Behind the SEC’s reform agenda

The Securities and Exchange Commission has been busy issuing proposals in line with Chair Paul Atkins’ desire to overhaul “the current public company regulatory framework.” From the proposed semiannual reporting rule to limiting SOX 404(b) auditor attestation requirements to only the largest filers, there’s a lot for public companies (and their CFOs) to consider.

A driving factor behind these actions is how the SEC can “get more companies to be public companies, and give investors a lot more opportunities for companies that they can invest in,” Kurt Hohl, the agency’s chief accountant, said in a prerecorded interview shown at Workiva’s annual Amplify conference mid-September in Las Vegas.

Workiva played Hohl’s comments during a session to walk attendees through the myriad potential SEC reforms.

“The general sentiment is that there’s a lot,” Steve Soter, VP and industry principal at Workiva, told CFO Brew after the session. “We’re starting to see some very active rulemaking at the SEC, and it has largely followed what Chair Atkins said that he was going to do.”

Behind the scenes. The semiannual disclosure rule—giving issuers the option to file once every six months instead of every three—is meant to give companies more flexibility, according to Hohl. “When we go around [and] we talk to various stakeholders and practitioners, one thing that’s evident is that a one-size-fits-all disclosure regime might not necessarily be that meaningful,” he said.

Beyond semiannual reporting, the SEC has proposed a change that would raise the threshold for what size company is considered a large accelerated filer, to $2 billion in public float from $700 million. That change, in combination with making all companies below that size nonaccelerated filers, would in effect reduce the number of companies that have to obtain an auditor’s attestation on their internal control over financial reporting. With these changes, Hohl said, “the commission was working to try to craft a solution where [they] eliminated the complexity associated with…requirements under the federal securities laws, and then trying to entice as many companies as [it could] to come to the markets.”

Hohl said he planned to meet with audit committees later in the month to discuss what they may do differently if the reforms go through. If organizations relax their controls, he said, problems could go undetected for longer.

“So this is going to be a real challenge for management [and] for audit committees, in terms of how they rethink their governance environment and their governance structures under these new rules,” he said.

Soter told us the reforms present an opportunity for organizations to “reinvigorate the internal audit teams rather than being compliance checkers on SOX” requirements. “I think there’s a real opportunity for them to not just be looking at the minimum on internal controls, but ‘how do we make processes better?’”

What’s material, anyway? “A lot of the focus” behind what the commission is doing, Hohl said, “is on how much does it cost to prepare a 10-Q each period [and] report it to investors? Is that really the meaningful information that investors need in order to make investment decisions?”

What some companies and investors consider material may not matter as much to others, Hohl said. He gave a hypothetical example. A large organization with “sophisticated financial reporting groups, very large staffs, great oversight and governance models” will want to report different information than a small biotechnology firm, whose investors are likely more concerned about a pending FDA approval than they are with quarterly profitability.

“What’s material to those investors might not necessarily be financial statement oriented,” Hohl said.

He said when he asks company executives why they file information that has no material change from the previous year in an annual report—such as footnotes on pensions or fixed assets—their response is because they believe they have to. “How relevant is this to an investor’s decision to buy, sell, or hold a security? It’s probably not,” he said.

The SEC, Hohl said, encourages preparers to speak with investor groups, auditors, and regulators like the PCAOB in assessing what constitutes materiality. “Hopefully, with all those initiatives taken together, [we can] reduce the size of filings so that somebody can actually consume them.”