Where’s the SEC?
Credit market dramas have put the Securities and Exchange Commission in the background, where Chairman Chris Cox is being stung by rebuke for his neglect of investor interests and capital market safety, while fiddling away with luxury items few care about like high-tech financial reporting called XBRL. Now stalled yet again, despite earlier exuberance, is the SEC’s proposal to switch the US from its own accounting standards (GAAP) to new international financial reporting standards (IFRS).
Mr. Cox formally began to back this initiative aggressively early last year. He staked much of his legacy on it. Auditors and managers favor it and benefit from it. Investors and auditing standard setters express serious reservations about the plan, which many say has been rushed. Even the SEC seemed to accept this criticism, most recently saying it would propose a longer timetable for the shift than Mr. Cox and the SEC initially imagined.
Still, the SEC promised a month ago, on August 27, that a Release outlining milestones on this road would be forthcoming shortly. As of today, the SEC has issued no such Release, despite the SEC Chief Accountant, Conrad Hewitt, and Corporate Finance Chief, John White, describing its contents and assuring the public one would be forthcoming “this summer.”
It is hard to believe that it’s because the SEC is too busy with pressing matters concerning the credit crunch. After all, its campaign to curb short selling has largely been functionally outsourced to the New York Stock Exchange. Investment banking firms previously subject to its jurisdiction are no longer: Bear Stearns and Lehman Brothers are bankrupt; Merrill Lynch is to become part of Bank of America; and Goldman Sachs and Morgan Stanley are reregistering as banks under supervision of the Federal Reserve rather than the SEC.
On the other hand, the SEC is busy fielding campaigns by lobbyists, especially the American Bankers Association, which is meeting with the SEC tomorrow, to eliminate accounting rules requiring reporting certain investments, including those at the heart of the credit crunch, at fair value (“marking them to market”). That requirement of GAAP also appears, in slightly different form, in IFRS. For an SEC sympathetic to friends like the ABA, it is easier to change GAAP (simply passing regulations overruling our domestic accounting standard setter) than to change IFRS (requiring the US to opt out of an international protocol that would risk embarrassing the US as antagonistic to the international standard setter).
Two other speculative explanations for the SEC’s delay appear. First, Mr. Cox may have decided now is not the best time for the SEC to issue a Release that would be largely deregulatory and elevate managerial and auditor interests over those of investors and other users of financial reports. Second, Mr. Cox may believe that he should have unanimous Commission support for such a controversial Release. This may be more difficult now that he must work with a full slate of Commissioners, compared to earlier this year when vacancies existed. Some current Commissioners may side with investors and oppose the Release.
Despite the SEC’s earlier exuberance, there no longer appear to be reasons for Mr. Cox to continue a quixotic campaign to move the US from its own to international accounting standards. For Mr. Cox, the consequence is being deprived of a legacy he sought. For investors, that would be a good thing too.