NOTE: The FEI Financial Reporting Blog was launched in Sept. 2004, originally on FEI's website. The blog moved to Google blogger in Nov. 2008. All posts from 2008 forward are currently online on the new web address; we are in process of copying posts from 2007 and prior. Below are all posts from November, 2007.
Treasury Committee On Audit Profession Meets Monday; FEI’s Cangemi To Testify
The U.S. Treasury Department’s Advisory Committee on the Auditing Profession (ACAP), chaired by Arthur Levitt and Don Nicolaisen, will meet on Monday, December 3. According to this Federal Register notice, the meeting will be open to the public, advance security clearance is required.
ACAP will hear from four panels of experts at its meeting on Monday, to receive feedback on issues impacting the sustainability of the auditing profession, including those issues identified in the working discussion outline presented at ACAP’s inaugural meeting in October. The four panels presenting at the Dec. 3 meeting are on: Human Capital, Firm Structure and Finances, Concentration and Competition, and General Sustainability.
Financial Executives International (FEI) President and CEO Michael P. Cangemi is slated to testify on the fourth panel. As noted in his written statement, Cangemi will provide some suggestions for the committee’s consideration on the structure and ownership of audit firms, expansion of the types of audit firms and work done by professionals in those firms, the need for tort reform, and the importance of changing auditor’s and inspector’s behavior.
“Treasury Secretary Paulson asked in one of his speeches when this committee was formed,” observes Cangemi in his written statement: “Do auditors seek detailed rules in order to focus on technical compliance rather than using professional judgment that could be second guessed by the PCAOB or private litigants?” Cangemi responds, “Based on my experience as both an audit partner and senior executive at companies, I would have to answer Secretary Paulson by saying, Yes, I do believe auditors seek detailed rules and feel pressured to audit for technical compliance vs. professional judgment. I also believe over-auditing results from the focus on rules-based compliance.”
Cangemi adds,”I would suggest the committee seek ways to make auditors more comfortable applying professional judgment to particular fact situations under the tenets of broad principles, and likewise encourage standard setters to resist temptation for overly detailed bright lines vs. striving for sensible principles that can be applied and understood in practice by auditors and financial executives as well as by investors.”
A copy of FEI’s Four Point Plan to reduce complexity in financial reporting, which parallels some of the recommendations above, is attached to Cangemi’s written statement.
Deal Struck on Freezing Some Subprime Rates for Some Borrowers, WSJ Reports
In other Treasury-related news, Deborah Solomon and Michael M. Phillips report in today’s Wall Street Journal, “U.S., Banks Near a Plan to Freeze Subprime Rates.”
Solomon and Phillips open their page one story: “The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.”
They add, “The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies,” who are being asked to “follow any agreement reached by the coalition, which is called the Hope Now Alliance.”
The plan could be announced as early as next week, Solomon and Phillips report. “The Bush administration has been looking for ways to stem the fallout from the mortgage crisis,” they note. “Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson helped assemble the coalition so that government officials could have a single counterpart with which to discuss terms of a plan.”
“While the government can't force the industry to modify loans,” explain Solomon and Phillips, “Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens.”
However, they also note, “Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.”
As told by Solomon and Phillips, Paulson has said he has been spending most of his time with issues relating to the mortgage market.
"If I ever saw a role for government,” Paulson said, according to WSJ’s Solomon and Phillips, “it is...to bring the private sector together when innovation has really outrun our ability to deal with it." They report that state Paulson “is expected to talk about the administration's approach to the housing crisis at a conference Monday.”
For links to our prior coverage of the subprime situation, go here.
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Nov 30, 2007, 2:14 AM by Edith Orenstein
SEC’s Vote on Proxy Access: One Man’s Codify is Another Man’s Deny
In announcing its decision on shareholder proxy access yesterday, the SEC described its action as ‘codifying’ its existing interpretation of its rules, as noted in its press release: “SEC Votes to Codify Longstanding Policy on Shareholder Proposals on Election Procedures.” The lone dissenting vote on the ‘codification,’ Commissioner Annette Nazareth, characterized it as a ‘non-access’ release (rule), as detailed in our summary of the open meeting, and in her remarks.
Although the word “deny” or “bar” is not found in SEC’s announcement (the less loaded term ‘exclusion’ is used, consistent with the underlying terminology in Exchange Act Rule 14-a-8), the press has emphasized the effect of yesterday’s decision by putting terms like ‘deny’ and ‘bar’ upfront in its headlines, perhaps finding those terms equivalent to or more illustrative than ‘exclude’ in its own version of a plain English thesaurus.
Aside from emphasizing the ‘denial’ aspect of yesterday’s vote impacting the current proxy season, the articles below generally note (as we did in our summary yesterday) that SEC Chairman Christopher Cox promised to continue to explore issues surrounding shareholder access to the proxy for director nominations, but that effort would be directed at future proxy seasons.
Here’s some of today’s news coverage, and some organizational press releases, commenting on yesterday’s SEC decision:
“Cox, in Denying Proxy Access, Puts His SEC Legacy on Line,” by Kara Scannell, Wall Street Journal.
“SEC Bars Investors’ Directors,” by Eric Dash, New York Times.
“SEC Votes to Limit Shareholder Rights,” by Carrie Johnson, Washington Post.
“Council of Institutional Investors Deplores SEC Move To Curb Investor Rights,” Nov. 28 press release by Council of Institutional Investors (CII).
“Statement of AFL-CIO President John Sweeney on SEC Attack on Investor Rights,” Nov. 28 press release by AFL-CIO.
“Chamber Applauds SEC Action to Curb Abuse of Proxy Process,” Nov. 28 press release by U.S. Chamber of Commerce.
Business Roundtable: At this moment, there isn’t currently a statement on the Business Roundtables’s website regarding yesterday’s SEC decision. However, earlier this year, their views were described in this Jan. 22, 2007 WSJ OpEd by John Castellani, President of the Business Roundtable, which concluded: “When it revisits the "shareholder access" question in the coming weeks, the SEC should reaffirm its rules to keep special interests, politics and divisiveness out of our boardrooms, and to allow corporate directors to continue their focus on what they're truly there to do, create value for all shareholders invested in companies. The stakes are extraordinarily high: the continued health of the greatest wealth-creation engine in the history of the world -- the American free market system -- and the institution that is its bulwark, the corporation.”
Nov 29, 2007, 8:22 AM by Edith Orenstein
SEC Approves Rule Clarifying Exclusion of Shareholder Director Nominations; Nazareth Opposes It As Shareholder “Non-access
At its open commission meeting earlier today (Nov. 28), the SEC voted in favor of a final rule amendment to the proxy rules to clarify the basis on which companies can exclude shareholder director nominations and exclude other procedures such as bylaw amendments that would facilitate such nominations. [UPDATE: Here is the SEC's press release on this topic issued after the meeting.]
The vote to adopt the proxy rule amendment above was on party lines, with the three Republican nominated commissioners (Chairman Christopher Cox, Commissioner Paul Atkins, and Commissioner Kathleen Casey) voting in favor of this final rule, and the lone Democrat appointee, Commissioner Annette Nazareth, voting against it. Nazareth claimed the rule amendment was a shareholder ‘non-access’ rule and not responsive to a majority of the 8800 comment letters filed on the short proposal (out of the total 34,000 letters filed on both the short and long proposals).
SEC staff said the wording of the core provision of the final rule remains unchanged from the version proposed in July. The final rule adopted today was based on the ‘short proposal’ on excluding shareholder nominations, issued for public comment in tandem with a ‘long proposal’ that would have permitted shareholder proposed bylaw amendments, which, if passed by a majority of shareholders, would have permitted director nominations by shareholders. The rule amendment will become effective 30 days from its publication in the Federal Register.
The rule amendment approved today impacts Rule 14a-8 of the Exchange Act, which includes procedural requirements for shareholders owning a relatively small amount of a company’s securities to submit proposals for inclusion in a company’s proxy materials, and lists thirteen bases for exclusion of such proposals. One of the exclusions, Rule 14a-8(i)(8), currently permits a company to omit from its proxy materials any proposal that “relates to an election for membership on the company’s board of directors or analogous governing body.”
Under the rule amendment adopted today – the core of which is verbatim what was contained in the ‘short proposal’ issued in July – the words wording of the exclusion rule above is being broadened by inserting the word ‘nomination’ as well as the words ‘or a procedure for such nomination or election’ into Rule 14a-8(i)(8) (as highlighted below), so it will now read:
“If the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.” [highlighting added to emphasize new words added under the amendment]
Cox said he supported the final rule to remove uncertainty this proxy season, which he said had been created not only by last year’s Second Circuit Court decision (AFSCME v. AIG) but also by a Supreme Court decision (Long Island Care) which reversed a similar second circuit decision earlier this year.
“In the upcoming proxy season, unless the SEC clarifies things, no one will,” said Cox. SEC staff noted that in the past proxy season, staff chose not to give any interpretation of its rules in this area, pending Commission action. In the current environment, given the second circuit decision, and lacking a final rule by the SEC, said Cox, “it would require shareholders and companies to go to court to determine the meaning of the commission’s proxy rules.”
“Inaction may benefit some parties that may benefit from the current legal fog,” Cox said, but he wanted to fulfill his commitment of providing clarity for this proxy season.
“The only legal question is what the SEC’s over-30 year old rule means,” said Cox. “As the second circuit told us, resolving the question is only a matter of explaining ourselves; there can be no excuse not to do so.”
If the SEC failed to clarify its rules, Cox warned, “disclosure and antifraud provisions applicable to proxy contests could be out the window.”
Cox called today’s rule a ‘status quo proposal, nothing more or less,’ saying it would ‘preserve shareholder rights.”
However, he noted, “[M]erely preserving the status quo is not what investors hope for,” adding, “I am in that camp.”
With the Commission currently down one commissioner (Commissioner Roel Campos left earlier this year), Cox acknowledged, “I received private and public requests to wait until next year to act on this proposal, since we have one vacancy [on the commission].”
He added, “many believe codifying the interpretation will take the wind out of the momentum” of addressing broader shareholder proxy access. However, the alternative of doing nothing in the interim, he said, would “provide an easy end-run” around the proxy disclosure requirements.
“We can have a better rule, on the same schedule they contemplate,” with respect to broader proxy access, said Cox, “if we press on and not give up, if we use time wisely, we can act next year’s proxy season,” for a rule that interacts with state rights for shareholder access. “But it is not necessary to subject everyone in the current proxy season to a regime of self help and ambiguity as to the rule of law.” That is why he favored a two step approach of finalizing a rule amendment this year on what the SEC’s current interpretation of its proxy rules is, and potentially going back to the drawing table to address broader questions next year.
He said such deliberations “May yet lead us to a broader consensus on the wisdom of vindicating shareholder rights.”
In registering the lone dissenting vote against the final rule amendment, Commissioner Nazareth said, “It is important for the Commission to provide a reasoned explanation,” given that the vast majority of comment letters on what she termed the ‘nonaccess’ proposal opposed the proposal, she noted. “Yet, the commission is ignoring the pleas of investors,” said Nazareth, adding, “I don’t think commission should make hasty decisions that impair shareholder rights simply to meet this time frame.” She also said she did not recall the Supreme Court Long Island Care case having been raised as a factor intensifying uncertainty in any of the discussions prior to the proposing release this summer, or in the proposing release or any of the comment letters, although the case preceded the proposed rulemaking by six weeks.
Acknowledging the SEC’s actions to gain feedback through a series of roundtables following the AFSCME decision, Nazareth called today’s decision “a step backward.”
In terms of global competitiveness, she also noted “All 40 of the largest markets outside the U.S. give investors’ ability to nominate and remove directors.” In the U.S., she said, “this is long overdue.”
Noting that Chairman Cox stated his plan to have the commission continue to address shareholder rights “in the near future,” she stated “I fervently hope it does.”
Rule Amendment Allowing Electronic Shareholder Forums Also Approved
Immediately preceding its discussion and vote on the shareholder proxy access rule, the Commission unanimously voted to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums. [UPDATE: Here is the SEC's press release on this topic issued after the meeting.]
Although voting in favor of the electronic shareholder forum rule, Nazareth said, “It seems to me this release is poised as a counterweight to the next proposal we will consider…. and should not serve to mask our actions in that area.”
Nov 28, 2007, 1:18 PM by Edith Orenstein
Sarbox, FCPA in the News; Draft Guidance Can be Used to Assess Anti-Fraud Programs - ACFE/AICPA/IIA Seek Your Views
A decrease in the number of material weaknesses in internal control reported under the Sarbanes-Oxley Act (Sarbox) - within the large company sector that has been subject to the act’s reporting requirements for a few years - and an increase in bribery and corruption cases being taken up by the Justice Department and FBI under the Foreign Corrupt Practices Act (FCPA) were both in the news this week, along with other items of interest on auditors requests for information subject to attorney-client privilege, and the current debate surrounding what constitutes a ‘reconsideration’ event under current accounting rules to require certain off balance sheet assets [e.g., Collateralized Debt Obligations (CDOs) issued by off balance sheet Structured Investment Vehicles (SIVs)] to be put back on the balance sheet. These articles can be found in the links listed further below.
Separately, draft anti-fraud guidance sponsored jointly by the Association of Certified Fraud Examiners (ACFE), American Institute of CPAs (AICPA) and the Institute of Internal Auditors (IIA) was recently released for public comment, with a comment deadline of December 21. As noted in a cover letter by IIA President Dave Richards, coordinator of the project, the Exposure Draft, entitled, “Managing the Business Risk of Fraud: A Practical Guide,” can be used to assess an organization’s antifraud program. Additionally, the guidance can help companies develop and improve antifraud programs. Richards also states final guidance is expected to be released in January, 2008.
The draft cites FCPA, OECD’s 1997 Anti-Bribery Convention, Sarbox and the U.S. Sentencing Guidelines, as well as the increased emphasis on fraud in SEC’s management guidance for internal control reporting and PCAOB’s AS5, and says: “Due to the heightened regulatory environment, as well as increased public attention, boards of directors, executive management, and internal auditors, among others, are being asked specifically how the organization is responding to these regulations, how they identify fraud risks, what they are doing to better prevent or at least detect fraud sooner, and what programs and procedures are in place to investigate fraud.” The draft adds, “This document is designed to help address these tough issues.”
Major areas covered by the AICPA/ACFE/IIA’s draft anti-fraud guidance include Fraud Risk Governance, Fraud Risk Assessment, Fraud Prevention, Fraud Detection, and Investigation and Response.
As promised, here are links to articles on Sarbox, FCPA and other topics cited at the beginning of today’s post:
“Big Drop in Sarbox Breaches,” by Jeremy Grant in Nov. 26 Financial Times, citing Compliance Week survey.
“Payload: Taking Aim at Corporate Bribery,” (re: FCPA) by Nelson D. Schwartz and Lowell Bergman (and additional reporting by Marlena Telvick) in Nov. 25 New York Times (NYT).
“What the Corporate Auditor is Told, A Plaintiff Could Exploit,” by Lynnley Browning in Nov. 23 NYT.
“Citi’s $41 Billion Issue: Should It Put CDO’s on the Balance Sheet?” by David Reilly in Nov. 26 Wall Street Journal.
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Nov 26, 2007, 8:58 AM by Edith Orenstein
SEC Confirms Nov. 28 Meeting to Vote on Shareholder Proxy Access For Director Nom's; Paulson Shifts View on Subprime Response
The SEC announced yesterday it will meet on Nov. 28 to consider a final rule on shareholder proxy access. Separately, Treasury Secretary Henry M. Paulson's view on responding to the subprime crisis has shifted, reports Deborah Solomon in today's Wall Street Journal. Both of these items are detailed further below.
SEC to Vote on Shareholder Proxy Access Nov. 28
The SEC confirmed by issuing a Sunshine Act Notice yesterday that it will hold an open commission meeting on Nov. 28 to “consider whether to adopt amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, to clarify its longstanding interpretation of that rule.”
What does this mean in plain English? The commission will vote to adopt (unless there is a 2-2 split among the commissioners) a final rule to clarify the SEC’s current position on allowing shareholders the ability to nominate their own picks for directors by being able to place their nominations for directors on company proxy statements i.e. via shareholder proxy access. Said another way, the rule would likely attempt to add clarity to when a company can deny including such a shareholder proposal. The SEC will also consider a related matter on “whether to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.”
The vote follows SEC’s release of two alternative proposals for providing (or, in contrast, excluding) shareholder proxy access, with one (the ‘short proposal’) attempting to clarify SEC’s policy for companies to exclude such proposals, and the other (the ‘long proposal’) establishing a mechanism for shareholders to place a proposal for a bylaw amendment on the proxy ballot for shareholders to vote on allowing shareholder nomination of directors, including a proposed 5% minimum ownership threshold for a shareholder or group of shareholders to submit the bylaw amendment, and certain required disclosures to be made by those shareholders.
As we previously reported here, SEC Corp Fin Director John White told Financial Executives International’s (FEI’s) Current Financial Reporting Issues conference last week that 34,000 comment letters - a record - were received on the SEC’s two shareholder proxy access proposals. He noted the issue of shareholder proxy access is “the most highly charged matter at the Commission today.”
SEC Chairman Christopher Cox testified to a Senate Banking Committee hearing on November 14 that uncertainties and risks created by a Second Circuit Court decision which prompted the SEC to clarify its position through the issuance of the proposed rules was compounded by a recent Supreme Court decision.
“The Supreme Court reversed another panel of the Second Circuit in a similar case of an agency that changed its interpretation of its rules,” Cox told the Senate Banking Committee. “Just as in the proxy access case, the Second Circuit rejected the agency's more recent interpretation. Justice Breyer’s opinion for the unanimous Court held that the agency’s interpretation of its own regulations is controlling unless plainly erroneous. As a result of this decision, it is more likely today that even a Second Circuit court would uphold the agency’s longstanding interpretation of our proxy access rule.”
“In this escalating state of confusion,” said Cox, “the only rule across America at the moment is every litigant for himself.” Therefore, he continued, “[T]he only legal question is what the SEC’s rule means – not the new rules that we have proposed, but the rule that is already on the books, and has been for over 30 years.” He added, “It should be a straightforward matter for the SEC to answer that question”.
Cox said that after the Second Circuit’s decision last year, the SEC staff has stopped responding entirely to questions about what their current rule means. “There can be absolutely no excuse for our continuing to fail to answer that basic question,” he said, adding, “That is why I have said all year that we are committed to having a clear rule in place for the coming proxy season.
Furthermore, Cox told the Senators, the SEC does not simply have to make a binary choice to adopt one of two alternative proposals issued earlier this year.
“[I]n fact we may also adopt a rule that is different than either of those proposed,” he said. “The only requirement is that the proposed rule, and the questions the agency has asked, provide fair notice to the public of what the Commission is contemplating and the issues involved.” He added, “So long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention."
Following Cox’ testimony, the Senate Banking Committee held a panel of investor representatives. Detailed reporting on this panel and questions raised by the Senators to the investor panel and to Cox can be found in “Cox Stands Ground on Proxy Access Rule Under Questioning by Senate Banking Panel,” in the November 15 edition of BNA’s Daily Report for Executives.
Dave Lynn reported on the Senate hearing in his November 15 post in TheCorporateCounsel.net blog. He noted that Cox closed his testimony by saying some had asked the SEC to go back to the drawing board and take a ‘fresh look’ at the shareholder proxy access issue, but that “none of the 22 SEC Chairmen since the agency first looked at this issue in 1942 has successfully taken this step.”
Lynn, formerly Chief Counsel in SEC’s Division of Corporation Finance, observed, “That is an awful lot of history to overcome."
Paulson Shifts Stand, Calling for Broad-Based Response to Subprime Crisis vs. One-Off Solutions
Also in today’s ‘big news’ file, Deborah Solomon reports in today’s Wall Street Journal, “Paulson Shifts on Mortgages Treasury Secretary Seeks Broad Moves by Lenders; 'Not Business as Usual'.”
Solomon says Paulson said in an interview that “the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007,” and that “he is "aggressively encouraging" the mortgage-service industry -- which collects loan payments from borrowers -- to develop criteria that would enable large groups of borrowers who might default on their payments to qualify for loans with better terms.”
“That's a shift from his previous view that the problems didn't warrant a group approach,” said Solomon, adding, “Mr. Paulson said his outlook has evolved as he has learned more about the problem.”
"We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off," Paulson said, according to Solomon, adding, “I've talked to enough people now to know there's no way that's going to work."
Solomon adds, “The momentum for a new approach received a boost yesterday when four major mortgage-loan servicers, including Countrywide Financial Corp., and California Gov. Arnold Schwarzenegger agreed to endorse a plan for temporarily freezing interest rates to help borrowers in good standing from facing foreclosure when their loans reset to higher interest rates."
“While he stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rate on the two million mortgages due to reset to higher rates between now and the end of 2008, he said that's "one idea," according to Solomon. She added, “Mr. Paulson said he supports finding some way to develop "standard criteria that's going to allow for modification and workouts."
For additional background on this topic, see our most recent coverage in our posts dated October 11, .September 27, Sept. 18 , Sept. 12 and Sept. 4.
Nov 21, 2007, 9:07 AM by Edith Orenstein
SEC Names Wayne Carnall Chief Accountant of Division of Corp Fin; Breheny Named Deputy Director Corp Fin
Earlier today, the SEC announced it has named Wayne Carnall Chief Accountant of the Division of Corporation Finance. Prior to joining the SEC, Carnall served as a partner at PwC, and before that he was a staff member at the SEC, serving in a number of positions in the Division of Corporation Finance. Carnall fills the position vacated earlier this year by Carol Stacey, who left the SEC to join conference firm The SEC Institute.
Separately, the SEC also announced it has named Brian V. Breheny as Deputy Director for Legal and Regulatory Policy in the Division of Corporation Finance. In this role, Breheny will join Shelley E. Parratt, Deputy Director for Disclosure Operations, in overseeing Corp Fin’s day-to-day activities. An attorney and accountant, Breheny served in other positions in Corp Fin, and prior to that with law firm Clifford Chance US LLP and audit firm KPMG. He fills the Deputy Director position vacated by Marty Dunn earlier this year; Dunn left to go to law firm O’Melveny & Myers LLP.
Nov 20, 2007, 11:55 AM by Edith Orenstein
Of Whistleblowers And Lawyers
Whistleblowers and lawyers were in the news on a number of fronts last week, summarized below.
WorldCom Whistleblower Cynthia Cooper Keynotes FEI ConferenceCynthia Cooper, best known for her role in uncovering (as Vice President of Internal Audit) and blowing the whistle on Worldcom’s massive fraud in 2002, delivered the keynote address on Day 2 of Financial Executives International’s (FEI’s) Current Financial Reporting Issues (CFRI) conference last week. Day 1 was keynoted by SEC ‘Complexity Committee’ Chair Robert Pozen.
You may think you know Cooper’s story, given the extensive press about the unraveling at Worldcom (a fraud of such massive proportions it earned its own ‘Spotlight’ page on the SEC’s website), and seeing Cooper named one of Time Magazine’s Person’s of the Year in 2002, along with Enron whistleblower Sherron Watkins (see related item below) and FBI’s Colleen Rowley (who blew the whistle on some FBI practices which she thought contributed to the 9-11 tragedy).
But, there is much to Cooper's story that you may not know which is fascinating and inspiring, regarding her courage in pursuing leads through whatever means available to her and her staff to get to the bottom of the fraud.
Cooper shared a number of powerful anecdotes and lessons in her remarks at the FEI conference, including how she was not only told by the CFO to stop asking questions in certain areas, or to direct her questions at him, not the external auditor (KPMG, which replaced Andersen, and had hired a number of the former Andersen staffers following Enron and Andersen’s implosion). Conversations she scheduled with the Chairman of the Audit Committee were also blocked or delayed by higher-ups. She told of the press showing up at her parents’ door one day demanding a recent photo, lest they use the only one available to them from her high school yearbook. She also heard of rumored smear campaigns that some were asking the press to run to discredit her.
One key lesson Cooper imparted in her remarks at the FEI conference was that one reason Andersen missed Worldcom’s fraud was overreliance on analytical reviews (i.e., comparisons of key financial statistics and results period to period) and internal controls, which were brought down by collusion. She added Andersen did not have real time access to the accounting system at Worldcom, hindering its work.
Asked if Sarbanes-Oxley Section 404 would have prevented Worldcom, Cooper replied, “Internal control is important, but we’ve spent way too much time testing the bowels of the organization; entity level controls are more important.” Asked if there was anything she would have done differently, Cooper said internal audit had been very focused on operational auditing. “I would encourage them to focus more on internal control audits,” she said.
With respect to the Sarbanes-Oxley Act more generally, she added, “One of the most important things in SOX is the fraud hot-line.” Such hotlines can be important, she said, because, “very few frauds are caught by the external auditor” -as shown in various studies - and are sometimes hidden by collusion at the top of the company.
Cooper was very personable to conference attendees, I was honored to meet her. She autographed bookplates of her new book “Extraordinary Circumstances: The Journey of a Corporate Whistleblower”published by Wiley. UPDATE: You can purchase a copy of Cooper's book through the Financial Executives Research Foundation (the research affiliate of FEI) bookstore here. .
NYT on Novation Whistleblower Cynthia Fitzgerald“Blowing the Whistle, Many Times,” by Mary Williams Walsh in Sunday’s (Nov. 18) New York Times tells the story of Cynthia Fitzgerald, fired from medical supply buying company Novation after questioning what she believed were illegal bidding practices, including bribery, and claims of misreporting of certain rebates which allegedly led to Medicare fraud.
Fitzgerald filed a case under the False Claims Act, ‘alleg[ing] systemic fraud across a whole network of companies and more than 7,000 health care institutions,” reports Walsh.
Over $20 billion has been recovered by the government under the False Claims Act since 1986, notes Walsh, with $5 billion recovered in the past two years alone. Whistleblowers filing claims under the False Claims Act which are joined by the government get 15-30% of any government recovery, explains Walsh.
Having relocated to Dallas to join Novation following “a financially ruinous divorce,” writes Walsh, Fitzgerald was deeply troubled by certain approaches by contract bidders to Novation which appeared to cross the company’s ethical lines established in training courses as well as potentially breaking the law.
In one meeting requested by a contract bidder during what was supposed to be a quiet period in the bid process, Fitzgerald exclaimed, according to Walsh, “This is illegal, and I don’t look good in orange.”
Fitzgerald did not suffer in silence; according to Walsh, she “took her concerns to Novation’s legal department, human resources and even the company’s president.”
Novation disputes Fitzgerald’s claims. In a deposition by former Novation executive John M. Burks, Walsh reports, Burks “confirmed [Fitzgerald’s] activities, but called her ‘an employee who doesn’t simply understand that when a supplier asks an inappropriate question, you simply say no and move on.’”
Walsh notes that, “Proponents of the law say that $20 billion of recoveries is proof that contracting fraud is real, and that offering whistle-blowers a percentage is a good way to compensate them for the near-certainty that they will be fired.”
However, she also notes, “Companies and their lawyers say the growing caseload is a sign that the False Claims Act, with its promise of a payout for whistle-blowers, is motivating disgruntled employees to file nuisance suits that can tie up law-abiding companies for years.”
Ethisphereblog Reports on Enron Self-Acclaimed Whistle-Blower Lynn Brewer “Lynn Brewer Thinks Sherron Watkins is Jealous,” reported Ethisphereblog.com on Nov. 17. The blog cites stories implying self-proclaimed Enron whistleblower Lynn Brewer may be riding the coattails of recognized Enron whistleblower Sherron Watkins, and that some have raised questions about the role Brewer actually played at Enron and the circumstances surrounding her leaving the company. An earlier post in the Ethisphereblog (Oct. 16) about Brewer notes: “USAToday Debunks Enron ‘Whistleblower.”
The USAToday article reports that Brewer was a founding member of the Open Compliance and Ethics Group and that she founded her own company, The Integrity Institute.
NYT on Mass Tort Liability: “Forget Fair, It’s Litigation as Usual”Joe Nocera had a powerful article about the realities of who is harmed and who is helped by mass tort claims, in his article, “Forget Fair: It’s Litigation as Usual,” in Saturday’s New York Times. “27,000 [cases] were brought against Merck, which took Vioxx off the market three years ago after a study made it clear that the medication increased the risk of a heart attack or stroke,” Nocera writes. He focuses on the role of lawyers that file early in a class action matter - who try to establish ‘keynote cases’ and try to sell them to as ‘kits’ or ‘trial packages’ to other law firms.Russ Herman, a New Orleans lawyer described by Nocera as one of the architects of Merck’s $4.85 settlement announced last week, called the settlement ‘fair,’ one which ‘balances the scales between two competing parties, as reported by Nocera.
“But [Herman] also said something plaintiffs’ lawyers don’t often say out loud — at least not when a reporter is within hearing distance,” noted Nocera. “A corporate defendant cannot afford to defend thousands of cases where there is an alleged mass disaster at one time,” Herman reportedly told Nocera. “So true,” Nocera observed, adding, “If we’ve learned anything as mass torts have evolved over the last decade, it is that it scarcely matters anymore whether the facts are on the plaintiffs’ side — not when a thousand lawyers are armed with those kits.” “When you are a corporation facing 27,000 lawsuits, the question is never whether you’re going to settle. The only questions are when and for how much,” soberly notes Nocera. “Well, actually, there is one other question," he notes, "though in a society as litigious as ours, it is rarely raised. Is a mass tort really the right mechanism to settle disputes about product safety, or to punish corporate wrongdoing?”Here’s his answer: “There are many problems with viewing product liability lawsuits as a means to right wrongs, which is how we see them in this country. They often make lawyers rich while the people who say they were hurt wind up with very little. The legal system gives corporations zero incentive to step forward if there is evidence that a drug might have a harmful side effect — because, after all, they’ll get sued as soon as they make such an admission. Third, even the smartest lawyers aren’t the Food and Drug Administration, which is charged with making decisions about which drugs should be allowed on the market and how their risks should be disclosed. Mass torts have become a rogue form of regulation, and not necessarily in the public interest. And finally, when you get right down to it, litigation is a crapshoot, and it can be cruelly unfair.” For particulars of his position, see Nocera’s article.
Nov 19, 2007, 9:40 AM by Edith Orenstein
SEC Drops IFRS Reconciliation, Next Step: IFRS for U.S. Co's? Small Bus Rules Adopted, Mutual Fund Disclosures Proposed
The SEC released three press releases confirming its votes yesterday (Nov. 15) on dropping the IFRS reconciliation, adopting small business regulation enhancements and simplification by expanding the number of companies qualifying as small business filers and simplifying some of their reporting requirements, and agreeing to release rule proposals on mutual fund disclosures, including mandating a Summary Prospectus.
If you’re looking for particulars on the IFRS rulemaking, you won’t find much detail in yesterday’s press release, it is of the 50,000 feet variety, perhaps as part of SEC’s plain English initiative, or maybe because of the scope of interest in the matter internationally as well as in the U.S.
However if you’re anxious for insights as to the major provisions of the SEC’s rule dropping the IFRS reconciliation, see our FEI blog post that went up within an hour of the SEC’s vote yesterday, which provides a quick summary of the major provisions of the rule, based on comments made during the open commission meeting by SEC commissioners and staff. Most of our observations are from comments made by Corp Fin staffer Michael Coco during the meeting. Hopefully his remarks will be posted on the SEC website, at this moment they are not yet posted, although some of the other staff and commissioner remarks have been posted here.
FEI’s Committee on Corporate Reporting (CCR), in a comment letter filed Sept. 25, supported the SEC’s then-proposal to drop the IFRS reconciliation requirement.
Next Step: SEC Considers Whether U.S. Co’s Should be Permitted - or Required - to File in IFRS
The next step for SEC’s consideration in helping promote movement to one global accounting standard - which is the path SEC as well as the FASB and IASB have been on for some time now, as noted in yesterday’s meeting, is for the SEC to consider comments received on its Concept Release issued earlier this year regarding IFRS. The Concept Release, a preliminary document which is a precursors to any proposed rulemaking, raised questions for public comment on whether the SEC should permit - or require - U.S. companies to report in IFRS for purposes of their SEC filings.
As noted in our blog post yesterday and in SEC’s press release on IFRS, SEC Chairman Christopher Cox announced during yesterday’s open commission meeting that in addition to analyzing comment letters received on its Concept Release, the SEC will hold two roundtables on IFRS Dec. 13 and Dec. 17, to get additional feedback on this matter.
FEI’s Committee on Corporate Reporting (CCR) filed a comment letter Nov. 13 supporting a voluntary choice for U.S. companies to file in IFRS, but not mandating any potential shift to IFRS until at least 2012.
“In providing our support for providing an option for voluntary adoption, 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,” said the letter, signed by FEI CCR Chair Arnold C. Hanish. Hanish is Chief Accounting Officer at Eli Lilly and Company.
Additionally, the FEI letter said, “It would be helpful for the SEC to establish a specific, phased timetable” for a move to IFRS by all U.S. companies to occur, to engage members of the financial reporting community in the process.
“We believe that mandatory adoption by all companies could occur no sooner than 2012,” said FEI. “In the meantime, we believe that it is important to start that process now by permitting companies the option to adopt IFRS voluntarily.” FEI added “there is significant work that needs to be done with respect to infrastructure (e.g., academic curricula, continuing professional education, certification, etc.),” and observed, “We believe that the most effective way to meet this challenge is to bring market forces to bear now.”
FEI stated a voluntary program would provide a market-based impetus for change through education requirements, certification requirements, and employer demand.
Postscript: NYT's Norris on IFRS and IASB; .... And... What's Next: Intergalactic Standards?Separately, I noted in my Nov. 8 post a blog post by NYT's Floyd Norris on Nov. 6 entitled "Bye, Bye Independence" in which he discussed a potential threat to IASB's independence by last week's announcments by the IASCF and regulators about instituting greater ties between regulators and the IASCF/IASB.
I observed on Nov. 8: "Significantly, Norris states his view that: “You can have ‘accountability.’ Or you can have ‘independence.’ But it is an illusion to say you can have both.” I further observed my view that: "In contrast, I can also see the viewpoint of those who argue for an oversight role for securities regulators such as the SEC and its counterparts overseas – including IOSCO, although I am not sure the extent to which IOSCO may be viewed as ‘politicized’ vs. the SEC. Just as the SEC oversees the FASB, some argue there should be global regulatory oversight for the global standard setter - and that global standard setter will ‘eventually’ will be the IASB, as expressed by FASB Chairman Bob Herz at FEI’s Global Financial Reporting Conference on Sept. 28." I concluded, " I believe those making the argument for global regulatory oversight may base it on the fact that it is the securities regulators for whom ‘the buck [or euro, or other currency, as it may be] stops here’ when it comes to investor protection and regulating capital markets – arising from the quality of accounting standards and enforcement of their application – or otherwise."Norris' article about SEC's vote on IFRS published in the NYT today (Nov. 16), "SEC Says Foreign Companies Do Not Have to Adjust to U.S. Accounting," looks to me like he may have moderated his views some on any perceived threat to IASB's independence. In his article today (Nov. 16), Norris writes: "Mr. Cox, along with European and Japanese officials, has endorsed the creation of a new body that would be able to exercise control over appointments to the international board, but details of that group have not been ironed out. It is not clear whether that group would seriously challenge the independence of the board in setting rules." I posted a comment observing this seeming moderation of viewpoint on Norris' blog.
It will be interesting to see how the move to one global standard setter, with all the accompanying infrastructure changes, plays out. Who knows, maybe one day we'll be faced with convergence with intergalactic accounting standards? (I wonder if they have an equivalent to XBRL?)
Nov 16, 2007, 9:05 AM by Edith Orenstein
SEC Votes To Drop IFRS Reconciliation Requirement, Effective Immediately
The SEC just voted unanimously to drop the IFRS reconciliation requirement, effective immediately, as described below.
SEC Staff Recommends Dropping the IFRS Reconciliation Requirement
As described by Michael Coco of the Division of Corporation Finance to the Commissioners: “The Division of Corporation Finance and the Office of Chief Accountant jointly recommend the Commission adopt an amendment to accept in Foreign Private Issuer’s (FPI) filings financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB without reconciliation to US Generally Accepted Accounting Principles (U.S. GAAP).” Coco noted this will include amendments to Form 20-F and conforming amendments to certain other forms and rules.
Immediate Effective Date Would Enable 2007 Financial Statements Filed Without Reconciliation
The SEC staff recommends the “earliest possible effectiveness” for this rule change, said Coco. Therefore, the SEC staff recommends: “FPI whose 2007 financial year has not yet ended would be able to file in their next annual report or registration statement” under the new rule, if that rule is approved today.
John White, Director of the Division of Corporation Finance, noting the comment period on the proposed rule ended just two months ago, told the Commission, “the staff has worked incredibly hard to bring this recommendation to you so it can be applicable to financial years ending after today (i.e. ending in 2007).”
Auditors, Issuers Would Have to Opine They Use IFRS ‘As Issued By IASB”
To work toward the goal of a single set - not a multiplicity of sets - of high quality global accounting standards, the SEC staff recommends the SEC only accept IFRS by FPI without reconciliation if the issuer company asserts, and the auditor opines, compliance with IFRS as issued by the IASB, said Coco.
Two Year Transition Period For Companies Following EU Carve-Out for IAS 39, Derivatives
Coco added the SEC staff recommends offering an “Optional, temporary provision, for any FPI currently applying the EU accommodation [referred to by some as the EU ‘carve-out’] for IAS 39 [on derivatives].” This would be a two year transition period, said Coco, to allow such issuers to reconcile their financial statements (prepared using the EU carve-out) to IFRS as issued by the IASB. The temporary provision would apply for the first two financial years after Nov. 15, 2007; subsequently, said Coco, those issuers would have to report in the same manner as any other FPI (i.e., by using IFRS as issued by the IASB, without any local or jurisdictional carve-out.”
Deputy Chief Accountant Julie Erhardt explained the SEC staff was recommending the two year transition period for companies using the EU carve-out since the companies’ developed accounting policies in good faith relying on the carve-out, prior to knowing the final decision of the SEC to be made today, and the timing of that decision. She added the transition period was offered to build a bridge for such issuers to the end goal of what the SEC requires for all FPIs to not have to reconcile to U.S. GAAP.
“Since the EU carve-out,” added Erhrardt, “efforts have proceeded with IAS 39 and our own US GAAP on derivatives. Our staff’s thinking is this area is [a standard-setter] can use all the brainpower it can get, making it understandable for investors and making costs [reasonable]. I’m sure SEC staff would be happy to contribute our brainpower to the extent helpful to IASB and FASB to see if new ideas can be generated in this area [derivatives]."
Chief Accountant Conrad Hewitt added that as a practical matter, the EU IAS 39 carve-out impacts just 7 paragraphs of IAS 39, and has only been used by a handful of companies. He added, "Our own FAS 133 [on derivatives] needs a lot of improvement," and that the IASB and FASB have put a project on improving derivatives accounting on their list of standards to be improved.
FASB, IASB Committed To Convergence, Now In Its Its "Teen Years"
Hewitt noted that the Chairmen of the IASB and FASB "have stated publicly their commitment to continue the shared goal of convergence worldwide."
Erhardt gave the analogy of the convergence process entering its 'teen years." The first 5 years focus on looking at differences between IFRS and US GAAP, she explained, including whether IASB or FASB had a standard better than the other, and if there was an easy way to converge to the preferable standard. "That ground has been plowed," said Erhardt, "and the next phase is [where] neither has a 'world class' standard,' there will be a joint effort to develop a world class standard... to meet investors' needs." SEC Chairman Christopher Cox reponded to Erhardt's characterization of convergence being in the teen years, "It sounds like a very promising adulthood."
Related SEC Rule Amendments
Coco described related rule amendments the SEC staff was recommending include: “Issuers filing in IFRS for interim periods without reconciliation will be able to do so without disclosure under article 10 of S-X, provided they comply with IAS 34 for interim financial reporting.” He described a number of other related rule amendments, which I would assume will be in the SEC’s press release announcing the vote today and/or in Coco’s remarks if they are posted on the SEC website.
FEI Supported SEC Action to Drop IFRS Reconciliation
FEI's Committee on Corporate Reporting (CCR) filed a comment letter on the proposed rule supporting SEC dropping the IFRS reconciliation requirement. FEI's CCR also filed a comment letter on the related SEC concept release which raised questions about permitting or requiring U.S. companies to file in IFRS in the U.S.
UPDATE 12:55 pm re: SEC Also Announces 2 Roundtables on Concept Release
Also of interest relating to IFRS, separate from today's vote on dropping the IFRS reconcilation requirement for foreign private issuers (FPIs) described above, SEC Chairman Christopher Cox also noted during his opening remarks on IFRS that the SEC will be holding 2 roundtables in December (Dec. 13 and 17) to get more feedback on the Concept Release on whether to allow US companies to file in IFRS. He said the roundtables will include audit firms, preparers, users, analysts and lenders, and intermediaries such as underwriters, regulators, and rating agencies.
Nov 15, 2007, 12:52 PM by Edith Orenstein
FASB To Propose One Year Delay of Certain Provisions of FAS 157, Fair Value Measurement
At its board meeting earlier today, FASB voted to propose a ‘partial’ one year deferral (i.e., delay of the effective date of certain provisions) of FAS 157, Fair Value Measurement. The partial deferral would apply only to certain nonfinancial assets and liabilities as described below. The vote was 4-3 for this partial deferral. The three board members in the minority, Batavick, Seidman and Smith, said they would still prefer a full delay of all provisions of FAS 157 for all companies. The four member majority (Herz, Crooch, Linsmeier and Young) only agreed to a partial delay as described below. [UPDATE 9:30 PM - FASB issued a press release late today confirming the decision, see more about the press release at bottom.]
Scope of Proposed 'Partial Deferral' of FAS 157The board agreed to “defer the effective date of FAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).” The proposed deferral is described as ‘alternative B’ on pdf page 24 of today’s FASB board handout, which provides examples of items that would or would not be deferred under this proposal.
The deferral of certain nonfinancial assets and liabilities under FAS 157 as described above would apply to public and private companies. FASB staff will proceed in drafting a proposed FASB Staff Position (FSP) for public comment on this proposed delay.
Implementation Guidance Coming in Proposed FSPsImmediately preceding its vote on whether to delay certain provisions of FAS 157, the FASB board also discussed a number of implementation issues that have arisen under FAS 157, and voted whether staff should provide implementation guidance (in the form of a proposed FSP) on these issues.
Liabilities: The board agreed that staff should provide implementation guidance in a proposed FSP for measurement of liabilities under FAS 157, since there is not always a market in which to obtain an exit price (unless it is publicly traded debt). FASB Chairman Bob Herz supported efforts to provide guidance to simplify this, he said, given the ‘mental gymnastics’ companies currently have to go thru on hypothetical basis, and given cost-benefit of that exercise.
Pensions, Post-retirement benefits (OPEB): The FASB board discussed - but my take based on listening to the webcast is, they did not appear to formally vote on - whether the disclosures specified in paragraph 32 of FAS 157 should be provided in the plan sponsor’s financial statements. There was a split among the board during discussion on this point, with four board members indicating they did not believe pension/OPEB disclosures were contemplated under FAS 157, and other board members disagreed. If we receive further clarification on this matter, I will update this post.
The one thing the board did appear to agree on regarding this topic was that the staff should proceed in drafting a proposed FSP to expand fair value related disclosures about plan assets under FAS 132R, Employers' Disclosures about Pensions and Other Postretirement Benefits. There was some debate what the effective date of such proposed guidance would be, some were concerned that pension plan year ends may fall before the effective date of FAS 157, thus there may be a lag in having FAS 157-based info available from plans to plan sponsors. A question as to whether it would be practicable for companies to implement any further guidance issued close to year- end that would be applicable to this year-end shadowed this discussion. FASB’s Russell Golden pointed out the first reporting of the FAS 157 disclosures would be required (for public companies) with Form 10-K in March, which implied that some on the staff (and perhaps board) may believe any such proposed disclosures could still be effective as of this year-end.
Unit of Valuation: The board voted not to provide additional guidance on unit of valuation or broader questions on existing concepts in FAS 157 at this time.
UPDATE 9:30 PM: FASB issued a press release late today (Nov. 14) confirming the decision reached earlier today regarding a 'partial' deferral of the effective date of FAS 157. I think the FASB will be applauded for getting the news out there in its own words so quickly; normally FASB doesn't post the results of board decisions until at least one week following the meeting. So the first observation I would make is that in a world crying for real-time disclosure of material items, FASB's press release provides a good example, following in the footsteps of the SEC and PCAOB which routinely issue press releases on a same-day (or next-day) basis following major Commission (Board) votes. The second observation I would make regards the fact that the headline of the press release states what they did NOT do today - "FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities" - vs. what they did do today in approving a deferral for certain nonfinancial assets and liabilities. I'm not sure its the most plain English headline but no doubt it is meant to hammer a message to quell any potential criticism from some quarters fearing any scaling back by FASB of accounting or disclosures relating to financial assets and liabilties in the current troubled subprime environment and credit markets generally. As far as the reach of the nonfinancial assets and liabilities related deferral, the devil will be in the details to some extent in interpreting what it means. Once again, as noted in our earlier summary above, FASB provided some examples of what would, and would not fall under the proposed deferral, beginning on pdf page 24 of today's board handout.
Nov 14, 2007, 2:45 PM by Edith Orenstein
Shareholder Proxy Access The Most Highly Charged Matter at SEC Today, White Tells FEI Conference; Cox To Testify To Senate
John White, Director of the Division of Corporation Finance of the SEC, told Financial Executives International's (FEI’s) Current Financial Reporting Issues (CFRI) conference today that the issue of shareholder proposals and director nominations is “the most highly charged matter at the Commission today.” He also noted SEC Chairman Christopher Cox will be testifying at a Senate Banking hearing tomorrow on this subject. Also testifying at the hearing will be representatives of the Business Roundtable, CalPERS, the Council of Institutional Investors, and the International Corporate Governance Network (ICGN).
White told the FEI conference the SEC received 34,000 comment letters –the most in its history- on its two proposals released earlier this year providing alternative views on shareholder proxy access. He reiterated that Cox has stated he wants the SEC to resolve the issue this fall, to be effective with next year’s proxy season. However, one of the issues that may come up at the Senate hearing tomorrow will be whether the vote should be put off until there is a full commission to vote on this; currently, there is one vacancy from Commissioner Campos’ retirement, and another vacancy looms as Commissioner Nazareth previously announced her intent to leave as well.
White, Hewitt Will Recommend SEC Adopt Proposal on IFRS Without Reconciliation
Separately, referencing the SEC’s upcoming vote this Thursday on whether to drop the reconciliation requirement from IFRS to U.S. GAAP for foreign private issuers [FPIs] filing in IFRS in the U.S., White told the FEI conference, “Conrad [Hewitt, SEC Chief Accountant] and I will recommend to the SEC that this proposal to eliminate the reconciliation requirement be approved by the SEC.”
Asked what the proposed effective date on which FPIs could cease including the reconciliation, White said he could not comment on that today.
We will include additional highlights from today’s SEC presentations at FEI’s CFRI conference in our blog post tomorrow. See also our blog post from yesterday (which includes a couple of corrections on a reference to an effective date and a quote from FASB) for highlights from Day 1 of the FEI conference.
Nov 13, 2007, 1:06 PM by Edith Orenstein
FASB To Consider Alternatives for Fair Value Delay This Week; Guidance on Convert. Debt Likely To Not Take Effect Til 2009
FASB will consider at this week’s board meeting alternatives for how it may offer a partial delay (i.e., limited scope delay) of its standard on Fair Value Measurement, FAS 157, FASB’s Russell Golden told a standing room crowd at FEI’s Current Financial Reporting Issues (CFRI) conference this morning. See also the related announcement in FASB's Action Alert for this week's FASB board meeting.
Golden, FASB’s Director of Technical Application & Implementation Activities, said that although the FASB board voted recently against offering a full delay of the standard - which is otherwise set to take effect for fiscal years ending on or after Nov. 15, 2007, [UPDATE: correction to this post which originally said Dec. 15, 2007] with early adoption permitted - they are ‘likely to defer nonfinancial assets and liabilities that are not measured and recorded on a recurring basis.” (UPDATE: correction made to previous sentence to say "recorded" instead of "remeasured" as confirmed with FASB.) Thus, he said, certain derivatives, even if nonfinancial in nature, would not be scoped out.
He added that, (subject to the results of this week’s FASB meeting) he believes FASB could issue a proposal to defer the effective date of FAS 157 as specified above in mid-December, for a 15-30 day comment period.
A joint comment letter filed Nov. 6 by FEI’s Committee on Corporate Reporting (CCR) and Small Public Company Task Force (SPCTF), reiterated the reasons noted in its earlier letter calling for a delay of FAS 157. FEI’s Committee on Private Companies (CPC) standards subcommittee also filed a letter Nov. 6 calling for a delay in FAS 157, and the Institute of Management Accountants (IMA) also previously filed a letter with FASB requesting a delay of the fair value measurement standard.
Among reasons for a delay cited by FEI’s CCR and SPCTF and by the IMA were the fact that significant implementation issues regarding FAS 157 have been identified by, and remain to be addressed by, FASB’s Valuation Resource Group (VRG).
Golden explained that, in the past, there was more of a rush to issue implementation guidance, but today, in his view, it is important to determine if users of financial statements can accept some diversity in practice, e.g. if there are two reasonable views how to interpret a particular provision in a standard, to potentially allow such diversity to exist, with one consideration being whether there is adequate disclosure. Based on his remarks, it appears FASB staff, (if not the board) are not necessarily convinced that major implementation issues that may create a diversity in practice must be resolved immediately. He also noted that there have been two meetings of the VRG so far, and those meetings are ‘closed to public observation so we can obtain a better dialogue.” However, he said, FASB staff brief the board on major issues raised by VRG at public board meetings. Additionally, “we encourage VRG members to write notes and publish those notes so you can know what’s going on,” he added.
Other issues that may be discussed as part of the proposed (partial) delay of FAS 157, Golden said, included: a ‘practical expedient’ to measure liabilities, where an exit price cannot be obtained since you can’t readily exit those liabilities. Additionally, the prposed guidance may discuss applicability of level 3 (non-market traded) disclosures in pension plans, including the plan sponsor’s financial statements.
Opposition to Proposed Guidance on Convertible Debt that May be Cash Settled, Any Final Guidance Will Likely Have Effective Date One Year Later Than Proposed (2009 vs. 2008)
On another topic, Golden noted FASB received some opposition to its proposed guidance on accounting for convertible debt that may be cash settled (proposed FSP APB 14-a). FEI was among those who suggested in a comment letter (see FEI comment letter) that FASB consider any potential guidance in this area within its broader liabilities and equities project, or at a minimum, delay the effective date of any final standard from the proposed effective date of fiscal years beginning after Dec. 15, 2007.
Golden indicated a final FSP may be issued in December or early 2008 but given that timetable, the effective date would likely be moved out a year to fiscal years beginning after Dec. 15, 2008 (i.e., for all intents and purposes, to calendar year 2009).
Other Key Remarks
FASB Chairman Bob Herz and IASB Vice Chairman Tom Jones also made remarks during the a.m. session at FEI’s CFRI conference. To get maximum benefit from their presentations and others today, including the live demo earlier today of FASB’s soon to be released online ‘verification’ phase version of its Codification of standards, SEC ‘Complexity Committee’ Chair Bob Pozen’s keynote that began moments ago, the panel on FASB’s Financial Statement Presentation project earlier today, sessions on Sarbox 404, fair value and derivatives, a controller’s roundtable - and much more (and that’s just today’s agenda, tomorrow is SEC Chief Accountant Conrad Hewitt, WorldCom whistleblower Cynthia Cooper, and more!) - you really need to be here (we have onsite registration!) We'll share with you a couple of highlights from Herz' and Jones' remarks.
Herz reiterated his call made at FEI’s Global Convergence conference Sept. 28 and at the recent Senate hearing on IFRS, for the U.S. to establish a blueprint to move to what the rest of the world has moved to or is in the process of moving to as the one global accounting standard – IFRS.
Jones noting the varied reaction to IASB’s proposed IFRS for Small and Medium Sized Entities (SME’s) ranges from one or two respondents saying they’ll accept the scaled back IFRS for SMEs ‘over my dead body,’ to many other respondents reacting positively to the proposal. In fact, he said some in Africa are beginning to adopt IFRS for SMEs even before a final standard is written, based on the draft standard issued in the form of an Exposure Draft earlier this year. Jones noted the proposed IFRS for SMEs was issued to meet demands mainly from Latin America and Africa that it was not possible to apply the full set of IFRS to small companies.
Jones noted that he likes the IFRS for SMEs project because it is an example of providing a standard in a simple format. He said board members will sometimes ask, if it can be done so simply for IFRS for SMEs, maybe further simplification can be done in the full set of IFRS, or on new standards they are developing. He added one reason the IASB’s standards are more principles based than U.S. standards is the need to be able to translate IASB’s standards into over 40 languages for countries that have adopted or are planning to adopt IASB standards. FEI’s Committee on Private Companies (CPC) standards subcommittee filed a comment letter supporting the proposed IFRS for SMEs.
FEI President and CEO Michael P. Cangemi summed up the current state of play in financial reporting in his opening remarks, noting, “As 2008 looms, the entire subject of accounting standards seems to be somewhat in flux. FASB and the IASB are working closely with each other, doing joint projects and working toward common standards, but the results aren’t yet fully discernable.” He added, “This uncertainty is compounding the concerns that preparers [of financial statements] in general have about resources.” As an example of pressure on resources, Cangemi noted, “Subject matter experts are required in many aspects of accounting – financial instruments, pensions, business combinations, among others.”
“But resources are tight,” he continued, and the compliance burdens of Sarbanes-Oxley are still with us.” Cangemi added, “It remains to be seen if [PCAOB’s] Auditing Standard No. 5... will indeed present an improvement over its predecessor [AS2].” He noted highlights of the conference that would address many of the issues financial executives are facing today.
Marsha L. Hunt, Vice President and Corporate Controller of Cummins, Inc. and a member of FEI’s Committee on Corporate Reporting (CCR) served as chair of the 2007 CFRI conference.
For more information about FEI, visit our website at http://www.financialexecutives.org/. If I can answer any questions for you about FEI membership or conferences, or if you’d like to receive automated emails of our blog posts, feel free to email me at firstname.lastname@example.org.
Nov 12, 2007, 12:37 PM by Edith Orenstein
EU, U.S. Delegates To TEC Anticipate SEC Will Approve IFRS Without Reconciliation
European Union (EU) and U.S. delegates to the first Transatlantic Economic Council (TEC) meeting issued a Joint Statement on Friday (Nov. 9) saying they expect the SEC to drop the IFRS reconciliation requirement, and that the European Commission will similarly accept U.S. GAAP filings in the EU.
“On accounting standards, we anticipate that the U.S. Securities and Exchange Commission will soon complete a rulemaking to accept, without reconciliation to U.S. GAAP, financial statements of EU issuers prepared in accordance with International Financial Reporting Standards; and that the European Commission is preparing a mechanism that will allow use of U.S. GAAP,” said the Joint Statement released following TEC’s November 9 meeting held in Washington, D.C.
Other matters noted in TEC’s Joint Statement include areas of mutual interest in enhancing mutual recognition and reducing cross border barriers in securities regulation, investment and trade.
The SEC has scheduled a vote on November 15 on whether to drop the IFRS reconciliation requirement. As reported in Accountancy Age on November 8, in an article entitled, “IFRS a year early for US-listed European firms,” the SEC’s vote - perhaps strongly encouraged if not essentially a fait accompli following the TEC Joint Statement - comes a year ahead of time, based on the SEC’s IFRS ‘Roadmap’ first established in April, 2005 under then-SEC Chief Accountant Don Nicolaisen. Appendix I to Nicolaisen’s April, 2005 article linked above provides a timeline in the form of a diagram laying out the SEC’s goals for considering dropping the IFRS reconciliation.
The fact that the SEC is considering dropping the reconciliation requirement a year ahead of time has not gone unnoticed, although there are different views behind the acceleration. One such view, as noted in the above-cited article from Accountancy Age, states, “It appears the US financial market regulator has yielded to EU pressure to bring forward the date on which the obligation to use US Generally Accepted Accounting Principles (GAAP) is abolished.”
The willingness of the SEC to consider dropping the reconciliation requirement even short of 100% convergence of IFRS to U.S. GAAP was further articulated in a speech by Ethiopis Tafara, Director of the SEC’s Office of International Affairs, in December, 2005, when Tafara told the Federation of European Accountants, “I am here today to make clear that we do not expect full or even a finite degree of convergence before we are willing to eliminate the reconciliation requirement. What is important is that investors in the United States be able to understand financial statements prepared under IFRS. While convergence between IFRS and US GAAP will certainly help us all in reaching that goal, it is clearly possible for US investors to understand financial statements prepared using a rigorously applied system of IFRS, even if there remain differences between IFRS and US GAAP.”
The status of convergence under the timetable established in the FASB-IASB's Memorandum of Understanding (MOU) has the two boards endeavoring to complete certain major convergence projects by 2009, although ultimate convergence is not anticipated by many until at least 2012. Former SEC Chief Accountant Nicolaisen, having served as a prime force behind the SEC's IFRS Roadmap, used a reference point of the year 2020 at FEI's Sept. 28 conference on global convergence, asking panelists to project what the global accounting landscape will look like in 2020, as summarized here.
The momentum for SEC to vote next week on whether to drop the IFRS reconcilaiton requirement also closely follows announcements by the International Accounting Standards Committee Foundation (IASCF) - which oversees the IASB, and a joint statement by international securities regulators, including the SEC, EU, IOSCO and Japan's FSA, in support of IASCF's strategy for enhanced governance, funding, and public accountability, which we previously reported here.
Additionally, Accountancy Age reported that, in a parallel move to the SEC’s upcoming decision on accepting IFRS without reconciliation from foreign filers, “The US expects the EU on its part to introduce similar changes for US companies with a European listing.” This reference, and the related reference to European Commission (EC) consideration of permitting U.S. GAAP in the EU noted in the TEC Joint Statement above, refers to the fact that unless the EC/EU acts otherwise, companies based outside the EU that have listings on EU exchanges and file their financial statements there in U.S. GAAP will be required to file their financial statements in IFRS beginning Jan. 1, 2009, unless U.S. GAAP is found to be ‘equivalent’ to IFRS by the EC/EU.
So far, based on recommendations made to the EC/EU by the Committee of European Securities Regulators (CESR), certain third country GAAP, including U.S. GAAP, Canadian GAAP and Japanese GAAP, would be deemed ‘equivalent’ to IFRS except for certain significant items for which explanations would have to be provided. (In the meantime, Canada and Japan have announced their intent to directly converge with IFRS, as noted here and here.)
Some in the U.S. had viewed a potential EU requirement calling for a quantitative and qualitative description of significant differences between IFRS and U.S. GAAP to be tantamount to a de facto reconciliation requirement from U.S. GAAP to IFRS for filings made, e.g., by U.S. based companies that trade on exchanges in the EU. This view remains in spite of CESR's claims to the contrary, that they are not considering requiring a reconciliation per se. However, some view the CESR-recommended requirement as, at a minimum, requiring maintainance of two sets of books -e.g., in U.S. GAAP and IFRS - for U.S. GAAP filers to fulfill the reporting requirements in the EU. [UPDATE Nov. 11, 2007: above link to CESR website and link to KPMG comment letter which follows added to this post Nov. 11, 2007:See, e.g., KPMG comment letter to CESR dated May 8, 2007 which stated: "[CESR's] proposals imply that the disclosures required to remedy differences in measurement principles would need to be both 'non-complex' and more comprehensive than any form of reconciliation to IFRS."]
The Jan. 1, 2009 deadline for non-EU based filers in the EU to switch to IFRS for purposes of their EU filings has already been extended once from the previous deadline which would have been Jan. 1, 2007. Under the revised deadline, as of Jan. 1, 2009, all filers in the EU would be on a level platform of IFRS, bringing non-EU based foreign filers in line with EU companies which began reporting in IFRS in 2005. However, the level platform of IFRS is not so level when one considers some jurisdictions have offered their own versions of IFRS (called, not unexpectedly, ‘jurisdictional IFRS’), rather than requiring conformity with IFRS as adopted (as published) by the International Accounting Standards Board (IASB).’ See European Commission report on convergence of U.S. GAAP and IFRS dated released July 6, 2007.
The SEC’s proposal issued earlier this year, on which a related vote is scheduled for November 15, contained in this proposed rule, was to accept IFRS by foreign filers only if they used IFRS as adopted (published) by the IASB. Without that proviso, the SEC, FASB and IASB contend, they would not be supporting one set of global standards, but many different sets of global standards.
Some in the EC/EU have voiced concerns about this approach of requiring IFRS as adopted (published) by the IASB, since the European Parliament has approved an EU endorsed version of IFRS including certain carve-outs from IFRS, such as on Financial Instruments reporting. See, e.g., European Commission press release issued July 12, 2007 accompanying the EC’s latest convergence report, which stated: “In the report the [European] Commission welcomes the recent announcement by the United States Securities Exchange Commission (SEC) of proposed rule changes to allow IFRS-based financial statements to be filed without any reconciliation to US GAAP. However, the Commission recalls its general objective of removing this reconciliation requirement for European issuers using IFRS as adopted by the EU,” [emphasis added]. See also this June 22, 2007 statement by two members of the European Parliament.
However, statements of FASB Chairman Bob Herz, IASB Chairman Sir David Tweedie, and others at the recent Senate hearing on IFRS and in other forums indicate the SEC is being strongly encouraged to stay on the path set forth in its proposed rule, that if the SEC accepts IFRS without reconciliation, it accept IFRS under one global regime, that of IFRS as adopted (published) by the IASB.
The comment letter filed by FEI’s Committee on Corporate Reporting (CCR) on SEC’s rule proposal said, “CCR fully supports the concepts underlying the SEC’s “roadmap” to elimination of the requirement to reconcile IFRS (as adopted by the International Accounting Standards Board (“IASB”)) filings to U.S. GAAP.” CCR is also currently considering whether to file a comment letter on SEC’s related Concept Release that posed questions on whether the SEC should permit or require U.S. companies to file with the SEC in IFRS rather than U.S. GAAP. The comment deadline on the Concept Release is Nov. 13.
Separately, FEI’s Committee on Private Companies (CPC) standards subcommittee filed a comment letter Sept. 27 supporting the IASB’s proposed IFRS for Small and Medium-Sized Entities (SME’s). The IASB extended the comment deadline to Nov. 30, and FEI’s CPC is considering filing additional comments.
Nov 10, 2007, 11:09 AM by Edith Orenstein
Sarbanes-Oxley Studies, Speeches Call for Small Co Delay, Leveraging Benefits, and Recalibration
Sarbanes-Oxley, particularly Section 404 on internal control reporting, remains in the news with the release of two studies this week by the U.S. Chamber of Commerce and Jefferson Wells/APQC, which some may view as partially in conflict. Additionally, two former General Counsels of the SEC commented on Sarbox recently, as detailed below.
The “Cost of 404 Survey”, released yesterday by the U.S. Chamber of Commerce, the cover page of which also carries the logos of the Institute of Management Accountants (IMA) and the American Stock Exchange (organizations who sent the study to their members, along with the American Banker’s Association, as described in the ‘methodology’ section of the report) focused on the projected cost of Section 404 compliance on small businesses. Small companies (‘non-accelerated filers’ generally defined as having less than $75 million market cap) come into the 404 fold this year, beginning with their first Section 404(a) management report on internal control due as of this year-end (e.g. in 10Ks filed this spring), and their first Section 404(b) auditor’s report on internal control due next year-end (e.g. for 10Ks filed in early 2009). 50% of the survey respondents had public float less than $75 million, and three quarters had public float less than $200 million.
Key findings of the U.S. Chamber survey: 79% of respondents said they believed a further delay in the Sarbox deadlines would be helpful; 89% expect the costs of compliance will moderately exceed or greatly exceed the benefits, and 59% said they believed compliance with 404 would help their companies or auditors detect and prevent fraud “very little [if] at all.”
The U.S. Chamber issued a press release yesterday stating that based on the results of the study, the Chamber is “calling [again] for a one-year delay in small company implementation and urging Congress to hold hearings on the issue.”
Separately, Jefferson Wells, in conjunction with APQC (previously known as the American Productivity and Quality Center, an organization which helped launch the Malcolm Baldridge National Quality Award), published a study Nov. 7 entitled, “Leveraging SOX to Maximize Shareholder Value” (the JW/APQC report). [Note: the study can be downloaded for free at that link - also found on http://www.jeffersonwells.com/, after entering name, address, etc. There is also a related press release.]
“Many companies have a strong desire to protect shareholders’ interests through improved internal controls, but hesitate to do so at a cost that exceeds the benefits to investors,” says the JW/APQC report. “Unfortunately, many have had little choice, hurling continuously increasing resources at non value-adding process documentation and testing, information technology systems, employee training and communication, and external consulting.”
“If fulfilling compliance requirements has no benefit beyond meeting obligations,” continues JW/APQC, “then fulfillment merely creates an unprofitable, “just comply” mentality. This collaborative benchmarking research sought to uncover how organizations could not only better comply with regulations, but also reap ancillary benefits from their compliance investments.”
The JW/APQC study highlighted best practices on leveraging 404 at four companies: Intel, Marathon Oil, Microsoft and WellPoint. See also the related press release.
'Special Study Advisors' on the JW/ACQC study included Jeff Thomson, VP of Research and Applications Development at the Institute of Management Accountants (IMA), and Prof. William Shenkir of the University of VA. The report also lists sponsoring organizations of IBM, Sony Mexico, and the U.S. Postal Service.
I asked IMA’s Thomson to comment on what some may view as a potential conflict in the recommendations from the two studies with which IMA was affiliated – the U.S. Chamber study and the JW/APQC study, with the Chamber (and IMA, as noted below) calling for a further delay in Sarbox for small co’s, and the JW/APQC study outlining how to leverage benefits of compliance with 404.
Thomson provided his views as follows: “The two studies do appear to be independent and potentially conflicting but they are not at all. We [IMA] have called for a delay in Sarbanes Oxley Section 404 for small business, but only contingent on fundamental reforms to the SOX regime.” Thomson pointed out IMA has gone on the record on this position in the past, as noted in IMA’s written testimony to the House Small Business Committee on June 7, 2007, which stated: “IMA’s conclusion is that the May 2007 SOX section 404 implementation guidance is still seriously sub-optimal and that further delay, backed by a more radical and time-bound action plan, is necessary for small companies.”
“So, there always was a contingency,” continued Thomson. “A small business delay to keep them out of SOX forever was never our position – small businesses must be SOX compliant or risk being perceived as a “class B” stock.”
“Fundamental reforms are necessary, however, with 6000+ non-accelerated filers being thrust into a regime with high controls effectiveness error rates and 1 in 10 restatements," Thomson said, citing data from an Audit Analytics study.
Moving to the JW/APQC study, Thomson said, “The business reality is that small business must comply now (i.e. March 10Ks) barring any divine intervention. With that the case, there are methods such as six sigma, business process management and others that can help organizations comply more cost effectively.” He added, “It should also be noted that the [JW]APQC study was focused on large caps, although the improvement methods cited are scalable.”
Another voice out there calling for some level of Sarbanes-Oxley reform is former SEC General Counsel Ralph C. Ferrara, a partner with LeBoeuf, Lamb, Greene MacRae LLP. In remarks at the Practicing Law Institute’s Annual Conference on Securities Regulation, Ferrara called for some ‘recalibration’ of Sarbox, as noted by Rachel McTague in her article in today’s BNA Daily Report for Executives, “Former GC Calls for SOX Recalibration, Lays Blame for IPO Migration to Foreign Markets.”
According to McTague, Ferrara told the PLI conference:
“[D]irectors on corporate boards, who should be counselors to management, have instead become compliance officers for management, while gripping the sleeves of their lawyers. Meanwhile, he said, "CEOs have been turned into COOs" running the company, instead of taking it into the next generation."
“At the same time, Ferrara contended, U.S. exchanges have been losing market share of initial public offerings to foreign markets. "We've lost IPOs because we've lost growth. We've lost growth because we've lost risk-taking. We've lost risk-taking because of Sarbanes-Oxley," Ferrara contended, to applause by many of the hundreds of private lawyers at the institute. “
McTague also reported that another former SEC General Counsel speaking at the PLI conference, Jim Doty, a partner with Baker Botts LLP, called Sarbanes-Oxley a "rather blunt instrument in picking up all [1934 Securities Exchange Act] Section 12(g) [reporting] companies and putting one set of rules on them."
Separately, Ferrara told reporters in an interview, according to BNA's McTague, that "Now that we're through the apparent crisis that was the animating spirit of Sarbanes-Oxley, I think someone should sit down with a group of congressional staffers and the SEC and the plaintiffs' bar and the defense bar and some good corporate governance experts, and say, 'Let's now look at Sarbanes-Oxley a few years later and let's see if we can, outside of the passion of that moment, recalibrate all of it to make sure that it's fit for the purpose.' If you write it, then someone may say, 'You know, this is a good time to have that happen, to sit down.' ... As American enterprise becomes less and less competitive in our markets, I think there's a growing impetus for it."
Also in the News... on IFRS and Fair Value... A couple articles in today's papers you may find of interest if you, like we, have been following developments in IFRS and fair value accounting, are linked below:
"Minding the GAAP," an OpEd in today's Wall Street Journal by Ernst & Young CEO Jim Turley, saying the U.S. should move to IFRS, and backing FASB Chairman's call for a blueprint or timetable to make this move. "To take [Herz] suggestion a step further," says Turley, "the U.S. should reject a wait-and-see approach, go beyond the possibility of a switch [to IFRS] and declare that it will adopt IFRS as of a date certain for all public companies filing in the U.S."
"Reading the Tea Leaves of Financial Statements," (also called "Reading Write-Down Tea Leaves" in some editions of the NYT) by Floyd Norris in today's New York Times, notes Citigroup's recent writedowns relating to what he calls 'esoteric things called collateralized debt obligations' or CDOs, and serves as a jumping off point for his argument that: "Mark-to-market accounting is one of those ideas that sound brilliant until you try to do it when there is no market. That’s where mark-to-model comes in: companies say things are worth what they ought to be worth. But as Wall Street’s credit squeeze has worsened, even mark-to-model seems to be too generous a term. Mark-to-muddle may be closer to reality." My two cents: as SEC's 'Complexity Committee' (the SEC Advisory Committee on Improvements to Financial Reporting, chaired by Robert Pozen) continues to look at fair value among many issues relating to complexity, as discussed at their most recent meeting on Nov. 2, among issues to consider is whether the complexity of the accounting unnecessarily outdoes the complexity of the underlying instruments, and whether a more principles-based approach to the accounting may result in equally if not more meaningful accounting at less cost, freeing up time and money to invest in accounting and controls - relating to fair valued items or otherwise - where it would achieve a real benefit.
Nov 9, 2007, 10:56 AM by Edith Orenstein
SEC Votes Nov. 15 Whether To Drop IFRS Reconciliation Requirement;IFRS On Tap For Transatlantic Economic Council Meeting Nov. 9
Props to Broc Romanek who noted in TheCorporateCounsel.net blog today (Nov. 8) that the SEC posted a Sunshine Act Notice late yesterday (Nov. 7) announcing the commissioners will vote at an open commission meeting next week on whether to drop the IFRS-to U.S. GAAP reconciliation requirement for foreign filers. The IFRS matter is listed as agenda item 2 on the 5 point agenda for SEC’s Nov. 15 open commission meeting. Other agenda items for the Nov. 15 meeting include proposals for a mutual fund summary prospectus, expanding companies that fall under small bus reporting requirements and simplifying some of those requirements, shortening the holding period for restricted securities, and exemptions from registration requirements for certain compensatory employee stock options.
The announcement of the SEC’s taking up of a vote on the IFRS without reconciliation issue comes a day after the SEC, IOSCO, the EU, and Japan’s FSA issued a joint statement supporting IASCF’s strategy for enhanced governance, including building a direct link with international securities regulators responsible for protecting investors and regulating capital markets, as we reported yesterday.
Floyd Norris of the New York Times reflected on the potential enhanced oversight of international bodies over the IASCF in his Nov. 6 blog post, “Bye, Bye Independence.” Norris wrote, “When the [IASB] was set up in the 1990s, Arthur Levitt, then the chairman of the S.E.C., insisted on independence from the politicians. Now [current SEC Chairman Christopher] Cox has decided to walk away from that position.” Significantly, Norris states his view that: “You can have ‘accountability.’ Or you can have ‘independence.’ But it is an illusion to say you can have both.”
In contrast, I can also see the viewpoint of those who argue for an oversight role for securities regulators such as the SEC and its counterparts overseas – including IOSCO, although I am not sure the extent to which IOSCO may be viewed as ‘politicized’ vs. the SEC. Just as the SEC oversees the FASB, some argue there should be global regulatory oversight for the global standard setter - and that global standard setter will ‘eventually’ will be the IASB, as expressed by FASB Chairman Bob Herz at FEI’s Global Financial Reporting Conference on Sept. 28. I believe those making the argument for global regulatory oversight may base it on the fact that it is the securities regulators for whom ‘the buck [or euro, or other currency, as it may be] stops here’ when it comes to investor protection and regulating capital markets – arising from the quality of accounting standards and enforcement of their application – or otherwise.
Getting back to SEC’s upcoming vote on the IFRS reconciliation - in reaching its decision next week on whether – and when (i.e., effective date) - to drop the IFRS reconciliation for foreign filers, the SEC will consider views expressed in comment letters filed on its related proposed rule on dropping the IFRS reconciliation requirement. FEI’s Committee on Corporate Reporting (CCR) filed a comment letter supporting SEC’s proposal to drop the reconciliation requirement for foreign filers.
Additionally, by the time of the Nov. 15 vote on the IFRS reconciliation, the SEC will also have available comment letters filed on its related Concept Release which posed some preliminary questions – although stops short of being a formal proposal which would be the next step - on whether to permit or require U.S. issuers to file with the SEC in IFRS instead of in U.S. GAAP. Although many comment letters on the concept release have been filed in advance of the November 13 comment letter deadline, there is traditionally a flood of comment letters filed on the deadline day by companies, auditors, and professional associations. FEI’s Committee on Corporate Reporting (CCR) is among those considering filing a comment letter on the concept release.
Transatlantic Economic Council (TEC) to Hold First Meeting Nov. 9 in D.C.; IFRS on the Agenda
In the run-up to SEC’s decision on whether to drop the IFRS reconciliation requirement next week, besides the IASCF and joint securities regulators’ announcements yesterday referenced above, IFRS is also an agenda item of the Transatlantic Economic Council (TEC) which is holding its first meeting tomorrow (Nov. 9). The meeting will include EU and U.S. representatives, and will take place in Washington, D.C.
The issue of mutual acceptance of U.S. GAAP in the EU and IFRS in the U.S. without reconciliation was among ‘Lighthouse Priority Projects” listed on Annex 2 of the “Framework for Advancing Transatlantic Economic Integration Between the United States of America and the European Union” published April 30, 2007. The Framework was signed by U.S. President George W. Bush, European Council President Angela Merkel, and European Commission President Jose Manuel Barroso.
Tomorrow’s EU-U.S. TEC meeting will be “jointly chaired by European Commission Vice President Günter Verheugen, responsible for Enterprise and Industry Policy, and Allan Hubbard, Assistant to the President for Economic Policy and Director of the National Economic Council,” according to this press release issued by the EU today.
“The first meeting of the Transatlantic Economic Council is a milestone that will further strengthen the economic partnership between two economic giants, the European Union and the United States," stated Verheugen in press release. "Enhancing our economic cooperation is of the utmost importance for both of us and should especially be aimed at reducing unnecessary administrative and regulatory burdens for businesses and in the long term consumers.'
Accounting standards are among issues expected to be raised at the Nov. 9 TEC meeting, continues the press release, which states: “Reducing the burden of divergent regulation on businesses and consumers will be a major focus of the discussions.”
Props to Joe Kirwin of BNA who reported on the upcoming TEC meeting in his article in today’s BNA Daily Report for Executives, “Carve-Outs Still Key Issue for United States on Eve of EU Parliament Vote on IFRS 8.” Here’s a key excerpt from Kirwin’s article:
“Indicative of the difficulty of the issue on whether the EU IFRS carve-outs will be accepted were conflicting statements on the issue during briefings given by EU and U.S. officials in advance of the first TEC. Industry Commissioner Gunter Verheugen, who will lead the EU delegation, insisted in a meeting with reporters that one of the first "fruits" of the TEC was the United States' "acceptance of the European versions of the International Accounting Standards."
While the U.S. Securities and Exchange Commission recently stated that it was only prepared to accept the international accounting standards, the German commissioner insisted, "this is the White House that we are dealing with. We are not dealing with the SEC."
Later in the day, U.S. Ambassador to the European Union C. Boyden Gray gave his own briefing to a group of journalists, and he made clear that as it stands, the United States is prepared to accept only the IASs and not carve-outs, such as the one on IAS 39.”
If you’d like to learn more about IFRS and U.S. GAAP reporting issues, and hot issues from the SEC and PCAOB - straight from the regulators - sign up now (if you haven't already) - so you won't miss out on FEI’s Current Financial Reporting Issues Conference, which takes place Monday-Tuesday Nov. 12-13 in NYC. If you arrive Sunday evening or early Monday morning, look for me at the Registration desk!
Nov 8, 2007, 12:13 PM by Edith Orenstein
FASB Votes One Year Delay on FIN 48-Uncertain Tax Positions – For Private Companies; IASB To Enhance Governance/Funding; More
UPDATE 1:45 PM: See UPDATE at bottom of this post re: joint statement issued today (Nov. 7) by SEC, IOSCO, European Commission, and Japan FSA, supporting IASCF governance plan outlined below.
Earlier today (Nov. 7), the FASB voted to propose a delay in FIN 48 for private companies (technically, FASB used the term ‘nonpublic entities.’ Staff said they are using their most recent definition of nonpublic entities – non-SEC filers.The proposed delay of the effective date would be a one year deferral for private companies, moving the effective date for private companies to periods beginning after Dec. 15, 2007.
It appears this delay of effective date will be issued in the form of a proposed amendment to FIN 48 (possibly in the form of a proposed FASB Staff Position or FSP), and the board agreed to offer a 30 day comment period on this proposed change.
Basis for decision largely about confusion relating to pass-through entitiesFASB staff stated they received one comment letter from the FASB-AICPA Private Company Financial Reporting Committee (PCFRC) and another letter (not identified by name during the board meeting) asking FASB to consider an exemption from FIN 48 for private companies. asking FASB to consider an exemption from FIN 48 for private companies. (NOTE: Additionally, FEI’s Committee on Private Companies standards subcommittee sent FASB a letter requesting a delay of FIN 48, but FEI's letter did not ask for an exemption from FIN 48.)
The major reason FASB was persuaded to offer the delay was confusion over application to pass-through entities including Subchapter S corps, due to a reference in FIN 48 as amending FAS 109, and the fact that private companies may not be as familiar with FAS 109 as public companies. As noted in today’s FASB board handout, “It was argued that paragraph 1 of Interpretation 48 was counterintuitive. That is, pass-through entities, which traditionally had not been subject to the provisions of FASB Statement No. 109, Accounting for Income Taxes, would not understand how an interpretation of Statement 109 could apply.” A possible example as to applicability of FIN 48 to pass through entities was discussed at the meeting; board member Leslie Seidman suggested that example be provided in the minutes to today’s board meeting to communicate this point.
FASB Fears Moral Hazard of Trying to Time Guidance to Vendor’s CPE SessionsThe PCFRC letter had also argued there was a general lack of awareness of impact of the standard on private companies, due to a timing issue in that FIN 48 was issued in June 2006 and was not covered in major CPE sessions conducted on an annual basis in June of each year, which were directed at private companies. However, Board members were concerned about a ‘moral hazard’ in establishing a delaying a standard simply because CPE courses had not covered a particular new standard. However, board members agreed to focus more on FASB’s efforts to educate their constituents.
FASB staff noted the delay would not apply to entities that had already adopted FIN 48.
Hedging also DiscussedSeparately, following the FIN 48 discussion, FASB discussed a Fair Value Hedge Accounting Model for Cash Flow hedges. This is discussed on page 5-11 of the FASB board handout.
IASB Agrees To Enhance Governance, FundingSeparately, the International Accounting Standards Committee Foundation (IASCF), which oversees the IASB, issued a press release yesterday (Nov. 6) announcing a strategy to enhance the IASCF's and IASB's public accountability, primarily through its governance and funding, as described below.
Governance: The IASCF will:
establish a formal reporting link to a representative group of official organizations, including securities regulators which would approve Trustee appointments and review Trustee oversight activities, including the adequacy of the annual funding arrangements as well as the overall budget . [NOTE: the announcement does not specify which ‘representative group of official organizations’]
intensify and deepen engagement with key stakeholder groups beyond formal links to official organizsations, including by developing mechanisms for the Trustees to receive meet with official organizations, policymakers and private sector institutions, as well as from interested parties who wish to comment on the IASCF’s and IASB’s policies, processes and procedures. The enhanced strategy, states the IASCF, will require reconsideration of the role and structure of the Standards Advisory Council (SAC). [NOTE: FEI President and CEO Michael P. Cangemi is a member of the IASB’s SAC, and is in London now for the SAC meeting which will take place this week.]
National funding schemes (either through a levy or national payment) are in place in a number of countries (such as Australia, the Netherlands, New Zealand, and the United Kingdom).
Broad-based voluntary programmes in other jurisdictions (such as China, France, Germany, India, Japan, Korea, Luxembourg, South Africa, and Switzerland) are in place or are already agreed.
United States, Other countries: In other countries where fundraising efforts are continuing and are approaching an advanced stage, such as the United States, the Trustees are committed to establishing a broad funding base. The result of these ongoing efforts will bring the sources of funding from less than 200 organisations in 2005 to several thousand by 2008.
The Trustees will enhance their communications on funding arrangements by providing greater information regarding country-specific programs on the IASC Foundation’s Website and on levels of financing in the annual report.
Update on other IASCF matters noted in yesterday's IASCF announcement:
Commitment to convergence, MoU: The Trustees reiterated their support for work conducted under the February 2006 Memorandum of Understanding between the IASB and FASB. The IASCF also noted that future work under the MOU is largely focused on areas in which the objective is to develop a new world class international standard.
Expanding IFRS expertise on IFRIC: The Trustees approved a proposal to expand the membership of the IASB’s International Financial Reporting Interpretations Committee (IFRIC) (similar to FASB’s Emerging Issues Task Force or EITF) from 12 to 14 members in order to broaden IFRS expertise on IFRIC.
Review of feedback statements, impact assessments: The Trustees’ Due Process Oversight Committee (formerly the Procedures Committee) will review the IASB’s first feedback statements and impact statements before publication. The Due Process Oversight Committee also reported on its recent meeting with the IASB and indicated that it will schedule regular meetings with the IASB.
Trustee and IASB appointment matters: As previously announced, Gerrit Zalm has been appointed Chairman of the IASCF Trustees. Zalm is the former Dutch Deputy Prime Minister and Finance Minister. His three year term as chairman of the IASCF will begin Jan. 1, 2008. Phil Laskawy, the current Chairman of the Trustees, will become Vice Chairman of the Trustees, when Mr Zalm assumes the chairmanship in January 2008. As previously agreed, Bertrand Collomb will stand down as Vice Chairman at year end and will remain as a Trustee. Laskawy is the retired chairman of Ernst & Young, International.
Besides Zalm, another new trustee joining the IASCF in January will be Jeffrey Lucy, former Chairman of the Australian Securities and Investments Commission (ASIC) and incoming Chairman of the Australian Financial Reporting Council. Meantime, IASCF has been informed of a resignation of a trustee, Kees Storm, former Chairman of AEGON. Storm’s departure leaves three vacancies including the previously announced retirement from the IASCF trustees of Roberto Teixeira da Costa and William McDonough. (McDonough, the former PCAOB chair, is now vice chairman and special advisor to the chairman of Merrill Lynch).
IASB, FASB Analysts Advisory Groups MeetIn related news, IASB’s Analyst Representatives Group (ARG) meets today. The ARG appears similar (in role) to FASB’s Investors Technical Advisory Committee (ITAC), which is scheduled to meet Nov. 13.
UPDATE 1:45 pm: A joint statement was issued by the following securities regulators on November 7: the International Organization of Securities Commissions (IOSCO), the U.S. Securities and Exchange Commission (SEC), the European Commission, and Japan’s Financial Services Authority (FSA), supporting IASCF’s call for enhanced public accountability.
The regulators stated:
"International Financial Reporting Standards (IFRS) are becoming more widely used throughout the world. We have a common interest of ensuring continuing user confidence in the institutions responsible for the development of global accounting standards. A natural step in the institutional development of the IASB and the IASC Foundation would be to establish a means of accountability to those governmental authorities charged with protecting investors and regulating capital markets. We will work together to achieve these objectives."
Nov 7, 2007, 12:07 PM by Edith Orenstein
SEC Issues SAB 109 on Loan Commitments; FASB To Consider FIN 48 Delay for Private Co's, Ed Session on FAS 157 Delay Request
Yesterday, the SEC issued Staff Accounting Bulletin No. 109 (SAB 109) on loan commitments. It revises and rescinds portions of SAB 105, which was issued before FASB Statement No. (SFAS) No. 156 on loan servicing and SFAS 159 on the Fair Value Option. SAB 109 relates to valuing certain loan commitments and related intangible assets.
Tomorrow, FASB will take up whether to add an agenda project to delay FIN 48 on Uncertainty in Income Taxes for nonpublic enities. The FASB-AICPA joint Private Company Financial Reporting Committee sent FASB a letter requesting this delay, and the standard-setting subcommittee of FEI's Committee on Private Companies (CPC) is currently considering whether to file a comment letter on this matter, as well as on another matter FASB is considering a delay request on - FAS 157, Fair Value Measurement. FASB is scheduled to discuss requests for a delay in FAS 157 at an educational session following its board meeting tomorrow. As previously reported, FEI's Committee on Corporate Reporting (CCR) and Small Public Company Task Force (SPCTF) filed a joint comment letter requesting a delay in FAS 157. The Institute of Management Accountant's (IMA's) Financial Reporting Committee also requested such a delay. FASB previously decided not to offer a blanket delay in the standard, but is considering a delay for private companies and/or small public companies, and/or a delay for nonfinancial assets and liabilities. Check back to FEI's website http://www.financialexecutives.org/ and this blog for updates on FEI comment letters.
Nov 6, 2007, 9:33 AM by Edith Orenstein
Sarbox Hurt Analysts’ Accuracy, Study Says;Pozen Poses Alt's to Core EPS at SEC Adv. Comm.; See Pozen Next Wk at FEI CFRI Conf!
A study entitled, “The Impact of the Sarbanes-Oxley Act on Information Quality in Capital Markets” found an ‘unintended side effect’ of the legislation is that it ‘appears to have made Wall Street analysts less able to forecast corporate earnings.” This was reported by Mark Hulbert, editor of The Hubert Financial Digest, in his article carried in Sunday’s New York Times, “The Law of Unintended Consequences.”
Hulbert reports that the authors of the above cited study, Joy Begley and Qiang Cheng of the University of British Columbia in Vancouver and Yanmin Gao of the University of Alberta in Edmonton found that “the average earnings forecast was less accurate… from August 2003 through July 2004… than it was before the law. And it continued to be less accurate in the 12 months ended in July 2005.”
The academics used the accuracy of analysts’ forecasts as a proxy for reliability and accuracy of financial reporting post-Sarbox, since they believed they could only measure such characteristics through indirect means, as noted in Hulbert’s article.
Hulbert asks, “[I]s it possible that this decline had nothing to do with Sarbanes-Oxley?” He adds, “many other changes have been made during this decade that also affect how analysts go about their jobs,” and he lists Reg FD (SEC’s ‘fair disclosure’ rule that took effect in 2000, reducing differential disclosures to certain parties vs. making them available to the broad market) among them.
In response, he says, “Professor Begley acknowledged that while it was ‘highly likely’ that Sarbanes-Oxley contributed to the declining accuracy, it was impossible to know with certainty the relative roles of the law and these other factors.”
As noted by Hulbert, it is debatable how much stock to give an apparent correlation between accuracy of analysts forecasts and ‘reliability’ or ‘accuracy’ of financial reporting.
In fact, a broad array of organizations have argued in the past few years to place less emphasis on short term earnings estimates and potential pressure on companies to allegedly ‘manage earnings’ to meet analysts or the company’s own estimates.
Those arguing for less emphasis on short-termism and a less of a singulary focus on one number (such as EPS) have included the U.S. Chamber of Commerce supported Commission on Capital Markets Regulation in the 21st Century, whose March 2007 report stated, “Reducing the pressures to meet precise quarterly earnings targets announced by these very managers is an important first step in shifting the focus of the U.S. capital markets away from quarterly results and toward the long-term performance of U.S. companies.” Additionally, the Business Roundtable Institute for Corporate Ethics issued a report in July, 2006, “Breaking the Short-Term Cycle,” which “call[ed] on investors, corporations, asset managers and others to reconsider the benefits and consequences of short-term quarterly earnings guidance.”
Another group of academics has studied whether there is a correlation among firms that ceased earnings guidance (e.g., the extent to which those companies had poor performance prior to cessation) and trends in relative transparency or provision of other disclosures post-cessation. See “To Guide or Not to Guide: Causes and Consequences of Stopping Quarterly Earnings Guidance,” (April, 2007) by Joel Houston and Jennifer Tucker of the University of Florida and Baruch Lev of New York University.
The subject of focusing on one EPS number (vs. a range of potential EPS numbers given the variability under estimates inherent in the financial reporting process) came up during Friday’s meeting of the SEC Advisory Committee on Improvements to Financial Reporting, also called the ‘Complexity Committee’ or the ‘Pozen Committee’ after committee chair Robert Pozen.
Committee member Linda Griggs, an attorney with Morgan, Lewis & Bockius (and formerly chief counsel to the chief accountant at the SEC) responded to a presentation of the Substantive Subcommittee’s findings by encouraging them to look more into fair value reporting, noting some changes in fair value do not flow through the income statement.
Committee chair Pozen, noting he believes preparers or issuers of financial statements have resisted fair value reporting because of concerns about volatility, suggested, “You could have something like a core EPS which analysts look at, then other changes.” He added, “[I]f this was separated out from cash flow, it may help to show the core business is not effected by this volatility, and help with understanding whether the volatility was impacted by events beyond your control, or technical (accounting) changes.”
Joe Grundfest, a former SEC commissioner now with Stanford Law School, agreed with Pozen, saying Pozen was “being modest” and encouraged him to “push farther.” “There are many situations where [it may be] entirely appropriate for companies to report 3, 4 or 5 different EPS numbers,” said Grundfest, claiming, “that may reduce complexity.”
“At first blush,” continued Grundfest, “you may say, [does that mean] Citigroup [would] repor[t] 4 EPS numbers, [with] 2 up and 2 down? The answer is, yes,” he said, adding, “if you report only 1 EPS number, it makes it difficult to know what’s going on.”
Mike Cook, former CEO of Deloitte, and chair of the SEC Advisory Committee's Audit Issues & Compliance subcommittee responded, “I am less than convinced this will reduce complexity or take us to more understandable [reporting].” He added it merits further discussion, “but with our mandate of doing actionable, practical things,” that topic may not meet their mandate.
Previous recommendations regarding a ‘core earnings’ number contained in a report issued by Standards & Poor’s in 2002 is available among resources posted by Trinity University Professor Bob Jensen.
See also our summary of the Nov. 2 SEC Advisory Committee on Improvements to Financial Reporting aka Pozen committee meeting.
Readers who find this information of interest should also consider signing up for FEI’s Current Financial Reporting Issues Conference (CFRI) taking place next week, to hear a keynote from SEC Advisory Committee Chair Robert Pozen, as well as leaders from the SEC, PCAOB, FASB, IASB, and leading financial exec’s and auditors on the front lines of implementing new standards!
Nov 5, 2007, 11:23 AM by Edith Orenstein
Grundfest Warns of Iatrogenic Restatements; Jonas Warns a Fair Value Moratorium Could End Up a Funeral, At SEC Adv. Comm. Mtg
Earlier today, the SEC Advisory Committee on Improvements to Financial Reporting (also called the 'Complexity Committee' or the ‘Pozen Committee’ for chair Robert Pozen) met to discuss preliminary recommendations of its four subcommittees. There were no formal votes taken at today's meeting, although it appears likely that formal votes will be taken at the next meeting of the full committee on Jan. 11, 2008.
Standard-Setting SubcommitteeRecommendations of the Standard Setting Subcommittee (chaired by FEI Committee on Corporate Reporting (CCR) member David Sidwell, and including CCR advisory member and former FASB chairman Denny Beresford and others) were generally met with agreement, including recommendations for greater user involvement in the FAF, a coordinated agenda setting mechanism involving SEC, FASB, preparers auditors and users, and centralizing authoritative standard-setting in one entity - FASB, with SEC limiting its guidance to registrant specific matters; and if SEC were to provide broad guidance in speeches or otherwise, to subject such guidance to due process. The subcommittee also recommended more field testing and cost benefit testing. Characteristics for ideal standard-setting were also described in the committees report. FASB chairman Bob Herz, an observer on the SEC Advisory Committee, suggested a model used in the U.K. and elsewhere, where the Financial Reporting Council consists of representatives from the accounting standard-setting body, the securities regulator, and possibly banking regulators, may be something worth considering here.
Substantive Complexity SubcommitteeRecommendations of the Substantive Complexity Subcommittee (chaired by FEI member and former Federal Reserve Board Governor Susan Bies, joined by FEI member Ed McClammy and others) were also met with general agreement, including a definition of complexity and its causes, and a call for a reduction in industry specific guidance, vs. activity specific guidance. The subcommittee also made a recommendation for more ‘chunking’ of similar information in the financial statements. Moody’s Greg Jonas said the FASB-IASB Financial Statement Presentation project “offers the single biggest area for improvement in years, because standard setters had not previously given much attention to chunking,” and characterized the “direction to date” on the joint FASB-IASB project as “absolutely outstanding.”This subcommittee had also recommended a 'moratorium' on any new requirements for fair value reporting, until current issues of complexity were resolved, as detailed in the subcommitee's report. Jonas acknowledged the subcommitee's discussion of fair value was substantive, but warned, "On the concept of a moratorium, it can be appropriate if there is light at the end of the tunnel." He noted this particular suggested moratorium "is based on [waiting for] a decision framework for Fair Value," which he said is "badly needed,: and perhaps "the most controversial," issue in accounting today. However, he added, "History tells me this will take [a] very long [time], and a moratorium could turn out to be a funeral."
Audit Process and Compliance Subcommittee Of all the preliminary recommendations discussed today, the ones that met with a fair amount of opposition were a couple of recommendations of the subcommittee on Audit Process and Compliance, chaired by Mike Cook, former Chairman and CEO of Deloite, that would have delineated in a fair amount of detail a framework for professional judgment with separate requirements for auditors and preparers, including documentation requirements. Stanford Univ. Law Prof and former SEC Commissioner Joe Grundfest observed, "I’m a little skeptical about where all this leads, all these questions about judgment are made in the liability system, where there are words like reasonable and scienter, with shelves and shelves of books that define this, generally by example; and unless we can cause a lot of precedents to be reversed, I’m not sure if it's going to change behavior."
Another proposal from this subcommittee which was met with some opposition was the expressed preference of the subcommittee for judging interim materiality based on the interim period, not annual. The subcommittee will further consider issues of materiality and how to stem the tide of restatements. This subcommittee has also been asked (by the Substantial Complexity subcommittee) to consider whether a ‘tiered’ audit opinion would be useful in articulating different degrees of reliability on various numbers in the financial statements (e.g. cash vs. fair value estimates), although Cook said this issue may more appropriately be handled by Treasury’s Advisory Committee on the Audit Profession. Ed Nusbaum, CEO of Grant Thornton, noted the subcommittee had not made final recommendations in this area. However, a broader proposal on materiality met with less resistance - that of a sliding scale approach, combining quantitative and qualitative approaches. Specifically, the subcommittee suggested that errors amounting to less than 5% of net income or whatever number was the reference point would fall into a rebuttable presumption they were immaterial, although the rebuttable presumption could be overcome by qualitative factors. Similarly, errors over 10% would fall in a rebuttable presumption that they were quantitatively material, subject to qualitative considerations. Cook noted its the gray area in between the two - 5-10% that would pose the most difficulty.
Grundfest responded, "I’m not persuaded the quantitative things are driving the problems here; if you know something is a mistake and you read SAB 99 carefully, you have a hard time putting out historical data going out 3 years [and not correcting an error]." He concurred with a separate recommendation of the subcommittee to get more information out there sooner when a company is working on a potential restatement, which can last over a year in some cases, during which time investors sometimes receive very little information, since companies do not want to put out information that turns out to be 'wrong' until the investigation is finalized. "We can and must do better job on 12b issue of listing and not being able to put out financial statements," said Grundfest, "until a company can file financial statements again, to let people say 'look we found a problem, we have armies of auditors figuring it out, we’re warning you about this, here’s our best stab at our current quarterlies, we’re not taking any liability for this." He said it is within the SEC's power to provide necessary comfort to companies to provide this information, rather than keeping investors in the dark. He also added, "one part of the restatement process that hacks off issuers more than anything out is what I call the "iatrogenic" restatements, [like when] you go into the hospital and come out with an incurable infection you didn’t have when you went in. For example, a company says, this is the right accounting and why, the auditor says no, two years later the auditor says you’ve got to restate, and now you spend millions of dollars to do it the way you wanted to do it to begin with and the auditor said no. If you want to know what hacks people off behind the scenes – and let the record show the head of FASB, Bob Herz, is shaking his head [in agreement] like a bobble-head doll... it is not [always] true when a company has a restatement that the company made a mistake, it happens sometimes when the auditor changed its mind, acompany had it right all along. Delivery of Financial Information Subcommittee Additionally, the preliminary recommendations of the Delivering Financial Information subcommittee met with some resistance, especially the unanimous recommendation within that subcommittee that the SEC should make XBRL reporting mandatory, beginning with large accelerated filers in 2008. (This subcommitee is chaired by Jeff Diermeier, President and CEO of the CFA Institute. FEI member Christopher Liddell, CFO of Microsoft, serves on this subcommittee along with a number of other.) Thomas Weatherford, a former EVP and CFO of a small company warned a move to XBRL could impose a burden as great or greater than implementing Sarbanes-Oxley Section 404 on smaller companies, and they would not have the bandwidth to support it. He also questioned the subcommittee’s presumption that incremental audit costs would mainly only occur in the first year of XBRL. Another CFO, FEI member Ed McClammy, agreed that ‘404 flashed in front of his eyes” when he read the XBRL recommendation, and said that although he agrees with moving to XBRL, it must be done very methodically, with only the very largest companies (F500) being asked to implement it first, followed by a phase in of a number of tiers of smaller sized companies. Pozen indicated while moving to XBRL was a worthwhile long-term goal, significant questions remain for larger companies as well as small on issues such as cost, reliability and auditor assurance. Separately, on a recommendation that companies provide summary reports, there were questions about the viability and appetite among investors, corporate preparers and others to provide such reports, to potentially include certain information from the 10K, earnings release, management letter, KPIs, and other information. Pozen questioned if such a report, with the content suggested by the subcommittee, would really be a short summary, and a number of committee members said there was resistance to a similar recommendation made by FEI in the 1970s or 1980s (a joint recommendation of FEI and Haskins and Sells, according to Mike Cook), in that corporations saw the summary report as a cost add-on providing little incremental benefit, since no other information would be taken away. Retail and professional investors were also said to have objected to earlier proposals for summary reports, in part because they would have received the summary report but would have had to request the full report. Committee members noted advances in technology may make a summary report which links to more detailed information and filings more useful now, but questions about liability and whether there is a need for this new report, vs., as suggested by SEC Director of Corp Fin’s John White, elaborating the earnings release further, remain. Cook suggested the committee contact FEI for information on the reaction to their earlier recommendation for summary reports, noting FEI had offered to assist the committee. More Info On The Subcommitee's 37 RecommendationsFor more details on the 37 recommendations of the SEC advisory committee's four subcommittees, see our post from earlier today. As noted above, the SEC advisory did not conduct formal voting today, but we believe it is likely they will formally vote on a possibly modified list of recommendations (modified for today's discussion) at their Jan. 11, 2008 meeting.
Readers who liked this summary... also liked reading: FEI's Four Point Plan for Reducing Complexity in Financial Reporting, published March 29, 2007.
Nov 2, 2007, 4:04 PM by Edith Orenstein
Reports of SEC Complexity Subcomm's Posted For Today's Meeting; Treasury ACAP Seeks Comment; Why You Should Care About COSO
Later today (Nov. 2), the (SEC) Advisory Committee on Improvements to Financial Reporting - also called the ‘Complexity Committee’ or ‘Pozen Committee’ after its chair, Robert Pozen, will meet to discuss the reports and recommendations of its subcommittees, discussed below. The committee will also consider comments received on its draft Discussion Paper presented at its inaugural meeting in August. FEI’s Committee on Corporate Reporting filed a comment letter supporting the formation of the Pozen committee and offering its assistance.
The subcommittee reports filed in advance of the Pozen committee’s November 2 meeting weigh in at 55 pages, with the Substantive Complexity (SC) subcommittee’s report leading the pack at 16 pages, followed by the Standard-Setting (SS) and Delivering Financial Information (DFI) subcommittees (tied at 14 each) and the subcommittee on Audit Process and Compliance (AP&C) coming in at a crisp 11 pages. At this rate the Pozen committee is well on its way to approaching (in volume) the final report of the SEC Advisory Committee on Smaller Public Companies, which weighed in at 241 pages. The final report of the Pozen committee is due out next summer.
Complexity and Its CausesThe Substantive Complexity (SC) subcommittee provided a working definition of complexity as: “The state of being difficult to understand and apply. Complexity in financial reporting refers primarily to the difficulty for: (1) preparers to communicate the economics of a transaction in accordance with generally accepted accounting principles, (2) users to understand the economics of a transaction and the overall financial position and results of a company, and (3) other constituents to audit, analyze, and regulate a company’s financial reporting. Complexity can impede effective communication through financial reporting between a company and its stakeholders, and creates inefficiencies in the financial reporting cycle (e.g., increased preparer, audit, user, and regulation costs).”
The causes of complexity identified by the SC subcommittee include (1) The increasingly sophisticated nature of business transactions; (2) The manner in which financial reporting standards are written and interpreted, including the fear of being “second-guessed;” (3) Certain preparers and financial advisors who structure transactions in order to achieve particular financial reporting results; and (4) The vast number of formal and informal accounting standards, regulations, and interpretations currently in effect.”
Highlights of RecommendationsAmong the over 37 ‘preliminary recommendations’ and ‘hypotheses’ contained in the subcommittee reports, some key areas addressed include (subcommittee abbreviation in parenthesis):
Flattening the GAAP Hierarchy; SEC’s Role, FASB"“GAAP should be based on activities, rather than industries,” said the SC subcommittee. “Similarly, any exceptions included in GAAP should be based on activities, rather than industries.” (SC) Additionally, “GAAP should be based on a presumption that formally promulgated alternative accounting policies should not exist, unless their presence can be justified “The standard setting and regulatory processes need more individual user perspectives, which may be accomplished with more user representation, especially on both the FAF and the FASB.” (SS)
A formal ‘Agenda Committee’ should be formed, including representatives from the SEC, FASB, users, preparers and auditors, to “provide advice on the standard setting agendas of the FASB, EITF, and SEC, while at the same time maintaining an appropriate focus on user needs.” (SS) Additionally, “A framework should be developed … [to] assist the Agenda Committee with making agenda setting and prioritization decisions, including what projects to advise adding and removing from the agenda, and short-term priorities for active projects.” (SS)
In what may be described as a ‘reality check,’ the SS subcommittee recommended that FASB “consider an alternate staffing model that makes use of preparers, users, and auditors … directly or through task forces and resource groups (perhaps on a rotational basis) to bring additional subject matter expertise and recent business experience to each standard setting activity.”
Separately, the SS subcommittee recommended that all new standards should be subject to field tests which are in turn subject to cost-benefit tests. Post-adoption reviews should also be required, particularly around standards where there has been a great deal of restatement or interpretive activity. And, 2-3 year implementation periods should be provided for new standards. (SS)
The SS subcommittee also expressed strong views that there should be only one authoritative GAAP provider, and that one provider should be the FASB or its EITF as its delegate. As to the SEC’s role, the SS subcommittee added, “Authoritative accounting guidance that is applicable only to specific registrants should be given solely by the SEC and should not be required to be applied more broadly. This will require more formal coordination within the SEC.”
Further, “All precedent-setting accounting guidance applicable either broadly or to specific registrants (e.g., staff interpretations, speeches, information posted to its website, etc.) should be reviewed and approved by a single Chief Accountant. This will help to ensure consistency in the accounting conclusions that drive regulatory actions taken by various Divisions and Offices within the SEC.”(SS) Additionally, the SS subcommittee is going to consider the role of disclaimers or “caveat language” which is “commonly included on SEC staff guidance stating that it is either non-authoritative or does not represent the views of the SEC on the perception in the marketplace that it is non-authoritative.”
The SS subcommittee opined on the role of accounting firm guidance and SEC speeches (informally referred to, although not in so many words in the SS subcommittee’s report, as ‘speech GAAP’) stating: “All non-authoritative accounting guidance (including that which has historically been communicated in industry guides, SEC speeches, accounting firm guidance, etc.) should be clarified to be non-authoritative (by virtue of the fact that it will not be included in the codification) and would therefore not have more credence than well-reasoned, documented conclusions based on other, potentially-conflicting non-authoritative accounting guidance applied using a professional judgment framework.”
Additionally, said the SS subcommittee, “The SEC should establish a formal mechanism to refer projects to the FASB, says the SS subcommittee, and only when it appears that FASB or the EITF are ‘unable or unwilling’ to satisfactorily address the issue, which the SS subcommittees says would be rare, should the SEC proceed to issue accounting guidance that would be broadly applicable - and even then only if such proposed guidance undergoes due process, including public comment.(SS)
Codify and SimplifyAs part of FASB’s project to codify GAAP into one set of standards (having been produced by FASB, predecessor bodies, FASB’s Emerging Issues Task Force (EITF), FASB Staff Positions (FSPs), and in some cases SEC guidance, the SS subcommittee recommended FASB “consider whether GAAP should be systematically revisited, as follows:
To be more coherent post codification.
To remove redundancies.
To be less complex, where possible.
To be more principles-based.
To readdress frequent practice problems (as identified by restatement volumes, input from the SEC, recent interpretations, and frequently-asked questions), and
To readdress outdated standards (i.e., sunsetting).
Among FASB’s objectives in standard-setting, the SS subcommittee recommended an objective be added “that accounting models should not introduce unnecessary complexity (i.e., not be more complex than the underlying transactions).”
Anti-Anti-Abuse Provisions, and Characteristics of Ideal Standard-SettingListening to webcasts of some FASB meetings, you will hear references to inclusion of suggested provisions, sometimes in connection with SEC staff recommendations, to include certain ‘anti-abuse provisions.”
The SS subcommittee takes a markedly different view of what FASB’s objective should be, stating, “Accounting standards should be written in a manner that reflects the premise that there is trust and confidence in efficient markets through the respect of professional judgment, rather than by attempting to prevent abuse.” (SS)
Rather, FASB should follow a framework setting out characteristics of ideal standard-setting. A preliminary outline of characteristics of ideal standards would include:
Faithfully represent the economic consequences of transactions.
Be decision-useful and promote transparency.
Be consistent with the FASB’s conceptual framework.
Have an appropriately-defined scope that addresses a broad area of accounting.
Be written clearly and concisely in plain language.
Have an appropriate balance between principles, explanations, examples, and other guidance based on the complexity of the transactions.
Minimize rules, exceptions to the scope and principles, safe harbors, cliffs, thresholds, and bright lines.
Allow for the use of well-reasoned, documented professional judgment, where appropriate, with transparent disclosure.
Fair Value, ‘Tiered Audit Opinions,” and Hedge Accounting :The SC subcommittee acknowledged there are “numerous implementation issues surrounding the use of fair value, such as the potential need for additional standard setting and a regulatory body overseeing valuation specialists.” However, stated the report, “the [SC] subcommittee determined that, in light of the duration of the Advisory Committee, the mandate to develop do-able recommendations in the short-term, coupled with the developing nature of the valuation industry environment, it would focus its recommendations on broad concepts rather than specific implementation guidance.”
Such ‘broad concepts’ include a potential moratorium on issuance of standards that would expand fair value requirements until other issues regarding valuation and auditability are worked out. One such concept may be potential use of a ‘tiered audit opinion, which would provide varying levels of attestation based on the inherent uncertainty of a measurement,” although the SC subcommittee “concluded this area would be best considered by the Audit Process and Compliance [AP&C] subcommittee.”
Regarding hedge accounting, the SC subcommittee tentatively agreed that hedge accounting “should be simplified rather than eliminated,” and “is debating a recommendation to eliminate the requirement to assess hedge effectiveness and instead, record the ineffective portion in earnings (i.e., a pro rata approach versus an all or nothing approach.”
Restatements and MaterialityNoting the increase in the number of restatements in recent years, and evidence in some studies (including a study by PCAOB staff presented at the Oct. 18 PCAOB Standing Advisory Group (SAG) meeting) noting limited market reaction to restatements, the Audit Process and Compliance (AP&C) subcommittee recommended that further guidance on materiality, including interim materiality would reduce the number of restatements, and details are provided in the AP&C subcommittee’s report.
A Framework for Professional JudgmentThe AP&C subcommittee notes,“Companies and auditors agree, in principle, that a system in which professionals can use their judgment to determine the most appropriate accounting and disclosure for a particular transaction is preferable to a checklist-based approach. However, both groups continue to express skepticism that such a system could be fully successful without confidence that reasonable judgments would be respected. Regulators assert that they do respect reasonable judgments, but also express concern that companies and auditors attempt to defend certain clear cut errors as "reasonable judgments."
A preliminary suggested framework for professional judgment is presented by the AP&C subcommittee in the form of questions in 4 areas: accounting, documentation, disclosure, and other.
Should the proposed framework suggest that a judgment be made based on an assessment of the most transparent way to display the economic substance of the transaction or the accounting treatment that results in a “highest common denominator”? Would this imply that any conclusion that would not result in the most transparent way to display the economic substance of the transaction or the most preferable accounting could be questioned? Should the proposed framework suggest that a judgment be made based upon a reasonable analysis of the relevant accounting literature”?
Should the framework include discussion of the business purpose related to the accounting or auditing issue subject to the judgment?
Should the framework measure judgment against accounting principles and consistency of a judgment with those principles?
Should the framework consider other accounting-related criteria?
Should the proposed framework require that the basis for conclusions and alternatives considered and documented contemporaneously? That is, was the issue thoroughly considered before management filed the financial statements with the Commission?
Should the framework include guidance on the levels of review a professional judgment should go through (e.g., was the audit committee or were the external auditors involved, or did the judgment involve sufficient internal or external subject matter experts)?
Should the proposed framework contain a standard of “Was the accounting method transparently disclosed, such that all pertinent information was available to investors?”
Other issues identified in the AP&C subcommittee’s discussion of a framework for professional judgment include whether there should be additional safe harbor provisions.
Summary Reports of Financial Information“[S]erious retail investors may be persons who have concentrated holdings due to family or employment and, therefore, have a need to understand the economic nature of their portfolios or the investors may be individuals who take the time to understand and evaluate their portfolios,” the Delivery of Financial Information (DFI) subcommittee states. “Individual investors have, generally, both less time availability and access to primary and secondary analysis tools than do institutional investors, thus raising the time commitment they need to do comparable analyses of company filings.” DFI added, “A large portion of individual investors have lower levels of financial sophistication and respond to complicated documents by simply not reading them.”
To assist in the understandability and usefulness of financial reporting particularly for such retail investors, the DFI subcommittee has been exploring possible summary reporting information, which could be provided by a “management letter to shareholders or other summary report” and that companies “should be encouraged to provide relatively short, plain English shareholder summary letters to investors that would help investors fundamentally understand the companies’ businesses and activities. Such a summary report would be geared toward the retail investor and would be in addition to the annual report to shareholders currently required under the federal proxy rules and the periodic reports filed with the SEC. The subcommittee contemplates that the summary report would be available to the public on a company’s website and also may be provided to shareholders directly.”
The content of such a summary report could include, says the DFI subcommittee:
1. A letter from the CEO/Chairman;
2. Brief description of the company’s business, sales and marketing;
3. A digest of the company’s GAAP and non-GAAP key performance indicators (KPI's);
4. 10 year summary financial figures;Summary of a company’s current financial statements;
5. Management’s Discussion and Analysis (MD&A), including a list of the company’s subsidiaries and brands discussions, as well as a summary of risk factors.
Liability issues for summary reporting would also have to be considered, states the DFI subcommittee, and they list in their report particular issues that need to be considered.
XBRL“The [DFI] subcommittee has met with representatives of various constituencies of the financial reporting process regarding the use of XBRL and intends to approach additional market representatives regarding issues relating to the use of XBRL under the Exchange Act reporting regime,” the DFI subcommittee report states. “The subcommittee believes, in conformity with the unanimous opinion of both preparers and users we consulted, that interactive data under an XBRL platform will offer significant benefits to public company preparers, users of public company reports, and the financial markets generally. Although the subcommittee recognizes that there are certain challenges to full implementation of XBRL, it believes that these can be effectively addressed. Accordingly, the subcommittee has concluded that XBRL has the potential to provide financial and non-financial information to the market in a way that is better, faster and cheaper than the current system, enhancing the availability, accessibility, consistency, and comparability of business information, together with cost savings that will be of great benefit to companies, analysts and investors alike."
After listing many benefits of interactive reporting for various constituencies, the DFI subcommittee also details in its report a long list of practical and policy issues that would need to be addressed in connection with any potential mandatory requirement for XBRL reporting, including:
Limited acceptance or understanding of XBRL
Implementation issues (including continuing education)
Reliability/accuracy and assurance issues.
Costs of implementation and compliance, and
Liability Concerns - including treatment of XBRL data as filed with or furnished to the SEC
After weighing the costs and benefits of XBRL reporting, the DFI subcommittee issued a preliminary recommendation/hypothesis that, “The SEC should consider mandating, or through other means create momentum for, wide scale adoption of XBRL within a defined time frame.”
To best achieve this, DFI recommends, “The SEC should develop a roadmap that would phase-in compliance based on the size of the reporting company and the amount of information to be reported. The roadmap also would take into account issues involving technological developments and assurance.” DFI adds, ““For example, as a first phase, the SEC should consider mandating the use of XBRL for the facing financial statements for fiscal years ending December 31, 2008 for large accelerated filers.”
Additional highlights from the subcommittee reports can be found in this FEI Summary. (FEI summary can be downloaded by FEI members only; for information on FEI membership, contact me at email@example.com.)
TREASURY ADVISORY COMMITTEE ON AUDIT PROFESSION SEEKS COMMENTSome of the work of the SEC’s Complexity Committee will interrelate to the work of the U.S. Treasury Department’s Advisory Committee on the Audit Profession (ACAP). ACAP held its inaugural meeting on October 15, and as we noted in our summary of that meeting, among items discussed by ACAP was its 21-page working discussion outline.
As noted in BNA Daily Report for Executives on Nov. 1, “Treasury’s Audit Advisory Panel Seeks Feedback,” a request for public comment on ACAP’s working discussion outline was published by Treasury in the Federal Register on October 31. (I don’t even see that notice linked on ACAP’s website yet, thanks for the heads up, BNA!) The Federal Register notice states the comment deadline is Nov. 30.
WHY YOU SHOULD PAY ATTENTION TO COSO'S MONITORING GUIDANCE; FEI COMMENT LETTER FILED We’ve said it before, and we’ll say it again - here’s why you should pay attention to COSO’s (the Committee of Sponsoring Organizations of the Treadway Commission’s) proposed guidance on Monitoring Internal Control: If you are a public company required to assert to internal control under Sarbanes-Oxley Section 404, or if you are a private company that does so voluntarily - and your frame of reference is the COSO Internal Control-Integrated Framework (which we believe most if not virtually all U.S. companies assert to - while Canada has it’s “CoCo” framework, and the U.K. has “Turnbull”) then you should be following COSO’s current project to provide additional guidance on Monitoring - one of the five core components of internal control established in COSO’s landmark Internal Control-Internal Framework which was originally published in 1992. You’ll find the Discussion Document containing the draft guidance on COSO’s website, http://www.coso.org/.
And, now you can read FEI’s comment letter on the COSO Discussion Document, filed by FEI’s Task Force on Monitoring October 31, signed by TFM chair Rick Brounstein, EVP of Calypte Biomedical Corp, who also serves as FEI’s rep on the COSO Monitoring Project Task Force. FEI’s comment letter acknowledged that COSO’s guidance can help raise awareness of the monitoring component of internal control. However, FEI observed that the length and level of prescriptiveness of the Discussion Document could detract from the usefulness of the guidance.
“Our experience with the initial implementation of SOX is that there was too much prescription and too little common sense,” said FEI’s letter to COSO. “Without the proper perspective, this document can lead to unnecessary work by management at the behest of auditors.”
October 31 was the comment deadline on COSO’s Discussion Document on Monitoring. We understand over 40 comment letters (in the form of online surveys completed or standalone letters) have been received by COSO and are in the process of being posted to COSO’s website. The next step in the project will be for the Grant Thornton team leading the drafting of the guidance - in conjunction with a broad-based task force - to issue an Exposure Draft including the conceptual guidance contained in the Discussion Document (as revised for comment letters received) as well as practical examples and implementation guidance from interviews Grant Thornton is conducting with various companies. The Exposure Draft is currently anticipated to be released in January, 2008 with final guidance published by June, 2008. NOVEMBER FEI CONFERENCES COMING SOON, DON'T DELAY - SIGN UP TODAY!FEI’s Hall of Fame Gala and Current Financial Reporting Issues (CFRI) conferences are almost here, sign up now so you won’t miss out! The FEI Hall of Fame Gala, taking place on Sunday evening, November 11 at Cipriani 23rd Street in New York City, will honor this year’s FEI Hall of Fame inductees: Thomas Jones, Vice Chairman of the IASB and former CFO of Citibank and Citicorp, and Samuel Siegel, Retired Vice Chairman, CFO, Treasurer and Secretary, Nucor Corporation. Proceeds will benefit the work of the Financial Executives Research Foundation (FERF) - the research affiliate of FEI. Stay on in NYC for our Current Financial Reporting Issues (CFRI) conference, taking place Nov. 12-13 at the New York Marriott Marquis Hotel, with leading speakers from FASB, IASB, SEC, PCAOB, and leading financial exec’s and auditors.
Nov 2, 2007, 3:57 AM by Edith Orenstein
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