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Mar 31, 2008
Treasury Blueprint Today; Pres. Bush Announces Intent to Nominate Aguilar, Walter to SEC;SEC Letter on Disclosure of FV Info
UPDATED 10:30 a.m. to add links. In a speech delivered at 10:00 a.m. today (March 31), U.S. Treasury Secretary Henry M. Paulson announced the release of Treasury’s Blueprint for a Modernized Regulatory Structure.
A 22-page Executive Summary (public link to WSJ) was released in advance by Treasury, and a synopsis of the blueprint’s recommendations is contained in this Treasury Department Fact Sheet. We will also be posting additional information in a summary on FEI’s website, http://www.financialexecutives.org/ .
Among items of note within the short-term (immediate), intermediate-term (2-8 years, per Paulson quote to WSJ writer Damien Paletta as cited in the WSJ Economic blog March 28), and long-term recommendations of note are that the SEC and CFTC would merge in the intermediate term, and some of the SEC’s current powers with respect to financial services and financial institutions would move to a new federal agency that would be formed, the Conduct of Business Regulatory Agency (CBRA), leaving SEC as the ‘corporate finance regulator.’
CBRA would be one of the three ‘objectives based’ agencies leading Treasury’s self-described ‘aspirational’ model for modernizing the regulatory structure; the other two would be the Market Stability Regulator (a further empowered Federal Reserve as lead coordinator) and another new federal agency, a Prudential Financial Regulatory Agency (PFRA), which would be responsible for safety and soundness regulation, enforcement and inspections, particularly of financial services providers that are afforded federal insurance such as federal deposit guarantee insurance.
SEC Chairman Christopher Cox released a brief statement on March 29 in response to the Treasury's Blueprint, saying in part: "The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets."
Check back to our website later for a more detailed summary of Treasury’s Blueprint. In the meantime, here’s a simplified mnemonic I made up to help explain Treasury’s Blueprint (caution, although the blueprint contains many new acronyms, the ones that follow are NOT among them!): Fi, Fie, Fo, Fum. This stands for: Financial Institutions, particularly those that receive Federal Insurance or have a significant impact on the Economy, should be subject to coordinated Federal Oversight, (including, to varying degrees, regulation, self-regulation, inspection, examination, disclosure and enforcement), to avoid Fumbles and to promote sound, competitive financial markets.
On March 27, the SEC posted a 'Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements)." By way of introduction, the SEC states: “In March 2008, the Division of Corporation Finance sent the following illustrative letter to certain public companies identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion and Analysis for their upcoming quarterly reports on Form 10-Q.”
On March 28, President Bush formally announced his intent to nominate Luis Aguilar and Elisse B. Walter to the vacant Commissioner positions at the SEC previously held by Democrats Roel Campos and Annette Nazareth.
8:23 AM by Edith Orenstein
Mar 27, 2008
SEC's Thomsen at Chamber Like 'Nixon Coming to China;' Paulson and 'Conflation;' FASB Finalizing GAAP Hierarchy, More
There were numerous interesting speakers at yesterday’s U.S. Chamber of Commerce Capital Markets Summit – I covered some highlights in this blog yesterday, other blogger’s covering it include David Peck in ChamberPost, on ”Paulson, Turley and Donohue on Capital Markets,” (including highlights from E&Y CEO and Chairman Jim Turley’s speech, “The Changing Dynamics of Global Capital Markets”) and Francine McKenna of Re: The Auditors, in her post, “Live From the Capital Markets Summit.” McKenna routinely not only reports on the news, she is part of the news – posing some questions at the microphone to U.S. Treasury Secretary Henry M. Paulson and SEC Enforcement Director Linda Thomsen! (I'll have to ask Broc Romanek of The CorporateCounsel.net Blog if he thinks McKenna may be the next Evelyn Y. Davis, all kidding aside.)
SEC’s Thomsen Addresses Chamber
Speaking of Thomsen, someone from the Chamber gave her a great introduction, comparing the SEC Enforcement Director coming to the U.S. Chamber like “Nixon Coming to China.” (Update 4.16.08: Thomsen's speech posted here.) She focused on insider trading, drawing comparisons to characters in the 1983 movie “The Big Chill,” and noting, among other things, some of the younger perpetrators the SEC is catching today may not have even heard of the lessons of the insider traders prosecuted in the 1980’s. (Interesting how SEC leaders are turning to movie analogies in their speeches these days, e.g. SEC Office of International Affairs Director Ethiopis Tafara’s Feb. 20 speech entitled, “The New Frontier and The Man Who Shot Liberty Valance.”) See further below for Reuters article on Thomsen’s remarks.
To close the Nixon coming to China analogy, following Thomsen’s remarks, David Hirschmann of the Chamber thanked Thomsen for speaking, and noted that business supports aggressive enforcement against fraud, and at the same time, business wants to see fairness in enforcement. Thus, he noted the Chamber may have a shared partnership with the SEC.
Paulson and ‘Conflation’I know people closely follow Fed Chairman Ben S. Bernanke's and U.S. Treasury Secretary Henry M. Paulson’s remarks (as they used to follow former Fed Chairman Alan Greenspan’s every move) for any hint on inflation, deflation, or recession. Yesterday, Paulson indirectly referenced ‘conflation.’ The use of that word made me think about a new economic status – where alleged con’s (or fraudsters) contribute to inflation/recession. Paulson actually used the word ‘conflated,’ (not ‘conflation’) as follows: “Amid this correction, there are many calls to ‘do something about housing.’” He added, “When people say this, they are urging any number of possible things... The `to do' list tends to get conflated.” According to the American Heritage Dictionary, 'conflated' means "to bring together, meld or fuse." Thus, Paulson continued, "We must sort through each of these shared and desired outcomes, carefully choosing policies that minimize the impact of – but do not slow – the housing correction."
Getting back to the topic of alleged con’s or fraudster’s and the subprime crisis, Reuters reporter Karey Wutkowski, covering SEC Enforcement Director Linda Thomsen’s remarks at the Chamber, wrote, “SEC Official Says More Subprime Fraud Could Surface.”
See also, “Indictments Announced in Major Mortgage Fraud Scheme,” a press release issued recently by the U.S. Attorney’s Office in Southern CA, and “A Labyrinthine Path To Justice, FBI, SEC Join Complex Probe of Housing Crisis,” by Carrie Johnson in the Washington Post (Feb. 14).
FASB Finalizing GAAP Hierarchy Standard, FSP on Convertible Debt At yesterday’s (March 26) FASB board meeting, the board voted to move to finalize its GAAP Hierarchy standard and to finalize a FASB Staff Position (FSP) on convertible instruments. FASB staff said they would release the final GAAP Hierarchy standard, after FASB board members vote on final ballot, concurrent with the PCAOB’s related final standard, which is currently awaiting signoff by the SEC. Separately, FASB voted to proceed to a final FASB Staff Position (FSP) on convertible debt, after considering comments received on proposed FSP APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement.
FASB staff noted that 46 of 57 comment letters received disagreed with some aspects of the proposed FSP. Some of those comment letters, such as the comment letter filed by FEI, requested that the project be dealt with as part of FASB’s liability-equity project. Although FASB voted to proceed in finalizing the FSP, they did vote to extend the effective date by a year, which was one of the points made in the FEI letter. Further details can be found in FASB’s board handout and in this FEI summary.
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10:53 AM by Edith Orenstein
Mar 26, 2008
Paulson Says Treasury Blueprint Coming Soon, As He Encourages Regulators To 'Continue Building Robust Cooperative Framework'
In a speech earlier today (March 26), U.S. Treasury Secretary Henry M. Paulson said Treasury’s blueprint to modernize the regulatory structure is coming soon. He added that in light of the Bear Stearns bailout and the Federal Reserve’s (Fed’s) response to recent market turmoil, he also encouraged regulators to ‘continue their work of building a robust cooperative framework’ and to ‘consider whether a more formalized working agreement should be entered into to reflect these events.” He also discussed the housing downturn and various responses in place to address the resultant market turmoil.
Treasury Blueprint Coming Soon; Regulatory Cooperation Encouraged
Speaking at the the U.S. Chamber of Commerce's Second Annual Capital Markets Summit, Paulson said, "Treasury will soon release a Blueprint for Regulatory Reform that proposes a financial regulatory framework which we believe will more effectively promote orderly markets and foster financial sector innovation and competitiveness. [NOTE: Treasury sought public comment on this issue last fall, and further information is available on Treasury’s webpage: Key Initiatives: Blueprint for a Modernized Regulatory Structure.]
He also said he supports the Federal Reserve’s (Fed) recent action actions in opening the discount window to provide additional liquidity to non-depository institutions in light of recent market turmoil.
“Such direct lending from the central bank to non-depository institutions has not occurred since the 1930s,” observed Paulson. He added, “Taking this step in a period of stress recognizes the changed nature of our financial system and the role played by investment banks in the post Glass-Steagall world.”
However, he noted this was not a permanent solution, and said, “For the non-depository institutions that now have temporary access to the discount window, I believe a few constructive steps would enable the Fed to protect its balance sheet, and ultimately protect U.S. taxpayers.”
Although the Fed’s “creativity in the face of new challenges deserves praise,” he said, he also warned that “the circumstances that led the Fed to modify its lending facilities raises significant policy considerations that need to be addressed. “
In addition to providing more transparency on the process for obtaining funds from the Fed, Paulson said, “We suggest that the Fed, the SEC, and the CFTC continue their work of building a robust cooperative framework.” He noted, “Already, at the invitation of the SEC, the Federal Reserve is working alongside their teams within these institutions.” He added, “These regulators should consider whether a more formalized working agreement should be entered into to reflect these events.”
Housing and the Economy
Paulson also commented on the housing downturn and the economy, saying the correction in the housing market was inevitable, and should not be slowed, although the Administration and Congress are taking certain actions to maintain orderly markets and to help avoid ‘preventable’ foreclosures.
One of the initiatives Treasury has encouraged, noted Paulson, is the private sector HOPE NOW alliance, and HOPE NOW’s work with the American Securitization Forum [ASF] in implementing a protocol to assist subprime borrowers facing mortgage resets. “We are closely monitoring the implementation and results of HOPE NOW and the ASF efforts,” he added. [NOTE: See related letter issued Jan. 8, 2008 by SEC Chief Accountant Conrad Hewitt to the AICPA and FEI on accounting matters relating to the ASF Streamlined Foreclosure and Loss Avoidance Framework.]
Congress Needs To Complete FHA, GSE Legislation; Need For Balance
Commenting further on the housing correction, Paulson noted, “Amid this correction, there are many calls to "do something about housing." He added, “The `to do' list tends to get conflated… We must sort through each of these shared and desired outcomes, carefully choosing policies that minimize the impact of – but do not slow – the housing correction.”
“The Administration and Congress demonstrated how well bipartisanship can work when we quickly passed and enacted an economic stimulus package earlier this year,” said Paulson. He urged Congress to finalize legislation on FHA modernization and GSE reform.
“We are obviously well aware that the housing market correction was not only a precipitating cause but continues to be an underlying factor in our capital markets' stress. Both are disrupting our economy right now,” he noted.
Paulson concluded, “We will continue to pursue policies that strike the right balance: that do not slow the housing correction, yet also help avoid preventable foreclosures and unnecessary capital market turmoil.”
2:35 PM by Edith Orenstein
Mar 26, 2008
US Chamber Backs IFRS,Calls for Fairness in US Legal, Regulatory, Enforcement Process;CFO Optimism Drops Amid Recession Concern
In a report issued today (March 26) in conjunction with its Second Annual Capital Markets Summit, the U.S. Chamber of Commerce reiterated its support for adoption of International Financial Reporting Standards (IFRS) in the U.S., and renewed its call to “restore fairness to legal, regulatory, and enforcement processes.” These and other recommendations were contained in the chamber’s report entitled, “Strengthening U.S. Capital Markets: A Challenge For All Americans.”
Some highlights from the Chamber’s recommendations include:
“International Financial Reporting Standards (IFRS) is the preferred global accounting standard ….To ensure that the U.S. remains a strong voice in the development of these standards, the Chamber will take every opportunity to push policymakers to ensure effective and timely adoption of IFRS in the U.S.”
[NOTE: If you are interested in IFRS – see FEI’s June 5th conference: “The World Is Moving To IFRS – Are You? Register soon, space is limited.]
“To ensure a more transparent process and to reduce the need for unnecessary, costly, and disruptive restatements, the Chamber will closely monitor the U.S. Securities and Exchange Commission's (SEC) activities. Specifically, it will work to ensure that the agency respects the full public notice and comment requirements of the Administrative Procedures Act (APA) and ends the practice of “Speech GAAP”—that is, adopting significant changes in public company reporting requirements through staff speeches and interpretations.”
“Securities litigation reform is urgently needed to maintain U.S. competitiveness in global capital markets…. The Chamber’s Institute for Legal Reform (ILR) will continue exposing and challenging the abusive and often illegal tactics of trial lawyers.”
“Both U.S. and global capital markets are greatly exposed to a twin risk: concentration among public company auditors and audit firm exposure to extreme catastrophic litigation. In 2008, the Chamber will work with its public company and audit firm members and policymakers to identify meaningful and sustainable solutions, including safe harbors for certain defined auditing practices, limitations on liability in certain circumstances, development of new business models for audit firms, and establishment of an optional national charter for multinational public company audit firms with national oversight.”
“There is an urgent need for more reliable and user-friendly financial information, especially for investors. … Policymakers need to realize that detailed and complex accounting rules more often than not only complicate matters.” To combat this problem, “the Chamber will educate the SEC, Public Company Accounting Oversight Board (PCAOB), Congress and others through comment letters, roundtables, and other necessary means.” The Chamber states it will also “continue to support the positive work coming from the SEC’s committee studying accounting complexity.”
Additional highlights from the Chamber’s report can be found in this FEI summary.
As we noted yesterday, U.S. Treasury Secretary Henry M. Paulson is scheduled to give a keynote address on the U.S. economy later today at the Chamber program. today, and observers are watching to see if he will give a status update on Treasury’s Blueprint to modernize the regulatory structure.
CFO Optimism Drops Amid Recession Concerns
In other news relating to the economy, FEI and Baruch College announced the results of their first quarter 2008 CFO survey today. The survey noted that CFOs of American companies believe recession concerns in the U.S. are impacting their Company's budgets, spending and hiring. 41 percent of the CFOs surveyed said they believe the U.S. is currently in a recession [this year], while an additional 32 percent believe the U.S. will likely go into a recession within the next 6 months. Only 18 percent said they did not believe the U.S. would go into a recession at all in 2008. Additionally, the survey noted, the CFO Optimism Index for the U.S. economy was 54.29 for this quarter, dropping even further past last quarter's three-year low of 56.26. Thirty- four percent of the CFOs surveyed said that, during the first quarter of this year, they had delayed the implementation of business-related spending due to recession concerns.
9:00 AM by Edith Orenstein
Mar 25, 2008
Reform of Financial Markets On Tap At Chamber Summit, Will Paulson Discuss Treasury Blueprint?
A panel on “The Emerging Consensus for Financial Market Reforms” (including Harvard Law School’s Hal Scott, coordinator of the Committee on Capital Markets Regulation nicknamed ‘the Paulson committee’) and a speech by Thomas Renyi, Chairman of the Financial Services Roundtable, on “The Growing Momentum to Enhance U.S. Financial Competitiveness” will set the stage for a keynote address by U.S. Treasury Secretary Henry M. Paulson at tomorrow’s (March 26) U.S. Chamber of Commerce Second Annual Capital Markets Summit.
Observers will be watching to see if Paulson chooses the Chamber summit as a venue to unveil Treasury’s blueprint to modernize financial regulation. As noted on Treasury’s Key Initiatives Page: Blueprint for a Modernized Regulatory Structure, a draft blueprint was released for comment last fall, and the latest public statement on the status of that blueprint was a speech by Under Secretary Robert K. Steele on February 7.
As reported by James Politi in his article "Regulation of investment banks set for scrutiny” in the Financial Times last week: “The Treasury had been expected to release a new regulatory blueprint before the end of the month, but that timing could slip.”
Similar thoughts were expressed by Eamon Javers and Victoria McGrane in their article in The Politico today, “Treasury May Delay Sector Overhaul.” Javers and McGrane say: “Wall Street’s continuing volatility is likely to delay a long-awaited administration proposal to overhaul regulation of the nation’s financial services sector. Plans for the overhaul were expected before the end of the first quarter March 31. But officials say Treasury Secretary Henry Paulson will likely delay the announcement, in part because of concern the news could spook a stock market already jittery in the wake of federal intervention into the collapse and sale of investment bank Bear Stearns.”
“[W]hile the Fed and Treasury might favour supervisory consolidation, they might not want to go too far in imposing additional regulations on the investment banks,” the FT’s Politi added.
Politi also quotes former Fed Chairman Paul Volcker’s remarks on CBS’s Charlie Rose show last week, when Volcker said of investment banks: “We're going to lend to them and protect them, shouldn't they be regulated? . . . absolutely."
Similar thoughts about the ‘shadow banking system’ [aka investment banks, hedge funds, et al] were expressed in the column “Taming the Beast,” by Paul Krugman in yesterday’s New York Times.
In the highly charged atmosphere of the post-Bear Stearns bailout, Congress wants to get involved as well. FT’s Politi notes: “Lawmakers said they would examine whether investment banks should continue to be regulated by the Securities and Exchange Commission under a light-touch regime, or whether they needed to be subject to tighter regulation, possibly by the US central bank.”
Although Congress is in the midst of a two week recess, Hope Yen of the Associated Press reported that Senator Arlen Specter is calling for Congress to return early to address issues arising from the subprime and housing crisis and greater market turmoil, noted in Yen’s article: “Specter to Congress: Cut break, work on economy“
Congressmen and Senators have been giving indications of their plans for proposed legislation. See, e.g., “Rep. Fossella Unveils Five Principles of Legislation to Modernize Oversight of U.S. Financial Markets,” (March 19), “Frank Calls for Significant Changes in Financial Services Regulation,” (March 20), and “Dodd Statement on Markets, Fed Action” (March 17).
Additional topics that may be covered at tomorrow’s Capital Markets Summit, according to the Chamber, (although not expressly listed on the agenda), include Securities Litigation and Reform, Attorney-Client Privilege, Subprime Mortgage Crisis, and Accounting and Auditing. Presumably that last topic will be the focus of a keynote address by James S. Turley, Chairman and CEO of Ernst & Young, LLP. Turley also serves as chair of the governing board of the Center for Audit Quality (CAQ – affiliated with the AICPA).
We covered last year’s U.S. Chamber Capital Markets Summit here, here and here, and will provide highlights from this year’s summit as well.
Mar 24, 2008
Today's Market And Accounting, Legal Issues
In the aftermath of Bear Stearns’ collapse (by that I am referencing the collapse in its stock price following a liquidity crisis and ‘run on the (investment) bank’), its impending acquisition by JPMorgan Chase, and the market turmoil of the past year generally, commentators have discussed the role of accounting standards in bringing valuation issues to light, as well as potential legal implications of ‘second-guessing’ of valuations by regulators or the plaintiff’s bar.
“Where do you see a major firm that's been around for years go from $65 a share to being sold for $2 a couple of days later. That's never happened," notes a trader as quoted by Matthew Karnitschnig and David Enrich in their March 19 article in the Wall Street Journal, ”Bear’s Runup Sets the Stage for Epic Clash.” [Update: see “JPMorgan in Negotiations to Raise Bear Stearns Bid,” by Andrew Ross Sorkin on NYT.com March 24.]
Fair Value Accounting
“The one [question] consuming Wall Street these days is this: What killed Bear Stearns?” asked Scott Patterson in Unanswered Questions in Bear’s Death” in the Wall Street Journal on March 21.
Accounting standards are being bandied about by some as being among the usual (or unusual) suspects in the Bear Stearns whodunit, and in considering where the next shoe may drop.
Broader potential regulatory and legislative responses are being offered to the market situation generally, noted in two articles in today’s (March 24) Wall Street Journal: “Potential Pendulum Swings Toward Stricter Regulation,” by Elizabeth Williamson and “Washington Sees Several Fronts For Attacking Mortgage Crisis.”
With respect to accounting, various articles over the past week discussing Bear Stearns and the markets generally have referenced FASB Statement No. 157, “Fair Value Measurement” (FAS 157). As noted in a number of the commentaries, FAS 157 did not change the requirements for which assets or liabilities must be carried (reported) at fair value – it’s aim was to articulate a consistent methodology or framework for how to calculate fair value.
FAS 157 also provided some new disclosure requirements to enhance transparency and aid understanding of the assumptions behind what FAS 157 describes as a three level hierarchy of fair valued instruments. In simple terms: Level 1 contains actively traded items for which quoted market prices are available, Level 2 instruments are less actively traded but extrapolations can be made based on available prices, and level 3 instruments are not actively traded (and sometimes not traded at all) and their valuation is most dependent on valuation models that include, as required by FAS 157, hypothetical assumptions of what a market participant ‘would’ pay for a transaction in the current market.
One article in particular, “Fair Value Accounting and Subprime,” by attorney Michael R. Young of Willkie, Farr & Gallagher, notes the need for preparers to update fair value estimates and models under FAS 157, particularly in a rapidly changing market.
“To some, particularly to those who never liked fair value accounting to begin with, this was all evidence that fair value accounting is a folly,” Young observed, and added, “According to one managing director at a risk research firm, ‘All this volatility we now have in reporting and disclosure, it’s just absolute madness.’” Young responds, “The frustration is understandable. But defenders of fair value accounting would point out that keeping financial assets on the books at levels well above that for which they could be sold is not exactly a model of transparency in financial reporting.”
Litigation Over Accounting Valuations Post-Subprime Can Be Counterproductive, Young Says
“Whatever one thinks of fair value accounting, though,” says Young, “one feature of the subprime aftermath has the potential to be completely counterproductive. It is the extent to which our system of litigation and regulatory oversight results in unjustified assertions of “fraud” against those who were doing their best under circumstances that were exceedingly difficult.” He adds, “If it does turn out that financial statement preparers and auditors are to be penalized where good faith judgment calls turned out to be wrong,” warns Young, “then continued progress in financial reporting – at least in the highly litigious environment of the United States – will foreseeably be frozen in its tracks.”
For those interested in hearing more on this topic, the Director’s Roundtable is holding a Conference on April 11, 2008 in New York City entitled, “ A National Conference on Historic Challenges Arising From Fair Value and Other New Accounting.”Panelists include FASB Chairman Robert Herz, Willkie Farr partners Michael Young and Antonio Yanez, Jr., KPMG partner Michael Hall, and a financial executive (to be announced).
Links To Other Commentary, and Observations
I have prepared a summary of links to and excerpts from a sample of articles discussing accounting in the current environment. It is not meant to be an exhaustive or all inclusive summary, but a sample of seven articles explaining the benefits of fair value reporting, and seven articles that raise related questions.
With respect to the sample of articles, I have two observations I’d add.
Most of the recent articles on the role of fair value accounting in recent market events focus almost exclusively on FAS 157, with little discussion of the role of guidance issued by the Center for Audit Quality (CAQ – an affiliate of the AICPA) in the form of white papers issued last October, which may have been interpreted in turn by some companies and their auditors even more conservatively than FAS 157 was written, with respect to how to consider what some view as ‘fire sale’ prices in view of determining ‘fair value’ or current market prices. For example, the CAQ guidance on “Measurements of Fair Value in Illiquid Markets” says: “The fact that transaction volume in a market is significantly lower than in previous periods does not necessarily mean that these are forced or distressed sales. Moreover, decreased volumes in a market do not necessarily mean the market has become inactive… Even if the volume of observable transactions is not sufficient to conclude that the market is “active,” such observable transactions would still constitute Level 2 inputs that must be considered in the measurement of fair value.” One issue to consider – particularly in light of fear of litigation over valuation, as noted by attorney Young in his article cited above - may be whether CAQ’s instruction to not only ‘consider’ observable market transactions but implied message that current transactions were not necessarily ‘forced’ or ‘distressed’ sales as those terms are used in FAS 157 – may have been interpreted by some as ‘use’ those prices, vs. ‘consider’ those prices, or may have had unintended consequences in discouraging any adjustments to what some may have viewed as ‘fire sale’ prices that otherwise could or should have been made. In related news, the SEC is reportedly considering issuing guidance soon to encourage more disclosure of ranges of valuation, as reported by David Reilly and Kara Scannell in the March 14 WSJ: “SEC Aims to Let Firms Explain [Credit] Crunch Thorns.”
Secondly, as various commentators have pointed out, the broader debate over accounting vs. economic reality, and the debate over whether accounting drives rational (or irrational) behavior or vice versa, is seen by some as, in part, an iterative ‘which came first’ or ‘chicken and egg’ type argument. The question of the economic impact of accounting has had a long storied and long studied history, with FASB convening roundtables and publishing a report on the economic impact of accounting standards in the late 1970s. People have lined up on both sides of the issue as to whether, as stated in FASB’s conceptual framework, accounting should be entirely ‘neutral’ as to any potential economic effect, or the extent to which whether FASB should, if at all, consider the potential economic consequences resulting from recognition and measurement requirements in particular, as well as disclosures, in crafting its standards. I view the question, in part, as whether particular accounting standards are like a glass that provides transparency, vs. acting as a glass that colors or exaggerates the underlying transactions. The part that gets tricky is when the glass is transparent but appears to color resultant behaviors rather than the transactions themselves.
If you have insights you'd like to share, feel free to post a comment or email me. If you received this blog post from 'a friend' you can sign up here to receive our blog via email.
8:45 AM by Edith Orenstein
Mar 19, 2008
SEC Complexity Comm. Hears Testimony; IASB on Complexity of Fin. Instruments; FASB on Deriv., Hedging; SEC FV Guidance Coming
Last week (March 13-14), the SEC Advisory Committee on Improvements to Financial Reporting (abbreviated CiFIR, also called the “complexity committee” or “Pozen committee” for chair Robert Pozen) met and heard testimony from three panels in response to CiFIR’s recommendations on materiality and restatements, the proposed Professional Judgment Framework (PJF), and XBRL, as detailed in this FEI summary. Pozen also noted dates of upcoming committee meetings, and touched on further recommendations being developed by the subcommittees, as noted in our summary.
As a reminder, March 31 is the comment deadline on the SEC’s request for comment on the recommendations contained in CiFIR’s initial Progress Report.
IASB Seeks Comment on Reducing Complexity of Reporting Fin. Instruments
Also on the topic of complexity – and another hot topic, financial instruments - the International Accounting Standards Board (IASB) yesterday (March 19) issued a Discussion Paper (DP) on "Reducing Complexity in Reporting Financial Instruments." The comment deadline on the DP is September 19.
The DP concludes that use of one measurement attribute for financial instruments would reduce complexity, and in the long term, they conclude that fair value (FV) would be that attribute. However, the DP acknowledges there are pros and cons about use of FV, and suggests some intermediary steps could be taken. Further information can be found in this FEI summary. Learn more about IFRS at FEI’s June 5 conference: “The World is Moving to IFRS-Are You?”
Breaking News: FASB Issues FAS 161 On Derivatives, Hedging Disclosures, MoreIn other news yesterday, the Financial Accounting Standards Board (FASB) issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities.” A related press release is here.
Separately, FASB released Proposed FASB Staff Position (FSP) No. 132(R)-a, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” The comment deadline on the proposal is May 2, and a related press release is here.
Also yesterday, the FASB board voted to extend the effective date of its proposed FSP FAS 142-f, “Useful Life of Intangible Assets,” to conform the effective date to that of FAS 141R and FAS 157. Thus the effective date of the final FSP will be for financial statements issued for fiscal years beginning after Dec. 15, 2008. Other changes will be made in the final FSP based on comments received; details are in FASB’s board handout.
Watch For SEC Guidance On Fair Value
Last Friday (March 14), David Reilly and Kara Scannell reported in their article in the Wall Street Journal, “SEC Aims To Let Firms Explain Credit Crunch Thorns,” that the SEC is expected to release guidance – probably in the form of a letter to issuers which will likely be posted on the SEC website – to permit companies to disclose more information about ranges of possible fair values. It is hoped that such guidance will calm markets swooning from depressed and volatile fair value measurements calculated under FAS 157, Fair Value Measurement, and presumably under guidance issued in the form of ‘white papers’ by the Center for Audit Quality (CAQ – affiliated with the AICPA) last fall, as applied to current market conditions.
WSJ’s Reilly & Scannell noted that Congress is once again taking a keen interest in accounting standards. “Chairman of the House Financial Services Committee Barney Frank… says there is an urgent need to look at mark-to-market accounting because it's having a "downward pull" on the economy,” Reilly and Scannell report. They add, “Mr. Frank says he is in touch with regulators and will hold a hearing when Congress returns from break next month.”
We will be on the lookout for such a letter from the SEC, and plan to provide further coverage on the debate taking place on whether accounting standards like FAS 157 are a neutral glass through which to transparently view the values of assets and liabilities, or whether the standard acts as a magnifying glass or otherwise colors the view of the underlying asset or liability, particularly in thinly traded or illiquid markets (e.g. subprime).
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11:24 PM by Edith Orenstein
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Mar 14, 2008
Volcker, Backing Treas. ACAP Rec, Says 'You Can't Leave Education to a Few Theorists;' PWG Report; Bear Necessities
On March 13, 2008, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC Chairman Arthur Levitt, Jr. and former SEC Chief Accountant Don Nicolaisen, met to discuss the preliminary recommendations of its subcommittees on human capital, [audit] firm structure and finances, and concentration and competition. See our summary of the 13 preliminary recommendations contained in ACAP’s March 13 report.
We understand that after revisions are made to the preliminary recommendations presented at the March 13 ACAP meeting, (i.e. revisions based on committee members' comments) that a revised version of the report will be posted for public comment toward the end of April.
In today’s blog post, I’m going to focus on the discussion that took place around the recommendations of ACAP’s human capital subcommittee. I may, in a future post, provide some additional highlights of the discussion on the other topics covered.
The preliminary recommendations of the human capital subcommittee focused on the need to:
Update and improve curriculum to reflect real world changes in business and the market,
Ensure a robust supply of qualified college professors in financial accounting, audit and tax, taking into account the rising shortage of PhDs due to increased enrollments and retirements of PhDs, including an emphasis on cross-sabbaticals (i.e., in which one faculty member from a school works at an audit firm for a year, and an auditor teaches at the college for a year),
Improve the representation and retention of minorities in the auditing profession, through recruitment from other disciplines, outreach to community colleges, cross-sabbaticals and focused efforts to increase the number of minority doctoral students, and
Develop and maintain consistent demographic and higher education program data.
My favorite remarks of the day came from former Federal Reserve Board Chairman (and former Chairman of the International Accounting Standards Committee Foundation) Paul A. Volcker.
Volcker was outspoken on the topic of education – including what he saw as an imbalance in a society that trains more financial engineers than basic engineers. He also noted his concern with theoretical approaches like fair value or mark to market, in cases where, as a practical matter, there is no market. Below is an excerpt of his remarks, as best I could capture them from the webcast.
“I want to be broadly in support of all this emphasis on education and students,” said Volcker.
From a historical perspective, he observed, “[A]ccounting as a profession through the decades has been downgraded in terms of respect.” He added, “accountants are underpaid, underrespected, it reminds me of the status of public administrators too.”
He noted, “The most fashionable schools, business schools, don’t teach accounting, or they teach it as two sessions of financial accounting or financial engineering.”
“I was at a meeting yesterday,” continued Volcker, “when a distinguished Engineering professor was bemoaning colleges don’t teach [basic] engineering… You see all the effort into financial engineering, and what’s the result: a deteriorating infrastructure and bridges, [buildings that] look ugly… too much theory, not enough practice, that’s what’s become of accounting.”
Volcker observed it is “enormously challenging intellectually to get the right accounting, I don’t think this enormous challenge has been sufficiently recognized; it involves some blend of [theory] with practical.” He added, “That’s why you need to get businessmen in there, you can’t leave this to a few PhD theorists.”
His emphasis on the need to blend theory with practice provided a segue for Volcker to state his views on fair value accounting.
“I have problems with fair value accounting, it has been seized upon as the [I didn’t hear what term Volcker used, I will update this post if I find out] …. of accounting, to solve all problems … it is evident it doesn’t solve all problems, in fact, it may create a few…especially among financial engineers.” Specifically, he noted, “There is a real question how to blend insights of mark-to-market accounting where there is no market…. and it may lead to exaggerated movements in the markets.”
Volcker noted, “There are beautiful theoretical models in economics which impress accountants, [since the Economists] get Nobel prizes, but applied to the real world that don’t work well, [that] is the real challenge.”
In sum, regarding these recommendations, Volcker said, “All these efforts you [recommend] mak[ing] to education are terribly important…. I want you to lift your sights even above what’s reflected here… The more you can blend theory and practice, the better off we’ll be.”
Lynn Turner, former Chief Accountant at the SEC, said, “I echo what [former Fed Chairman] Volcker said, all the way down to what he started talking about on fair value.”
Turner concurred that graduates of accounting programs are “undereducated and underskilled,” and agreeing with Volcker, said, “we need to take it to a higher level, that’s what’s missing.”
“[An issue] we haven’t taken head on,” said Turner, is that, “if you look at the material that needs to be taught, you don’t have enough time in the classroom today.” He noted, “That’s why four decades ago, former SEC Commissioner Manny Cohen recommended taking it up to the professional school level; I think unless you take that bold step and say we’ve got to get there sooner or later, you aren’t going to get those people educated.”
As an example, Turner noted that intermediate level coursework in accounting has grown from 2 semesters, to 3 semesters at some schools. “Yet, the vast majority of schools teach it in 2 semesters, [by] skip[ing some] chapters, like risk management and derivatives - that’s kind of a black hole,” he said.
“Until you take on that issue, you can have the best textbooks and professors, but until you give them time to teach it, you’ll lose the best and brightest to law school and medicine.” He emphasized, “There is a need to strengthen and identify [accounting] as a real profession.”
Turner added that funding of accounting programs comes largely from two sources:
"endowments, which means we’ve got to get the firms and corporations [to participate].” He added, “the firms fund, then they lose people to corporations through attrition, I do think apprenticeships could be built in," but
“ultimately funding will have to be [from] the states, or private enterprises, I think part of the recommendation [should be] the states have got to step up, taxpayers have got to be willing to pay for this.”
SEC Deputy Chief Accountant Zoe Vonna Palmrose, an observer on ACAP, noted there could be numerous benefits accruing to working professionals as well as educators and students from the subcommittee’s recommended ‘cross sabbatical’ program.
“It is enormously important to bring real world business experience into the classroom, but bringing [the] real world to undergrads who have no [business] experience is a difficult challenge,” observed Palmrose.
In contrast, she noted, “Once you’re in the real world, there is no time for reflection… so what you have here in the cross sabbatical is an opportunity for practice to sub into education [i.e. by trading places with a professor], it is an opportunity for reflective thinking you never have time for.”
The need for more reflective thinking by professionals – and not just reactive thinking –was noted by other ACAP members.
H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell, noted, “If you are a practicing accountant or lawyer and you have to go into a classroom, that does give you the opportunity to do the reflective thinking you need to do.”
The need to increase the number of Professionally Qualified (PQ) instructors – to provide more practical insights into the classroom, and to help offset the shortage of Academically Qualified (AQ) professors (those with PhDs) was also among the human capital subcommittee’s recommendations.
NOTE: If you’re a working professional and you’d like to dip your toe in the water to find out more about what it’s like to teach at the college level, I recommend the American Accounting Association (AAA)’s one day PQ program. The program is held in various cities around the country, the next session will be Saturday, April 19 in New York City. A pre-registration application is required by March 26, and those accepted into the program will then be sent registration info and asked to make the $450 payment at that time, which includes one year of free membership in AAA. Or, if you’re ready for a deep dive into becoming PQ, check out the one week Bridge program offered by the Association to Advance Collegiate Schools of Business (AACSB). Registration closed March 10 for their upcoming Bridge program in May, but future Bridge programs will be offered. Find out more about AAA’s PQ program and the AACSB’s Bridge program here. If you apply to either program, please note on your application if you heard about it from FEI!
AAA President Gary John Previts noted, “A couple of new committees were formed at AAA, and [there is] a lot of online activity with the firms.” He also noted that FASB board member Tom Linsmeier, a professor at Michigan State prior to coming to the FASB, was actively involved in working with the AAA committees.
Tim Flynn, Chairman of KPMG International, said, “All of the [Big 4] firms are doing things to engage faculty, if we could bring more structure to that, take our learnings and update faculty on current events, do case studies, we would welcome the opportunity to talk about that.” Major fundraising efforts coordinated by the AICPA to fund faculty positions, and the PhD Project funded by KPMG to encourage more PhDs in accounting among minorities, were noted.
A number of ACAP members disagreed with the human capital subcommittee’s recommendation 2c for special tax incentives for companies that donate money to accounting programs or to fund accounting faculty.
Ken Goldman, CFO of Fortinet, Inc. and a member of FEI, said, “I prefer not to use tax incentives… I tend to let the free market work.” He asked if the subcommittee had considered: “brining more people in, whether salaries for incoming folks should be raised?” Additionally, he noted, “the retirement age limits [at audit firms] are [generally] around age 60; was any consideration given to moving it higher, to encourage them to stay and be engagement partners, mentor other folks?”
In response, Amy Woods Brinkley, Global Risk Executive for Bank of America, said the issue of compensation was considered by the subcommittee, but, “our conclusion was, the pipeline issue is a much more critical issue with [the shortage of] PhDs and qualified faculty… quality of candidates, we agree there is an image question, we came at it more from enriching the curricula and helping people understand this is one of the most exciting spaces, we did not get a lot of information suggesting compensation is a key issue.”
Barry C. Melancon, President and CEO of the AICPA, noted, “Some firms have mandatory retirement, some don’t, some are reconsidering it.”
On the issue of retention, Phil Laskawy, vice chairman of the International Accounting Standards Committee Foundation (IASCF), and retired chairman of Ernst & Young, said, “The recommendations are excellent,” but asked, “is there any discussion about retention?”
He added, “At the end of the day, the biggest challenge is retaining people; to issue a report on human capital without spending significant time on the retention issue is a major shortcoming.”
NOTE: In testimony before ACAP on December 3, 2007, FEI President and CEO Michael P. Cangemi noted the need for the audit profession to address work-life issues and reduce turnover, as well as structural issues.
Amy Woods Brinkley noted, “It [retention] was a topic we spent time talking about, but it did not hit our top 5 or 6 list.” She added, “we stand [ready] to hear data to contradict this, but the retention issues, as we talked within our committee and talked with people outside, we assumed it was a big issue, but did not find as serious as we thought.” Part of the reason why retention (or lack thereof) isn’t necessarily as serious a problem as they would have thought, was because “there are people who move into the corporate sector, but we view that as a good thing, part of the supply chain management that needs to go on,” she said. Additionally, “If there were a single issue we heard anecdotally, it was the risk that individuals feel they face in accounting firms, and issues of work life balance.”
AICPA’s Melancon added, “To an extent, the retention issues is true, but part of the business world in general.”
KPMG International Chairman Tim Flynn said turnover at his firm had been in the ‘mid to low 20s” (20%), and they reduced it to the mid-teens. “Turnover is still high, but I think we have digested it well.”
ACAP co-chair Don Nicolaisen offered his “Strong support for the recommendations,” and noted, “on the retention issue – if someone doesn’t have a role model there may be retention issues there.” He applauded the subcommittees recommendations, particularly on minority recruitment, noting it is “about providing opportunity, which is what this country is all about.”
President’s Working Group Policy Statement In Response to Market Turmoil Includes Recommendations on Mortgage Origination, Securitization, Credit Ratings, Regulation, FASB
In other treasury related news, also on March 13, U.S. Treasury Secretary Henry M. Paulson announced that the President’s Working Group on Financial Markets (PWG) – which he chairs – released a “Policy Statement on Financial Market Developments."
The 21-page PWG report provides detailed recommendations on:
reforming key parts of the mortgage origination process in the United States;
enhancing disclosure and improve the practices of sponsors, underwriters, and investors with respect to securitized credits, thereby imposing more effective market discipline;
reforming the credit rating agencies’ processes for and practices regarding rating structured credit products to ensure integrity and transparency;
ensuring that global financial institutions take appropriate steps to address the weaknesses in risk management and reporting practices that the market turmoil has exposed; and
ensuring that prudential regulatory policies applicable to banks and securities firms, including capital and disclosure requirements, provide strong incentives for effective risk management practices. Paulson also referenced the need for a ‘stronger market infrastructure,’ including particularly for over-the-counter (OTC) derivatives markets.
FASB, IASB Action Encouraged
The PWG recommends: “Authorities should encourage FASB to evaluate the role of accounting standards in the current market turmoil.”
“This evaluation should include an assessment of the need for further modifications to accounting standards related to consolidation and securitization, with the goal of improving transparency and the operation of U.S. standards in the short-term,” the report continues.
“Additionally, authorities should encourage FASB and IASB to achieve more rapid convergence of accounting standards for consolidation of ABCP [asset backed commercial paper] conduits and other off-balance sheet vehicles.”
Regulation Needs To Catch Up With Innovation, Paulson Says
Commenting on the report, Paulson said, “The objective here is to get the balance right,” he emphasized, noting, “regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”
The other three members of the PWG include Federal Reserve Chairman Ben Bernanke, U.S. Securities and Exchange Commission Chairman (SEC) Chairman Christopher Cox, and Commodities Futures Trading Commission (CFTC) Chairman Walt Lukken; their remarks can be found in this press release.
Bear Necessities I received a press release from the U.S. Treasury Department by email at 11:08 a.m. (EDT) today (Friday March 14), which included a Statement by Treasury Secretary Henry M. Paulson that hinted of some crisis averted, but was astoundingly vague. It stated, in its entirety, “As we have been saying for some time, there are challenges in our financial markets, and we continue to address them. This is another challenge that market participants and regulators are addressing. We are working closely with the Federal Reserve and the SEC. I appreciate the leadership of the Federal Reserve in enhancing the stability and orderliness of our markets. Our financial system is flexible and resilient and I am confident that the efforts of regulators and market participants will minimize disruption to the system."
Then, at 11:32 a.m., I received an email alert from Securities Mosaic, that the SEC had issued a presss release on: "Statement of SEC Division of Trading and Marekts Regarding The Bear Stearns Companies." A pillar of plain English disclosure, the SEC statement said: “The decision by the Federal Reserve Bank of New York to provide The Bear Stearns Companies temporary funding through J.P. Morgan Chase & Co. today followed a significant deterioration in Bear Stearns' liquidity on Thursday.” The SEC added that although Bear’s net capital position had exceeded regulatory requirements on the morning of March 11, with $17 billion of net cash and liquid assets.But beginning on March 11, and increasingly through the week,” said the SEC, “lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns' excess liquidity rapidly eroded.”
Thus, the joint action by the Fed and JP Morgan Chase (interestingly characterized by the SEC as noted above, as the Fed providing Bear temporary funding through JPMorganChase), was done to, presumably, forestall a collapse of Bear, the U.S.’ fifth largest investment bank, a failure which in turn could have sent shock waives through world financial markets. Just four days prior (March 10), Bear issued a press release stating: “Bear Stearns Denies Liquidity Rumors.” Today, the company announced, “ Bear Stearns Agrees to Secured Loan Facility With JPMorgan Chase.” Interestingly, Bear’s press release makes no mention of the Fed.“The Bear Stearns Companies Inc. announced today it reached an agreement with JPMorgan Chase & Co. (JPMC) to provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access liquidity as needed," says their press release.
"Bear Stearns also announced that it is talking with JPMorgan Chase & Co., regarding permanent financing or other alternatives,” states the press release, adding, "Alan Schwartz, president and chief executive officer of The Bear Stearns Companies Inc., said, "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
Ominously, although barristers will probably say its just boilerplate, Bear’s press release added, “The company can make no assurance that any strategic alternatives will be successfully completed.” What has been the reaction to the 'bailout?" CNN carried a Dow Jones newswire article this afternoon, “Like Others Before It, Bear Seen as Too Big To Fail”precedented intervention on behalf of Bear Stearns Cos. was intended to ease fallout from the credit crunch, but experts fear it augurs more government bailouts as the crisis worsens. by Marshall Eckblad and Michael Crittenden. USA Today is reporting: “Experts: Aid For Bear Stearns Could Usher in Further Bailouts.” Tying together the subjects of today's post: In a world looking at sustainability of the audit profession, with lessons learned from Andersen’s collapse, I hope there will be a renewed focus on sustainability of the financial services profession; that seems to be a clear goal of the President’s Working Group report issued earlier this week, noted above. Hopefully the temporary liquidity facility set up by the Fed and JP Morgan Chase will buy Bear enough time to get past the rumors and return to a stronger liquidity position, so we won’t have a sense of déjà vu - albeit on a lesser scale – of a failure of a major company and the impact that will have on its employees, their families, customers, clients and counterparties. I think it would be a tragedy for Bear to have to shut its doors, as far as its human capital is concerned. Admittedly, it was one of the first firms - but clearly not one of the only firms - to suffer from subprime related investments, one of the major triggers of the PWG report issued March 13. We first reported on this issue in our June 25, 2007 blog post: "Bear Stearns Hedge Fund Crisis: The Fallacy of Fair Value?” (And on that note, we return to the remarks of former Fed chairman Paul Volcker, at the Treasury ACAP meeting on March 13. described further above, in which he said, “..it is evident [fair value] doesn’t solve all problems, in fact, it may create a few…especially among financial engineers.”)
11:25 PM by Edith Orenstein
Mar 13, 2008
Paulson To Release Recommendations Today, Backed By President's Working Group, In Response to Credit Crisis
U.S. Treasury Secretary Henry M. Paulson, Jr. is expected to release recommendations in response to the credit crisis - driven in large part by the crisis in subprime lending - in remarks to be delivered at the National Press Club at 10:00 a.m. today. A pen-and-pad briefing will follow at 11:30 a.m. at the Treasury Department. (Treasury will be a busy place today, with its Advisory Committee on the Auditing Profession (ACAP) co-chaired by Arthur Levitt, Jr. and Don Nicolaisen holding a meeting there at 10:00 a.m.)
Damien Paletta of the Wall Street Journal provides advance details from Paulson’s expected remarks in his front page story, “U.S. to Revamp Credit Rules, Drawing From Crisis Lessons,” subtitled: “Paulson Plan Seeks To Tame Excesses In Mortgage Market.”
“The nation's top economic policy makers plan to release today their broadest blueprint yet for avoiding a recurrence of the credit crunch now threatening the economy,” states Paletta. He notes, “Their recommendations extend to nearly every niche in the credit markets -- from mortgage brokers to the Wall Street firms that package home loans into securities, to the credit-rating firms that assess the risk of those securities, to the regulators who police the system.”
“Many of the recommendations parallel those made by others,” reports Paletta, “but the endorsement by top officials carries significant weight. They reflect a consensus of the [President’s] Working Group, which includes the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Each agency has considerable sway over banks, investment houses and investors.”
Based on information provided by Paulson to the WSJ, says Paletta, the recommendations to be announced today by Paulson are expected to include proposals for:
disclosures by issuers of mortgage-backed securities as to “the level of scope of due diligence” and whether they ‘opinion shopped’ for ratings
“credit-rating firms and regulators to differentiate between ratings on complex structured products and conventional bonds,” and
“rating firms to disclose conflicts of interest and details of their reviews and to heighten scrutiny of outfits that originate loans that are enveloped by various securities.”
It will be interesting to see if Paulson has changed his stance on how aggressively to deal with the credit crisis. Some corners have recommended that lenders and investors absorb writedowns of mortages that exceed the current market value of the underlying collateral (house), and share in any subsequent writeup of value if those homes increase in value.
For example, in earlier remarks at the National Economic Club (NEC) on Feb. 28, Paulson said: “[W]hile some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good. I'm not interested in bailing out investors, lenders and speculators. I'm focused on solutions targeted at struggling homeowners who want to keep their homes." He added, “"Being "underwater" when you can afford your mortgage does not affect your ability to pay your mortgage.”
Indirectly referencing a letter sent in January by SEC Chief Accountant Conrad Hewitt to the AICPA and FEI, Paulson added in his remarks at the NEC on Feb 28: "In January, the SEC signed off on a new protocol for streamlining some subprime borrowers into modifications and refinances. Servicers began to implement it then, some faster than others. I look forward to seeing the results for January soon. They will serve as a baseline for measuring the effectiveness of this effort going forward. I'll be examining the results closely – it's important to see that everyone who signed up for this protocol is following through on their commitment to implement it. I won't look kindly on free riders."
Joint Supervisory Agencies Issue Report on Risk Management During Market Crisis
In related news, on March 6, seven supervisory agencies from around the globe released a joint report entitled, “Observations on Risk Management Practices during the Recent Market Turbulence.” As noted in this joint press release, the agencies included the French Banking Commission, the German Federal Financial Supervisory Authority (BaFIN), the Swiss Federal Banking Commission, the U.K. Financial Services Authority (FSA), and, in the United States, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve (including participation by the Federal Reserve Bank of New York, thus there are eight agency logos on the front page of the report.)
The joint supervisory report was undertaken in response to a request from the Financial Stability Forum, according to the press release, which adds, “The Financial Stability Forum has established a Working Group on Market and Institutional Resilience that is preparing a separate report to the Finance Ministers and Central Bank Governors of the G-7 countries on the underlying causes of recent financial market turmoil and will make appropriate recommendations.”
A summary of the recommendations made in the March 6 joint supervisory group report is available in the transmittal letter to the report.
CiFIR Meeting, FASB Codification Webcast Today
As we previously reported, the SEC Advisory Committee on Improvements to Financial Reporting (CiFIR or the Pozen Committee for Chair Robert Pozen) is meeting today, and FASB is holding a webcast on its Codification of accounting standards which is currently out for testing by the public.
6:50 AM by Edith Orenstein
Mar 12, 2008
FASB Proposed Changes to Contingency Disclosures (FAS5) Coming Soon; SEC-CFTC Sign MOU; Glauber Named IASCF Trustee
Yesterday, the FASB board voted to release a proposed amendment of the disclosures contained in FAS 5, “Accounting for Contingencies,” as reported by Denise Lugo in today’s BNA Daily Report for Executives. In her article, “FASB to Issue Proposal Requiring More Judgment for Loss Contingencies,” Lugo reports that the expected release date of FASB’s proposal is the end of April, with a 60 day comment period, and the proposed effective date would be annual financial statements issued for years beginning after 12/15/08, and interim periods within those fiscal years.
Lugo notes the proposal is scoped to disclosures only, since FASB is waiting for IASB to complete its amendment of IAS 37 on contingencies and then decide how to proceed with any broader amendment of FAS 5.
Additionally, Lugo notes, "Due to the expected controversy surrounding the issue, the board said it will hold a public roundtable that would include preparers, auditors, and financial statement users near the end of its proposed comment period--expected to be mid-July."
BNA is the exclusive sponsor of FEI’s June 5 IFRS conference in NYC: “The World is Moving to IFRS – Are You?”, featuring a keynote by SEC Corp Fin Director John White and other leading experts from the world of corporate reporting, auditing, standard-setting and auditing. Additional info on FASB’s FAS 5 revision can be found in FASB’s board handout.
Separately, at today's FASB board meeting, the board is scheduled to: “revisit its decision that an entity should present income taxes in a separate section in the financial statements. The Board also will discuss what additional disclosures an entity should present if income taxes are no longer to be allocated to continuing operations, discontinued operations, and other comprehensive income.” Details are in today’s FASB board handout.
SEC-CFTC Sign MOU
In other news yesterday, the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) held a joint press conference, and issued this press release announcing a Memorandum of Understanding (MOU) to formalize cooperation between the two agencies and extending it further.
SEC Chairman Christopher Cox noted during the press conference that the MOU
establishes a permanent regulatory liaison between the agencies
requires that staff of the two agencies meet formally every quarter and consult in advance on issues of interest to either age
establishes a framework for more extensive sharing of information, e.g. regarding firms registered with both agencies
memorializes ongoing consultations on enforcement and examination matters,
provides that staff will consult on mergers of entities that impact their regulatory interests, and
establishes several key principles to guide the agencies as they consider novel financial products – products that may combine elements of both securities and commodity futures or options.
“We also have taken a great step forward on new products that implicate overlapping areas of regulatory concern,” said Cox. He added, “I’m pleased to announce today that our agencies will endeavor to permit such [novel derivative’ products to trade in either or both a CFTC- or SEC-regulated environment.” Also, he noted, “Any such trading will have to be consistent with each agencies applicable laws and regulations.”
Cox added each of the agencies will issue for public comment later today Notices requesting public comment on two innovative new financial products – one an option traded on options exchanges, the other a future traded on a single stock futures exchange.
“Working together we expect to adopt a comprehensive regulatory approach in this area.” said Cox. He noted the agencies also expect to issue – during the next couple of weeks - Notices relating to clearance and settlement of these products.
As shown in the photo on accompanying the press release on SEC’s website, you can actually see Cox and CFTC Chairman Walt Lukken signing the MOU during the press conference (I think its between 11 and 12 minutes into the webcast).
IASCF Names Glauber, Malan, and Spaventa as New Trustees
Yesterday, the International Accounting Standards Committee Foundation (IASCF), which oversees the IASB, issued a press release announcing three new Trustees have been appointed to the IASCF: Robert Glauber, retired chairman and chief executive officer, NASD and former Under Secretary of the Treasury for Finance, United States, Pedro Malan, former Finance Minister and former president of the Central Bank of Brazil, and currently chairman of the board of Unibanco , and Luigi Spaventa, former chairman of the Commissione nazionale per le società e la borsa (Consob) and former Minister of the Budget, Italy.
8:37 AM by Edith Orenstein
Mar 11, 2008
It was with shock and sadness that I read of N.Y. Governor Eliot Spitzer’s alleged involvement in a scandal involving potential criminal as well as moral implications. The New York Times website broke the story yesterday, and it is front page news today, including “Spitzer Said to be Weighing Resignation” (NYT). The NYT also reports, “Revelations Began With Routine Tax Inquiry,” which led to indications of possible money laundering, among other potential crimes that go beyond the scope of this blog.
The Governor issued a statement yesterday that referred, in part, to “a private matter,” and said, "I have acted in a way that violates my obligations to my family, and violates my -- or any -- sense of right and wrong. I apologize first and most importantly to my family. I apologize to the public, whom I promised better.” He added, “I must now dedicate some time to regain the trust of my family. I will report back to you in short order.”
Numerous business news sources and blogs have taken a keen interest in this budding scandal, not only due to the scandal itself, but the fact that Spitzer, formerly N.Y. attorney general, had built a reputation (and largely run for office on that reputation) of being a crime-buster, including notably with his investigation into analysts’ conflicts of interests, which led - in tandem with the SEC’s investigation - to the Global Research Analyst Settlement in 2003. Some of this coverage includes “Wall Street Cheers As Its Nemesis Falls From Grace” (WSJ), “A Shocking Day for Spitzer” (CFO.com), and “Has Spitzer Found His Kryptonite” (Maryland Association of CPA’s “CPA Success” blog).
I have written in this blog previously about Spitzer’s Commission to Modernize Regulation of Financial Services.
But questions about any impact on that Commission should Spitzer leave are not the cause of my disappointment in hearing about the allegations about the Governor.
My shock and disappointment relate more to my previously looking up to him as a moral leader, and recognizing that some will now question his credibility and the validity of his earlier actions and remarks about doing the right thing. I quoted some of those remarks from an appearance Spitzer made with then-SEC Enforcement Director Stephen Cutler at an SEC Historical Society Event in 2003, an event I attended personally, which I wrote about in this blog last June.
According to this transcript of the SEC Historical Society event, in describing the analysts’ behavior which Spitzer and the SEC investigated, Spitzer said (emphasis added):
“I think we have a more complicated textured problem to deal with than simply analysts could make more money by putting a buy on a stock that was being underwritten by the company.”
He added, “The only thoughtful answer that I have seen to this problem was crafted by somebody who I think is one of the most brilliant elected officials we ever had… and that's Pat Moynihan.”
“Pat Moynihan, in a very different context, wrote about defining deviancy down. When he was talking about criminal justice and street crime, he said that over a period of years we lost the will to prosecute and pursue small violations. Whether it was graffiti, pickpocketing, whatever it may have been, we lost the will to pursue that.”
“And what happened over time was that there was a dissipation in standards, a dissipation in our expectation with respect to the behavior that people had to live up to. And that permeated our society and crime exploded.”
“Now, then from that sort of intellectual nugget, what evolved was the broken window school of prosecution, which went after small crimes to re-establish our basic moral principles. And over time we have beaten back the issue of street crime to a great extent. We have some problems here and there, certainly, but we have made enormous progress.”
Spitzer continued at the SEC Historical Society event, “I think the same thing happened with respect to our governing structures. Small violations that may have been akin to a barnacle on the bottom of a boat, that did not appear to be material, one-off balance sheet partnership, one small indiscretion, began to grow during a decade when things were so good that we lost the will to challenge small violations. And over time it led to a larger dissipation.”
“And as a result, we woke up a year or two ago when things crashed for a number of other reasons, and because a rising tide washes away a lot of sins, we suddenly had to see what wreckage was there. And it was a consequence of a growing complacency that calls out in many sectors for all of us--and I think that's why--and I hate to pontificate, to use a word derivative of one you just used. But I think all of us who are in positions where we have fiduciary duties have to re-examine how we fulfill them. Because I think it is everybody in every position of some power or governing responsibility who has to examine what happened and why. And I think we all have to sort of pull ourselves up by the bootstraps and think of this in a much larger context.”
In his more recent statement issued yesterday, Spitzer said: “I do not believe that politics in the long run is about individuals. It is about ideas, the public good and doing what’s best for the state of New York.”
The broader debate about individuals’ personal behavior and its reflection on their ideas and work on behalf of the public good is likely to continue.
9:35 AM by Edith Orenstein
Mar 10, 2008
SocGen's Presentation 'True & Fair?'-Learn More About IFRS at FEI IFRS Conf. June 5 Sponsored by BNA
Last Friday (March 7, 2008) NYT’s Floyd Norris wrote about Société Générale’s use of the ‘true and fair’ exception permitted under International Financial Reporting Standards (IFRS). In his article, “Loophole Lets Banks Rewrite the Calendar,” Norris explained that SocGen took advantage of IFRS’ rarely used “true and fair” exception to book its 2008 trading loss of $6 billion euros (currently worth about U.S. $9 billion) that arose from unwinding fraudulent transactions of ‘rogue’ trader Jérôme Kerviel, by booking the loss as part of SocGen’s 2007 results - rather than 2008 results - thereby softening the blow on a bottom line basis in a year in which the bank did very well (2007). In fact, Kerviel is reported to made significant trading gains for the bank in 4th quarter 2007.
“In moving the loss from 2008 — when it actually occurred — to 2007, Société Générale has created a furor in accounting circles and raised questions about whether international accounting standards can be consistently applied in the many countries around the world that are converting to the standards,” reports Norris.
He adds, “In its annual report released this week, Société Générale invoked what is known as the “true and fair” provision of international accounting standards, which provides that “in the extremely rare circumstances in which management concludes that compliance” with the rules “would be so misleading that it would conflict with the objective of financial statements,” a company can depart from the rules.”
Norris included some insights from Jack Ciesielski, editor of The Analyst’s Accounting Observer and the AAOweblog, and a member of FASB’s Investors’ Technical Advisory Committee (ITAC). Specifically, Ciesielski said in the NYT article: “Investors should be troubled by this in an I.A.S.B. world. While it makes sense to have a ‘fair and true override’ to allow for the fact that broad principles might not always make for the best reporting, you need to have good judgment exercised to make it fair for investors. SocGen and its auditors look like they were trying more to appease the class of investors or regulators who want to believe it’s all over when they say it’s over, whether it is or not.”
I asked Ciesielski some followup questions on Friday, to expand on a couple questions I had. Below are the questions and his reply.
Q. 1: Why isn't it more misleading to investors to show larger profit in 2007, when you know in January 2008 you have a material loss? From a complexity, simplicity, communication point of view, isn't it better to book subsequent event loss occurring in January that relates to 2007 transactions as of 2007 for conservatism, so to speak?
“What belongs in 2007 is what happened in 2007,” Ciesielski said. “You aren’t doing anybody a favor by flushing it into a prior year.” In fact, under that kind of strategy, he noted, some would ask, “Why not take all the other bad investments, underwater investments you have, write them down or sell them but book the loss through last year’s earnings, to avoid hurting the current period’s earnings and soften the blow.”
Ciesielski mentioned that SocGen is not in the portfolio of companies he follows, “but from what I’ve read in the press, it sounds like the fraud was a lot more intricate than could have been accomplished by just a single person (Jerome Kerviel), and there may still be some unanswered questions as to others’ involvement in the fraud.”
“Using the SocGen example,” he continued, “if a company just discovered a $4-$6 billion potential fraud or error on January 18, if they didn’t have a handle on those transactions for a long time, it is surprising they could conclude by the time they issued their year-end results (Feb. 21) that they knew the full extent of the fraud. To bottle up everything into 2007, when in reality, the loss itself was triggered by the unwinding of the transactions in 2008, is wrong.”
“If questionable events began in 2007, but the transactions to unwind the positions took place in 2008, causing the loss in 2008, then that’s what they should disclose as a subsequent event. Otherwise, it misstates the historical profitability of 2007, by putting 2008 results into it,” he noted.
In addition, he said, “I find it incredible they had everything under control,” by the time they issued their year-end press release, given the fraud was reported by SocGen as initially discovered on January 18. He noted press reports have questioned whether a fraud of that magnitude could have been committed solely by one perpetrator.
Q. 2: Generally speaking, what are the rules for subsequent event reporting?
“U.S. principles would have said, if facts are uncovered after the balance sheet date, which expose a condition that existed at the balance sheet date, you record that as of the balance sheet date. In contrast, if there was a material loss that didn’t occur until 2008 – but prior to the auditor signing their opinion on 2007 – and it does not relate to a condition that occurred in 2007, then you have a duty to disclose the subsequent event when you issue your 2007 financial statements.”
Ciesielski reiterated, “You don’t do investors any favor by putting in results that don’t relate to the time period.” Instead, he said, investors should look at the footnote on subsequent events and read it to understand its implications.
The disclosure approach for losses that occurred subsequent to the balance sheet date, and relate to the current period rather than a prior period, is preferable for investors, he added. “Otherwise,” he explained, “a company with a bad first quarter, could decide to go back and retroactively write off, e.g. construction in progress as of 2007, to make 2008 look better.”
Learn More at FEI’s Conference June 5 in NYC: “The World Is Moving To IFRS – Are You?” – Keynote Speaker John White, SEC Director of Division of Corp Fin
Many people, including Financial Accounting Standards Board (FASB) Chairman Robert Herz, have acknowledged the world is moving to IFRS as the global accounting standard.
U.S. Securities and Exchange Commission (SEC) Chairman Christopher Cox announced in a speech earlier this year he intends to have SEC staff develop a roadmap to consider permitting - or requiring - IFRS reporting by U.S. companies that are registered with the SEC. Private companies are also following the International Accounting Standards Board's IFRS for Small and Medium Sized Entities (IFRS for SMEs) project.
To be ahead of the curve on reporting in IFRS and the potential impact on your company, you won't want to miss FEI’s June 5 conference, “The World Is Moving to IFRS – Are You?” The Bureau of National Affairs (BNA) is the exclusive sponsor of this conference.
A highlight of the event is John White, Director of the SEC's Division of Corporation Finance, who will be providing keynote remarks at the conference on the status of the SEC’s roadmap.
In addition, leaders from companies, audit firms, IASB staff and other experts will speak on panels on the advantages and challenges in reporting in IFRS, provide an overview of major differences between IFRS and U.S. GAAP and highlight how some companies are organizing project teams to consider the implications of adopting IFRS.
Jack Ciesielski, quoted above, is also confirmed to participate in our June 5 IFRS conference. Ciesielski has done significant studies of the differences between IFRS and U.S. GAAP as shown in reconciliations previously filed by foreign filers, which he noted in his comment letter to the SEC in 2007 and in Senate testimony in 2007. Other confirmed speakers so far besides White and Ciesielski include Vin Colman of PwC, DJ Gannon of Deloitte, Paul Munter of KPMG, and Danita Ostling of E&Y.
Find out more about FEI's June 5 IFRS conference, sponsored by BNA, here. We will be adding further details regarding the agenda and confirmed speakers to that link this week.
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8:36 AM by Edith Orenstein
Mar 6, 2008
Treasury, SEC, FASB Schedule Mtgs for March 13; R U Interested in Teaching, But Don't Have PhD? March Deadline for AAA, AACSB
Three events will take place on Thursday, March 13. (Talk about multi-tasking, I wish I had 3 ears and six hands so I could blog about all 3 simultaneously!) These events are:
The U.S. Treasury Department’s Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC Chairman Arthur Levitt, Jr. and former SEC Chief Accountant Don Nicolaisen, is meeting on Thursday, March 13 at the Treasury Department in Washington, D.C. The meeting will begin at 10 a.m. and is open to the public although advance registration is required. Presumably, the meeting will be webast.
The SEC Advisory Committee on Improvements to Financial Reporting (CiFIR or the Pozen Committee, for committee chair Robert Pozen) is meeting at the University of California - San Francisco at 3:00 p.m. Pacific time, to discuss comments received and take related testimony on CiFIR’s Progress Report issued to the SEC. This is actually a two day meeting, continuing at 8:00 a.m. Pacific time on Friday, March 14, and the meetings on both days will be webcast. As previously noted, the SEC has issued a Request for Comment on CiFIR’s report, and the comment deadline is March 31. For additional information, see this summary of CiFiR’s 12 proposals, summary of CiFIR’s proposed Professional Judgment Framework, our earlier post about the PCAOB SAG’s discussion of the PJF, and my observations about the PJF.
The Financial Accounting Standards Board (FASB) announced it is holding a webcast on March 13 from 1:00 – 2:00 p.m. Eastern time on: “The Move to Codification of U.S. GAAP.” FASB Board Member Larry Smith and Codification Project Director Tom Hoey will discuss and demonstrate use of FASB’s Accounting Standards Codification, an on-line research system that organizes by topic all authoritative U.S. GAAP. Jay Hanson, National Director of Accounting for McGladrey & Pullen, will moderate the program. FASB’s Codification is currently in the verification phase, which means that it is not yet authoritative. During the verification phase, constituents are encouraged to use and provide feedback on the Codification.
Are You Interested in Teaching, But Don’t Have a PhD? Check out AAA’s PQ Program, AACSB’s Bridge Program, Deadlines to Apply in March
You may have seen the front page story in today’s Wall Street Journal, “High Schools Add Classes Scripted by Corporations,” by Anne Marie Chaker, about how corporations are funding career development and specific skill training programs, to create the next generation of workers in their field.
On a related note, for you finance professionals out there (CFOs, Controllers, and other professionals in the finance field) and other professionals (lawyers, analysts, auditors) who work in some capacity with financial reporting, have you ever considered teaching accounting, auditing or tax at the college level?
If you have thought about teaching at the college level but assumed you couldn’t because you don’t have a PhD, think again – the AAA’s program for Professionally Qualified (“PQ”) instructors, or the AACSB’s “Bridge” program, may be for you.
The “PQ” designation for professionally qualified instructors who lack Academically Qualified (“AQ”) credentials, like a PhD, was developed in recent years for two reasons: to help offset the shortage of PhDs who are needed to teach rising enrollments in accounting, particularly audit and tax, (complicated by an expected rise in PhD faculty retirements as baby boomers continue to reach retirement age), and to add more practical insights from working professionals as instructors.
AAA sponsors a one day PQ program, which costs $450, including one year free membership in AAA. The next PQ program will be held Saturday, April 19, in New York City. The application deadline is March 26.
Separately, another organization called AACSB sponsors a one week “Bridge” program, which costs $5,000. The next AACSB Bridge program will be held May 4-9 at Babson College in MA, and the application deadline is March 10.
For further information about the AAA PQ and AACSB Bridge programs, see this FEI summary.
1:19 AM by Edith Orenstein
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