Corporate Governance

SEC Urged to Repair Broken Financial Reporting Infrastructure

More than 30 individuals and organizations – including former SEC officials, investor advocates, asset managers, and academics – wrote to Securities and Exchange Commission (SEC) Chair Gary Gensler urging him to make it a priority to fix our capital markets’ broken financial reporting infrastructure. “Two decades after a wave of major accounting scandals swept U.S. markets and Congress responded with passage of the Sarbanes-Oxley Act (SOX), many of the root causes of that crisis – deeply flawed and outdated accounting standards, weak and ineffective auditor oversight, and auditors who lack both independence and professional skepticism – have reemerged as pressing issues,” they warned, adding that, “For too many years, the Commission itself has been either complicit or passive in the face of these developments. We are writing to urge you to take bold action to restore the financial reporting infrastructure on which investor protection, the fair and orderly functioning of our markets, and the efficiency of the capital formation process all depend.”

The letter outlines deep institutional failures at the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board (PCAOB), and the SEC’s Office of Chief Accountant. It calls on the SEC to:

  • Reconstitute FASB and the Financial Accounting Foundation to include a majority of investor members with expertise in the use of financial reports and knowledge of the accounting standard-setting process;
  • Undertake a top-to-bottom housecleaning at the PCAOB, including changing its leadership, increasing its budget, restoring the expertise of its staff, increasing the frequency and rigor of inspections and backing them up with strong enforcement, and reinvigorating the standard-setting process; and
  • Appointing investor representatives as Chief and Deputy Chief Accountants in order to refocus that office on its investor protection mission.

“Market integrity, investor confidence, and the efficient allocation of capital all depend on complete, accurate, and comparable financial reporting. Currently, however, the institutions that make up the financial reporting infrastructure – FASB, PCAOB, and the SEC Office of Chief Accountant – are in a state of serious disrepair. …  We look forward to working with you to restore these entities to their appropriate role of ensuring that financial reports are complete, accurate, and comparable – to the benefit of investors, the markets, and the health of our economy,” the letter concludes.