SEC Commissioner Stresses Cybersecurity Risks
Kara Stein, a commissioner at the US Securities and Exchange Commission, said cybersecurity has become one of the most significant issues affecting investors, corporate issuers, and financial institutions.
Stein spoke today in London at an event organised by the Institute of Chartered Accountants in England and Wales and British American Business.
In March last year the SEC convened a roundtable to discuss how cyber-threats were challenging the capital markets. Mary Jo White, chair of the SEC, said in her opening statement at the roundtable: “This is a global threat. Cyber threats are of extraordinary and long-term seriousness. They are first on the Division of Intelligence’s list of global threats, even surpassing terrorism.”
Stein said: “How should companies communicate with investors and creditors about how cybersecurity specifically affects the enterprise? This is a challenge that, unfortunately, is not going away.”
Hacking has changed the way that regulators need to view insider trading which used to be related to “insiders” in the financial industry who pass non-public information to friends or relatives.
“Much of our approach has been to rely on broad principles to improve systems integrity for certain key market participants,” Stein added. “But who is checking to see whether those are working? And what about the broader array of market participants?”
For example, last month the SEC charged 32 members of an alleged international hacking and insider trading ring which is estimated to have made more than $100m in illegal profits. The ring hacked into financial newswires in order to trade on press releases before they were published. The indictment said the hackers accessed more than 150,000 stolen releases and installed malware on the target companies’ computers.
As investors, dealers, rating agencies, and regulators consume an increasing amount of data in order to make decisions Stein said there are new opportunities for the accountancy profession.
“If that data is opaque, unreliable, or not useful for decision-making what good is it?” she said. “Accountants’ expertise in summarizing and presenting information – that is, data – makes them ideally suited to play a crucial role in ensuring the reliability and accessibility of the data that now drives our capital markets.”
The commissioner added that financial reporting has not changed for many years and so may be ripe for disruption. For example, many tech start-ups rely heavily on intangibles such as intellectual and human capital, rather than assembly line machines and traditional assets. Stein said: “As a result, investors in these innovative companies find themselves facing an increasing gap between the market value of an enterprise and its tangible net assets.”
Investors are also asking for more information on environmental, social and governance concerns which could be combined, or integrated, with traditional financial reports.
“Despite these new demands by investors, current financial reporting standards – whether under U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International Financial Reporting Standards (IFRS) – provide little information about a company’s intellectual assets or its sustainability,” added Stein. “Accounting standards need to evolve to meet the needs of investors in the digital era.”
She also asked whether auditors should report closer in time to when a company announces its earnings now that the markets have ultra-fast trading.
Stein queried whether a single set of globally accepted financial reporting standards would ever be achieved despite business and data increasingly moving across borders. “The process of convergence of local accounting standards to eliminate differences, where possible, has been an important and productive process, but I question whether it has, at all times, truly contributed to improved quality,” she said.
In order to improve financial reporting, Stein encouraged the use of more structured data. UK companies are required to file corporate tax returns using inline XBRL, a form of data tagging designed for financial information, so they can be easily read by both humans and machines.
However US listed companies are not required to report using inline XBRL. Stein said: “This contributes to poor data quality for investors and extra costs for companies. Today’s data-driven markets are simply demanding more.”
Featured image via Dollar Photo Club
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