speech as an explanation of where the SEC and capital markets have been and how we can plan for the future of financial reporting. He reiterated that all of the efforts of the SEC and all of the work of preparers and auditors should be done with the mindset that high-quality financial reporting is the bedrock of global capital markets. However, it is not enough to have high-quality financial reports; companies, auditors, and regulators need to work to instill and improve investor confidence in the financial reporting system. Bricker noted that while financial reports are becoming more robust and reliable, there is a growing sentiment of less trust and confidence from investors.

While there are many negative trends in the news regarding the financial reporting system, Bricker highlighted a few observations that evidence the strength of the U.S. financial reporting structure. Restatement rates are at the lowest level in two decades, companies with ineffective disclosure controls have decreased for the second year in a row, and auditor inspection findings in the U.S. are on the decline both in frequency and in severity. Bricker ended his speech, “I firmly believe a bright future beckons. But, it is not a certainty. Even as we advance high-quality information in the capital markets, it is critically important to understand and maintain focus on the core principles that will move us forward and to continue to act by them. Having fair, orderly, and efficient capital markets that facilitate capital formation while protecting investors is a pillar of the U.S. economy, and the quality and performance of the U.S. economy supports and promotes many of America's other strengths, as well as public policy initiatives. The future belongs to those with the energy to lead and the imagination to make things better.”