Exclusive: Are the SEC’s Mary Jo White and Her Husband Teaming Up to Gut Corporate Disclosure and Make It Harder to Fight Fraud?

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By David Dayen, a lapsed blogger who writes at Salon, The Intercept, The Fiscal Times and more. Follow him on Twitter @ddayen

The heart of the SEC’s mission is disclosure, which means providing enough information to investors so they can make sound choices when they buy stocks and bonds. Without disclosure you don’t really have an SEC, and you put investors – and potentially the whole economy – at risk. Weak securities disclosure enables financial fraud. That was the big, costly lesson of the Roaring Twenties and the enormous stock market bubble and disastrous crash that resulted. The SEC’s raison d’etre is to serve as a major bulwark against that ever happening again.

But the commission is striving to hit that self-destruct button, by allowing new rules that would make it much easier for companies to hide their activities. It’s highly likely that this effort reaches all the way to the office of SEC Chair Mary Jo White.

At issue is the standard of “materiality,” whether or not information is germane enough to be disclosed in financial statements. The SEC designates responsibility for setting this standard to the Financial Accounting Standards Board (FASB), a private-sector organization created in 1973 to establish and update the nation’s Generally Accepted Accounting Principles (GAAP). Here’s the FASB’s longstanding materiality guideline:

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

But a few weeks ago, on September 24, FASB published two drafts for public comment, one to update FASB’s Conceptual Framework, and the other an Accounting Standards Update to clarify it for corporate management. FASB said the updates would “improve the effectiveness of disclosures in notes to financial statements.”

It’s important to recognize that notes in financial statements are absolutely critical to understanding a 10-K or any other report. Companies are required to give various explanations on taxes, debt structure, impending litigation, etc. Without these notes you have no idea what’s really going on in the company.

FASB wants us to believe that this is a mere technical fix to alleviate confusion. But what it really would do is change the definition of materiality. This is from FASB Chairman Russell Golden:

Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court… This led to uncertainty about organizations’ abilities to interpret what disclosures are material; and the Board’s ability to identify and evaluate disclosure requirements in accounting standards.

The Supreme Court’s materiality standard is applied under SEC Rule 10b-5, a rule that targets securities fraud. It comes from a 1988 case, Basic v. Levinson, which determines materiality as whether a reasonable investor would have viewed whatever was undisclosed as something that would have altered the “total mix” of information about the company.

That’s pretty similar to the current FASB standard. But think about it. Basic v. Levinson defines when a lack of disclosure rises to the level of securities fraud. That’s necessarily a higher standard than the positive obligation to disclose. “I want to know more as an investor than what it would take for the thing to be a fraud,” said Damon Silvers, policy director at the AFL-CIO. The legal standard, then, creates a higher threshold for materiality – though nobody really knows how high – subject to the whims of the company and its auditor. And every time the courts tinker with the standard – and we know the pro-corporate tilt of this Court – the materiality standard would change.

Lynn Turner, a former Chief Accountant of the SEC who is now a trustee for the Colorado Public Employee Retirement Association, gave me an example of a materiality question from his time at the commission, which concerned McDonald’s. “They were in the process of redoing all the kitchens in their stores to make them more efficient and cleaner,” Turner told me. “They decided they would do it, but they needed the cash to do it, which took about 3-4 years.” During this time, instead of changing the depreciation value of how long their stoves, sinks and ovens would actually last, McDonald’s kept them at the same rate, making the company look more profitable by creating no awareness of future capital expenditures.

Turner became aware of this and got on a call with McDonald’s and their auditor, Ernst & Young. “I asked McDnonald’s, why didn’t you correct the accounting? They said, if we fix it, we’re going to miss the estimate for earnings that we gave to the Street. Well, you’re the idiots that came up with the estimate!” Ernst & Young said they informed McDonald’s of the issue, but the company didn’t want to disclose, and anyway it only amounted to a penny a share, so they agreed to let it go.

“I told the CFO, call me back and tell me what you will tell investors about why this was OK,” Turner said. “The next day, there’s a press release in the Wall Street Journal. Obviously it was material because the guy didn’t want to tell his investors!”

These judgment calls take on new significance when the materiality threshold is set higher. It gives companies far too much leeway to goose their stock by hiding things they’d rather not tell investors. This opaqueness on balance sheets is arguably part of what led to the 2008 crisis, and certainly relevant to the accounting scandals of Enron and WorldCom. Only now, such lack of disclosure would be allowable. “Raising materiality limits would be terrible for investors,” Lynn Turner said, “giving a pass to management who put out bad, incorrect and misleading numbers.”

“If Lynn Turner is concerned I’m concerned,” noted Barbara Roper of the Consumer Federation of America, who added that this change has been on the agenda of the corporate and auditing community for a while. The proposal comes out of FASB’s “disclosure framework project,” established in 2009. “There’s a sense that the project is not being driven by a conversation with investors about what would make disclosures more effective, and more by a conversation with issuers and auditors,” Roper said. The SEC has a similar project, established by Mary Jo White, through the division of Corporation Finance, which monitors financial statements at the SEC. That project too, investor advocates suspect, is designed to relieve disclosure “burdens” on business, meaning let them say less and get away with a lot more.

Last Thursday, at a meeting of the SEC’s Investor Advisory Committee (IAC), which was created in Dodd-Frank to give outside perspectives on the commission’s work, participants all but accused FASB of engaging in a bait and switch. The IAC hauled in the SEC’s Chief Accountant, Jim Schnurr, to question him about the proposal. The Chief Accounting Office has oversight responsibility for FASB.

Schnurr was a longtime partner in the national office of Deloitte, one of the Big Four auditing firms. He has a history of attempting to soften rules for his industry friends. By the way, Russell Golden, the chair of FASB, also was a partner at Deloitte. Same with vice chair James Kroeker. Sensing a theme?

While not officially supporting the proposal, Schnurr took the FASB line. “There were questions on how you apply materiality to disclosures,” he said. “This is not intended to change that but make it more clear.” He used the example of a large company with a single small pension plan that was not material to financial statements, and whether they could omit that without it being seen as an accounting error. “It’s intended to provide management with the flexibility about what they think is important to investors.”

But the IAC went to town on Schnurr. “Is this a clarification of what materiality was all along,” said Roy Katzovicz, chairman of private investment group Saddle Point, “or a change in the standards, such that it’s a less sensitive standard that would allow for less disclosure?”

Schnurr said he thought the rule was not intended to reduce disclosure. But Katzovicz replied that “the mix of total information,” the language from the Supreme Court, “is a higher materiality standard. If that’s not intended by the FASB, they need to go back.”

Katzovicz wondered if lawyers would now decide what ends up in the notes to financial statements, nimbly sidestepping the legal definition. “If we get rid of low-level, not valuable disclosures, that’s fine,” added Joe Carcello of the University of Tennessee. “If they are valuable disclosures, that would be a bad thing. To make this change without thinking about that is fraught with risk.”

While the IAC appeared unclear on exactly how critical this change would be, not one member who spoke up at the meeting was satisfied with the FASB proposal or the Chief Accountant’s defense of it. “When you change the broad terms of the definition of materiality, you’re potentially making a large change, whether you think you’ve got it right or not,” said Damon Silvers at the meeting. “The feeling of this body is that more disclosure is better than less in general. The clear drift of this is in the other direction.”

The Chief Accountant absolutely has the ability to shut this down, said former Chief Accountant Lynn Turner, who in 1999 put out his own staff bulletin on materiality, backing up the original FASB standard. “If the FASB proposal would change in any manner the longstanding guidance put out by the SEC, unequivocally the Chief Accounting Office should say no, you can’t do it.” So if Schnurr does nothing, he would absolutely be abetting this.

Which leads us to the question of who’s driving this change. We know the FASB disclosure framework has been driven by corporations. We know Schnurr, who has never worked on behalf of investors, appears more concerned with softening up the rules for industry. And we know that Schnurr is personally very close to John White, Mary Jo White’s husband and a corporate lawyer with Cravath.

White is on the Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB), and was recently part of the advisory group for FASB. He was the previous head of the division of Corporation Finance in the laissez-faire Christopher Cox days. The current head of CorpFin, Keith Higgins, used to work for John White there, and he’s been focused during his tenure on “improving” disclosure.

John White has been accused of spearheading the effort to undermine and kick out Jim Doty, the head of the PCAOB, who has strived to police auditors. Progressive organizations have asked Mary Jo White to recuse herself from choosing the next PCAOB chair, because of the conflict of interest with her husband. Jim Schnurr, meanwhile, has described Doty as “too focused on its disclosure efforts and not enough on enacting rules to govern the nuts and bolts of conducting audits.”

Mary Jo White herself has talked about “reforming” disclosure for years, citing an “information overload” in financial statements. The day after FASB’s proposal, the SEC put out a request for comment to review Regulation S-X, which governs disclosures. And all of White’s top advisors on commission staff come from a business background. “Can you name any person at the SEC motivated by the desire to advocate for investors?” Barbara Roper asked.

Put this together and you have FASB, the Chief Accounting Office, the division of Corporation Finance, CEOs, auditors, lawyers and even the SEC Chair all moving in the same direction – to reduce disclosure. And the materiality threshold represents their opportunity. If this were vetted by people with serious credibility, who had investor protection at the forefront of their efforts, that’s one thing. But for this proposal to bubble up from committees and individuals with clear ties to big business makes it look suspiciously like Mary Jo White and her minions want to undermine the SEC from within.

Schnurr left it at the IAC meeting that they would “take into account” the committee’s comments as they work with FASB. “He didn’t appear to be persuaded by our arguments,” Barbara Roper said. The public comment period for the FASB proposal lasts until December 8, so anyone who wants to see corporate disclosures maintain their integrity can submit their remarks.

“This is a very significant issue,” said Lynn Turner. “It runs to the heart of the credibility of financial statements.”

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. Ed Walker

    The reason there is so much information in these financial disclosures is the direct result of the complexity of the financial structures of mega-corporations. JPM has about $2.45 trillion in total assets, and total debt in excess of $2.2 trillion. Obviously there is a lot of material information. The most recent 10-Q on file is more than 186 pages. http://www.sec.gov/Archives/edgar/data/19617/000001961715000367/corpq22015.htm We know that JPM doesn’t disclose all sorts of wonderful things: just look at its rap sheet.

    Only a corrupt person thinks that we should let Dimon and his loyal minions decide what is critical to our understanding of that mountain of whatever it is. Reading the footnotes gives us some idea of potential problems. That won’t happen when only “critical” information is made available.

  2. dutch

    All the discussion of who is related to whom, through which organization is itself immaterial to what should be the main thrust: Obama wants it this way. Everyone else in the government reports to him, and he reports to the banks.

    1. Vatch

      I think this is the comments link:


      I found it in the document (or one of the documents):

      Proposed Accounting Standards Update
      Issued: September 30, 2015
      Comments Due: November 16, 2015

      The Board issued this Exposure Draft to solicit public comment on proposed changes to Topics 350, 805, 810, and 815 of the FASB Accounting Standards Codification®. Individuals can submit comments in one of three ways: using the electronic feedback form on the FASB website, emailing written comments to director@fasb.org, or sending a letter to “Technical Director, File Reference No. PCC-15-01, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.”

      Do not send responses by fax.

      Here’s the URL of the document:


  3. nat scientist

    Chair White would have been a star in the Nixon Administration, building a better mousetrap of language constructing the Corporate State, giving a pass to the trash where Nature simply expels its waste rather than buries it in the shadows of a diseased body of truth.

  4. Vatch

    If you’re an investor or anyone who cares about the honest disclosure of financial information,

    “You don’t mess with Mary Jo”.

  5. Synoia

    Sorry Mr Large Institution, we cannot lend you money, nor buy your shares, because the standard for you disclosures are not detailed enough.

    Says the “institutional investor.”

    He who has the money makes the rules.

    Then what?

    1. BrianM

      Nice thought, but not realistic. Most of the people who make the buy decision leave it to minions to look at the accounts. And if that were really a possibility then JPM and the other too big to analyse institutions would already be struggling.

  6. Ishmael

    About a year ago I was advising a company on disclosure issues as they were preparing to go public. I thought about asking whether they needed this one disclosure but even private they would needed to disclose it and they were audited by a top notch accounting firm. We get some comments from the attorneys and I looked at them and say “Hey, if you do that before you go public you will need to include the impact in the pro formas.” A quiet second goes by and they ask me to go work on something. About an hour goes by and they call me back in and tell me what they have been doing the last few years and ask me how I think they should account for it. I am like that is a non-cash expense which needs to be recognized in the financial statements and disclosed. It ends up wiping out 20% of the income over the last five years and totally changing things. After the meeting I was thinking WTF where have the auditors been the last few years.

    Let me just be straight. Most companies are really not being audited like they were 25 years ago. There has been a steady move by congress and the SEC to not hold auditors responsible for their work. Personally, I think we should just eliminate the audit requirement. People are getting a false sense of security from the audit reports. Certain unnamed Big 4 are worse than others.

  7. GlennF

    Yves has done great work on trying to force disclosure of all fees for a couple of the CA pension plans. The document “FASB Disclosure Framework Exposure Drafts on Materiality” referenced in this post states “The proposed Accounting Standards Update (ASU) Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, a component of the “entity decision process,” is intended to promote the appropriate use of discretion by organizations when deciding which disclosures should be considered material in their particular circumstances. The amendments to Topic 235 would apply to all types of organizations—public and private companies, not-for-profit organizations, and employee benefit plans.

    So it appears that someone has noticed.

  8. Chauncey Gardiner

    It is Interesting to see the word “Minions” appear at least three times in this article and comments. Per wikipedia’s review of the film of the same title:

    “Minions are small, yellow creatures who have existed since the beginning of time, evolving from single-celled organisms into beings who exist only to serve history’s most villainous masters.”

    That definition of enablers seems appropriate, both in this instance and in many others we have witnessed over the past couple decades.

    Drilling down a bit on the particular matter discussed in this article, a question arises about whether the nondisclosures which management and their “independent accountants” would under this proposed revised standard consider “not material”, could in the aggregate be VERY material? Derivatives exposures, “assets” that are booked in SIVs and other off-balance sheet vehicles at the so called “TBTF” banks, etc. come to mind as prospective candidates for this type of accounting mistreatment under the proposed revision. Footnote disclosures are an integral part of the financial statements.

    IMO this is just another move out of their playbook by the banksters and corporatists in their organized efforts to move the goalposts. As has become clear with the TPP and their other so called “trade agreements”, Obfuscation plays a prominent role in their endeavors. There is now very little discussion in the corporate-controlled MSM of meaningful reforms of the monetary and financial system, and their organized efforts to hide risk and even fraud behind a curtain of “materiality”, which they themselves define, plays into this objective.

    They also frequently resort to the lowest common denominator argument about “losing business” to the banks’ branch offices, subsidiaries and affiliates in the City of London if such and such a waiver or regulatory revision is not given.

    Their schemes are about preserving the channels for their accumulation and preservation of wealth; concentrating political power in their own hands; transferring their losses onto us; and defunding and imposing austerity on We the People.

    Thank you for your timely post and raising my own awareness of this issue, David Dayen.

      1. Plenue

        Next you’ll suggest the Justice Department actively colluded with banks to lessen prison terms into fines. How preposterou-oh…right…

    1. participant-observer-observed

      Proof that we need more David Dayens & NCs to point out to these people THEIR own risks here… need to go Ralph Nader on them and do bipartisan town meetings, etc., to subvert the internet propaganda.

  9. Ishmael

    Just as a side note, I can tell you first hand many of the worker bees in the financial reporting area of Fortune 500 companies are sick and disgusted by much of this. I have consulted for 3 this year and the amount of what was called tin-foil talk ten years ago which goes on is amazing.

Comments are closed.