ASSIGNMENT 7
COMPLIANCE W EEK THE L E A D I N G I N F O R M A T I O N S E R V I C E ON C O R P O R A T E G O V E R N A N C E , RI SK, A N D C O M P L I A N C E
S hop Talk: M o v in g From C o m p lia n c e t o ERM
November 2015 | www.complianceweek.com
By J a c ly n J a e g e r
More and more companies want to build their enterprise risk management programs, particularly as emerging risks like cyber-security force their way on to board agendas. The trick is in get ting from your compliance routines of today to a more coherent ERM program tomorrow.
To debate the finer points of shifting from a compliance program to ERM, Compli ance Week and Workiva recently hosted 10 compliance, risk, and audit professionals in Orlando for an executive roundtable on the subject. “Risk management is not a sequence after compliance,” said Mike Rost, vice president of vertical solution strategy with Workiva. “It is its own thing, and every or ganization is going to come at it differently.
The good news: Most participants said that they are implementing ERM to some de-
A L S O INSIDE
gree, even if many are still in the early stages. Some of that effort traces its origins back to compliance with the Sarbanes-Oxley Act, plus good internal auditing principles that require an annual enterprise risk assessment. Little surprise, then, that numerous partici pants said their internal audit departments still drive their organization’s ERM efforts.
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U.S. Financial Reporting: How Are We Doing? By R o b e r t H e r z C o m p lia n c e W e e k C o lu m n is t
Earlier this year I gave a guest lecture to a major university, and met with a group of accounting doctoral stu dents informally to discuss their areas of research and current developments in finan cial reporting. I was rather startled (or better said, taken aback) when student from abroad asked me the following question: “Why is the U.S. falling behind in financial reporting?”
N ot only was this stu dent questioning whether the United States is the leader in financial report ing, but doing so in a way that implied that it is an accepted fact that the U.S. reporting system is lagging behind those in other coun tries.
My instinctive reaction was to correct the student by stating that, of course the United States is the leader in financial re porting. But instead, I took a deep breath and decided that I should try to understand why he believed that the U.S. is falling behind in financial reporting. So I asked him.
He responded that he believed that we have been slower than other counties to adopt advances in financial and corporate reporting, and cited three things: adoption of International Financial Reporting Stan dards; expanded auditor reporting; and in tegrated reporting of financial and key non- financial information, including information on environmental, social, and governance (ESG) issues.
I responded that though there would like ly be differing viewpoints among informed and reasonable people as to whether the matters he cited are indicative of the United States falling behind in financial and corpo-
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2 4 ENFORCEMENT & LITIGATION T ip s fo r th w a r tin g a Federal Trade C o m m issio n c y b e r-s e c u rity a c tio n .
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8 1 0 H O I C K
Robert Herz C olum nist
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U.S. Financial Reporting: How Are W e Doing? Continued from Page 1
rate reporting, or indeed whether any or all of these represented needed changes in reporting. I also said that while I support the goal of a single set of global account ing standards for at least listed companies and favor continued convergence between U.S. Generally Accepted Accounting Principles and IFRS, I do not view IFRS as superior to U.S. GAAP, or vice versa.
I also pointed out that the Public Company Accounting Oversight Board continues to consider requiring expand ed auditor reporting, and that while I am proponent of integrated reporting, many U.S. companies include key non- financial performance measures in their earnings releases and Securities and Ex change Commission filings, that many also issue separate sustainability re ports, and that the San Francisco-based Sustainability Accounting Standards Boards is developing a set of industry- based standards for voluntary reporting of material ESG issues and metrics in SEC filings.
Although I felt I had responded ap propriately to the student’s question, his question and the way he stated it contin ued to haunt me a bit. I have been involved in financial reporting for more than 40 years, both in the U.S. and internation ally. I have regarded the United States as the clear leader in financial reporting. In my view, we led in the development of accounting and auditing standards and corporate disclosure requirements, which other countries and capital markets then looked to as the gold standard. O ur SEC is the largest, and I believe the most ca pable, capital markets regulator in the world.
In my view these factors have contrib uted significantly to the United States having the deepest, most liquid capital markets in the world, and a place that continues to be viewed as a safe haven for investing in a turbulent world. Still, the student’s question continued to bother me. Might there be some truth that we have been slow in recent years to embrace potentially positive changes and in mod ernizing our reporting system, so much so that we might be falling behind?
So I pondered it some more. Some thoughts came to mind. First, I think it is
now widely accepted that vital aspects of our national infrastructure, such as our highways, bridges, airports, and passen ger rail system, are in critical need of re pair, rebuilding, and modernization; and that we have fallen behind those of many other countries. And while we continue to have many of the finest universities and hospitals in the world, I think evi dence abounds that the quality and effec tiveness of our education and healthcare systems lag those in many other coun tries in terms of measured costs and out comes.
So if that is the case with other impor tant aspects of national infrastructure, might it also be possible for our reporting system? In that regard, I thought further about whether the three matters cited by the student, as well as other aspects of fi nancial and corporate reporting, might be indicators of the United States falling be hind. And if so, why?
First, on IFRS: my view is that both U.S. GAAP and IFRS are high-quality sets of accounting standards, what I call "capital markets” accounting standards. Both the U.S. Financial Accounting Standards Board and the International Accounting Standards Board have com petent board members and staff who con duct standard setting through a thorough and objective due process. While there are some specific IFRS standards that I feel are superior to the corresponding U.S. GAAP standard, there are also cases where I believe the U.S. GAAP standard is better.
So overall, while I would like to see continued convergence between the two sets of standards-not just for the sake of convergence, but also to improve both the comparability and quality of financial reporting worldwide. O ur not having ad
opted IFRS is not at all evidence that U.S. financial reporting is falling behind.
Second, on expanded auditor report ing, while it is true that certain other countries (most notably Britain) have led the way on this, and that the Interna tional Auditing and Assurance Standards Board and the European Union have been ahead of the PCAOB in promulgat ing requirements for expanded auditor reporting, I think we will soon see this in our country.
And finally, on integrated reporting: Yes, it has become mandated in certain
other countries and voluntarily adopt ed by a growing number of companies around the world. But as discussed in my February 2015 column, I believe that the SEC’s current initiative on disclosure effectiveness provides a real opportu nity for enhancing and modernizing the SEC reporting system through adopt ing more of an integrated reporting ap proach to organizing and presenting fi nancial and non-financial information, and to incorporating material informa tion on ESG issues in SEC filings more systematically.
We will have to see how this effort by the SEC progresses, whether it results in the kinds of changes necessary to improve and modernize the SEC reporting sys tem, and how that will stack up against those that are evolving in other parts of the world. So on this important aspect of our reporting system, I think the jury is still out as to whether we might be falling behind.
What about the many other aspects of our reporting system compared those in other parts of the world, such as the quality of auditing and internal controls over financial reporting, the performance of audit committees, effective regulatory
In a world where other countries and regions are investing, innovating, and advancing in critical components o f their infrastructures, including their financial and corporate reporting systems, we must be open to changes that improve the quality and effectiveness of our national infrastructures, including our reporting system. Otherwise, we do risk falling behind.
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review and enforcement, and scrutiny of corporate information by investors and financial analysts? Although I believe that these continue to improve in other parts of the world, I feel strongly that the U nit ed States leads the world in these critical aspects of reporting.
My conclusion from this exercise is that overall the United States has not fallen behind in financial and corporate reporting. Still, there are plenty of oppor tunities to improve and modernize our reporting system.
At times we do seem to be slower to adopt changes in reporting than certain other countries and jurisdictions. I attri bute this, at least partly, to the extensive due process and stakeholder engagement that our standard setters and regulators are required to conduct before adopting major changes in our reporting system. That is crucial to ensuring that proposed changes are likely to prove positive and cost beneficial. I also believe that concerns by U.S. companies, audit committees, and auditors over being second-guessed and potentially becoming subject to enforce ment actions and litigation can some times, quite understandably, make them resistant to proposed changes in our re porting system.
Similarly, although the enhanced fo cus on internal controls has been instru mental in raising the quality of financial reporting in the United States, it has also upped the cost of implementing changes in accounting and financial reporting, which affects both the overall receptivity to change and the cost-benefit analysis of proposed changes. And there are always vested interests that want to maintain the status quo.
But in a world where other countries and regions are investing, innovating, and advancing in critical components of their infrastructures, including their finan cial and corporate reporting systems, we must be open to changes that improve the quality and effectiveness of our national infrastructures, including our reporting system. Otherwise, we do risk falling be hind. ■
Robert Herz was chairman o f the Financial Ac counting Standards Board (FASB), from July 2002 to
September 2010. Previously, he was a senior partner w ith PricewaterhouseCoopers.
Prior to joining FASB, Herz was PricewaterhouseC oopers North America theater leader of Professional, Technical, Risk & Quality and a member of the firm's Global and U.S. Boards. Fie was also president o f the PricewaterhouseCoopers Foundation which supports college and university activities. Fie also served as a part-tim e member o f the International Accounting Standards Board. Herz is both a U.S. Certified Public Accountant and a U.K. Chartered Accountant and a gold medal w inner on the uniform CPA examination.
Herz joined Price Waterhouse in 1974 upon grad-
RECENT COLUMNS BY ROBERT HERZ
uating from the University of Manchester in England w ith a B.A. first class honors degree in economics, graduating top o f his class. He later joined Coopers & Lybrand becoming its senior technical partner in 1996 and assumed a sim ilar position w ith the merged firm o f PricewaterhouseCoopers in 1998.
During his distinguished career, Herz headed Coopers & Lybrand's Corporate Finance Advisory Ser vices and served as audit partner on numerous major clients including AT&T, Dun & Bradstreet, Goldman Sachs, Shearson Lehman Bros, and Volvo.
He can be reached at RHerz@complianceweek. com.
Below are recent columns by Compliance Week Columnist Robert Herz. To read more from Herz, please go to www.complianceweek.com and select "Columnists" from the Compliance Week toolbar.
Gleaning Enforcement Insights From Accounting Missteps A confession from CW colum n ist Robert Herz: He spends tim e each sum mer reading A ccounting & A u d itin g Enforcem ent Releases the SEC publishes as p a rt o f its enforcem ent against corporate mis conduct. Herz looks over the various AAERs o f th e last 12 months to pluck o u t com mon them es: more enforcem ent against individuals, more problem s w ith revenue, more a tte n tio n to in ternal control. Published online 08/25/15
Improving EITF to Improve Accounting Practice FASB's Emerging Issues Task Force turns 30 th is year, and w ith th a t comes its th ird 10-year review of h ow th e EITF should consider new accounting issues. Compliance W eek colum n ist Robert Herz offers his th o u g h ts on w here the EITF can im prove, in cluding w h a t issues it addresses and vo tin g practices to make decisions. Published online 0 6 /09/15
Tilting Toward IFRS Experiments in the U.S. Last December, SEC officials raised yet again the idea o f le ttin g U.S. companies file financial d a ta — ju st a bit, on a vo lu n ta ry basis— according to Inte rna tional Financial Reporting Standards. The proposal was the latest in a long discussion a b o u t w h e th e r to let U.S. businesses ado pt IFRS. Compliance Week colum nist Robert Herz examines the current state o f IFRS debates in corporate accounting and w h a t m ig h t come next. Published online 04/21/15
New Ideas on Disclosure Reform Disclosure reform is one o f th e more in tra cta b le problem s o f corporate re porting. The SEC says it w ill w o rk to move th a t issue fo rw a rd this year, and inside, Compliance W eek colum n ist Robert Herz offe rs his vie w on ho w to reinvigorate th a t project: Aim fo r a system o f one corporate "e verg ree n" file o f in fo rm a tio n , w ith real-tim e updates as m aterial events happen a fte r th a t. Published online 02/18/15
The Ingredients for Good Non-Financial Reporting Good disclosure begins w ith good standards. That has been challenging enough fo r finan cial reporting, and no w investors w a n t even m ore disclosure a b o u t im p o rta n t non -fina ncial in fo rm a tio n . Compliance W eek colum n ist Robert Herz ta lks a b o u t th e Su stainability A ccounting Standards Board (disclosure: he sits on SASB's board), its e ffo rt to develop disclosure standards, and ho w th e y can be used to com ple m ent finan cial data and satisfy investors. Published online 12/22/14
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