The 42nd Annual SEC and Financial Reporting Conference is a premier annual gathering on the West Coast that facilitates interaction between industry leaders, accounting executives, and policy setters from the U.S. Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB). This year’s conference was held on June 6, 2024, on the campus of the University of Southern California (USC).

Professional Integrity and Ethics

The overarching theme of the conference was professional integrity and ethics. Paul Munter, Chief Accountant in the Office of the Chief Accountant at the SEC, insisted in his opening remarks that professional integrity and ethics within an organization’s culture should be promoted at least as much as profitability and growth. While the tone at the top has become a focus point for regulators in recent years, Munter pointed out that professional integrity and ethics matter at all levels of the organization, including middle management and staff levels.

Munter reminded registrants and their auditors that a comprehensive risk assessment is key to high-quality financial reporting. Too narrow of a focus by management or auditors can result in unmitigated risks to investors. A good risk assessment should cover not only financial accounting and reporting considerations, but also the regulatory environment, industry trends, short seller reports, and changes in technology or systems. These risks should be continuously evaluated to ensure they are mitigated and properly communicated to investors.

Munter said that high-quality financial reporting is a communication activity with investors and requires proper recognition and measurement, not just adequate disclosure. Munter remarked, “Disclosure does not cure bad accounting.”

SEC Comment Letter Trends

Melissa Rocha, Deputy Chief Accountant in the Division of Corporation Finance (CorpFin) at the SEC, led a discussion of comment letter trends. Hot topics included inflation / interest rates, supply chain, Ukraine/China/Israel, impairment, climate-related disclosures, human capital, cybersecurity, and digital assets (crypto).

Traditional SEC comment letter topics, such as non-GAAP, MD&A, revenue recognition, business combinations, and segments, remain high on the list. The SEC staff reviews SEC filings in combination with reviewing a registrant’s website, press releases, earnings call transcripts, and other public information. Inconsistencies between the SEC filing and these other sources of information are often the basis for comments.

While registration statements are typically reviewed by accountants and lawyers on the SEC staff, most periodic reviews (which are required to be conducted at least once every three years by the Sarbanes-Oxley Act of 2002) are conducted only by accountants in CorpFin. As such, the SEC staff emphasized the need to get accountants involved when responding to SEC comment letters. Rocha quipped, “The staff doesn’t want accounting issues explained to them by lawyers.”

As they frequently do, the SEC staff expressed a willingness to work with registrants and encouraged early communication when financial accounting and reporting challenges occur. The staff also reminded registrants of Rule 3-13 of Regulation S-X, which allows companies to seek relief from the financial statement disclosure requirements if they believe the information is burdensome and goes beyond what is material to investors.

Disaggregation of Income Statement Expenses (DISE)

The FASB proposal on the disaggregation of income statement expenses (DISE) came up in several sessions. The FASB’s proposal would require public companies to disclose in a tabular format, on an annual and interim basis, inventory and manufacturing expense, employee compensation, depreciation, and intangible asset amortization for each income statement line item that contains at least one of those expenses. Specified expenses, gains, and losses that are already disclosed under existing U.S. GAAP would also have to be included in the tabular disaggregated expense disclosures for each relevant expense line item. Finally, the aggregate amount of the required expense categories would need to be reconciled to each relevant expense line item on the income statement.

Reflecting concerns heard by the FASB during the comment period, several industry speakers expressed trepidation about the new data requirements to comply with the proposed rule. Speakers expressed concern regarding accounting systems that may not currently be set up to produce the data required for DISE disclosures, and the need to set up internal controls over the completeness and accuracy of such information when it is produced.

There was also discussion regarding how registrants could manage the messaging and interpretation by the investor community of the newly public information that would be disclosed under the DISE proposal. The incremental cost of system changes and audit requirements was also discussed.

The FASB believes that more detailed information about expenses is critically important in understanding an entity’s performance, assessing an entity’s prospects for future cash flows, and comparing an entity’s performance over time and with that of other entities. While the FASB continues deliberations, speakers roundly recommended that registrants start performing dry runs of DISE disclosures.

Generative Artificial Intelligence (AI)

All speakers agreed that AI is a rapidly developing technology that is here to stay. Speakers emphasized the importance of understanding the costs and benefits of generative AI given that cloud computing costs can be high. The completeness and accuracy of data input into generative AI models is also paramount, as is asking the right questions.

Given that algorithms used in generative AI are often a black box, there was also discussion from auditors about whether it would become necessary for public accounting firms to create their own generative AI models to audit accounting estimates and footnote disclosures produced by registrants using generative AI. Although it may seem like a distant future, one of the industry speakers remarked that their Big Four auditor required representations that generative AI was not used to produce any footnote disclosures in their 2023 Annual Report on Form 10-K.

What Keeps Controllers Up at Night?

The conference ended with a Controller Roundtable discussion. When asked “What keeps Controllers up at night?” panelists unanimously agreed that the pace of change tops the list. From new accounting standards and changing regulations to generative AI, the pace of change has left many Controllers, and their auditors, weary.

The ongoing shortage of accounting graduates and certified public accountants (CPAs) compounds the problem. There was passionate discussion about inspiring a new generation of accountants by leveraging technology to focus on more analytical work, providing rotations within an organization to enrich experiences, and adjusting compensation to align with other professions in finance. While the pace of change can be demanding, change seems necessary for the sustainability of the profession.