Business and the SEC: lessons in coexistence.

• Position: Panel discussion

Representatives from the SEC, business, and the accounting profession conduct a dialogue on major issues of concern to the business community.

What is the latest SEC thinking on today's major accounting and reporting issues? Each year, Commission representatives offer an insider's view at FEI's Current Financial Reporting Issues conference.

Four issues, and their relevance to financial executives, were prime topics at the most recent CFRI meeting, along with comments by business and accounting panelists.

* What will be the impact of proposed federal legislation on accounting and reporting standards?

* How do accounting and reporting requirements affect the competitive position of U.S. companies?

* What are the pros and cons of current value accounting, and why does the SEC prefer it?

* Are consulting services still considered a threat to auditor independence?

Discussion of these issues was followed by news from the SEC staff and questions from the audience.

The panel members were: Donald Steine, vice president and controller at Exxon, who served as moderator; Lonnie A. Arnett, vice president and controller at Bethlehem Steel; Edmund Coulson, who has since left his position as chief accountant at the SEC; John O. Penhollow, director of the SEC's Office of EDGAR Management; Linda C. Quinn, director of the SEC's Division of Corporation Finance; and Norman N. Strauss, a partner at Ernst & Young.

The following is an edited and condensed version of their discussion. As usual, the opinions expressed by SEC staff members are their own opinions and not necessarily those of the SEC.

PROPOSED LEGISLATION

STEINE: Linda, we start with you.

What is the SECs view on proposed legislation covering accounting, reporting, and control standards?

QUINN: Two major legislative proposals were introduced last year that didn't make it through Congress. But I expect both will be reintroduced this year. The first of these proposals would repeal those provisions of the Securities Exchange Act of 1934 [Subsection (i) of Section 12 and Section 3(a)(2) and (3)(a)(5)] that exempt securities issued by banks and thrifts from registration with the SEC. It is our feeling that banks and thrifts should report to the SEC as do all other public companies, rather than to bank regulators as they do now.

The second is the proposed amendment to the Comprehensive Crime Control Act of 1990, entitled, "Accounting and Auditing Standards for the Detection and Disclosure of Financial Irregularities." The amendment passed the House in October but not the Senate, and was removed during conference. Representative John Dingell (D-Mich), chairman of the House Energy and Commerce Committee, and Representative Ron Wyden (D-Ore) have proposed a concept like this for several years, and this is the farthest it's gone. I understand they plan to reintroduce the legislation this year.

The legislation would require public companies to do the following: include in their annual report a description of management's responsibility to maintain an adequate system of internal controls; assess whether the internal control structure assures the preparation of financial statements that comply with GAAP; disclose material weaknesses previously identified that have not been corrected; and provide a report by the independent public accountant on management's assessment of the internal control standards.

Note that the SEC itself has a rule-making proposal that would require a similar assessment by management, but not the report by the independent accountant. The SEC received 189 letters of comment on the proposal, and the staff is considering it as well as legislative proposals.

The legislation also proposes that the audit include procedures to provide reasonable assurance of the detection of illegal acts that would have a material effect on financial statements. The proposal also would require an auditor who suspects an illegal act, whether or not its effect would be material, to do several things. First, assess if the illegal act is likely to have occurred. Second, consider its effect on the financial statement. Third, inform management, and assure that the audit committee or the board has the information. There are several other requirements, but they boil down to either the company going to the Commission with the information, or the auditor doing so.

STEINE: Was the SEC consulted by Congress about this legislation?

QUINN: Our general counsel testified before Congress in August 1990 and pointed out a number of drafting problems, but the Commission has not taken a position. That will depend on whether the legislation is reintroduced, and in what form. One of our major concerns, of course, is the cost/benefit analysis.

STEINE: Norm, the Big Six, as well as the AICPA, supported the legislation. Cynics suggest the Big Six has a financial incentive. Why did the Big Six support this legislation when the business community is so opposed?

STRAUSS: We felt that some legislation was going to be adopted by Congress, and we thought what was being proposed initially was completely unworkable. So we decided the better course of action would be to persuade Congress to change those provisions that we believed would cause tremendous practical problems. The initial proposal would have given auditors increased responsibility for detecting internal control weaknesses and illegal acts that were not even material to financial statements and for reporting illegal acts directly to the SEC. We felt lawyers, not accountants, should determine what is illegal.

We thought the whole proposal was too costly and unworkable. So we, the Big Six and the AICPA, conferred with Congress, and we think the final bill that the House passed was much improved and workable. The internal control report, for example, was changed to relate to material matters only, and auditors would need to report their suspicions...