Formation of New Advisory Committee: The SEC Picks A Fight

Yesterday, SEC chairman Christopher Cox held a press conference to announce the formation of an advisory committee whose mission is to 1), study complexity in financial reporting and 2), make financial reporting more understandable to investors. (Press release link here; webcast link here.)

The committee will be chaired by Robert Pozen, Chairman of MFS Investments, and formerly vice chairman of Fidelity Investments. Over the next few weeks, 13 to 17 more members will be added. The committee is expected to take a year to develop its recommendations.

According to the press release, the areas to be studied are:

the current approach to setting financial accounting and reporting standards;

the current process of regulating compliance by registrants and financial professionals with accounting and reporting standards;

the current systems for delivering financial information to investors and accessing that information;

other environmental factors that drive unnecessary complexity and reduce transparency to investors;

whether there are current accounting and reporting standards that impose costs that outweigh the resulting benefits, and

whether this cost-benefit analysis is likely to be impacted by the growing use of international accounting standards.

Though not mentioned in the press release (and I don’t remember it in the webcast), the effort seems to be a parallel to Treasury Secretary Henry Paulson’s plans for streamlining capital markets regulation.

One wonders: is this an attempt to speed up the adoption of international accounting standards in the United States? Will the committee recommend swapping out parts of U.S. standards with IFRS comparables? Will anyone care? (Just kidding.)

One would hope, though, that when they study “other environmental factors that drive unnecessary complexity and reduce transparency to investors,” they take a good hard look at the tort system and the reasons why auditors and accountants always request ever more-detailed guidance from standard-setters. That builds up complexity quickly.

The cost-benefit analysis angle should be interesting also; that’s a new-found mantra in criticisms of the FASB and SEC. You can hear an echo of it in the comments of Columbia Business School’s Glenn Hubbard in this Wall Street Journal video. More to come as the committee strikes up a beat.