FEI Financial Reporting Blog

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2011-11-03T10:47:00.000-04:00

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SEC Ready For Full-Court Press With Senate Confirm of Aguilar, Gallagher

2011-10-24T13:19:00.000-04:00

The U.S. Securities and Exchange Commission will be back up to its full panoply of five Commissioners, with the Senate's reappointment of Commissioner Luis Aguilar to a second term, and the appointment of Dan Gallagher as a new Commissioner.

Aguilar, a Dem, began his first term as an SEC Commissioner on July 31, 2008. Gallagher, a Republican (replacing the vacancy created at the end of Commissioner Kathleen Casey's term), formerly served on SEC staff, including as Deputy Director of the Division of Trading and Markets. Gallagher re-joined law firm WilmerHale upon leaving the SEC in 2010 (see 2010 press release).

SEC Chairman Mary L. Schapiro made the following announcement following the Senate's action on Friday:

"I very much appreciate the Senate's confirmation of these nominees. Investors and markets are best served when the SEC benefits from the dedication and broad range of views that a full five-member Commission provides. I look forward to Luis's continued service, and I welcome Dan's return to the agency as we continue our efforts to protect investors and improve our markets and the economy."

Read more in TheCorporateCounsel.net blog and in the Washington Post.

Investment Companies, Investment Properties, Subject of FASB Proposals

2011-10-24T13:14:00.000-04:00

The FASB released two proposals (more formally, Exposure Drafts of proposed Accounting Standards Updates) on Friday, relating to investment companies and investment properties, respectively.

See:

Proposed ASU: Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (see related press release), and

Proposed ASU: Real Estate—Investment Property Entities (Topic 973) (see related press release).

The comment period ends on Jan. 5, 2012 for both proposals.

FASB Proposes Deferring OCI Reclass Adjustments

2011-10-24T13:13:00.000-04:00

The Financial Accounting Standards Board voted on Friday to propose a deferral of certain requirements in ASU 2011-5, Comprehensive Income, issued earlier this year. Important: the only requirements in that standard which will be deferred - while FASB further deliberates those matters - are the requirements for presentation of ‘reclassification adjustments’ from Other Comprehensive Income (OCI); the remaining provisions of ASU 2011-5 will become effective as originally set forth in that standard (beginning with public companies, for fiscal years, and interim periods within those years, ending after Dec. 15, 2011; private companies are subject to a later effective date in the standard). The action was expected, as noted here.

Proposal Expected Soon; At Least 15-Day Comment Period
An AccountingLink Financial Reporting Alert, published by Ernst & Young on Friday was one of the first reports published in the board’s vote. According to E&Y,

“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”

Reclassification Adjustments aka ‘Recycling’
BNA’s Steven Burkholder, in an article entitled FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”

The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”

Current Disclosure Requirements In Force During Deferral Period
Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.

Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”

Watch for FASB’s proposal (and potentially a related press release) on their website, www.fasb.org.

SEC FRS Kicks Off With Nov. 8 Roundtable On Measurement Uncertainty; FASB To Meet On Future Scope of Risks and Uncertainties, Going Concern Project

2011-10-21T13:30:00.000-04:00

Earlier today, the SEC announced it will hold the inaugural program in its Financial Reporting Series (FRS) on November 8; the focus of the initial roundtable will be Measurement Uncertainty. As we reported in June, the SEC’s FRS will consist of a series of roundtables focused on “the early identification of risks to the financial reporting system.”

In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.

The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS.

SEC FRS vis-a-vis FASB, PCAOB
Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.

As stated on the SEC’s webpage on the FRS, the objectives of the FRS are as follows:

to provide SEC staff, the Financial Accounting Standards Board ("FASB"), and the Public Company Accounting Oversight Board ("PCAOB") with useful information about matters affecting the financial reporting system;

for OCA to work closely with both Boards to ensure that they consider the appropriate actions to address emerging issues and changes in the business environment; and

for OCA, in coordination with the Division of Corporation Finance (and, where appropriate, other SEC offices or divisions), to consider whether changes to Commission rules and regulations would be appropriate.

See also ‘My Two Cents” at the bottom of this post, regarding an upcoming meeting of the FASB board relating to this subject, and regarding the interplay between FASB, SEC and PCAOB, or more broadly, the need to strike the right balance between the sometimes seemingly conflicting objectives of relevance, reliability and auditability.

Briefing Paper Outlines Issues; Public Comment Sought
As noted on the SEC webpage on Upcoming FRS Roundtables, the focus of the inaugural roundtable will be on:

where uncertain measurements provide investors with useful information and how those measurements should be recognized in the financial statements,

the information investors need to understand and assess uncertainties,

the need for additional guidance on the disclosures associated with uncertainties, and

the auditor’s role and responsibility for reporting on uncertainties.

Specific questions the SEC is seeking input on, and additional background information, can be found in this briefing paper prepared by the SEC staff.

The SEC formally invites public comment via Release No. 34-65602 published yesterday, “Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”

As noted in the briefing paper:

Uncertainty exists in financial statements where measurements “to a large extent…are based on estimates, judgments, and models rather than exact depictions.” As the level of uncertainty increases, challenges may exist for:

financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions,

auditors to verify the subjective judgments about those uncertainties, and

investors to understand those uncertainties and assess their potential impact on future earnings or cash flows.

Further, the SEC states that the inaugural roundtable “will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown.” Issues of focus will include:

Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information.

Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information.

Auditability — the auditor's role and responsibility for reporting on financial statements with measurement uncertainties.

Here are the questions on which input is sought from panelists and through public comment, in the above-listed Release. As detailed in the Briefing Paper, "The panel discussions will focus on the following questions. Panelists will be encouraged to specify, where applicable, the topic — financial instruments, goodwill, loss contingencies, etc — that their comments address."

Please provide feedback on any topics where the extent of uncertainty is less useful to investors and why a more certain measurement would be preferable. Likewise, provide comments on those topics where a measurement with uncertainty gives investors more useful information and why it is preferable to a more certain measurement.

For those topics where uncertain measurements are useful to investors, how should the uncertainties be incorporated into the measure? Please explain the reasons for the measurement method(s) you selected.

What information do investors utilize to understand uncertainty? Please describe why such information is useful and, if it is not disclosed in the financial statements, indicate its source.

What are the challenges for investors in understanding the nature and extent of measurement uncertainty?

As measurement uncertainty increases, please explain whether (and how, if applicable) it changes the investor’s expectation of preparers and auditors.

For preparers, what are the challenges in or impediments to providing investors with information to understand the nature and extent of measurement uncertainties?

What are the challenges for auditors in evaluating management’s judgments related to measurement uncertainties?

Please provide comments on whether (and how) a change in the auditor’s responsibility or role would enhance the investor’s understanding of the nature and extent of measurement uncertainties.

Please provide any additional comments or suggestions pertinent to how much uncertainty to recognize and how best to communicate it.

Future FRS Programs/Topics
The SEC’s webpage on the FRS states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at FRS@sec.gov or on the FRS webpage.”
More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”

My Two Cents
A couple observations (please see the disclaimer posted on the right side of this blog).

Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern).

FASB recently discussed this project during an Education Session, and as shown in FASB’s calendar and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):

“The Board will discuss whether to continue with the project as it is currently designed or modify the scope to provide guidance on assessing an entity’s ability to continue as a going concern.”

As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.

Francine McKenna, managing editor of Re:TheAuditors has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 Going, Going, Gone.
Of course, the subject of Going Concern is not to be confused with the popular ‘accounting tabloid,’ Going Concern.

Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see my earlier post from Sept. 2009.

Get The Latest FASB, SEC, IASB Updates At FEI CFRI; Consider Hall of Fame, IFRS Boot Camp

2011-10-15T17:31:00.001-04:00

If you’re a regular reader of this blog, or you otherwise are tasked with following developments at, and/or implementing changes in accounting and financial reporting rules emanating from the FASB, SEC or IASB, you won’t want to miss this year’s FEI Current Financial Reporting Issues conference.

Set to take place November 14-15 at the Marriott Marquis Times Square hotel in New York City, this is the 30th year of FEI’s CFRI conference. Included among the speakers will be FASB Chairman Leslie Seidman, IASB Vice Chairman Ian Mackintosh, and SEC Chief Accountant Jim Kroeker.

While you are in NYC for CFRI, consider attending FEI’s Hall of Fame Gala Monday night November 14, or the post-conference IFRS Boot Camp on November 16. The Hall of Fame and IFRS Boot Camp are available by separate registration (they are not part of the CFRI program).

The Hall of Fame Gala, taking place at Gotham Hall in Manhattan, will celebrate the induction of this year’s Hall of Fame inductees: Robert C. Butler, Judy C. Lewent, and David B. Rickard. Proceeds of the Hall of Fame Gala benefit the Financial Executives Research Foundation (FERF).

Read more about all three events in this FEI press release; or visit the related webpages on agenda, speakers, and registration info for: CFRI, Hall of Fame, and IFRS Boot Camp.

FASB Releases Proposed 'Technical Corrections' To Codification

2011-10-15T17:28:00.004-04:00

On Friday, October 14, the FASB released a 214-page set of proposed technical corrections to the Accounting Standards Codification.

The proposed changes, which cover a wide variety of areas. Included among the proposed changes are include certain ‘conforming’ changes to reflect FAS 157, Fair Value Measurement, in certain parts of the Codification that were not previously updated (e.g. to change certain references from ‘market value,’ or ‘mark to market’ to ‘fair value.’)

According to the board, the proposed changes to the Codification are aimed at being ‘technical’ in nature, vs. ‘pervasive’ or ‘substantive.’ As explained in FASB’s press release (reformatted into bullets)

Periodically, the FASB updates the Codification for technical corrections and clarifications that are deemed necessary.

The amendments included in this proposed Update cover a wide range of Topics and are generally nonsubstantive in nature.

Many of the proposed amendments update terminology to conform with Topic 820 (Fair Value Measurement).

The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.

Importantly, FASB notes in the Exposure Draft of the proposed changes to the Codification:

The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.

However, it is possible that certain proposed amendments may result in a change to existing practice.

The effective date of the proposed amendments would be determined after the Board considers comments on the proposal.

The comment deadline is Dec. 13, 2011.

FASB To Meet This Week on Deferring Certain Aspects of ASU 2011-05: Comprehensive Income

2011-10-15T17:27:00.002-04:00

The FASB board is set to meet Friday, October 21, to discuss “whether to defer the effective date of the presentation requirements for classification adjustments in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The information about the board meeting – set to take place on Friday, following a series of FASB-IASB joint board meetings taking place on Wednesday and Thursday – appears in FASB’s calendar.

The addition of this matter to the board’s agenda was announced on Thursday by FASB chairman Leslie Seidman.

The particular aspect of ASU 2011-05 which the board will consider delaying is the requirement for separate presentation of items reclassified from other comprehensive income [OCI] to net income. Additional information on this matter can be found in KPMG’s Defining Issues.

PCAOB Proposes Disclosure of Engagement Partner, Other Firms In Audit

2011-10-11T15:21:00.003-04:00

Earlier today, the Public Company Accounting Oversight Board voted to release proposed amendments to its standards to require disclosure of the name of the audit engagement partner, and disclosure of certain other persons and firms associated with the audit. The PCAOB’s press release and related documents are linked at the bottom of this post.

The proposal follows from a recommendation of the U.S. Treasury Advisory Committee on the Auditing Profession published in 2008, and a PCAOB Concept Release issued in 2009, including consideration of comment letters received on that Concept Release, and input received by the PCAOB by its Standing Advisory Group, Investor Advisory Group, and others. For background, particularly regarding the move to require ‘disclosure’ vs. ‘signature’ by the engagement partner, and a discussion about potential liability issues arising from such disclosure or signature, see our earlier blog post.

PCAOB Chief auditor Marty Baumann outlined today’s proposal as requiring disclosure of the:
· Name of the engagement partner [to be disclosed], in the audit report
· Name of the engagement partner, [to be disclosed] in the annual report filed by each registered audit firm with the PCAOB [Form 2]
· Names, locations, and extent of participation of other persons and firms who took part in the audit

Disclosure Of Engagement Partner For Most Recent Audit Period Only

Dima Andriyenko of the PCAOB staff said disclosure of the engagement partner signature would be required by adding the following sentence to the auditor’s report: "The engagement partner responsible for the audit for the period ended [date] was [name of engagement partner]."

He also noted that while the audit report relates to financial statements of more than one year; based on comments received on the earlier Concept Release, the PCAOB’s current proposal recommends disclosure of the engagement partner for the most recent period’s audit only.

3% Threshold For Disclosure of Other Audit Firms, Persons
Lisa Calandriello of the PCAOB staff explained the scope of the proposed requirement to disclose the names and locations of other independent accounting firms or persons who participated in the audit, and how that determination is to be made with respect to considerations relating to contractual relationships with those other persons/firms, and with respect to taking responsibility as the “principal audit firm” for work performed by other audit firms/persons as described in AU 543, Part of Audit Performed by Other Independent Auditors, or in a supervisory role as specified in AS 10, Supervision of the Audit Engagement.

Calandriello described a 3% threshold for determining whether another audit firm/person needed to be disclosed: "If the percentage of total audit hours [performed by another person or audit firm] attributed to the audit … is 3 % or more, then this firm or person [would be] disclosed separately. [The proposal], would not require separate disclosure of firms or persons whose participation is below3%, such firms or persons would either be disclosed as a group, or disclosed separately, as determined by the audit firm issuing the audit report."

Unanimous Vote; 90-Day Comment Period
The board voted unanimously in favor of releasing for public comment the proposal on disclosure of the engagement partner and certain other firms/persons involved in the audit. The staff recommended, a 90-day comment period, noted Calandriello; ending Jan. 9, 2012.

Comment Sought On Legal Liability, Disclosure Of Additional Parties
The board members’ opening statements, and in particular, the Question and Answer period between the board members and staff, highlighted a number of issues on which there is still some uncertainty and/or the board is specifically seeking comment in the proposing release.

Will disclosure of the engagement partner, as required in the proposing release (or an engagement partner signature, as still preferred by board member Steve Harris, although he concurred with issuing the proposing release) increase the personal liability of the engagement partner? Matters specifically discussed in the Q&A, particularly in questions posed by board member Dan Goelzer (a lawyer) and board member Jay Hanson (an auditor, who asked for a ‘plain English’ explanation of the legal issues), and in responses provided by the PCAOB’s General Counsel, Gordon Seymour, centered on liability as enforced by the SEC under Securities Act Section 7 and Section 11, and liability under the anti-fraud provisions of Section 10b, particularly in light of the recent Janus decision [Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011)], as to who the ‘maker’ of a statement is.

Here is an excerpt from the discussion re: engagement partner liability: GOELZER: Let’s turn to liability, the elephant in the room. Treasury ACAP said signature should not impose any greater liability on the partner than they would otherwise have; ACAP went on to discuss possibility of the SEC offering a safe harbor; does the [PCAOB] staff believe the switch from [considering requiring an engagement partner] signature to disclosure [of the name of the engagement partner] would obviate the need for a safe harbor? PCAOB GC GORDON SEYMOUR: ACAP referred to the possibility of a safe harbor regarding Section 11 of the Securities Act of ’33. The SEC administers Section 11, [and the SEC] would have to decide if … [disclosure of the engagement partner] would subject that individual to Section 11 liability, which raises in turn whether the SEC would promulgate a safe harbor; yes, that’s an issue, we’ve had discussions with the SEC, as to their willingness to promulgate a safe harbor, [it is not yet determined], we’ll continue to have discussions with the SEC staff. GOELZER: Section 11 is under the SEC’s control, whether or not they’ll accept a Section 7 consent, that will drive Section 11 liability. …

SEYMOUR [later, in response to question posed by board member Jay Hanson]: There are two provisions in the Federal Securities laws, that could be enforced b y regulatory, and private actions, Section 7 and 11 work in tandem, Section 10b is another, 10b is a fraud based claim, the recent decision in Janus clarifies who the ‘maker’ of a statement is; at the time of [the board’s 2009] Concept Release on an [engagement partner] signature requirement, the law was more uncertain, predated Janus, many commenters thought a signature requirement would make the signer the ‘maker’ of the statement; , we have questions whether there are implications post-Janus on signature requirement; Section 7 and 11 [of the Securities Act] relates to securities offerings, companies [e.g. audit firms] named in a registration statement have to file a ‘consent’ and therefore have potential liability for statements potentially false in the that registration statement; the issue is whether the SEC would require a Section 7 consent; it is clear today an audit firm would be such an expert and face that potential liability, the only issue here is whether the SEC would also see that individual as an ‘expert’ if they are seen [disclosed] in that audit report, therefore that individual could face liability [under Section 11] if they couldn’t show they acted with due diligence. The SEC could issue a safe harbor rule, we understand ACAP recommended [that].

Another issue discussed in the Q&A at the board meeting, on which the PCAOB specifically seeks comment in the proposing release, is whether disclosure of any additional partners should be required, specifically, the Engagement Quality Review [EQR] partner, or the ‘Appendix K’ review partner. As explained by Deputy Chief Auditor Jennifer Rand: “there are certain exceptions to disclosure of other firms or persons, EQR is one, Appendix K review [is another, as well as], specialists, internal audit, use of work of others. Lisa also talked about the construct of disclosure in 1 of 2 buckets: those firms you take responsibility for under AU 543, the other is under AS10 [which] the board issued a year ago…. [In contrast] Engagement quality review is intended to be an objective look at the audit; outside the audit, that person does not perform audit procedures, not involved in role of performing audit work; [but] making sure the opinion was appropriately issued; we thought under construct of AU 543 and AS10, EQR didn’t meet that construct, the release includes questions whether eng quality reviewer should be disclosed.” In response to a question from Chairman Jim Doty on why the ‘Appendix K’ review partner was excluded, Rand replied: “Appendix K is a requirement the board adopted in 2003 from the AICPA’s SEC practice section, which had requirements that went to its member firms; Appendix K requires firms that had been members of the SEC Practice Section to have filings reviewed of foreign affiliated firms before it comes into the US market, to have someone knowledgeable about U.S. rules [conduct a review].” She said the reasoning behind not requiring disclosure of Appendix K review partner was similar to that in not requiring disclosure of the EQR partner.

3% threshold for disclosure of other firms or individuals (outside the principal audit firm) performing part of the audit: In response to a board member’s question, Baumann noted that the 3% figure was arrived at after the staff concluded there should be a threshold, and they determined the 3% threshold to be reasonable for this purpose. Staff pointed out the 3% threshold differs from the board’s 20% threshold which determines which audit firms must be registered with, and inspected by, the PCAOB (firms performing 20% or more of audits of a public company). Therefore, some nonregistered audit firms may be disclosed under this proposals 3% threshold, and some registered audit firms involved in less than 3% of the work on a particular audit may not necessarily be disclosed in that particular audit report.
Information will be searchable: in response to a question from Goelzer, PCAOB staff member Mary Peters said that the names of engagement partners as disclosed in PCAOB’s Form 2 will be searchable on the PCAOB website.

Will Enhanced ‘Accountability’ Mindset Drive Increase In Audit Procedures, Cost?
Also during the Q&A , board member Daniel Goelzer raised a specific line of questions on the subject of cost-benefit, centering on whether changes in attitude (i.e., a presumed enhanced sense of ‘accountability’ on the part of an engagement partner whose name was disclosed) would lead to changes in behavior, and specifically to changes in audit procedures – which could in turn potentially drive increased costs. Although PCAOB staff said ‘no new procedures’ were required under this proposal (which could potentially be used to assert no additional costs were likely to arise), the potential for the engagement partner to drive increased procedures that result in simply covering their liability, but do not add to audit quality, and the potential for increased audit procedures that actually increase audit quality, is certainly there, and is something that commenters may want to consider.

Following are some excerpts from the Q&A during today’s PCAOB board meeting, regarding cost-benefit of the proposal for disclosure of the name of the engagement partner: GOELZER asked Baumann to describe the ‘specific behavioral changes the staff expects from a signature or disclosure requirement. ‘ BAUMANN replied that the staff ‘expect it would enhance a sense of accountability; ….inspection results show there is room for substantial improvement in professional skepticism and other areas, and the enhanced accountability from a disclosure of the engagement partner is expected to [be helpful].” ANDRIYENKO added that ‘the proposal does not require any additional audit procedures.’ GOELZER: “Do you plan to do a cost/benefit analysis, if people are going to perform audits differently, I think there has to be some analysis of the costs.” BAUMANN: “On the surface, inclusion of [engagement partner] signature would require no cost; whether the auditor suddenly feels he or she has to perform more procedures just because their name is there, … as to the assertion we heard from the [audit] firms that they already felt accountable signing the audit firms’ name, whether additional procedures [in some cases are necessary].. that would be a positive benefit; additional costs are not quite known. We are looking for input on this proposal on issues of cost and benefit.” GOELZER: [As referenced earlier in the meeting and in the proposal] the EU requires signature of [engagement partner]natural person on audits, do you know if there has been behavioral research on changes from that? BAUMANN: audit quality is a very hard thing to define; measuring improvements in audit quality is a difficult thing, a period of time is needed to assess improvements, there isn’t a lot of history whether engagement partner signature [in the EU] has changed audit quality; one study showed no apparent change, but those researchers used ….. things that are not necessarily linked to audit quality. “ANDRIYENKO : “One study on the effect of engagement partner signature in one European country; failed to document any relationship in audit quality based on parameters of the study; however, [the study also] failed to unconditionally conclude there is no relationship between audit quality, changes in audit quality, and [the EU] requirement for engagement partner signature.” GOELZER: It seems to me there are several things going on, one is whether they [the engagement partner] would feel more accountable, one is whether they would act differently, .. whether they are doing self protective things that wouldn’t improve audits, staff should [look at that]. The other is disclosure/transparency matter; [for example] you know who [a public company’s] directors are, officers, a lot of information required to be disclosed about people involved with public companies, do you know if the SEC has ever considered requiring disclosure of the names of engagement partners? PCAOB staff: “The SEC staff talked about some matters staff was considering, they had not presented it to the commission, I am not aware if that has advanced to the commission; not aware of other activity.”

Links to PCAOB Documents

The following documents relating to today’s PCAOB board vote to release proposed amendments requiring disclosure of the name of the engagement partner, and disclosure of certain other firms and individuals (outside the principal audit firm), have been issued by the PCAOB:
PCAOB Press release Oct. 11, 2011
Statement of Chairman Jim Doty
Statement of Board Member Dan Goelzer
Statement of Board Member Lew Ferguson
Statement of Board Member Steven B. Harris
Statement of Board Member Jay Hanson
Watch for a link to the proposed rule (and the archived webcast) to be posted here.

PCAOB May Propose Engagement Partner ‘Disclosure’ Tuesday

2011-10-10T15:31:00.000-04:00

The Public Company Accounting Oversight Board is scheduled to vote tomorrow on whether to propose that audit firms should (1) disclose the name of the audit engagement partner in the audit report, (2) disclose the names of each audit engagement partner for each engagement reported in the audit firm’s Annual Report Form filed with the PCAOB, and (3) disclose the names of “other accounting firms and certain other participants that took part in the audit.”

Disclosure, vs. Signature
My two cents (see disclaimer posted on the right side of this blog): I believe it is significant and intentional that the PCAOB’s press release announcing tomorrow’s meeting uses the words ‘disclosure’ and ‘disclose’ rather than the previously common vernacular of engagement partner “signature.”

The latter term ties back to the Final Report and recommendations published in 2008 by the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP), (see recommendation 6, Subcommittee on Firm Structure and Finances) which recommended that regulators, the auditing profession, and other bodies, as applicable: “Urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report), and to the PCAOB’s 2009 Concept Release issued for public comment, entitled, “Concept Release on Requiring the Engagement Partner to Sign the Audit.”

ACAP described the potential benefits from such a requirement as “increase[ing] transparency and accountability.” :

As also recognized by ACAP, one of the most contentious issues surrounding a potential engagement partner signature requirement was whether the value-added by such a signature would offset any potential additional legal liability to that partner.

Additionally, concerns have been voiced in ACAP and at prior discussions of the PCAOB Standing Advisory Group about any unintended consequences other potential reputational risks arising from the association of one partner’s name (instead of the firm’s name generically, as is the case today) with one particular audit, vis-à-vis other audits headed up by that particular partner, as well as potential client’s consideration of taking on that particular partner and his/her firm, based on particular audits for which that partner signed off.

Some questioned the impact this could have on auditor’s behavior as well, not only in the desired direction of ‘accountability’ but on the flipside, potentially causing the opposite effect, in which some questioned whether putting their name on the line associated with ‘good’ and ‘bad’ audits could potentially cause an auditor to hesitate to cause a negative consequence to a client, since his/her name would be publicly attached to that particular client, and in turn impact other clients, the investing public, and regulator’s views about that partners’ other audit clients.

Safe Harbor: Necessary? Provided?
Concern about legal liability in particular may be the driving force behind why a call for ‘engagement partner signature,’ floated a few years ago in its Concept Release, is now at the proposal stage but appears targeted at engagement partner ‘disclosure’ rather than signature. I assume that the presumed benefits anyone is looking for from a signature requirement would be satisfied by a disclosure (rather than signature) requirement.

At a 2009 PCAOB Standing Advisory Group Meeting, SAG member Jeff Mahoney, General Counsel of the Council of Institutional Investors (also a member of ACAP), noted that footnote 87 (in the section pertaining to the Subcommittee on Firm Structure and Finances) in ACAP’s Final Report (numbered page VII: 20 of that report) spoke of the belief that the same kind of “Safe Harbor” available to the audit committee ‘financial expert” by the Securities and Exchange Commission in the SEC’s Final Rule requiring disclosure of the name of the audit committee ‘financial expert, could form the model for a safe harbor for a safe harbor for audit firm engagement partners under any requirement to disclose them by name. (See the safe harbor in the SEC’s Final Rule.: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8817)

Here is what the relevant sentence in ACAPs report said, which includes footnote 87:

The Committee notes the signature requirement should not impose on any signing partner any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of an auditing firm.[87]”

87 This language is similar to safe harbor language the SEC promulgated in its rulemaking pursuant to Sarbanes-Oxley’s Section 407 for audit committee financial experts. See SEC, Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8177 (Jan. 23, 2003).

Here is what the SEC’s Final Rule on disclosure of the audit committee financial expert says re: Safe Harbor:

5. Safe Harbor from Liability for Audit Committee Financial Experts

Several commenters urged us to clarify that the designation or identification of an audit committee financial expert will not increase or decrease his or her duties, obligations or potential liability as an audit committee member. A few recommended a formal safe harbor from liability for audit committee financial experts. Unlike the provisions of the Act that impose substantive requirements,34 the requirements contemplated by Section 407 are entirely disclosure-based. We find no support in the Sarbanes-Oxley Act or in related legislative history that Congress intended to change the duties, obligations or liability of any audit committee member, including the audit committee financial expert, through this provision.

In the proposing release, we stated that we did not believe that the mere designation of the audit committee financial expert would impose a higher degree of individual responsibility or obligation on that person. Nor did we intend for the designation to decrease the duties and obligations of other audit committee members or the board of directors.

We continue to believe that it would adversely affect the operation of the audit committee and its vital role in our financial reporting and public disclosure system, and systems of corporate governance more generally, if courts were to conclude that the designation and public identification of an audit committee financial expert affected such person's duties, obligations or liability as an audit committee member or board member. We find that it would be adverse to the interests of investors and to the operation of markets and therefore would not be in the public interest, if the designation and identification affected the duties, obligations or liabilities to which any member of the company's audit committee or board is subject. To codify this position, we are including a safe harbor in the new audit committee disclosure item to clarify that:

A person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for purposes of Section 11 of the Securities Act,35 as a result of being designated or identified as an audit committee financial expert pursuant to the new disclosure item;

The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification; and The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.36

This safe harbor clarifies that any information in a registration statement reviewed
by the audit committee financial expert is not "expertised" unless such person is acting in the capacity of some other type of traditionally recognized expert.

Similarly, because the audit committee financial expert is not an expert for purposes of Section 11,37 he or she is not subject to a higher level of due diligence with respect to any portion of the registration statement as a result of his or her designation or
identification as an audit committee financial expert.

In adopting this safe harbor, we wish to emphasize that all directors bear significant responsibility. State law generally imposes a fiduciary duty upon directors to protect the interests of a company's shareholders. This duty requires a director to inform
himself or herself of relevant facts and to use a "critical eye" in assessing information prior to acting on a matter.38 Our new rule provides that whether a person is, or is not, an audit committee financial expert does not alter his or her duties, obligations or liabilities. We believe this should be the case under federal and state law.

However, I for one wonder if the reference to what an ‘expert’ means, as relating to those experts who ‘certify’ certain information, takes the SEC financial expert safe harbor type language out of the water if applied to a named engagement partner; see e.g. footnote 37 of the above-referenced SEC rule, which states:

37 Section 11 of the Securities Act imposes liability for material misstatements and omissions in a registration statement, but provides a defense to liability for those who perform adequate due diligence. The level of due diligence required depends on the position held by a defendant and the type of information at issue. Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968). The type of information can be categorized as either "expertised," which means information that is prepared or certified by an expert who is named in the registration statement, or "non-expertised." Similarly, a defendant can be characterized either as an "expert" or a "non-expert."

Whether disclosure (vs. signature), potentially paired with some type of Safe Harbor language, will entirely protect the named partner(s) from incurring potential additional legal liability remains to be seen, and it will be interesting to hear the PCAOB board and staff members’ discussion, as well as the discussion in the proposing release, around this point. It will also be interesting to hear the scope of potential disclosure requirements of “other accounting firms and certain other participants that took part in the audit.”

The PCAOB’s open meeting, slated for 9:30 am (ET) Tues. Oct. 11, will be webcast.

Economists Martin Feldstein, Robert Rubin: Highlights From the World Business Forum

2011-10-07T17:00:00.000-04:00

Economists Martin Feldstein and Robert Rubin gave their prognosis of the U.S. and global economic, speaking on a panel October 6 at the World Business Forum 2011. The panel was moderated by Alan S. Murray of the Wall Street Journal. Over 4,000 were in attendance at the program.

The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program. You can read highlights by going to the FEI blog on twitter, www.twitter.com/feiblog, and scroll down to view our tweets on Feldstein, Rubin and Murray's panel. We will be posting a direct link to an excerpt of our tweets on this panel, watch for updates to this post for that link.

For additional coverage of Feldstein's and Rubin's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub; the twitter hashtag for the program was #wbf11.

Follow the FEI blog on Twitter @feiblog at www.twitter.com/feiblog. Visit the FEI blog at www.financialexecutives.org/blog; sign up to receive blog posts via email, by sending an email to blogs@financialexecutives.org, and write in Subject line: Sign up.

Bruno Ferrari, Secretary of the Economy, Mexico, Speaks At World Business Forum

2011-10-07T16:58:00.000-04:00

On October 6, 2011 Bruno Ferrari, Secretary of the Economy, Mexico, was interviewed by Daniel Doctoroff, President of Bloomberg LP, at the World Business Forum 2011 in New York City.

See highlights of Ferrari's remarks, from our live-tweeting at the program. (If you have trouble viewing the page, click on the image to zoom in.)

For additional coverage of Ferrari's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub. Follow the FEI blog on Twitter @feiblog at www.twitter.com/feiblog. Visit the FEI blog at www.financialexecutives.org/blog; sign up to receive blog posts via email, by sending an email to blogs@financialexecutives.org, and write in Subject line: Sign up.

Seth Godin, Gary Hamel on Management: World Business Forum

2011-10-07T16:56:00.000-04:00

Well known authors, speakers and 'guru's' (I won't limit them to management or social media gurus) Seth Godin and Prof. Gary Hamel spoke on Managing Teams & Talent, and Management Innovation, respectively, at the World Business Forum 2011 in New York City. In separate presentations, they touched to some extent on each other's topics as well. Their remarks were very well received by the audience of over 4,000. The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program.

Read: Seth Godin's remarks as tweeted by the FEI Blog (click on the image if it is too small to read) and Gary Hamel's remarks as tweeted by the FEI Blog (click on the image if it is too small to read).

For additional coverage of Godin and Hamel's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub.

You can also search on twitter for all tweets from the program, e.g. by going to www.search.twitter.com and searching for hashtag #wbf11.

IASB’s Hoogervorst Makes Case For IFRS Adoption in US; Goldschmid Warns of ‘The Dark Side’ if SEC Says No

2011-10-05T20:12:00.000-04:00

Witha decision looming by the U.S.Securities and Exchange Commission on whether to permit or require U.S. publiccompanies to file with the SEC using International Financial ReportingStandards, the Chairman of the International Accounting Standards Board, HansHoogervorst, called upon the SEC to reach a positive decision in support ofIFRS. Hoogervorst’s remarks were in a speech delivered earliertoday at an AICPA-IASB conference.

Reasons in favor of one set of global accountingstandards, noted Hoogervorst, included ’commercial advantages’ forinternational companies. Citing a joint comment letter filed with the SEC earlier this year by Ford MotorCompany, Archer-Daniels-Midland, the Bank of New York Mellon, Kellogg,Chrysler, and United Continental Holdings, Hoogervorst noted the letter“call[ed] for the adoption of IFRSs in the United States,” adding, “Clearly,this is an important issue to them, as it is to other major preparers thatshare similar views. Note: see the comment letterfiled with the SEC earlier this year by FEI’s Committee on Corporate Reporting.

Hoogervorst also made the case that a move to IFRS wouldbenefit U.S. investors. Observing that, “The US’s current share of globalmarket capitalisationnow stands at just over30%,compared to an average of 45% between 1996 and 2006,” Hoogervorst cited acomment letter by one of the largest ‘investors,’ public pension fund CalPERS(the California Public Employees’ Retirement System, in which CalPERS said: “theSEC has the opportunity to effectively improve accounting standards, and toregain and increase investors’ trust in financial reporting.” Hoogervorstadded, “To me, that says it all. US investors, preparers and capital marketproviders recognise the substantial benefits that come from everyone speakingthe same financial language, while securities regulators understand that,without it, opportunities for regulatory arbitrage will remain. That is why Ibelieve that the case for global accounting standards, and with it the case forUS adoption of IFRSs, remains compelling.”

Here are some excerpts from Hoogervorst's speech, as to why he believes the US should adopt IFRS:

Quality: Citing academic studies and the progress ofconvergence work between IFRS and U.S. GAAP, Hoogervorst said: “While I am notdismissing [there are] differences, I am not convinced by the arguments thatone set of standards is clearly superior to the other.”

Actual Usage of IFRS: Hoogervorst spoke of the highdegree of adoption of IFRS worldwide, and countered arguments about the extentof usage of opt-outs in Europe, saying, “I have heard it argued that few majoreconomies actually use IFRSs. Some even say that Europe does not use IFRSs dueto the optionality of nine paragraphs of IAS 39 Financial Instruments.Yet this option is used by less than 30 companies. That is less than 1% oflisted companies in Europe. The other 99%, some 8,000 listed Europeancompanies, all use full IFRSs.”

Consistent application: Hoogervorst acknowledged, “A morecompelling criticism of IFRSs is that inconsistent application of the standardsmakes international comparison more difficult. However,” he added, “the same istrue when you have different accounting standards… A major comfort to theUnited States should be that if you adopt IFRSs the SEC will remain in fullcontrol of enforcement.”

Preparedness and costs: Hoogervorst said: “Many Americancompanies worry about the costs of adopting IFRSs. Let’s not beat about thebush; these are real costs. Therefore itwould be reasonable that a relatively long transitional period is provided,particularly for smaller publicly traded companies. An option to allowearly adoption of IFRSs also seems sensible for those companies that canalready see substantial net benefits of IFRSs” As to preparedness in the U.S.,he noted: “Convergence has brought IFRSs and US GAAP much closer together.There is already a lot of IFRS knowledge in the United States. The SEC has built-upa substantial IFRS competence, overseeing the financial statements of a growingnumber of foreign private issuers listed in the United States. Many largepreparers already have IFRS expertise within their organisations throughinternational subsidiaries. The CFA Institute now teaches IFRS financialstatement analysis to all CFA Program students studying in the United Statesand elsewhere. From this year, students sitting the AICPA’s CPA exam will be tested on IFRSs.”

Sovereignty: Another argument used against US adoption ofIFRSs is the perceived loss in sovereignty. The SEC Staff Paper specificallyaddresses this point. It makes it clear that the FASB and the SEC will continueto have ultimate responsibility for accounting standards regardless of whetherthe United States moves forward with IFRSs. Obviously, participation in anyinternational agreement, whether it is the World Trade Organisation or IFRSstandards, requires negotiation and cooperation. The United States willcontinue to have a great deal of input into the standard-setting process. Theknowledge base within the FASB is too valuable to the IASB to be excluded. Inaddition to the role of the FASB, the United States has, and will continue tohave, a great deal of influence within the IASB. Four out of the fifteen boardmembers are American and they certainly play a significant role

Independence of the IASB: Hoogervorst said: "I have never worked in an organisationthat is so transparent in its activities, and that consults so widely. As forpolitical pressure: I can only admit that it can be there. But this is notunique to the IASB. In the heat of the financial crisis, both the IASB and theFASB were put under intense pressure to relax our rules. It was not a prettypicture. Pressure on the boards is a fact of life. Our work affects manybusiness interests that often find the willing ears of politicians. But I thinkthat, as the IASB grows and diversifies, it will become much more difficult forspecial interests to force their issues onto the board. On a more personalnote, I did not leave politics to make accounting political. Quite theopposite; I will use all my political skills to keep accounting as apoliticalas possible.

Of interest particularly regardingsovereignty, see also Hoogervorst’s remarksmade earlier this week at a meeting of the Economicand Monetary Affairs (ECON) Committee of the European Parliament, Hoogervorstnoted the support the IASB has received from Europe – both from thegovernment sector and the private sector, and called for continuing support,telling the European group: “We will continue to increase the sense oftrust and buy-in among those who have adopted our standards. We will continueto strengthen the institutional relationships between the IASB and Europe, inthe same way as we are doing in other parts of the world. That is how we, as anindependent standard-setter, must reciprocate your trust. This will continue tobe a priority of the IASB as the organisation evolves into a globalstandard-setting authority.”

Goldschmid Warns of ‘The Dark Side’ IfSEC Says No

IFRSFoundation Trustee (and former SEC Commissioner and General Counsel) HarveyGoldschmid, whose remarks followed those ofHoogervorst at today’s AICPA-IASB conference, supported Hoogervorst’s call for the SEC tovote in favor of a move to IFRS.

Goldschmidoutlined in detail why he believes (as his speech is titled): U.S.Incorporation of IFRS is a National Imperative.

My two cents (I remind you of the disclaimer posted on the right side ofthis blog): I foundthe section of Goldschmid’s remarks entitled ‘The Dark Side’ to be of the mostinterest, in which he relates the potential negative impact if the SEC decidesnot to permit or require IFRS in the U.S.

Goldschmid provided a disclaimer early in his remarks,saying, “Today, particularly if I say something with which my Trusteecolleagues disagree, I am speaking only for myself.” He also expressly emphasizedthat his remarks on this point were not meantas “any kind of threat.” However, I personally don’t recall seeing thesearguments laid out in such specific terms before, as to how the U.S. (SEC,FASB, etc.) could get shut out (my words, not his) of the internationalaccounting standard-setting community if we don’t take a seat at the tableamong adopters of the IFRS standards. Here is what he said:

What if the SEC fails to commit toincorporation in the next period of months or simply says “no”? I see two basicscenarios; one would be bad for the U.S. and the other far worse…..

In my first scenario, the coalition ofnations supporting IFRS would break apart. Rather than two sets of accountingstandards, IFRS and U.S. GAAP, we would have a number of regional GAAPs, or wewould go back to pre-2000 fragmentation. At a minimum, a number of national orregional accounting systems would exist. The cost of fragmentation, in terms oflack of transparency and comparability, higher accounting expenses,inefficiency, etc., would be extremely large.

The second scenario is far worse froma U.S. perspective. The coalition in support of IFRS would hold together, andthe U.S. would become isolated in this area. There would be few, if any, U.S. members of the InternationalAccounting Standards Board or U.S. Trustees. The SEC would be removed from theMonitoring Board. The U.S. would no longer play the large and constructive roleit now plays in IFRS development and oversight.

I believe that without active U.S.participation the overall quality of the international accounting standardswould deteriorate. Remember, there is less concern about transparency andinvestor protection in some other parts of the world.

Ialso believe that the U.S. could not remain out of a global system forever.

Ina year like 2020 or 2030, the U.S. would be forced to adopt internationalaccounting standards, but I predict, it would be adoptingweaker IFRS standards than now exist. TheU.S. would then - - as opposed to now - - have only a very small seat at IFRSdrafting and governance tables.

In other action today, the IASB posted an updated versionof its IFRS Learning Resources (aka IFRS Resources List), containinglinks to places on the IASB’s website, and the websites of accounting firms andothers providing information relating to IFRS.

Awaiting SEC Decision

The SEC announced in its Work Plan for the Consideration ofIncorporating IFRS Into the U.S. Financial Reporting System, published Feb. 24,2010 that it anticipates making a decision in 2011 on whether to permit orrequire use of IFRS by U.S. public companies. There is a little bit of wiggleroom in the 2011 decision target, in the formal terminology, which states: “Following successful completion of the Work Plan and theFASB-IASB convergence projects according to their current work plan, theCommission will be in a position in 2011 to determine whether to incorporateIFRS into the U.S. domestic reporting system.”

The IFRS Foundation’s Goldschmid noted in his speechearlier today how uncompleted convergence projects could be handled in a worldin which the SEC decides favorably to move to IFRS.

Goldschmid said: “[T]he SEC, in its planning, hasprudently focused on minimizing disruption and cost. The SEC Staff Paper,titled “Exploring a Possible Method of Incorporation,” dated May 26, 2011, setsforth a phased approach to adoption of IFRS through an incorporation mechanism.The SEC’s framework is realistic and sound. Basically, if I understand theapproach correctly, existing IASB/FASB converged standards would beincorporated into U.S. GAAP. Not yet completed convergence projects (e.g.,leasing and revenue recognition) would be completed and incorporated. FASBwould stop writing new standards to prevent confusion and divergence. FASB,which would continue to play a critical role as the U.S. national standardsetter, would endorse and incorporate remaining, non-converged IFRS standardsover five to seven years. Similarly, FASB would continuously evaluate andendorse new IFRS standards. As a result of this process, U.S. publiccorporations would be complying with both U.S. GAAP and IFRS.”

Separately, the SEC states in its IFRS Work Plan that: “The staff will provide public progress reports on the WorkPlan beginning no later than October 2010 and frequently thereafter until thework is complete.”

Personally (I remind you again of the disclaimer posted on the right side ofthis blog),I wouldn’t be surprised if another progress report on the SEC’s IFRS Work Plan ispublished sometime this month, since I believe the last one was published lastOctober (see SEC Progress report on Work Plan,published 10.29.10), although some may consider the SEC staff paper published5.26.11 to effectively incorporate a progress report as well.

Whether the SEC Commissioners actually meetand decide on IFRS in October, November, or December of this year (or later), acritically important point is that this step would solely be a decision onwhether or not to permit or require IFRS. Within that decision lies a separatedecision as to the effective date for adoption (incorporation) of IFRS in theU.S.

Goldschmid addressed this point as well, inhis speech earlier today, saying:

“The largest concern I have heard from the U.S. businesscommunity is that Dodd-Frank implementation, and other changes caused by thefinancial crisis and the current economic downturn, make 2011 and 2012 thewrong years to create new burdens. The basic answer to this concern is that anSEC decision to commit to IFRS in the coming months will not be disruptive. Theeffective date - - when IFRS would be required for the largest U.S. publiccorporations - - will not come until 2016, at the earliest. (An even laterdate, in my view, makes sense for small public corporations.) The year 2016 or2017, for large public corporations, would provide ample time for planning,education, training, and retooling. The SEC is already used to reviewing IFRSfilings, which now come from foreign private issuers. It is an unambiguous SECcommitment to incorporation that is essential in the coming months. That wouldcreate the certainty and incentives for our large issuers, investment analysts,accounting firms, and business schools to be ready by a year like 2016.”

Personally, (you read the part about the disclaimer on the right side of thisblog, right?) I think2017 or even 2018 has a pretty good ring to it, as far as any earliestmandatory effective date, starting with the largest public companies, phasingin at a later date for smaller public companies, if a decision comes down fromthe SEC in 2011 or 2012.

PCAOB Update

2011-10-05T20:05:00.000-04:00

ThePublic Company Accounting Oversight Board has received over 140 commentletters;as of the September 30 comment deadline, on its Concept Release onthe Auditor’s Reporting Model.

Ifthe ideas in the Concept Release move forward to proposed and final rulemaking,they could mark significant changes in the language of the auditor’s report –and, in turn, in the way that audits are conducted.

(Althoughdirected at public company audits, any resultant changes in PCAOB auditstandards could also indirectly impact private company audits, to the extentaudit firms that service both types of clients move to incorporate one set ofstandard practices in their audits (and to the extent there is harmony withAICPA requirements for audits of nonpublic companies).

Inaddition to the comment letter process, the PCAOB also invited feedback on theConcept Release at a September 15 roundtable; an unofficial transcriptof the roundtablewas recently posted.

FEI Views on Auditor’s Reporting Model

Ina comment letter filed last week, FEI’s Committee on Corporate Reportingprovided its views on the PCAOB’s Concept Release on the Auditor’s ReportingModel. Read more in the FEI CCR letter.

Next Up: Auditor Independence, AuditFirm Rotation

Anotherdocument on which the PCAOB seeks public comment is the Concept Release on AuditorIndependence and Audit Firm Rotation. The comment period on that Concept Releasecloses December 14.

Staff Alert on Emerging Markets

Inother PCAOB-related news, the audit regulator published a staff audit practicealert earlier this week, entitled: Staff Audit PracticeAlert No. 8: Audit Risks in Certain Emerging Markets. See also the related press release.

McKenna,Weil Weigh In Re: PCAOB Board Vacancy
Writers FrancineMcKenna and Jonathan Weil recently weighed in on prospects for filing thecurrent vacancy at the PCAOB Board. Read McKenna’s post in Forbes online, and Weil’s article in Bloomberg’s TheTicker. Hat tip to Broc Romanek ofTheCorporateCounsel.net.

UPDATE 10/6:
Office of Internal Oversight & Performance Assurance (IOPA) Issues Two ReportsOn October 5, the PCAOB posted on its website two reports that were recently issued by its office of Internal Oversight and Performance Assurance (IOPA), including the related transmittal letters accompanying the reports; the letters were sent by PCAOB Chairman Jim Doty to SEC Chairman Mary L. Schapiro. The two reports were on the PCAOB's:
- IT Governance and Staffing, and
- Controls Over Employee Internet Activity

The Meaning & Significance of 'Undue Cost or Effort,' 'Impracticable' in Accounting Standards; IASB Draft Q&A

2011-10-04T16:01:00.000-04:00

Among five draft Q&As relating to International Financial Reporting Standards for Small and Medium Sized Entities (IFRS for SMEs) released for public comment by the IASB last week, the one that piqued my interest in particular was: Interpretation of ‘Undue Cost or Effort’ and ‘Impracticable.’

Impracticable
The IASB’s draft Q&A pertaining to IFRS for SMEs states:

‘Impracticable’ is defined in the IFRS for SMEs as follows: ‘Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’, therefore, generally only covers situations where information is unavailable, for example where data, that has not been collected at the time of an event, is impossible to create at a later point, rather than situations where the data could be obtained but it would be expensive or time consuming to do so. ’….

…. Impracticable is defined in the IFRS for SMEs in the same way as under full IFRSs. The definition refers to effort, but not to cost. Therefore, some people have concluded that if the data required in order to apply a principle in an IFRS can be obtained, an entity must do so regardless of cost….

It could be argued that ‘every reasonable effort to do so’ would not include spending excessive resources in order to comply with a requirement. However, enquiries to the IASB concerning the difference between ‘impracticable’ and ‘undue cost or effort’ suggest that the IFRS for SMEs is not clear as to whether cost alone would render a requirement impracticable.

Undue Cost or Effort
Further, the draft Q&A pertaining to IFRS for SMEs states:

‘Undue cost or effort’ is deliberately not defined in the IFRS for SMEs as it will depend on the SME’s specific circumstances and management’s professional judgment in assessing the costs and benefits. That assessment should include a
consideration of how the economic decisions of the users of the financial statements could be affected by the availability of the information. Applying a requirement would result in ‘undue cost or effort’ because of either excessive cost (e.g. through valuers’ fees) or excessive endeavors by employees in comparison to the benefits that the users of the SME’s financial statements would receive from having the information.

…Where ‘undue cost or effort’ is used together with ‘impracticable’, this should be applied in the same way as ‘undue cost or effort’ on its own. ‘Undue cost or effort’ is used either instead of, or together with, ‘impracticable’ for certain requirements in
the IFRS for SMEs in order to include cost or burden as factors to take into
account when deciding whether to obtain or determine the information.

To include an exemption for impracticability alone would mean that an SME would be required to follow the requirements if it is possible to obtain or determine the information, regardless of the cost or effort required. For example, an SME would be expected to engage a valuer, actuary or other professional to make a particular measurement, regardless of the cost, provided the valuer expects to be able to develop a reliable valuation of the asset.

… The inclusion of ‘undue cost or effort’ for certain requirements in the IFRS for SMEs is intended to clarify that cost is a consideration when applying that requirement. Although there is no direct reference to benefits in the term, in order to assess whether cost and effort is ‘undue’ SMEs would have to make an assessment of how important the information is to users.

Why Does This Matter?
My two cents (please note the disclaimer posted on the right side of this blog): Although IFRS for SMEs, a condensed, simplified, and self-contained set of IFRS, about 1/10 the size of full IFRS, may be elected for use (e.g., as an alternative to full IFRS, or, theoretically, as an alternative to U.S. GAAP) by private companies only (i.e., those that are not publicly listed , and even then, only those that do not have ‘public accountability’ such as banks and certain other entities), I believe this draft Q&A is something worth studying and watching how it evolves, whether you work for (or are indirectly involved in some capacity such as auditing or investing in) a private company or public company, and whether you that company (ies) follow IFRS or U.S. GAAP.

Here is why: The Draft Q&A notes that the definition of the term ‘impracticable’ applicable to IFRS for SMEs is the same as that in full IFRS. Therefore it will be interesting to see if any potential changes to the definition applicable to IFRS for SMEs would then raise questions with regard to whether the definition of ‘impracticable’ in full IFRS (as well as usage of ‘undue cost and effort’ in full IFRS) should be considered/reconsidered. Thus, with potential engagement of consideration of implications for full IFRS, the private co/public co (or small co/large co) dividing line may not be as relevant.

Similarly, with convergence a priority – although on particular matters the FASB and the IASB can ‘agree to disagree,’ it will be interesting to see if the consideration/reconsideration of the definitions of these key terms will take place at some future date in a parallel manner by the FASB and its constituents.

Why does this matter? The significance of the terms ‘undue cost or effort’ and ‘impracticable’ in terms of accounting standard-setting, is that development of (and revision of) GAAP standards theoretically takes into account cost-benefit considerations, and the above terms are sometimes specifically used in defending or arguing against particular accounting treatments. In certain instances, ‘practicability’ exceptions are also provided, and those exceptions do not necessarily relate only to private companies or small companies, particularly if ‘new information’ has to be developed to satisfy a particular accounting requirement, which cannot readily be recreated after-the-fact (this point relates particularly to the transition method or method of adoption set forth in a new standard(s), such as retroactive, retrospective, or current/going-forward basis).

I would add that, again in my personal opinion, in terms of a common sense definition of ‘impracticable,’ (although I am not certain how this lines up with any definition(s) of the term in existing U.S. GAAP standards or concept statements, or in the FASB’s Standards of Procedure which govern how they set standards, and I would welcome anyone to provide insights they have via a comment on this blog or an email to me), I would not have thought that a cost of something close to ‘infinity’ would not be considered as rendering a particular requirement ‘impracticable,’ even if it is theoretically ‘possible’ to obtain/develop/recreate said information. In fact, if impracticable meant ‘impossible’ if not used in conjunction with ‘without undue cost or effort,’ then I would think that the term perhaps should never be used alone, without the ‘undue cost or effort’ proviso. What do you think?

The comment deadline on the five draft Q&As on IFRS for SMEs released for comment on September 28, will end November 30. See related press release.
In related news on the private company front, see our post earlier today, FAF Proposes Private Co Standards Improvement Council To Modify GAAP For Private Co’s – PCSIC’s Recommendations Would Be Subject To Public Comment, FASB Ratification . See also: Plan to Simplify US Private Company Accounts by Helen Thomas in the Financial Times published earlier today, and Big GAAP/Little GAAP: A Possible Solution? published 12/21/10 in the Cherry, Beckaert & Holland Blog.

FAF Proposes Private Co Stds Improvement Council To Modify GAAP For Private Cos, PCSIC Rec's Would Be Subject To Public Comment, FASB Ratification

2011-10-04T14:30:00.001-04:00

Earlier today, the Financial Accounting Foundation, which oversees the FASB, released its Plan to Establish the Private Company Standards Improvement Council (the ‘Plan’). The PCSIC would review existing U.S. GAAP to recommend modifications and exceptions for private companies; those recommendations would be subject to FASB ratification and public comment (a model similar to that employed by the FASB’s Emerging Issues Task Force. A similar model was suggested in a comment letter to the FAF filed by FEI’s Committee on Private Company Standards earlier this year, noted below). The FAF seeks public comments on its Plan released today; the comment deadline is January 14, 2012.

FAF Recommendation Similar To That Suggested By FEI Committee
George W. Beckwith, Chairman of FEI’s Committee on Private Co. Standards (CPC-S), said: “CPC-S is pleased that the FAF has released a draft for public comment, on how to improve private company standard-setting. This proposal parallels the suggestion made in the comment letter sent by CPC-S in April of this year.”

He added, “I believe the basic theme of the FAF’s proposal, to form a strong private co committee with the ability to propose and vote on private company exceptions to existing standards changes is a big step and shows FAF has been listening to the concerns of its private company constituents. Having the new group report directly to the FAF board shows the importance FAF has given to private company concerns. Our committee appreciates the work of the Blue Ribbon Panel, FAF, the AICPA and NASBA in helping articulate the issues and identify potential solutions. We plan to carefully review the FAF’s proposal, to provide a comment letter by the Jan. 14 deadline.”

Composition and Authority Of PSCIC
The FAF’s proposed PSCIC would be chaired by “a FASB member with substantial experience with and exposure to private companies during his or her career.” In addition to the chair, the PSCIC would include 11 to 15 members, selected and appointed by the FAF Trustees, based on nominations submitted to the FAF. Members of the PSCIC would “include users, preparers, and practitioners who have significant experience using, preparing, and auditing (and/or compiling and reviewing) private company financial statements.”

The PSCIC would review existing U.S. GAAP and – using a set of criteria to be developed jointly with the FASB - develop recommendations for exceptions or modifications to U.S. GAAP, to “address the needs of users of private company financial statements.” As stated in the Plan, “Any proposed changes to existing US GAAP [recommended by the PSCIC] would be subject to ratification by the FASB and undergo thorough due process, including public comment.”

In addition to being called upon to study and make recommendations relating proposed modifications/exceptions to existing U.S. GAAP, the PSCIC would also be called upon in an advisory capacity with respect to items under current deliberation by the FASB. Specifically, the Plan states: “For items under active consideration on the FASB’s technical agenda, the PCSIC would serve as the primary source of advice on appropriate treatment for private companies by working actively and closely with FASB members and staff, and providing advice for consideration by the FASB members in their deliberations. In addition, the PCSIC would have the ability to vote to take a position on the appropriate treatment for private companies related to issues under active consideration by the FASB.”

As we previously reported, a majority of comment letters filed on an ‘unsolicited’ basis (i.e., in advance of release of the FAF’s Plan) providing input to the FAF, particularly with respect to the recommendations released earlier this year by Blue Ribbon Panel (BRP) on Standard Setting For Private Companies) , supported the recommendation of the BRP to form a separate board to set accounting standards for private companies. Many of those letters supporting the BRP recommendations contained similar phrasing, along the lines of a form letter (see July 1 article Turf War Over Private Company GAAP by Alix Stuart of CFO.com).

The FAF, “acknowledge[d] receipt of more than 2,800 unsolicited letters,” [now numbering over 3,000 comment letters] “ most of which made similar points in support of the Blue-Ribbon Panel’s recommendation for a separate standard-setting board for private companies.”

However, the FAF also observed that, based on information provided during its outreach efforts, “While some practitioners and preparers expressed support for the formation of a separate board as recommended by the Blue-Ribbon Panel, the view was not widely held. In fact, many of those who initially spoke in support of the creation of a new authoritative board, moved away from that view after hearing concerns of others. Such concerns included the likelihood of confusion, the lack of acceptance of new standards by banks and sureties who expect to see US GAAP financial statements, the establishment of a bifurcated profession, a recognition that the formation of a new board and the promulgation of new rules would take years, and a fear that financial statements prepared in accordance to “little GAAP” would be viewed as inferior to “big GAAP” financial statements.”

Another reason why the FAF ultimately decided on recommending a PSCIC, vs. a new standard-setting board, as noted in the Plan, is that the FAF Trustees believe that, ‘The FASB should address—and is committed to addressing—complexity, relevance, and cost-benefit issues more broadly, as other constituents, in addition to private companies, have expressed similar concerns.”

Further, the FAF observed that, “The FASB has made recent, substantive changes to how it engages with private company constituents, and has demonstrated a greater operational and structural commitment to further address these issues. The Trustees believe it is appropriate to allow a period of time for those efforts to mature and are monitoring those efforts closely.”

Roundtables Coming; Additional Information
In addition to the Plan itself, related documents and material posted by the FAF include this press release, and Executive Summary. A podcast featuring FAF President and CEO Terri Polley and FAF Chairman Jack Brennan can also be downloaded here. The FAF also notes that, in addition to seeking comment letters by January 14, public roundtables will be convened on the Plan.

CHANGE TO FEI BLOG'S RSS FEED!
If you are reading this post on google blogger platform because you have bookmarked the google blogger RSS feed, please redirect your feed for this blog to our new platform, which is part of FEI's new website, the new RSS feed is here. The google blogger feed for this blog is anticipated to cease in the near future. Look for the FEI Financial Reporting Blog on FEI's new website here.

Sarbanes-Oxley Section 404: Will We See More?

2011-09-21T16:57:00.001-04:00

Appearing at her second Congressional hearing in as many weeks relating to small business capital formation, SEC Division of Corporation Finance Director Meredith Cross testified to the House Financial Services Committee earlier today on various initiatives the SEC is considering to better facilitate small business capital formation, while still adhering to its investor protection mandate. See the link to the hearing webpage, which includes links to all testimony and some related proposed legislation.

I found her prepared remarks on Sarbanes-Oxley Section 404 to be of the most interest, as summarized below. (Please note the disclaimer that appears on the right side of this blog).

Note: I did not listen to the live webcast of the hearing, this summary is based on written testimony and draft legislation; if other bloggers out there live-blogged (or live-tweeted) the hearing, I invite you to post a comment or send me an email with a link to your blog post or twitter handle.).

In her testimony today, SEC’s Cross noted that the Dodd-Frank Act amended Sarbox by exempting non-accelerated filers (i.e. companies with less than $75 million market cap). A footnote in her testimony linked to the SEC’s study, also mandated by the Dodd-Frank Act, as to whether further exemptions or other improvements could be made with respect to the rules pertaining to Sarbox 404, for companies with over $75 million market cap and less than $250 million market cap; that study concluded there should be no further exemptions, and that further study would be given to potential improvements.

She reiterated in her testimony today, in language similar to that used in the SEC’s Sarbox study referenced above, that:

The staff encourages activities that have the potential to further improve both the effectiveness and the efficiency of the evaluation of internal controls, while maintaining important investor protection safeguards. For example, with this objective in mind, the staff continues to work with the PCAOB to monitor inspection results and assess the extent to which publishing observations can be useful.

She added:

The staff is also observing COSO’s (Committee of Sponsoring Organizations of the Treadway Commission) project to review and update its internal control framework, which is the most common framework used by management and auditors alike in performing assessments of internal control over financial reporting.

NOTE: We previously reported that an Exposure Draft of the update to COSO’s 1992 Internal Control-Integrated Framework is expected to be released for public comment later this year.

Congress Gets Into The Act

Various members of Congress have circulated proposals to further amend Sarbanes-Oxley Section 404 by increasing the threshold level of exemptions from the Sarbox Section 404(b) auditor’s report on internal control (i.e., increasing the exemption level provided in the Dodd-Frank Act) and in some cases by providing certain opt-outs for companies up to a threshold level of, in some proposals, $1 billion, with some bills specifying the company would need to disclose if it took advantage of that opt-out (aka, what some may describe as ‘comply or explain.”)

For example, Cross referenced draft legislation proposed by Rep. Stephen Fincher (R-TN). Fincher’s draft bill, the Small Company Job Growth and Regulatory Relief Act of 2011 would further amend Sarbox 404 by:

· increasing the threshold level of companies exempted from the Sarbox 404(b) auditor’s report on internal control, from the current level of $75 million, to a level of $500 million, and

o provide an additional exemption for companies between $500 million and $1 billion of market cap: “(1) for the first five years following the registration of securities of an issuer that first registers after the enactment of the Small Company Job Growth and Regulatory Relief Act of 2011,” or (2) any report filed pursuant to subsection (a) by an issuer that has opted out of subsection (b), by consent of its shareholders by majority vote.”

It appears to me (see the disclaimer on the right side of this blog) that Rep Fincher’s bill is proposing a permanent opt-out from Sarbox 404(b) – if and only if there is majority shareholder approval - for companies with less than $1 billion market cap.

In contrast, a similar bill in circulation, “The Startup Expansion and Investment Act,” sponsored by Rep. Ben Quayle (R-AZ), appears to provide a ‘comply or explain;’ type opt out for a time limited period (10 years) for companies with less than $1 billion market cap. As described in Rep Quayle’s press release:

Specifically, the bill allows new companies with a market capitalization under $1 billion to opt-out of regulations within section 404 of the Sarbanes-Oxley Act for the first ten years after going public. To inform investors, a company must clearly disclose in its annual reports that it chose to opt out of section 404.

Props to former SEC Chief Accountant Lynn E. Turner for bringing the Quayle bill to my attention through an email news listerv he provides. Of course, he added his own commentary to his email, (subject line “Short Memories”), in which he stated, “Clearly people have forgotten the hundreds of billions in dollars of losses investors suffered during the corporate financial reporting frauds, and the tens of thousands of jobs lost [from those frauds].”

CFA Institute, CAQ, and CII Caution Against Further Sarbox Exemptions

Yesterday, a joint letter was sent by the CFA Institute, the Center for Audit Quality, and the Council of Institutional Investors, to the Chairman (Rep. Spencer Bachus) and Ranking Member (Rep. Barney Frank) of the House Financial Services Committee (sponsor of today’s hearing), stating:

We understand that the Committee is considering legislation that could weaken certain investor protections of the Sarbanes-Oxley Act of 2002 (SOX). The Center for Audit Quality, the Council for Institutional Investors, and CFA Institute are writing to urge you to resist efforts to further weaken SOX by exempting even more public companies from compliance with Section 404(b) of the Act, which requires an independent audit of a company’s assessment of its internal controls as a component of its financial statement audit.

Read more in the CFA Institute, CAQ, CII Sept. 20 letter.

SEC IG Issues Report on Conflicts of Interest

In the interim period between the two Congressional hearings addressing crowdfunding and other small business capital formation matters, the SEC’s Inspector General publicly released his report and recommendations entitled: Investigation of Conflict of Interest Arising from Former General Counsel's Participation in Madoff-Related Matters. The report examined the involvement of former SEC General Counsel David M. Becker in certain matters relating to the Madoff liquidation, in light of his having inherited some funds from his late mother’s estate which came from liquidation of an investment in Madoff securities. Becker had received clearance from the SEC Ethics Officer to participate in matters relating to the Madoff liquidation. Among parties sued by the Madoff bankruptcy Trustee for clawback of a certain portion of funds received were the Becker estate.

In response to the IG’s report, SEC Chairman Mary L. Schapiro made the following statement:

Last March, after learning about the Trustee’s suit against the Becker estate, I asked for the Inspector General to look into the matter.

I take his report, which was published today, very seriously.

It would be inappropriate for me to comment on the Inspector General’s referral to the Department of Justice.

I do want to state that I’ve known David for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three Chairmen.

As the Inspector General recommends, we will seek another vote of the Commission on the question of the SEC’s position on the valuation of Madoff victim accounts.

I believe that the decision the Commission made on that issue was appropriate under the law and in the best interest of investors.

Moving forward, we plan to implement the other recommendations contained in the report as well.

Of note in Cross’s testimony before the House Financial Services Committee today, as shown in footnote/endnote number 1 to her written testimony, was that Cross has voluntarily recused herself from matters relating to ‘crowdfunding,’ and that Lona Nallengara, Deputy Director of the Division of Corp Fin, would provide testimony on crowdfunding specifically, with Cross providing the remainder of today’s testimony. As explained in the footnote:

Ms. Cross’s participation in this testimony does not include matters related to crowdfunding. Prior to joining the Commission staff in June 2009, Ms. Cross served as counsel to a company in connection with its registration under the Securities Act of 1933 of notes offered and sold through its “peer-to-peer” lending platform. Although Ms. Cross has no financial or other interest in her former client or her prior employer, in light of the small number of participants in that market, in order to avoid any appearance concerns, she does not participate in matters involving peer-to-peer lending. Further, since there are some similarities between peer-to-peer lending and some crowdfunding concepts, even though Ms. Cross has been advised by SEC Ethics Counsel that there is no conflict of interest, Ms. Cross has determined that in order to avoid any appearance concerns, she will no longer participate in crowdfunding matters. For purposes of this testimony, Mr. Nallengara will address crowdfunding matters.

It appears that Cross’s voluntary recusal from matters relating to crowdfunding (including from providing formal testimony on the matter today), and the related disclosure in footnote 1 of her testimony, reflects an abundance of caution to avoid even the appearance of any potential conflict of interest, particularly in light of the IG’s report and recommendations released yesterday.

NOTE to subscribers to our RSS feed: As previously reported, the FEI blog is now housed on FEI's new website, and we encourage you to pick up our new RSS feed.

Schapiro, Pitt, Others Testify On Congressional Proposals On SEC Modernization, Accountability

2011-09-16T14:01:00.000-04:00

SEC Chairman Mary L. Shapiro, former SEC Chairman Harvey L. Pitt, and other former high ranking officials of the SEC testified at a Congressional hearing yesterday on "Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission."

Shubh Saumya of the Boston Consulting Group was also among those testifying at the hearing, vis-a-vis BCG's recommendations issued to the SEC in March 2011 and followup planning and action taken as noted in the Special Study published by the SEC on September 9: Report on the Implementation of SEC Organizational Reform Recommendations.

Also testifying at the hearing were former SEC Commissioner Paul Atkins, former SEC Secretary Jack Katz, former SEC Deputy Chief Litigation Counsel Stephen Crimmins, and George Mason Law Prof J.W. Verret.

Among the more interesting reporting coming out of the hearing:

Former SEC Head Opposes New Restrictions, by David Hilzenrath, Washington Post 9/16

In Switch, Bachus Backs More SEC Funds For Dodd-Frank, by Melanie Waddell, AdvisorOne, 9/15

See also our post earlier today on a separate Congressional hearing taking place yesterday, relating to the SEC's consideration of 'crowdfunding' and potential exemptions from SEC registration requirments.

SEC Considers Exempting Crowdfunding From Reg. Requirements, Corp Fin’s Cross Tells Congress; Forms Advisory Committee on Small and Emerging Co’s

2011-09-16T11:49:00.002-04:00

At a Congressional hearing yesterday, the SEC's Director of the Division of Corporation Finance testified that the SEC staff is currently considering- and a newly formed Advisory Committee on Small and Emerging Companies will also consider and provide input on - potential methods to enhance the ability of small businesses to raise capital, including by potentially increasing the minimum size of offerings that would be exempted from SEC registration requirements, including (but not limited to) small business or startup fundings conducted online and/or through social media referred to via as 'crowdfunding.'

The term 'crowdfunding' and a possible tie to an exemption from SEC Registration requirements to loosen regulatory burdens on startup companies to encourage capital formation and job growth was popularized recently in a White House Fact Sheet posted in connection with President Barack Obama's proposed American Jobs Act and related initiatives including the Startup America partnership, and further publicised in a number of blog posts by the Administration, e.g. here and here. The reference to 'crowdfunding' in the White House Fact Sheet is cited below.

A personal observation - and please see the disclaimer on the right side of our blog: it is very interesting to see continued references to the challenges of complying with the Sarbanes-Oxley Act, presumably in particular Section 404 on internal control reporting, with respect to challenges to small business and start-ups in particular. This issue was debated not only after Sarbox (resulting in some amendments to the initial SEC and PCAOB rulemaking implementing Sarbox 404) but also during and after the Dodd-Frank Act which provided certain additional exemptions and calls for studies. The continued interest in Sarbox could be the thinking among some that there is something of a fixed cost and/or minimal staffing component to certain of the Sarbox 404 requirements.

Crowdfunding is referenced in the White House Fact Sheet as follows:

"As part of the President’s Startup America initiative, the Administration will pursue efforts to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection. This includes working with the SEC to explore ways to address the costs that small and new firms face in complying with Sarbanes-Oxley disclosure and auditing requirements. The administration also supports establishing a “crowdfunding” exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10% of investors’ annual income) and raising the cap on “mini-offerings” (Regulation A) from $5 million to $50 million. This will make it easier for entrepreneurs to raise capital and create jobs."

In her testimony yesterday before the House Committee on Oversight and Government Reform's Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, Corp Fin Director Meredith Cross described 'crowdfunding' and the SEC's consideration of same as follows:

Generally, the term “crowdfunding” is used to describe a form of capital raising whereby groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal. This funding strategy was initially developed to fund such things as films, books, music recordings, and charitable endeavors. At that time, the individuals providing the funding were more akin to contributors than “investors” and were either simply donating funds or were offered a “perk,” such as a copy of the related book.

Another personal observation: (I remind you again of the disclaimer posted on the right side of this blog): My own experience with 'crowdfunding' earlier this year was in responding to a request for funding a project posted by a singer-songwriter friend (NB, that would be you), which he posted on facebook , to fund a new CD and songbook. His facebook post, in turn, linked to specific info about his project posted on the crowdfunding webite Kickstarter.com , including his funding goal, and total amount raised toward that goal. Those wishing to make a contribution to the project could do so via electronic fund transfer via Amazon. An apparent ongoing debate about kickstarter.com vs. other crowdfunding sites is the fact that kickstarter runs an 'all or nothing' funding collection program, either the goal is met and everyone's pledges are paid, or the goal is not met and (presumably) no one's pledges are collected. Read more about the all-or-nothing kickstarter model and other facts on kickstarter.com's FAQs. Significantly, this was not an 'investment' and did not purport to be a 'security' but I offer this example up for those of you interested in learing about some of the crowdfunding mechanisms out there, such as those referenced in Cross' testimony. (Postscript: my singer-songwriter friend NB met his funding goal.)

Following are some additional highlights from Cross's testimony on crowdfunding yesterday:

As these capital raising strategies did not provide an opportunity for profit participation, initial crowdfunding efforts did not raise issues under the federal securities laws.

…Proponents of crowdfunding are advocating for exemptions from the Securities Act registration requirements for this type of capital raising activity in an effort to assist early stage companies and small businesses.

...For example, the Commission received a rulemaking petition requesting that the Commission create an exemption from the Securities Act registration requirements for offerings with a $100,000 maximum offering amount that would permit individuals to invest up to a maximum of $100.

…in considering whether to provide an exemption from the Securities Act registration requirements for capital raising strategies like crowdfunding, the Commission needs to be mindful of its responsibilities both to facilitate capital formation and protect investors.

The Commission’s rules previously included an exemption, Rule 504, which allowed a public offering to investors (including non-accredited investors) for securities offerings of up to $1 million, with no prescribed disclosures and no limitations on resales of the securities sold. These offerings were subject only to state blue sky regulation and the antifraud and other civil liability provisions of the federal securities laws.

In 1999, that exemption was significantly revised due in part to investor protection concerns about fraud in the market in connection with offerings conducted pursuant to this exemption.

In assessing any possible exemption for crowdfunding, it would be important to consider this experience and build in investor protections to address the issues created under the prior exemption.

Some of the questions to consider with regard to crowdfunding include:
what information — for example, about the business, the planned use of funds raised, and the principals, agents, and finders involved with the business — should be required to be available to investors;

what restrictions should there be on participation by individuals or firms that have been convicted or sanctioned in connection with prior securities fraud;

should a Commission filing or notice be required so that activities in these offerings could be observed;

should securities purchased be freely tradable; and

should websites that facilitate crowdfunding investing be subject to regulatory
oversight?

Advisory Committee on Small and Emerging Co's
SEC's Cross also told the Congressional subcommittee that input on crowdfunding and other capital formation issues would be sought from the SEC's new Advisory Committee on Small and Emerging Companies. This new advisory committee, and its members, were announced earlier this week in this SEC press release.

Bills Introduced To Exempt Certain Crowdfunding
As reported by Bloomberg's Phil Mattingly today, a number of Congressional bills have already been submitted to provide certain exemptions from SEC registration requirements for crowdfunding. See Mattingly's article, U.S. House Republicans Embrace Obama Push to Ease SEC Rules.

NEW! FEI Blog Part of FEI's New Website!

2011-09-07T14:45:00.001-04:00

Earlier today, Financial Executives International launched a new and improved version of its website, www.financialexecutives.org. The FEI Financial Reporting Blog will now be housed among its brother and sister posts on FEI's website, providing you one-stop shopping for the latest info on FEI's outstanding conferences, webcasts, advocacy and accounting policy committee activities, career development, and more! For direct access to the blog, you can continue to visit www.financialexecutives.org/blog.

NEW RSS FEED:

Those of you who utilize our RSS feed, please note the feed will change, you will need to pick up the feed that appears on our new website next to the FEI Financial Reporting Blog. Our twitter site, www.twitter.com/feiblog has not changed.

CHANGE COMING TO EMAIL DELIVERY:
*** Our email delivery will also change over to a new method in the coming month or so. If you should notice you do not receive emails that are posted on our site www.financialexecutives.org/blog, please feel free to contact me with questions about your email delivery or any other questions regarding the blog or our new website, and I or our IT team will be happy to get back to you to address any concern you have.

And of course, we will continue to bring you cutting edge news and analysis of the latest and greatest happenings in the world of financial reporting from the FASB, IASB, SEC and PCAOB, by means of the written word and the occasional music video by which we are known!

We invite you to take a tour of FEI's new website; there is also a feedback box to provide real-time feedback.

QUESTIONS?

Some finishing touches are still being added to the blog page on this new site, including our blog roll of esteemed blogger colleagues and areas for sponsoring advertisers. Once again, if you have any questions regarding the blog, please do not hesitate to contact me at eorenstein@financialexecutives.org.

SEC Seeks Comment On Plan For Retrospective Review of Existing Reg's

2011-09-06T15:34:00.000-04:00

The SEC published today a request for comment on its plan for conducting its retrospective review of its existing regulations, to be conducted in accordance with a Presidential order issued on July 11 of this year. See SEC's press release and request for information. Comments are due by October 6.

As noted in the SEC's press release:

The Commission is seeking public comment on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process....

President Barack Obama issued an order on July 11 that recommended that independent regulatory agencies consider how they might best analyze rules that
may be outmoded, ineffective or excessively burdensome, and modify, streamline
or repeal them. The order also recommends analysis of regulations that might need to be strengthened or modernized, which may entail new rulemaking.

FAF Proposal On Private Co Standard Setting Coming In A Matter of 'Weeks,' Says FAF's Polley

2011-09-06T15:27:00.000-04:00

In the Sept., 2011 "From the President's Desk" letter issued earlier today, Financial Accounting Foundation President & CEO Terri Polley said that after receiving an enormous amount of written and in-person feedback on the topic of how best to set accounting standards for private (nonpublic) companies, the FAF plans to release a proposal on this matter for public comment "in the coming weeks."

Close to 2,500 'unsolicited' (i.e., prior to a formal request for comment) letters have been filed with the FAF/FASB on the subject of private co standard-setting so far, with the initial letter having been filed in the spring by FEI's Committee on Private Company Standards, chaired by George Beckwith.

As noted in Polley's letter, in addition to the longer term strategic decisions being undertaken by the FAF on how best to set accounting standards for private co's (including consideration of the report and recommendations of the Blue Ribbon Panel on Private Co Accounting, issued earlier this year, which recommended formation of a separate board focused on private co accounting standards), FASB is conducting public hearings next month on particular issues and how best to handle those matters for private companies.

FASB Project Aims For Less Disclosures, With More Utility

2011-09-06T15:11:00.001-04:00

The Financial Accounting Standards Board is bringing its consideration of its Disclosure Framework project, first launched in 2009, to the forefront, bringing the results of staff research and a proposed decision framework for the board's first formal consideration last week.

The Disclosure Framework project was prompted, in large part, (although not solely by), recommendations contained in the Report and Recommendations of the SEC Advisory Committee on Improvements to Financial Reporting (aka CIFiR or The Pozen Committee).

As noted in FASB's summary of its Aug. 24 meeting at which the Disclosure Framework project was discussed, the board essentially agreed with the decision approach recommended by the staff, shown in the board handout, including the fact that the Disclosure Framework would be approached more from the perspective of a Concepts Statement than an individual accounting standard (Accounting Standards Update) per se.

Something that jumped out at me in reading FASB's meeting summary was a sentence that seemed to very crisply identify the objective of the Disclosure Framework project, in terms even more precise than those used when the project was first announced in FASB's 7/28/09 press release.

Specifically, FASB stated in its summary last week that:

The desired result [of the Disclosure Framework project] is a net
reduction in disclosure volume and a net increase in the
utility of the information disclosed.

One caveat before leaping on the 'reduction in disclosure volume' and 'increase in utility' goals: (I remind you of the disclaimer posted on the right side of this blog) - keep in mind the operative term, "net" - that there will be a "net" reduction in disclosure volume (so, leaving the door open for new disclosures to be added, with a concurrent reduction in some other disclosures).

Still, the hoped for net decrease in disclosure combined with a net increase in utility of those disclosures would be a welcome development for all those involved in the financial reporting process including preparers, auditors, investors, directors, educators, and others.

Important Message From FEI Re: Power Outage and Changes to Blog

2011-08-30T11:06:00.000-04:00

Due to Hurricane Irene, FEI Headquarters, located in Morristown, NJ has suffered a major power outage. As soon as power is restored, FEI will be back online. Thank you for your patience.

Additionally, although there will be delays sending out emails from this blog, check back to the blog at http://financialexecutives.blogspot.com for new blog posts this week. You can also keep up with news from the blog and FEI via our twitter accounts at www.twitter.com/feiblog and www.twitter.com/feinews .

In other news, please note the URL to this blog (and the related RSS feed) may change soon in connection with a website update at FEI. Check back to this site for further updates.

CFOs Invited To New FEI Programs; Sept. 1 Conference Call

2011-08-26T14:28:00.000-04:00

FEI is sponsoring new programs for Chief Financial Officers. The first program will be a conference call for CFOs to share experiences, challenges, and best practices on: The Role of the CFO, Thurs., September 1 from 1:00 – 2:00 PM EDT.

Use the online signup form if you are:

an FEI member who is a CFO, to sign up to receive information about future programs for CFOs, or to register specifically for the Sept. 1 conference call;

an FEI member who wishes to refer the CFO of their company or another company to consider participating in these programs (nonmembers who are CFOs, referred by an FEI member or a member of the FEI staff, may participate in the Sept. 1 program as well as FEI members who are CFOs.

a CFO who is not currently a member of FEI, but you have been referred to this program or received an invitation from an FEI member or a member of the FEI staff (blog readers: you can write "FEI blog" for the name of the person who referred you to this program; participants must be CFOs).

Got Social Media? Take the FERF-GT Survey

2011-08-26T14:15:00.000-04:00

FEI's research affiliate, the Financial Executives Research Foundation (FERF), in partnership with Grant Thornton, is launching the Social Media and Its Associated Risks Survey to look at how social media is changing the face of business in the U.S. and around the world.

With the scope of social media expanding every day, companies have an opportunity to take advantage of business-building and promotional avenues that were not available only a few years ago. These opportunities come with an accompanying list of new risks, however.

Through this survey and in-depth follow up interviews, senior financial executives will learn about practical guidance in social media policymaking and risks to be considered in regard to their companies’ social media plans and strategies. The research will also inform senior financial executives about governance issues, corporate policy, a code of ethics around social media, internal control issues and social media audits.

The good folks at FERF estimate it will take you about 15 minutes to complete the survey. Thank you for your input!

Take survey here.

Disclosure Management: SAP and FEI Offer Half-Day Seminar

2011-08-26T14:07:00.003-04:00

SAP and FEI are cosponsoring a half-day program on Building the Case for Disclosure Management - Automating the Last Mile of Finance. Featured speakers include: Jon Church, Managing Director, cundus Inc., George Neal, Sr. Director, Center of Excellence, SAP America, Muthu Ranganathan, Director, SAP America, and Mike Willis, Partner, PwC.Here's a brief program description:

The term “financial close” describes a corporation’s ability to complete its accounting cycles and produce financial statements for internal management and external legal reporting. The requirement to close books quickly and with quality is a key indicator for the success of a company’s finance function.

Recently, there has been an increasing focus on automating the “last mile of finance” with disclosure management solutions, to manage the production, filing, and publication of financial statements and reports, driven in part by the increasing global mandates for companies to submit electronic filings in the XBRL (eXtensible Business Reporting Language) format.

This half-day seminar will focus on trends, issues, and strategies for accelerating the financial close, with a concentration on automating the financial and regulatory disclosure processes.

The program will be offered in four separate cities in September. Sign up for the program in the city of your choice by using the links below.

New York City, NY – September 13

Chicago, IL – September 14

San Francisco, CA – September 15

Dallas, TX – September 20

Will Auditors Be Required To Report "Close Calls"? Tune Into PCAOB's Sept. 15 Roundtable; Comment On The Concept Release

2011-08-25T14:02:00.006-04:00

Will auditors of public companies be required to report "difficult" or "contentious" issues, and "close calls," including material matters that were corrected or resolved to the auditor's satisfaction before the end of the reporting period? The auditor could be required to do just that, and more, if ideas put forth in the PCAOB's Concept Release on the Auditor's Reporting Model, published earlier this year, were to advance to proposed and final rulemaking.

Earlier today, the PCAOB announced it will hold a public roundtable on September 15 to gather additional feedback on the Concept Release on the Auditor's Reporting Model, in addition to the feedback it receives through comment letters (comment deadline: September 30). See the PCAOB's Briefing Paper for the Roundtable.

Close Calls, Difficult & Contenious Issues, Would Be Reported By Auditor in Proposed New "AD&A"
As we previously reported, the PCAOB's Concept Release on the Auditor's reporting model includes a proposed new section in the auditor's report called the Auditor's Discussion & Analysis or AD&A, modelled after the SEC requirement for management to provide an MD&A section, or Management's Discussion & Analysis.

Pros and cons associated the above potential new reporting requirement is discussed in Appendix C of the Concept Release under 'staff outreach'. Here is an excerpt, illustrating the varying views of investors and others (preparers, auditors) [style, but not content, reformatted for emphasis]:

3. Difficult or Contentious Issues, Including "Close Calls"

Some outreach participants recommended that the auditor identify in the auditor's report the most difficult or contentious issues discussed with management.

Difficult or contentious issues might arise in various stages of the audit, including in the auditor's evaluation of management's judgments, estimates, and accounting policies. Many outreach participants described difficult or contentious issues as those critical matters that concerned the auditor when making the auditor's final assessment of whether the financial statements are presented fairly.

A difficult issue might not always be synonymous with a contentious issue.

Rather, a difficult issue might be a matter that requires significant consideration or consultation; however, the auditor might agree with management's conclusions regarding the issue.

A contentious issue might be a matter that not only requires significant consideration or consultation but also leads to significant points of disagreement, debate or deliberation between the auditor and management.

Regardless of whether the issue is difficult or contentious, some outreach participants indicated that they would like information concerning how management and the auditor ultimately resolved the issue in order for the auditor to issue an unqualified opinion.

In addition, some outreach participants suggested the auditor should discuss the "close calls" encountered by the auditor in performing the audit.

Some investors described close calls to include matters such as –
• Those accounting decisions that required significant deliberation by the auditor and management before being deemed to be acceptable within the applicable financial accounting framework,
• Those matters related to internal control over financial reporting that required significant deliberation by the auditor and management, and
• A financial statement issue that had a potential material impact to the financial statements and was corrected prior to the end of the period.
Some outreach participants indicated that knowing the difficult or contentious issues or the close calls would provide insight into the auditor's significant judgments.

Others suggested that the auditor provide a listing of the issues in the auditor's report (e.g., difficult, contentious, or close calls) without the auditor's views. Based on this information, financial statement users could determine if further investigation is warranted as part of their investment analysis.

However, other outreach participants believe that if the difficult or contentious issues, or "close calls" are resolved to the auditor's satisfaction then description of them in the auditor's report would not provide relevant and useful information and could be misleading regarding the meaning of the auditor's opinion (i.e., the issuance of an unqualified opinion demonstrates that the auditor has satisfactorily resolved all material matters).

Some outreach participants indicated that due to the financial complexity of most public companies and their many accounting policies and estimates, there are typically a significant number of difficult or contentious issues or close calls in the normal course of the audit. Therefore, it may be hard for the auditor to determine which particular issues are most important to be discussed in the auditor's report.

Next Steps
The potential requirements listed above, and other ideas floated in the PCAOB's June 2011 Concept Release on the Auditor's Reporting Model - not to be confused with PCAOB's August, 2011 Concept Release on Auditor Independence (see Jim Petersen's latest post on the auditor independence concept release in his blog, Re:Balance; and Broc Romanek's post today in TheCorporateCounsel.net blog) are just what the title of the document says - "Concepts," they are not "standards" or "rules" - yet.

That is, some of the concepts in the Concept Release ultimately may not become standards or rules, or could be further fine-tuned, based on the PCAOB board's deliberations upon reviewing public comments received on the Concept Release, as well as comments received if the board advances the ball to the next step of issuing proposed rulemaking (i.e., a proposed auditing standard(s) on the auditor's reporting model). Then, the PCAOB board would deliberate developing a final standard after reviewing comments received on the proposed standard(s).

My Two Cents: This is a "Big Deal"
Before proceeding, I remind you of the disclaimer posted on the right side of this blog. I believe the significant potential changes to the auditors' report bear careful attention by preparers, auditors, investors and others, particularly issues such as the reporting of 'close calls' that were caught by the auditor or raised by the auditor in the review of financial statements prior to the information in question being publicly reported, and after any corrections or modifications were made to the auditor's satisfaction. In some ways, that would be like putting the teacher's or professor's grade of your 'rough draft' on your final report card, vs. your final grade after making changes based on the teacher/professor's suggestions. Or, like having doctor's report out to you a mistake they 'almost' made, but caught in time. As much as that might sound like information you'd 'like to know,' is there a 'need to know,' and could not only the cost of such reporting (including hours of time in the general counsel's office and outside counsel of the reporting entity and potentially the audit firm) worth it on such highly judgemental instances, particularly if modifications and corrections were made pre-publication to the auditor's satisfaction? Is such reporting best suited for public reporting, or internal reporting to the board of directors, particularly the audit committee?

The items discussed in this post are only a few of the concepts floated in the PCAOB's Concept Release. I would suggest interested parties (preparers, auditors, investors and others) review the Concept Release, tune into the Sept. 15 PCAOB public roundtable, and consider submitting a comment letter by the September 30 deadline. Thoughtful commentary, particularly when it includes data that substantiates practical considerations, and includes suggestions for alternatives that may better assist in reaching the goal of a particular proposal, can assist standard-setting and regulatory bodies in producing thoughtful rules and standards. Reference can be made to comment letters filed so far on this Concept Release.

PCAOB Issues Concept Release on Auditor Independence; Comments Due Dec. 14

2011-08-16T11:36:00.000-04:00

Earlier today, the PCAOB voted to issue a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism can be enhanced, including through mandatory rotation of audit firms. Comments are due Dec. 14, 2011. The action was expected, as noted here.

In related news, the PCAOB announced that a public roundtable on auditor independence and mandatory audit firm rotation will be held in March 2012.

Additional details and related reading can be found in:
*** We will insert a link to the Concept Release here, when it is posted by the PCAOB.
PCAOB’s press release
Chairman Jim Doty’s Statement
Board Member Dan Goelzer’s Statement
Board Member Jay Hanson’s Statement
Board Member Lew Ferguson’s Statement

Other voices:
Dear Auditors: My Response to Your Request for Comments, Francine McKenna, author of blog, Re: The Auditors
A Prescription For What Ails Large-Company Audit: Real Medicine, For A Change, Jim Peterson, author of the blog: Re:Balance.

COSO Exposure Draft, Updating Internal Control Framework, Expected October/November

2011-08-12T12:32:00.003-04:00

In an online interview published by the AICPA's Journal of Accountancy, AT&T Director Bill Schneider, a member of the COSO Advisory Task Force, provides a briefing on the objectives of COSO's current project to update its landmark 1992 Internal Control-Integrated Framework, and states that an Exposure Draft of the update is expected to be released for public comment in October or November. (See 2:40 on the AICPA JofA video, Modernizing the Internal Control-Integrated Framework, for the discussion of expected timing of the ED.)

Schneider also notes that COSO plans to publish a separate supplement to the updated internal control framework, focusing on applying the framework to external financial reporting. Interest in the COSO framework was renewed following the Sarbanes-Oxley Act, which required management and auditors to assess the effectiveness of internal control over financial reporting and make a related attestation thereto, respectively.

FEI is one of the five founding members of COSO, along with the AAA, AICPA, IIA, and IMA. COSO board members and additional representatives from the five member organizations amke up the COSO advisory task force, which is providing input to, and overseeing the development of the updated framework, the heavy lifting of which is being conducted on behalf of COSO by audit firm PwC.

Further on the internal control/anti-fraud front, here's some related reading material:

Committed to Fraud Prevention, published in CFO.com, authored by Tracey L. Coenen, founder of forensic investigation firm Sequence, Inc. and author of The Fraud Files blog.

Creating a Culture of Compliance, published in CFO.com, authored by Kimberly Blanton, a former reporter with the Boston Globe, and author of the blog Squared Away: Frontiers in Financial Literacy.

FEI Joins Anti-Fraud Effort with CAQ, IIA, NACD (10/6/10)

Deterring and Detecting Financial Reporting Fraud: A Platform For Action (CAQ 10/6/10)

SEC Whistleblower Program Open For Business; Takes Effect Today (FEI blog 8/12/11)

SEC's New Tips System Gets Good Marks From Markopolos (FEI Blog 7/28/11)

COSO Contemplates Expansion of 5-point Internal Control Framework Into 20+ Principles; Potential Impact on Sarbox 404 Assertions (FEI blog 3/25/11)

Feel free to post additional links to helpful information in the comments section of this blog. If you received this blog post from 'a friend' and would like to receive updates to the blog directly by email, send an email to blogs@financialexecutives.org and write in the Subject line: Sign Up. And you can follow us on Twitter at www.twitter.com/feiblog.

CFOs From U.S., France and Italy On The Economy, Hiring, More

2011-08-12T11:57:00.001-04:00

CFOs from the U.S., France and Italy provided their views on the global economy, their plans for hiring in the next six months, the U.S. debt situation, health care costs, and more, in the latest FEI-Baruch CFO Outlook Survey, published yesterday. Highlights:

Federal Reserve Board Chairman Ben Bernanke received a grade of "B" from most U.S. CFOs

CFO optimism declined among U.S. CFOs and their counterparts in France and Italy

Over half the U.S. CFOs plan to hire in the next six months; less than half the CFOs from France and Italy plan to hire in that timeframe

The complete FEI-Baruch CFO Outlook Survey results are available from the Financial Executives Research Foundation (FERF) online bookstore.

Separately, CFO.com released their own survey results yesterday as well, including views on the U.S. debt situation.

SEC's New Whistleblower Program Open For Business; Takes Effect Today

2011-08-12T11:15:00.001-04:00

The SEC's new whistleblower program, created under rulemaking implementing the Dodd-Frank Act, is effective today. See the SEC's press release issued this morning: SEC's New Whistleblower Program Takes Effect Today, which links in turn to the SEC's central portal for reporting as a whistleblower and related info: www.sec.gov/whistleblower.

See also this Introduction by Office of the Whistleblower Chief Sean McKessy, and McKessy's remarks 8.11.11 at Georgetown University. Props to Dave Lynn of TheCorporateCounsel.net Blog for the heads up in his post earlier today: W-Day is Here: The SEC's Whistleblower Rules Are Now Effective.

FASB Approves Simplification Of Goodwill Impairment Testing

2011-08-11T12:19:00.000-04:00

At its board meeting yesterday, FASB approved an amendment to its standards which will simplify testing for goodwill impairment. According to FASB's press release, the Accounting Standards Update, expected to be issued in September, will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption will be permitted.

Amendment Suggested By Private Cos; Will Be Available To All Cos.
FASB Board Member Daryl Buck, who joined the board earlier this year with a wealth of private company experience, including, most recently, as SVP and CFO of Reasor's Holding Company, explained in FASB's press release:

The Board’s decision today comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test. The amendments approved by the Board address those concerns and will simplify the process for public and nonpublic entities alike.

Qualitative Assessment

To simplify the goodwill impairment test, a qualitative assessment will be permitted to determine if the two-step quantitative goodwill impairment test is needed. As further described in FASB's press release (reformatted to bullets):

An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.

The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment.

Prior to today’s decision, entities were required to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any.

The goodwill testing simplification approved by FASB yesterday, emphasizing what some would view as a principles based, qualitative approach with example factors to consider, aims at reducing unnecessary complexity in financial reporting. If you haven't seen it, check out our 'music video' on this subject.

PCAOB To Vote Next Week Whether To Issue Concept Release On Auditor Independence

2011-08-11T11:46:00.000-04:00

The PCAOB will vote next week on whether to issue a Concept Release for public comment on Auditor Independence and Audit Firm Rotation. (For background, see our earlier post, PCAOB To Consider Mandatory Audit Firm Rotation.) The vote is set to take place at an open meeting Tues. Aug. 16 at 9:30 a.m.; the meeting will be webcast.

According to the PCAOB's press release announcing next week's meeting, the Concept Release being considered would address:

ways that auditor independence, objectivity, and professional skepticism could be enhanced, including mandatory audit firm rotation

I believe (please note the disclaimer on the right side of this blog) we can be reasonably assured that the PCAOB board will vote to issue the above Concept Release. In fact, I believe it is more likely than not that board's vote will be unanimous in favor of issuing the Concept Release.

The reason why I assert the above, is because a Concept Release is not formal rulemaking per se, but an early opportunity for public comment on an issue(s), which in turn provides insight to the PCAOB in determining if, when and how to go to the next step of proposed standard-setting.

Speaking generally, (not about this Concept Release specifically), if some matters described in a Concept Release elicit comment that a better solution would be through means other than new standard-setting - e.g., if a proposed solution appears to be burdensome and/or ineffective for a majority of audit firms/issuers/investors, and moreso, if it appears to be a solution in search of a problem; or if the perceived problem could be better addressed through enforcement of existing standards, or through improvements that can be achieved via best practices. Additionally, there is an interplay to be considered between the PCAOB's Auditor Independence standards, and those of the SEC. (As background, the SEC has some archived material on this subject, as of 2001.)

In considering the likely issuance of the Concept Release on Auditor Independence next week, and preparing comment letters thereon, it will also be important to consider potential changes not only to how audits are conducted, but also the product of the audit. In that vein, keep in mind the September 30 comment deadline for another Concept Release issued by the PCAOB earlier this year, on the Auditor's Reporting Model.

Big GAAP/Little GAAP: A 'Big Deal'

2011-08-05T15:11:00.000-04:00

The FAF's consideration of whether and how to establish differential accounting standards for public vs. private companies, referred to colloquially as Big GAAP/Little GAAP, has great import for private companies and the users of their financial statements in particular, and is of interest to public companies and the U.S. Securities and Exchange Commission as well, as noted in SEC Chief Accountant Jim Kroeker's June 5 speech at USC.

Before continuing, please note the disclaimer posted on the right side of this blog.

When we last covered this subject in July, we noted that over 1,100 comment letters had been filed with the FAF, a majority of which constituted variations of a form letter with points said by some to have been circulated by the AICPA, backing the recommendation of a broad-based Blue Ribbon Panel on private co. standard-setting (a panel co-sponsored by the FAF, AICPA and NASBA), which concluded that a new standards board should be established under the FAF to focus on private company standard-setting.

We also noted that not all comment letters held that view, in fact the letter filed by FEI's Committee on Private Company Standards, in an April comment letter, took the recommendation of the Blue Ribbon Panel and modified it to some extent, by suggesting that the FAF form a Private Company Task Force (PCTF), structured and empowered to participate in the standard-setting process in a similar manner to FASB's Emerging Issues Task Force (EITF).

During the last few weeks in July, another 500 comment letters were filed with the FAF on this topic. (See all comment letters filed to date.)

In an article published earlier this week, Private Co. GAAP Heats Up, (subtitled: An intense lobbying effort to keep new standards for private companies out of FASB's grasp is under way), CFO.com's Alix Stuart writes:

At least 15 state CPA societies, including those in Alabama, Illinois, New Jersey, and New York, have sent letters to the FAF urging a separate board, according to Maryland Association of CPAs CEO Tom Hood, who also penned a letter. ...“This issue has been around for 30 years, and this is a once-in-a-lifetime chance to get it right,” says Hood. “If it doesn’t happen now, it will never happen.”

Stuart observed that of the over 1,500 comment letters so far, there were "multiple submissions from many CPA firms and predominantly in boilerplate language. Most appear to be in favor of a separate board, for various reasons. ... the AICPA provides a Mad Libs–style letter template with phrases and sentences for commenters to plug in... Notably, however, Finance Executives International's Committee on Private Company Standards submitted the first letter, in April, opposing the idea. 'Working within. . .the FASB would avoid some of the implementation issues that would require state recognition of a new standard setting body' and would also be less expensive, the letter noted."

NVCA, NYSSCPA, MACPA, NCCPAP Letters
Of the more recent comment letters filed, some have very powerful arguments, and are very instructive as to how, in some cases, certain constituencies (such as the National Venture Capital Association) have strongly held views calling for a separate standards board for private companies. NVCA's letter, signed by its President, Mark Heesen, included 76 additional venture cap member signatories, and states:

As an asset class committed to investing in America’s most promising private companies, the venture capital industry understands the importance of
accurate, transparent and meaningful financial reporting practices. While
tremendous advances in information technology have been made in the last
decade, the same can not be said for private company accounting standards
which have been wrongly based on public company practices for too long. Private company standards have become both burdensome and irrelevant, rendering them costly for preparers and meaningless for users. As investors in these companies we assert that the situation has become untenable and must be addressed.

On behalf of our firms and portfolio companies, we support the creation of a separate private company board with standard-setting authority under the Financial Accounting Foundation’s oversight. Through this independent board, appropriate modifications to existing U.S. GAAP (generally accepted accounting principles) for private companies would be driven to reflect their financial statement users’ unique needs.

It has become clear that the Financial Accounting Standards Board (FASB), despite past efforts, is not able to adequately address the issues faced by private companies... Applying accounting standards designed for public entities diverts precious private company resources to meet standards which result in statements which are not relevant, reliable, nor comparable. A private company board comprised of members with constituent experience would be best positioned to recognize the important needs of private company reporting. Such a group would also be able to ensure an effective and useful path to public company accounting
principles as a company moves toward becoming public. If left unaddressed, current private company accounting practices will continue to negatively
impact our country’s emerging growth companies. At a time when economic recovery is paramount, we must be do all we can to ensure that financial reporting is efficient, effective and relevant for all stakeholders. ...

We applaud the FAF’s recognition of these issues and its wisdom in forming the Blue Ribbon Panel and strongly encourage the adoption of the panel’s recommendations. Anything short of adoption would be at the expense of US private companies.

The New York State Society of CPAs struggled with a nearly split view on the question of whether or not there should be an entirely separate standards board for private companies, although a majority of its members and leadership polled agreed there should be differential standards for private companies, by developing more exceptions and modifications of GAAP (vs. developing a new set of private company GAAP), and in the end, following the recommendation of a slight majority of its leadership, recommended forming a separate or 'autonomous' standards board for private company standards, in part because:

there is not a proper weighing of costs and benefits in setting standards for private companies and there is a need for more relevant financial statements for private companies and their financial statement users. Given the public company reporting pressures placed upon the FASB, the Board cannot adequately respond to the competing needs of the private company sector.

Others, such as the Maryland Association of CPAs, supported their call for a new standard-setting board for private companies with a white paper prepared by MACPA's Accounting Standards Task Force. The white paper summarized input from discussions held with over 1,500 MACPA members at town hall meetings in which:

More than 90 percent of members polled ... believed GAAP modifications and
exceptions for private companies are the best solution to the problem... [and
that MACPA's] Task Force agreed that a separate board for private companies
is warranted

MACPA's white paper also notes that while "A majority of the Task Force wanted the separate board to have ultimate authority over standards decisions for private companies," there was a dissenting opinion in favor of forming a group similar to the EITF instead (a position advocated by FEI's CPC-S in its own letter earlier this year, as noted above).

The National Conference of CPA Practitioners (NCCPAP) also weighs in, stating:

Based on our collective experience and knowledge of the profession, we feel that a separate, autonomous regulatory standard setting body is the only acceptable answer to address these issues. The body should come under the jurisdiction of the FAF without the need for FASB approval.

Short-term actions taking place
As the FAF continues to review comment letters and conduct additional outreach to constituents as it deliberates this issue, as previously reported, FASB committed to taking a number of short-term steps, including some recommended by the Blue Ribbon Panel, to enhance its consideration of private company concerns.

One such step includes convening public roundtables to get input specifically from private companies, such as those announced for October, which we reported on here.

FASB Invites Private Cos. to Public Roundtable

2011-08-05T07:41:00.001-04:00

FASB issued a call yesterday for representatives from private companies to speak at public roundtables on "issues relating to existing private company accounting and reporting standards." Separately, FEI launched a program earlier this year called the "Private Company Roundtable."

Private Co. Input Sought on Need For Differention in Existing GAAP
Two such roundtables seeking private company input on existing GAAP will be convened, on October 11 in Chicago, and October 17 in San Francisco. The purpose of the October roundtables, following on similar roundtables held last year, was described by FASB Chairman Leslie Seidman in FASB's press release as follows:

to engage in a constructive dialogue about private company accounting and reporting issues on existing GAAP with a wide variety of stakeholders, including private companies, their CPA practitioners, and users of private company financial statements

Seidman added:

The [FASB] Board and staff found that the two roundtables we held last fall were valuable forums for hearing first hand from private company constituents about their concerns with existing GAAP. Those roundtables provided the impetus for our efforts to develop a differential reporting framework for private companies and our project to simplify goodwill impairment assessments.

VIEs, Swaps, Fair Value Among Topics
Topics to be addressed at FASB's October roundtables, according to the board, "are expected to include, but will not be limited to, accounting and disclosure requirements relating to:
- variable interest entities,
- interest rate swaps, and
- level 3 fair value measurements

Private company stakeholders (preparers, auditors, users of private company financial statements, and others) interested in being considered as a participant in FASB's October roundtables need to complete this online application form by September 13.

Join FEI's Private Company Roundtable
Speaking of 'roundtables' and private companies, Financial Executives International, an association of senior financial executives, launched an outreach program last year called the "Private Company Roundtable" (PCR).

The PCR, building on the success of FEI's Committee on Private Company Policy, and Committee on Private Company Standards, has met with great success in providing an avenue for private companies to participate in educational, networking, and advocacy opportunities, through conference calls, webcasts and an upcoming Town Hall meeting.

The PCR is open to all interested FEI members, whereas membership in CPC-P, CPC-S and FEI's other national technical committees is more limited.

Participants in FEI's Private Company Roundtable can:
- Join fellow members in quarterly conference calls to discuss important private company topics and hear from high-ranking government officials and technical experts.
- Receive initiations to participate in discussions regarding finance policy issues and critical-interest topics with Congressional members, Administration officials, and senior staffers.
- Provide feedback on business operations and the potential business impact of policies to assist FEI in the formulation of policy positions and strategic education and advocacy efforts.
- Offer support on critical issues through targeted correspondence to policy-makers regarding information that is timely and pertinent to private companies.

FEI Private Company Roundtable's Townhall Sept. 26;
FEI Washington Policy Conference Sept. 26-27
FEI's Private Company Roundtable is hosting its inaugural in-person Town Hall meeting on September 26, in advance of the 2nd annual FEI Washington Policy Conference (of interest to public companies and private companies) on Sept. 26-27. Read more about these programs here.

FEI Private Co. Town Hall Sept. 26; Washington Policy Conf. Sept. 26-27

2011-08-05T07:33:00.001-04:00

On Monday, September 26, 2011, FEI's Private Company Roundtable will host an in-person Town Hall meeting in conjunction with FEI's Washington Policy Conference in Washington, D.C.

FEI's Private Company Roundtable was established to provide a forum for members from private companies to network and discuss private company finance issues. During the past year, the Private Company Roundtable has met virtually, by conference call, and hosted numerous speakers from policy making positions on Capitol Hill.

The upcoming Town Hall meeting will be the first in-person meeting of the Private Company Roundtable. Set to take place from 2:00pm-5:00pm on September 26, the Town Hall meeting will include high-level policy speakers and an opportunity to meet, dialogue, and network with fellow FEI Private Company Roundtable members.

For those members of the Private Company Roundtable that are interested in arriving to Washington early on September 26th, FEI is planning meetings on Capitol Hill, as well as an optional lunch to round out the visit.

Oxley, Blanchard, Castle, Malek Keynote Washington Policy Conference
Following the PCR Town Hall meeting, a reception will kick-off FEI's Washington Policy Conference on the evening of September 26, continuing with a full day of programming on September 27th.

The 2nd annual Washington Policy Conference, of interest to public company and private company financial executives, brings together key business and government leaders to provide insight into policy questions facing senior financial executives and their companies.

Topics include the policy impacts of reigning in the deficit, prospects of fundamental tax reform and the impact of new legislation and regulations currently being debated.

Keynote speakers at FEI's Washington Policy Conference include Mike Oxley, former Chairman of the House Financial Services Committee; Fred Malek, former President of Marriott Hotels and Northwest Airlines; Mike Castle, former Member of Congress (R-DE) and former Governor of Delaware; and James Blanchard, former Member of Congress (D-MI) and former Governor of Michigan.

Learn more about FEI membership; see the detailed agenda and register for:
FEI's Private Company Roundtable Town Hall, Sept. 26, Washington DC
FEI's Washington Policy Conference, Sept. 26-27, Washington DC

Disclosure Framework, Improving, Integrating Certain FASB, SEC Disclosure Requirements, On Deck for FASB Ed Session This Week

2011-08-01T10:57:00.004-04:00

The Financial Accounting Standards Board (FASB) will pick up its discussion of its Disclosure Framework project at an Education Session (Ed session) this Wednesday, August 3. FASB began webcasting its Ed sessions earlier this year, and although no votes are taken, they provide a glimpse of what's on deck for formal discussion at a future FASB board meeting, generally the meeting held the following week. (This week's FASB board meeting, to be held Friday, is on the proposed Accounting Standards Update on Consolidation: Investment Companies.)

Objective: Improve, Integrate GAAP, MD&A Disclosures
As noted in FASB's project summary of the Disclosure Framework project:

The objectives of this project are to (1) establish an overarching framework intended to make financial statement disclosures more effective and coordinated and (2) seek ways to better integrate information provided in financial statements, Management Discussion & Analysis (MD&A), and other parts of a reporting entity’s financial reporting package. The project objective is not intended to be additive but, rather, to develop a framework for improved U.S. Generally Accepted Accounting Principles (GAAP) that promotes meaningful communication and logical presentation of disclosures and avoids unnecessary repetition.

Roots of Project in SEC's Pozen Committee; ITAC

The genesis of the Disclosure Framework project, as also noted in FASB's project summary, was to:

establis[h] an overarching framework intended to make financial statement disclosures more effective, coordinated, and less redundant. The project was
added in response to requests and recommendations received from several constituents, including the Investors Technical Advisory Committee (ITAC) and the Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting (Recommendations 1.2 and 1.3).

The above-named SEC advisory committee, abbreviated CIFiR, and chaired by Robert Pozen, was informally referred to as the Pozen Committee. Today happens to be the third anniversary of the Pozen Committee's report & recommendations; in honor of the Aug. 1 anniversary of that report (and, we understand, (according to wikipedia!) Mr. Pozen's upcoming birthday on Aug. 8), we are pleased to post as a tribute to that committee, the music video, shown above, Hey There Bob Pozen.

Hey There Bob Pozen!

2011-07-29T14:59:00.006-04:00

Just in time to celebrate the third anniversary of the Pozen Committee report –(see SEC’s Aug. 1, 2008 press release, see also the Final Report of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR),or the Pozen Committee in honor of its chairman, Bob Pozen) –- and, in advance of Mr. Pozen’s August 8 birthday (source: Wikipedia) the FEI Financial Reporting Blog is pleased to present a lost tape of a ‘music video’ called Hey There Bob Pozen . SONG LYRICS.

NOTE: You may recognize the tune to Hey There Bob Pozen, as a song parody of Hey There Delilah by the Plain White T’s. You may also recognize some of the scenes of the Pozen committee from the SEC’s public webcasts. DISCLAIMER 1: please note the SEC had nothing to do with the production of this music video and has not been asked to opine on it, nor has any other standard-setting body or individual. DISCLAIMER 2: Please refer to the FEI blog’s disclaimer, posted on the right side of our blog.

For those of you who like to singalong, we'll be posting a link to the full lyrics in an update at the bottom of this post, as well as on our youtube page, check back later today.

BACKGROUND ON THE POZEN COMMITTEE
As noted in the SEC’s June 27, 2007 press release announcing the formation of the Pozen committee, established by the SEC under the Federal Advisory Committee Act (FACA), the committee was formed to:

...examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors…[and to]... study the causes of complexity and recommend to the Commission how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting.

The June 27, 2007 press release noted the selection of Robert C. (Bob) Pozen to chair the advisory committee. The committee included a broad range of the SEC’s constituents (investors, preparers, auditors and others) as noted in the SEC’s July 31, 2007 press release listing committee members (see also bios). The Chairmen of the FASB, PCAOB, IFRS Foundation, and a representative from the U.S. Treasury Department participated in this high-level committee as observers.

The detailed deliberations of the Pozen committee during its one-year existence from July 2007 to July 2008, culminated in the issuance of a final report and recommendations on August 1, 2008. Materials relating to the Pozen committee (interim reports and reports of its subcommittees, press releases and archived webcasts) can be found on the SEC’s Spotlight page on the Pozen Committee (CIFiR).

RECOMMENDATIONS OF POZEN COMMITTEE
In ‘plain English,’ the recommendations were summarized in the SEC’s August 1, 2008 press release, and under “Key Recommendations” in the Executive Summary of the committee’s final report as follows:
A. Increasing the usefulness of information in SEC reports
B. Enhancing the accounting standards-setting process
C. Improving the substantive design of new accounting standards
D. Delineating authoritative interpretive guidance
E. Clarifying guidance on financial restatements and accounting judgments

INFLUENCE OF POZEN COMMITTEE
The SEC, PCAOB and FASB (as well as related private sector efforts) have implemented, directly and indirectly, numerous recommendations of the Pozen Committee. To name but a few, these include:
- Increasing investor participation in FASB and the FAF
- Launching of Post-Implementation Review by FASB
- SEC’s “Financial Reporting Series” to begin this year, in which SEC will host a series of public roundtables on important topics in financial reporting, with cross-section of constituents participating
- SEC interpretive guidance to increased ability of companies to provide information required by the SEC via various forms of electronic media
- Phasing in eXtensible Business Reporting Language (XBRL) requirements in SEC reports
- Professional judgment: although the SEC and PCAOB have not issued ‘rules’ or ‘standards’ per se on what constitutes professional judgment by preparers or auditors, respectively, various members of the SEC staff have referred to the Pozen committee’s recommendations as useful guidance. For example, during a press session at FEI’s Current Financial Reporting Issues Conference in November, 2009 SEC Chief Accountant Jim Kroeker said: :Regardless whether there is any more formal action on a judgment framework [that the points outlined by CIFiR are] the kinds of things we look for in the preclearance process [in the Office of the Chief Accountant], and in the Corp Fin comment process." (See info about our upcoming 30th anniversary Current Financial Reporting Issues Conference, Nov. 14-15, 2011 in NYC.)

WHAT WILL THE FUTURE HOLD?
In addition to the diligent efforts of the standard-setters, rule-makers, their advisory committees, and the private sector to avoid unnecessary complexity if possible, particularly through enhanced outreach, post-implementation review, and other methods, some say there is more ground that can be covered in addressing complexity head-on.

For instance, audit firm PwC released a “Point of View” report last month, entitled “Reducing Complexity,”

The topic of improving financial reporting, reducing unnecessary complexity in financial reporting, and making financial reporting more understandable and useful will always be an important topic to financial professionals, whether preparers, auditors, investors, academics, students, regulators, or others, and as we have seen during the Sarbanes-Oxley and Dodd-Frank legislation, to our elected officials as well.

Hey There Bob Pozen, Here's To You, Your Committee and Observers Too
We’d like to take the opportunity on this 3rd anniversary of the Pozen committee report to thank the members of the committee (and their observers and staff) for their dedication to the goal of improving financial reporting and reducing complexity, and to note the Pozen committee report can continue to serve as a useful reference in this endeavor.

Here's to our production team!
I'd like to thank our production team, Steven Zelin, "The Singing CPA," Glenora (Glennie) Blackshire (videographer), Rob Taube, (audio recording engineer). Thanks also to Lili Devita at FEI and the rest of the marketing team (Tish Ysambart and Doug Hoekstra), and my personal thanks to Merrill Reich.

SEC's New Tips System Gets Good Marks From Markopolos

2011-07-28T13:52:00.001-04:00

In an exclusive report published by Reuters yesterday, Madoff whistleblower Harry Markopolos indicates he is pleased with the improvements the SEC has made in following up on tips of alleged securities fraud. The SEC was criticized for its handling of the Madoff ponzi scheme, in reports written up by the SEC's own Inspector General, David Kotz, and at related Congressional hearings. Since that time, the SEC has undertaken numerous post-Madoff reforms.

"Everything they should have done in the Madoff case they are now doing," Markopolos says now of the SEC, as cited in yesterday's article by Reuters Sarah N. Lynch and Matthew Goldstein, SEC Builds New Tips Machine To Catch The Next Madoff. Markopolos adds: "They have done a fantastic job of reforming themselves."

SEC's Tips, Complaints & Referrals Portal
Lynch and Goldstein provide a link to the SEC's new Tips, Complaints and Referrals portal (the external, public side of the portal).

See also the SEC's Tips & Compliants information page, and SEC's Information for You Before You Submit a Tip or Complaint to the Division of Enforcement page.

FBI -SEC Partnership Benefits Both Agencies; Model May Be Replicated
The Reuters writers note the working relationship between the FBI and the SEC, in which an FBI agent (a former PwC auditor) is embedded at the SEC. As noted in the article, this partnership between the FBI and another regulatory agency is believed to benefit investigations at both agencies, and the model may be replicated between the FBI and other agencies as well.

Got Music? More Harmony In Accounting On Its Way...

2011-07-28T12:56:00.000-04:00

There's harmony in accounting*, and then there's harmony in accounting**... for all of you aficionados of music, financial reporting, regulatory reporting, or combinations thereof, watch for the FEI Blog's 2011 music video, set to launch in the FEI Blog tomorrow, July 29!

Notes:

* The first "harmony in accounting" link above goes to a research paper entitled, "Will Harmonizing Accounting Standards Really Harmonize Accounting? - Evidence from Non-U.S. Firms Adopting US GAAP," published in 2007 by two associate professors of accounting at the Harvard Business School: Mark T. Bradshaw, and Gregory S. Miller. The Abstract from their paper is copied below; the last sentence is highlighted as it appears particularly significant:

International harmonization of accounting standards appears to be inevitable. However, little evidence exists regarding whether harmonizing accounting standards will result in actual harmonization of accounting practices. Using a sample of non-US firms that adopt US GAAP to provide evidence on this issue, we find that most firms that adopt US GAAP adjust their accounting methods to those required by US GAAP. Properties of the firms’ accounting numbers also change significantly after adopting US GAAP, but do not fully converge towards that of US firms. In the cross-section,
regulatory oversight is associated with more successful implementation of US
GAAP; firm-specific capital market incentives are not. These results suggest that harmonizing accounting standards may result in more comparable accounting methods and numbers, but that effective regulatory oversight will be important in reaching this outcome.

** The second "harmony in accounting" link above goes to a youtube video entitled "Accounting Songs" posted by "Hescott12" on October 29, 2007. My guess is the singing Professor and his class are based in Australia, as I thought I heard a reference to "ASIC," which would be the Australian Securities and Investments Commission, but I could be wrong. For the curious, I have reached out to Hescott12 for further info and if I receive any I'll update this post.

Butler, Lewent, Rickard To Be Inducted Into FEI Hall of Fame

2011-07-28T12:49:00.001-04:00

Former FASAC Chairman, and former Celgene SVP & CFO, Robert C. Butler, former Merck EVP & CFO Judy C. Lewent, and former CVS/Caremark EVP, CFO and CAO David B. Rickard have been selected for induction into the FEI Hall of Fame. The announcement was made by FEI earlier today, and additional background on the inductees can be found in FEI's press release.

Butler, Lewent, and Rickard will be formally inducted at the FEI Hall of Fame Gala, a black-tie event taking place on November 14 at Gotham Hall in New York City. Master of ceremonies will be CNBC’s Tyler Mathisen.

Sponsors & Beneficiaries
FEI congratulations this year's, and prior year's inductees, and thanks the sponsors of this event, including premier sponsor Microsoft, bronze sponsor Merrill Datasite, and media sponsor CNBC.

Additional sponsorship opportunities are available; contact Lorna Raagas lraagas@financialexecutives.org.

Proceeds from the FEI Hall of Fame Gala benefit FEI's research affiliate, the Financial Executives Research Foundation (FERF).

CFRI - Nov. 14-15, NYC
If you are in NYC to attend the Hall of Fame Gala, and for everyone interested in the latest developments in financial reporting, we encourage you to also attend FEI's 30th annual Current Financial Reporting Issues (CFRI) conference, November 14-15 in New York City. (NOTE: Separate paid registration is required for the Hall of Fame Gala, and CFRI.)

FASB Approves New Standard On Multiemployer Pension Plans

2011-07-27T13:46:00.000-04:00

At its board meeting earlier today, the Financial Accounting Standards Board approved issuing a new standard on Employer Disclosures For Multiemployer Pension Plans.

According to FASB's press release, the new standard is expected to be published in September, 2011, and will have the following effective date:

For public entities, the enhanced disclosures will be required in fiscal years ending after Dec.15, 2011.

For nonpublic entities, the enhanced disclosures will be required in fiscal years ending after Dec. 15, 2012.”

Describing the new standard, FASB Chairman Leslie Seidman stated,

“Historically, very limited information about these plans has been disclosed, even though they may represent significant potential obligations for many large, unionized industries such as trucking, supermarket chains, and construction firms. The enhanced disclosures will ensure that shareholders in companies that participate in these plans, workers who depend on them for their retirement benefits, as well as lenders and others, will have more information regarding the employers’ pension commitments and the financial health of the plans.”

Change made to proposal in response to constituent comments
As noted in FASB's press release:

Prior to today’s action by the FASB, employers were required to disclose only their total contributions to all multiemployer plans in which they participate. Today’s decisions conclude comprehensive deliberations about the disclosures an employer should provide. The FASB issued initial proposals for revising disclosures for public comment in September 2010. As part of its redeliberations, the FASB decided to delete a proposal to require employers to disclose their withdrawal liability to all plans in which they participate, or provide a “point-in-time” estimate of its obligations with respect to the underfunded status of individual plans.

Further highlights of the new requirements can be found in FASB's press release. See also FASB's project page.

IASB 'Request For Views' Seeks Comment On Strategy, Work Program

2011-07-27T13:44:00.000-04:00

Yesterday, the International Accounting Standards Board published a Request for Views: Agenda Consultation 2011, to seek broad public input on the strategic direction and overall balance of its future work program.

As noted in the IASB's press release:

The consultation document published today asks deliberately open questions to gather views on the IASB’s future work programme from all those involved in or affected by financial reporting. In particular, the IASB is seeking feedback on how it should balance the development of financial reporting with the maintenance of IFRSs and—with consideration of our time and resource constraints—those areas of financial reporting that should be given the highest priority for further improvement.

The comment deadline on the Request for Views: Agenda Consultation 2011 ends November 30.

An informational webcast on this topic will be conducted by the IASB on August 3.

Read more in the IASB’s press release.

FASB, IASB To Re-Expose Leasing ED

2011-07-25T14:44:00.001-04:00

At their joint board meeting last week, the FASB and IASB announced they have decided to formally re-expose their proposal for a common leasing standard.

In my view (see disclaimer posted on right side of this blog) this decision will be viewed as very responsive to concerns voiced by preparers and others about the need for the standard-setters to release a revised exposure draft - reflecting all the changes made during redeliberation of the original exposure draft in response to comment letters received. See, e.g. our prior posts, Preparers concerned about change in direction of FASB, IASB leasing proposal, and FEI, Applauding FASB-IASB Move For More Time on Convergence Projects, Calls For Reexposure of Remaining MOU Projects; SEC Announces IFRS Roundtable .

The objective of releasing a revised exposure draft of a proposed standard, in the eyes of FASB and the IASB's constituents, is two-fold: (1) to inform preparers, auditors, users of financial statements and others of the changes made to the original exposure draft, by seeing the most up-to-date version of the exposure draft, and (2) given the significant changes made during redeliberation of the original exposure draft, to allow public comment on the latest version of the exposure draft which incorporates those significant changes.

Said another way, in the words of FASB and the IASB, the decision to re-expose the leasing standard is because:

Even through the boards have not completed all of their deliberations, the decisions taken to date were sufficiently different from those published in the exposure draft to warrant re-exposure of the revised proposals.

As to timing, the revised ED (exposure draft) is expected to be finalized during the 3rd quarter, 2011, "with a view to publishing a revised exposure draft shortly afterwards," according to the two boards.

Separately, as previously reported, FASB and the IASB intend to release a revised ED on their proposed standard on revenue recognition, with an expected release date of this quarter, for a 120-day comment period. (The length of the comment period on the upcoming leasing ED has not yet been determined.)

Obama, House and Senate Leaders Work To Avert U.S. Debt Crisis; David Walker Unveils Proposals To ‘Restore Fiscal Sanity’

2011-07-20T14:48:00.001-04:00

Christina Crooks, Manager, Government Affairs and Alexandra Sipes, Legislative Aide, in FEI’s Washington, DC office, reporting on the looming U.S. debt crisis, note that following the re-entry of Senator Tom Coburn (R-OK) into the “Gang of Six” on July 19, the ‘G6’ announced their deficit-reduction proposal to a group of 50 senators from both parties.

The G6 proposal would cut the deficit by $3.7 trillion over the next 10 years, by producing an immediate $500 billion in deficit savings and requiring congressional committees to discover viable cuts in entitlements, discretionary spending, and a massive reform of the tax code within six months. The proposal has gained a great deal of support in the Senate from both parties, and President Obama also endorsed the group’s efforts. Experts have indicated this plan may provide the necessary support to boost the debt ceiling and avoid default. Read more about this development Gang of Six Breakthrough: Behind the Scenes, by Manu Raju in Politico.com.

According to Sam Youngman of TheHill.com, citing White House Press Secretary Jay Carney, Obama, House and Senate Leaders are set to meet at 2:50 pm today at the White House to try to firm up a bipartisan solution on the debt talks.

David Walker, Comeback America Initiative, Unveils “Restoring Fiscal Sanity" Report

In related news, earlier today, David Walker, President and CEO of the Comeback America Initiative (CAI), presented the “Restoring Fiscal Sanity Report” during a briefing in the U.S. Senate. Walker is the former Comptroller General of the U.S.

The CAI report issued today includes two proposals to address our nation’s fiscal challenges.

One proposal, the Preemptive Framework, focuses on cutting short-term discretionary spending back while at the same time including $500 billion in investments to help stimulate the economy.
The other path, the Reactive Framework, illustrates what must take place in order to avoid a “crisis management” atmosphere. Walker’s report is said to be more comprehensive and includes much more specific details than other proposals currently circulating in Washington.

CAI is a non-partisan organization dedicated to fostering a national discussion around fiscal challenges and solutions

Read more in CAI’s press release; download the CAI report.

FEI’s President and CEO, Marie Hollein is a member of the CAI Advisory Council.

Additional highlights from Walker’s presentation on Capitol Hill earlier today, announcing the release of the report, will be posted in a summary on FEI’s website.

IRS Issues FAQs on Uncertain Tax Positions

2011-07-20T13:12:00.006-04:00

Yesterday, the Internal Revenue Service released additional guidance relating to the IRS' new reporting requirements for Uncertain Tax Positions (UTP). The guidance was issued in the form of Frequently Asked Questions on Schedule UTP.

Props to Alison Bennett, who flagged this development in her article in BNA's Daily Report for Executives earlier today, IRS Issues Uncertain Tax Position Guidance, Clarifies Definition of Recording a Reserve. In her article, Bennett states that the IRS guidance issued yesterday:

address[es] key questions surrounding the recording of a tax reserve and the treatment of net operating loss carryforwards, among other significant issues... and] comes as the deadline approaches for the first wave of taxpayers to file the Schedule UTP... The guidance adds eight new questions to the FAQ first unveiled in March ... and updates one existing question on whether interest and penalties should be included when taxpayers are “ranking” their positions on the new schedule.

The IRS' new requirements for reporting of Uncertain Tax Positions were among those included in FEI CEO's 2011 Top Challenges for Financial Executives published earlier this year, and took FIN 48 (in pre-Codification nomenclature, FASB's rules for reporting of Uncertain Tax Positions) to a new level by creating new IRS reporting requirements for UTP.

Additional links to information relating to Schedule UTP, including IRS Ann. 2010-75, Reporting of Uncertain Tax Positions, and IRS Ann. 2010-76, Policy of Restraint and Uncertain Tax Positions, can be found on the IRS website here.

Obama Nominates Cordray To Head CFPB; Vows to Fight Efforts To Repeal Fin'l Reg Reform; FSOC Finalizes Criteria for Systemically Important FMUs

2011-07-18T14:40:00.000-04:00

At a press conference earlier today, President Barack Obama announced his nomination of Richard Cordray, a former Ohio Attorney General, and currently the Enforcement chief for the Consumer Financial Protection Bureau, to serve as the first Director of the CFPB.

The CFPB (or the ‘Bureau’ as referenced during the President’s press conference), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, has been advised during its development stage by Elizabeth Warren, chair of the Congressional Oversight Panel formed a few years ago to oversee the results of the government’s TARP spending following the credit crisis.

Warren writes in the WhiteHouseBlog today of Cordray’s appointment, noting that, “On Thursday [July 21], the CFPB makes its transition from a start-up to a real, live agency with the authority to write rules and to supervise the activities of America's largest banks.”

Obama Will Fight Efforts To Repeal Financial Reg Reform
In announcing his nomination of Cordray, Obama defended the regulatory changes laid out in the Dodd-Frank Act, saying, “The financial crisis not the result of normal economic cycles or bad luck, [but from] abuses… I will fight any efforts to repeal or undermine the important changes we passed.” Read the full text of the President’s remarks.

Reflecting on the political dissent, Warren added in her post in the WhiteHouseBlog, “In May, forty-four Republican Senators wrote a letter saying that they will block anyone from serving as CFPB Director. Many of them don't like the agency or the ideas that led to its creation. They lost that fight last summer in a straight-up vote, but they say they will use a filibuster over a Director nomination to undercut the agency. Without a Director, however, the agency's authority over payday lenders, debt collectors and other non-bank financial companies can be challenged.
The Republicans say that they will permit a Director only if the agency is amended to make it less independent and less likely to act.” She added, “I remain hopeful that those who want to cripple this consumer bureau will think again and remember that the financial crisis -- and the recession and job losses that it sparked -- began one lousy mortgage at a time.

Learn more about Cordray in Meet Richard Cordray, the Candidate to Lead the CFPB, by Jacob Gaffney of Housing Wire.

CFPB Issues Progress Report
In related news, the CFPB issued a 32-page Progress Report today. As noted in the CFPB’s press release, the report “chronicl[es] [the CFPB’s] work to build the agency from the ground up since the passage last year of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” The CFPB is also expected to issue two more reports this week.

FSOC Releases Final Rule: Criteria For Designating Systemically Important FMUs
Separately, the Financial Stability Oversight Council (FSOC), also formed as part of the Dodd-Frank Act, released a final rule today setting forth the criteria the agency will use to designate systemically important nonbank financial entities, more formally referenced in the rulemaking as Financial Market Utilities or FMUs. See FSOC final rule.

On this topic, Cheyenne Hopkins and Ian Katz wrote in Bloomberg earlier today, in Dodd-Frank Risk Panel Delays Create ‘Guessing Game,’ that an apparent delay in action by the FSOC in identifying the systemically important FMUs is causing regulatory uncertainty among nonbank financial institutions, including whether they will be required to raise capital.

Schapiro, Gensler, Geithner Among “Most Influential U.S. Financial Watchdogs” – Reuters
SEC Chairman Mary L. Schapiro, CFTC Chairman Gary Gensler, and Secretary of the Treasury Tim Geithner are among the “Most Influential U.S. Financial Watchdogs,” in a short-list published by Reuters earlier today. They are joined by Fed Governor Dan Tarullo, CFPB Nominee Rich Cordray, FDIC chairman-nominee Martin Gruenberg, Comptroller of the Currency-nominee Thomas Curry, House Financial Services Committee Ranking Member Barney Frank, and Senate Banking Committee Ranking Member Richard Shelby. (See Shelby’s May 5 press release regarding the letter from 44 Senators to the President on the CFPB, cited directly and indirectly by Warren and Obama, above).

Summer Blockbusters!

2011-07-15T16:00:00.000-04:00

Amidst the summer blockbuster season, with fare like the final Harry Potter movie which opened today, setting a record in midnight opening ticket sales, and other top box office hits, the FEI Financial Reporting Blog has announced the upcoming release of its second 'music video' about accounting.

Slated for release the last week in July, the FEI blog's 2011 music video features a star turn by Steven Zelin, "The Singing CPA." The audio was recorded under the outstanding direction of Rob Taube of Rob Taube Words and Music, and the video is being shot by the talented videographer, Glenora ("Glennie") Blackshire.
Similar to the FEI blog's 2010 music video, this year's production will feature a parody of a well-known song, with a slight 'twist' about financial accounting and regulatory reporting. New this year: the music video will feature live footage of the performance, and other surprises.

Watch last year's video, and watch for the release later this month of the FEI blog's 2011 music video on the FEI Blog's youtube channel, and watch for updates in the FEI Blog.

Included in this post are some photos taken at the audio recording session.

Photos credit: Merrill Reich

PCAOB Proposes Two Standards For (1) Broker-Dealers and (2) All Issuers

2011-07-15T13:35:00.001-04:00

Earlier this week, the Public Company Accounting Oversight Board proposed two auditing standards, one relating to broker-dealer audits, and another which relates to all auditing supplemental information accompanying financial statements of all issuers (not just broker-dealers). The two proposals are:

BROKER DEALER AUDITS: Proposed Standards for Attestation Engagements Related to Broker and Dealer Compliance or Exemption Reports Required by the U.S. Securities and Exchange Commission and Related Amendments to PCAOB Standards , (see also statements of PCAOB Board Members on this proposal), and

AUDITS OF ALL ISSUERS: Proposed Auditing Standard on Auditing Supplemental Information Accompanying Audited Financial Statements and Related Amendments to PCAOB Standards (see also statements of PCAOB Board Members on this proposal)

Scope and Objective of Proposal on Auditing Supplemental Information
As described in the PCAOB’s press release, the proposal on auditing supplemental information would:

supersede the [PCAOB] Board's auditing standard, AU sec. 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, and related amendments, and

establish the auditor's responsibilities when the financial statement auditor is engaged to audit and report on supplemental information that accompanies the audited financial statements.

Examples of such supplemental information include the supporting schedules that brokers and dealers are required to file with the SEC.

The proposed standard also would apply to certain supplemental information of issuers that is included in SEC filings.

Additionally, Section III of the proposing release states (footnotes omitted; reformatted for emphasis)

The proposed standard would apply when the auditor of the company's financial statements is engaged to audit and report on supplemental information that accompanies the audited financial statements. Such supplemental information
includes:

the supporting schedules prepared pursuant to SEC Rule 17a-5,

supplemental information required to be prepared pursuant to the rules and
regulations of a regulatory body other than the SEC and included in an SEC
filing, and information included in SEC filings that is ancillary to the audited financial statements, derived from the company's accounting books and records, and not otherwise required to be prepared pursuant to the rules and
regulation of the SEC or another relevant regulatory body.
The auditor's standard report includes an opinion on the financial statements.

Historically, when auditors reported on supplemental information, they often
expressed their opinions on the supplemental information "in relation to" the
financial statements as a whole. Audit procedures regarding that
supplemental information generally have been performed in conjunction with the audit of the financial statements.

Indeed, the auditor's report on supplemental information currently required
under AU sec. 551 is rooted in the concept that the supplemental information is
presented in relation to the financial statements as a whole.

The proposed standard retains the existing "in relation to" language in the
auditor's report.

The proposed standard establishes procedural and reporting responsibilities
for the auditor regarding supplemental information accompanying financial
statements. The proposed standard enhances existing PCAOB standards by:

Requiring the auditor to perform certain audit procedures to test and
evaluate the supplemental information, and

Establishing requirements that promote enhanced coordination between the
work performed on the supplemental information with work performed on the
financial statement audit and other engagements, such as a compliance
attestation engagement for brokers and dealers.

The proposed standard would not apply to schedules prepared pursuant to SEC
Regulation S-X, 17 CFR § 210 because those schedules are deemed to be part of
the financial statements.

Appendix 3 in the proposing release “describes how the proposed standard and
related amendments would change the requirements in existing PCAOB auditing standards.”

Effective Date
The proposing release states: “The Board expects that the proposed standard would beeffective for fiscal years ending on or after September 15, 2012, subject to approval by the SEC.”

Comment Deadline
The comment deadline on both of the above proposals is September 12.

XBRL: Smaller Co's Phase In, Liability Exemptions Phase Out

2011-07-14T14:54:00.000-04:00

The SEC's three-year phase-in -- from the largest to the smallest companies --to furnish financial statements, footnotes, and certain other information to the SEC using interactive data tags called eXtensible Business Reporting Language or XBRL, recently reached the third and final year of the phase-in, with the smallest companies (those with less than $700 million market cap) joining the ranks of their larger co brethren, effective with fiscal periods ending on or after June 15, 2011. See the SEC's Summary of XBRL Information for Phase 3 Filers.

Lessons Learned
XBRL filers of all sizes will find useful the SEC's recent publication of 'lessons learned' during the implementation of XBRL by large accelerated filers, published in the form of SEC Staff Observations From Review of Interactive Data Financial Statements. The report was prepared by staff of the SEC's Division of Risk, Strategy, and Financial Innovation.

See the related article in the Hitachi Data Interactive Blog: SEC Staff Assess Early 2011 XBRL Submissions, Offer Suggestions for Improvements

Liability Exemptions Being Phased Out
Meanwhile, the liability exemptions offered during the first two years of XBRL filing are being phased out according to preset sunset provisions set forth in the initial XBRL rulemaking. Read more in this article by Skadden Arps' Brian Breheny, Skadden on the Completion of XBRL's Phase-In Period, via PLI's Securities Law Practice Center. Prior to joining Skadden, Breheny was Deputy Director, Legal and Regulatory Policy, in the SEC's Division of Corp Fin.

Who Wants To Win $20,000?
XBRL US, the nonprofit consortium for XBRL business reporting standards in the U.S. market, recently teamed together with the CFA Institute and Wharton Research Data Services to offer "A $20,000 grand prize ... to the company, team or individual developer who submits the most inventive and useful application leveraging XBRL-formatted data from the U.S. Securities and Exchange Commission (SEC) EDGAR database." (See XBRL-US press release.)

As further stated in the press release:

Individuals or organizations can learn more and enter the contest on the XBRL Challenge page on Facebook at http://xbrl.us/challengefb or by visiting http://xbrl.us/challenge . Updates will be shared on Facebook and on Twitter at http://twitter.com/xbrlus using the hashtag #XBRLCHALLENGE.

Developers and other prospective contestants may participate in a special briefing on August 3, 2011. Go to http://xbrl.us/challenge and click on the link on the right-hand side. All final submissions must be received by January 31, 2012.

Former FASB Chairman Featured In July 28 Webcast
In related news, former FASB Chairman Bob Herz will be the featured speaker in a July 28 webcast co-sponsored by Webfilings and FEI, entitled: SEC Reporting Today and Tomorrow: A Q&A Discussion With Bob Herz, Former FASB Chairman. The discussion will be moderated by Joe Howell, co-founder and managing director of WebFilings and organizer/community moderator of the SEC Professionals Group.

Herz will be answering questions submitted by registrants about key financial reporting developments covering a variety of topics - from the current status of FASB projects and XBRL compliance to the future with IFRS. Participants in the free live webcast can earn 1 CPE.

Investors, Small Cos, and Regulators Sound Off At SEC IFRS Roundtable

2011-07-11T16:26:00.000-04:00

Following on our post last week with some highlights from the investors panel at the SEC's July 7 IFRS Roundtable (Carve-Ins, Not Carve-Outs, Can Help IFRS Adoption, Investors Panel Tells SEC), FEI posted a more detailed summary today containing highlights from all three panels at the roundtable.

The FEI summary, entitled "Investors, Small Companies, and Regulators Sound Off at SEC IFRS Roundtable" was authored by Quentin Walsh, a member of FEI’s New Jersey Chapter, who observed the roundtable proceedings first-hand in the public observers’ area.

Additional summaries of the SEC's July 7 IFRS Roundtable can be found in various blogs and news websites. As is apparent in some of the headlines below, (some of which are on the subject of the SEC's consideration of IFRS, but not necessarily last week's roundtable) the posts contain the various author's own views, in addition to highlights from the roundtable.

SEC Roundtable Ponders IFRS Condorsement (Michael Cohn, AccountingTODAY)

SEC Urged To Go Slow On Global Accounting Move (Dena Aubin, Reuters)

Investors Hesitant on Foreign Accounting Rules (Moran Zhang, Medill News Service via Marketwatch)

SEC IFRS Roundtable Debrief: March of the Zombies - (Tom Selling, The Accounting Onion)

Is IFRS For Criminals? (Prof. Dave Albrecht, citing an article by that name by Ed Ketz and Anthony Catanach)

SEC Updates C&DI's On Exec Comp, More

2011-07-11T16:07:00.000-04:00

On Friday, July 8 the SEC's Division of Corporation Finance posted a number of new Compliance and Disclosure Interpretations (C&DI's) relating to Executive Compensation and other matters.

Props to Broc Romanek who posted a quick summary in TheCorporateCounsel.net blog, noting that in addition to the new C&DIs, one C&DI was withdrawn, and Corp Fin also released a statement relating to WKSi's (well known seasoned issuers).

Broc's summary links in turn to a post by Vanessa Schoenthaler in her 100 F Street blog (the 100 F St. reference being a nod to the SEC's Washington, DC HQ address).

FAF Conclusions On Private Co Standards Expected This Fall; Outreach Continues; Over 1,100 Comment Letters Filed; FASB Staff Findings Issued

2011-07-11T16:06:00.004-04:00

A mid-year update posted earlier toay by the Financial Accounting Foundation - overseer of FASB and GASB - concerning the FAF's consideration of a recommendation made by a Blue Ribbon Panel that a separate board be formed under the FAF to focus on private company standard-setting - notes that further outreach to preparers, users of private company financial statements and others will continue to take place, under the continued leadership of a Working Group of the FAF Trustees focusing on this issue. It also addresses when it expects to reach conclusions, as noted below.

Findings and Conclusions Expected This Fall
Regarding timing of the announcement of the FAF's conclusions, following the completion of the outreach process, the FAF's mid-year update states:

It is anticipated that the Trustees will share their findings and conclusions in the fall.

Over 1,100 comment letters
In addition to in-person meetings being conducted by the FAF Trustees, and outreach being conducted by FASB board and staff members, regarding potential improvements to standard-setting for private companies, the FAF has thus far received over 1,100 comment letters on this subject. A very quick scan of the comment letter file reveals at least three types of positions.

A substantial number of the comment letters, following a form-letter type format (e.g, see Comment Letter 5, and Comment Letter 1105), call for adoption of the Blue Ribbon Panel's recommendation to form a new standards-setting board for private companies. For example, those letters state in part:

I believe a systemic problem exists. The current standard-setting process does not adequately take into account the needs of the private company sector. Further, the panel was correct in that there is not a proper weighing of costs and benefits when it comes to setting standards for private companies ... [A] new, separate body with standard-setting authority must be established directly under FAF and not subject to FASB approval. Given the public company reporting pressures placed upon FASB, the board cannot adequately respond to the competing needs of the private company sector."

Others comment letters, however, while sympathetic to the need to provide more relief to private companies, particularly give that the users of private company financial statements do not have the same needs as users of public company financial statements (such as analysts), are not supportive of the wholesale creation of a new standards board for private companies, preferring instead other approaches, including formation of a new advisory group to FASB regarding private company accounting.

For example, the comment letter filed by Richard Avril, Shareholder, Burr, Pilger Mayer states:

Although I believe it is appropriate to focus on meaningful as well as practical standards for private companies, I also believe that the underlying principles for both public and private entities should be essentially the same for the basic recognition and measurement principles. However, they could include simplifying shortcut or default methods for private companies, in addition to differential disclosure requirements.

There are currently differential disclosure requirements for private and public entities but other than delay in implementation and certain exclusions, often the requirements are quite labor intensive for many smaller private entities. In this regard, I believe there may be a need for the Financial Accounting Standards Board (FASB) to modify its approach and have a process that focuses as much on the needs of private industry as on the analyst and creditor community requests for more layers of information on public enterprises.

Accordingly, I would be supportive of creating a strong advisory body with significant influence to lobby the interests of the private sector with an ongoing FASB rather than the creation of a separate autonomous principal setting body as proposed by the Blue Ribbon Committee.

I think the possibility of having big and little IFRS, U.S. GAAP and many other country specific GAAP may add complexity to comparability and variations in reporting rather than having similar economic transactions reflected consistently in financial reporting by various types of entities. Additionally, these differences could result in additional complexity in the valuation by the respective enterprises for accounting or other purposes.

In the same vein, the comment letter filed by FEI's Committee on Private Company Standards called for the formation of a Private Company Task Force, with standard-setting powers similar to that of FASB's Emerging Issues Task Force, whose consensus positions are released for public comment and subject to FASB approval; certain pervasive or controversial issues are sometimes moved from the EITF's agenda directly to the FASB's agenda.

FASB Staff Preliminary Findings Issued; Possible Academic Research
The mid-year update on private company standard-setting posted by the FAF notes that in addition to conducting further outreach with preparers, users of private company financial statements and others, "the [FAF] Trustees also may consider whether additional academic research is necessary."

Personally (I remind you of the disclaimer posted on the right side of this blog), I wonder if any such academic research would address matters identified by FASB Chairman Leslie Seidman in her "Outlook: 2011" webcast earlier this year, (see our Jan. 25 blog post), in which she said that as part of FASB's initiatives to improve standard-setting for private companies, "[W]e are developing a white paper on the unique needs of users of private company financial statements."

UPDATE 4:35 PM: FASB separately published preliminary staff findings in a "FASB in Focus: Private Companies: The Path to a Differential Standard-Setting Framework"

FEI's research affiliate, the Financial Executives Research Foundation (FERF), published a report on this subject in 2006, entitled What Do Users of Private Company Financial Statements Want? The report is available in FERF's online bookstore and as a resource on the Private Company Financial Reporting Committee (PCFRC's) website; the PCFRC is a joint committee of FASB and the AICPA.

Stay up-to-date on developments relating to the FAF and FASB's consideration of standard-setting for private companies, by visiting FASB's Non-Public Entity Web Portal.

IASB Funding, Due Process, Agenda and More in IFRSF Annual Report

2011-07-08T14:34:00.000-04:00

The IASB's (technically, its parent organization, the IFRS Foundation's) funding and financial position, 2010 report of its Due Process Oversight Committee, a list of countries that permit or require IFRS (or, like the U.S., are in the process of reaching that decision), and an update on projects on the IASB's technical agenda are among the highlights that can be found in the IFRS Foundation's Annual Report, published today.

Another key highlight is the Report of the Chairman of the IASB, written just prior to year-end 6/30, by then-Chairman Sir David Tweedie. The observations he makes as to the IASB's development over his 10-year tenure as chair make for very good reading, and should perhaps be required reading, particularly by students of accounting, as well as practitioners.

See also our related posts on yesterday's SEC IFRS Roundable, and on our April 13 post on highlights of the FAF (parent of the FASB & GASB's) Annual Report.

Carve-Ins, Not Carve-Outs, Can Help IFRS Adoption, Investor Panel Tells SEC

2011-07-07T16:52:00.003-04:00

A panel of investors, speaking at an SEC roundtable on International Financial Reporting Standards earlier today, told SEC Chairman Mary L. Schapiro, Commissioner Elisse Walter, and SEC staff present that 'carve-ins' (or requiring additional or alternative information to that required by IFRS) - vs. 'carve-outs' (in which a country opts out of all or a portion of a particular IFRS standard) can be helpful if the SEC were to move to adopt IFRS.

Carve-Ins, Not Carve-Outs
Mark LaMonte, managing director, Moody's Investor Service, told the group, "Carve-outs are not particularly helpful; carve-ins can be. FASB needs to understand where U.S. views [differ] … maybe you have carve-ins [such as] incremental disclosures, or alternative presentations, we still make sure we adopt the standards in a way that allows those global comparisons to take place."

David Larsen, Managing Director, Duff & Phelps noted he supported what has informally been described as a 'condorsement' approach to adopting IFRS in the U.S., as outlined in a May 27 SEC staff paper on the incorporation of IFRS into the U.S. financial reporting system. Under the 'condorsement' approach, the FASB would have a continuing role in participating in the development of IFRS, and in serving as the 'endorsement' mechanism in the U.S., to approve standards for adoption in the U.S., or develop modifications for U.S. adoption, as needed.

Y2K Prep May Be A Useful Model
Larsen added, "The condorsement approach has a great deal of merit; a strong and vibrant FASB has had a strong, positive impact on the development of IFRS."

Drawing a comparison between IFRS adoption and the runup to Y2K, Larsen said, "Similar to y2K, a lot of work was done, a lot of money was spent on consultants to get there; that being said, it seemed to go smoothly, and there were’t too many hiccups."

Private Company Considerations
Alluding to ongoing deliberations by the Financial Accounting Foundation, parent of the FASB, on private company accounting (including consideration of a recommendation released earlier this year by a Blue Ribbon Panel sponsored by the FAF, the AICPA and NASBA, that a separate board be formed under the FAF, to focus on private company standard-setting), Larsen stated, , "We need to be careful not to dilute FASB with a separate private company board."

In contrast, a comment letter filed by Mark Heeson of the National Venture Capital Association included in the SEC's comment file on IFRS warns,

As we noted in our 2007 comment letter on the SEC’s Concept Release on Allowing US Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, both venture capital firms and venture funds generally operate as private companies in a partnership form. Additionally, venture funds invest almost exclusively in private companies. As we note in our 2007 comment letter, NVCA is concerned that the SEC’s evaluation of IFRS has included too little consideration of the way decisions regarding accounting standards for public companies ripple through and affect accounting and auditing for venture capital funds and the private companies in which they invest.

Among the points raised in NVCA's most recent letter, are:

Efforts to converge IFRS and US reporting standards have added to the FASB’s excessive focus on issues of publicly traded companies and retail investment vehicles,

The SEC has a responsibility to minimize the negative consequences of any move to IFRS on private companies in the US and is uniquely positioned to do so, and

[NVCA] remain[s] concerned that the move to IFRS will further solidify the oligopoly position of the Big Four Accounting firms.

NOTE: Canada adopted its own 'home-grown' model of private company GAAP ("Accounting Standards for Private Enterprises or ASPE), as Canadian public companies move to adopt IFRS this year. See, e.g. Canadian GAAP at a Crossroads (updated 4/11) by Deloitte.

Political Pressure A Reason To Join In, Rather Than Opt Out of IFRS Process
Tricia O'Malley, a former IASB board member, and former Chairman of the Canadian Accounting Standards Board (note: Canadian public companies are in the process of adopting IFRS this year), appeared to indicate that concerns about the politicization of accounting standards and the IASB's standard-seting process were a reason for the U.S. to join into and provide a thoughtful counterweight to that process, rather than opting out and letting the political pressures that current face the IASB continue to mount.

Specifically, O'Malley said, "[I]t became quite clear to us early on, a lot of people signed onto use of IFRS as their reporting language without understanding the fundamental philosophy of a conceptual framework, and that financial reporting is for investors.

She added, "I think there are a lot of jurisdictions using IFRS where it is pretty clear the standard setting process has been under political control … [geared toward] policy making, as opposed to … investors." That, said O'Malley, is "one of the reasons [some of] the rest of the world would like to see the U.S. and Japan join ... It would actually help the funding issue, and as Greg [Greg Jonas of Morgan Stanley] mentioned earlier, ensure continuous U.S. participation in the process which I think is absolutely essential, so investor focus remains front and center; that is the critical piece of the IASB continuing to be successful."

Investors Will Be Ready, Panelists Say

Asked by SEC Chief Accountant Jim Kroeker to comment on investors' IFRS readiness, the panelists (notably, mainly institutional investors and analysts) generally indicated that investors will be ready, or at least will be able to gear up to be ready, but that the effort to fully gear up, particularly among investors or analysts that are not focused on multinationals, but more domestically focused, may not take place in earnest until a date certain is announced, as to a pending move, and the nature of that move, to IFRS.

Gerry White, of Grace and White, Inc. observed, "Knowledge of IFRS is very variable, and particularly among people who follow U.S. companies only, is broad but not at all deep; having said that, giving people another two years is not going to make much of a difference, most analysts focus on accounting changes when they happen."

Regarding a potential transition to IFRS, White noted, "The [SEC] staff paper talks about prospective change, our surveys show that among investors, that is a clear second choice, it is much more helpful for investors to have retrospective adoption."

Mary Morris of CalPERS agreed, saying, "Investors will be ready to jump in full force, as Gerry says, when the decision is made," although she also highlighted some matters requiring attention.

Greg Jonas of Morgan Stanley noted, "U.S. investors are heavily exposed to IFRS today, and more as time goes on; we can only protect U.S. investors by bolstering IFRS, making it strong and vibrant, bringing it into the U.S. in a thoughtful way." He added, "Personally, I am a condorsement fan."

Neri Bukspan of Standard and Poor's said, "Investors are going to be ready, we ought to be ready if we cover companies globally." He added that both FASB's Investor Advisory Committee and the IASB's Investor Advisory Committee emphasized the importance of the conceptual framework, which was also referenced by FASB Chairman Leslie Seidman, in attendance as an observer at the roundtable.

Bukspan also noted the importance of a comprehensive disclosure framework, (a project which is currently being deliberated by the FASB, with a Discussion Document due out for public comment in the 4th quarter of this year), adding, "I believe the Commission could promote the dialogue, [including] thinking about what the right kind of disclosure [would be], and considering cost/benefit of prospective vs. retrospective adoption."

Industry Communication With Investors Essential
Panelists emphasized that it is essential that companies individually, and in some cases supported by educational efforts by industry associations, make sure that investors in their companies are prepared for any major change in reporting such as an adoption of IFRS, specific to how such adoption is likely to impact that industry and/or company.

O'Malley observed, with insight from Canadas's ongoing transition: "I would emphasize the incredible importance of industry groups [in educating investors about the transition]; I would give absolute top marks to our own GAAS guys... helping people with questions about transitioning from Canadian GAAP to IFRS, spent a lot of time with groups, including major analysts." She added, "Other industries like the banking industry have done major presentations, explained the kind of choices individual companies are going to be making, has really just started getting into high gear as transition approached, they know the analysts are still trying to understand whats going on in the last year of Canadian reporting."

Further, O'Malley noted, "Some of the companies have actually had ‘boot camps’ for some of the analysts that follow them; one of the CFO's said, ‘This is part of my job, if something happens to my stock price because I didn’t explain something propertly to my analysts, I’m going to wear it.”

Jonas had a similar view, adding, "On the education front, investors will be ready for any thoughtful transition approach, and the primary education vehicle will be what companies say to investors as they prepare for transition, not only in [the year of] transition, but the years prior to transition, so they can prepare for it."

In related news, see Michael Rapaport's July 6 Wall Street Journal article, U.S. Firms Clash Over Accounting Rules.

Process, Process, Process
Kevin Spataro of The Allstate Corporation, (a frequent and well-spoken, in my view (please refer to the disclaimer on the right side of this blog), participant in past SEC and FASB panels on fair value reporting), noted that it's all about "Process, process, process," pointing out that the IASB needs processes that are "similar to those that have made the FASB so successful."

Today's SEC IFRS roundtable also included a panel of small public companies, and a panel of regulators from other regulatory agencies. For more info, refer to the archived webcast, list of panelists and agenda. See also our post yesterday: New IASB Chairman, Hans Hoogervorst, Optimistic SEC Will Move To Incorporate IFRS Shortly.

FEI Elects 2011-2012 Officers; George Boyadjis Becomes Chairman

2011-07-07T12:57:00.001-04:00

Earlier today, FEI announced its 2011-12 slate of officers, whose terms begin immediately.

George Boyadjis, CPA, executive director of CresaPartners, LLC, was elected to the position of FEI's national chair, after serving as national vice chair for the previous year. Boyadjis, who has been a member of FEI since 1994, also served a vice president at large from 2008-2010. A member of the FEI Board for five years, Boyadjis previously chaired the Strategic Planning Committee for FEI and has also been a trustee and chair of FERF. He previously served as a member of FEI's Ethics and Eligibility Committee and as president of FEI's Twin Cities chapter. Prior to his current position at CresaPartners, he was EVP, CFO, secretary and treasurer for American TeleCare, Inc., and before that served as CFO, treasurer and corporate compliance officer for MedManagement, LLC.

Marsha L. Hunt, CPA, vice president, controller and principal accounting officer of Cummins, Inc. will now serve as national vice chair.Hunt, an FEI member since 2000, has been a trustee of FERF for seven years (2004-2011), as well as a member of the FEI Hall of Fame Selection Committee, Strategic Planning Committee and the Committee on Corporate Reporting. Prior to joining Cummins in 2003, Marsha worked with Corning Incorporated for 7 years and served as its Assistant Controller.

Taylor Hawes, Sr. CFO of intellectual property and licensing for Microsoft Corporation, will continue to serve as vice president at large. Before joining Microsoft Corporation, Hawes was the North America controller for U.K.-based Raleigh Bicycle Corporation. Hawes, a member of FEI since 2002, serves on the Committee on Finance and Information Technology (CFIT), and previously served as treasurer of FEI, and as a trustee and chair of FERF.

Harry W. Zike, CPA, CFO and Board member of GTE, Plc., will now serve as vice president at large. A member of FEI since 1989, Zike previously served as Chief Financial Officer of Energy Conversion Devices (ECD), and prior to that spent nearly two decades with Siemens, where he held a number of executive financial positions in both Europe and the USA.

David Nunes, senior vice president of Finance for Minor League Baseball, joins the FEI Board in the role of treasurer.Prior to joining Minor League Baseball, Nunes was Vice President of Finance for Sun Life Stadium, home of the Miami Dolphins. Nunes has been a member of FEI since 2000 and has served as Area vice president for the Southern Region and Chapter President for the Southern Florida Chapter.

Robert Shultz, vice president, Enterprise Services Strategy at the Hewlett-Packard Company, will serve as secretary. A member of FEI since 2005, he served as chairman of FEI's Committee on Finance & Information Technology (CFIT) from 2008-11. Shultz joined HP in 1982 and prior to his current position, he served as vice president of Internal Audit, general manager of the Business Process Outsourcing organization, and vice president of Shared Services.

Kim K. Gazzola, vice president for Finance and Administration at Cambridge College, will continue to serve as FERF chair for a second year. FERF, the Financial Executives Research Foundation, is the research affiliate of FEI.Gazzola, a member of FEI since 1989, was previously the president of the Boston chapter. Prior to her tenure at Cambridge College, she served in senior roles at Bridgewater State College, Wentworth Institute of Technology and Gaston & Snow.

Welcoming the new officers, FEI President and CEO Marie Hollein said, "On behalf of our entire organization, I am pleased to welcome and congratulate these accomplished business leaders on their well-earned positions on the FEI board. With their continued leadership and dedication to FEI's mission, we look forward to continued success over the coming year. We are privileged to have these leaders as part of our organization."

Read more about FEI's 2011-2012 leadership:

FEI press release

FEI Office of the Chair (links to bios)

Financial Executive Magazine, July 2011: For FEI's Chair, It's His Time To Pay It Forward (free login required)

Read more about FEI and the value of FEI membership:

About FEI

Join FEI (links to short, information video, membership eligibility criteria, online membership application)

FEI Website: http://www.financialexecutives.org/

New IASB Chairman, Hans Hoogervorst, Optimistic SEC Will Move To Incorporate IFRS Shortly

2011-07-06T16:26:00.000-04:00

Hans Hoogervorst, the International Accounting Standards Board's new chairman, said last week he is 'optimistic the SEC will move to fully incorporate IFRS shortly.' Hoogervorst became Chairman of the IASB on July 1, succeeding Sir David Tweedie, whose term ended June 30.

Among Hoogervorst’s former positions (see bio), he served as chairman of the executive board of the Netherlands Authority for the Financial Markets (AFM); chaired the IOSCO technical committee, and co-chaired the Financial Crisis Advisory Group (FCAG) jointly sponsored by FASB and the IASB.

Hoogervorst on IFRS Roadmap; Post-Convergence Agenda
In his welcome message, Hoogervorst notes that the IASB will soon publish a consultation document seeking comment on its post-convergence agenda.

Regarding the SEC’s consideration of permitting or requiring IFRS by public companies in the U.S., Hoogervorst states:

[W]e need to help complete the missing pieces of the IFRS jigsaw, and an important element of that is encouraging the United States to come on board. IFRSs are already permitted for use by non-US companies listed on American markets, and I am optimistic that the US Securities and Exchange Commission (SEC) will move to fully incorporate IFRSs into the US financial reporting regime shortly. The US is the single largest national financial market, with the most developed and mature national accounting standards. It seems reasonable to me that the SEC takes its time to make the appropriate transitional arrangements, however it is clear that US companies would welcome some certainty in the near future. The SEC’s decision will certainly have consequences elsewhere in the world, with several other major economies waiting to see what happens before finalising their own plans to adopt.

Additional priorities are also discussed in the new IASB chairman's welcome message.

Panelists for IFRS Roundtable Announced; Comments on 'Condorsement' Due 7/31
In related news, the SEC recently released the detailed agenda and list of panelists for its previously announced IFRS Roundtable, taking place tomorrow.

As noted in the SEC's press release, the roundtable "will focus on topics such as investor understanding of IFRS, the impact on smaller public companies, and on the benefits and challenges of incorporating IFRS into U.S. public company accounting."

Reminder: the SEC requested comments by July 31 on its SEC staff paper outlining what is informally referred to as a 'condorsement' approach (a term coined by SEC Deputy Chief Accountant Paul Beswick) to using the FASB as the endorsement mechanism for IFRS in the U.S., in a role similar to that of some other national standard-setters in countries that have adopted IFRS.

My Two Cents: The Meaning of "Incorporation" (of IFRS)
In my view (I remind you of the disclaimer posted on the right side of this blog), some of the strongest rhetoric against the potential adoption of IFRS in the U.S. appears to be based on a presumption that the SEC's ultimate decision could be to require public companies to move from their current, U.S. GAAP platform, to a wholly different platform, in the form of IFRS. But let's break this down.

Decision is not pre-ordained; various alternatives still under consideration

The SEC staff emphasized in their staff paper on condorsement that a final decision has not yet been made by the SEC staff vis-a-vis incorporation of IFRS, any upcoming decision is not necessarily a binary decision, and various alternatives are still under consideration.

In the SEC staff's own words (from the SEC staff paper):

The Commission has not yet made a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers. While the Staff’s work on the Work Plan continues, including assessing the quality of the standard setting process, the focus of this Staff Paper is to outline a possible approach for incorporation of IFRS into the U.S. financial reporting system, if the Commission were to decide that incorporation of IFRS is in the best interest of U.S. investors. This Staff Paper does not provide an extensive discussion of a potential timeline of incorporation. That is not to diminish the importance of the timing of incorporation but reflects the fact that the timeline for incorporation is a separate consideration....

...The Staff’s discussion in this Staff Paper is not intended to suggest that the Commission has determined to incorporate IFRS or that the discussed framework is the preferred approach or would be the only possible approach. The framework is presented to illustrate that:
1. The decision faced by the Commission in an effort to achieve a single set of high-quality, globally accepted accounting standards is not necessarily a binary decision (i.e., either to require the use of IFRS by all U.S. issuers immediately or not);
2. Incorporation of IFRS is not inconsistent with the SEC maintaining its ultimate authority over U.S. accounting standard setting; and
3. There are potential ways to accomplish the broad objective of pursuing a single set of high-quality, globally accepted accounting standards while minimizing cost, effort, and other transition obstacles.

'Permit,' 'Require,' or 'Converge'
An oft-cited statistic, loosely translated over the past few years, is that over 100 countries currently "use" IFRS. A useful table specifying which countries in the G-20 have decided to (or, are in the process of deciding whether to) require, permit or converge with IFRS can be found in the IFRS Foundation and IASB's Who We Are and What We Do (updated July, 2011).

As noted in the summary sentence at the top of pg 4 of that publication:

Since 2001, almost 120 countries have required or permitted the use of IFRSs. All remaining major economies have established time lines to converge with or adopt IFRSs in the near future.

The operative word in the above sentence which I would point out, is the word "or," as in, almost 120 countries have required OR permitted the use of IFRS. Refer to the table on pg 4 of the IFRSF/IASB report for country-by-country specifics as relate to the G-20.

The Significance of the Meaning Of 'Incorporate' (re: IFRS)

Moving from the point above, that the use of IFRS in various countries ranges from being a mandatory requirement, to a permitted framework, to a framework upon which national standards have converged, is the next and final point that the SEC's use of the word 'incorporate' - to me, at least - is significant.

Webster's dictionary defines incorporate (parts 1a and 1b of the definition) as:

to unite or work into something already existent so as to form an indistinguishable whole... to blend or combine thoroughly

Thus, to 'incorporate' IFRS could mean, in plain English, for U.S. GAAP to converge with IFRS, period, and that it remain converged with IFRS over the long haul, either through a FASB endorsement mechanism as described in the SEC staff paper, or though maintaining the current design and mandate of the FASB. The downside to keeping a fully standalone mandate for the FASB could be, as expressed by former FASB Chairman Bob Herz in numerous speeches, the challenge of having to 'ride two horses' in maintaining and improving a separate set of U.S. GAAP, along with (what could become an ongoing) convergence mandate.

Additionally, in my view, the word 'incorporate' can be broadly interpreted to include a decision to 'permit' the use of IFRS by U.S. public companies, not only a decision to 'require' the use of IFRS. The jist of the arguments generally made against a decision to simply 'permit' a move to IFRS is that, if companies take advantage of such an 'optional' opportunity (1) they would not want to risk having to change back to U.S. GAAP, with significant costs and complexities attached to changing over an entire accounting and reporting system, impacting SEC reporting and more, and (2) they very likely would not want to incur the cost of having to report, to the SEC, at least, under both IFRS and U.S. GAAP, for much the same reason (incurring the cost of dual reporting systems to fulfill an 'optional' requirement, when one would be sufficient). If companies were offered an opportunity to report in IFRS instead of U.S. GAAP, and had a comfort level the decision would not be reversed on them, I believe there would be some appetite for such a move if IFRS were an 'option.'

However, another flip-side to an IFRS 'option,' would be consideration of investor, preparer, auditor, regulator (regulators in addition to the SEC, who base regulatory actions, taxes, fees, etc. on information provided under U.S. GAAP) and other feedback on the usefulness and understandability of public reporting under an IFRS 'option,' vs. continuing to require U.S. GAAP only, or moving to an IFRS-only requirement.

The main thing I'd like to point out is that 'incorporation' of IFRS in the U.S. public reporting system, as noted in the SEC staff report, can take any number of different forms, ranging from a mandate to optionality (i.e. permission to use IFRS), as well as incorporation through convergence.

In support of this potentially expansive view as to the possible mechanism(s) of incorporation of IFRS in the U.S. financial reporting system, it is interesting to note that the word 'incorporate' has been receiving more prominent placement in SEC releases (certainly in the title of those releases) beginning with the SEC's Feb. 24, 2010 Work Plan for the Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers (released as an Appendix to the SEC's 2/24/10 Commission Statement in Support of Convergence and Global Accounting Standards). As noted above, the SEC staff paper released in May of this year also has 'incorporation' of IFRS in its title.

Prior to the 2010 IFRS WorkPlan, the SEC did not highlight the term 'incorporation' in its releases. For example, the SEC's Nov. 14, 2008 rule proposal was entitled: Roadmap for the Potential Use of Financial Statements Prepared in Accordance With IFRS, and the SEC's August 7, 2007 Concept Release was entitled, Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with IFRS.

How much significance do you think should be ascribed to the word 'incorporate'? Feel free to post a comment on our blog. If you would like to receive the FEI blog by email, please send an email to blogs@financialexecutives.org and write in Subject line: Sign Up.

Private Companies Can Provide Input, Receive Info From Web Portal Offered By FASB

2011-06-29T18:19:00.000-04:00

Earlier today, the FASB announced the launch of a 'web portal' in which private company stakeholders can learn how to provide input to the FASB on matters relating to private company standard-setting, and obtain updates on related developments. Visit FASB's Non-Public Entity Web Portal, read more in FASB's Press Release.

PwC Recommends FAF Form Advisory Committee On Reducing Complexity

2011-06-29T18:03:00.003-04:00

In a June 28, 2011 Point of view article entitled, “Reducing Complexity,” audit firm PwC called for the formation of an advisory committee by the Financial Accounting Foundation, to advise the FASB on reducing complexity in accounting standards. PwC notes:

Accounting and financial reporting complexity continues to increase, presenting challenges for investors, preparers and auditors. While some complexity is necessary, complicated scope provisions, exceptions to general principles, and overly detailed guidance often make standards difficult to understand, interpret, and apply. New standards continue to be issued, further adding to complexity.

In our Point of view on reducing complexity in financial reporting, we note unnecessary complexity diminishes the value of accounting and reporting for
investors, who may look elsewhere for information. Complexity is also costly for
preparers (and investors who ultimately bear such costs), and the costs may not
be commensurate with the benefits to investors.

Given the above, we recommend the Financial Accounting Foundation establish
an advisory committee to the Financial Accounting Standards Board (FASB) focused
on complexity. The committee, comprised of a variety of stakeholders, would
advise the FASB on sources of complexity in existing accounting standards and
standards under development, and help propose balanced solutions that improve
the quality of information for investors while reducing complexity.

Related SEC Initiatives: Pozen Committee (CiFIR), 2011 Fin. Reporting Series

Among the Q&A's included at the conclusion of the PwC's paper, the firm references some related efforts headed up by the SEC to address complexity in financial reporting including the work of the SEC Advisory Committee on Improvements to Financial Reporting (aka "CiFIR" or the "Pozen Committee" for committee chairman Bob Pozen), as well as the SEC's upcoming Financial Reporting Series.

With respect to the work of the Pozen committee (CiFIR), which issued its report and recommendations in 2008, including recommendations aimed at accounting standard-setting, PwC says:

Our proposal, while consistent with the spirit of those recommendations, is different because it focuses on establishing a sustainable mechanism to address both existing
complexity and potential complexity through involvement early in the standard-setting process. We believe that our proposal addresses the necessary mechanism, process, and resources to help achieve the goal of reducing complexity.

Regarding the SEC's upcoming Financial Reporting Series, PwC notes that, in addition to having the advisory committee on complexity conduct a survey of all constituents of financial reporting (users, preparers, auditors, others), "The committee also would consider any complexity-related suggestions from the [FAF's] new post-implementation review process and the SEC's planned Financial Reporting Series of round tables."

My Two Cents
(I remind you of the disclaimer posted on the right side of this blog.)

An interesting point made by PwC is that the work of an advisory committee focused on reducing complexity can benefit private companies and public companies.

The firm observes that FASB resources have been directed at convergence with IFRS (note: in my view, this relates mainly, but not entirely, to public companies, given the SEC's current consideration of whether to permit or require public companies to report using IFRS instead of U.S. GAAP). Before leaving the topic of convergence, PwC states:

We observe that the current uncertain path toward convergence with, or possible
adoption of, international standards represents a major challenge. Some may question why the complexity issue should be addressed at this time. To us, too much complexity already exists in both sets of standards. This means that focusing attention on developing a systematic process for addressing this issue and getting started now are important.

PwC also observes that the FASB's existing advisory groups include advisory groups on private companies (which in my view, are looking for, in part, simplification of standards designed or driven by the needs of public companies, investors, regulators or analyts, but are viewed by some as needlessly complex for private companies and the users of private company financial reporting.)

A key point that lies below the surface of some of the discussions of the need to simplify private company accounting, (such as the deliberations of the Blue Ribbon Panel on Standard-Setting for Private Companies, whose report and recommendations are currently under consideration by the FAF, which is conducting outreach to obtain constituent views; see also FEI CPC-S position) is that public companies and the users of public company financial reporting are looking for, and could benefit from, a reduction in complexity in financial reporting as well.

This is particularly the case regarding accounting standards that appear to reflect 'unneccesarily complexity" - i.e., beyond that required by the level of complexity of the underlying transaction or economic event itself.

Complexity is exacerbated, however, for private companies and their users, when certain levels of complexity appear to follow from the needs of certain public company constituents, whereby the resultant reporting is either not as relevant or not as cost effective for private companies and the users of their financial statements, based on the differing needs of public vs. private company users, and different forms of access to information. [UPDATE 6:12 PM - This afternoon, FASB announced the launch of a web portal for nonpublic entities. ]

As noted by PwC, if a broad based advisory committee on complexity were formed, such as recommended by the firm, "Its output would benefit all companies."

FASB Parent - FAF - Seeks Trustees; IASB Parent - IFRSF - Seeks IFRS Advisory Council Members

2011-06-28T12:06:00.002-04:00

On Friday, June 24, the Financial Accounting Foundation (which oversees the FASB and GASB) published a call for nominations to fill vacancies on the FAF board of Trustees. On the same day, the International Financial Reporting Standards Foundation (which oversees the IASB) announced a call for nominations to fill vacancies on the IFRS Advisory Council.

What Does It Take To Be An FAF Trustee?
"Ideal candidates" for FAF Trustee positions are described in the FAF's press release as follows:

The ideal candidates will be highly regarded within their profession, possess an understanding of the U.S. and global financial and capital markets, and have a strong appreciation for the importance to the markets, the investment community, and the public at large of independent standard setting for financial accounting and reporting. Candidates will be committed to the mission of the FAF, FASB, and GASB, demonstrate a concern for the public interest, and have an appreciation for the varying interests and perspectives of investors and other users of financial information and the preparers and auditors of financial reports.

In addition to the attributes described above, the FAF currently is seeking senior-level professionals with backgrounds and experience in one or more of the following areas:

Using financial statements, including those of private companies or of state or municipal governments

Leading smaller and/or private companies

Leading not-for-profit organizations.

FASB Board Appointments, Funding, Among Duties of FAF Trustees
Primary duties of the FAF Trustees are described as follows:

To monitor, on an ongoing basis, the activities of the FASB and the GASB and their due process practices, policies and procedures, including agenda setting, solicitation and consideration of public comments, post-implementation evaluation of the effectiveness and efficiency of their standards and standard-setting activities, and their performance within the context of their mission statements.

To appoint the Chairs and members of the FASB, GASB, and their advisory boards.

To approve the short and longer range strategic plans of the FAF, FASB and GASB, and monitor the progress in implementing such plans.

To advocate publicly on behalf of the independent standard setting process.

To conduct periodic reviews of the structure for establishing and improving financial accounting and reporting standards in such scope and at such times as the Trustees shall determine.

To oversee the finances, arrange and advocate for appropriate resources and funding, and approve the budgets of the FAF, FASB, and GASB.

The deadline to submit nominations for FAF Trustees is July 29. Details about the nomination process can be found in the FAF's press release.

IFRS Advisory Council To Turnover In Full in 2012
On the international accounting standard-setting front, the IASCF's press release notes:

The terms of all existing members of the IFRS Advisory Council expire at the end of December 2011. This will conclude the third iteration of the IFRS Advisory Council, which was the first one where individuals served as representatives of organisations that have an interest in standard-setting.

To aid in transition, while the terms of all IFRS Advisory Council members will end this year, the IFRS Advisory Council chair and vice chairs have been reappointed for terms ranging from one to three years. Additionally, terms of new members of the council will be staggered.

As background, the reference above to the 'third iteration' of the IFRS Advisory Council, with its emphasis on members serving on the council who represent 'organizations that have an interest in standard-setting,' follows from the restructuring of the IFRS Foundation's former 'Standards Advisory Committee" or SAC in 2008, one among a number of changes undertaken by the IASB and the IFRS Foundation following the IASB's 2008 Constitutional Review.

Representation Sought From Regional Standard-Setters, SMEs, More
Although the core framework of the IFRS Advisory Council will remain, according to the IFRSF's press release, the IFRS Foundation is seeking to expand the council's membership in certain key areas, described below (emphasis added).

Based upon the input received from the Advisory Council and others, the Trustees have agreed to keep the current representative model for membership. Furthermore, while the Trustees recognise that the IFRS Advisory Council is quite large, the Advisory Council’s chairs and vice-chairs, who have been reappointed, and members generally, believe that the size is manageable and
necessary to have the necessary broad range of interested parties represented
around the table. The Trustees have supported this view.

In terms of the composition of the Advisory Council’s membership, the Trustees have also accepted the broadly held view that the general mixture of perspectives is
appropriate.

At the same time, the Trustees will be making some minor modifications:

•Inviting regional standard-setting bodies to join, instead of national standard-setters currently serving: The Trustees wish to encourage the development of regional bodies. A global National Standard-Setter group exists, and regional bodies exist or are in the process of being established in Africa, the Americas, Asia-Oceania, and Europe. The Trustees will ask the heads of these groups to serve on the Advisory Council, rather than individual national standard-setters themselves.

•Seek further participation from the academic community, other internationally recognised professional bodies with an interest in financial reporting not currently represented, and the SME community

•Add greater participation from developing markets (including Asia and the Middle East) and other economies committed to IFRS adoption

As noted in the IFRSF's advertisement for nominations to the IFRS Advisory Council, the deadline for nominations to the IFRS Advisory Council is September 19.

IASB Issues Additional Guidance For Private Co’s On IFRS for SMEs

2011-06-23T17:33:00.001-04:00

Earlier today, the IASB published additional guidance relating to IFRS for Small and Medium-Sized Entities, in the form of the first set of final Q&As developed by the IFRS for SMEs Implementation Group. The IASB's action is detailed below, as well as an update on FAF/FASB consideration of private company standard setting.

The thrust of IFRS for SMEs, published in July, 2009, is to provide a simplified set of self-contained GAAP for private companies; that is, the essense of the definition of 'SME' set forth in the IASB's IFRS for SMEs is not so much based on size per se, but based on companies that are not publicly listed and do not have 'public accountability' such as certain financial institutions and certain other types of companies, as defined in the IFRS for SMEs document. A good source of basic information, providing a basic walkthough of what IFRS for SMEs is all about, can be found on the IASB's About the IFRS for SMEs webpage.

The additional guidance published today, IFRS for SMEs Q&A 2011/01: Use of IFRS for SMEs in a Parent [Company's] Separate Financial Statements, was developed by the IFRS for SMEs Implementation Group (SMEIG), after being released in draft form earlier this year, and approved for publication by the IASB. Here is additional information about the role and composition of the SMEIG.

Additional information about IFRS for SMEs available on the IASB's website includes Presentations about the IFRS for SMEs. Among the presentations currently posted includes a January, 2011 presentation by IASB Board Member Paul Pacter (presented at a AAA meeting), provocatively entitled: Why the World Needs A Separate Standard for Private Companies, and Why the U.S. Does, Too.

FAF, FASB Consideration of Private Co. Standard-Setting
On the subject of the consideration of private company standard-setting in the U.S., the Financial Accounting Foundation, which oversees the FASB, has received over 800 comment letters regarding the January, 2011 recommendations of the Blue Ribbon Panel on Standard-Setting for Private Companies.

Many of those letters, beginning with Comment Letter # 5 filed in early June, follow from points suggested by the AICPA to its members, supporting the recommendation made by a majority of the Blue Ribbon Panel to have not only differential standards for private vs. public companies, but a separate standard-setter, side by side with the FASB.

In contrast, the comment letter filed by FEI's Committee on Private Company Standards in April, as previously reported here, suggests that an alternative path to providing focus on the needs of private companies and the users of their financial statements, without forming a separate standards-setting board, could potentially be achieved by forming a Private Company Task Force (PCTF), empowered with the ability to establish guidance, modelled after the Emerging Issues Task Force (EITF).

Additional information about the FAF's outreach on standard-setting for private companies can be found on the FAF's Standard-Setting for Nonpublic Entities webpage. You can also view the archived webcast of the FASB: In Focus webcast originally presented on June 17: FASB Update for Nonpublic Entities.

PCAOB Concept Release Issued Today Calls For 'AD&A,' Assurance On Additional Info, More

2011-06-21T12:21:00.002-04:00

Earlier today, the PCAOB voted to issue a Concept Release on the Auditor's Reporting Model. As noted in the PCAOB's press release:

Auditor's Discussion & Analysis
Joining the ranks of the 'MD&A' (management's discussion and analysis) and 'CD&A' (compensation discussion and analysis) required of management by the SEC, would be an 'AD&A' (auditor's discussion and analysis), as set forth in the PCAOB's Concept Release.

Assurance On Other Information; Clarification of Language
Other ideas included in the Concept Release address required and expanded use of emphasis paragraphs; auditor assurance on other information outside the financial statements, and
clarification of language in the standard auditor's report.

Public Comment Sought via Comment Period, Roundtable
The public comment period on the Concept Release closes on September 30.

The PCAOB also announced today they will hold a public Roundtable in the third quarter, 2011 to obtain additional feedback on the Concept Release.

Further information is available in the PCAOB's Fact Sheet; the archived webcast of today's PCAOB board meeting will be posted by the PCAOB within 24 hours. See also related items for this Concept Release in the PCAOB's Rulemaking Docket No. 034.

FASB, IASB Amend Standards For Presentation Of Comprehensive Income, OCI

2011-06-20T11:26:00.000-04:00

On June 16, 2011 the Financial Accounting Standards Board and the International Accounting Standards Board issued amended standards for the presentation of comprehensive income and other comprehensive income (OCI). In the U.S., the amendment was issued as Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The IASB effected the change by amending IAS 1, Presentation of Financial Statements.

As noted in FASB's press release:

...(ASU) No. 2011-05 Comprehensive Income (Topic 220): Presentation of
Comprehensive Income... is intended to increase the prominence of other comprehensive income in financial statements.

In US GAAP, the ASU will supersede some of the guidance in Topic 220 of the accounting Codification.

The main provisions of this Update provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements:

- A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income.

- In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.

The option in current GAAP that permits the presentation of other comprehensive
income in the statement of changes in equity has been eliminated.

As noted in the IASB's press release:

...the amendment [to IAS 1] ... will improve and align the presentation of items of other comprehensive income (OCI) in financial statements prepared in accordance with International Financial Reporting Standards (IFRSs) and those prepared in accordance with US generally accepted accounting principles (GAAP).

The amendments to IAS 1 Presentation of Financial Statements require companies preparing financial statements in accordance with IFRSs to group together items within OCI that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements.

Read more in this edition of KPMG's Defining Issues.

FASB, IASB To Re-Expose Rev Rec For 120-Day Comment Period

2011-06-15T14:39:00.000-04:00

Earlier today, FASB and the IASB announced they will re-expose an Exposure Draft of their proposed Revenue Recognition (‘Rev Rec’) standard. The re-exposure document will reflect changes agreed to by the boards based on their discussion of comment letters received on the original Exposure Draft.

According to this FASB-IASB press release, the boards plan to release the updated Exposure Draft in the third quarter of 2011 for a 120-Day comment period.

FASB Decides To Exempt Private Cos. From Certain Rev Rec Disclosures
In related news, at last week’s FASB meeting, the board decided to exempt private companies from certain disclosure requirements in its upcoming standard on revenue recognition. Other matters discussed at the board meeting included revenue recognition: rate regulated entities, financial instruments, and investment companies. Details are in this FEI Summary and FASB's Summary of Board Decisions.

Dodd-Frank's Impact on U.S. Competitiveness Focus Of June 16 Hearing

2011-06-15T14:21:00.000-04:00

The House Financial Services Committee is holding a hearing tomorrow on the impact of the Dodd-Frank Act on jobs and U.S. competitiveness.

Describing the objective of the hearing in this press release, Committee Chairman Spencer Bachus stated:

There is a widespread and growing concern that the Dodd-Frank Act with its 400 new regulations will lead to industry, capital and jobs leaving the United States. This is a concern that many of us on the Committee have expressed repeatedly. Our hearing will examine the regulatory disparities between the U.S. and other nations and how that could put American companies at a competitive disadvantage and harm our economy.

The press release continues:

The Committee will specifically look at four crucial areas where divergent regulatory approaches taken by the United States and the rest of the world could damage the U.S. economy and the ability of financial institutions to compete against their foreign counterparts: capital and liquidity requirements; regulation and oversight of “systemically important financial institutions”; derivatives requirements; and a total ban on proprietary trading.

Slated to appear on the first panel at the hearing are the SEC Chairman Mary Schapiro, CFTC Chairman Gary Gensler, FDIC Chairman Sheila Bair, and senior representatives from the Federal Reserve, OCC and U.S. Treasury.

The second panel includes representatives from industry associations ISDA and SIFMA, the Chief Risk Officer of JP Morgan Chase, Hal Scott of Harvard Law School (who heads up a private sector initiative on U.S. competitiveness, the Committee on Capital Markets Regulation, informally known as the 'Paulson Committee' as it was launched during former U.S. Treasury Secretary Henry Paulson's tenure), and Damon Silvers of the AFL-CIO (who served on the Congressional Oversight Panel established by Congress in 2008 'to review the current state of financial markets and the financial regulatory system' ).

Some of the testimony has already been posted on the hearing webpage.

XBRL US GAAP Taxonomy: FASB, SEC Staff On June 22 FASB Webcast

2011-06-13T11:11:00.001-04:00

The Financial Accounting Standards Board will host a webcast on June 22 from 1:00 -2:00 pm EDT on: How to Use the XBRL 2011 US GAAP Financial Reporting Taxonomy.

The webcast will focus on: "How to use the soon-to-be-released Taxonomy Online Review and Comment System’s search and navigation functions to efficiently find the tags that meet the U.S. Securities and Exchange Commission’s filer requirements."

Subtopics to be covered include:

Navigating the taxonomy

Considerations for tag selection

Understanding tag relationships and how to use the network views

Using advanced search and shared search functions to find relevant tags

Quickly finding certain types of tags

Understanding when to use industry entry points

Finding tags using the Accounting Standards Codification

Using specialized labels to find tags

Providing feedback on the Development and Accounting Standards Update Taxonomies.

Speakers include:

J.. Louis Matherne, FASB chief of taxonomy development,

Christine Tan, FASB XBRL project manager, and

Susan Yount, SEC, Office of Interactive Data

Up to 1 CPE credit will be available for the live webcast. An archived version of the webcast will also be available on FASB’s website through Sept. 21, 2011 (no CPE will be available for the archived webcast).

See the course description and registration information for FASB's June 22 webcast on the XBRL taxonomy.

Private Co. Accounting Standard-Setting Subject Of June 17 FASB Webcast

2011-06-13T10:58:00.002-04:00

Private companies won't want to miss FASB's Update for Nonpublic Entities, featuring FASB board and staff members, in a live webcast this Friday June 17 from 1-2:40 pm EDT.

The webcast will focus on:

The Financial Accounting Foundation’s strategic review of standard setting for nonpublic entities

The FASB’s recent process changes made to broadly engage nonpublic stakeholders in standard setting

Progress on the FASB-International Accounting Standards Board (IASB) convergence program, and

Other active projects or recently-issued standards of interest to nonpublic entities.

Speakers will include:

FASB Board Member Daryl Buck (NOTE: prior to joining the FASB board this year, Buck served as CFO of Reasor's Inc. and as Chairman of FEI's Committee on Private Company Standards)

FASB Board Member Larry Smith, and

FASB Staff Members Jeff Mechanick, Ron Bossio, and Paul Glotzer

Up to 2.0 CPE will be offered for the live webcast. An archived webcast (no CPE available for archived webcast) will also be avaialble on FASB's website until September 15.

Read additional course and registration information for FASB's June 17 Update for Nonpublic Entities.

SEC "Financial Reporting Series" To Focus On Early Identification of Risks to the Financial Reporting System

2011-06-10T15:26:00.001-04:00

In remarks at USC's 30th Annual SEC and Financial Reporting Institute, SEC Chief Accountant Jim Kroeker announced that the SEC will launch a series of roundtables "to facilitate a balanced discussion of existing pressures or emerging issues in financial reporting." The roundtables, entitled the "Financial Reporting Series," are expected to be held three times per year. They will be open to the public, and webcast.

Objective: Early Identification of Risks
The objective of the Financial Reporting Series, said Kroeker, is to "assist us in our early identification of risks related to, as well as areas for potential improvements in, the reliability and usefulness of financial reporting to investors."

The first such roundtable, said Kroeker, is "expect[ed] ...to be held later this year," and will focus on "a topic such as the role of uncertainty in financial reporting and whether [the] right level of information about uncertainty is being provided."

It appears the Financial Reporting Series, focused on the early identification of risks to the financial reporting system, dovetails neatly into the role of the newest Deputy Chief Accountant to join the OCA team - Mike Starr.

As noted in the SEC's press release issued last fall when Starr, former Chief Operating Officer of Grant Thornton Int'l, was hired in the newly created position of Deputy Chief Accountant for Policy Support and Market Monitoring: "In this role, Mr. Starr will serve as the Chief Accountant's liaison on projects and activities to improve the quality of accounting and auditing policy decisions and to identify and address potential financial reporting weaknesses and risks. Mr. Starr also will advise the Chief Accountant and the Office on highly complex topics."

Series of Roundtables, vs. a Formal Panel
Kroeker pointed out the Financial Reporting Series roundtables will differ from a formal advisory committee or blue ribbon panel (which, for example, aim to seek a consensus view and issue formal recommendations on behalf of the group). However, similar to the use of the output of a more formal committee, "I expect that the Series will provide the Commission staff, as well as the FASB and the PCAOB, with useful information about emerging issues and changes in the business environment that affect each of our respective roles in the financial reporting system."

Although he did not use the term 'ad hoc,' it appears the flexibility offered by a roundtable series - i.e., by not bringing together a formal panel to hold multiple meetings, deliberate, debate for a consensus, and issue formal recommendations - offers the benefit of being less labor intensive for SEC staff (and for those who participate in the roundtables). Additionally, the roundtable format will enable the SEC to bring together different groups of experts each time, (vs. an advisory committee) depending on the subject matter.

FASB, PCAOB and Other Observers
As has been the case with past SEC roundtables and advisory committees on cross-cutting issues that impact financial reporting and auditing, the chairs of the FASB and PCAOB will serve as observers at the roundtables.

Kroeker added that other observers may include staff from the federal bank regulatory agencies. In addition, although the roundtables will be organized by the SEC's Office of the Chief Accountant, he added that staff from other divisions and offices may observe (or, in my view, potentially co-moderate) the roundtables from time to time, including staff from the SEC's Division of Corporation Finance.

SEC Chairman Mary L. Schapiro gave an early nod to the Financial Reporting Series in remarks at a Financial Accounting Foundation dinner last month, when she said, "I am also looking forward to the FASB’s and the PCAOB’s participation in the SEC staff’s new 'Financial Reporting Series.' This will be another opportunity to listen and learn — a series of roundtables designed to help all of us who are involved in the financial reporting system, identify risks related to the reliability and usefulness of financial reporting, as well as areas for potential improvements. We believe that the series will provide us, as well as the FASB, PCAOB and others, with useful information about emerging issues and about changes in the business environment that affect the financial reporting system."

Diverse Participants
Participants in the Financial Reporting Series roundtables, Kroeker said last week at USC, will represent a variety of groups included among the SEC's constituents.

"The approach will be one of inviting a cross section of capital markets participants," he said, "including investors, preparers, auditors, and others." He added the aim of the discussion was to "foster an informed dialogue on some of the most difficult financial reporting topics."

Shades Of Pozen Committee, Dodd-Frank
The Financial Reporting Series appears to have some roots in a similar cross-constituent group recommended by SEC Advisory Committee on Improvements to Financial Reporting (aka 'the Pozen Committee' for its chair, Bob Pozen; also known as CIFiR).

In the Pozen Committee's final report issued on August 1, 2008, Recommendation 2.3 included forming a Financial Reporting Forum, as follows:

Create a Financial Reporting Forum (FRF) that includes key constituents from the preparer, auditor, and investor and other user communities, to meet with representatives from the SEC, the FASB, and the PCAOB to discuss pressures
in the financial reporting system overall, both immediate and long-term, and how individual constituents are meeting these challenges. This may require the FASB to re-evaluate the roles and composition of its advisory groups or agenda committees....

In the detailed discussion of this recommendation later in the Pozen committee's report, it was noted that the scope of their suggested FRF would be broader than just FASB issues, "[W]e would not limit the proposed FRF’s purview solely to the work of the FASB. Rather, key constituents in the U.S. financial reporting system would meet with representatives from the SEC, the FASB, and the PCAOB to confer on immediate financial reporting needs and priorities system-wide. By identifying emerging issues, the FRF would give timely input on pressures affecting the financial reporting system, both immediate and long-term."

Like the Pozen Committee's recommended FRF, the SEC's Financial Reporting Series will include participation by representatives of the SEC, FASB and PCAOB; however, unlike the Pozen Committee's FRF, the agency representatives will serve in an observer role.
Also, like the Pozen Committee's FRF, there will be a variety of constituents from the financial reporting and auditing process (investors, preparers, auditors and others); but unlike the FRF, the Financial Reporting Series will not be a formal advisory group. (Potential conflicts of a formal FRF with other existing advisory committees were foreseen by some, as noted in the Pozen committee report; the SEC has avoided this problem by keeping the roundtables in more of an informal, ad hoc nature, rather than forming a formal advisory committee.)

In the main, by addressing emerging issues, including broad-based constituents from the private sector and regulatory community, and convening in public, the new Financial Reporting Series, based on Kroeker's description at USC, appears to implement the thrust of the Pozen Committee's recommended FRF, which called for a focus on, "Urgent matters in the U.S. financial reporting system [which] should be dealt with in a timely fashion, which may require the FRF to be convened both on a regular schedule and on short notice, as necessary. The meeting process should allow interested parties to raise issues in a transparent fashion."

Separately, an earlier version of the Dodd-Frank Act (the House version passed on Dec. 11, 2009) called for the formation of a "Financial Reporting Forum." As noted in our blog post at that time:

Financial Reporting Forum to make recommendations to Congress: A Financial Reporting Forum would be created, consisting of the Chairmen of the FASB, SEC,
bank regulatory agencies, and certain others to be appointed by the SEC (including a representative of a financial institution, a non-financial institution, auditors, and investors). The Financial Reporting Forum would meet at least quarterly, to: "discuss immediate and long-term issues critical to financial reporting," and would "issue an annual report to the Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters." [NOTE: An earlier version of this provision was submitted by Rep. Miller.] [Sec. 7417]

Although I don't believe the "Financial Reporting Forum" recommended in the earlier House version remained in the final Dodd-Frank Act, the common theme of involving representatives of the SEC, FASB and PCAOB, along with key constituents, to "discuss immediate and long-term issues critical to financial reporting" seems to be consistent in many respects not only with the Pozen Committee's recommended FRF, but also with the SEC's new Financial Reporting Series.

Additionally, I believe (before its too late, let me remind you of the disclaimer posted on the right side of this blog) that the new Financial Reporting Series can be beneficial to the SEC, PCAOB and FASB, given the responsibility of the Financial Stability Oversight Council which was included in the final Dodd-Frank Act.

As described by AICPA JofA Senior Editor Matthew Lamoreaux in his article, Financial Regulatory Reform Bill Clears Congress, when the final Dodd-Frank Act was signed by President Obama last year:

Accounting standards. The act gives the Financial Stability Oversight Council the duty to monitor domestic and international financial regulatory proposals and developments, including insurance and accounting issues, and to advise Congress and make recommendations in such areas that will enhance the integrity, efficiency, competitiveness and stability of the U.S. financial markets. The council may submit comments to the SEC and any standard-setting body with respect to an existing or proposed accounting principle, standard or procedure.

Stay Tuned
In his remarks at USC last week, Kroeker noted, "I encourage you to watch for public announcements of the sessions in advance through a press release or on a devoted Financial Reporting Series webpage on the Commission’s website."

Other Topics In Kroeker's Speech
Other major topics covered in Kroeker's speech, besides the Financial Reporting Series, included:

Oversight of Standard-Setting: Convergence (IFRS and U.S. GAAP)

Oversight of Standard-Setting: Private Companies (Note: some may consider it interesting that the SEC's oversight indirectly extends to private companies (in addition to public companies) through its oversight of the FASB.) In his remarks, Kroeker states: "I have also spent time understanding the report and recommendations put forward by a Blue-Ribbon Panel on Standard Setting for Private Companies. My focus in understanding those recommendations is to consider the nature and impact of any recommendations for private companies to apply accounting standards that may differ from those that public companies apply."

He continues, "It is prudent, in my view, to carefully consider the nature of any differences and their effect on the capital formation process if private companies have to adopt a revised, and more stringent set of accounting policies in connection with preparing Commission filings to raise public capital. Further, it is important to understand why one might suggest a different standard for private companies."

Kroeker concludes on this subject, "I support the approach taken by the FAF Trustees in carefully considering the advice from this panel as they strategically assess the financial reporting system for private companies. Further, I believe that in a number of areas additional research, study, and outreach, particularly to investors, would be warranted prior to implementing any significant change in the standard-setting structure applicable to nonpublic entities."

SEC's Sarbox Section 404 Study - including a repeated call for PCAOB to publish findings of 'lessons learned' about auditor practices, from its inspections data

Mitigating financial reporting risk - through PCAOB's announced consideration of potential changes to the auditor's reporting model, and through better audits

Need for focus on PCAOB international inspections

Auditor Relationship, Audit Fees, and Risk Management: FEI-FERF Report

2011-06-09T14:36:00.000-04:00

Earlier today, results of the latest FEI Audit Fee Survey, conducted by FEI's research affiliate, the Financial Executives Research Foundation (FERF), were released.

This year's survey, sponsored by NYSE-Euronext, was expanded as in recent years to include audit fees in total (i.e., not only Sarbanes-Oxley Section 404-related fees, which was the objective of the audit fee survey when first launched). Information on total audit fees is now the focus of the survey, since Sarbanes-Oxley Section 404 fees are generally not broken out as much by auditors as in prior years, and have been blended into the integrated audit fee.

Public and Private Companies Surveyed
The survey results include results for both private and public companies, with results broken out within public companies for accelerated and nonaccelerated filers.

243 survey responses were received in total, representing executives from 98 U.S. publicly-held companies (consisting of 82 accelerated filers and 16 nonaccelerated filers), 124 U.S. privately-held companies, three foreign companies and 21 non-profit organizations.

Modest Changes In Audit Fees

Audit fees for public company accelerated filers increased by 2%, on average;

Audit fees for public company nonaccelerated filers increased by 3%, on average; and

Audit fees for private companies remained flat, on average.

Auditor Relationship

the relationship with auditors was rated ‘neutral to good’ on average by both public and private companies.

21 years was the weighted average number of years of the client-auditor relationship for the public company survey respondents, compared with 8 years for the private company respondents

Note: see also our recent blog post, PCAOB To Consider Mandatory Audit Firm Rotation.

Risk Management
For the first time, the Audit Fee Survey included questions about risk management. Questions addressed such topics as whether survey respondents currently have a company-wide risk management process in place, rolled out to the whole company, or used at headquarters.

Read more in FEI's press release.
Access the full Audit Fee Survey report.

PCAOB To Consider Mandatory Audit Firm Rotation

2011-06-08T11:25:00.000-04:00

In a keynote speech last week entitled Rethinking the Relevance, Credibility and Transparency of Audits, Public Company Accounting Oversight Board Chairman Jim Doty called for a reexamination of whether there should be a move to mandatory audit firm rotation. Doty delivered the speech at USC's 30th Annual SEC and Financial Reporting Institute.

Mandatory Audit Firm Rotation, More, Coming In Concept Release
Referencing the importance of independence and skepticism, Doty said, “I believe it is incumbent on the PCAOB to take up the debate about firm tenure and examine it, with rigorous analysis and the weight of evidence in support and against. I don't have a predetermined idea as to whether the PCAOB ultimately should adopt term limits. My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public.

“As such,” he continued, “the [PCAOB] board plans to issue another concept release to explore whether there are other approaches we could take that could more systematically insulate auditors from the forces that pull them away from the necessary mindset.”

Auditor's Reporting Model - Concept Release Coming
As reported in March, the PCAOB plans to issue a concept release for public comment on the Auditor's Reporting Model. Doty added in last week's speech that the PCAOB expects to issue the above-referenced concept release on enhancing auditor's independence and skepticism "around the same time that we issue the concept release on the auditor's reporting model, in order that they can be considered together in a holistic manner."

FEI’s Committee on Corporate Reporting will be closely following these issues to provide thoughtful and practical input from the prepararer's point of view.