Amy Reeve 11 Jun 2018 11:15am

US accountant on advancing financial reporting

Wesley Bricker, chief accountant at America’s capital markets regulator the Securities and Exchange Commission (SEC), was in London this week to give a speech on the intersection of financial reporting and innovation. Amy Reeve went to meet him

During the speech, Bricker said financial reporting was “critical to a healthy economy” as auditors play a vital part in this architecture. “The integrity with which auditors, as well as all other stakeholders in the financial reporting process, execute their responsibilities is foundational to the enduring confidence of the investing public in our capital markets,” he added.

Speaking at ICAEW, Bricker, a PwC alumni who has been principal adviser to SEC chair Jay Clayton on accounting and audit matters since 2015, referred to “recent business failures” to emphasise how financial reporting underpins decision making within financial markets. “Good accounting and auditing may not readily grab the general public’s attention, but they are essential to our livelihoods,” he said. “We all benefit when we learn from and strengthen our system of business and financial reporting.”

With much of the UK accounting profession’s mind on the recent collapse of construction company Carillion and its affect on the audit industry, Bricker said a critical dialogue must surely now be on the agenda “in order to examine each phase of financial reporting (preparation, audit, delivery, and use) and whether it’s possible to improve the quality of audited financial statements upon which investors (and lenders) rely.”

Speaking to economia earlier in the day, Bricker said the Sarbanes-Oxley Act of 2002 is one example of how America responded to business failure in the markets. “The Sarbanes-Oxley Act provided useful direction in terms of measures to strengthen corporate governance; the independence and sustainability of private sector standards-setters; and to strengthen the role and relevance of auditors with a standalone PCAOB [Public Company Accounting Oversight Board]. We have seen failures and we have found ways to come out of failure stronger in financial reporting. We’ve done that by staying focused on the core objective of reporting: to communicate the best representation of economic reality so that market participants can make better-informed decisions.”

In his speech at Chartered Accountants’ Hall, Bricker said the collective goal “must be for the information to be reliable the first time it is provided to investors”. Even though financial statements are not the sole source of information for decision-makers, “audited financial statements are a vital element”. It’s for this reason that he encourages anyone involved in financial reporting to commit to continual self-analysis, reflection and future gazing.

“What can we do today to support the financial reporting of tomorrow; how can we bolster coordination and collaboration among the organisations involved? What can we learn from previous financial reporting failures to evaluate whether and how each organisation could more effectively contribute to the prevention of reoccurrences/future failures? What information should be provided in the financial statements to meet the needs of investors, lenders, and other creditors, even as demographics, technology, and market structures change?”

Asked if he thought the objectives of financial reporting are changing and whether everyone is keeping up, he told economia, “At the most fundamental level the importance of accurate, understandable communication between companies and their investors, lenders and other capital providers is not changing. But the tools by which communication is accomplished certainly are. I think it’s important for accountants to stay grounded in the fundamental objective of contributing to clear communication in the first instance, even as accountants also seek to understand how technology is changing, and how expectations are changing. So there’s a bit of a measured balance between keeping the fundamental true, which is clear communication, while also responding to changes in how that communication occurs.”

Have some accountants lost focus on what they’re there to do? “In the work to maintain an understanding of a very fast-moving change in technology, we do well to remind ourselves of the more fundamental purpose of accounting: recording the history of business and communicating it so that capital providers can make decisions in light of that history,” Bricker said.

But everyone must share the responsibility. This applies to his own organisation, which he says takes the best ideas from the private sector “to understand where standards need to be enhanced or changed so that investors ultimately get a better product” and then hones them. This requires the best talent from a diverse field. “Within the office of the chief accountant we enjoy a diversity of perspectives through academics, practice professionals, regulatory professionals, accountants, lawyers, we even have a PhD economist. We bring our best thinking to any given issue.”

And he would expect nothing less from the other side. Firms, and indeed standards-setters and public sector organisations, must ensure they have the talent required to help maintain the quality of financial reporting today and in preparation for a future that will have technology at its heart. He said in his speech that audit firms must be prepared to respond to the quickly changing needs of investors as well as to maintain sufficient technical expertise internally.

This challenge is as pertinent in the US as it is in the UK. The other is expectation. He told the audience at ICAEW, “Even in meeting the rightfully high expectations and needs of investors, lenders, and other creditors, audits are not capable of providing absolute assurance – a guarantee – of the integrity of management’s financial statements or the viability and soundness of a business model. It is essential for all of us to fully understand what audited financial statements can provide and not suggest that audited financial statements provide investors with more information than such statements are designed to provide.”

Speaking to economia he reiterated that point, “The events of the day, whether it’s Carillion or more broadly a change in the markets, reinforce the importance to all of us in first understanding the expectations of users, to then evaluate expectation gaps, to then evaluate how to best address those gaps. There are a variety of tools to address expectation gaps, but it’s first identifying what those expectations are.

“Businesses across our economy are spending substantial amounts of time understanding consumer expectations. Accountants do well to understand financial reporting consumer expectations and then to act.” Of course there’s work to do, he admits, “but expectations are normative, our work is never done. Nor should we view it as being done, because financial reporting is communication, and communication is never status quo, it’s never done.”