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Commissioner Paredes on Cost Benefit Analysis

In a recent speech to the AICPA, SEC Commissioner Troy Paredes discussed, in part, the importance of regulatory agencies' use of cost-benefit analysis to inform rulemakings.  Commissioner Paredes emphasized the need to give "due regard to the potential undesirable effects of our choices."  He encouraged the use of cost-benefit analysis to challenge a regulator's own views on issues:

"Considering information that is contrary to one's own views leads to more informed decision-making and helps counteract the risk that a person will become overly committed to his or her own perspectives and beliefs and overconfident that what he or she advances is correct."

In addition to using cost-benefit analysis to inform solutions to problems, Commissioner Paredes discussed the benefits of using the analysis to determine whether an issue rose to the level necessary for regulation:

"Instead of too readily accepting that there is a problem, regulators should start by verifying that the perceived problem does in fact exist and then work to understand the problem's nature, scope and magnitude."

Commissioner Paredes then discussed recent PCAOB issues, praising PCAOB Commissioner Doty for committing "that before advancing a proposal on mandatory audit firm rotation, the PCAOB would carefully analyze not only the benefits, but also the costs and unanticipated consequences that could result."

A full text of the speech is available at http://www.sec.gov/news/speech/2012/spch051712tap.htm.