Saturday, December 1, 2007

December, 2007 archive

NOTE to readers: The FEI Financial Reporting Blog was launched in Sept., 2004, originally posted directly on FEI's website. The blog moved to the Google Blogger platform in Nov. 2008. All posts from 2008 forward are presently online at the new blog web address; we are in process of copying over archived posts from 2007 and earlier. Below are all posts from Dec. 2007.

The Regulatory Landscape in 2008: Coming Attractions
Tonight being New Year’s Eve, we thought we’d provide a brief list of the most significant regulatory and other standard-setting developments we anticipate in 2008 that could have a far reaching impact on SEC reporting and private company reporting. With 2008 being an election year in the U.S., the change in administration following the November Presidential Election means the pressure is on to complete certain rulemaking central to the current administration’s (including, the regulatory agencies under their current leadership) desired legacy.
A requirement for mandatory adoption of eXtensible Business Reporting Language (XBRL), a form of interactive data or electronically tagged data elements, which companies would be required to provide in SEC filings, may come in 2008 (with a phased in implementation period). As we reported on Sept. 25, SEC Chairman Christopher Cox has asked the SEC staff to release a proposed rule in the spring, with the goal of final rulemaking by the fall, on the use of XBRL. The SEC already has a Voluntary Filer Program using XBRL, and in December requested public comment on the U.S. GAAP taxonomy or dictionary of XBRL data tags (with comments due April 8). Further indication of the seriousness of the move to XBRL was the formation of the SEC’s Office of Interactive Disclosure in October, and the release of Interactive Data Viewers the public can use to view original XBRL filings, as well as Executive Compensation data for 500 large companies compiled by the SEC.
If you still don’t believe XBRL (generically, interactive data) may become a reality for all U.S. public companies by SEC fiat, (and in other countries by their home regulators, too) see Cox’ remarks to the International Organization of Securities Commissions (IOSCO) in November, in which he said: "The global movement to interactive data for financial reporting is truly underway…. Without question, 2008 will be a watershed year for interactive data.”
A number of significant issues to watch for in 2008 with regard to XBRL are whether the SEC would mandate XBRL for footnote and narrative disclosures, or only for the financial statements themselves, and what the role of the auditor would be with respect to XBRL information.
XBRL is one of the legacies Cox may leave as Chairman of the SEC. Another one is International Financial Reporting Standards (IFRS), discussed below.
As we reported in November, the SEC voted to drop the requirement that foreign filers provide reconciliation from International Financial Reporting Standards (IFRS) to U.S. Generally Accepted Accounting Principles (GAAP) if they use IFRS as published by the International Accounting Standards Board (IASB). This decision by the SEC was a year ahead of schedule according to the IFRS ‘Roadmap’ first articulated by then-SEC Chief Accountant Don Nicolaisen in April, 2005.
But the bigger decision currently facing the SEC is whether to permit, or require, U.S. companies to report their SEC filings in IFRS instead of U.S. GAAP. Preliminary feedback on this issue was sought through SEC’s Concept Release earlier in 2007, and we reported on the SEC’s two public roundtables held in December on this subject, at which various FEI members and other experts from financial reporting, auditing, and the analyst and investment banking community testified. As we reported, there is interest, particularly among large, multinational companies, in permitting IFRS reporting by U.S. companies on a voluntary basis, but there are concerns about how long any dual-reporting system (where companies can report in IFRS or U.S. GAAP) would be allowed; at the same time, there are serious concerns among companies, investors and others about how quickly any mandatory move to IFRS would take place.
Major changes to the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) and their oversight bodies are under active consideration as the world moves ever faster toward one set of global accounting standards.
We reported in December on the release of “Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB and GASB” released by the Trustees of the Financial Accounting Foundation (FAF) which oversees the FASB and its counterpart, the Governmental Accounting Standards Board (GASB).
The FAF’s proposal is something all companies – public and private – and other stakeholders in the financial reporting process should take note of and consider commenting on. Among the significant changes proposed are that the size of the FASB board be decreased from seven to five board members, and that power to set FASB’s agenda be placed in the hands of the Chairman, vs. the current process where the board determines the agenda. The comment deadline is Feb. 10, 2008.
On the topic of governmental reporting, see also the op-ed in today’s Wall Street Journal, “Speak Up, Mr. Buffett,” which says “Warren Buffett's entry into the muni bond insurance market could represent perfect timing, both financially and politically… While Congress has been busy crafting still more regulations on private business, Members have ignored SEC warnings about the lack of transparency in government finance.” After citing fraud uncovered with the city of San Diego’s finances and other municipalities, the WSJ, normally a free market advocate, concludes: “Congress acted in 1995 to make its Members live by the same laws that they foist on the rest of us. Why should city hall get a free pass when it comes to securities laws?” The WSJ adds, “Mr. Buffett is just the man to end this hypocrisy… [his] voice on behalf of investors could advance an eminently sensible, and much-needed, reform.”
Meanwhile, as we reported in November, the IASB announced steps to enhance its governance, oversight and funding, and the announcement was welcomed in a joint statement by the SEC, IOSCO, the European Commission, and Japan’s Financial Services Authority (FSA).
The process by which accounting standards are set (including the professional knowledge and experience of the members of the standard-setting board(s) and their overseers), the independence and transparency of that process, and the stability of funding are key issues that can have a profound effect on the nature and quality of how information is reported by public and private companies and government agencies. Stay tuned for further developments in this area.
SEC, Treasury Advisory Committees To Issue Recommendations in 2008
With Treasury Secretary Henry M. Paulson leading the call to examine competitiveness issues in the U.S., and following a year in which numerous reports were issued on this theme (e.g., reports by the Committee on Capital Markets Regulation, by New York Mayor Michael Bloomberg and Senator Charles Schumer, and by a U.S. Chamber of Commerce sponsored committee), the SEC and the Treasury Department formed Advisory Committees in 2007 which plan to release recommendations by the summer of 2008.
The SEC Advisory Committee on Improvements to Financial Reporting, abbreviated CiFR and also referred to as the ‘Pozen Committee’ as it is chaired by Robert Pozen, has announced its next meeting will be held January 11, 2008. See our summaries of their Nov. 2 meeting here and here. A number of FEI members serve on the Pozen Committee.
Treasury’s Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC Chairman Arthur Levitt, Jr. and former SEC Chief Accountant Don Nicolaisen, last meet on Dec. 3, 2007. As noted in our summary of that meeting, FEI President and CEO Michael P. Cangemi was among those who testified to the committee.
For additional themes that will be on the radar of financial executives in 2008, see "FEI CEO's Top Challenges for Financial Executives in 2008" which we have previously reported.
Other New Releases in 2008 – The Singing CPA!
In our tradition of offering you some clips of accounting-related songs/videos to enjoy for New Year’s Eve, (last year we shared with you “Sarbanes-Oxley” (song 3 on the link) by the Victor Bravo band) the FEI Financial Reporting Blog brings you an exclusive clip from the upcoming CD to be released in early 2008 by “The Singing CPA” – Steven Zelin. The clip is Zelin’s new song, “Major in Accounting” which may help that thorny shortage of PhD issue we reported on earlier this year, and may help increase the number of students majoring in accounting – a field that has already seen a boost in the post Sarbanes-0xley period.
Zelin is known for his appearances in various venues, including appearing at New York City’s main post office on the tax filing deadline, April 15, with his signature song, “Dear I.R.S.” That song is available on his earlier CD, “Just Take a Sick Day,” available on iTunes and through his website,
If you haven’t heard Zelin’s songs, they go way beyond his “Singing CPA” persona and evidence some talented musicianship and story-telling; listen to this clip from “Bagel Store” from his “Just Take a Sick Day” CD. (The clip doesn't do it justice, it's like hearing just a clip from a Harry Chapin or Billy Joel song, there's an interesting story that unfolds.) If you’ve lived in Manhattan you’ll recognize the themes in many of his other songs like “Island of Manhattan Blues” and “Free Furniture Day.”
Performing accounting and non-accounting related songs, Zelin is kind of the Miley Cyrus/Hannah Montana of the professional set. (See the article on Cyrus’ concert in today’s New York Times, my younger daughter and I enjoyed the concert in NJ yesterday; she is touring with New Jersey natives and co-Disney stars, the Jonas Brothers.) With lawsuits cropping up over the Cyrus/Montana concert selling out in minutes by having tickets snapped up by internet ticket bots vs. individual fan club members, I’ve shared with some of you the challenge of ordering tickets to her NJ concert that went on pre-sale to the fan club at 10am Sept. 25, the same time as SEC’s XBRL press conference was scheduled to begin which I reported on here; I had two computers at the ready, it helped the SEC press conference started about 15 minutes late that day!
If you received our blog posts from ‘a friend’ this year, sign up here so you can start getting our posts real-time by email in 2008! We also offer RSS and other feeds.
Happy New Year to all our FEI blog readers, wishing you, your families and associates all the best in 2008!
Dec 31, 2007, 11:21 AM by Edith Orenstein

Congress Approves SEC Funding, Applauds Delay of Sarbox Audit for Small Bus; Should There Be a Sarbox Solution for Subprime?
Congress sent the Securities and Exchange Commission (SEC) a message in a bottle - or rather, in the wallet –expressing its concern about the impact of the Sarbanes-Oxley Act’s Section 404 internal controls reporting requirements on small business, and voicing its support for the SEC’s ‘decision’ to delay the external auditor’s report on internal control (Sarbox Section 404(b)) for small businesses by an additional year - as part of the government’s fiscal year 2008 appropriations signed into law on Wednesday.
Within the FY ’08 Appropriations Act, the section entitled Division D-Financial Services set forth the SEC’s FY 08 funding at $906 million.
“The amount represents a 1.5 percent increase over the agency's fiscal 2007 appropriations and is slightly more than the president's request last winter. It is also a compromise between the $905.3 million sought by Bush and cleared by the Senate, and the $908.4 million approved by the House,” notes this article in today’s BNA Daily Report for Executives.
The commentary attached to the appropriations bill stopped short of forbidding the SEC to enforce the provisions of Sarbox 404 on small business, which had been proposed in the Garrett-Feeney amendment to the appropriations bill passed earlier this year by the House which failed to gain traction in the Senate.
Instead, the Joint Explanatory Statement (JES) to Division D includes the following note pertaining to Sarbox and small bus (which we have outlined in bullet form below):
“The Appropriations Committees are concerned about costs that may confront small businesses complying with section 404 of the Sarbanes-Oxley Act and related SEC guidance and Public Company Accounting Oversight Board auditing standards.
“Therefore, the Committees are supportive of the recent decision by the SEC to delay for an additional year the requirement for an auditor's attestation of management's assessment of internal controls.” [See NOTE below regarding this ‘decision’ to delay 404 for small bus.]
“The Committees understand that the SEC is collecting cost data and will assess that data to determine whether the current guidance and standards, approved in May 2007, pose an unreasonable financial burden on small businesses.
“The SEC is directed to solicit the views of affected small businesses during this process.”
NOTE: Any SEC ‘decision’ to delay Sarbox 404(b) for small companies has not yet been formalized, although SEC Chairman Christopher Cox spoke of his intent to propose such a delay in testimony before the House Small Business Committee earlier in December.
Further on the subject of small business, the joint explanatory statement to the appropriations bill acknowledged the role of the SEC’s Office of Small Business Policy and Congress “direct[s] it to act as the Commission’s Small Business Ombudsman.”
Separately, support for stepped up international convergence efforts is also evident in the SEC’s funding package approved by Congress, which provides that an amount “not to exceed $20,000 may be used toward funding a permanent secretariat for the International Organization of Securities Commissions (IOSCO),” and an amount “not to exceed $100,000 shall be available for expenses for consultations and meetings hosted by the Commission with foreign governmental and other regulatory officials.”
The SEC’s planned delay of the Sarbox 404(b) external audit of internal control has met with approval by the U.S. Small Business Administration’s Office of Advocacy as noted in their Dec. 20 press release.
A statement issued by Congressman Scott Garrett on Dec. 17 also supported the SEC’s planned delay of 404(b): “By delaying this SOX requirement we are giving our small businesses more time to ensure that they are not unfairly hurt without jeopardizing the accountability goals of the initial SOX legislation.”
Sarbox and Subprime
Speaking of the goals of the initial Sarbanes-Oxley legislation, an oped in today’s Wall Street Journal warns of the potential consequences of a rush to legislate in the wake of a financial markets crisis, drawing parallels to today’s subprime mortgage-backed ‘debacle’ and the related impact on the credit markets.
The op-ed, “Subprime Conduct,” authored by Neil Weinberg, senior editor at Forbes, says “The predictable effects” of the Sarbox legislation’s broadbrush response to high profile frauds like Enron and Worldcom (now MCI) was: “tens of billions of dollars in added costs for American business (aka, the small investors and pension funds who own them), loads of new work for accountants and lawyers, a turn away from U.S. capital markets by foreigners, and little, if any, effect on corporate crime.”
“The futility of Sarbox-style corporate crime fighting is apparent in recent survey results,” Weinberg notes, citing a survey by PricewaterhouseCoopers which shows: “Forty-three percent of companies have had to deal over the past two years with serious economic crimes, including accounting fraud, asset misappropriation and bribery,” and “[t]he incidence of such wrongdoing is actually up six percentage points since 2003, the year after Sarbanes-Oxley.”
What’s Weinberg’s solution to corporate fraud or malfeasance, if it isn’t Sarbox like legislation? “Tone at the Top,” he says, and making it a reality throughout the organization.
“Corny as it sounds,” says Weinberg, “corporate leaders can clean up their acts, and keep politicians and lawyers off our backs, only by setting the right tone at the top. Then, unlike Enron, which on paper had a model code of ethics, they must actually live by it.”
In practice, he adds, “That means setting strict rules for personal conduct and punishing even top talent for breaking them (something the PricewaterhouseCoopers survey found lacking). It means making sure performance pay rewards workers for doing the right things and not the wrong ones.”
Guidance on Tone at the Top (part of the Control Environment) is included in COSO’s landmark 1992 Internal Control-Integrated Framework, and COSO’s 2006 Guidance for Smaller Public Companies (which can be applied by companies of all sizes). Separately, COSO is currently developing additional guidance on Monitoring internal controls.
Weinberg concluded his WSJ op-ed: “The remedy for corporate wrongdoing, in other words, is not in our laws but in ourselves.” Some mix of legislation, regulation, and market based solutions may ultimately come of the subprime ‘debacle’ (the word used in his op-ed), as 2008 unfolds.
The WSJ lists Weinberg not only as a senior editor at Forbes, but also as the co-author of a recently published book with Walter Pavlo Jr.: "Stolen Without A Gun -- Confessions from inside the largest accounting fraud in history, the collapse of MCI WorldCom."
Weinberg notes his “first insight into the recent pendulum of corporate excess” began when he received a letter from Pavlo – then an inmate in federal prison – in 2002, which said: “I helped MCI cook its books. I thought you might want to know."
Pavlo’s name rung a bell as I realized he was the subject of an anti-fraud video produced last year by the AICPA and the Association of Certified Fraud Examiners (ACFE), which I recommend.
Other reformed players from major frauds providing educational programs include Sam E. Antar, former CFO of Crazy Eddie, Inc. (and cousin of Eddie Antar), who maintains, and Frank W. Abagnale, whose life was featured in the movie “Catch Me if You Can.” Abagnale was a keynote speaker at Financial Executives International’s (FEI’s) Summit conference last year, and his info is available at
Fraud hunters like former WorldCom Internal Audit Director Cynthia Cooper are also on the speaking circuit and writing about their experience. As we previously reported, Cooper gave a keynote speech at FEI's Current Financial Reporting Issues Conference (CFRI) in November, currently serves as a member of the PCAOB's Standing Advisory Group, and has a new book out published by Wiley which you can purchase through the Financial Executives Research Foundation (FERF) bookstore in the Wiley books section.
As we head into this holiday weekend, if you missed our FEI blog posts earlier this week, see: Treasury Releases Tax Study; SEC Releases SAB 110 and Exec Comp Viewer; SuperSIV on Hold, and Subprime Shenanigans, Tax Shelters in the News, Other Happenings. To receive our blog posts by email, enter your email address here.

Dec 28, 2007, 11:16 AM by Edith Orenstein

Subprime Shenanigans, Tax Shelters in the News, Other Happenings
The rise and fall of a subprime mortgage-backed Collateralized Debt Obligation (CDO) named “Norma” developed and marketed by a major investment bank (Merrill) and a small money management firm known for investing in penny stocks (N.I.R. Group LLC) is detailed in an article by Carrick Mollenkamp and Serena Ng in today’s Wall Street Journal entitled, “Wall Street Wizardry Amplified Credit Crisis.”
Investments in CDO’s resembling ‘Norma’ are among the billions of dollars in write-downs of underwater subprime-backed assets which investment banks have taken of late, say Mollenkamp and Ng.
“By mid-December,” the WSJ writers state, “$153.5 billion in CDO slices had been downgraded, according to Deutsche Bank.” They add, “Because banks owned the lion's share of the mezzanine CDOs, they bore the brunt of the losses. In all, banks' write-downs on mortgage investments announced so far add up to more than $70 billion.” They note, “For larger banks, holdings of mezzanine CDOs could account for one-third to three-quarters of the total losses.”
Besides detailing how ‘Norma’ came to be, the WSJ writers include the role of the ratings agencies. When the “78-page pitchbook that bore Merrill's trademark bull,” was released, it noted some of Norma’s tranches received AAA ratings when it was released in the spring. However, by the fall, some of those AAA rated tranches were downgraded to junk.
“Ratings companies say their March opinions represented their best read at the time,” note Mollenkamp and Ng, “and called the subprime deterioration unprecedented and unexpectedly rapid.” They quote Kevin Kendra, a managing director at Fitch Ratings, saying: “The world has changed quite drastically -- and our view of the world has changed quite drastically."
“Son of Boss” Tax Shelter Ruled Abusive By U.S. Court of Federal Claims
In other news, the ‘Son of Boss’ tax shelter disallowed by the I.R.S. in 2000 has been ruled an abusive tax shelter in civil court, reports Lynnley Browning of the New York Times today, in “Judge Hands I.R.S. Victory in Tax Shelter.”
Browning reports, “The decision, by the United States Court of Federal Claims, covers one of the most widely used aggressive tax shelters of the late 1990s through recent years,” and adds, “The ruling, issued on Friday [was] discussed by an I.R.S. spokesman for the first time Wednesday.”
FASB Releases Draft EITF Abstract on Two Class Method for Master Limited Partnerships
Yesterday, FASB posted for public comment the draft abstract (consensus) of FASB’s Emerging Issues Task Force (EITF) on EITF Issue 07-4: "Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships.” The comment deadline is Feb. 8, 2008.
What Else is Happening?
Want to keep up on other happenings impacting the finance field? Meet with your peers and hear from top rated speakers at FEI’s upcoming conferences. FEI’s Summit conference May 4-6, 2008 at the Arizona Biltmore in Phoenix, AZ features Nasdaq CEO Bob Greifeld, Chief Economist Anthony Chan from JP Morgan Chase Private Client Services, political consultants Mary Matalin and James Carville, and many other experts.
Or, consider attending the Sixth Annual Vision for Tomorrow’s Treasurer Conference March 18-19, 2008, sponsored by Treasury & Risk in association with FEI. The Treasury conference will be held at the Marriott Marquis in New York City.
Those of you who have attended FEI conferences know the caliber of our speakers is top-notch. And, if you attended FEI’s annual Current Financial Reporting Issues Conference (CFRI) in the fall know the Marriott Marquis as a great conference venue in terms of location (on Times Square) and amenities. In fact, a Broadway theatre is located within the hotel, the Marquis Theatre.
Attending CFRI the past few years I wondered what the current play, The Drowsy Chaperone, would be like, and hearing that Bob Saget (known for TV’s Full House and other venues) was currently performing as ‘man in chair’ locked it in for us, so our family went to see the show yesterday. We really enjoyed it; if you were thinking about seeing the show, I’d recommend it; (the show won the most Tony Awards of any Broadway musical in 2006); but note that it closes its current Broadway run on Dec. 30!

Dec 27, 2007, 10:42 AM by Edith Orenstein
Treasury Releases Tax Study; SEC Releases SAB 110 and Exec Comp Viewer; SuperSIV on Hold
Topics relating to taxation and valuation of subprime and other assets will continue to be at the forefront entering 2008, as noted in “FEI CEO Michael P. Cangemi’s Top 2008 Challenges for Financial Executives.”

Regulatory agencies released a number of items relating to taxes (U.S. Treasury) and stock options and executive comp (SEC) before the year-end holidays set in, and a bank-led consortium announced it would not move forward to create a joint funding vehicle to stabilize prcing of assets underlying structured investment vehicles (SIVs) at this time.Last Thursday (Dec. 20) the U.S. Treasury Department’s Office of Tax Policy released its study on: “Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.”

As noted in remarks by Assistant Secretary for Tax Policy Eric Solomon, the comprehensive study “is a follow-up to [Treasury’s] July conference with business leaders, economists, and policy makers about this important issue.” He added, "To maintain the competitiveness of U.S. businesses and U.S. workers in a global economy, an examination of our business tax system in the context of the global marketplace is overdue.” Now that the study has been published, he said, Treasury will continue to have “discussions with Congress, the business community, and other policy makers,” as they further consider this issue.

The study “outlines several broad approaches to business tax reform… [and] specific business tax areas that can be addressed,” said Solomon. However, he added, “There are no policy recommendations in this study.“ Rather than recommending a preferred approach at this time, he said, “We believe it will provide significant substance for discussion, and will further the effort to inform the public policy debate.”

Treasury also issued a summary of its 121 page study. Here are the three major approaches for tax reform aimed at improving the competitiveness of U.S. businesses and U.S. workers in the study:
1. Replace the Business Income Tax System with a Business Activity Tax (BAT)The BAT tax base would be gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses. Wages and other forms of employee comp would not be deductible; interest would not be deductible nor taxed as income. See the summary for more details.
2. Broaden the Business Tax Base and Lower the Statutory Tax Rate/Provide Expensing The top federal business tax rate could be lowered to 28% if all special provisions were eliminated (31% if accelerated depreciation is retained), Treasury’s study concluded, as noted in their summary. One option explored is to provide partial immediate writeoffs of depreciable assets. See the summary for more details.
3. Specific Areas of the U.S. Current Business Tax System That Could Be Addressed, including:
o Multiple taxation of corporate profits
o Tax bias favoring debt finance
o Taxation of international income
o Treatment of losses
o Book-tax conformity
o Other areas to improve tax administration
Consistent with Solomon’s remarks, Treasury’s summary also states: “NOTE: The approaches presented in this study are not intended to be all inclusive and do not favor one approach over another.”
Book-tax conformity?The discussion of the pros and cons of potentially conforming book and tax reporting – i.e. if the I.R.S. were to tax based on U.S. GAAP income under FASB standards.
“A significant benefit of using book income as the tax base is that corporations would no longer have to keep a second set of books for tax purposes. Eliminating this requirement could save corporations substantial recordkeeping costs and decrease the role of tax legislation and the costs of enforcement,” says the study.
However, the study also notes some potential pitfalls of book-tax conformity. “It is unclear,” says the study, “whether the SEC is in a position to protect the tax base from eroding as effectively as it protects shareholders and creditors from overstated earnings.”
The study adds, “Many corporations might respond to a book income tax base by seeking to decrease book income. Managers might find ways other than official income measures to communicate profitability to investors. If so, new costs might arise related to communicating free cash flow and other pro-forma earnings to analysts, market participants, and creditors. So while tax and book income might be formally conformed, in practice there could be two reporting regimes, one of which will effectively have no formal rules. Thus, it is possible that taxing book income could impair the competitiveness of the flagship financial reporting system that makes the U.S. capital market the strongest in the world,” says the study, “without leading to an increase in tax collections. Indeed, certain evidence from European countries suggests that conformity between book and tax income measures has reduced the reliability of book reporting in these countries.”
The study also notes challenges to a book-tax conformed system could arise from the increasing move to fair value accounting in GAAP.
“Fair value accounting seeks relevance even at the risk of some reliability and certainty,” says the study. “As such, fair value accounting is in stark contrast to tax accounting, which emphasizes certainty and so is based on historical values and the realization principle.” Additionally, ”Valuation is a judgment call, and the SEC generally does not challenge a firm’s valuation if there is a reasonable basis for the value.” Therefore, the study says, “Using unchallenged financial accounting valuations may place government tax revenues at risk.” Additionally, the study notes, “Financial accounting also requires more evidence and certainty for recognizing gain contingencies than for recognizing loss contingencies. This rule would tend to reduce tax collections. The accounting principles that require accruing losses sooner than gains also would permit corporate taxpayers to use management discretion to decrease the tax base.”
Additionally, “A regulatory and enforcement system for nonpublic firms would need to be developed," if book-tax conformity were required, says the study. "Even more importantly," the study says, "the relationship between FASB/SEC, the Congress, the Treasury Department/IRS, and the federal courts would have to be determined. “
Treasury's study also challenges others’ assertions that a book-tax conformed system would play a big role in resolving the tax gap. Although book income did exceed tax income in the late 90’s, that gap varies over time, and has been narrowing more recently, as shown in Chart 4.1 in the study.
SEC Releases SAB 110, Updating SAB 107 on Employee Stock Options
Last Friday (Dec. 21), the SEC released Staff Accounting Bulletin 110 (SAB 110), updating SAB 107 relating to accounting for employee stock options under FAS 123R, Accounting for Share-Based Payments. See also this related press release. When SAB 107 was issued, the SEC indicated it would accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term.
“At the time SAB 107 was issued,” says SAB 110, “the [SEC] staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007.”
However, “The [SEC] staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007,” says SAB 110.
“Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007,” says SAB 110. “Without this action, otherwise eligible public companies would have lost the option to use the simplified method as of Dec. 31, 2007. The limited extension in SAB 110 will be of particular benefit to those public companies that lack historical exercise data, many of which are smaller companies.”
Executive Pay At 500 Large Companies Can be Compared in XBRL Data Published by SEC
Before breaking for the extended holiday weekend (see commentary by Broc Romanek in The Blog), the SEC announced Friday afternoon (Dec. 21) the release of “the first-ever online tool that enables investors to easily and instantly compare what 500 of the largest American companies are paying their top executives.”
“The new database highlights the power of interactive data to transform financial disclosure,” said the SEC, which used its own staff to load exec comp disclosure data provided the old fashioned way into an XBRL format. (A limited number of companies currently provide XBRL data directly to the SEC under the SEC’s XBRL Voluntary Filer Program.)
As noted in the announcement, the SEC has provided access to this exec comp data through an “Executive Compensation Reader” available at http: . The SEC says making this data available this way “builds on the Commission's new requirements that went into effect earlier this year to dramatically enhance clarity and completeness of executive compensation disclosure.”
SuperSIV on HoldUpdating our earlier report in October that a number of major banks were considering forming a “SuperSIV” to facilitate orderly funding and transactions in mortgage-backed securities held in Structured Investment Vehicles (SIVs) sponsored by those banks, there were various press reports over the weekend that the SuperSIV plan has been abandoned for now.
Here is the joint press release issued Friday (Dec. 21) by Bank of America, Citigroup, JP Morgan Chase and BlackRock, which notes, “Based upon the feedback that the bank consortium and the advisor [BlackRock] have received from domestic and global liquidity sources and from prospective SIV participants, they have determined the vehicle is not needed at this time.”
The SuperSIV, more formally referred to as M-LEC for Master Liquidity Enhancement Conduit, “was conceived as a ‘buyer of last resort’ for SIV assets, if and when other traditional and nontraditional sources of liquidity did not emerge,” said the press release, and was designed “to provide a market-based solution to continued illiquidity in the short-term credit markets" by “supporting the return of stable market conditions, an orderly unwinding of SIVs and the avoidance of a ‘firesale’ of SIV assets.”
The banks' joint press release notes recent events during the past three months have shown an increase in market based solutions, “including moves by several bank-owned SIVs to significantly reduce SIV exposure and to develop their own liquidity support,” and “recent reports show SIV assets have been steadily reduced to less than $265 billion in senior debt outstanding in early December, from $340 billion at a summer peak. A continued decline is expected,” adds the press release. [NOTE: We corrected our original blog post which erroneously said $240 billion instead of $340 billion.]
Among the recent initiatives taking place in the market which may have contributed to the decision to avoid launching the SuperSIV or M-LEC at this time may include Citigroup's recent action to support $49 billion of its SIVs and bring them back on the balance sheet.
See also our related coverage of SEC and other regulatory investigations into accounting and disclosures of investments in SIVs and other off-balance sheet investments.

Dec 24, 2007, 10:14 AM by Edith Orenstein
SEC Probe of Subprime Disclosures Rivals That of 2003 Analyst Probe,WSJ Says;Class Actions Up Per NERA;FASB Gift to Private Cos
In an article entitled, “Pricing Probes on Wall Street Gather Steam,” Susan Pulliam and Kara Scannell of the Wall Street Journal report that regulatory investigations, led by the SEC, are “examining whether financial firms should have told the public earlier about the declining value of [mortgage-backed] securities and how they priced them on their books.”
Issues being examined include whether firms priced assets for their own book differently than that given to their customers’ holdings, the timing of write-downs and related disclosures, and issues relating to pricing and disclosures relating to holdings in off-balance sheet entities.
We previously reported the SEC issued a letter in early December to over two dozen companies, reminding them of their disclosure obligations for investments in Structured Investment Vehicles (SIVs), Collateralized Debt Obligations (CDOs), and other off-balance sheet entities.
“Three dozen investigations [have been] opened by the SEC tied to the downturn of the subprime market,” WSJ’s Pulliam and Scannell say, looking into issues described above and others.
“The SEC has set up a working group that also is looking at whether firms adequately disclosed the risks of these investments and were timely in announcing stresses on the firms’ financial statements,” they note.
Mark Schoenfeld, director of the SEC’s New York Office, is quoted by Pulliam and Scannell: “As in most investigations, the issue comes down to what did people know and when did they know it.”
Walter Ricciardi, Deputy Director of the SEC’s Enforcement Division, is also quoted in the WSJ article: “The fact that we’re investigating does not mean that we have uncovered wrongdoing. We don’t know now that we will be recommending any enforcement actions in the subprime area.”
With over $80 billion in write-downs of mortgage-related assets in the past several months, according to Pulliam and Scannell, “some observers have compared this SEC investigation to an investigation of analyst research after the technology bubble burst.”
“In that investigation," they note, "the issues came down to what was said publicly versus what they were saying internally, regulators and lawyers say.” Note: the analyst investigation they refer to resulted in the 2003 Global Analyst Research Settlement with ten investment banks, netting over $1 billion in total penalties, disgorgement, funding of independent research and education efforts, and structural reforms.
The current investigations “will be complicated by the inherent difficulty in pricing such complicated securities, particularly when markets dry up. Financial firms often use mathematical models with built-in assumptions in determining value, or ‘marks,’ which might differ if they had to sell the securities,” Pulliam and Scannell add.
Related articles in today’s WSJ include, “Fraud Seen as a Driver in Wave of Foreclosures” (subtitled: Atlanta Ring Scams Bear Stearns, Getting $6.8 Million in Loans,” and “SEC Probes WaMu on Appraisals.”
NERA Reports Increase in Class Action Filings, Fueled by Subprime Crisis
Separately, an article in today’s New York Times by Karen Donovan, “Class Action Cases Rise, Fueled by Subprime Troubles,” says “The subprime mess is turning out to be a boon for class-action lawyers,” which will be shown in a report on class actions released today by NERA Economic Consulting.
The NERA class action study, released today, shows a reversal in the trend of a previous decline in class action filings, with an increase fueled by subprime related matters. Highlights from their study, as noted in the NERA press release, include:
The 18-month decline in shareholder class action filings has definitively reversed course, with 2007 federal filings projected to increase by 58% compared to the previous year, according to NERA Economic Consulting's semi-annual benchmark study, released today.
The NERA report projects there will be 207 federal filings by year end, following just 131 filings in 2006. Despite widespread speculation that filings would continue to decline, the trend has reversed course and filings are back up to 2005 levels, as NERA predicted in its mid-year review of filings from January through June 2007.
The sharp increase in filings has been driven in part by litigation related to subprime lending. As of 15 December 2007, 38 subprime shareholder class actions had been filed this year. The first subprime-related shareholder class action was filed on 8 February 2007, and the pace of filings accelerated throughout the remainder of the year. In fact, by 15 December the total number of subprime cases filed had more than quadrupled compared to the first half of 2007.
However, subprime litigation is not the entire story. 2007 standard federal filings alone -- excluding the subprime and options backdating cases -- increased nearly 40% from 2006.
FASB’s Gift to Private Companies: Proposed Deferral of FIN 48 on Uncertain Income Taxes
FASB provided a holiday gift to private companies by issuing a proposal earlier this week to delay the effective date of FIN 48 on uncertain income taxes for one year. This proposal, issued in the form of Proposed FSP FIN 48-b, “Effective Date of FASB Interpretation No. 48 for Nonpublic Enterprises,” would only apply to ‘nonpublic enterprises” as defined by paragraph 289 of FAS 109 (accounting for income taxes). FASB proposes a one year deferral for private companies, extending the effective date of FIN 48 from fiscal years beginning after 12.15.06, to fiscal years beginning after 12.15.07. The comment deadline on the proposed FSP is January 18, 2008.

Dec 21, 2007, 9:53 AM by Edith Orenstein
Major Changes Proposed to FASB Oversight, Structure; Highlights of SEC's 2nd IFRS Roundtable
Late yesterday (Dec. 18), the Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) released for public comment, "Proposed Changes to Oversight, Structure, Operations of FAF, FASB and GASB" (the ‘proposal’). The comment deadline is Feb. 10, 2008. In brief, the 11 recommendations in the proposal are:

Expand the breadth of individuals and organizations that are invited to submit nominations for the FAF Board of Trustees with the understanding that final authority for all appointments rests solely with the Board of Trustees.
Change the term of service for Trustees from two three-year terms to one five-year term.
Change the size of the Board of Trustees from sixteen members to a range of fourteen to eighteen members.
Strengthen and enhance the governance and oversight activities of the Trustees as to the efficiency and effectiveness of the standard-setting process.
Reduce the size of the FASB from seven members to five.
Retain the FASB simple majority voting requirement.
Realign the FASB composition, to include one member from each of the following areas of primary experience: auditor, preparer, academic, and financial statement user. In selecting a member for the remaining seat, the Trustees would analyze the expertise and experience of the candidates to achieve the appropriate balance on the FASB and would select one at-large, best-qualified member.
Provide the FASB Chair with decision-making authority to set the FASB technical agenda.
Secure a stable mandatory funding source for the GASB.
Retain the current size, term length, and composition of the GASB.
Provide the GASB Chair with decision-making authority to set the GASB technical agenda.
Reactions Vary

Early reactions to the proposal, issued late yesterday, varied.

Former SEC Chief Accountant Lynn Turner said in an email today, “I understand this is a precursor to its chairman ultimately merging the FASB and the IASB, shifting the U.S. funding from the FASB to the IASB, and raising the question then as to who would be the next chairman of the IASB.” Turner added, “It is entirely consistent with recent testimony by the FASB Chairman in which he called for a national plan to move from U.S. GAAP in the U.S. to International Standards set by the IASB.”

Note: Regarding a potential merger of FASB and IASB, I predicted this in a de facto sense in my Oct. 22 post: “If You Want to See the Future of Global Financial Reporting...Tune Into FASB-IASB's Joint Meeting Today-Tomorrow.”
Other commentators reacting to yesterday’s FASB news have raised questions as to what’s driving the need for the changes. Current FASB board member Don Young, and former FASB board member (current Duke University professor) Katherine Schipper, were among those who raised such questions in the article “Downsizing FASB” by Tim Reason and Marie Leone in today’s

Similar questions were raised by current IASB Board member (and former FASB vice-chairman) Jim Leisenring, as noted in “FASB Overseer FAF Working Out Details Of Major Restructuring for Standard-Setter,” by Steven Marcy and Steve Burkholder, in today’s BNA Daily Report for Executives. Leisenring said, as quoted by BNA: I do not understand the problems that these recommendations purport to solve, particularly with respect to the [FASB] board.”

A relatively neutral to supportive response came from former FASB Chairman Denny Beresford, quoted in Beresford now teaches at the University of Georgia, and is a member of the SEC Advisory Committee on Improvements to Financial Reporting (CiFR, or the ‘Pozen Committee,’ led by Bob Pozen.)

Supporters of the FAF’s proposal, at least with respect to the ‘downsizing’ of the board, included former PCAOB general counsel Lew Ferguson, now a partner at Gibson, Dunn & Crutcher LLP. The BNA article quotes him as saying: "I support the proposals to alter FASB.," Ferguson explained, according to BNA, "One of the criticisms of FASB is that it's unwieldy and too slow to act. I'd also note that it reduces the board to the same size as the PCAOB and gives comparable administrative and agenda-setting powers to the FASB chairman that the [SEC] and PCAOB chairmen now have. So I think it's a good thing."

Speaking of the powers of the SEC and PCAOB, see also our FEI blog post yesterday, “SEC Approves PCAOB Budget, But Atkins Declines Over Issue of PCAOB Board Salaries.
Highlights From SEC’s Second IFRS Roundtable Held Dec. 17, 2007In related news, here’s some highlights from SEC’s Second IFRS roundtable, held on Monday, Dec. 17, on the subject of potentially permitting – or requiring – U.S. companies to report in International Financial Reporting Standards (IFRS) issued by the IASB, instead of the current requirement to report in U.S. Generally Accepted Accounting Principles (U.S. GAAP) issued by the FASB. As was the case with the Dec. 13 roundtable, two separate panels were convened on Dec. 17.The highlights below were jointly prepared by myself (listening to the webcast of the roundtable) and Serena Davila, FEI’s Director of Technical Activities in our Washington, D.C. office who observed the hearing in person.
Two members of FEI's Committee on Corporate Reporting (CCR) appeared on the Dec. 17 panel, Margaret (Peggy) Smyth of UTC, and Mick Homan of P&G. Panelists reprented a broad representation of preparers, auditors, analysts, investment bankers and regulators, some of whom have already who have gone thru, or are presently going thru, the experience of adopting IFRS.
Large Public Co’s May Opt to Adopt IFRS First; Fundamental Issues Remain Benefits accruing to large, multinational public companies in moving to one set of global accounting standards were cited by several panelists. Such benefits can include having one set of consistent policies, not having to reconcile from one set of standards (IFRS) to another (U.S. GAAP) – particularly when foreign subsidiaries are already applying IFRS for local statutory or other purposes – and enhancing competitiveness in the ability to raise capital in markets or industries where the competition reports in IFRS.However, panelists emphasized it is not just differences in accounting that need to be considered in moving to IFRS, but differences in the legal, regulatory and tax environment that can impact the ultimate benefit to investors, issuers and the capital markets, versus the costs.
Panelists generally were not in favor of any 'reverse reconcilation' from IFRS to U.S. GAAP during any transition period, which had been suggested for consideration by panelists Hal Scott at the SEC's Dec. 13 IFRS roundtable.
Additionally, responding to a question raised by SEC staff, panelists were also not in favor of any IFRS-specific certification requirement for auditors to sign off on IFRS financial statements, preferring IFRS to be blended into the broader CPA exam requirements.
Some panelists noted a frame of reference for disclosures for companies transitioning to IFRS can be found in the recommendations given by the Committee of European Securities Regulators (CESR) to EU member companies to use during the intial move to mandated IFRS from 2002 to 2005 in the EU. U.K. Financial Services Authority representative noted preparers and auditors were hesitant to provide some of the quantitative disclosures of the expected impact of adopting IFRS, fearing what the consequences may be if they were 'wrong' but they were encouraged to do so.
KPMG Partner Sam Ranzilla likened the kind of disclosures we may see during the transition period as "SAB 74 on steroids." SAB 74 provides analogous requirements for disclosures of the impact of recently issued accounting standards. Private Companies, Small Companies Also Impacted Directly, IndirectlyAlthough large, multinational companies are expected to be among the first to adopt IFRS for U.S. reporting – if permitted by the SEC – there was also a fair amount of discussion at the roundtable about the potential impact of any SEC decision in this area as it would directly or indirectly impact private companies and small public companies.
As noted in written comments of FASB Chairman Bob Herz submitted to the SEC (originally provided in the form of slides accompanying Herz remarks at a recent AICPA conference), the FASB recommends movement to “a single set of high-quality international standards for registrants (and perhaps others).” The reference to “others” includes other non-SEC registrants, such as private companies.
SEC Chairman Christopher Cox noted the need for the SEC to balance two concerns: “Our concern about smaller companies being mandated to do this,” particularly if there is “a lack of obvious benefit for smaller companies, and a lack of overseas competition,” vs. “our concern about making sure everybody does it same way.” Cox indicated the SEC may consider a "phase-in" approach, rather than requiring all companies to adopt IFRS as of one date. Further details from the Dec. 17 SEC IFRS roundtable can be found in this FEI detailed summary. The summary can only be downloaded by FEI members; here’s info on how to become an FEI member, and here’s where you can sign up to receive emails of new blog posts (available to members and nonmembers).

Dec 19, 2007, 9:18 AM by Edith Orenstein
SEC Approves PCAOB Budget, But Atkins Declines Over Issue of PCAOB Board Salaries
Moments ago, the SEC voted to approve the PCAOB's 2008 budget and the related accounting support fee charged to public companies, which funds the PCAOB. As noted by SEC Chairman Christopher Cox, the budget includes total outlays of $144 million, with $134 of revenue to be collected in the form of accounting support fees, and the remainder funded by a carryover of excess funds from 2007.
PCAOB Board Salaries Too High, Says SEC's AtkinsThe only dissenting vote among the four SEC Commissioners was Paul Atkins, who critized the level of increase in PCAOB board salaries and the process by which communication between SEC staff and PCAOB staff on this issue took place, saying erroneous information had previously been provided by the PCAOB to the SEC which was just corrected earlier today. PCAOB Board Chairman Mark Olson said he would like to see the 'erroneous' information the commissioners said was previously provided, since board salaries are generally publicly disclosed.
"As a matter of policy, the board salaries are disproportionately high," said Atkins, adding the rate of increase is higher than comparable rates. Although agreeing with PCAOB's decision to de-couple use of FASB board salaries as a 'benchmark' rate, Atkins showed some slides at the meeting demonstrating why he thought PCAOB board salaries were still too high.
Atkins' slides compared the $515,000 PCAOB board member's salary (other than the chair, to be discussed momentarily) to that of the President of the United States, the Supreme Court Chief Justice, and CEO level salaries, showing it was higher than most all of those (if not all).
He also stated the salary of the Chairman of the PCAOB exceeded that of the SEC commissioners, combined.
"We have not found difficulty finding and retaining board candidates," Atkins said of the PCAOB board. He added "The level of [PCAOB] board salaries is out of synch with other prominent indviduals of integrity," who serve in prestigous government and private sector positions.
Commissioner Kathleen Casey also took the PCAOB to task over the level and rate of its salary increases, but she voted in favor of the budget. Others voting in favor of the budget were SEC Chairman Cox and Commissioner Annette Nazareth.
Office of Research & Analysis, Targeting Large Companies, Subprime Mentioned
Atkins also grilled PCAOB Chairman Olson on use of consultants fees paid by the PCAOB. Olson explained some of those fees were for legal experts consulting on enforcement matters that were anticipated to potentially go to litigation, as well as some IT consultants that assisted in developing systems.
Research projects of PCAOB's Office of Research & Analysis (ORA) fell under particular scrutiny by Atkins, including what he described as PCAOB's "development of a model for targeting high risk, large issuer financial statements," and research papers on stock options and the subprime market.
Olson responded the PCAOB was increasingly relying on methodology developed by ORA with the assistance of consultants to develop audit risk exposure methodology and profiles to use in prioritizing and focusing inspections. This customized audit risk methodology combined publicly available info with nonpublic info avaialable to the PCAOB through its ongoing inspections.
"On an issue like subprime lending," said Olson said "we're saying, where would the risks be in an audit, that flow from that." (On a related matter, PCAOB recently issued an Audit Practice Alert relating to fair value measurements and use of specialists.)
SEC Emphasises Importance of Linking PCAOB Strategic Plan to BudgetOlson said the PCAOB intends to further review and update its Strategic Plan soon, and may hold an off-site board meeting on this matter.
SEC Commissioner Casey emphasized the importance of the PCAOB linking its Strategic Plan to its budget, and the importance of SEC and PCAOB staff discussions to enhance communication of the SEC's views.
Among the areas set to increase substantially in PCAOB's 2008 budget, besides the increase in salary noted above, was an increase of over a million dollars in the inspections budget, due in large part to the anticipated increase in international inspections activity. Olson said the PCAOB has worked cooperatively with its overseas counterparts, sometimes under bi-lateral agreements. Work with such overseas counterparts is expected to grow as more countries establish PCAOB-like organizations, particularly as required under an EU Directive requiring member countries to develop such bodies, said Olson.
Olson also noted that a critical part of PCAOB's strategic planning will be assessing changes in the environment, and keeping up with those changes. Additionally, he said the PCAOB will need to address any changes recommended by two federal advisory committees currently operating at the SEC and U.S. Treasury Department. These are the SEC Committee on Improvements to Financial Reporting (also called CiFR or the Pozen Committee, chaired by Robert Pozen), and the Treasury Advisory Committee on the Auditing Profession (ACAP), co-chaired by Arthur Levitt, Jr. and Don Nicolaisen.
Goal is for PCAOB to Be At Full Strength by 2011Cox noted the budget is based on PCAOB's growth to full capacity by 2011. "The common goal," of the SEC and PCAOB, said Cox, was that "PCAOB be at its ultimate strength by 2011."

Dec 18, 2007, 12:44 PM by Edith Orenstein
Dec. 17 Comment Deadline On PCAOB Small Bus Guidance; FASB Invites Comment By Jan. 16 On Proposed Delay Of Fair Value Standard
NOTICE TO READERS: This post was originally written for Monday, Dec. 17 but was unable to be posted due to technical difficulties, thus references to 'today' refer to Mon. Dec. 17 and 'yesterday' refers to Sun. Dec. 16. We apologize for any inconvenience. Readers of Securities Mosaic Blogwatch were able to view this post on Monday.
Today (Dec. 17) is the comment deadline on PCAOB’s guidance for small company internal control audits, issued in October in the form of “Preliminary Staff Views” (PSV).
With today being the deadline for comments on the PSV, the number of comment letters posted so far on PCAOB’s website is not necessarily indicative of the level of response that will come in. It is not unusual for comment letters to be filed on the deadline day by many companies, audit firms, law firms, and professional associations.
One indication of the level of attention to the scalability of the PCAOB’s internal control audit standards for smaller public companies is the fact that SEC Chairman Christopher Cox noted in Congressional testimony last week he intends to propose to the SEC that they issue an additional one year delay on the requirement that small companies (‘non-accelerated filers’) undergo their first internal control audit.
If adopted by the commission, the delay proposed by Cox would move the deadline for small co’s first internal control audit (i.e. the external auditor’s report on internal control required by Section 404(b) of the Sarbanes-Oxley Act) from year-end 2008, to year-end 2009. The delay, if limited to Section 404(b) of Sarbox, would have no impact on the management report required by Section 404(a) of Sarbox, which small co’s will provide for the first time effective this year-end (2007). Large companies (‘accelerated filers’) have been providing both the management report and the external auditor’s report on internal control as required under the Sarbanes-Oxley Act for three years now.
Financial Executives International (FEI), a leading association of senior financial executives, filed a comment letter on the PCAOB’s PSV on Friday Dec. 14. The letter was submitted by FEI’s Small and Mid-size Public Company Committee (SMPCC).
“In general, we strongly support the PSV’s emphasis of five major areas where smaller, less complex companies may achieve the objectives of internal control differently from large, complex companies,” said the FEI SMPCC letter, signed by SMPCC Chair Karen Rasmussen.
However, FEI SMPCC's letter recommended various areas where the PSV could be improved, noting in particular the committee’s concern with the level of prescriptiveness by which the PSV addressed how auditors can gauge the ‘precision’ of entity-level controls.
Among the 4 comment letters on the PSV posted on the PCAOB website as of Friday afternoon, I noted in particular comments by James C. Conboy, Jr., the CEO of Citizens National Bank of Cheyboygan and CNB Corporation.
Conboy pointed out, “The exams conducted by the state and federal bank regulators are independent, in depth, and carry enforcement powers like no other third party review I am aware of.” He suggested, “[T]he PCAOB ought to enter into dialogue with the Office of the Comptroller of the Currency, Federal Reserve, FDIC, and Conference of State Bank Supervisors independently or through the Federal Financial Institutions Examination Council to determine how examinations may be relied upon for purposes of Audit Standard 5.”
He added, “Frankly in all the discussions and literature regarding section 404 I have heard or read I have not seen or heard mention of reliance on regulatory exams which are unique to depository financial institutions.”
In related news, internal control reporting is among the “Top Challenges for Financial Executives in 2008” listed by FEI President & CEO Michael P. Cangemi, in an article to appear in the January/February issue of Financial Executive Magazine.
GAO Report on SEC Expected Today Will Criticize SEC’s Limited Use of SRO Internal Audits
I found the banker’s comments on the PCAOB’s PSV noted above even more intriguing in light of a partially analogous question of the extent to which a regulator can rely on internal audit reports of self-regulatory organizations for which that regulator has oversight responsibilities.
Specifically, I refer to Gretchen Morgenson’s article in Sunday’s New York Times, “Quick, Call Tech Support for the SEC.” After duly noting “It’s no secret that the [SEC] is terrifically understaffed and wildly underfunded compared with the populous and wealthy Wall Street world it is supposed to police” – Morgenson spills the beans that a GAO report to be issued today on the SEC’s oversight of certain self-regulatory organizations (specifically, “various stock and options exchanges,” according to Morgenson) has found that, “in its battles against insider trading and market manipulation, the commission declines to use one of the sharpest tools in its arsenal: the internal audits conducted by the nation’s stock and options exchanges.”
“As the G.A.O. pointed out,” says Morgenson, “the commission is unusual in its reluctance to use contemporaneous reviews of exchanges’ internal investigations. Federal bank examiners base their risk assessments of the institutions they oversee at least partly on internal audit reports produced by these institutions. By not including internal audit information in its planning, the S.E.C. may duplicate the exchanges’ efforts or miss opportunities to uncover new areas of investigatory interest, the report said.”
In other SEC news, the second of two roundtables hosted by the SEC this month will take place today on the potential use of IFRS by U.S. companies in filings with the SEC. We previously reported some highlights from the December 14 roundtable.
FASB Invites Comments on Proposed Delay of Fair Value Measurement Standard – Delay Would Apply to Certain Nonfinancial Assets and Liabilities Only
Separately, FASB released its proposal to indefinitely delay the effective date of its Fair Value Measurement Standard - FAS 157 – but only with respect to certain nonfinancial assets and liabilities, so implementation issues regarding those matters can be further addressed by FASB, its Valuation Resource Group (VRG), and by audit and corporate financial practitioners. The remainder of the standard, however, would be effective as originally stated in FAS 157, i.e. for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. (Additionally, FASB had permitted early adoption of FAS 157, and some companies, particularly some financial institutions, chose to ‘early adopt’ the standard this year.) The current proposal for the partial delay of the standard came in the form of a Proposed FASB Staff Position issued on Friday (Dec. 14): Proposed FSP FAS 157-b, “Effective Date of FASB Statement No. 157.”
FASB has issued this proposed deferral of part of FAS 157 in response to comments sent by FEI and others pointing out the need for such a delay. See, e.g. the joint letter sent by FEI’s Committee on Corporate Reporting (CCR) and Small and Mid-size Public Company Committee (SMPCC - formerly called the ‘Small Public Company Task Force”) on Nov. 5, following on their earlier letter of Oct. 1, and a separate letter sent by FEI’s Committee on Private Companies (CPC) standards subcommittee on Nov. 6.
The comment deadline on FASB’s proposed partial delay of FAS 157 (Proposed FSP FAS 157-b) is January 16, 2008.
In other FAS 157 developments, as previously reported, FASB formally proposed to scope out FAS 13 (leasing) from FAS 157 (Fair Value Measurement). This scope-out is being proposed via Proposed FSP FAS 157-a, which has a comment deadline of January 4.
Goodbye Dan FogelbergAlas, no further delays for the illness that took the life of singer-songwriter Dan Fogelberg, who passed away yesterday (Dec. 16) after a three year battle with cancer. Here’s the AP wire story, “Dan Fogelberg, Lyric Rocker, Dies at 56” published in today’s NYT.
Followers of this blog who’ve heard me talk about attending high school/college in the late 70s – early 80s won’t be surprised to learn his music had an influence on me, particularly those of you (mainly some FEI staff, my family and some fellow camp counselors from back in the day) who know of my interest in song writing. Fogelberg was perhaps best known for songs like “Leader of the Band” (his tribute to his father), “Netherlands,” “Same Olde Lang Syne,” “Dancing Shoes,” and “Part of the Plan.” He will be missed.

Dec 18, 2007, 8:27 AM by Edith Orenstein
CFOs Busy as Citis Bailed SIVs Go Back on Balance Sheet,Goldman Trades Make Hay;Fair Value,Convergence,Complexity Top FEI List
Chief Financial Officers (CFOs) are busy these days. Front page news in today’s Wall Street Journal is that “Citigroup …. is bailing out seven affiliated investment entities” - structured investment vehicles or SIVs - “bringing $49 billion in assets onto its balance sheet and further denting its depleted capital base.” That statement is included in an article by Robin Sidel, David Reilly and David Enrich entitled, “Citigroup Alters Course, Bails Out Affiliated Funds.” They add: “While Citigroup's action may ease uncertainty about the future of its SIVs, it may be the death knell for an industrywide effort to create a rescue fund for the struggling vehicles.”
If that weren’t enough to keep Citi’s CFO, Gary Crittenden busy, David Enrich reports separately in the WSJ’s “Citigroup Cure: Tough Love or Kid Gloves?”, that Crittenden has been picked by Citi’s new CEO, Vikram Pandit, to lead certain changes at the global financial institution.
As background, Enrich reports: “A few hours after the board named him CEO on Tuesday, Mr. Pandit told analysts and investors that one of his top priorities is "an objective and dispassionate review of all our businesses.” Regarding Crittenden, he notes, “Citigroup executives have again been instructed to find areas to cut, and the result may be thousands more layoffs next year, people familiar with the matter say. Other, less dramatic, moves are more likely in the near future, including better integration of businesses and management shuffling. In a memo to employees, Mr. Pandit named Chief Financial Officer Gary Crittenden to lead the effort.”
Another CFO in the news is Goldman CFO David Viniar. In a separate front page article in today’s WSJ, “How Goldman Won Big On Mortgage Meltdown,” Kate Kelly reports that although, “The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street,” the situation is different at Goldman Sachs. She notes at Goldman, “thanks to a tiny group of traders, it has generated one of the biggest windfalls the securities industry has seen in years.”
“The group's big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm's finances,” says Kelly, “eras[ing] $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. On Tuesday, despite a terrible November and some of the worst market conditions in decades, analysts expect Goldman to report record net annual income of more than $11 billion.”
Kelly notes Goldman CFO played a role in the winning strategy. “Last December, David Viniar, Goldman's chief financial officer, gave the group a big push, suggesting that it adopt a more-bearish posture on the subprime market… During a discussion with [mortgage department head Don Sparks] and others, Mr. Viniar noted that Goldman had big exposure to the subprime mortgage market because of CDOs and other complex securities it was holding… Emerging signs of weakness in the market, meant that Goldman needed to hedge its bets, the group concluded,” she says, citing unnamed ‘people familiar with the matter.”
Subprime/Fair Value Issues, Global Convergence, Complexity Top FEI CEO’s List of Top Challenges for Financial Executives in 2008
The front page news about subprime securities and related valuation issues for these and other thinly traded or nontraded items will continue to be top of mind issues for CFOs and other financial executives as they head into 2008. Global convergence of accounting and auditing standards, and complexity in financial reporting standards, also top the list of challenges for financial exec’s, as noted in FEI President and CEO Michael P. Cangemi’s list of the “Top Challenges for Financial Executives in 2008.”
The FEI CEO’s list, annually published in the January/February issue of Financial Executive Magazine, was released earlier this week, and includes:
1. Fair Value-Subprime Market Crisis - Derivatives
2. Global Convergence of U.S. GAAP and IFRS
3. Complexity in Financial Reporting
4. Audit Profession
6. Business Combinations
7. Internal Controls
8. Healthcare
9. Corporate Taxation
10. Rating Agency Regulation
11. IRS Policy of Restraint/Privilege
See the complete article for further details.
We will continue to update you on these issues in 2008. To get involved with our technical committees that deal with these issues at a hands-on level, discussing developments with regulators and legislators, to network with other senior financial executives, or benefit from our CPE programs,consider joining FEI ! Visit our website
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Dec 14, 2007, 9:04 AM by Edith Orenstein
March To IFRS Is On, But Let’s Not March Off A Cliff; Start With Optionality,Can Make Mandatory by 2013-2015,Panelists Tell SEC
Dec 13, 2007, 10:41 PM by Edith Orenstein
As snow fell over much of the northeast earlier today (Dec. 13) - so much so that a certain panelist from a certain northeast law school exited a bit early lest he be snowbound with the regulators in D.C.! - the SEC heard from a variety of experts at the first of two roundtables taking place over the course of the next week on International Financial Reporting Standards (IFRS). Specifically, the roundtables are to gather feedback on the ramifications of the SEC potentially permitting - or requiring - U.S. companies to report their financial statements to the SEC in accordance with IFRS as published by the IASB. Currently, U.S. companies must report to the SEC using U.S. Generally Accepted Accounting Principles (U.S. GAAP) issued by the Financial Accounting Standards Board (FASB). Questions relating to this topic were floated for public comment earlier this year in an SEC Concept Release. FEI's Committee on Corporate Reporting (CCR) filed a comment letter on the Concept Release in November.
Following are highlights from the two panels convened on December 13. Two FEI members were among the panelists that day, Gregg Nelson of IBM, and Matt Hilzinger of Exelon Corporation. Nelson also serves as an alternate on FEI’s Committee on Corporate Reporting (CCR). FEI CCR members Mick Homan of Procter & Gamble, and Margaret (Peggy) Smyth of United Technologies, will appear on the December 17 panel.
Highlights of December 13 SEC IFRS Roundtable:
Initial optionality generally favored : Companies and auditors on the panel, and certain other panelists, generally agreed that that providing an option to U.S. companies to report in IFRS would enhance competitiveness, and provide an opportunity to learn from the experiences of companies - likely large, multinational companies - that chose to adopt IFRS during the optional period. IBM’s Nelson said offering the option could enhance competitiveness by allowing companies to will enhance efficiency, increase quality, and reduce the cost of compliance with multiple reporting frameworks.” Hilzinger, representing a smaller company, did not favor an optional period, but favored movement to one set of global standards on a mandatory basis, over a sufficient period of time. However, Harvard Law School’s Hal Scott - who coordinates the private sector Committee on Capital Market Regulation (co-chaired by John Thornton and Glenn Hubbard) - said he did not think the SEC should make a final decision as to when and if to making IFRS mandatory, until information is gained on the costs and benefits of adopting IFRS through an optional period. He also said a final decision on mandating IFRS would lessen the momentum for convergence. Other panelists, however, favored the SEC laying out a timetable for mandatory adoption by a date certain, with an initial period of optionality, and during which time training, implementation, and infrastructure issues could be addressed.
Investor concern: Investor representatives, including Gerry White, a member of the CFA Institute, and Jeff Mahoney of the Council of Institutional Investors, have some concerns about offering IFRS now, even on an optional basis, given the current state of differences between the two sets of standards (IFRS and U.S. GAAP), as well as broader governance, independence and funding issues that remain to be resolved pertaining to the IASB.
Reverse reconciliation? Harvard Law Schools’ Scott suggested it may help investors make the transition if, during any transition period, companies include a ‘reverse reconciliation’ from U.S. GAAP to IFRS. However, he noted he was not advocating this as he did not know the cost-benefit of such a disclosure requirement at this time, only that it was but one type of disclosure the SEC could consider requiring. BDO Seidman’s Hambleton, however, cautioned she hoped U.S. companies adopting IFRS would endeavor to do so directly, not simply by preparing financial statements under U.S. GAAP and then trying to reconcile to IFRS. Many panelists noted there is a need for IFRS education and training among auditors, preparers, college students, investors and regulators.
Standard-setting moves at two speeds: slow and slower, says analyst Gerry White; how would a move to permit IFRS impact convergence? Deputy Chief Accountant Jim Kroeker, co-moderating the first panel with Corp Fin Director John White, noted some commenters on SEC’s concept release voiced concern that permitting U.S. companies to report in IFRS would slow down convergence efforts. CFA institute’s rep, Gerry White said, “Standard-setting seems to move at two speeds, slow and slower.” Although the IASB has been progressing along a workplan relating to the MOU, he said, “the question is, how quickly are they going to move through that.” Harvard Law Schools’ Scott later posed the theoretical question, as to why the EU was not considering permitting European companies to file in U.S. GAAP, instead of only in IFRS - the flipside of the U.S. considering now whether to permit its own domiciled companies to file in IFRS. (SEC Chairman Cox noted the EU is considering, however, whether to continue to permit U.S. based companies to file in the EU in U.S. GAAP; however, all European companies have been required to file in IFRS since 2005.) SEC Commissioner Annette Nazareth said, “Not only would that have standard setters moving slow and slower, but slow and reverse, I don’t think we’d advocate that.”
The march is on, says NYSE Euronext’s Culhane; but let’s not march off a cliff, says CII’s Mahoney: Noreen Culhane of the NYSE Euronext noted investors are increasingly diversifying their portfolios and investing more and more in foreign securities, and she and others noted it is only a small percentage of foreign issuers that actually have had to reconcile their financial statements to U.S. GAAP, given other listing opportunities. Thus, she said, ‘the march is on’ in terms of the movement to foreign securities which, for the most part, report under IFRS. However, Jeff Mahoney of the Council of Institutional Investors suggested that while the march may be on, “let’s not march off a cliff,’ and said ‘it is important to look at all the issues before we pull the trigger on this.”
Policing needed to avoid ‘free-for-all’; need for a judgment framework, says Deloitte’s Schnurr: Deloitte’s Jim Schnurr cautioned, ““If there is no global regulatory structure to decide where the bounds or limits are for particular standards, there is potential for a free-for-all, in which standards are whatever you want, with no comparability. That would be the worst of all worlds,” he said. He added an infrastructure needs to be put into place that ‘polices’ practice, “so practice will not become so diverse that there is no comparability.” Also, he noted, although IFRS is not entirely principles based, it is moreso than U.S. GAAP, and will require more judgments. Thus, he said, there is a need to “make sure there is a framework for making judgments.” He added, “When we deal with our member firms auditing foreign private issuers, we often hear, ‘well, it’s not in the standard, it’s my judgment, I can do whatever I want.’” He cautioned, “If that is permitted to exist, IFRS would be terrible, it would be the worst situation.” Schnurr also recommended companies explain why they chose to adopt IFRS.
PwC’s Kaplan suggests timing for mandatory adoption - if that path is chosen by SEC - could be in range of 2013-2015 - but suggests optional period first: Panelists were asked by SEC staff what they would recommend in terms of timing and transitional provisions in any potential mandatory requirement to move to IFRS. PwC’s Dave Kaplan said he favored an initial optional period, and suggested that if the SEC were to mandate IFRS, “A mandatory date somewhere in the range of 2013-2015” would be appropriate. He added, “At the end of the day, the ultimate timing needs to be informed by the plan we develop and the challenges we identify up front,” and how much time it will take to address those challenges, which include putting IFRS in the academic curriculum, offering training to professionals in companies and audit firms, training for investors and regulators, and other issues noted on the panels, including the need to potentially revise contracts, loan covenants, and other legal documents if a company’s basis of accounting changes from U.S. GAAP to IFRS. “You need a reasonable period of time,” before any change is mandated, Kaplan said, adding, “you don’t want to force companies to change in too short a time, you want them to take time to do a good implementation.” He noted that for those companies that don’t yet want to adopt IFRS, a period of optionality would provide more time for IFRS to improve, and for convergence to continue, thereby making the ultimate conversion potentially easier for companies who may choose to wait longer, and take advantage of the learning experience of companies that adopted IFRS earlier.
Commitment to convergence still required: As to timing, analyst Neri Bukspan of S&P said he hoped any move by the SEC, even to permit optional adoption of IFRS, “would not happen tomorrow.” Deputy Chief Accountant Julie Erhardt, co-moderating the second panel with Ethiopis Tafara, Director of the Office of International Affairs, said, “We’re not that good.” Bukspan responded, “on [dropping] the reconciliation [for foreign filers], you were fairly efficient.” Moving forward, Bukspan said, “If we are not committed [IFRS] is going to be the standard of the future,” necessitating “a clear plan for improvement, and a single standard setter, the timing will move from slow to slower to doing nothing.” He added the regulatory structure is also critically important. “If we cannot get comfortable with [all] this, I would challenge whether we should start,” Bukspan cautioned. ”Otherwise, we’ll find ourselves or our grandkids sitting around the same table saying the world is divergent, and what can we do to get it convergent.”
What will FASB’s role be: Professor Mark Lang of the University of North Carolina emphasized, “IFRS is a good set of standards,” but “everything is in the application; the standards are less important than the way they are applied.” He also noted the importance of “the attestation, litigation, and enforcement environments.” “Every time I mention this to my colleagues,” he said, the question is raised on “what the IASB would be like without the FASB.” He said, “we haven’t talked about that much; the perception is the IASB relies heavily on FASB, it comes back partially to a resources issue.” “We have to make sure,” said Lang, “if FASB became less important in this process, whether that would make the IASB less effective as well.”
FEI TV Launched This Week!
Additional details from the December 13 SEC IFRS roundtable are in this FEI summary. (NOTE: Detailed summary can be downloaded by FEI members only; for information on FEI membership, contact me at And - If you’d like to learn more about - and from - FEI, including information on hot topics in financial reporting provided by leading experts, check out FEI TV - launched this week!

Dec 13, 2007, 10:41 PM by Edith Orenstein
Agenda, Panelists For Today’s SEC IFRS Roundtable; WSJ on Lawyering Around Rules; FEI CCR Comments; EU Quid Pro Quo?
Yesterday (Dec. 12) the SEC issued a press release linking to the agendas and list of panelists to appear at roundtables today (Dec. 13) and next week (Dec. 17) on whether to permit or require the use of International Financial Reporting Standards (IFRS) by U.S. companies. The roundtables are schedued to run from 9am - 12:45 PM EST both days.
The question of whether to permit or require U.S. companies to file with the SEC in IFRS published by the International Accounting Standards Board (IASB), vs. U.S. Generally Accepted Accounting Principles (U.S. GAAP) published by the Financial Accounting Standards Board (FASB), was first raised at the SEC’s IFRS roundtable held in March, and comment on this issue was sought in a Concept Release issued in August. Besides reviewing comment letters received, the SEC seeks further insight on the issues raised in the concept release through the two roundtables being held this month.
Consideration of this issue follows the SEC’s November 15 decision to drop the IFRS reconciliation requirement for foreign private issuers. Under that decision, foreign filers in the U.S. that file in IFRS as published by the IASB will no longer have to reconcile their financial statements to U.S. GAAP.
FEI Members on Panels; FEI Committee on Corporate Reporting Comments on Concept ReleaseFour members of Financial Executives International (FEI), an association of senior financial executives, are among panelists appearing on the SEC’s IFRS roundtables. FEI members participating on today’s panel are Gregg L. Nelson, VP, Accounting Policy and Financial Reporting at IBM Corporation and Matthew Hilzinger, SVP and Corporate Controller, Exelon Corporation. The December 17 panel includes FEI members Mick Homan, Comptroller, Corporate Accounting, Procter & Gamble Corporation, and Margaret (Peggy) Smyth, VP and Controller, United Technologies Corporation.
Homan, Nelson and Smyth are members of FEI’s Committee on Corporate Reporting (CCR). CCR provided a comment letter to the SEC on November 15, in response to SEC’s Concept Release on whether to permit or require U.S. companies to file their financial statements with the SEC in IFRS.
Voluntary Adoption of IFRS Supported by CCR; No Mandatory Adoption Before 2012CCR’s comment letter supported permitting U.S. companies the option of voluntary adoption of IFRS. If the SEC were to decide to make IFRS mandatory, CCR said in its November 15 letter that mandatory adoption by all companies could come ‘no sooner than 2012.’
“CCR strongly supports providing a choice in the near term to U.S. issuers to prepare financial statements in accordance with IFRS as published by the International Accounting Standards Board,” said the CCR letter, signed by CCR Chair Arnold C. Hanish, EVP and Chief Accounting Officer, Eli Lilly and Co.
However, CCR’s letter added, “It is important to acknowledge that the prospect of allowing U.S. companies to file on the basis of IFRS has very different implications for the broad array of U.S. companies that form the membership of FEI.”
“In providing our support for providing an option for voluntary adoption,” CCR further stated, “we recognize that we have a long journey ahead of us and that adoption of IFRS by all U.S. companies will have to occur over an extended time frame. It would be helpful for the SEC to establish a specific, phased timetable for that to occur, as it will serve to engage members of the financial reporting community in the process.”
If the SEC were to decide to mandate IFRS for U.S. companies, CCR said, “We believe that mandatory adoption by all companies could occur no sooner than 2012. In the meantime, we believe that it is important to start that process now by permitting companies the option to adopt IFRS voluntarily.”
WSJ Says FASB-IASB Competition Is Good, Adds: “With IFRS’ Concise Principles, There’s Far Less Opportunity To Lawyer Around Them”An editorial in yesterday’s (Dec. 12) Wall Street Journal (WSJ), “Closing the GAAP,” - subtitled: “Bring on the foreign accounting rules!” - praised SEC’s November decision to drop the IFRS reconciliation requirement, and noted criticism of FASB’s detailed and complex rules, but stopped short of backing any ‘super-monopoly’ of world accounting standards or standard-setters, instead favoring continuing competition in the accounting standards market.“Some people will no doubt urge "convergence" of the international and U.S. accounting standards,” said the WSJ, but creating one "super-monopoly" for the entire world might compound the problems created by the FASB bureaucracy, notes an influential 2003 Harvard Law School paper by Rachel Carnachan. Ms. Carnachan urges a competition that will likely improve both sets of standards.”The WSJ added: “Knees start jerking about a possible "race to the bottom" whenever the idea of regulatory competition is raised. But IFRS's streamlined accounting standards will offer investors more protection against fraud, not less. That's because IFRS is a "principles-based" system, in contrast to GAAP's "rules-based approach." “GAAP's hyper-detailed standards invite the ethically challenged to seek ways to violate the spirit of the rules by contorting to follow the letter,” closed the WSJ. “With IFRS's concise principles, there's far less opportunity to lawyer around them.”Quid Pro Quo, or Status Quo, in the EU?Separately, CCR’s Nov. 15 letter on the SEC’s Concept Release noted the importance of having the European Union (EU) continue to accept U.S. GAAP filings at this point rather than require a reconciliation from U.S. GAAP to IFRS. The EU has not yet made a final determination on this matter. The EU was using its power to decide to require a reconciliation for U.S. GAAP filers in the EU as leverage in helping influence the SEC’s decision to drop the IFRS reconciliation requirement in the U.S.In remarks before the European Federation of Accountants (FEE) on November 27, EU Internal Markets Commissioner Charlie McCreevy called the U.S. decision to eliminate the reconciliation requirement an ‘extraordinary breakthrough,’ and said, “Now it will be Europe's turn to accept accounts in US GAAP.” Furthermore, he added, “[I]t is certainly my intention to propose that no reconciliation to IFRS will be needed for companies filing their accounts under US GAAP.”However, even if U.S. GAAP is accepted as ‘equivalent’ to IFRS in the EU, and even if no formal ‘reconciliation’ is required, it remains to be seen if the EU would require companies filing in U.S. GAAP to provide qualitative and quantitative ‘remedies’ or ‘rectifying disclosures’ between financial results shown in U.S. GAAP vs. IFRS. Such ‘remedies’ were previously considered in the EU - specifically, by the Committee of European Securities Regulators (CESR) - see CESR reports numbered CESR/07-289 dated May 30, 2007, CESR/05-230-b dated June, 2005, updated in CESR/07-138 dated March 6, 2007. and CESR/07-289 dated May 30, 2007 - and were viewed by some in the U.S. as tantamount to a de facto reconciliation requirement. For example, the joint letter filed by FEI’s Committee on Corporate Reporting (CCR) and Globalization Oversight Committee (GOC) on June 24, 2005 in response to CESR’s then-proposal (consultation) said, “we believe the proposed remedies in the CESR proposal are excessive and [the] cost will significantly exceed the benefits to users.” Will the EU offer a quid pro quo - or at least let things remain at the status quo - in which U.S. GAAP filings are accepted in the EU without reconciliation? More discussion of this issue can be found in the Washington Insights column in the January, 2008 issue of Financial Executive Magazine, online at Jan. 1.
SEC Chairman To Propose Additional Year Delay in Sarbox Section 404(b) External Audit of Internal Control for Small Co’sIf you missed our post yesterday, SEC Chairman Christopher Cox testified before the House Small Business Committee yesterday he intends to propose an additional one year delay for small companies (nonaccelerated filers) in the Sarbanes-Oxley Section 404(b) requirement for an external audit of internal control. This delay would not impact the current Section 404(a) requirement set to take effect this year-end for small co’s to begin providing their first management report on internal control. The first to break this news was Floyd Norris in his column yesterday in the New York Times, "SEC Planning to Delay Accounting Rules for Small Companies."

Dec 13, 2007, 8:29 AM by Edith Orenstein
SEC’s Cox Tells House Small Bus Committee He Wants to Delay Sarbox External Audit Requirement for Small Co’s by Additional Year
According to written testimony prepared for a hearing of the House Small Business Committee taking place right now, SEC Chairman Christopher Cox will tell the committee: “I intend to propose to the Commission that we authorize a further one-year delay in implementation for small businesses” in the requirement that small bus provide their first external auditor’s report on internal control, currently due effective year-end 2008, “in order to base our decision on final implementation of section 404(b) on the best available cost data.”
Cox restricted his call for a further delay for small co’s only to Section 404(b) of Sarbanes-Oxley – the section which requires an external auditor’s report on internal control.
His written testimony did not suggest any 11th hour deferral of the effective date for Section 404(a) of Sarbanes-Oxley, which requires management to report on internal control. Under the current SEC rules, small co’s (specifically, “non-accelerated filers,’ generally, companies with less than $75 million market cap) must begin filing their first Section 404(a) management reports on internal control effective this year-end.
Large co’s (accelerated filers) have been providing both the management report and external auditor’s report under Sarbanes-Oxley for three years now.
Cox said the reason why he will propose a one year further delay in the requirement for small co’s to provide an external auditor’s report on internal control is to provide sufficient time for the SEC to complete its study of the costs and benefits of reporting under Sarbox under the latest guidance issued by the SEC (this summer’s management guidance, filling what some perceived as a vacuum for management guidance) and the PCAOB (Auditing Standard No. 5 (AS5) also issued this summer, which replaced what was broadly viewed as an overly prescriptive Auditing Standard No. 2 (AS2)).
“Madam Chairman,” Cox states in his written testimony, addressing House Small Business Committee Chair Nydia Velasquez, “it is the SEC’s intention that our new guidance for management, and the PCAOB’s new standard for auditors, will lower overall compliance costs for companies of all sizes, and significantly so, compared to the old standard.” He noted an important feature of the new guidance would be encouragement of “scaling of all audits to reflect each company’s circumstances rather than a single check-list for all situations.”
As previously announced by the SEC, Cox noted the SEC will be conducting a study of the costs and benefits of Sarbox compliance under the SEC’s and PCAOB’s new guidance.
However, he noted, due to the fact that the study, coordinated by SEC’s Office of Economic Analysis, will use “real-world data” - which Cox said will be “obtained through a web-based survey of companies that are subject to section 404, and in-depth interviews with a subset of companies including those that are just now becoming compliant” – the SEC “anticipates that the study and analysis of the results will be completed no earlier than June 2008.” Thus, he is going to propose to the Commission a further one year delay (from year-end 2008, to year-end 2009) in the Section 404(b) external audit of internal control for small co’s, said Cox, to provide sufficient time to analyze the results of SEC’s cost/benefit study.
In a comment letter filed Feb. 26, 2007 on the SEC's then-proposed management guidance, FEI's Small Public Company Task Force (NOTE: FEI Small Co comment letter begins pdf pg 14, it was attached to a separate FEI Committee on Corporate Reporting letter) said, "As SEC reviews all proposals and moves this guidance forward, we would also suggest that the implementation date be extended one additional year for the non-accelerated filer – and that the determination of size category be based on the valuation at the beginning of the fiscal year." The letter, signed by then-chair of FEI's Small Public Company Task Force, Rick Brounstein, added, "It takes a full year to manage the first year reporting process cost effectively under Section 404, and without the delay, many of these companies will need to spend significant monies – that they cannot afford – on consultants that still have only the old 404 model to safely apply." Separately, the comment letter sent by FEI's Small Co Task Force Feb. 26, 2007 on the PCAOB's companion proposal (proposed AS5) (NOTE: FEI Small Co task force letter begins on pdf pg 28, the letter was attached to a separate Committee on Corporate Reporting letter which precedes it) did not call for a further deferral of the effective date of the Section 404(b) external audit requirement from year-end 2008, but noted: "Even with the principles based approach being advocated in the SEC’s and PCAOB’s proposals, the key will be in the implementation and interpretation, especially by the larger accounting firms, who invariably become the drivers of best practice." The FEI Small Co letter further noted: "There appears to be a cultural predisposition for some of the accounting firms to revert to a check list and prescriptive approach as a means of implementation, even if the guidance by the SEC and the PCAOB is principles based. This could be because a checklist driven approach may be viewed by some as providing better protection for auditors against legal liability, although check-lists may be mechanically applied with limited relevance." The letter continued, "We believe that for a principles based system to "walk the talk" - in real-life implementation of the standards – the PCAOB inspection process will need to accept reasonable judgments of auditors, and that PCAOB and SEC inspection and enforcement actions will need to allow for a reasonable range of judgment and flexibility in accordance with the principles based standards."
We noted yesterday SEC Commissioner Kathleen Casey called for the study of empirical evidence to be completed before a final date is set for small co compliance with the external audit requirement under 404(b), and we also noted Rep. Spencer Bachus, Ranking Member on the House Financial Services Committee, sent a letter to the SEC Chairman last week, asking the SEC to provide an additional year before small companies have to have their first external audit of internal control.

Dec 12, 2007, 11:35 AM by Edith Orenstein
SEC Letter Reminds Co’s of Disclosure Obligations for Investments in SIVs, CDOs, and other Off-Balance Sheet Entities
The SEC sent a letter this week to at least two dozen companies, reminding them of their disclosure obligations for investments in Structured Investment Vehicles (SIV’s), conduits, Collateralized Debt Obligations (CDOs), and other off-balance sheet entities. Here is the SEC’s letter.
This was first reported by Rachel McTague in today’s BNA Daily Report for Executives in an article entitled, “SEC Staff Reminds Financial Firms Of Disclosure Obligations in Current Market.” McTague, citing SEC Corp Fin Director John White, says the SEC sent the letter to “two dozen large banks, investment banks, and insurance companies, based on certain investments identified in their SEC filings, and the letter ”remind[ed] them of their disclosure obligations," for investments in off-balance sheet entities.
SEC Chairman Christopher Cox responded to a question on this issue, as described by BNA’s McTague: “Asked whether the letter concerns more than mortgage-related securitizations, SEC Chairman Christopher Cox said to reporters after an open SEC meeting, ‘It is certainly aimed specifically at that set of issues, but as a technical matter it could encompass more.’”
Corp Fin Director John White also responded to a question on what prompted the SEC to send the letters, according to McTague, by saying: “’I think just the general conditions in this whole market.’" She continues that White “noted that the companies likely are in the process of preparing their annual reports on Form 10-K. The letter, signed by a senior assistant chief accountant in the division, was sent to each company's chief financial officer.”
This is not the first time the SEC has sent a form letter so to speak to a group of companies in the months leading up to or after year-end, reminding them of disclosure obligations on current hot issues or issues on which the SEC, based on its review of filings, finds a pervasive issue it wants to provide general guidance on through the form of a letter to companies. Prior ‘sample letters’ on various topics are listed under “Commonly Requested Disclosures” on the Corp Fin “Accounting and Financial Reporting” webpage.
More Guidance From SEC at AICPA Conference: Disclosures Relating to Valuation Experts
We reported yesterday on this week’s AICPA Conference on Current SEC and PCAOB Developments. The speeches are continuing to take place during this 3 day conference which ends today, although not all been posted at this time.
Two speeches not yet posted to the SEC website were reviewed by David Schwartz in today’s BNA Daily Report for Executives, in an article entitled, “SEC Corporation Finance Accountants Address Expert Review [by Valuation Experts], 'Immaterial' Errors.
Schwartz reports that Corp Fin Associate Chief Accountant Stephanie Hunsacker reminded attendees at the AICPA conference of their disclosure obligations relating to use of valuation experts.
According to BNA’s Schwartz, “[Hunsacker] said there is no requirement to use outside experts under the Securities Exchange Act of 1934…. However, if a company refers to a valuation firm or other expert in its filing, it must name that expert.” Additionally, Schwartz says, Hunsacker indicated that under the Securities Act of 1933, “if an expert is cited in a filing, the company must include a written consent from that expert to use his or her conclusions in the filing,” and that the SEC staff interprets this requirement broadly.
Separately, in an apparent act of Déjà vu, Corp Fin’s Todd Hardiman reportedly spoke again at the AICPA conference this year on the topic of materiality (his speech was on this same topic last year.) BNA’s Schwartz reports Hardiman emphasized this year, "Don't assume [an error is immaterial], talk to us." Additionally, Hardiman said, according to Schwartz, “reasonable judgment is the foundation of our financial reporting system,” and that although “the [SEC] staff does question judgments … the mere fact that we ask questions does not mean we think your judgment is wrong." Schwartz notes Hardiman also said, “When the division [of Corp Fin] asks questions, ‘it is an invitation to dialogue ... admittedly an invitation that is sometimes hard to decline.’
SEC Votes to Issue Concept Release on Oil and Gas Disclosures; Approves Final Rules for Small Co’s
In other SEC news, the commission voted yesterday to approve the issuance of certain final rules and a concept release, as described in these press releases: “SEC Votes to Publish Concept Release Soliciting Comment on Oil and Gas Disclosure Requirements,” and “SEC Facilitates Smaller Company Access to Capital Markets - Also Approves Electronic Filing and Changes to Form D.” Further analysis of the small bus rules can be found in Dave Lynn’s post in The blog.
Dropped from the original agenda for SEC’s meeting yesterday, (therefore, to be discussed at a future meeting) was consideration of PCAOB’s 2008 budget and annual support fee, as noted in this Sunshine Act Notice published yesterday.
Coming Up: IFRS Roundtables
Coming up tomorrow (Dec. 13) and next week (Dec. 17) at the SEC: roundtables to obtain additional feedback on SEC’s Concept Release on whether to offer U.S. companies the option - or whether to one day mandate - a switch from U.S. GAAP to International Financial Reporting Standards (IFRS). The roundtables were previously confirmed in this Dec. 4 Sunshine Act Notice

Dec 12, 2007, 10:32 AM by Edith Orenstein
SEC's Casey Wants Evidence of Cost Savings From New Sarbox Rules Before Requiring Small Co Audit of Internal Control;AICPA Conf
In remarks before the AICPA’s National Conference on Current SEC and PCAOB Developments, SEC Commissioner Kathleen Casey called for examination of empirical evidence of cost savings from the SEC’s and PCAOB’s new guidance on Sarbanes-0xley Section 404 implementation issued earlier this year, before determining the final timetable by which small companies must begin to undergo external audits of internal control.
Referring to SEC’s management guidance and PCAOB’s AS5 issued earlier this year, Casey said, “We hope that, as a result of our actions, the accelerated filers will see a reduction in the costs and burdens of the internal control requirements.”
“Chairman Cox and I have met with the leaders of the large accounting firms on multiple occasions over the last six months to develop support for the new approach to Section 404 compliance and to emphasize the need to re-educate the audit community,” Casey added. She also noted the SEC recently “translated our management guidance into "plain English"” in the form of a Sarbanes-Oxley Section 404 Guide for Small Business.
Casey stated “only time will tell” whether the SEC’s and PCAOB’s new guidance will better align the costs and benefits of Sarbox 404. She continued, “Even though the Commission has pledged to monitor the costs and benefits of our efforts to scale the application of the internal control provisions, and we are considering how best to carry out such a study, it is my personal view that it would make sense to analyze some empirical evidence of the effectiveness of our efforts to reduce compliance costs for larger companies before determining the timetable for full compliance with Section 404 for smaller public companies.” In addition to the need for an empirical study of the costs and benefits of implementing the new guidance, Casey noted the SEC “continue[s] to work with the PCAOB to make sure that its inspection process is consistent with our new approach,” and noted the SEC “remain[s] sensitive to concerns that our compliance and enforcement regimes similarly reflect our changes in 404 implementation.”
In addition to Casey, others speaking at this year’s conference included Chief Accountant Conrad Hewitt, Division of Corporation Finance Director John White, PCAOB Chairman Mark Olson, and a slew of SEC and PCAOB staff. (In past years, some, including SEC Commissioner Paul Atkins, have criticized some of the speeches as being de facto ‘speech GAAP’ (i.e., forming new Generally Accepted Accounting Principles) without the benefit of the notice and comment period required by the Administrative Procedures Act). We have posted a list of topics covered in the speeches at the AICPA conference, with links to the speeches here. (FEI membership required to download list of topics; for info on FEI membership contact me at
Among announcements made at the conference was yesterday’s issuance of PCAOB’s Audit Practice Alert No. 2, on “Matters Relating to Fair Value and Use of Specialists.”
Bachus Asks SEC to Provide Additional Year for Small Co Internal Control Audits; House Small Bus Committee to Hold Hearing
In related news, Rep. Spencer Bachus, (R-Ala.), Ranking Member on the House Financial Services Committee, sent a letter to SEC Chairman Christopher Cox last week, asking the SEC to provide an additional year before small companies have to have their first external audit of internal control.
Under the current timetable set by the SEC, small companies will begin providing their first management report on internal control as of this year-end (in their annual reports filed in 2008), and must include an auditors' report on internal control as of next year-end (in their annual reports filed in 2009).
In his letter to Cox, Bauchus congratulated the SEC and PCAOB on their new management (auditor) guidance on internal control reporting issued earlier this year.
However, he noted that small companies still face burdens in implementing the Sarbanes-Oxley Act, and further revisions to the new management guidance and AS5 may follow first-year implementation (in 2008) of the new guidance. Thus, he recommended the SEC offer an additional one-year extension for small companies to provide their first auditor's attestation on internal control, meaning that this first report would not be due until fiscal years ending on or after Dec. 15, 2009 (in annual reports filed in 2010).
Separately, the House Committee on Small Business, chaired by Rep. Nydia M. Velazquez, is holding a hearing tomorrow (Dec. 12) on: “Sarbanes-Oxley Section 404: New Evidence on the Cost for Small Companies
Committee on Capital Markets Regulation Issues Followup Report on U.S. Competitiveness
The Hal Scott/John Thornton/Glenn Hubbard - led Committee on Capital Markets Regulation issued a followup report Dec. 4 on “The Competitive Position of the U.S. Public Equity Market.” This report provides statistics on IPOs in the U.S. vs. foreign markets, foreign delistings in the U.S., and other data, which the CCMR collectively views as a ‘second wake-up call’ that the recommendations in its ‘interim report’ issued last November must be implemented to stem an erosion in U.S. competitiveness.
A “Summary of Competitiveness Measures” is provided on printed pg. 5 (pdf pg 13) of their latest report.
Some, like CCRM, view the fact that, e.g. so far in 2007, none of the largest global IPOs have been listed in the U.S., as a significant worsening from an already weakening position in global competitveness. Others (including some of those described by CCRM in the “Faulty Competitiveness Measures” and “Maybe Competitive Measures” sections at the end of their report) view the changing demographics more as a sign of growth in size and sophistication of global capital markets than a weakening of the U.S. market per se.
Even without a sky is falling mentality, issues noted in CCMR's landmark report last year (e.g., the litigation environment in the U.S., and issues regarding the regulatory environment and specific regulations) are broadly looked at as having merit to consider, to strengthen the competitiveness and strength of the U.S. capital markets vis a vis foreign markets, and for enhancing investor protection and the growth of U.S. markets generally.

Dec 11, 2007, 9:24 AM by Edith Orenstein
FASB Could Become Part of IASB, Herz Reportedly Tells IFAC Conference; SEC To Meet Next Week
There’s been a flurry of reporting on FASB Chairman Bob Herz’ remarks at the International Federation of Accountants (IFAC) 30th anniversary World Accountancy Forum earlier this week, in which Herz is reported to have said that in light of the move toward one global standard setter – and, as he has previously stated, that one global standard setter will one day be the IASB - FASB can essentially become a branch or satellite office of the IASB. This was reported in “FASB Sees Its Future as Part of IASB,” Accountancy Age, Dec. 7, “FASB Could Become Branch of IASB,” Webcpa, Dec. 6, and “FASB Members Suggest board Could Become IASB ‘Satellite’ or U.S. Office,” BNA Daily Report for Executives, Dec. 7.
The BNA article notes not only Herz remarks at IFAC on Dec. 4, but similar remarks by FASB board member Michael Crooch at yesterday’s (Dec. 6) FASB Accounting Standards Advisory Council (FASAC) meeting. BNA describes Herz' remarks at IFAC as “suggest[ing] IASB could have an office ‘in the United States – maybe in Norwalk [Conn.]’ for example, and it ‘might have an office in Japan.’ BNA also notes Crooch told FASAC yesterday: “At some point, the FASB is going to have to be out of the business of writing accounting standards, if you’re going to have one global standard-setter.”
We asked Michael P. Cangemi, President and CEO of Financial Executives International (FEI) and a member of FASAC, for his thoughts on this topic.
“In my view, the FASB has been visionary in its encouragement of the goal of one set of global accounting standards," said Cangemi, adding, "In essence, the FASB as the standard setter for the world’s largest capital market, has been the key enabler for global standards by agreeing to converge with IASB standards.”
“Importantly,” he noted, “FASB – and the IASB - accepted the goal of developing the best joint standards, versus unilaterally pushing for adoption of FASB’s existing standards, or the IASB’s existing standards.”
We also asked Cangemi what his thoughts were on the role FASB may play in a world in which the IASB becomes even more formally the world’s standard-setter – e.g., if the SEC were to adopt IFRS as the standard for public companies to file financial statements in the U.S. (see also info on SEC's December roundtables on IFRS, below.)
“It is hard for me to imagine the FASB not having a significant role in accounting standards,” said Cangemi, adding, “FASB has a great cadre of experts and is now a partner in the convergence project.”
“The ultimate question,” said Cangemi, “is one of national sovereignty.” Specifically, the question will be, “Will countries be willing to cede all accounting standard setting to an independent body?” He added, “This question is a long way from being answered and tested.”
Another question, Cangemi noted, will be the role of national standard-setters such as the FASB in setting standards for private companies, governmental entities, or other entities not covered by any national requirement to adopt IFRS.
The views of FEI's Committee on Corporate Reporting on SEC's Concept Release on use of IFRS by U.S. companies are contained in this comment letter filed Nov. 15. Separately, FEI’s Committee on Private Companies filed a followup letter last week with the IASB supporting IASB’s proposed IFRS for Small and Medium Sized Entities (SME’s).
Followers of this blog will note I predicted on October 22 that FASB and the IASB will move to a more blended model of working together; and to outside observers like myself, it seems like they have been moving in that direction very successfully.
SEC Confirms December 13, 17 Roundtables on IFRS
Further movement toward potential adoption of IFRS in the U.S. may come after the SEC holds two roundtables on the subject Dec. 13 and 17. The scheduling of the roundtables was recently confirmed in this SEC Sunshine Act Notice published Dec. 4; presumably a list of roundtable participants will be posted soon. Following the roundtables, SEC's next step would be to issue a proposing release. Whether the SEC would propose offering companies the right to file in IFRS as a choice - or whether SEC would mandate IFRS - remains to be seen.
SEC To Meet Dec. 11 on Small Bus Rules, Oil and Gas Disclosures, More
Other matters noted in SEC's Sunshine Act Notice published Dec. 4 include that SEC will hold an open meeting on Dec. 11 to discuss:
whether to approve PCAOB's 2008 budget and the related annual accounting support fee charged to companies,
whether to adopt amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act of 1933 to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to certain restrictions,
whether to adopt amendments to mandate electronic filing of Form D, and
whether to publish a Concept Release on amending certain oil and gas disclosure requirements

Dec 7, 2007, 10:00 AM by Edith Orenstein
FASB Issues Business Combination Standards; Taxes, Derivatives Up For Discussion Today
The post-Thanksgiving period has been a busy one for the FASB, with yesterday’s release of its new standards on business combinations, and last week’s release of proposed standards/preliminary views on various topics.
Yesterday (Dec. 4) FASB issued FAS 141R, Business Combinations, and FAS 160, Noncontrolling Interests in Consolidated Financial Statements. A news release provides further details.
Slated for today’s FASB board meeting: a discussion of remaining issues before FASB produces an Exposure Draft on its income tax convergence project with the IASB, and continued redeliberation of FASB’s Exposure Draft, Disclosures about Derivative Instruments and Hedging Activities. Further details are in today’s FASB board handout.
Coming attractions: Coming soon, we believe, is a proposed FASB Staff Position (FSP) to delay certain provisions of FAS 157, as agreed to by FASB at its Nov. 14 meeting, as we previously reported here, and as confirmed in this FASB press release and the Nov. 21 edition of FASB action alert.

Dec 5, 2007, 8:44 AM by Edith Orenstein
Treasury Advisory Committee on Audit Profession Hears From Legal, Audit Experts
Yesterday (Dec. 3), the Advisory Committee on the Auditing Profession (ACAP) formed by U.S. Treasury Secretary Henry M. Paulson, led by Arthur Levitt and Don Nicolaisen, heard from nineteen panelists on the topics of human capital, firm structure and finances, audit firm concentration and competition, and general sustainability issues. Panelists represented a wide range of interests, from Big 4 and next tier audit firms, law firms, accounting and law professors, GAO and the U.K.’s FRC, preparers and users of audited financial statements. Highlights from the day-long proceedings are noted below; additional details can be found in the panelists’ written statements. ACAP members may submit questions to panelists after the meeting as well.
Law School or Medical School Model for Auditors?
A law school model for professional auditors was suggested by panelist Joe Carcello of the University of Tennessee who also serves as a member of PCAOB’s Standing Advisory Group (SAG). ACAP member Damon Silvers asked Carcello if a medical school model may be even more appropriate, where there is more interaction with training by the firms, and a joint approach to research. Carcello responded he had not thought of that model. Additionally, Carcello proposed a two tier system of education and professional assignments for students who want to be partner track vs. serve in other capacities. ACAP member Gaylen Hansen, who also is on the SAG, noted his concern with having young people identify at such an early age which ‘track’ they will be on, and that such tracking may exacerbate issues of concentration and segmentation in the profession, since it may be difficult to have increased degrees of specialization (e.g. individuals practicing solely with SEC clients) at smaller firms.
Litigation: Compensatory, deterrence value of civil litigation vs. regulatory oversight, settlements
The U.S. litigation system and the question of compensatory vs. deterrent value of civil vs. regulatory proceedings and settlements vs. costs exacted, questions of insurability, and the potential for a catastrophic loss to take out one or more of the remaining Big 4 or next tier firms was debated at length, particularly during the panel on firm structure and finances.
Former SEC General Counsel Jim Doty, now with law firm Baker Botts, said, “If we go back to investors protection, the SEC’s administered funds go further at getting money in hands of investors.” He also spoke of ‘gaming in the system’ of civil litigation. “I think a more regulatory approach, to subject the whole process to some kind of review in scale of harm, assessing the harm,” would be preferable, said Doty. “We now have an agency in the PCAOB with a shotgun behind the door at the SEC, who have the capability and time to assess if audit failure is the result of concealment by mgmt, or the result of judgment which should be permitted but perhaps reviewed, or out and out negligence. I’d like to see the SEC, PCAOB play more of a role in assessing what happened in an audit failure.”
ACAP member Richard Murray, Managing Director of Swiss Re (and formerly with Deloitte) noted the compensatory aspect of civil litigation is limited, “because our current liability system is the most uneconomic in world, consuming 50% of the intake.” He also questioned deterrence assumptions pertaining to class actions against public companies, given there are deterrence aspects from director and regulatory oversight, and questioning actions taken against public vs. private companies.
Professional Judgment Akin to Directors Business Judgment Rule?
The need to apply and recognize the use of professional judgment was emphasized by the Big 4 CEOs, Dennis Nally of PwC and Jim Turley of E&Y.
“The use of professional judgment is one of the core issues we should address as a profession,” said Nally. He added, “Over the years, we have become so focused on getting technical answers right, at the expense of using good, professional judgment, in facing challenges of companies we audit.” He said as the world moves toward global standards which are more principles based, “it will require the use of much more professional judgment, and a regulatory environment that supports a balanced approach to support that professional judgment.”
E&Ys Turley said complexity and globalization were major issues impacting the profession, and noted they are being addressed in part by the SEC’s Advisory Committee on Improvements to Financial Reporting (chaired by Bob Pozen). Insurability was another issue, he said. He focused his remarks on what he called the ‘regulatory mindset.”
“A lot could be achieved by embracing a professional judgment rule,” said Turley, “under which good faith judgments, rational and well documented, whether made by registrants or by auditors, would be afforded respect by regulators and in legal proceedings.”
As detailed in his written testimony, Turley recommended creating an auditors’ professional judgment rule akin to the business judgment rule applicable to boards of directors, “to protect against regulatory second-guessing and civil liability arising from rational, well-considered, documented judgments.”
ACAP member Silvers noted the business judgment rule was expressly directed to a reasonableness standard for non-experts, whereas an auditor judgment rule would likely have to take into account the auditors’ role as experts.
In response to a question from ACAP cochair Don Nicolaisen, Turley said he doesn’t see the need for a professional judgment rule solely as a litigation issue. “I see this as a relevance issue to the profession,” said Turley, “when young men and women enter the profession, when so much of rules or principles have a great big amount of judgment in them, when we are absolutely having to encourage our partners and staff to exercise professional judgment.”
What is More Important to Sustainability, Audit Quality, or Reducing Concentration/Increasing Competition?
Separately, a philosophical debate ensued between U.K. FRC’s Paul Boyle, GAO’s Jeff Steinhoff and some members of the committee, over whether the primary issue in sustainability of the audit profession was over risk of catastrophic loss or losing one or more firms, exacerbated by the current extent of concentration in the profession among the Big 4, or, as Steinhoff posited, if the core issue to the sustainability of the audit profession was over audit quality. Steinhoff provided some preliminary statistics from GAO’s update of its 2003 study on audit firm concentration and competition (see charts in his written statement), noting some a small amount of expansion beyond the Big 4, although there was still a tendency among the largest companies to remain almost exclusively with Big 4 firms. However, Steinhoff noted that beyond issues of competition or concentration, the issues that took down Andersen, for example, were over ‘bad, bad audits,” and addressing audit quality would be a strong factor in sustainability of the audit profession.
Catastrophic Loss Could Extend Beyond One Firm; Limits of “persuasiveness’ and ‘precision’
E&Y CEO Jim Turley noted in a later panel his concern about catastrophic loss was not limited to one of the Big 4 closing, but that it could influence professionals at the remaining 3 firms to leave the profession, having a broader catastrophic impact on the industry, potentially moving the role of auditing into the hands of the government vs. the private sector.
Turley also made some interesting comments on the need to apply judgment to determine what makes persuasive evidence, and on inflated perceptions of precision. He said he had spoken with some directors of professional practice at firms recently, and, “oftentimes you can get into a debate over whether something is persuasive evidence; a lot of judgment has to be made.” Additionally, he noted, “Very definitely there is an expectation of a level of precision that is not based on reality.”
Law prof James D. Cox said he would not be in favor of indemnification clauses for audit firms (which some noted cause independence issues) but some form of liability caps may be worth considering.
Expansion Teams?
Steinhoff noted even if the 4 next tier firms (Grant Thornton, BDO, Crowe Group and RSM) combined, they would still have 2600 fewer staff than the smallest of the Big 4, KPMG.
ACAP member Ken Goldman, a CFO and former president of FEI Santa Clara Chapter, asked if the next tier or smaller firms would consider forming ‘expansion teams’ by combining to form a Big 5 or 6 firm.
BDO Seidman’s Wayne Kolins responded, We have no primary objective to go to a Big 5, we are happy where we are.” He added, however, “We do feel there are companies that are only comfortable going to the Big 4, and it may not be due to technical attributes. That’s why we want to get that information out there,” to help companies and their audit committees consider audit firms below the Big 4, as described below.
Kolins said, “Investors want and deserve high quality audits, but audit firms are not fungible. Audit committees may choose from an array of factors for the best match.” These factors, said Kolins, include:
ability to deal with complex/technical problems
understanding of the industry
PCAOB inspection results
resources in multiple jurisdictions, and
audit firm’s culture, tone at the top
“Size of the [audit] firm is one factor,” said Kolins, “but should never be a prima facie bar to selection, excerpt perhaps by the largest multinational companies.”
Kolins also made a number of interesting suggestions for regulators and the stock exchanges to assist in enhancing competition:
issuance of guidance by regulators and exchanges to strongly encourage audit committees to consider suitable qualitative factors, emphasize concern for audit quality, and communicate their belief there are many firms [that can qualify].
encourage small firms to join national alliances
enhance availability of industry and specialized training
renew Corp Fin [SEC’s Division of Corporation Finance] practice fellow program, as well as the existing program of practice fellows in the Office of the Chief Accountant
create a PCAOB practice fellow program, reaching out to firms of all sizes
Preparers Want “Good Quality Audits, Properly Scoped, at Reasonable Cost” FEI’s Cangemi Says
Representing preparers, and with experience as an audit firm partner, as well as corporate CFO and CEO, FEI President & CEO Michael P. Cangemi suggested various areas for ACAPs consideration.
Regarding the structure and ownership of audit firms, Cangemi noting the large gap after the Big 4, “affects the choice my CFO members have,” in selecting an audit firm. He noted, “Recent efforts underway to expand the number of firms are important to us, including different structures for firms and ways to reduce litigation risk, ways to reduce pressure and provide additional resources to our member companies.”
Additionally, “There is the potential for smaller companies to be overaudited by larger firms,” observed Cangemi. He said, “It would be helpful to expand the choice of audit firms for high quality audits by smaller firms.”
Cangemi said he would support choices for public ownership or some type of blended approach to ownership of audit firms.
Also, he suggested considering “expansion of the types of audit firms to add value at lower fees.” He added, “We’ve seen significant cost increases in audits over the last 5 years, [and while] we are very cognizant the quality of audits up, our members want good quality audits, properly scoped, at reasonable cost.”
Asked by ACAP member, former SEC Chief Accountant and PCAOB SAG member (and FEI member) Lynn Turner, if FEI still supported the view expressed a few years ago that there should be more transparency by audit firms, Cangemi responded, “Yes, under principles of good governance, more transparency from the firms would lead to better overall governance.”
Turner also asked the fourth panel if they thought expanded disclosure of ranges of estimates would be useful.
Analyst, professor and consultant Tony Sondhi responded that information would be useful.
Cangemi questioned if only the most sophisticated users would benefit from that kind of disclosure. Additionally, such disclosures could raise issues of providing competitive information and could drive increased cost.

Dec 4, 2007, 5:30 AM by Edith Orenstein
It's a Liability, It's Equity, It's FASB's Preliminary Views... More From FASB Includes Useful Life of Intangibles
On Friday (Nov. 30), FASB issued its long-awaited Preliminary Views on its Liability-Equity project. Officially entitled, "Preliminary Views: Financial Instruments with Characteristics of Equity," the document has a comment deadline of May 8, 2008. The project is a joint project of the FASB and IASB. Additional information is in this news release.
BNA's Steve Burkholder reports in today's BNA Daily Report for Executives, in an article entitled, "FASB Issues Preliminary Views on Financial Instruments with Equity Traits":
"The standard-setting effort, which is being conducted jointly with the International Accounting Standards Board, is generally expected to result in a recording of more liabilities on companies' books than is the case at present.
"The FASB paper, Financial Instruments with Characteristics of Equity, "represents a major step in the development of a single standard" that would replace a complex "patchwork of existing guidance that continuously raises" questions on application of accounting principles, according to a board news release.
"Asked why the document has the more limited title--on instruments with "characteristics of equity"--that is different from the long-standing name of the project, "liabilities and equity," a FASB spokeswoman told BNA that the shorter title was more descriptive of the instruments at issue, as discussed in the paper."
Besides the liability-equity Preliminary Views, other documents released by FASB last week for public comment include:
Proposed FASB Staff Position (FSP) No. FAS 142-f, “Determination of the Useful Life of Intangible Assets.” Comment deadline: Jan. 16, 2008.
Proposed FSP No. FAS 157-a, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions.” Comment deadline: Jan. 4, 2008.
Proposed FASB Staff Position (FSP) No. SOP 07-1-a,, "Effective Date of AICPA SOP No. 07-1." The proposed FSP would indefinitely delay the effective date of AICPA’s Statement of Position No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies,” currently set to take effect for fiscal years beginning on or after Dec. 15, 2007; the SOP had encouraged early application. The comment deadline is Dec. 17, 2007.
Treasury Advisory Committee on Auditing Profession Meeting TodayAs detailed in this post on Friday, Treasury's Advisory Committee on the Auditing Profession (ACAP) meets today, with four panels of experts testifying. Financial Executives International (FEI) President and CEO Michael P. Cangemi is on the fourth panel, General Sustainability; here is his written statement.
(Check out our newly designed website,, launched today!)

Dec 3, 2007, 9:49 AM by Edith Orenstein