ince being sworn in
as the 28th SEC chairman in August 2005,
Christopher Cox has pursued an ambitious agenda of
trying to protect the investing public while
making government regulation more tolerable for
industry. Cox served in Congress from 1989 to
2005, including terms as chair of the House Policy
Committee, the Committee on Homeland Security, the
Select Committee on U.S. National Security, the
Task Force on Capital Markets and the Task Force
on Budget Process Reform. Chairman Cox spoke
recently to Journal of Accountancy
Publishing Director Geoffrey Pickard about
issues facing the SEC and the CPA profession.
The SEC and the PCAOB in December issued
proposals on changes to the implementation of
[Sarbanes-Oxley] section 404. What do you hope
to achieve and what outcome do you see?
Cox: We are absolutely
committed to wringing out the unnecessary costs of
section 404. As a member of the House-Senate
Conference Committee that wrote the final law, I
can say with some authority that Congress never
intended for section 404 to be unduly burdensome
and expensive. It came as a surprise that
legislative language that had been copied
virtually word for word from the FDIC Improvement
Act, where it had not ruffled any feathers, was
the source of multimillion-dollar expenses for
companies of all sizes.
I expect that 404
relief will be in effect for companies both in the
United States and abroad no later than the second
quarter of 2007.
Many of our members are auditors or members of
management in companies that have decided to
list on the Alternative Investment Market of the
London Stock Exchange. We’ve been told that AIM
came about for many reasons, including lower
costs, because companies listed there do not
have to comply with SOX regulations. What effect
do you believe SOX has had on the overall
competitiveness of U.S. markets?
Cox: Certainly, the early
implementation costs of Sarbanes-Oxley,
particularly section 404, caused many people in
America to at least take a look at opportunities
overseas. But even as we are taking aggressive
steps to reduce the cost of Sarbanes-Oxley
implementation, we’re also now noticing that the
flirtation with other overseas markets is abating.
There never really was a rush of American
companies listing on AIM and other similar venues.
That’s because the depth of those smaller
specialty markets is not the same as in the United
States and the price support for issues in the
after-market is not as strong as companies would
like. So there may well be opportunities for U.S.
exchanges to build these niches. In fact, the
American Stock Exchange has expressed some
interest in doing this.
Some believe that non-U.S. exchanges and
markets have used SOX and regulation as a
competitive tool. Are U.S. markets less
attractive today, do you think?
Cox: No, but they are
facing increasing competition. There now are
substantial pools of capital to be tapped in a
number of markets around the world, and the United
States is not the only place that companies can
list. But the United States still has substantial
advantages, and they are evident in the relative
market share of America vs. the rest of the world.
From a regulatory standpoint, our job is to
make sure the only risk investors face is the
inherent risk of the companies in which they
invest, and not the risk of fraud, unfair dealing
or erroneous information. To the extent that we
are successful in that mission, U.S. markets will
have a competitive advantage.
Some believe Sarbanes-Oxley has created an
environment where management is reluctant to
seek advice from its auditors on complex
accounting and business transactions for fear of
creating an independence issue. But auditor
advice often can enhance financial reporting.
What are your thoughts on this?
Cox: I believe strongly,
and the commission believes strongly, that there
is value in companies consulting with their
auditors. The SEC will continue to do whatever we
can to ensure the benefits of auditor involvement
are retained as we enforce our rules concerning
There is a growing market concern over the
increasing complexity of financial reporting.
What are the SEC’s plans to address the issue
domestically and internationally, and what can
the AICPA, and the accounting profession as a
whole, do to help?
Cox: The accounting
profession is actually leading the charge in the
war on complexity that the SEC has joined. The
reasons for battling the growing complexity in the
accounting literature and in the practice are
simple: If the rules become a thicket in which
fraudsters can hide instead of a means to achieve
truth, then we can’t achieve our goal of
The FASB and the SEC
are working together to codify all the accounting
literature, and the FASB is focused on particular
subject areas that are notoriously complex, such
as leases and intellectual property and pensions.
The practitioners who have to deal with this
complexity are in the best position to help us get
it right. I see the profession playing a leading
As a member of the Financial
Services Committee and the Energy and Commerce
Committee in the Congress, I participated in
extensive hearings on the Enron scandal. Enron was
the paradigm of complex error covering up simple
truth. It taught us anew that complexity can be
the enemy when it comes to investor protection.
XBRL is revolutionizing the efficiency of the
reporting process and the usability of reported
information. Your recent initiatives support
this concept, but there’s more to be done in
terms of providing more reliable and relevant
information for the investor community. How do
you believe the content of reported information
should be enhanced to better serve user needs
and capital market efficiency? What will the
commission do to encourage the business
community to report on this information?
Cox: XBRL is a tool, a way
for us to use financial information in the same
way we use almost every other kind of information
today on the Internet. We at the SEC are
aggressively embracing this new opportunity, both
internally in our own business processes and with
respect to registrants.
The SEC is
concerned with making disclosure more useful for
investors. That’s the whole point of our focus on
using interactive data for financial reporting.
Enlisting the power of new technology in our
efforts to improve the usability of financial
reporting is a natural.
our lives is more real-time today than it was a
decade, or even five years, ago. The same is
certainly true for financial reporting. There are
simply more means available now to find out what’s
going on in the marketplace than there ever have
We already put American
companies to a fair amount of expense to prepare
the financial disclosures that the SEC demands.
Now we intend to make that effort more worthwhile
by ensuring that it results in something useful
for investors. Through technology, we can
simultaneously reduce the cost of providing the
information and make it more useful for the
The SEC has awarded a contract to XBRL US Inc.
for the creation of financial reporting
taxonomies. Do you envision XBRL US as the
coordinator of taxonomy development for the
non-financial elements of the 10-K, such as the
MD&A, proxy statements and so on? What about
reporting for other agencies, such as the IRS,
OSHA, EPA and so forth?
Cox: The mission of XBRL
US and, indeed, of XBRL International is much
broader than merely financial reporting. The
genius of what I call interactive data is that the
computer standards are open source and market
driven. This is not a government enterprise; it
is, in every way, a private-sector enterprise. By
its very nature, XBRL can be used to tag data of
all kinds, both numbers and text. So if you’ve got
a complicated mixture of text and numbers in a
government report to the Environmental Protection
Agency, for example, there’s no reason in the
world it couldn’t be produced in XBRL format, for
the benefit of both the provider and the
How about the European Commission? What is its
level of receptivity to XBRL?
Cox: The international
effort also has been private-sector and market
driven. The government agencies aren’t always in
the forefront. Some, such as Her Majesty’s Customs
and Revenue in the United Kingdom, have been quick
to seize the opportunities. That agency has made
the XBRL format mandatory for reporting by
companies. But in other agencies the government
attitude toward XBRL is wait-and-see. It is
because the commercial benefits are so strong that
the international private-sector effort has long
been under way, and governments from the European
Commission to the United States are piggybacking
on the effort.
How do you see the AICPA’s role regarding
Cox: AICPA was there at
the founding. Back in 1998, the AICPA was part of
the working group that launched XBRL in the United
States, and it’s still in the forefront today. The
AICPA is very energetically involved in what is
now a much more mature effort.
How is the SEC incorporating XBRL into your
own business? I know EDGAR must be a potential
Cox: We’re incorporating
it in two ways. First, what I call “interactive
data” is going to be a hallmark of our
much-improved and qualitatively superior
disclosure for ordinary investors. Second, with
respect to the SEC’s internal work in the areas of
corporation finance, market regulation, investment
management, examinations and enforcement, and
accounting, interactive data is going to help us
do a much better job of analyzing the massive
amounts of information that are filed with the
In that respect, by the way,
the SEC is not unique. Anyone who analyzes data is
going to find XBRL to be a time-saving tool,
including, most obviously, professional analysts
of securities. If as an analyst today I can track
100 companies, tomorrow, with XBRL, I will be able
to track perhaps 200, because the data will be in
a much more accessible and useful format.
Every day brings new opportunities to improve
people’s access to information,especially in the
area of financial reporting. The SEC is doing
everything we can to capitalize on available
technological opportunities and convert what for
decades have been paper-based forms into
searchable data that can be immediately downloaded
into spreadsheets or other financial software and
used by our customers in more productive ways.
Over the coming decades, financial
information almost certainly will be available in
nearly real time and delivered to people in what
today would be considered unusual ways—for
example, streamed to them in already-processed
form over wireless devices they carry in their hip
pockets. There’s no limit to the possibilities.
Our era, appropriately called the “Information
Age,” is a golden age for markets.
And information is power.
markets mean a lower cost of capital, which in
turn translates into more productivity throughout
our economy—so customers and consumers are better
There has been talk at the SEC recently of
encouraging real-time reporting—for example, by
eliminating quarterly reviews and certain
auditor responsibilities. How do you envision
this all working?
Cox: The SEC has not, in
any formal way, proposed abandoning our periodic
reporting model. But, as a gloss on the periodic
reporting model, it’s easy to imagine that
providing investors with more real-time and more
qualitative, as opposed to merely numerical,
information could offer significant benefits. The
leaders of the Big Four accounting firms recently
published on this topic, and they see great
Let’s spend a minute on the current fraud
auditing standard. Do you agree with those who
say it’s broken?
Cox: As you know, the
PCAOB has adopted SAS 99, which was originally
promulgated by the AICPA. It’s now up to the PCAOB
to determine whether its application is working as
intended. To that end, the PCAOB has been having
some considerable discussion with its advisory
groups focused on the fraud standard. The SEC
looks forward to reviewing any recommendations the
PCAOB makes in this area or any amendments it
suggests to the standard.
What are your expectations for the convergence
of the PCAOB and IAASB auditing standards?
Cox: It’s absolutely
essential that we share best practices around the
globe, because, increasingly, investors in every
country are relying on the financial reports of
issuers in many other countries. The capital
markets are shrinking fast, and both auditing and
accounting standards that for so long have been
maintained on a national basis are now bumping
into each other. This is an ongoing dialogue with
regulators and private-sector organizations around
the world. The easier question is whether
convergence will come about; in one form or
another, it will. The difficult part is precisely
how that happens. I believe that technology—in
particular, interactive data, which could be
developed to render a given data set in any
accounting system one chooses—offers great
In your own career you moved from being a
member of Congress to being a regulator. Are you
enjoying this new role? What are some of the
joys and frustrations?
Cox: Well, it certainly is
interesting to be given the responsibility to
write regulations under laws that I wrote as a
member of Congress. We recently completed very
extensive negotiations with the banking regulators
that resulted in a joint rule proposal under the
Gramm-Leach-Bliley Act of 1999, for example, and I
was on the House-Senate Conference Committee for
that legislation. The fact that it had taken the
agency since the late 20th century to adopt rules
under Gramm-Leach-Bliley is a measure of how
difficult the job was. I think my insight as one
of the authors of the legislation helped somewhat,
but I also learned something: When Congress
reaches political compromises (in this case, with
the securities and the banking industries) with
the expectation that the professional regulators
will work out the details, it is assuming a great
deal. There is no magic wand that regulators can
wave. It’s just as difficult to do this job as a
regulator as it was to write the legislation in
the first place.
I’ve also had the
opportunity to work on the implementation of
Sarbanes-Oxley—where again there was a significant
difference between our expectations in writing the
law and what happened after it was passed. So
there’s been some satisfaction in being able to
finish the job of getting it right.
and again, I’ve seen how the effects of
legislation enacted by Congress, both intended and
unintended, play out in the regulatory sphere.
It’s been eye-opening and challenging. But it’s
also been most enjoyable.