A Q&A with SEC Chairman Jay Clayton

15 November 2019

In September, the SEC Professionals Group and SOX & Internal Controls Professionals Group hosted U.S. Securities and Exchange Commission Chairman Jay Clayton for a fireside chat and Q&A session.

Chair Clayton spent nearly an hour on stage with Professionals Groups Founder Joe Howell, taking questions submitted by members who were gathered in Texas, many of whom were also attending Workiva Amplify.

Chair Clayton previously served as a partner in a private law firm before joining the SEC and said his belief in the importance of quality disclosures has been affirmed now that he is serving in the public sector. "The quality of information that is available in the U.S. public capital markets is unrivalled," he said, noting that some U.S. standards are starting to spread around the world.

Here are highlights of the conversation. It should be noted that Chair Clayton's views, of course, were his own.

Effective disclosures

At the last AICPA annual conference, Chair Clayton sparked conversation when discussing the characteristics of effective disclosures, saying that in his view, disclosures are effective to the extent that they reflect management's view of the business.

"In an ideal world, the 10-K and 10-Q disclosure would be framed in the same way that management would frame a discussion with their most important investor," he said.

"I don't want management to feel like they should say as little as possible. That's not effective disclosure," Chair Clayton told Howell. He said mandated disclosures, combined with narrative that describes how management views the business, give the investing public the best result.

Doing that via tweet? Not always so easy.

"Now, there are some things that you can convey in very few characters like, 'I just put out an 8-K. Here's a link.' Fine," he said. "But, you can't convey, for example, a non-GAAP financial metric in just a few sentences and do so in a way that doesn't suffer from the likelihood of a material omission."

What Jay Clayton doesn't like to see in disclosures

As the conversation shifted to non-GAAP measures, Chair Clayton said they have value.

"My frustration—and sometimes frustration rises to level of annoyance and more—is when those measures are changed very rapidly," he said. "So let's take a step back from securities laws and just say that people who are constantly changing how they measure things probably don't have a good handle on how they're measuring things. Now, I know times change. Businesses change. You need to make adjustments. But, having to figure out quarter-to-quarter adjustments in those types of non-GAAP measures, I'm sure it's frustrating for investors. And, at certain points, I think it can rise to the level of being potentially misleading."

On capital markets and Main Street investors

Howell asked Chair Clayton about his goals for the SEC and his public statements on the increasing amount of time growing companies stay private—and out of reach for most Main Street investors.

"Programmatically, I do want to make the public capital markets more attractive to companies," Clayton told Howell. "I do think it's a problem that companies are waiting pretty long in their life cycle to become public companies. These days, companies wait until they're 5, 10, 20 billion-dollar companies, and much of what they use the public markets for is liquidity, not capital raising. That's a change that I'm not sure is so healthy."

Where the audit profession goes from here

Howell's conversation with the SEC Chairman happened before The Wall Street Journal reported on the most recent strife to hit the Public Company Accounting Oversight Board (PCAOB). Responding to a general comment on criticism of the board's oversight of the Big Four accounting firms, Chair Clayton noted the PCAOB's new members.

"I would encourage people to engage directly with the PCAOB as they look to modernize not only inspections but essentially the approach to quality globally," he said. "We really are moving into a time period when I think global control systems will go through another modernisation. I'd be interested in your views, but I think that's where they're headed. New standards are going to drive new systems or vice versa. But we're probably on the cusp of doing that again."

On the power of the Big Four and the friction that can come with switching firms to avoid conflicts, Chair Clayton observed: "The core idea that your independent auditor should indeed be independent—we can't relax that in order to allow switching to be subject to less friction."

The next generation of accounting and audit professionals

One conversation that Chair Clayton said he has with many financial leaders and public accounting firms is how to encourage a new generation to take on financial reporting as a career.

"You can have a very nice career in this profession. That's clear," he said. "The one thing that I would say is, you're never going to regret being financially literate. No matter what you do in your career, whether you stay in the profession or not, it's never going to hurt you. I'm not sure people hear that message enough."