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|  | JANUARY 25, 2005
By Amey Stone A Dream of Simpler Accounting The SEC's accounting chief wants rules to be more straightforward. Meanwhile, his office grapples with complex Sarbanes-Oxley requirements Don Nicolaisen, the Securities & Exchange Commission's accounting chief, doesn't like clock radios. What he prefers is a plain old alarm clock -- one that's reliable, easy to set, and unembellished with soft rock or ocean sounds. What does that have to do with accounting regulation? A lot, it turns out. TAGGING FINANCIAL DATA. A major goal for his office in the coming year is to reduce the level of complexity in accounting. To Nicolaisen, simpler really is better, just like he prefers his 20-year-old alarm clock to the high-tech version he found blaring music when he walked into his hotel room on a recent trip. He outlined his hopes for simplification and other priorities in a keynote speech at a conference of the New York State Society of Certified Public Accountants on Jan. 24. How do you transform today's accounting regulations (with 800 pages devoted to derivatives accounting alone) into a code as simply functional as an alarm clock? Technology may be part of the solution, and Nicolaisen says he's in favor of companies using XBRL, which stands for Extensible Business Reporting Language, to tag data points in their electronic filings. That would allow investors to manipulate and analyze financial data in new ways. It will also be a gargantuan undertaking that's just being studied now. Nicolaisen said the Commission and accounting regulators in the U.S. are looking at other ways to make accounting more straightforward, such as by segregating operating income from companies' other income streams to allow investors to better evaluate management's moves. He also hinted that his staff would be looking at ways to simplify some aspects of revenue recognition as well as accounting for derivatives. RECALIBRATING COMPLIANCE RULES. Such goals are part of a long-standing push for principles-based (also known as objectives-based) accounting -- where rules give broad guidelines rather than dictating every accounting twist and turn that can crop up at today's complex companies. Nicolaisen's comments about simplification quickly transitioned into a defense of recently added complexity in accounting. His office is still struggling with some aspects of implementation of the mammoth Sarbanes-Oxley corporate-governance reform act, which Congress passed in July, 2002. He says he's "very supportive" of the law and believes "it has done a lot of good," making chief executives more accountable and corporate boards approach their jobs with more "vigor." However, about half of Nicolaisen's speech was devoted to Section 404 of the law, which requires businesses and their auditors to testify that internal controls over financial reporting are in tip-top shape. That section, which took effect Nov. 15, 2004, continues to be an area where he hears a lot of "noise," as public companies struggle to meet its stiff requirements. While Nicolaisen doesn't believe Congress should rewrite that part of the act, he believes regulators will issue more guidance to auditors and perform some "recalibration" of rules to make it easier and less costly for companies to comply with, he said. NOT READY FOR PRIMETIME? Nicolaisen also said he's open to the possibility that smaller companies (those with less than $75 million in market cap) could get an extension similar to one that certain larger companies got in January (see BW Online, 1/12/04, "The Hard Knocks of Coping with SOX"). "I'm acutely aware the cost is particularly high for small businesses," he said, asking the audience, many of whom were auditors for small concerns, to let him know how long a deferment from the provision they would like. "Forever" wasn't an option he warned them. A sub-theme of Nicolaisen's speech is that there's a danger in acting too fast to change accounting rules -- even though reform is in order. That became especially clear near the end of his talk when he was responding to critiques from the audience about the Financial Accounting Standards Board's interpretation No. 46 (FIN 46), which requires consolidation of Enronesque financial structures known as variable-interest entities or special-purpose entities on the balance sheet. The FASB was trying to move quickly in the wake Enron's implosion to updates its rules, but the result was a standard that "wasn't totally ripe for issuance," he said. As in any kind of rulemaking, improvements are easier to talk about than achieve. Like getting hotels to switch from high-tech clock radios to plain old alarm clocks, Nicolaisen's job this year will be full of challenges.  Stone is a senior writer for BusinessWeek Online in New York Edited by Tzyh Ng Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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