Officials from the Securities and Exchange Commission discussed some of the proposed rules for digital assets like cryptocurrency and climate-related disclosures under development during a conference Monday.
"I think it's important for people to remember that the lessons of traditional finance apply in crypto," said SEC commissioner Hester Peirce during the AICPA & CIMA's Conference on Current SEC and PCAOB developments. "If you have entities that look very much like traditional financial entities, centralized entities, there are certainly basic rules that have been learned for centuries around how you manage a business and make sure that you are taking your accounting for things properly. These are things that businesses should be doing in the crypto industry, but customers and counterparties to those businesses should also be making sure that the entities they are interacting with are living up to these standard best practices. That kind of internal discipline can be very helpful to make sure that the industry matures and remembers the lessons of counterparty risk, conflicts of interest and those kinds of things."
In the wake of recent bankruptcies at high-profile crypto companies like FTX and BlockFi, investors are asking for more information about their assets. Peirce noted that she is starting to see that happen with people demanding proof of reserves and asking questions about collateral and what's happening with money that they deposit.
"Those kinds of questions and that kind of skepticism is extremely helpful," she said. "Regulation will come in this space. I've been at the SEC since 2018 and for much of that time have been saying we really need to put our heads together with the broader market and think about what good regulation might look like in this space. We haven't really done that. We've really taken a much more enforcement-centric approach, which is necessary to go after bad actors, of which there are plenty in this space. But we could also be doing a better job to create the environment within which good actors could experiment and try out some uses for this technology, and I think if we had done that and if we do that in the future, we'll end up with a crypto industry that's a little less focused on trading and numbers going up, and more focused on thinking about what can this technology bring us in the future, how can it transform and make more efficient the processes that we see in the financial markets, and how can it more efficiently allow people to transfer value seamlessly, which is a really powerful concept and shouldn't get lost in all the bad events of recent months."
SEC chief accountant Paul Munter is hearing other demands from investors as well, particularly around more specific kinds of information about a company's financial statements.
"Investors are asking for more disaggregation of information on the income statement, more disaggregation in terms of segment reporting, and the like," said Munter. "The [Financial Accounting Standards Board] has a number of projects falling into a number of those categories: a project to provide for greater information about the income tax provisions. An exposure draft will be out early in the new year on that. They are working toward a proposal on disaggregation of components of the income statement, cost of revenues, selling expenses, for example. I think those are going to be very important proposals."
The SEC also has a proposal out on climate-related disclosures that has been attracting thousands of comments. It builds on the widely used framework from the Financial Stability Board's Taskforce on Climate-related Financial Disclosures, but goes much further.
"Even when you look at something like TCFD, which many companies have been complying with in part, the question now is are you really going to be able to do this for real under an SEC regulatory obligation," said Peirce. "You won't be able to pick and choose what's in the regulation you're going to have to comply with, so it's a new day when you start building these things into regulations. Then we as regulators have to ask how evergreen are these rules going to be? I think if you look at the climate proposal, it's an extremely detailed regulatory proposal. There are lots of areas where very specific information is asked for. We're not talking only about the company, but all through the value chain of the company. Is that kind of disclosure, which is really going to dwarf a lot of the other disclosure, is that what we really need or is that something more pared back? I would say the pared-back approach is what we already have with our standards around disclosing material risks. For many companies, those may well involve climate risks, but for other companies, climate risks may not be the most important. So I think these are the kinds of issues we're wrestling with through the comment process. We've gotten lots of very helpful comments, very specific suggestions about how we can improve the proposal, so we're looking at those."
Beyond the U.S.
On the international level, standards are also evolving. The International Accounting Standards Board has a long-running effort to align International Financial Reporting Standards with U.S. GAAP. While the two boards have diverged on a number of fronts in recent years, IASB chair Andreas Barckow addressed some of the issues on which the two boards have been working.
"We have converged, or substantially converged, accounting standards on business combinations, consolidations, fair value measurement, leases, revenue recognition, segment reporting, to name but a few important ones," he said. "Of course, there are also some areas where the IASB and the FASB were not able to achieve full compatibility, notwithstanding greater directional alignment. Examples in this camp include our literature on financial instruments and insurance contracts."
He noted that the two boards had been discussing updating the goodwill impairment standards after doing a post-implementation review of IFRS 3, the IASB's standard on business combinations, and a similar review by FASB of its standard. "In that review, many stakeholders flagged to the IASB that the impairment-only model was not working as intended. The argument floated was the famous 'too little, too late,' said Barckow. "The FASB heard similar views in its review conducted a bit earlier. Having investigated the issue, we concluded that the current impairment-only model could not be substantially improved without introducing significantly more cost and complexity. Because of that, we tentatively decided to retain the current model, but proposed a comprehensive set of new targeted disclosures to significantly improve the quality in reporting on business combinations, particularly in post-acquisition performance."
The IASB issued a discussion paper outlining its proposals in 2020 and received feedback over the next 18 months, including consultations with FASB, but decided against making changes to goodwill impairment. "In the end, the IASB concluded that there was not a compelling case for changing the current accounting model at this time," said Barckow. "Note that our task was not to opine on whether board members preferred the impairment-only approach or an amortization-based model, but whether we have been presented with sufficient evidence to change the existing requirements for all stakeholders. Without such evidence, the desire to stay converged with the FASB became an important factor in our decision-making."
Updating the U.S. profession
The American Institute of CPAs has been working to update the requirements of the CPA exam and curriculum through a joint effort with the National Association of State Boards of Accountancy. "We must make sure what we do is attractive and results in a highly competent workforce for the future," said AICPA chair Anoop Mehta. "That is also one of the reasons why our joint CPA Evolution initiative with the National Association of State Boards of Accountancy is so important. We are transforming the CPA licensure model to ensure the future of our profession and we're on track to launch a new, more relevant CPA exam in January of 2024. We're also reimagining management accounting through our registered apprenticeship program for finance business partners. This program gives college graduates an apprenticeship path to pursue the CGMA designation. The U.S. Department of Labor recognized us as the first program of its type in the nation for the accounting and finance profession. It will establish a pipeline of highly engaged candidates that allows employers to monitor and develop more skilled, diverse long-term employees."
