SEC chief accountant Hewitt has objectives: three short-term and three long-term.

Conrad W. Hewitt, the chief accountant at the U.S. Securities and Exchange Commission (SEC), spoke with Financial Executive Executive Editor Ellen Heffes about his role and his priorities.

You've been chief accountant of the SEC for less than six months now. Is the job about what you expected it to be?

Hewitt: When I took this position, I expected it to be challenging--as I do love challenges. It is a challenging job, and I'm enjoying it. When I started back in August, the accounting issues related to the backdating of stock options had just occurred, and I knew that would be a problem for the registrants and external auditors. Also, I expected to be involved in dealing with concerns relating to the implementation of the 404 reporting requirements, especially those regarding the cost to small and mid-sized companies. Having been on the boards of small and mid-sized companies, I spent much time in the past few months in this area.

SEC Chairman Christopher Cox said that your mission is "to maintain the integrity and strength of the markets in an era of unprecedented global competition." While you say you like challenge, why, at this point in your career, did you decide to take on this particular challenge?

Hewitt: I've taken this opportunity as a way to cap my career. I'm known by many to be a very charitable person--because my philosophy is to give back to the community what I can. In that context, I knew that when I retired from public accounting I wanted to give back my experience and expertise to the public sector. I did that when I became the superintendent of banks for the State of California and the first commissioner for the Department of Financial Institutions for the State of California. My role with the SEC furthers that same philosophy.

You have quite a varied background, in accounting, in both the private and public sectors, as well as having served on corporate boards. How do you believe this broad background has prepared you for chief accountant at the SEC?

Hewitt: I believe that I have a unique background for this position [and] that has certainly prepared me well. Being a regulator for financial institutions in the State of California was a large responsibility, during which I learned how to work with the legislators, [the] administration and other regulators, such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). I also worked with the public, the press, my staff and the law and regulations. Our mission in California was to protect the depositor, then the FDIC insurance fund and, ultimately, the taxpayer.

Similarly, I see my role here at the SEC is to protect the investors, maintain an orderly marketplace and facilitate capital formation. I might just say that in the brief time I've been here at the SEC, that I've used [the experience of] many phases of my long career several times already!

Talk about the relationships between the various regulatory agencies--the SEC, Public Company Accounting Oversight Board (PCAOB), Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB)--how they work together to get things done and your role working with them.

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Hewitt: We work very closely with all the various agencies. We have similar, yet different missions--similar in that we're all on the same team for investors. I think it's very important that we [the regulators] communicate freely and exchange ideas among ourselves.

For example, before I came here, this office had established a roadmap on the subject of the international convergence. This requires much SEC cooperation and communication among FASB, IASB and other international regulators. I view my role as trying to help them pursue their goals and objectives as much as I can, in accordance with the SEC's mission.

Let's talk about some of the main issues that you're involved with in the office of the chief accountant (OCA). Will you list some items that are on the top of your agenda?

Hewitt: I divide my top objectives between short-term and long-term, and I have three of each. The first short-term issue or objective I would like to see accomplished this year is the finalization of our management guidance. The second short-term issue is finalization of the PCAOB's new AS5 auditing standard. And the third is the implementation of XBRL (eXtensible Business Reporting Language).

Then, I have three long-term objectives that I'd like to accomplish within the next couple of years: international convergence; complexity of standards (including auditing and accounting standards); and materiality review and applications.

What timeframe do you use to define short-term and long-term?

Hewitt: I've been using [strategies such as formulating] short-term goals, long-term goals and objectives and solutions over many years--in operating plans, strategic plans and business plans. In my mind, short-term are those items that you can reasonably accomplish within a 12-month period, and long-term would be somewhere between two to five years.

With interactive data a priority for Chairman Cox, and the SEC investing substantial resources in that area, do you see it being mandated soon?

Hewitt: We have not discussed the mandatory use for filing purposes yet, but we will, and sometime in the future the commission may consider whether registrants are required to use XBRL when they file. We already have over 40 companies who have filed approximately 100 filings on a voluntary basis using XBRL, with excellent results. (Editor's note: see article on page 29 for experiences of some of the voluntary filers.)

One concern that we want to study is the cost factor for small companies. I suspect that the marketplace will dictate eventually that all companies will need to file in XBRL. Before he hired me, Chairman Cox told me this was one of his priorities because of the benefits to everyone, and he's indicated publicly that this is one of his high priorities.

Let's go down a list of several initiatives and please comment on each: FIN 48, Accounting for Uncertainly in Income Taxes. Editor's note: On January 17, FASB said "no" to delaying implementation, although it had received over 400 comment letters on the subject (the majority pressing for delays).

Hewitt: Because of the FASB's open standard-setting process, companies have the opportunity to keep updated on the direction the FASB is headed on proposed interpretations and standards and generally to prepare for any changes. As a result, few pronouncements have been delayed beyond their original effective dates. It was not surprising, therefore, that FASB decided not to delay implementation for FIN 48.

We [at the SEC] have not had many questions yet on implementation. I do know that tax departments in many companies are involved in FIN 48, and they're spending time in this area to comply. As with any new standard, there's always the question of what should be included and how it should be presented, so probably after the first filings there may be more questions on FIN 48.

Section 404 management guidance and "AS5." Have the new proposals gone far enough to accomplish SEC/PCAOB goals? Editor's note: At the time of this interview, proposals had been issued by the SEC and PCAOB with comment periods ending on February 26, after press time.

Hewitt: I'm sure there will be comments, but we have not seen any yet. I believe the key to AS5 is the implementation of it by the public accounting firms and later inspections by PCAOB on the effectiveness of the implementation. Again, we believe the costs of these 404 audits need to be in line with the benefits, and our goal is to increase investor protection and value while reducing unnecessary costs of [Section] 404. And, by the way, that is not unique to 404. That is the SEC's goal in all regulations.

The comment period for proposed AS5 ends on February 26, and we have not had many comments, but we hope that in both cases--AS5 and management guidance--that the external auditors and management, to the extent practical, will start implementing major portions of the proposals. Both the commission and PCAOB will review the comment letters carefully and make changes in the drafts as we deem appropriate.

Still, there are many ideas reflected in the commission's guidance for management and in the AS5 draft that are consistent with AS2 and the current requirements that can be implemented now. These would include a top-down, risk-based approach to conducting audits and focusing on those things that really matter to investors. There's no reason why management and auditors cannot start doing some planning and implementation now to bring costs more in line with the benefits.

Sarbanes-Oxley Section 404 for smaller companies.

Hewitt: The smallest companies, of course, have not yet started to file. We believe that small companies will benefit from improved internal control systems regulations when complying with 404, but we want to make sure that the costs are not excessive in relationship to the benefits. Smaller companies definitely need some relief, and hopefully, the comments about small companies and discussion of scalability in AS5 will help those companies.

Again, we're looking forward to reading the comment letters in this area. Basically, smaller companies do not have the resources and their costs are much higher, relative or even on a regressive basis to their operating expenses, compared to the larger companies. As I understand it, the PCAOB has a task force looking into the audits of small companies, which should provide additional guidance in this area.

Stock options and backdating. You've said that was a big issue when you first came into your post, and at last count there were more than 130 cases under investigation by the SEC (with two enforcement actions brought by press time). Do you expect that this will mushroom into a bigger business scandal or will it go away?

Hewitt: I can't comment on what may be coming out of our Division of Enforcement, but the calls coming into our office, the OCA, would seem to indicate that most of the news in this area has occurred already.

One other item: back in September, we published guidance on about six or seven different accounting scenario issues that were the subject of recurring calls to our office. That publication seemed to take care of most of the questions regarding the accounting side of backdating of options.

International Convergence. IASB Chairman Sir David Tweedie has several times reiterated the date 2009 as a significant time for changes to occur for international convergence. What's your thinking?

Hewitt: I think everyone is working together to achieve the goals in the roadmap, and I follow the progress very closely. I am pleased with what's being accomplished. This is not an easy project. There are many major individual projects and some minor projects on the international convergence issue that need to be studied, and that's going to take some time--we'll know in a couple of years. [Tweedie's 2009 date] seems like a reasonable date today; the roadmap was established over a year and a half ago.

Complexity. Chairman Cox has waged an all-out war on complexity, and FASB Chairman Robert Herz also lists this as his priority.

Hewitt: I'll be working this year with several organizations--FASB, PCAOB, FEI, AICPA and others--that are focused on the complexity problem. There are many aspects to this problem. We need to analyze the causes and implications of complexity. This is a long-term project.

Materiality review and applications.

Hewitt: We get a lot of questions on materiality. [There seem to be] problems with how it is defined in AS2; in AS5, materiality standards are being redefined. We think we should take a look at the issue of materiality--how it is applied and what problems it presents to companies and whether the investor understands the materiality concept. We are just starting on that.

While you've just begun at the SEC, regardless how long you stay, what do you want your legacy to be?

Hewitt: I'd like my legacy at the SEC to include a good viable solution to the excessive costs versus the benefits received that were created during the initial implementation of SOX 404; excellent implementation of our management guidance proposal by the registrants; some good results of the international convergence situation; initiate the elimination of complex standards, both accounting and auditing standards; and, finally, implementation of XBRL for all companies.

If I get that done, I will have done something.

HERZ REAPPOINTED FOR 2ND TERM AS FASB CHAIR

Robert H. Herz was reappointed to a second five-year term as Chairman of the Financial Accounting Standards Board (FASB) commencing on July 1, 2007. This follows his first term, which began on July 1, 2002.

Herz is described in the FASB press release as a "staunch champion of simplification and the need to reduce complexity in the financial reporting system." He is also credited with presiding over FASB's historic Norwalk Agreement with the International Accounting Standards Board (IASB) to work together to develop a common set of accounting standards to better serve the global capital markets.

The announcement came from Robert J. DeSantis, president and COO of The Financial Accounting Foundation (FAF), which is responsible for the oversight, administration and finances of both FASB and the Governmental Accounting Standards Board (GASB).

Robert E. Denham, chairman of the FAF Board of Trustees, said of Herz: "Initially appointed at one of the most challenging times in the history of our reporting system, Chairman Herz has helped lead the FASB's efforts to significantly improve the quality of financial information available to investors and the capital markets."

RELATED ARTICLE: SEC Chief Accountant's Priorities

Three Short-Term Priorities

1. Finalize Management Guidance

2. Finalize PCAOB's Auditing Standard 5 (AS5)

3. Implementation of XBRL

Three Long-Term Priorities

1. International Convergence

2. Complexity of Standards

3. Materiality Review and Applications

Timeframe:

Short-Term -- within 12 months

Long-Term -- 2 to 5 years