Who Has the Legal Authority to Set Accounting Standards

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In summary, we have the deepest and most liquid capital markets in the world, mainly due to the high quality of our financial reporting system. Although our system is currently the best, there is room for improvement. Recent events have been a catalyst for reforms, and work has begun to implement the necessary reforms I have spoken about today. While it is imperative to respond to criticisms of the accounting standard-setting process, we must not abandon the system that has enabled us to achieve what we have achieved so far. Instead, we must seize the opportunity to fundamentally improve norm-setting and oversight. Thank you for your interest in holding this hearing today and for inviting me to attend. I would be pleased to answer any questions members of the subcommittee may have. An ideal accounting standard is a principles-based standard that requires financial information to reflect the economic substance rather than the form of the transaction. FASB Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets, issued in 2001, appear to be steps in the right direction. These standards serve as a test of the degree of specificity required to strike a balance between rules and principles.

Principles-based standards will lead to a less complex financial reporting paradigm that better responds to emerging issues. ISQC 1 and ISA 220 have not been adopted by the PCAOB. The PCAOB issued a press release in December 2019 proposing to update the quality control standards with the IAASB`s quality management standards. As of May 2022, the PCAOB had not yet completed the process. Two organizations are responsible for the application and development of generally accepted accounting principles (GAAP): the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). While our financial reporting system in the United States remains the best in the world, there are aspects of the system that can and should be improved. In particular, the Commission considers that the procedure for setting accounting standards needs to be improved in order to speed up the implementation of changes to accounting standards, to better respond to market developments and to provide investors with more transparent information. Under the Sarbanes-Oxley Act of 2002, the Public Corporation Accounting Oversight Council (PCAOB) has the authority to investigate and sanction registered accounting firms and individuals associated with those firms. Further details and clarification on the PCAOB mechanism and alignment with the GOS 6 benchmark/best practices are still awaited. The Securities Act of 1933 and the Securities Exchange Act of 1934 clearly state that the Commission has the authority to prescribe the methods to be used in the preparation of financial statements and the form and content of financial statements to be filed under the Act.4 To effectively discharge this legal responsibility and recognize expertise For more than 60 years, the Commission relies on the private sector: to play a leading role in setting and improving accounting standards. The quality of our accounting standards and capital markets is due in large part to the private sector standard-setting process overseen by the SEC.

The SEC has the authority under the Securities Act to establish and enforce accounting standards, while the FASB, an independent non-governmental organization mandated by the SEC, can only set standards. This is done by codifying accounting standards. In June 2022, the AICPA`s Auditing Standards Board (ASB) issued quality management standards based on the IAASB`s Quality Management Standards. The quality management standards will come into effect on December 15, 2025. The SEC has the authority to set standards for public companies under the 1934 Act; However, it relies on the FASB to fulfill this responsibility and formally recognizes U.S. GAAP issued by the FASB through Section 101 of Financial Reporting Release No. 1, recently reaffirmed in its April 2003 policy statement. FAF also amended the FASB`s voting process to require a simple majority for the issuance of an accounting standard. Previously, a qualified majority of the seven members of the Board of Directors was required. Critics of the majority requirement noted that the need for five votes led to a lack of accounting guidance in some controversial or complex areas, as the FASB was unable to collect a sufficient number of votes. In addition, critics also comment that the FASB compromised on certain aspects of a standard in an effort to get five votes.

We are encouraged by these recent steps and hope that they will lead to a more timely and improved direction. We commend the FASB and FAF for their efforts. A transition to principles-based standards requires greater discipline on the part of the business community, the profession, private sector standards bodies, and SEC staff. Moving away from the box-check-in approach to financial reporting means that all stakeholders must make a concerted effort to report transactions in accordance with the objectives of the standards. While this may mean that not all transactions are recorded in exactly the same way, I believe that similar transactions are not reported substantially differently in this principle-based standards system in order to maintain comparability. Finally, a crucial and important advantage of principles-based standards is that they would reduce the financial development opportunities of the rules. We have worked with the FASB to change its style to be more principles-based. An objective analysis of the FASB process must take into account what it has done well. U.S. GAAP, the backbone of our information system, is the most comprehensive set of accounting policies in the world. Some countries do not have accounting guidelines for financial instruments. Each council of state has the authority, within its respective jurisdiction, to regulate all chartered accountants – CPAs or chartered accountants – and the services these professionals are authorized to provide.

State bodies also set initial vocational education and training (IPD) and continuing professional development (CPD) requirements, ethical requirements, conduct investigation and disciplinary procedures, and require quality assurance audits for auditors conducted by the PCAOB for auditors providing services to public enterprises, and the AICPA for auditors working in public practice for non-auditors. Public. The institutions are active. Some regulated services are limited to certified auditors who own or are employees of registered accounting firms. Only CPAs can conduct mandatory audits of public companies. In addition, in recent years, some FASB standards have been rules-based, not principles-based. Rules-based accounting standards provide extremely detailed rules that attempt to adapt to virtually any application of the standard. This fosters a box-check-in mentality in financial reports that eliminates judgments from the application of information.