Friday, September 26, 2008

Treasury ACAP Issues Final Report:Over 30 Recs; No Consensus On Litigation; Q's On Fair Value, IFRS, XBRL Raised in Press Conf

Earlier today, the U.S. Treasury Department’s Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC Chairman Arthur Levitt and former SEC Chief Accountant Don Nicolaisen, voted 14-1 to release its Final Report . The one member voting no was Lynn Turner, former chief accountant at the SEC. Here is a link to the Draft Final Report that was voted on by the committee, a Fact Sheet summarizing the recommendations, and a related press release. Separately, a PCAOB statement issued today says “The PCAOB welcomes the Treasury report and will carefully consider those recommendations that may have an impact upon the Board’s oversight of the auditors of U.S. public companies.” See the list of ACAP members.

U.S. Treasury Secretary Henry M. Paulson, called in briefly at the beginning of the meeting to thank the committee, its chairs and observers from the SEC, FASB and PCAOB.

Alluding to the efforts underway with Congress and the Administration to reach a deal on
Treasury’s proposed $700 billion bailout plan, Paulson said, “I so much wish I was in person with you there today, because this is something very important that I have been looking forward to, but as you know I’ve been spending my time differently these days.”

Noting his call for this committee to be formed took place in 2007 as part of Treasury’s capital markets competitiveness initiatives, Paulson said ACAP’s work “is very important, this industry [the audit profession] is terribly important.” Once again alluding to current events, Paulson said, ““As I looked at my schedule this morning, I remember … 2007 seems a long time ago… I remember [former Treasury Secretary] George Schultz telling me the days would be long and the years would be short… for me, the days have been long and the years have been long.”

He stated that in discussions about competitiveness last year, “all of us thought accounting was right in the center” of capital market competitiveness, adding, "the lifeblood of capital markets are the financial statements, and the sustainability of the auditing profession is critical to investor confidence in our capital markets. Since that time, this has only become clearer, given some of these developments.”

“I very much welcome and am eager to receive your final report after you vote today,” said Paulson, adding, “I hope and believe what you do is going to contribute to, shape the necessary work to improving confidence in the financial markets.” Paulson also noted, “I know you’re going to vote on several very significant recommendations, including a market stability recommendation, and I think that’s very important.” [NOTE: The ‘market stability recommendation’ which Paulson alluded to would appear to be related to 2 of ACAP’s recommendations, summarized in the Fact Sheet as recommendations that

  • “the PCAOB monitor potential sources of catastrophic risk at auditing firms to prevent reduced auditor choice and significant market disruptions,” and for
  • “Creation of a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms to prevent reduced auditor choice and significant market disruptions.”]

Paulson closed, “I really appreciate what you’ve done, [and I] thank you for your service to the United States as the best place in the world to do business. We’ve got a lot of work to do in a lot of areas to get us back to where we should be, your work is an important part of it.” The ACAP cochairs thanked Paulson and Treasury staff that supported the committee, led by Kristen Jaconi.

ACAP’s recommendations are organized in three areas, as developed by its three subcommittees: (1) human capital , chaired by Prof. Gary Previts, immediate Past President of the American Accounting Association, addressing issues relating to education, recruitment, and retention, (2) firm structure and finances, chaired by former NASD Chairman and CEO Robert Glauber, and (3) concentration & competition chaired by AFL-CIO Associate General Counsel Damon Silvers . At today’s meeting, the subcommittee chairs said changes in today’s draft report vs. the earlier (July) draft were minor except for the following changes:

1. The final report makes no formal recommendation regarding litigation/liability reform, since the subcommittee charged with that task (Firm Structure and Finances) was unable to reach consensus. However, the divergent views of members of that subcommittee are included in the report, and a separate section of the report includes ACAP co-chairs (former SEC Chairman Arthur Levitt and former SEC Chief Accountant Don Nicolaisen’s) views on this and other topics. The manner in which the litigation issue was handled may be the basis for Turner’s dissent from the final report; although he did not elaborate during today’s meeting, he expressed concern on this point at prior meetings.

2. ACAP’s earlier recommendation to form a new national fraud center (to study and issue best practices on fraud prevention and detection) has now found a ‘home’ in the PCAOB, which has agreed to house the new fraud center.

3. Some additional language has been added to the report to facilitate the relationship between predecessor auditors, successor auditors, and client companies when there is a change in auditor. Levitt thanked in particular Ken Goldman [note: Goldman is CFO of Fortinet, Inc. and is an FEI member] and KPMG Chairman Tim Flynn for working out this language.

At a press conference following the meeting, ACAP co-chairs Levitt and Nicolaisen were asked about the committee’s deliberations on the litigation reform/liability issue.

Levitt responded, “There was certainly an awareness and sensitivity on the part of the accounting firms and other members of the committee that felt the threat to the firms coming from catastrophic liability claims could kill [a] firm and create… [a] very serious [situation] for our capital markets. He continued, “The issue is very easy to catalogue and talk about, but [reaching] consensus very difficult; rather than forcing compromises which represent relatively meaningless effort, we opted to have those having a particular view about litigation protections or caps or federalizing the supervision of accountants [to have] those views presented as their adherents wanted it presented.” Additionally, he noted, “Whatever happens to this report as it is used in terms of rulemaking or legislation… the positions are stated as clearly as I’ve ever seen before; although the committee as a whole did not vote yes or no [on the issue of litigation reform], the cochairs presented their view, and I think that will be noted as well.”

Asked if any firm is currently at risk of catastrophic loss, Nicolaisen replied, “We don’t think so, the firms are all here,” but added, “the concern is that firms can have difficulty for a number of different reasons.” He added “it would be hard to see a firm, one of Big 4, disappear, and be able to reallocate that in an orderly manner; it would be critical to keep our markets operating efficiently, important that regulators [be] very aware of those things that could threaten a firm’s existence.” He added the regulators need to pay attention to solvency and strength of the large audit firms going forward.

The co-chairs were also asked about audit firms' reaction to ACAP’s recommendation that audit firms provide the PCAOB with GAAP financial statements for their own firm, on a confidential basis (although, the report is silent as to whether or not the PCAOB could subsequently release the reports to the public, or if the firms could choose to publicly release their own GAAP financials.) Levitt responded, “Don [Nicolaisen] and I both in our letter voice strong support for the profession to present audited financials to the public, and I think that within a very short period of time some of the firms will do just that., and once one firm does it, the rest of them will.”

Questions About Fair Value, IFRS, XBRL Raised At Press Conference
Among other matters raised at the press conference with Levitt and Nicolaisen following ACAP’s meeting related to Fair Value Accounting, IFRS and XBRL. We’ve excerpted the Q&A on those issues below.

Q: Was fair value accounting addressed in the report/what are your thoughts on this issue?
Nicolaisen: “We have kept this [committee/report] focused on the auditing profession… [e.g.] does the auditor have training, background, are they equipped to deal with these issues… You’ll see recommendations [in the report] about increased need for more training, more experience with things like mark-to-market, as well as international accounting standards, as the world moves forward; we’re not taking any view on accounting in this document.

Levitt: “There were enough divisive issues in terms of [the auditing] industry and what its paradigm should be in the future… “ He later added in response to a different question, “There’s been a general improvement in the industry, trying to understand their public responsibilities, and I think they’re doing better than they’ve done prior to the [post-] Enron changes.”

Q: What about calls from the American Bankers Association (ABA) to suspend Fair Value accounting/mark-to-market rules… how should auditors deal with that?
Nicolaisen: “That is an issue we have not entered into within this committee, I don’t think it would be appropriate for us to comment on it, we were focused on the audit side, not accounting, didn’t view that as within the charge [of this committee]. The Treasury Secretary focus[ed] us on the audit profession, viability, quality, acceptability of work product [of the audit profession].

Q: Are we on track for a move to IFRS, are we on target to make decision by 2011 timeframe? [NOTE: SEC’s proposed IFRS roadmap discussed at SEC open meeting earlier this year set forth 2011 as date by which SEC would determine whether to mandate IFRS, and if so, that they would contemplate mandating it be effective in 2014.]
Nicolaisen: “I believe that the firms, the academic community can in fact get up to speed on IFRS. It’s important that the U.S. contribute to really good accounting standards around the globe, I believe we have the resources, intellect and capability to do that. It will be difficult and it will be more of a challenge to converge this capital market from one system to another, I think the SEC is right in having a very extended timetable - and also the opportunity for a time out if they need to, before it would be required, if it will be required.” He added, “You need a timetable to keep things moving, like everything else in life, it can be moved if it needs to.” A followup question was asked: is the message clear to universities they need to start developing IFRS programs. Nicolaisen responded: “I think it is very much coming across, universities today are also global… I serve on a board of advisors [of a university], I’m always impressed by the diversity of the students, number of countries, interests they bring; I think youthful interest combined with intellectual challenge, [will take the] next year or two to move this forward, to help get it done right, we don’t want to make mistakes.”

Q: Will XBRL place additional burdens on auditors, [e.g. if there is a] discrepancy between XBRL and the financial statements?
Nicolaisen: “XBRL is just data tagging, identifying data; it’s much like moving into the laptop age from ledgers that may have been prepared more rigidly with less flexibility to be able to analyze information.” He continued, “From what I understand of the technology, it’s good, it’s available, it can be very helpful in the long-run to better detailed information about financial data in income statements and balance sheets. Like any other technological change, you introduce it, a vast majority of people - particularly younger people - say it’s good stuff, let’s move with this; it has the potential to improve the quality of data.”

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