Evolving Regulations and Oversight in the Public Interest

Article excerpt

An Interview with SEC Chief Accountant Donald T. Nicolaisen

SEC Chairman William H. Donaldson announced the appointment of Donald T. Nicolaisen, CPA, as the commission's chief accountant in August 2003. Nicolaisen oversees the SEC's accounting policy initiatives and leads its efforts with national and international standards setters on critical accounting and auditing issues. He also works closely with the Public Company Accounting Oversight Board (PCAOB) to ensure that auditors adhere to the highest business and ethical standards.

Nicolaisen was previously a senior partner at PricewaterhouseCoopers LLP, where he held a range of management and leadership positions after joining the firm's predecessor, Price Waterhouse, in 1967. From 1988 to 1994, he led Price Waterhouse's national office for accounting and SEC services. During that time, he was also a member of FASB's Emerging Issues Task Force (EITF).

Nicolaisen met with CPA Journal Editor-in-Chief Robert Colson at the SEC's Washington, D.C., office in late 2003.

The Role of the Chief Accountant

The CPA Journal: What is the dominant item on your agenda as the new chief accountant?

Donald T. Nicolaisen: Narrowing it down to one thing is difficult, but broadly, it's helping investors be better informed and restoring investor confidence through reforms that improve the financial reporting process. This includes reform in the accounting and auditing profession, which the Sarbanes-Oxley Act has already catalyzed. The audit process must be improved, and investors deserve financial statements that are more transparent and easier to understand. This starts at the top of the organization and will involve, in many cases, a cultural change. In addition, there is an expectation gap between what the auditor is required to do and what the public expects the auditor to do. This gap needs to be addressed. Auditors must step up to the plate and better explain their role.

Fortunately, the OCA [Office of the Chief Accountant] staff comprises talented people, fully dedicated to quality financial reporting and investor protection. Together, I am confident that we will achieve our goals.

CPAJ: How would you characterize the problems you inherited on entering the chief accountancy?

Nicolaisen: Individual and corporate greed has strained the system and created excesses and abuses that have led to unethical and sometimes criminal behavior. In some cases, excessively detailed accounting rules have given those who choose to abuse the system a means to achieve better-looking numbers in financial statements by circumventing the fundamental principles behind the rules.

The SEC staff recently released a study on principles-based accounting standards. The report supports objectives-oriented standards, which will provide a better framework in which to exercise professional judgment and may help facilitate compliance with the intent of the standards. Such a change, where judgments are required and appropriately exercised, will go a long way toward improving the corporate reporting process.

CPAJ: How do you combat the "parsing the rules" mentality?

Nicolaisen: This is another example of how our culture has evolved. We have a society of laws and rules, and peopleincluding business owners-who want to understand what rules apply to them and how to follow them, till of which is entirely fair. But problems arise when the rules are stretched and transactions with little or no underlying economic substance are entered into simply to achieve an accounting result. In these cases, people have crossed the line and have misled investors. Professional accountants, whether working as preparers or auditors, recognize that misleading investors is unacceptable, and they have the ability to contribute to quality financial reporting. Our challenge, and the accounting profession's challenge, is not only to encourage compliance with the rules but also to inform investors about the underlying transactions and the resulting financial picture. …