Thursday, April 30, 2009

FASB-IASB Advisory Group (FCAG) Updates, Cautions G-20

Yesterday, the Financial Crisis Advisory Group (FCAG), formed jointly by the Financial Accounting Standards Board and the International Accounting Standards Board to advise the boards on accounting issues arising from the credit crisis, issued a letter to the G-20. The April 29 letter updates FCAG’s March 31 letter to the G-20, and has been sent in an advance of FCAG’s final report expected in July. Attachment 1 of the letter provides a list of FCAG members. Attachment 2 of the letter provides a chart outlining FASB and IASB actions completed, underway, and next steps planned, in response to the Nov. 2008 and April 2009 recommendations of the G20 with respect to accounting.

The G-20's recommendations relating to accounting and other matters can be found in our previous posts: G-20 Leaders Pledge Action (April 2-includes link to G-20 Leaders' Statement), and Under Pressure (March 16-includes link to G-20 Progress Report)

In its April 29 letter, FCAG provides its views on some high profile projects FASB and the IASB are undertaking which relate to the G-20 recommendations. Here are some excerpts from their letter (subtitles inserted):
  • Consolidation and derecognition: "The IASB issued proposed improvements in the area of off-balance sheet items (consolidation and derecognition standards) earlier this year and is working jointly with the FASB in this area. The FASB will issue in May improvements to the current US standards in this area. These projects follow a number of other improvements the Boards individually and together have been making over the past several months."
  • Fair value: "The two Boards have provided globally consistent fair value measurement guidance for inactive markets and enhanced fair value disclosure requirements. In early May, the IASB will publish a proposal to enhance disclosures related to fair value measurement. The FASB also published, in March 2009, improvements to asset impairment guidance related to a US-specific impairment approach." (See NOTE below)
  • Financial Instruments: "We at the FCAG are united in recommending to the two Boards that these joint and comprehensive projects [on financial instruments and consolidation/derecogntion] be the focus and chief priority of both organizations. We are also convinced that these projects present a tremendous challenge to the two Boards. The financial instruments project, in particular, is very wide-ranging and complex, and issuing a comprehensive proposal by the end of 2009, as the G-20 has urged, is ambitious and challenging, requiring significant resources, coordination, and focus."

NOTE: Some, particularly in the European Union as noted in the following articles, may take issue with the second bullet above; see e.g. IASB Plots Out Impairment Revisions (WebCPA, April 27) and IASB Rejects EU Calls For Immediate Guidance Changes (Reuters, April 24).

FCAG Cautions G-20
FCAG members expressed concern at their most recent meeting about political pressure being brought to bear on FASB and the IASB, as noted in Jason Karaian's summary of the April 20 FCAG meeting in, Herz: No Convergence for 10-15 Years. (See our related blog post and detailed summary.) The political pressure as viewed by some relates to the March 12 Congressional hearing on mark-to-market accounting, at which FASB Chairman Robert Herz and SEC Acting Chief Accountant Jim Kroeker were asked by members of the House Financial Services Committee-Capital Markets Subcommittee, to commit to issuing guidance on fair value in inactive markets and other-than-temporary-impairment within 3 weeks (coincidentally, the date of the G-20 meeting). (For background, see our blog posts on March 12, April 2, and April 3). Similarly, some point out pressure in the European Union on the IASB, as shown in these recent articles: EU Could Take Back IASB's Power - ECB's Noyer (Reuters, April 25), and France's Lagarde: Need Global Financial System Regulation (WSJ, April 27).

In an apparent attempt to defuse political pressure on the FASB and IASB boards, FCAG's April 29 letter to the G-20 states: “We fully understand that policymakers are under tremendous pressure to provide both short and long term reforms for the many challenges with which they are confronted. We stand ready to help where we can."

"However," the letter notes, "the FCAG strongly believes that the two Boards can only achieve what the G-20 seeks if they can completely focus on the highly complicated technical work that these projects entail."

Therefore, FCAG cautions, "Additional work on other issues, beyond the commitments the Boards have already made, will inevitably lead to delays on the projects that matter most.” FCAG closes its letter to the G-20 by stating it will “continue its constructive dialogue with the two Boards,” adding that besides issuing its final report in July, its members have agreed to hold a meeting in December to "discuss the Boards’ efforts and proposed guidance in these important areas for financial reporting, the financial markets, and the financial system."

The next FCAG meeting is slated to take place May 22 in London. This is currently scheduled to be the group's final meeting, although a tentative date of July 10 at Baruch College in NYC is on hold if the group decides one more meeting is necessary before issuing its final report. FCAG is co-chaired by former SEC Commissioner Harvey Goldschmid, and Hans Hoogervorst, Chairman, AFM (the Netherlands Authority for the Financial Markets).

Monitoring Board Takes Shape
Hoogervorst was also recently named chairman of the new Monitoring Board, formed as a link between the International Accounting Standards Committee Foundation (the parent of the IASB) and public authorities (including national and international regulatory bodies). Other members of the Monitoring Board currently include: Junichi Maruyama, Deputy Commissioner for International Affairs of the Financial Services Agency of Japan (JFSA), Guillermo LarraĆ­n, Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile , and Mary L. Schapiro, Chairman of the US Securities and Exchange Commission.

The role of the Monitoring Board has also been the subject of debate over whether it poses inappropriate use of political pressure on the IASB, or whether it imposes an appropriate level of oversight and due process over a standard-setter whose standards are required by law in the European Union and are used in over 100 countries around the world.
There were a couple of references to the Monitoring board at FCAG's April 20 meeting.
  • FCAG Co-Chair Harvey Goldschmid said, “As good as they are on Capitol Hill, they cannot understand the complexity of [what the FASB and IASB] boards do] beyond a couple talking points; there is plenty of oversight, accountability should be real, but the SEC is there for FASB, and the IASB has a new Monitoring Group; the idea that a layman can come in and set deadlines and know about timing somewhat frightens me.”
  • Another FCAG member, referencing the 100-plus countries that have adopted IFRS, said, “The hope from these 100 plus countries is that entities like the [IASCF’s] Monitoring Board, or the prestige of the IASCF, might … convince these politicians, maybe there are things that should not be determined on a deadline basis, just like it is unwise for politicians to tell the pharmaceutical industry you must find a cure for cancer tomorrow morning.. let them do high quality work… for high quality standards.”
  • Taking a slightly different point of view, Sylvie Matherat, an observer from the Basel Committee of Banking Supervisors, said, “Everybody agrees standard-setters should be independent; that doesn’t mean they shouldn't be accountable.”
The IASCF Monitoring Board held its first meeting on April 1-2 in London, the next meeting is slated for July 7-8 in Amsterdam.

Monday, April 27, 2009

Pandemic Preparedness

With concern rising rapidly worldwide about swine flu, following reports of 140 deaths from the illness in Mexico, and over 40 confirmed cases in the U.S. - as reported in this article in the New York Times-the World Health Organization (WHO), U.S. Government agencies, and governments worldwide have stepped up warnings and travel advisories regarding the swine flu.
Over the weekend, Dr. Margaret Chan, Director-General of WHO said the swine flu has 'pandemic potential' (Transcript), and this evening there was a Statement by the World Health Organization that WHO has raised the Pandemic Alert level from Phase 3 (levels 1-3 are predominantly animal infections) to Phase 4 (sustained human-to-human transmission.). (NOTE: The current alert level - Level 4 - is below Levels 5 and 6 which signify widespread human infection.) This evening, the U.S. Centers for Disease Control issued a Travel Health Warning against nonessential travel to Mexico, following yesterday's announcement by the U.S. Department of Health and Human Services: HHS Declares Public Health Emergency for Swine Flu. There were also reports earlier today that Europe had issued a travel warning against nonessential travel to the U.S. and Mexico, reports later this evening indicated any such warning in Europe may have been rescinded (at least with respect to travel to the U.S.), as reported by Donald G. McNeil, Jr. in his article on the New York Times website: Avoid Mexico, Traveler's Are Told, As Flu Toll Mounts. And, the Washington Post is reporting tonight: U.S. Lawmakers To Examine Swine Flu Response

As noted in the White House Blog, earlier today, President Barack Obama spoke at the National Academies of Sciences' Annual Meeting. According to the transcript of the President's remarks, Obama said this regarding the situation [note: his remarks were delivered at 9:12 am, and as noted above, the situation continues to evolve]:

"[I]f there was ever a day that reminded us of our shared stake in science and research, it's today. We are closely monitoring the emerging cases of swine flu in the United States. And this is obviously a cause for concern and requires a heightened state of alert. But it's not a cause for alarm. The Department of Health and Human Services has declared a public health emergency as a precautionary tool to ensure that we have the resources we need at our disposal to respond quickly and effectively. And I'm getting regular updates on the situation from the responsible agencies. And the Department of Health and Human Services as well as the Centers for Disease Control will be offering regular updates to the American people. And Secretary Napolitano will be offering regular updates to the American people, as well, so that they know what steps are being taken and what steps they may need to take.But one thing is clear -- our capacity to deal with a public health challenge of this sort rests heavily on the work of our scientific and medical community. And this is one more example of why we can't allow our nation to fall behind."

What does the swine flu threat mean in a practical sense? People are wondering - parsing the words in statements issued by official authorities - is this an emergency? A potential emergency? How should they deal with it?

Pandemic Preparedness
The need for preparedness in the event of potential pandemics and other catastropic events has been a topic covered periodically in Financial Executive magazine, published by FEI. We provide links to related articles below, which you may find useful resources in contemplating if you and your business are adequately prepared for such potential events.

Ellen M. Heffes, Editor-in-Chief of the Financial Executive magazine notes, "It’s been said we live in a crisis society, which too often involves planning when the crisis is upon us! In today’s environment, businesses can’t afford the unintended interruption that crises entail. Indeed, organizations need to be proactive in taking steps to always be prepared … since even if the crisis doesn’t occur, you’ll still be way ahead of the game. Whether preparation for a hurricane, blizzard, flu or biological attack, the fundamental principles of business continuity don’t change, but they do get updated with new technologies and capabilities."

The links to the Financial Executive magazine articles below can be viewed by FEI members and nonmembers alike; members will be prompted to enter your member login; nonmembers can create a free login account for the magazine only, which will enable you to read these and other articles. (Nonmembers-learn more about FEI; and FEI membership.)

UPDATE April 28, 2009
Links to additional information on swine flu preparedness

Friday, April 24, 2009

Fed Releases White Paper on Bank Stress Test Methodology; Results Will Be Public May 4

As reported on the Wall Street Journal website this afternoon, the Federal Reserve released a White Paper earlier today outlining the methodology used in the stress tests applied to banks under Treasury Secretary Tim Geithner's Financial Stability Plan.

In their article, Fed Releases Stress Test Results, WSJ writers Damien Paletta, David Enrich and Robin Sidel report: "The Federal Reserve on Friday said any banks directed to raise new capital as a result of the government's stress tests should not be viewed as insolvent or unviable, one way government officials are trying to manage the potential fallout from the high-stakes exams.
The central bank released the methodology of its stress tests Friday, the same day bank executives across the country huddled with Fed officials to go over their results. The Fed is sharing with the banks how much capital each company might need to raise to satisfy regulators that they can continue lending if the economy worsens significantly next year." They add, "Banks will have several days to challenge the findings before the government makes results public the week of May 4."

Here is the Fed's press release and the Fed's white paper: The Supervisory Capital Assessment Program: Design and Implementation. The WSJ's Real-Time Economics Blog has posted a List of 19 Banks Undergoing Stress Tests.

G-7 Finance Ministers Meet; Financial Stability Board Issues 2nd Report on EESA
In other news, the G-7 Finance Ministers and Central Bank Governors are meeting in Washington, D.C. today, here is the G-7 Statement issued today, and here is the related Statement of U.S. Treasury Secretary Geithner at the G-7 meeting.

Separately, the Financial Stability Oversight Board issued its second quarterly report to Congress today (covering the period Jan. 1 to March 31, 2009) on the Emergency Economic Stabilization Act of 2008.

As noted in this press release issued by the U.S. Treasury Department:
  • The report highlights the oversight activities of the Oversight Board during the quarterly period. It also presents the Oversight Board's evaluation of the effects thus far of the policies and programs implemented by Treasury (Treasury) under the Troubled Assets Relief Program (TARP).
  • In addition, the report describes the programs, policies, administrative actions, and financial commitments of the Treasury Department under the TARP during the quarterly period.
  • In the report, the Oversight Board indicates its belief that the actions taken by Treasury under the EESA have provided critical support to the financial system during this period of market turbulence and weakening economic conditions.
  • Together with other government actions, the report states that Treasury's actions may have helped prevent the current financial crisis from triggering a severe global financial and economic meltdown.
  • The Oversight Board believes the Treasury should continue to use its TARP authority to stabilize financial markets, help strengthen financial institutions, improve the functioning of the credit markets, and address systemic risks given the consequences that potential instability of the nation's financial institutions and markets can have for the broader economy.

There are various oversight mechanisms established for EESA and the TARP program in addition to the Financial Stability Oversight Board. These include the Congressional Oversight Panel, which has issued various reports and recommendations on these matters, and made broader recommendations for the regulatory system. Another arm of oversight is through the Office of the Special Inspector General for the Troubled Asset Relief Program - aka SIGTARP. In addition, GAO has issued various reports, including its 100 page report (see 2 page Highlights) issued in March 2009: Status of Efforts to Address Transparency and Accountability Issues.

PCAOB Gives (Guidance on Fair Value) and Receives (Comments on EQR)

This week marked a busy week for the Public Company Accounting Oversight Board, with the comment deadline closing on one proposal on April 20, Engagement Quality Review, and issuance of new guidance for auditors on fair value on April 21.

The PCAOB has received and posted 30 comment letters on EQR as of this afternoon, including this comment letter sent by FEI’s Committee on Corporate Reporting (CCR). The letter, signed by CCR chair Arnold Hanish, supports the PCAOB’s efforts to adopt a comprehensive standard on EQR, and commends the PCAOB for proposing a revised standard which “we believe … is better articulated, in a less prescriptive tone, than the Board’s original proposed standard.”

However, the FEI CCR letter also provides two suggestions for the PCAOB to consider in its deliberations toward issuing a final standard: (1) although CCR supports the change from ‘knows or should know’ to ‘due professional care’ in the revised proposal, the intent of that change, says FEI CCR, could be contradicted by wording on p. 24 of the Release; and (2) the documentation requirements in paragraph 19c of the proposal “are too prescriptive and would drive an excessive amount of documentation that is not necessary to further the objective of well-performed EQRs in quality audits.” Read FEI’s comment letter for further details.

Separately, on April 21, PCAOB released Staff Audit Practice Alert No. 4, Auditor Considerations Regarding Fair Value Measurements, Disclosures, and Other-Than-Temporary Impairments. As noted in the related PCAOB press release, “This alert is intended to remind auditors of their responsibilities in conducting reviews of interim financial information and annual audits in light of the new FSPs [FASB Staff Positions No. 157-4, 115-2, and 107-1] related to fair value measurements and other-than-temporary impairments.”

BNA Reports: FASB Developing New Fair Value Disclosure Guidance
In related news on the fair value front, Steve Burkholder reported earlier today, in his article FASB Eyes Third-Quarter Release On Enhanced Disclosures of Fair Value in BNA's Daily Report for Executives that "[FASB] is contemplating a third-quarter release of beefed-up disclosures intended to provide investors and other financial statement users with information on how companies arrive at fair values." The fair value disclosure project was added to FASB's agenda in February, as noted in this press release.

BNA's Burkholder, reporting on the discussion that took place at FASB's educational session earlier this week (FASB holds weekly educational or 'Ed sessions' which are open to the public - but not webcast - at which the board and staff discuss - but do not vote on - certain issues as it works toward developing proposed or final guidance), notes, "A main aim of the disclosures would be shedding light on how firms use what FASB in Statement No. 157 [Fair Value Measurement] labels 'inputs to valuation techniques,' or information factored into measurements of fair value, and the significant, 'reasonably possible' assumptions that underlie such gaugings."

He adds, "In a staff-written update on the disclosure improvements project, the board said that it may consider added footnote reporting requirements. Those might include sensitivity analysis, or 'the sensitivity of fair value measurements to changes in assumptions'... [which] might encompass a range of discount rates keyed to forecast credit losses or losses in loan portfolio values, for example, and perhaps a range that is narrower than a 'best-case, worst-case scenario... Similarly, the disclosures might show how much adjustment was made to observable data in carrying out fair valuations, one participant in the April 22 meeting suggested. On a related note, FASB Chairman Robert Herz spoke about 'a range of adjustments that would have been reasonable.'”

Burkholder reports there was also some discussion at the Ed session about what some constituents view as the 'taint' associated with 'Level 3' inputs, and some apparent frustration among some members of the board and staff (my take on what Burkholder reported) with what some members of the public say (or believe) about 'Level 3.' According to Burkholder:
- FASB Technical Director Russell Golden said at the Ed session: “People view ‘unobservable’ as ‘made-up,' which isn't true.”
- FASB Board Member Tom Linsemeier "cited his concern on seeing the Center for Audit Quality issuing a view that 'any observable price is better than Level 3,' adding, “I don't think that's the case.”
- In response to Linsmeier's comment, FASB Board Member Larry Smith said, "I agree.”

Wednesday, April 22, 2009

FASB Wants Changes To Loan Loss Disclosures Effective This Year

At its board meeting earlier today, the Financial Accounting Standards Board agreed that its soon-to-be-released proposal on Loan Loss Disclosures should be effective this year (specifically, interim and annual reporting periods ending after Dec. 15, 2009).

Effective date of loan loss disclosures decided in contemplation of effective date of upcoming amendments to FAS 140, FIN 46R: Part of the rationale for requiring the new disclosures this year-end, as explained in paragraph 7 (and footnote 1) in today's board handout [additional explanatory info inserted by me in brackets which does not appear in board handout], is that:

"The staff believes it would be beneficial for the effective date [of the Loan Loss Disclosures Statement] to be prior to the proposed effective date for proposed Statement, Accounting for Transfers of Financial Assets, and proposed Statement, Amendments to FASB Interpretation No. 46(R) [Consolidation of Variable Interest Entities]." As noted in footnote 1 in the board handout: "The proposed effective date for these proposed Statements [i.e. the amendment of FAS 140 and FIN 46R] are as of the beginning of each reporting entity’s first fiscal year or first interim reporting period that begins after November 15, 2009."

The staff added, " the disclosures in this project will provide enhanced credit risk information related to the financial assets included in the scope of those two proposed Statements [i.e. the amendment of FAS 140 and FIN 46R]. Therefore, the staff recommends the proposed Statement be effective for interim and annual reporting periods ending after December 15, 2009."

FASB Technical Director Russell Golden also noted that the assets on the balance sheet will be different after the amendments to FAS 140 and FIN 46R come into effect as proposed in 2010.

NOTE: The effective dates listed above for the proposed amendments to FAS 140 and FIN 46R are as proposed for public comment last year; as is done in finalizing all proposed standards, FASB is expected to discuss at an upcoming board meeting the effective date of those standards (i.e. whether to reaafirm the effective date as proposed).

Next steps on loan loss disclosures: FASB staff plan to release the proposal on Loan Loss Disclosures in May for a sixty-day comment period, and currently expect a final standard to be issued by the end of September. Following are some highlights from today's meeting.

Disaggregated disclosures for fair value of loans: The board agreed that a creditor should be required to disclose the fair value of financing receivables on a loan portfolio segment basis. Although not outlined in today’s board handout, this issue was addressed as a carryover from prior discussions during the development of FSP 107-1 which requires interim disclosures of fair value of financial instruments.

Loan loss disclosures required: The following loan loss disclosures would be required on an interim and annual basis – as discussed at the March 18, 2009 board meeting - as noted in paragraph 5 of today’s board handout:
a. Loan Rollforward Schedule
b. Allowance for Credit Losses
c. Credit Quality Information
d. Past Due Financing Receivables
e. Impaired Loans
f. Nonaccrual Financing Receivables

Interim and annual: At its meeting today, the board agreed to change the current requirement for annual credit loss (loan loss) disclosures, to require disclosures on an interim and annual basis. In reaching this decision, staff noted (as shown in the board handout) that “many entities are required to disclose detailed credit risk information through quarterly regulatory filings.”

Effective date and transition: The board agreed at its meeting today that the proposed effective date for the proposed loan loss disclosures would be interim and annual reporting periods ending after December 15, 2009. [For example, for calendar year-end companies, effective this year-end.] The board also agreed the proposed standard would not require disclosures for earlier periods presented for comparative periods at initial adoption. However, in periods after initial adoption, the board agreed to require comparative disclosures for all earlier periods that ended subsequent to initial adoption.

Comment period: The board agreed to a 60-day comment period for this proposal.

Discussion About Systems Changes; Fatal Flaw Review
FASB Board Member Tom Linsmeier asked the staff, “What sort of systems changes do you think will need to be put in place” for companies to adopt the proposed loan loss disclosures.

Project Manager Melissa Maroney responded that a great deal of the information in the proposed standard is already required for regulatory reports, and “a lot is built on how the loan loss (provision) is calculated.” She added, “We wrote the [proposed standard] to minimize the amount of system changes that would be needed.”

FASB Chairman Robert Herz, referencing bank regulatory reports (‘Call Reports’), observed that this information may be “required in Call Reports, but there are probably a lot of people that have big lending operations that are not filing Call Reports,” adding “that’s a whole other issue…”

FASB Board Member Leslie Seidman emphasized, “It’s really important that [the] fatal flaw [review] include some banks as reviewers, and maybe a nonbank too.” [NOTE: The fatal flaw review is standard procedure whereby before the board votes by written ballot to issue a proposed or final standard, the draft is sent out to external reviewers for a ‘fatal flaw’ review, and issues raised are addressed in final drafting, with significant issues brought back to the board.]]

Staff indicated they had done such outreach, and FASB Technical Director Russell Golden said staff would “find another large manufacturer” with a financing business to reach out to during the fatal flaw review.

As always, look for the official Summary of Board Decisions in FASB’s News Center, generally posted the same-day or next-day following board meetings.

If you received this blog post from ‘a friend’ and would like to receive our blog by email, send an email to and write in Subject line: Sign Up.

Tuesday, April 21, 2009

S&P Introduces Risk-Adjusted Capital Ratio For Financial Institutions

Earlier today (April 21, 2009) Standard & Poor's introduced a new risk-adjusted capital (RAC) ratio for financial institutions. As described in a press release issued by S&P, "The RAC aims to provide a globally consistent and independent view of capital adequacy for each of the financial institutions we rate.... and we intend to use it as a starting point for our analysis of capital adequacy." Read more in this FEI Summary, which includes a link to an article published today by S&P highlighting why they developed the new RAC ratio and how they intend to apply it.

Map Quest: Comments Roll In On SEC IFRS Roadmap

In the quest to achieve a high quality set of global accounting standards - including, potentially, U.S. public company filings with the U.S. Securities and Exchange Commission - comments are rolling in on the SEC's proposed IFRS Roadmap. The IFRS Roadmap specifies that if certain milestones are achieved with respect to standards established by the International Accounting Standards Board, its overseer (the International Accounting Standards Committee Foundation) and American readiness to adopt International Financial Reporting Standards generally, then - according to the proposal - the SEC would make a decision in 2011 as to whether to permit or require public companies to file their financial statements with the SEC using IFRS instead of U.S. GAAP, with the potential date of such a requirement being mandated over a three year period - with largest companies first, beginning in 2014 (according to the proposal).

Over 30 comment letters were filed on the comment deadline date alone (April 20), based on what's posted on the SEC's comment letters page, with more letters filed prior to that date, and additional letters in the process of being posted to the SEC's website, including this comment letter filed yesterday by FEI's Committee on Corporate Reporting and Committee on Taxation.

The FEI CCR COT letter states, "The committees continue to believe there are benefits to be derived from the development and use of a single set of globally accepted accounting standards. The credit crisis has highlighted a world economy that has become increasingly global in its nature and the eventual use of a single set of global accounting standards is a further step in recognizing and adapting to the global flow of capital. We also note that, as an example, differences between US GAAP and IFRS in the area of financial instruments are causing concern among preparers, regulators and government officials. We believe that the use of a single set of globally accepted accounting standards has the potential to mitigate these accounting debates in addition to further providing efficiencies with regard to systems, processes, documentation and training as well as comparable financial information for investors."

However, the FEI CCR COT letter adds, "While we acknowledge that IFRS as promulgated by the IASB is likely that single set of global standards, we are concerned regarding the timing of its potential adoption by U.S. registrants as currently proposed by the SEC. In reviewing the proposed roadmap, we recommend that the consider an interim approach in the overall process of moving towards a mandate for adoption of IFRS." The 'interim approach' recommended by FEI's CCR and COT, in brief (detailed further in the letter), includes:

  • FASB and the IASB should continue to focus on converging the most critical standards between now and 2011,
  • The SEC's Office of the Chief Accountant should conduct a study of the implications for investors and other market participants on the potential use of IFRS in the US, as recommended in the proposed roadmap, and
  • A broad based advisory committee should be formed, as recommended in the comment letter filed by FASB and the FAF, to advise the SEC on this matter.
Considering the information above and other information, the SEC could then potentially issue a final roadmap in 2011 - and, if the SEC does decide to mandate IFRS for public company filings in the U.S., then FEI CCR and COT recommend a date certain for adoption be specified by the SEC. Additionally, the FEI letter notes, the SEC need to provide a sufficient amount of time for implementation if it decides to mandate IFRS.

Separately, the Corporate Roundtable on International Financial Reporting (CRIFR), of which FEI is a member, also filed a comment letter in response to the SEC’s IFRS Roadmap. See CRIFR letter on IFRS Roadmap. The CRIFR letter does not state an overall position of its member companies relative to the IFRS Roadmap, but rather shares with the SEC the varied perspectives that currently exist regarding the potential use of International Financial Reporting Standards by U.S. registrants.

Skimming through the comment letters filed to date, one common theme noted among a number of them, even if not in these precise words, is that the implementation clock begins to tick in earnest once a date certain for a move to a different reporting regime is established - and not before - because in the current economic environment in particular, companies generally are hesitant to invest significant dollars into converting to a different basis of accounting which 'may' (but not 'must') be required; similarly there are disincentives to becoming an 'early adopter' of a reporting regime that 'may' one day be required, or -at the other extreme - may even be disallowed.

Moving away from the comment letters specifically, another point of interest which seems to have been lost in some of the more extreme rhetoric over the past year or so surrounding whether and when to move to IFRS in the U.S., is that the compasses at FASB and the SEC have directionally pointed toward one global set of accounting standards - generically, if not precisely identifying that set as IFRS - since at least the Norwalk Agreement which formed the original Memorandum of Understanding in 2002 between FASB and the IASB, (see related FASB-IASB press release of 10.29.02).

An SEC press release supporting the Norwalk Agreement was also issued on 10.29.02, in which then-SEC Chairman Harvey Pitt said: "For years, many have believed that a desirable goal someday would be to move towards a single set of high quality accounting standards around the world. Now the time frame has a more immediate focus. With so many new users of IAS [International Accounting Standards] coming in 2005, in Europe and elsewhere, there is a great opportunity to focus attention on ways to improve information for investors while working for greater convergence in both the short term and the long term."

In fact, one can trace the compass needle back to the year 2000, when the SEC issued for public comment its Concept Release on International Accounting Standards. Then-SEC Chairman Arthur Levitt said in this statement at an open commission meeting on Feb. 16, 2000: "The Commission today is being asked to consider a concept release on the elements of a high-quality international accounting framework. Such a framework has the potential of developing, in the not too distant future, a universal business language for the global marketplace." [Foreshadowing the 'lingua franca' reference associated generally with a more recent SEC Chairman - Christopher Cox - as noted in the Aug. 27, 2008 statement by then-SEC Chairman Cox at the SEC's open meeting on that date, when the commission agreed to release for public comment the proposed IFRS Roadmap.]

Turning back to Levitt's Feb. 16, 2000 remarks, "No one can take issue with the need for markets to converge on a common set of accounting standards," said Levitt. However, he added, "At the same time, it is critical to remember that a truly transparent and comparable system of financial reporting necessarily depends on the existence of a sound infrastructure. Accounting standards must rest upon a foundation that includes a quality process for developing those standards. They must be verified by a rigorous audit process conducted by firms covered by profession-wide quality assurance programs and a credible oversight program."

"While GAAP in its application is not without some complexity, the secret of its success is profoundly simple: a determined and vigilant focus on providing useful information to users of financial information," said Levitt. He continued: "Any set of international accounting standards should subscribe to this same principle by being comprehensive, comparable, transparent and rigorously interpreted and applied."

Levitt closed his remarks: "As time passes, financial centers, whether in New York, in London or in the Ethernet of bits and bytes, will only become more integrated, not less. At the foundation of any truly global financial architecture will be a system of sound financial reporting; a system that must be predicated on a commitment to serving the informational needs of the marketplace."

Monday, April 20, 2009

Fireside Chat on OCA Among 75th Anniv. Events Sponsored by SEC Historical Society

With this year marking the 75th anniversary of the U.S. Securities and Exchange Commission, a number of special programs are taking place, including some under the aegis of the SEC Historical Society (SECHS), the virtual museum of the SEC.

Tomorrow (Tues. April 21) at 3pm EDT, the SECHS is holding a Fireside Chat on the SEC's Office of the Chief Accountant. The program, webcast by SECHS, will feature John W. ('Jack') Albert, Senior Associate Chief Accountant, of the SEC's Office of the Chief Accountant (OCA), and Professor Gary J. Previts of Case Western Reserve University. Previts is immediate past-President of the American Accounting Association (AAA), and is also a member of Financial Executives International (FEI). The program, moderated by Professor Theresa A. Gabaldon of GW Law School, will focus on a discussion of the work, people and impact of OCA, one of the original offices of the SEC.

As a former member of OCA staff from Dec. 1999-Jan. 2004, I will be very interested in listening to this program; I was hired by then-Chief Accountant Lynn Turner and it's fun to envision him doing a fireside chat by a real fireplace like the one on the cover of Goodnight Moon. Actually, although Turner is not part of the April 21 program, you can read (or listen to) An Interview with Lynn Turner, conducted by Previts, in 2005, part of the SECHS Oral History series. We've mentioned in this blog before that you can read/hear the oral history of SEC Chairman Mary L. Schapiro, recorded by SECHS in 2005.

The April 21 Fireside chat is among the special programs being held by SECHS in this 75th commemorative year of the SEC (more are listed below). SECHS, a 501c3 nonprofit organization, operates as a virtual museum and archive, and is a treasure trove of information on the SEC. It is separate from and independent of ASECA, the Association of SEC Alumni. David B. H. Martin, a former Director of the Division of Corporation Finance, is currently President of the SECHS, and incoming President James W. Barratt will be sworn in at the SECHS 10th annual meeting on June 4.

SECHS Executive Director Carla L. Rosati tells us, "The SECHS Annual Meeting on June 4 will be video broadcast live on beginning at 12:00 noon EDT, free of charge. The topic will be the 'Future of the SEC,' a panel discussion moderated by Joel Seligman, (President of the University of Rochester and formly Dean of the Washington University School of Law) with some of our academic members of the Museum Committee." According to Rosati, "SEC Chairman Mary L. Schapiro is scheduled to make closing remarks. The broadcast will end at 1:30 pm." Separately, the SECHS June 25 dinner in honor of the SEC's 75th anniversary is sold out, but you can read more about their 75th anniversary programs and events .

Coda: Since SECHS is a 'virtual' museum, and the 75th anniversary dinner is sold out, it wouldn't surprise me to see some people (some bloggers actually) conduct their own virtual program -maybe on Second Life? maybe on CPA Island? or maybe a Tweetup?- in honor of the SEC's 75th anniversary. [Bloggers, you know who you are :) ] I haven't heard of a Lawyer's Island yet...although apparently there is a Second Life Bar Association.

Herz Tells FCAG, 'Rethinks' Exit Value In Certain Circumstances

In response to a question posed by Harvey Goldschmid, co-chair of the Financial Crisis Advisory Group (a joint advisory group of FASB and the IASB) on whether there is anything left for the FCAG to say on fair value in inactive markets - given FASB's recent guidance (and IASB's potential guidance) in that area - FASB Chairman Robert Herz noted that in light of recent discussions he had in formulating FASB's new guidance, “I have begun to question… to what extent do markets provide a good valuation or not.”

Alluding to the mark-to-market vs. mark-to-model debate, Herz indicated he didn’t think there was a better indication of fair value than market value - if the market value incorporated ‘fundamental factors’ and ‘good information’ - particularly compared to ‘just having one set of managers look at something,’ considering the potential for management bias.

However, he noted, “we have markets that have not only been illiquid, [lacking] proper price discovery and proper clearing mechanisms,” but also, "one has to question whether [market values are] being driven at points in time with other than fundamental factors.” In such circumstances, he added, although "using those, everybody has comparability... whether they have the most relevance - that’s another question." He also noted that while some issues are beyond the FCAG's, FASB or the IASB 's scope, such as actions being taken by regulators with respect to market structure and operation, "I am concerned that non-fundamental factors influence prices."

Herz reiterated this point in the afternoon session, saying, “What we’ve done over the last month or so, [we] talked to lots of people, one of the things we learned among many others, [were] factors that have a real impact on market price, demand, supply, [include] some processes of rating agencies... something rated investment grade [that is downgraded] to noninvestment grade, can all of a sudden take a good chunk of demand out of the market as well.”

“A lot of these things led me to rethink some of my basic thinking,” said Herz.

He added, “It seems to me the mark-to-market exit price is a very good and appropriate measure when .. [there is] activity, [but when there is a lack of activity] maybe less faithful to the objective of accounting which is supposed to provide information to people’s understanding of the amount, timing and uncertainty of future cash flows.”

“For those kind of situations,” he continued, “it gave me at least pause, to at least question, whether that provides relevant information.” He added, “If you think market price always provides that information, you would gravitate to that in all circumstances. The question is," he continued, "if you stick to [the] objective [of financial reporting], to understand information relevant to the amount, timing, uncertainty of future cash flows, you start questioning the premise that markets [are] functional, you start to look at alternatives.” (Observation: This sounds reminiscent of some of the things Vinny Catalano, CFA, a former President of the New York Society of Securities Analysts has been talking about in his blog, Musing on the Markets, e.g. his April 16 post on Antique Economic Theories, and in our interview of Vinny Catalano and Randy Randy Schostag earlier this year on User Views on Fair Value.)

NOTE: Herz was expressing his personal view in the remarks above cited from the FCAG meeting, not an official position of the FASB board; nonetheless his comment was very interesting with respect to the 'exit value' market value approach, which is the fundamental approach in FAS 157, Fair Value Measurement, although FAS 157 does permit other valution methods to be used (including as noted in FAS 157, paragraph 18: the market approach, the income or discounted cash flow approach, and the cost approach), although the emphasis (aka 'level 1' of the three level hierarchy) is on the market approach - when observable market prices are available, or hypothetical observable market prices can be arrived at based on other observable factors, as explained in FAS 157 and further expanded on in FSP 157-4, the recent guidance on fair value in inactive markets.

FCAG To Issue Report in July
The FCAG discussed matters including the standard-setters independence and due process, and continued prior discussions regarding fair value, impairment, off-balance-sheet accounting (including securitizations) and loan loss provisioning (including potential consideration of moving from the current ‘incurred loss’ model to an ‘expected loss’ model such as dynamic provisioning or through-the-cycle provisioning, the latter of which was considered more in the prudential regulators’ purview at a macro level, than generic expected losses on an individual entity basis or micro level)

As noted in a recent letter FCAG sent to the G-20, FCAG is aiming to issue a final report in July.

Although according to its charter, "The primary function of [FCAG] is to advise the boards about standard-setting implications of (1) the global financial crisis and (2) potential changes to the global regulatory environment," and, "[FCAG's] role is not to reach a consensus or to vote on the issues that it considers at its meetings," it appears FCAG may include some recommendations or statements of consensus in its final report, which is currently expected to be issued in July, as noted in FCAG's recent letter to the G-20.

FASB project manager Jeff Mechanick explained after the meeting, “Where FCAG has reached a general consensus, we will make recommendations to the boards [i.e. FASB and IASB].” He added, "In areas where there is not general consensus, we will likely summarize key points of view to help inform the boards.”

During the public portion of the meeting, it was not clear what if any ‘consensus’ was reached on particular areas, given differing points of view expressed, but FCAG convened in private session after the public portion of its meeting. The next scheduled meeting of FCAG is May 22 in London, with a final tentative meeting scheduled for July 10 in New York, 'if necessary'.

It will be interesting to see if FCAG will, e.g. post a draft copy of its recommendations and discuss them at a public meeting, similar to the SEC Advisory Committee on Improving Financial Reporting (CIFiR) or the U.S. Treasury Department's Advisory Committee on the Auditing Profession (ACAP) did last year, prior to issuing their final reports, although CIFiR and ACAP were bound by laws impacting the operation of Federal Advisory Committees or FACAs.

We will post additional details on the FCAG meeting in a summary on FEI's website.

Friday, April 17, 2009

IASB Makes Its Core Standards Freely Available; SEC Comment Deadline on IFRS Roadmap Looms

Earlier today, the International Accounting Standards Board took a significant step by providing free online access to its standards. As explained on the IFRS webpage, the documents which are now available by free download on the IASB website include International Financial Reporting Standards (IFRS) issued by the IASB and interpretations issued by the IASB's International Financial Reporting Interpretations Committee (IFRIC), as well as standards originally issued by the IASB's predecessor organization, the International Accounting Standards Committee (IASC) [International Accounting Standards (IAS)], and interpretations of IFRIC's predecessor, the Standards Interpretation Committee (SIC). IASB is similar in function to the Financial Accounting Standards Board, and IFRIC is similar in function to FASB's Emerging Issues Task Force (EITF).

'Unaccompanied' or 'Core' Standards
The standards that have been made freely available on IASB website are 'unaccompanied' standards, i.e. the "core" standards, excluding additional content such as the Basis for Conclusions. To obtain the complete material (e..g including Basis for Conclusions) purchase is required through an eIFRS subscription or through the IASB's online shop (see links below).

In addition to posting the "core" standards, the IASB has also posted some Technical Summaries prepared by IASB staff (which are not approved by IASB board). You will be prompted to register on the IASB website (free) to access the documents, if you were not previously registered.

Previously, IFRS were available for free download only by eIFRS subscribers or by separate purchase from the IASB. Printed copies of standards and related publications by the IASB can still be purchased from IASB's online shop. IASB continues to offer eIFRS subscriptions to receive the latest updates, and comprehensive subscriptions (download online plus printed copies), as described further on IASB's subscriptions page.

In related news, FASB recently announced "Through a special arrangement with the IASB, the Financial Accounting Foundation [parent of the FASB] will distribute the 2009 IFRS annual bound edition in the United States, U.S. possessions, Canada, and Mexico." I have to admit, when I first saw the sales of bound volumes of IFRS posted on the FASB website, I had a feeling this could be what it would look like if there were one global standard-setter or if FASB were an arm of the IASB. I have written in this blog before how I have had that feeling of advance deja vu (or whatever you would call it), when listening to webcasts of joint board meetings between FASB and the IASB. You may be able to have that opportunity next week, as the FASB and IASB are tentatively scheduled to hold a joint videoconference board meeting on Thurs. April 23 - currently tentatively scheduled - as shown on FASB's calendar. Additionally, the FASB-IASB joint Financial Crisis Advisory Group (FCAG) is set to meet on Monday (April 20), here is the agenda, related comment letter summary, and webcast schedule.

SEC IFRS Roadmap Comment Deadline Monday
The IASB's move to make its core standards freely available and the offer of purchase of bound volumes of IFRS through the FASB for distribution in North America comes on the cusp of the April 20 comment deadline on the SEC's proposed IFRS Roadmap (more specifically, the SEC's proposed Roadmap for the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards by U.S. Issuers.) See comments filed on the IFRS Roadmap to date; more comments are likely to be filed since the deadline has not yet arrived.

What’s New With Earnings Guidance, Press Releases?

Changes are afoot with respect to earnings guidance practices and press release practices, as noted by Broc Romanek in yesterday in his post Facing an Unpredictable World: How to Change Earnings Guidance Practices, by Dominic Jones in the IRWebReport yesterday NYSE, Nasdaq Move to Scrap Compulsory Press Releases, and Broc Romanek in today in NYSE Finally Moves to Scrap Compulsory Press Releases.

FEI’s research affiliate, the Financial Executives Research Foundation (FERF) is in the process of updating its report, Meeting the Street, A Discussion of Earnings and Other Guidance Provided to Investors. The original report, published in 2003, was authored by Robert (Bob) Kueppers and Greg Weaver of Deloitte. At the time, Kueppers was Senior Technical Partner at Deloitte, he is now Deputy CEO. Weaver was National Managing Partner of Audit and Enterprise Risk Services (ERS).

FERF is now working with Deloitte to update this report, and would like to interview financial executives from public companies of all sizes, that do and do not provide guidance to learn why. Please contact Bill Sinnett, Director of Research, at if you would like further information.

FERF reports are available by free download to FEI members, and by purchase from nonmembers. See the FERF bookstore.

Wednesday, April 15, 2009

Tax Day Doings

How are you spending "Tax Day" today? In a nod to the Boston Tea Party protest of 1773, hundreds of Tax Day Tea Party protests were held today. As reported by Liz Robbins of the New York Times, in her article , Tax Day Is Met With Tea Parties, "773 Tax Day tea parties were scheduled in cities from Boston to Washington, East Hampton, N.Y., to Yakima, Wash., to protest government spending — namely the Obama administration’s $787 billion stimulus and $3 trillion budget. "

Robbins adds, "Although organizers insisted they had created a non-partisan grassroots movement, it was argued by others that these parties were more of the synthetic “Game Day Grass” variety, since the occasion was largely created by the clamor of cable news and fueled with the financial and political support of current and former Republican leaders."
Some of the tax day tea parties were relatively spontaneous (fueled by the advent of social networking sites like Twitter and Facebook), some very orchestrated, with most having a connection to online sites or

The first site attributes the origin of today's tea parties as follows: "The Tea Party protests, in their current form, began in early 2009 when Rick Santelli, the On Air Editor for CNBC, set out on a rant to expose the bankrupt liberal agenda of the White House Administration and Congress. Specifically, the flawed “Stimulus Bill” and pork filled budget. During Rick’s rant... he called for a “Chicago tea Party” where advocates of the free-market system could join in a protest against out of control government spending." The second site highlights a button marked TEA: Taxed Enough Already.

On a more temperate level, FEI's Committee on Taxation files comment letters from time to time to share its views on tax and related economic policy issues by filing such letters with the administration, Congressional leadership, Treasury and the IRS. For further information about FEI's Committee on Taxation, contact Matt Miller, Senior Director, Government Affairs in FEI's Washington, DC office at

In other tax-related news, FASB met today to discuss its upcoming proposed guidance on applicability of FIN 48, Accounting for Uncertainty in Income Taxes, to private companies, particularly pass-through entities, and other types of pass-through entities. The board largely agreed with the staff's recommendations in today's board handout (with the exception of some changes to wording regarding consolidations) and expects to release draft guidance in April for a 30 day comment period, leading to expected release of the final guidance in June. Private companies are currently under a deferral of the effective date of FIN 48, however they must begin applying FIN 48 (if they did not voluntarily apply it already) at this year-end (specifically, as set forth under FSP FIN 48-3, in annual financial statements for fiscal years beginning on or after Dec. 15, 2008). Further details will be in FASB's Summary of Board Decisions which is generally posted in FASB's News Center the day of or day after board meetings. Public companies have already had to adopt FIN 48 a couple of years ago, an extension was only offered to private companies, in part to address the pass-through issues.

Here's another idea for something you can do to celebrate Tax Day, if you're in the New York City area, and you happen to be filing your return at the Main Post Office near Penn Station between 10pm and midnight (or if you already filed but would like to see what that scene is like with last minute tax filers), you can enjoy some entertainment by The Singing CPA (known in his day job as Steven Zelin, CPA). We noted last year that Zelin was featured on the front page of The Wall Street Journal, he is quite talented and a treat to listen to, whether you're stopping by to file your return or just to watch him perform.

Tuesday, April 14, 2009

Today is Comment Deadline on FASB-IASB Financial Statement Presentation

Today (April 14) is the comment deadline on the FASB-IASB Discussion Paper entitled Preliminary Views on Financial Statement Presentation. A Discussion Paper is presursor to a formal proposed standard, and is a means by which FASB and the IASB seek preliminary views on a matter, generally indicating the direction the boards are headed in terms of a future proposal.

FEI's Committee on Corporate Reporting (CCR) filed its comment letter on the FASB-IASB Discussion Paper this evening (see FEI CCR comment letter). (Note: FEI CCR also filed a preliminary comment letter on this project in February, with more detailed comments in the letter filed today.) As of 5pm EDT 122 comment letters have been posted on FASB's website, and more are in the process of being posted.

A 'Radical' Change
The changes to the financial statements described in the 126-page Discussion Paper released by FASB and the IASB for a six-month comment period last fall (see also this six-page Snapshot published by FASB-IASB) were described in advance of their release as a 'radical new format' in the article A New Vision for Accounting by Alix Stuart in CFO Magazine in Feb. 2008, and described as a 'radical' change by then-Wall Street Journal (now, Bloomberg) reporter David Reilly in his May 15, 2007 article originally published in the Wall Street Journal, with an archived version of the article available on SmartPro's website, Profit Could Be Lost With New Accounting Statements.

A good way to familiarize yourself with the FASB-IASB Discussion Paper, besides reading the FASB-IASB Snapshot, is by tuning into FASB's archived webcast which was originally presented on Jan. 27, 2009. The webcast runs for an hour, and you can immediately download the accompaning slides by registering for the webcast and clicking to run it. (According to FASB's website, the archived webcast will be available until June 30, 2009.)

SEC Releases SAB 111 on OTTI

This afternoon, the SEC released Staff Accounting Bulletin No. 111 (SAB 111), which amends SAB Topic 5-M on Other Than Temporary Impairment [OTTI] of Certain Investments in Debt and Equity Securities. Here is the SEC's press release and here is SAB 111. Props to Securities Mosaic, which got the word out to its subscribers earlier today.

SAB 111 notes that FASB Staff Position (FSP) No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”), issued last week, was scoped to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider with respect to OTTI for equity securities.

SAB 111 states the SEC staff's view that when FASB chose to use the words "other than temporary impairment" in FAS 115, that FASB did not intend for that term to mean 'permanent' impairment. The SAB goes on to state that numerous factors should be considered in evaluating if there has been OTTI of an equity security that is classfied as Available for Sale, for which a write-down would be required, and provides some suggested factors to consider (not an exhaustive list).

PCAOB Names Marty Baumann Chief Auditor

The PCAOB announced earlier today that it has named Martin F. (Marty) Baumann to the position of Chief Auditor and Director of Professional Standards. (See PCAOB press release.) Baumann moves into this position from his current position as Director of PCAOB's Office of Research and Analysis (ORA), a position he has held for the past three years. Prior to joining the PCAOB in 2006, Baumann had a 33 year career with PricewaterhouseCoopers, and as noted in PCAOB's press release issued today (and the earlier PCAOB press release when Baumann was first hired by the PCAOB in 2006), he was brought into serve as EVP Finance of Freddie Mac in 2003, after problems were identified at the company, to lead the completion of the company's restatement and improve its financial reporting.

FASB Drops FAS 140, FIN 46R Discussion From Tomorrow's Board Meeting

Since we previously posted that FASB was slated to discuss at its board meeting tomorrow the effective date and transition provisions for its upcoming amendments to FAS 140, Transfers of Financial Assets, and FIN 46R, Consolidation of Variable Interest Entities, we wanted to let you know that earlier today, FASB issued a Revised Action Alert (Notice of Open Meetings) , which notes that it has removed the discussion about FAS 140 and FIN 46R from tomorrow's meeting, and discussion of those topics "will be rescheduled to a later date". The remaining agenda item for tomorrow's FASB board meeting (slated to begin at 9am) is applicability of FIN 48, Accounting for Uncertainty in Income Taxes, to pass-through entities (mainly, but not exclusively, private companies). Links to FASB webcasts, announcements of upcoming meetings (Action Alert), board handouts and minutes, and additional information can be found on FASB's Board meetings page.

PCAOB Votes To Issue Concept Release on Audit Confirms

At its board meeting earlier today, the PCAOB board voted unanimously to release a Concept Release regarding possible revisions to the board’s standard on audit confirmations. Here is PCAOB’s press release. The existing standard was adopted by the PCAOB as one of its ‘interim standards’ – i.e. adopted directly from the preexisting auditing standard of the AICPA, contained in AU Section 330. The PCAOB reviews the interim standards over time to determine whether amendments or new standards are needed. There will be a 45 day comment period on the Concept Release, ending May 29.

Nine topics for comment
Nine topics are raised for comment in the Concept Release, and staff noted they also seek comments in any other areas (besides the nine areas identified) from interested parties, including investors, auditors, preparers, and firms involved with technology. Based on my listening to the webcast of the meeting, here are the nine topics (reference should be made to the Concept Release when issued; we will update this post to include link to the Concept Release, and revise list below accordingly, if necessary, when the Concept Release is posted):
  1. Definition of confirmation –e.g., changing the definition may provide an opportunity for auditors to use such methods as direct access to 3rd party information to improve the response rate, and may take less time than traditional confirmation process
  2. Design/form of confirmation request: auditor should consider prior experience on audits of similar engagements, nature of information being confirmed… whether to test some or all addresses where confirmations will be sent, before they are sent.
  3. Requirement to confirm
  4. Designing response: the form of the request
  5. Maintain control over request and response; consider that advances in technology can also provide additional opportunities for skilled individuals to intercept and revise response
  6. Reliability: consider whether additional direction may be needed, changes may include performing procedures to address reliability when alternative forms of communication are used; factors to be considered include: is the confirmation process secure, properly controlled, is information obtained from a 3rd party who is the intended recipient.
  7. Exceptions to nonresponse: whether the standard should eliminate the ability of auditor to omit performing alternate procedures for a nonresponse [i.e. to obtain a positive confirmation]; performing alternative procedures and investigating nonresponse may result in identification of previously unidentified risk of material misstatement and fraud
  8. Management requests not to confirm selected accounts, disclaimers and restrictive language: AU 330 does not address what actions auditors should consider taking when management requests the auditor not to confirm selected accounts or other items; procedures the auditor could perform could include… [procedures] to support reasonableness of management’s request, evaluate impact on auditors assessment [of risk of material misstatement] including risk of fraud, the need to perform alternate procedures to obtain sufficient, competent evidence. In addition, consider any disclaimers used in management’s response (e.g. language that may say ‘management takes no responsibility for accuracy of the response’); whether auditor should evaluate restrictive language, and determine if alternate procedures should be used.
  9. Negative confirmations: consider whether to continue to allow use of negative confirmations, and if allowed, whether the auditor should be required to perform other substantive procedures.
An ‘Experiment’
Staff noted that discussion at the April 2 PCAOB Standing Advisory Group (SAG) meeting and an earlier SAG meeting supports the need for potential improvements to the audit confirmation process.

Based on feedback received on the Concept Release, the board will consider whether to propose an amendment to AU330, or a new standard to replace AU330. It was noted that information from the inspection process indicates there could be some improvement to the existing standard, particularly in light of new technologies developed since AU 330 was written 15 years ago, however, inspection results also indicate some auditors are simply not following the existing standard.

Similar to the SEC’s use of Concept Releases, issuance of a Concept Release by the PCAOB is a precursor to publishing a proposed standard or proposed amendment to a standard. Board members described this Concept Release as an ‘experiment’ in response to recommendations by the SAG that the PCAOB be more transparent about its deliberations in connection with rulemaking.

However, two board members (Bill Gradison and Steve Harris) noted concern about this extra step (issuance of a Concept Release) potentially stretching out the timetable of reaching a proposed and then final standard in this area.

Attorney confirmations
Board member Daniel Goelzer asked if attorney confirmations were within the scope of this Concept Release. He explained, “[An] auditor asks [legal] Counsel to provide information concerning litigation, pending claims, unasserted claims, is that in the scope of this?

Staff replied, “We have a section talking about attorney letters and confirmations in other standards, but specifically no, the Concept Release is not contemplating affecting attorney letters, they are unique, not expecting this Concept Release to effect that at all.” NOTE: Reference should be made to the Concept Release on this and other issues.

Additional highlights from today’s PCAOB board meeting will be included in a detailed summary on FEI’s website. (Detailed summary will be accessible by FEI members only, consider joining FEI!) If you received this blog post from ‘a friend’ and would like to receive our blog by email, send an email to and write in Subject line: Sign up.

Friday, April 10, 2009

High Powered Panelists On Tap For SEC Roundtable On Credit Rating Agencies

Twenty-six high powered panelists are on set to appear at the U.S. Securities and Exchange Commission's April 15 Roundtable to Examine Oversight of Credit Rating Agencies. The roundtable will take place from 10am to 4:15 pm (closing remarks at 4:15) and will be webcast.

An updated agenda and list of panelists posted by the SEC on April 9 includes links to panelists' bios, and shows two changes vs. the earlier list of panelists in released by the SEC on March 24: a sixth rating agency (Realpoint LLC) has been added to panel 1, a new panelist has been added to panel 3 (the "users' panel") from the Colorado Public Employees' Retirement Association, one panelist (Wellington Capital) has moved from panel 3 to panel 4 on approaches to improve credit rating agency oversight, and one panelist previously listed on panel 4 is no longer listed (Steven Thieke of the Group of Thirty) although another member of panel 4, Mayree C. Clarke, served as an expert on the Group of Thirty's recent report on Financial Regulation Reform. Below is the current list of panelists for the SEC's April 15 roundtable.

The first panel, with representatives from S&P (Deven Sharma), Moodys (Raymond McDaniel), Fitch (Stephen Joynt), Egan-Jones (Sean Egan), Realpoint (Robert Dobilas) and DBRS (Daniel Curry), will address: "Current NRSRO Perspectives: What Went Wrong and What Corrective Steps Is the Industry Taking?"

The second panel represents a wide-ranging mix of panelists, including Alex Pollack of the American Enterprise Institute, George Miller of the American Securitization Forum, Damon Silvers of the AFL-CIO (and Deputy Chair of the Congressional Oversight Panel of TARP), Prof. Larry White of NYU, Prof. Frank Partnoy of the Univ. of San Diego, Ethan Berman of RiskMetrics Group, and James Gellert of Rapid Ratings International. The topic of the second panel is: "Competition Issues: What are Current Barriers to Entering the Credit Rating Agency Industry?"

The third panel on "users' perspectives" includes Deborah Cunningham on behalf of the Securities Industry and Fund Management Association (SIFMA), Jim Kaitz on behalf of the Association of Financial Professionals (AFP), Kurt Schacht of the CFA Institute, Paul Schott Stevens of the Investment Company Institute (ICI), Bruce Stern of the Association of Financial Guaranty Insurers, Alan Fohrer of Southern California Edison, and Gregory Smith of the Colorado Public Employees' Retirement Association.

The fourth and final panel on "Approaches to Improve Credit Rating Agency Oversight" includes Jorgen Holmquist, Director General, Internal Market and Services, European, Joseph Grundfest, former Commissioner of the SEC now with Stanford Law School, Richard H. Baker, President of the Managed Funds Association (MFA) and a former member of the House Financial Services Committee, Mayree C. Clark of Aetos Capital, Christopher Gootkind of Wellington Management, and Glenn Reynolds of CreditSights Inc.

FASB Issues Final FSPs On Fair Value, OTTI, Disclosure; Next Up: Effective Date of Amendments To Securitization Standards (FAS 140, FIN 46R)

Yesterday, the Financial Accounting Standards Board announced the release of three final FASB Staff Positions (FSPs) on fair value in inactive markets, other-than-temporary impairment, and fair value disclosures in interim periods. The press release and related FSPs are linked below:
FASB press release

FSP FAS: 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (the ‘fair value FSP’)

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (the ‘OTTI FSP’)

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (the ‘interim disclosures FSP’)

Additional information is in this FEI Summary. (Summary can be downloaded by FEI members only. Not an FEI member? Check out the benefits of FEI membership.)

Next Up: Effective Date of Upcoming Amendments to Securitization Standards (FAS 140, FIN 46R)
As noted in FASB’s most recent Action Alert, topics to be addressed at next week’s FASB board meeting include the effective date and transition for the upcoming amendments to the securitization standards, FAS 140, Transfers of Assets, and FIN 46R, Consolidation of Variable Interest Entities.

According to FASB’s Technical Plan, the board is scheduled to issue the final amendments to these standards by the end of June.

FIN 48, Uncertain Income Taxes, for Private Entities
Also at next week’s board meeting, FASB is slated to discuss guidance on the application of FASB Interpretation No. 48, (FIN 48), Accounting for Uncertainty in Income Taxes, to pass-through and not-for-profit entities, as well as proposed amendments to the FIN 48 disclosures for nonpublic entities. The effective date of FIN 48 for private companies had been deferred, most recently through FSP FIN 48-3 issued on Dec. 30, 2008, for another year, while FASB works on this additional guidance. The deferral of the effective date did not apply to public companies, but only to certain private companies, and required certain disclosures to be made by those companies electing to take the deferral, as explained here.

Wednesday, April 8, 2009

SEC To Release Proposals For Comment on Short Sales

UPDATE: As noted below, SEC's press release was issued this afternoon.
MarketWatch is reporting that at its open commission meeting earlier today, the SEC commissioners unamimously approved the release of five proposed rules for public comment relating to short sales. According to the MarketWatch article by Ronald D. Orol, SEC OK's Effort to Limit Short Sales, one of the proposals would simply reinstate the uptick rule, the other proposals are variations on that theme. He adds there will be a 60 day comment period.

As background, Orol notes, "Short-selling is controversial. Many companies say short sellers spread false rumors to drive prices lower, but short sellers say they provide the necessary counterweight to the boosterism of market bulls." He adds, "Some critics say the elimination of the uptick rule [in 2007] was a major factor in the bear market that has seen major stock averages fall 48% since peaking in October 2007, just three months after the rule was abolished. In October 2008, the SEC barred short sales of many financial corporations."

UPDATE 4pm: SEC press release has been issued. You can also read the statements made at today's open commission meeting by Chairman Mary L. Schapiro, Commissioner Luis A. Aguilar, and Commissioner Troy A. Paredes. Update 4/10: Read the statement of Commissioner Kathleen L. Casey . Read more in The SEC's 5 Uptick Rules in a post by that name by John Carney on MORE: SEC posted its 273-page rule proposal on April 10: [Proposed] Amendments to Regulation SHO.

Tuesday, April 7, 2009

SEC Chair Outlines Agenda; First Up: Short Sales

In a speech before the Council of Institutional Investors yesterday, SEC Chairman Mary Schapiro outlined the SEC's near-term agenda. Dave Lynn summarizes highlights of Schapiro's speech in his post today in Blog.

First up: tomorrow's SEC open commission meeting, at which (according to the Sunshine Act notice) "The Commission will consider whether to propose short sale price test rules."

According to Rachelle Younglai of Reuters, "U.S. SEC To Consider About Four Short Sale Proposals."

Citing remarks made by Schapiro to reporters following her formal remarks at the CII conference, Younglai reports:
"We are going to put forward about four different proposals, and one of
them does include the original (uptick rule)," SEC Chairwoman Mary Schapiro told
reporters on the sidelines of the Council of Institutional Investors conference.
"There are different modified versions because the markets have changed a lot,
even since 2007." Schapiro said other proposals on the table include a so-called
"bid test" and a "circuit breaker."

Friday, April 3, 2009

FASB Releases 'Plain English' Statement On Fair Value Actions

This afternoon, FASB released a 'plain English' statement to journalists - supplementing its formal Summary of Board Decisions published on yesterday's FASB actions to finalize guidance on fair value in inactive markets, other-than-temporary-impairment (OTTI), and fair value disclosures. See FASB's 'plain English' summary. See also our coverage of yesterday's FASB board meeting and press conference. Broc Romanek gathered some links to recent coverage of FASB's action in his blog post today in blog, including a link to Jack Ciesielski's AAOWeblog. Ciesielski is a member of FASB's Investors Technical Advisory Committee (ITAC).

My two cents (these are my personal views, I remind you of the disclaimer which appears in the right margin of this blog): I think some corners of the financial press (print, TV, bloggers and the rest) have unfairly characterized the mark-to-market (fair value) debate into one of good and evil, where some observers view one or the other side of the debate as right or wrong, pushing or being pushed, good or evil.

That kind of coverage may generate 'buzz' but it over-politicizes the reality of what happened in terms of the action taken yesterday by FASB: actions which followed almost a year of public hearings around the world (as noted in FASB's press conference yesterday) including in relation to the financial crisis, as well as SEC's roundtables on mark-to-market, the recommendation that FASB act on fair value and inactive markets and OTTI which was included in SEC's Dec. 30, 2008 report to Congress, and the recommendation of FASB's own Valuation Resource Group at VRG's Feb. 5 meeting. This is not to say whether or not the FSPs are the be-all and end-all of the mark-to-market debate, but just that the actions taken by FASB were moving on a track toward releasing further guidance, but the nature of the push by members of Congress at the March 12 hearing on mark-to-market accounting may have replaced the train with a faster version, an Acela if you will.

I believe it is helpful that FASB put out a 'plain English' explanation of its actions taken, given news reports up to now have taken polar opposite views (and to some extent, probably still will, as people parse and apply the words in the new guidance) as to whether FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Ian Katz, in Bloomberg, April 2) , or whether there will be Little Impact From FASB Fair Value Change: Analyst (Dan Wilchins, Reuters, April 2).

UPDATE: Those of you interested in chapter and verse, I posted a comment on Floyd Norris of the New York Times' Notions on High and Low Finance blog, in response to his post entitled, 'Integrity' and Standard Setting, in which I cite some specific paragraphs from FAS 157, Fair Value Measurement, which can be tied directly to the present projects to provide fair value guidance for inactive markets, and the linkage between FASB's words in the original standard, and their actions this week, would appear (to me, at least) to deflect those who say or imply that FASB 'caved' to political pressure (at least on the 157-e fair value guidance, if not the OTTI guidance). I started thinking about this when I read Suspending Mark-to-Market: Bad Policy, Bad Time in Andrew Ross Sorkin's Dealbook blog in the NYT earlier this week, which picks up an article by Richard Beales, U.S. Backtrack on Mark-to-Market Ill Timed, which appeared in on March 31; that article accused FASB of 'caving' to political pressure. I posted a similar comment on Larry Doyle's Sense on Cents blog, in response to his post Putting Perfume on a Pig, and he posted an interesting comment in response. Other blogs that have been following the fair value issue closely include Bill Sheridan in the Maryland Association of CPAs (MACPA) CPA Success blog. MORE: See also Laura Hay's post in the Ohio Society of CPAs Blog on April 3 entitled, The Politization of Accounting Standard-Setting.

Thursday, April 2, 2009

G-20 Leaders Pledge Action; Financial Stability Board to Replace FSF

Earlier today, leaders of the G-20 nations issued a nine-page Communique announcing they have "pledged to do whatever is necessary to:

  • restore confidence, growth, and jobs;
  • repair the financial system to restore lending;
  • strengthen financial regulation to rebuild trust;
  • fund and reform our international financial institutions to overcome this crisis and prevent future ones;
  • promote global trade and investment and reject protectionism, to underpin prosperity; and
  • build an inclusive, green, and sustainable recovery

Under the heading of 'strengthening financial regulation,' the G-20 leaders state: "We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

  • to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
  • that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
  • to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
  • to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
  • to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
  • to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
  • to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
  • to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
  • to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest."

The G-20 leaders add: "We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November."

Read more in the G-20 Communique (Leaders Statement), the Communique Annex: Declaration on Strengthening the Financial System, and the related Declaration on Delivering Resources Through the International Financial Institutions.

FEI members interested in financial regulatory reform, contact Cady North, manager, Government Affairs, in our Washington D.C. office, if you are interested in participating in an FEI working group to discuss and learn more about financial regulatory reform proposals in the U.S. Not an FEI member? Learn more about FEI membership here, or feel free to contact me for info about membership at