'Getting It Right': An Interview With Christopher Cox

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.

JofA : 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.

JofA : 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.

JofA : 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.

JofA : 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 auditor independence.

JofA : 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 protecting investors.

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 role here.

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.

JofA : 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.

Everything about 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 been before.

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 customer.

JofA : 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 government agency.

JofA : 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.

JofA : How do you see the AICPA’s role regarding XBRL?

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.

JofA : How is the SEC incorporating XBRL into your own business? I know EDGAR must be a potential beneficiary.

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 commission.

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.

JofA : And information is power.

Cox: More-efficient markets mean a lower cost of capital, which in turn translates into more productivity throughout our economy—so customers and consumers are better off.

JofA : 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 promise here.

JofA : 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.

JofA : 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 promise.

JofA : 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.

Time 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.