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House Financial Services Subcommittee Hearing Examining FASB and PCAOB

House Financial Services Subcommittee

“An Examination of the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.”

Wednesday, January 15, 2020

 

Key Topics & Takeaways

  • The purpose of the hearing was for members of the House Financial Services Subcommittee to exercise its oversight responsibilities and to better understand the role of the FASB and PCAOB in accounting and audit standards.
  • Analysis of CECL: Golden stated that the FASB held 25 meetings throughout the project to conduct field studies. He added that a cost-benefit analysis was conducted to provide more useful information to investors. Golden repeatedly stated that this proposal provides investors with better information to make better capital allocation decisions. He said that he will closely monitor implementation and will work with the Treasury Department and other regulators to make improvements. He said that this proposal is a principles-based approach, which allows management the flexibility to address their specific banking needs.
  • CECL Impact in a Recession: Golden said that Federal Reserve staff found that leading up to a recession, lending would dampen and then accelerate during a recession. He added that it would be less pro-cyclical than the current model. Golden said that believes capital allocation helps reduce the cost of capital for investors.
  • Role of the PCAOB: Duhnke said the core functions of the PCAOB are inspections and enforcement standards, with the SEC is involved as an appellate authority. He said that for audits, the PCAOB and SEC accountant examination standards are similar. Duhnke added that there are several similarities between the PCAOB and SEC, as well as some unavoidable duplications. Duhnke reiterated that the PCAOB is gradually making improvements. Duhnke stated his aspiration to address the fate of the small broker-dealer program this year.
  • PCAOB Inspection of Chinese Company Listings: When asked about the PCAOB’s role in inspecting Chinese companies on U.S. exchanges, Duhnke explained the PCAOB’s inspections process. He said after the initial inspection, the PCAOB will file a notice of violation, which leads to enforcement, then resolutions and lastly, sanctions. He added that sanctions could range from a fine to de-registering. Duhnke said that it is then up to the SEC to determine the qualification standards for listing. He stated that the PCAOB protects investors by letting them know the status of companies in the market and that it is a “buyer beware” situation.

Witness

Opening Statements

Chairman Brad Sherman (D-Calif.)

In his opening statement, Sherman emphasized that the American economy is the most powerful engine in history. Sherman claimed that the Financial Accounting Standards Board (FASB) Chair, Russell Golden, is the most powerful, “totally anonymous” individual in the country. Sherman focused on the role of the FASB and criticized the FASB Statement of Financial Accounting Standards No. 2 specific to research and development, as well as the recent Current Expected Credit Losses (CECL) proposal. Sherman also expressed his desire for the Public Company Accounting Oversight Board (PCAOB) Chair, William Duhnke, to address concerns about the listing of unregistered Chinese public companies on U.S. exchanges.

Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga highlighted the oversight roles of both the FASB and PCAOB regarding accounting standards. He also focused on the overlap between the PCAOB and the Securities and Exchange Commission (SEC), expressing his concerns about redundancies between the two entities. Huizenga continued that he has concerns with the updated CECL proposal. Huizenga recommended that Congress consider taking a holistic approach regarding audit standards granted under the Sarbanes-Oxley Act of 2002.

Testimony

Russell G. Golden, Chairman, Financial Accounting Standards Board

In his testimony, Golden discussed the role of the FASB, which includes robust and transparent standard-setting procedures and the importance of stakeholder engagement. Golden stated the FASB establishes financial accounting and reporting standards for non-governmental entities that follow the U.S. generally accepted accounting principles (U.S. GAAP). Golden added that the FASB frequently works with the SEC, PCAOB and banking regulators to identify areas for improvement. He highlighted the completion of the CECL proposal and said that he believes large publicly traded institutions are ready to implement the new standards. He stated they are consistent with other financial reporting processes. Golden noted that he is aware of the Treasury Department’s study on the impact of CECL, adding that FASB “stands ready” to work with regulators to make improvements.

William D. Duhnke III, Chairman, Public Company Accounting Oversight Board

In his testimony, Duhnke stated that he and four other members joined the PCAOB in 2018, noting that this was the first time all PCAOB board members joined at roughly the same time. Duhnke continued that in 2018 the board performed a comprehensive assessment of the PCAOB and produced a strategic plan in November of 2018, which calls for the PCAOB to demonstrate a significant change in integrity, excellence, effectiveness, collaboration, and accountability. He opined that the PCAOB made substantial progress on these matters after implementing changes, including the PCAOB improving the oversight of inspections of audit firms, enforcement of auditing standards and related securities laws. He added that the PCAOB has an increased focus on innovation, technology, stakeholder engagement and outreach efforts.

Question & Answer

Analysis of CECL

Reps. Steve Stivers (R-Ohio), Blaine Luetkemeyer (R-Mo.), Ann Wagner (R-Mo.), Warren Davidson (R-Ohio), Anthony Gonzalez (R-Ohio), Vicente Gonzalez (D-Texas), Huizenga and Sherman asked what steps the FASB took in analyzing the impacts of CECL. Golden responded that the FASB held 25 meetings throughout the project to conduct field studies. He added that a cost-benefit analysis was conducted to provide more useful information to investors. Golden repeatedly stated that this proposal provides investors with better information to make better capital allocation decisions. He said that he will closely monitor implementation and will work with the Treasury Department and other regulators to make improvements.

Vicente Gonzalez also asked about the impact of additional capital retention on banks. Golden committed to responding to Gonzalez at a later time.

Rep. French Hill (R-Ark.) asked about the CECL standard’s effect on operating leases and the lengths of lending. Golden acknowledged Hill’s points and said the model does not require a forecast over five years.

Davidson asked how the FASB will coordinate with the SEC to avoid duplicate standards. Golden expressed that the FASB works with the SEC Chief Accountant, PCAOB Chief Auditor, and other banking regulatory agencies for input and enforceability measures. He added that the FASB would review the SEC Division of Corporation Finance’s review of CECL to narrow diversity and review enforceability.

Rep. Trey Hollingsworth (R-Ind.) asked about the impact on emerging smaller public companies. Golden responded that the FASB approved the effective date changes for smaller public companies and not-for-profit companies to begin CECL compliance in 2023. He added that SEC filers have begun implementation.

Rep. Bryan Steil (R-Wis.) asked how FASB plans to improve transparency for insurance receivables. Golden stated that he believes the same accounting conclusion should be given to the same activity. He added that he has a specific board to understand implementation questions better to help narrow diversity and provide additional educational material.

Steil asked how the proposal would benefit investors. Golden said the FASB had a lot of dialogue with investors to help them understand the benefits of CECL. He said that this proposal is a principles-based approach, which allows management the flexibility to address their specific banking needs.

Rep. Cindy Axne (D-Iowa) asked about country-by-country reporting standards. Golden responded that his board would have a discussion on country-by-country reporting to determine whether the information will be valuable or too costly for companies.

CECL Impact in a Recession

Reps. Bill Foster (D-Ill.), Gregory Meeks (D-N.Y.), Vicente Gonzalez, Luetkemeyer, Stivers, and Wagner asked about the impact of CECL in a downturn. Golden said that Federal Reserve staff found that leading up to a recession, lending would dampen and then accelerate during a recession. He added that it would be less pro-cyclical than the current model. Golden said that believes capital allocation helps reduce the cost of capital for investors.

Meeks specifically asked about the impact on minority depository institutions and underserved, low-income communities. Golden said that he believes the costs to transition will be similar to the incurred cost-loss model. He reiterated the effective date delays for certain institutions until 2023.

FASB Statement of Financial Accounting Standards No. 2

Sherman asked if Golden is considering reversing the FASB Statement of Financial Accounting Standards No. 2 or reviewing its impact. Golden responded that the FASB has not undertaken internally developing the intangible aspects, including research and development. However, he said they have taken up potentially aligning accounting in-purchases processes for research and development.

Role of the PCAOB

Huizenga, Hill, Stivers and Sherman asked about PCAOB oversight, improvements, SEC overlap, audit costs and quality. Duhnke said the core functions of the PCAOB are inspections and enforcement standards, with the SEC is involved as an appellate authority. He said that for audits, the PCAOB and SEC accountant examination standards are similar. Duhnke added that there are several similarities between the PCAOB and SEC, as well as some unavoidable duplications. He continued that PCAOB wants to ensure they are not causing companies to exceed cost requirements, and the question is more about how to implement a standard. Duhnke reiterated that the PCAOB is gradually making improvements.

Hill expressed his desire for there to be a relief for small broker-dealers. Duhnke stated his aspiration to address the fate of the broker-dealer program this year.

PCAOB Inspection of Chinese Company Listings

Reps. Carolyn Maloney (D-N.Y.), Hill, and Anthony Gonzalez inquired about the listing of unregistered Chinese companies on U.S. exchanges. Duhnke said that compliance discussions with China remain at the status quo. Duhnke explained the PCAOB’s inspections process. He said after the initial inspection, the PCAOB will file a notice of violation, which leads to enforcement, then resolutions and lastly, sanctions. He added that sanctions could range from a fine to de-registering. Duhnke said that it is then up to the SEC to determine the qualification standards for listing. He stated that the PCAOB protects investors by letting them know the status of companies in the market and that it is a “buyer beware” situation.

For more information about this hearing, click here.

For an archive of past SIFMA hearing coverage, please click here.