The UK has made use of iXBRL to great effect in its reporting programs,with the result being more easily aessible and reliable data and rced filing sts for regulated entities.SEC missioner Kara M.Stein,in remarks to the Institute of Chartered Aountants in England and Wales and British American Business,spoke recently of the importance of structured data and the SEC’s anticipated implementation of Inline XBRL.

Aountants and Capital Markets in an Era of Digital Disruption:Remarks to the Institute of Chartered Aountants in England and Wales and British American Business

missioner Kara M.Stein

Sept.9,2015

Thank you,Robert [Hodgkinson]for that kind introduction.Thank you,also,to the Institute of Chartered Aountants in England and Wales (ICAEW),as well as BritishAmerican Business for sponsoring this event.I am delighted to be in London and with you this morning.

Before I begin my remarks,I must note that the views I express today are my own,and do not necessarily reflect the views of the U.S.Securities and Exchange mission (mission or SEC),my fellow missioners,or members of the staff.

It is privilege to speak to you this morning in the Chartered Aountants’Hall.As many of you know,in 1880Queen Victoria granted a Royal Charter to the Institute regnizing professional aountants.Shortly thereafter,this hall became your home.While walking in this morning,I noticed the frieze depicting aountants and their role in the arts and mmerce,including agriculture,mining,shipping,manufacturing,the railways,and cation.I always find it interesting to note how many aspects of modern life have been,and ntinue to be,influenced by the aounting profession.

But I am not here today to speak to you solely about history –however interesting that may be.Instead,this is a keen setting to examine how,in an era of tremendous technological change,aountants –and those who utilize that same training in other roles –can be leaders in moving capital markets and our enomy forward.

From the Industrial Revolution and the emergence of rporations to the growth of railroads to the rapid developments in today’s technology,the aounting profession has played an important role in the development of modern capital markets.In the 1880s,creditors hired British chartered aountants to me to the U.S.to audit railway management reports.It is easy to understand why.When an investor puts money into a far off rporate enterprise,the auditor is an independent aounting professional who serves as the eyes and ears of the investor.In nducting an independent audit,the aountant facilitates trust between management and investors.Through understandable and mparable reports,aounting facilitates investment and rporate development.

This close linkage between aounting,investment,and enomic growth means that the public has a real interest in a strong professional aountancy.In fact,the Royal Charter I noted earlier specifically references public interest as a reason underlying its drafting.In the U.S.,the legislative response to the Great Depression,which included the creation of the SEC,also enuraged development of independent audits as a way to inform and protect investors and to provide nfidence in capital markets.

So what does that mean for us today?How can a profession so important for public trust,a profession that enables global investments and,by extension,the health of our capital markets and our enomy,evolve to meet new and different challenges?More specifically,what does it mean in an era of tremendous digital disruption?

Technological change is rapidly transforming business models,all but eliminating traditional borders.Some have called this a “digital disruption”or “disruptive change”because of the speed and intensity of the changes.More and more data,available nearly instantaneously around the globe,both nnects us and overwhelms us.

The changing landscape is transforming our financial markets as well.Investors,and others,are aessing and analyzing massive amounts of information from sources,like social media,unimaginable just a few years ago.This new data may be empowering investors to make smarter investment decisions.At the same time,technology exposes new risks.A glitch uld leave investors and markets frozen for minutes or hours,flood the market with millions of erroneous orders,or upset an initial public offering.A cyberattack uld undermine an exchange or imperil a derivatives clearinghouse.Technology can enhance transparency and nfidence in the market or it can rapidly erode it.

The aounting profession,with its history in reporting and providing assurance,is uniquely situated to respond to these changes.By creatively leading in these new arenas,aountants,I believe,can provide value to investors,mpanies,and regulators.

Specifically,I believe there are certain opportunities in this data-driven world for aountants to lead and provide new approaches to the traditional disclosure space,including by enhancing financial reporting overall,by rethinking certain aspects of audits,and by providing investors transparent,straight-forward information about the stability of a rporation.In addition,I believe there are also new opportunities for aountants to help firms protect themselves,and thus investors,by understanding new technology and its uses in the cybersecurity world,and effectively relaying that information to mpanies,investors,and regulators.Together,aountants can help our capital markets respond to the challenges of an increasingly borderless world and new,disruptive business models.

I am hopeful that the ideas I put forward today will be received in the spirit in which I offer them –with a view toward upholding a vision of the public aountant as an agent of the public interest,instilling trust and nfidence in our capital markets.

Opportunities for Aessible,Transparent,and Reliable Data

As I have just noted,market participants of all types produce and utilize lossal volumes of data.Investors,dealers,rating agencies,and regulators nsume more and more data in order to make decisions.Yet,if that data is opaque,unreliable,or not useful for decision making,what good is it?Aountants’expertise in summarizing and presenting information –that is,data –makes them ideally suited to play a crucial role in ensuring the reliability and aessibility of the data that now drives our capital markets.

Gaps in Financial Reporting

I want to start out by examining financial reporting.Financial reports remain the primary way that rporate management mmunicates with investors regarding mpanies’current positions and results.But re financial reporting has changed little over the years and may be ripe for disruption.

Many of the world’s most “disruptive”businesses rely heavily on intellectual and human capital,rather than assembly-line machines and other traditional assets.For example,many tech start-ups have no real “assets.”Rather,they have ideas and an app.As a result,investors in these innovative mpanies find themselves facing an increasing gap between the market value of an enterprise and its tangible assets.

Similarly,more and more investors are demanding information,including non-financial information,about social and ernance ncerns.In response,many mpanies have begun providing what I will call “sustainability reporting,”or,essentially,information on enomic,environmental,social,and ernance matters.Some of these reports are being mbined,or integrated,with traditional financial reports in an effort to address some of these informational gaps.

Despite these new demands by investors,current financial reporting standards –whether under U.S.Generally Aepted Aounting Principles (U.S.GAAP)or International Financial Reporting Standards (IFRS)–provide little information about a mpany’s intellectual assets or its sustainability.Aounting standards need to evolve to meet the needs of investors in the digital era.Isn’t it time we updated our metrics to provide this type of important information to investors?Wouldn’t investors –and mpanies,through increased investor nfidence –benefit from having that information audited or evaluated by independent aountants?Are there other assurances that aountants uld provide?

Aounting Standards in an Era of Borderless Business

On the ic of aounting standards,for a number of years there has been an effort to find a globally aepted,single-set of high-quality financial reporting standards.In an era of borderless business and instantaneous movement of data,there is a certain attractiveness to this vision.The challenge,however,is that the practicalities demonstrate the overwhelming challenges of it.Quite frankly,it often feels like we are searching for the Holy Grail.But I am not sure it is there.The process of nvergence of local aounting standards to eliminate differences,where possible,has been an important and productive process,but I question whether it has,at all times,truly ntributed to improved quality.

I think we should go back to first principles.Information provided to investors must be relevant,reliable,and timely,to be decision-useful.How that is achieved may vary across cultures and reflect deeply entrenched political and enomic structures.And that is appropriate –indeed,unavoidable.Advances in mmunications,technology,and data analytics can ntribute to improvements in financial reporting,and this too can help bridge those gaps.The key in my mind is not necessarily to nverge for the sake of nvergence,but rather to expand timely aess to information and provide for understanding differences.For example,mpanies should use mmon taxonomies to provide up-to-date,aessible,and transparent information to investors.This is where reporting and standards can be reimagined in the new digital world.Let’s think seriously:how should the delivery of information change in the digital age?How should investors aess information?Should it be pushed to them every few months,or should it be available on-demand?

Structured Data

Further,technology can enhance both the delivery and usability of financial reports.Most mpanies keep their financial reporting data in structured databases.However,the data is often presented to investors and financial statement users in an unstructured manner.It is my understanding that all U.K.mpanies are required to file rporate tax returns using inline XBRL.This means that the document is presented with structured data embedded within it,so that it can be read easily by both humans and machines.

The SEC has played an important role in advancing the presentation of structured data for investors,such as through XBRL.Yet the mission has yet to require inline XBRL reporting for U.S.listed mpanies.This ntributes to poor data quality for investors and extra sts for mpanies.Today’s data-driven markets are simply demanding more.

As the SEC modernizes its disclosure system,it is important that each disclosure document be presented in a manner that can be effectively and efficiently used in today’s modern capital markets,with an independent aountant providing assurances to investors and market participants about its auracy and fair presentation.The importance of this structured data for aountants is clear,and the SEC needs to follow your lead and adopt measures,such as requiring the use of inline XBRL,for financial reporting and for other data-centric reports.This is where your mments can be tremendously helpful to us.Tell us how it has benefited your capital markets and your investors.Where has it let you down?And where is it driving change with new business models and new opportunities?

Audits

In addition to reimagining financial reports overall,I think it is important to take a specific look at ways to enhance the aessibility and transparency of audits.In many ways,the U.K.’s Financial Reporting uncil (FRC)has moved ahead of the pack,by adopting requirements for both audit mmittees and auditors to provide additional,clear information about their processes.As you know,under these requirements,both audit mmittees and auditors must include certain important items,such as a discussion of the assessed risks,the spe of the audit,and the materiality assessments for the audit.However,and importantly,audit mmittees and auditors also are enuraged to innovate by providing an expanded or original presentation of financial reporting and the audit process,ideally improving aessibility and transparency.This was a bold move in light of industry and rporate ncerns,but it also provides an opportunity for auditors to engage with investors and explain how aountants nsider investors’interests in their audits.

Perhaps one of the more important mmunications to investors is a description of how the auditor approaches materiality.Materiality is a measure auditors use to determine what is important to an investor –anything over the materiality threshold may be important to investors,while anything under the materiality threshold is unlikely to be of ncern.Aordingly,investors should understand how the auditor makes that determination and how it changes over time and in particular circumstances.

Recent studies have examined the new package of reporting and ncluded that “[t]he U.K.’s new auditor and audit mmittee reporting requirements are associated with a significant improvement in audit quality without…significant incremental sts.”Further,despite the new requirements,there was no delay in mmunicating with investors.

Sounds like a win-win to me,and a way to enurage ongoing enhancements to traditional disclosures;another way to lead.Unfortunately,the U.S.has not yet required this transparency in and aessibility to audits.The SEC did,however,recently request mment on possible improvements to audit mmittee reporting.As the SEC starts to ntemplate these issues,I would invite those of you who have already been through the process to share your experiences and to respond to our request for mment.I believe much more can and should be done.Here,you have provided us with leadership,and we need to follow.

Going ncern

I have one final point on the ic of where aountants can lead in addressing new transparency needs in our changing capital markets.That deals with going ncern –or the viability of a rporation to ntinue its operations over the next year.To that end,the financial crisis exposed fears that auditors were remaining silent about going ncern issues,when they should have been sounding the alarm.For example,many questioned the issuance of unqualified audit opinions for firms that llapsed or were bankrupt shortly after a report’s issuance indicating that the mpany was viable.Essentially,investors and others wanted to know why the auditor did not bark.

The issues are mplex because they deal with uncertainties and future events,but investors and creditors expect the auditor to raise ncerns when a firm’s survival is in question,thus providing important transparency.

In the U.S.,the auditor has both legal and professional obligations to assess a mpany’s ability to ntinue as a going ncern.U.S.law mandates that audits include a going ncern evaluation,a requirement that came about after thousands of savings and loans associations,the U.S.version of the building societies,failed in the 1980s.But does an auditor have the right incentives to do so?How does one evaluate a firm’s viability?And for what period of time?Should so-called stress tests be part of an auditor’s assessments?

This is an area that is ripe for disruption,and again,in light of the suess of expanded audit reports,aountants should lead the way.Aountants and auditors can and should be doing more in the area of viability assessments,transparently reporting on them,and providing investors with an early warning.Current disclosures,if they are triggered,are mainly binary.Shouldn’t firms and auditors provide a thorough discussion of the material risks and how those risks are being addressed?

Opportunities Related to Cybersecurity

Technology and borderless business are changing not just the types and forms of data and information that capital market participants need,but also the risks that these market participants face.These risks are unimaginable to those who stood in this Hall in 1880.

As a result of these changes,cybersecurity has beme one of the most significant issues affecting investors,rporate issuers,and financial institutions –really just about everyone in the financial marketplace.Last year,the SEC nvened a roundtable to discuss how cyber-threats were challenging the capital markets.The panel discussions focused on the cybersecurity landscape overall,issues in market systems,risks in broker-dealers,investment advisers,and transfer agents,and the mplexities ncerning public mpany disclosures for investors.

Hard work is ongoing to try to get ahead of these risks,but problems will persist.Just last month,the United States criminal authorities and the SEC announced litigated actions against a brazen international work of alleged cybercriminals and stock traders.Thirty-two traders and hackers llaborating from around the world ntributed to an elaborate scheme to obtain nfidential information related to rporate announcements and traded on that information before the information was released to the public.The hackers,working from overseas locations,invaded the servers of newswire services and obtained news releases before they were public.The hackers then passed the information on to an international work of stock traders who would then buy or sell securities that were the subject of the news releases prior to the information being made public.The SEC estimates that the traders made over $100million in illicit profits.

Stealing nonpublic information is nothing new,but this latest case disrupts what we typically characterize as “insider trading.”Insider trading was once the purview of the “insiders”in the financial markets:those nnected to key facts and secrets who passed information to golf buddies,drinking buddies,friends,or relatives.We now face a whole new battleground that uld fundamentally reshape the risks that investors and market participants face.To date,much of our approach has been to rely on broad principles to improve systems integrity for certain key market participants.But who is checking to see whether those are working?And what about the broader array of market participants?

As with other areas I have talked about,I believe aountants,with their experience integrating data,can play a leadership role in helping us address the risks of cybersecurity.Audit mmittees,too,can play an important role.Indeed,more and more mpanies are turning to their audit mmittees to develop the deep knowledge necessary for handling cybersecurity and for providing appropriate ernance and oversight both to prevent problems and to deal with the inevitable.

This is a brand new area and requires creative thinking.What role should aountants play in addressing cybersecurity risks?How should mpanies mmunicate with investors and creditors about how cybersecurity specifically affects the enterprise?This is a challenge that,unfortunately,is not going away.Let us try to tap the innovation,professionalism,and credibility of auditors and aountants to renew the nfidence that investors have in our markets and mpanies.

Thinking Further

Changes in capital markets are creating new demands on,and opportunities for,leadership by the profession,and I have discussed just a few of those opportunities.But there are many other possibilities.For example,in an era of ultra-fast trading,should the auditor report closer in time to when a mpany announces its earnings?Are there other areas where investors would be aided by certain assurances from an auditor?Are there other ways that investors can directly interact with auditors?

I would be remiss,though,if I did not ask you –both aountant and non-aountant alike –to think specifically about the relationship between aounting and mpliance culture.Nearly every week,the mission meets to nsider whether it should authorize enforcement actions against firms and individuals.As I have witnessed,rporate culture,tone at the ,and incentives can have long-lasting and significant impact on individual actions throughout the anization.Unfortunately,as we all know,uhical behavior can spread quickly and have serious negative implications on an anization.

In the U.S.,every public mpany auditor is required,by law,to report likely illegal acts that have a material impact on the financial statements when detected during the urse of an audit.The public mpany auditor must ensure that appropriate remedial actions have been taken by management or the board of directors.In fact,the International Auditing and Assurance Standards Board (IAASB)is currently soliciting mment on an auditor’s ethical obligation to report when enuntering non-mpliance or suspected non-mpliance with laws and regulations.

Here is another area where aountants and auditors can provide leadership.How does the auditor nsider culture in assessing risks?How should this nsideration be reported to the audit mmittee?How can culture and risk be transparently mmunicated to the audit mmittee?Or to investors?This may seem awkward at first,but fundamentally,it is the same role they play in other ntexts –being the nduit enhancing trust between investors and management.

nclusion

A lot has changed since the early 1880s.But just as the industrial revolution drove and aelerated growth,the digital revolution is driving change.Aountants have a unique role to play in our capital markets.With this role mes the responsibility to move forward with strategies to help businesses,investors,and regulators in an increasingly digitally disrupted world.Aountants can and should be driving innovations to enhance transparency,aessibility,aountability,and to promote further trust in the integrity of our capital markets.

Yet,despite all the change,at the end of the day,some things remain nstant.This Institute represents a special heritage –a mmitment to the public trust that you bring to wherever you work,be it in aounting,management,as investors,or in other capacities.I want to again thank the ICAEW and British-American Business for inviting me to speak with you today,and I look forward to your feedback on these issues.

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