Thursday, May 28, 2009
To learn more about this new standard and other FASB standards that become effective this quarter (e.g. the new fair value guidance issued in April), and for an update on other current issues, join us at FEI's June 9 webcast, 12 noon -1:30 pm EDT: "What's New With FASB?" Featured speakers include Russell Golden, Technical Director, FASB; Carlo Pippolo, Director, Standard Setting, Ernst & Young LLP; and Bob Uhl, National Director of Accounting Standards and Communications, Deloitte & Touche LLP. The panel will be moderated by Steve Burkholder, Staff Correspondant, BNA. Free for FEI members; $50 for nonmembers; advance registration is required; 1.5 CPE is offered; register here.
FAF Annual Report, FAS 164 Posted
In other FASB news, the Financial Accounting Foundation (FAF), parent organization of the FASB and GASB, recently posted the FAF 2008 Annual Report. Additionally, FASB issued FAS 164 last week: Not for Profit Entities: Mergers and Acquisitions. (see FASB news release.)
Proposed IFRS on Fair Value Measurement
As noted in IASB's press release: “If adopted, the proposals would replace fair value measurement guidance contained in individual International Financial Reporting Standards (IFRSs) with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. The proposals deal with how fair value should be measured when it is already required by existing standards. They do not extend its use in any way. To ensure consistency between IFRSs and US generally accepted accounting principles (GAAP), the proposals incorporate recent guidance on fair value measurement published by the US Financial Accounting Standards Board (FASB) and are consistent with a report of the IASB’s Expert Advisory Panel published in October 2008 on fair value measurement in illiquid markets. This project forms part of a long-term programme by the IASB and the FASB to achieve convergence of IFRSs and US GAAP, as described in the boards’ Memorandum of Understanding published in September 2008. It is also consistent with requests from G20 leaders to align fair value measurement in IFRSs and US GAAP. The IASB’s starting point in developing the exposure draft was the equivalent US standard, SFAS 157 Fair Value Measurements as amended. The proposed definition of fair value is identical to the definition in SFAS 157 and the supporting guidance is largely consistent with US GAAP. “ The comment deadline is Sept. 28; further information is available here.
Proposed amendments to IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.
As noted in IASB's press release: “The proposed amendments are aimed at correcting an unintended consequence of IFRIC 14, an interpretation of IAS 19 Employee Benefits . As a result of the interpretation, entities are in some circumstances not permitted to recognise as an asset some prepayments for minimum funding contributions. This issue was also raised as a concern by many interested parties. The proposals published today respond to those concerns and, if confirmed, would remedy this unintended consequence of IFRIC 14.” Comments are due July 27.
Tuesday, May 26, 2009
Among issues Sotomayor will address, if confirmed, along with the other Supreme Court justices: last week, the U.S. Supreme Court agreed to hear an appeal relating to a challenge to the Constitutionality of the Sarbanes-Oxley Act, specifically whether the appointment of PCAOB board members by the SEC commissioners (as opposed to by the President) violates the Appointment Clause of the Constitution. According to this one-page Supreme Court document confirming the court’s decision to ‘grant certiorari’ or take on the case, the questions presented are:
- Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the Public Company Accounting Oversight Board ("PCAOB") with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
- Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the Securities and Exchange Commission ("SEC"), where the SEC lacks any authority to supervise those members personally, to remove the members for any policy related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
- If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" under Freytag v. Commissioner, 501 U.S. 868 (1991), or because the five commissioners, acting collectively, are not the "Head" of the SEC.
Broc Romanek noted in The CorporateCounsel.net Blog (under subhead: It Ain’t Over Til It’s Over: SCOTUS to Review Constitutionality of SOX): “Last August, the US Court of Appeals for the DC Circuit - voting 2-1 - concluded that the SEC’s “comprehensive” oversight of the PCAOB satisfied the appointments clause. Then in November, the full DC Circuit voted 5-4 not to reconsider the ruling.” Bruce Carton noted in his Securities Docket Blog, in a post entitled U.S. Supreme Court Grants Cert. in Case Challenging Constitutionality of PCAOB, that: "The Court will hear arguments during its 2009-10 term, which starts in October." In related news, see the WSJ OpEd dated May 13, The PCAOB: An Obstacle to President Obama's Success, by Kenneth Starr and Viet Dinh, who are among the lead lawyers for the plaintiffs, audit firm Beckstead & Watts, and the Free Enterprise Fund.
FCPA Investigations Increase
Meanwhile, Dionne Searcey of the Wall Street Journal reports today on developments relating to a precursor to Sarbanes-Oxley: The Foreign Corrupt Practices Act or FCPA. In her article, U.S. Cracks Down on Corporate Bribes, Searcey explains that FCPA, which became law in 1977 as a response to corporate bribery scandals at home and abroad, has seen an uptick in related investigations, rising from 100 last year, to 120 this year. She notes: "The effort began in the wake of a series of business scandals earlier this decade, including the collapse of Enron, that stirred up a new corporate-reform movement... After the passage of the 2002 Sarbanes-Oxley Act, which is intended to hold executives more accountable for their companies' actions, the Justice Department dusted off the FCPA law as part of the overall crackdown on corporate shenanigans."
In 1979, then-SEC Chairman Harold Williams outlined the accounting and internal control provisions of FCPA, as implemented though Section 13 (b) of the Securities Exchange Act, in this speech: “[to] make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer [and to] devise and maintain a system of internal controls sufficient to provide reasonable assurances [that specified objectives are met.].”
Williams noted that the SEC was proposing a management report on internal control, adding: “In fashioning this proposal, our objective was to meld the management report concept recommended by the Cohen Commission, the Financial Executives Institute [now called Financial Executives International], and other elements of business leadership with the national policy congress adopted in the accounting provisions of the [FCPA].”
However, the proposal from Williams’ day, and another proposal a decade later, were ultimately not issued as final rules, in part over concerns about lack of a materiality threshhold, and concerns about language surrounding documenting compliance with the law. Banks were ultimately required to provide a management report under FDICIA enacted in 1991. Separately, in a private sector initiative, companies were provided guidance on internal control, including a sample management report on internal control, by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), published in 1992 as COSO’s Internal Control-Integrated Framework. Ultimately, the requirement for all public companies to provide a management report on internal control, and an auditor’s report on internal control, came in the form of Sarbanes-Oxley Sections 404a and 404b, respectively. The SEC and PCAOB rulemaking under Sarbanes-Oxley recognizes the COSO internal control framework as a suitable, generally accepted framework for purposes of the internal control attestation. COSO continues to publish guidance and research studies, visit http://www.coso.org/ for more information.
Returning full circle to the topic earlier in this post, some have posited that if one section of the Sarbanes-Oxley Act is found unconstitutional, that could open a can of worms for other provisions in the act or the act as a whole. See,e.g. Is SOX Unconstitutional Dec. 2006 by Kevin LaCroix in the D&O Diary, in which he says of the Free Enterprise Fund v. PCAOB case: “Although the case focuses on only a narrow part of the [Sarbanes-Oxley] Act, it has the potential to bring down the entire statute.” I don’t know if the Supreme Court permits bloggers in the courtroom (nor do I know if cameras or cell phones are permitted); if so, I’m sure we’ll see some interesting live blogging (or tweeting) from the proceedings.
Sunday, May 24, 2009
This being Memorial Day Weekend in the U.S., I figured I'd take a detour from the usual reporting on the latest accounting and regulatory developments, to include a note of thanks to those people who put themselves in harm's way to make the world a better place for the rest of us. That includes people in the armed forces, police, fire and emergency workers: thank you for having the courage to do what you do, so the rest of us can go about our daily lives feeling a little more secure - whether we think about it in our daily lives, or not.
Certainly people with family serving in any of the capacities listed above think about it every day, people like Michelle Golden, President of Golden Marketing, Inc., a fellow member of AccountingWeb's Bloggers' Crew, and author of the Golden Practices blog. It was through Michelle that I learned (via Twitter) of the Gratitude campaign which produced the video linked in this post. Michelle shared with colleagues that her son recently returned from a tour of duty with the U.S. Army, where he was stationed in Afghanistan. Many of us in the accounting/legal blogging community were glad to hear of her son's safe return, and are thankful for his service, and others like him.
I have also written previously in this blog (e.g. on President's Day, 2007) about meeting many members of the armed services, police and fire departments, like my roommate, a Marine helicoptor pilot, and my co-instructor, a Philadelphia Fire Captain, when I served as a Volunteer Instructor with Presidential Classroom (PC) for a week in 2003 (at the time, I worked for the federal government, which, like the military, encouraged employees to participate in such programs; PC encourages volunteer instructors from the private sector as well.) PC is a nonpartisan, nonprofit organization that provides a one week in-residence program in Washington, D.C. for high school students from around the country, (offered during various weeks through the year), geared toward "educat[ing] and motivat[ing] outstanding students to aspire to leadership by providing the highest quality civic education programs." The program includes meetings on Capitol Hill, visits to federal regulatory agencies and foreign embassies, and some time for fun, too. I highly recommend the PC program for high school students as participants, and for adults who can spend a week away (since volunteer instructors are required to live on campus during the week you volunteer). It's an eye-opening experience not only for the high school students, but for the volunteer instructors as well, particurly in getting to know people who may come from vastly different backgrounds than yourself, and have chosen different paths in life. You will return to your normal routine or 'day job' a different person, enhanced by the experience. I have noted that those of us with 'desk jobs' really can benefit from getting to know people like my roommate and coinstructor in the PC program, and the many other fine instructors in the program, many of whom who risk their lives every day at their 'day' job.
President Barack Obama, in his weekly address, (also known as the weekly radio address) (transcript), said this is a time "to pay tribute to our fallen heroes; and to remember the servicemen and women who cannot be with us this year because they are standing post far from home." He spoke of government programs, adding, "we must also do our part, not only as a nation, but as individuals for those Americans who are bearing the burden of wars being fought on our behalf. That can mean sending a letter or a care package to our troops overseas. It can mean volunteering at a clinic where a wounded warrior is being treated or bringing supplies to a homeless veterans center. Or it can mean something as simple as saying 'thank you' to a veteran you pass on the street."
Scott Truitt, founder of the Gratitude Campaign, which encourages a simple, nonverbal gesture of Thank-You, derived from American Sign Language, notes, "Is this limited to the military? Not at all. If you look around you I'm sure that you'll find lots of people who are serving their communities, from local to global. If you appreciate their service, give them a sign. Say 'thank you from the bottom of my heart.'" As we prepare to return to our regularly scheduled programming, to all those looking out for our safety at home and abroad, thank you.
Saturday, May 23, 2009
The public portion of FCAG's meeting lasted one hour; the remainder of the seven-hour meeting consisted of a closed session for drafting FCAG's final report, due out in July. Goldschmid noted it is likely the group will meet one more time, on July 10 in NYC, to finalize its report. He added the group will hold a followup meeting on December 15 in London to consider developments since the issuance of its report.
FCAG Members Fear Pressure on FASB, IASB Could Result in 'Tragedy'
FCAG Co-chair Harvey Goldschmid, a former SEC commissioner, called on IASB Chairman Sir David Tweedie and FASB Chairman Bob Herz to update FCAG on developments since FCAG's last meeting (held in April).
Tweedie said, "What has happened, there has been a lot of pressure, that both of us [FASB and the IASB] get, about an unlevel playing field.” He explained the IASB has chosen to focus on its long-term project to improve financial instruments, a joint project with the FASB, vs. taking on, e.g. a new short term project on other-than-temporary impairment, which some asked it to do after FASB's April guidance on OTTI, a concept that is not currently part of IASB's literature. Tweedie said the IASB believes focusing on the broader, long-term and potentially converged solution regarding financial instruments would be of more benefit. (See additional discussion regarding differing views between the FASB and IASB on the current direction of the financial instruments project, further below.)
Hans Hoogervoorst, FCAG co-chair, and Chairman, AFM (the Netherlands Authority for the Financial Markets), responded to Tweedie's comments as to the pressure the boards are under, saying, "I am feeling increasingly uncomfortable with that situation, the boards have already implemented quite a few actual changes, [more] to come; still, continuous pressure is being exerted on the boards.. exerted by bankers, ministers of finance who are all bankers, and have very little interest in transparency, or don't have a natural interest in transparency, so the pressure for short term changes is completely lopsided - all in the direction of more favorable standards leading to more favorable balance sheet presentation...increasing the risk investors get a lopsided view."
Goldschmid noted, "I couldn't agree more with Hans' comment, when we use the word pressure ... the pressure on the two standard-setters has created more than a crisis, and for the IASB in particular, a threat to the very existence of international accounting standards." He added, "The financial crisis came about for reasons other than accounting; Clearly there were private sector failures.. foolish risk decisions.. regulatory failures, in the U.S. context , bank regulators, the SEC, FINRA all share part of the blame for what went wrong; not basic failures of the accounting, and scapegoating [accounting] is really a tragedy for all concerned." He continued, “From a U.S. standpoint, if we lose the IASB system, we are going back to reconciliation; it is only IASB IFRS that are accepted [for foreign filers in the U.S.], not a carve-out.. not national standards; the costs for everyone long-term will be immense [if something were to happen to the IASB]; I am very worried about the time we are in, very glad David [Tweedie] and Bob [Herz] are in charge of the two boards.” Critical of those who are "challenging accounting standards [and] challenging the two boards in ways that are unconstructive," he urged, "it is important the business community and government begin to speak out.. we could lose this entire system, and the costs for going backward are very [large]."
Nelson Carvalho, chair of the IASB’s Standing Advisory Committee, said, "If we were ever under risk of getting back to the old system we had, back to the 200-plus national sets of GAAP, that would be a tragedy, a tragedy toward the aim of restoring investor confidence, losing the wonderful work of the IASB ...the world would suffer dramatically, including the new emerging [markets] which are already discussing getting rid of the dollar as the common currency for bilateral trade.” He closed, “The boards are in desperate need of advice; the G-20 finance ministers might make better use of our advice: Please keep politicians away from accounting standards.”
Michel Prada, former chairman, Autorité des Marchés Financiers (AMF), observed, "A few months ago, I said I thought our role would be to participate in cooling down temperatures and cooling down direction-pressure, and now .... [we are] on the verge of a tragedy in accounting." He added, "I don't see a situation where bankers are opposed to accounting standard-setters...I believe we should try to calm down this, and [warn] politicians we shouldn't go that direction, if we go that approach, we will end up with the situation we were in 15 years ago."
Don Nicolaisen, former SEC chief accountant, and co-chair with Arthur Levitt last year of the U.S. Treasury Advisory Committee on the Audit Profession, commented, "Accounting standards as written are always going to be refined, we don't get it perfect; but what we do have is an extremely cynical investing public, less trustful of regulators, government, and business – plenty of blame to go around.” He added, “To have them not trust accounting standards, I don't think would help the situation, it would put us in the dilemma of fueling that cynicism, unwillingness to accept responsibility by any group.” He analogized, “If we are facing global climate change as a problem, and [someone says] the solution is to go to scientists and say recalibrate your thermometers and we don't have to do anything ... no one believes that." Similarly, with external pressures to change accounting, he said, "If we have reached the ridiculous, the answer is no, better to let the system deal with failure of our accounting standard-setters, if you think of it that way; we are not willing to compromise, not willing to (produce) results that are unrealistic economically." He added, however, along the lines of his opening sentence that some refinements may be warranted, "[To] deal with complexity, deal with issues that arise because we know more today than a year ago, it would be sensible, responsible ...to do that."
Jerry Edwards, an observer from the Bank for International Settlements, and former Chief Accountant at the Federal Reserve Board, said, "It is important to keep in mind the very good foundation that exists in a number of different areas, whether Basel, or the Financial Stability Forum, that have truly worked to support high quality accounting and independent standard-setting." He added, "I think the record shows those bringing pressure on financial standard-setters aren't those around the table, that pressure is coming from others. " Edwards then stated, "Accounting standard-setting is at its best when it brings its expertise and independence, [and] also shows it is responsible and reasonable in considering input... [and] hopefully, all these pressures will dissipate over time."
James Leisenring, a member of the IASB, and former member of FASB, advised the advisory group, "It is important for you to say, not only didn't [accounting] cause [the credit crisis], but [accounting] is not the solution. As Don [Nicolaisen] said, anything that increases cynicism or lack of confidence will prolong the crisis; recovery would be speeded if people had confidence in the information they see.”
FASB, IASB Views Currently Differ On Financial Instruments Project
Another subject discussed at the FCAG meeting was the status of the boards' joint efforts to improve accounting for financial instruments.
The IASB's current thinking, Tweedie explained, is to collapse what currently are four models of measurement or classifications into two: those measured at fair value, and those measured at amortized cost. In making the determination between the two categories of fair value and amortized cost, there are two possible ways the board could go, according to Tweedie. "You can say, anything that's traded is at fair value and anything else at (amortized) cost," [sometimes described as an intent-based model], "or, you can say, if you know the characteristics and cash flows of the instrument, and they are determinable, then [record at] amortized cost." He added, "We will probably allow a fair value option."
FASB Chairman Robert Herz sounded a note of caution. “I want to be as positive, constructive, and politic as I can be. We desire to get to a common, good answer with the IASB, we will make that effort to do so, but some of the direction they are currently headed in is very, very preliminarily not to the liking or acceptance of our board. In particular, one of our principles [is], you can't significantly widen the cost bucket, we don't think that's a step forward in financial reporting; there may be ways to deal with it through disclosure, that would mean more burden on U.S. preparers; if there was widening of the cost bucket, we might want to have a quarterly fair value balance sheet.” He added, "“We have talked with many investors, and the appetite in the U.S. for the sake of convergence vs. improvement is not there.” He added there is no bigger proponent of convergence than he, but questioned how impairment would be handled if more assets were potentially going to be carried at cost, or in his words, 'moved to the cost bucket’.
Tweedie said, "To clarify, I didn't want to give the impression there is no impairment test for cost [basis assets], we already have an impairment test... the credit loss model based on incurred loss."
Herz added that FASB and the IASB “need to work intensively together to see if can get to a common place, that means for other people, not just people putting pressure on the IASB, but other people who want to use global standards as their product, to be engaged in this.”
Fernando Restoy of the Committee of European Securities Regulators (CESR), an observer at the FCAG meeting, commented, "In terms of convergence, I have the impression there is [a] sort of underlying technical disagreement [on the financial instruments project]...it is hard to understand why we cannot get technical agreement on a well defined technical issue... at this stage of the ballgame, we should come out with a common technical solution... we cannot be in continuous discussion, we need to do something as soon as possible."
Herz responded, “Rest assured, we will move heaven and earth to try to come to a common solution [on financial instruments], but will not be on technically based narrow differences, the issue is much more fundamental to us, the issue is, what's good for investors, that's more than a technical issue; our big concern is significantly broadening a cost bucket is not perceived as a move forward, it may be a move forward to simplify things, we could only cure that with [more] disclosure.”
Tweedie replied, “I wouldn't want the impression to be given we [IASB] don't consider investors." He added, "we don't think great chunks of things will go out of fair value to the cost bucket; we are happy to consider FASB's objections, [we are] looking to try to have one model by July."
For more details on the May 22 FCAG meeting (including an impromptu call by Hoogervoorst that the group consider recommending European bank regulators conduct stress tests so there would be a level playing field for investors in European bank stocks vs. U.S. bank stocks - after hearing FASB chairman Bob Herz speak of the approach taken by U.S. bank regulators in considering upcoming changes to accounting rules, including the upcoming amendments to FAS 140 and FIN 46R, - as part of their stress tests, and the fact that the results of the stress tests were disclosed publicly; and an impromptu call by another FCAG member to consider recommending that the boards require a reconciliation and/or further disclosures to show how bank regulators adjust GAAP-based capital to arrive at regulatory capital, see this FEI Summary.)
Goldschmid closed the public portion of FCAG's May 22 meeting, noting, “There is an enormous advantage of having one set of global standards,” including to remove any perceived ‘arbitrage play’ among different sets of accounting standards. Given the amount of time taken up by FCAG members in their opening remarks and the fact that there was an extended impromptu discussion about the pressure on the standard-setters, which took up virtually the entire hour allocated to the public portion of the meeting, Goldschmid noted that with respect to the formal agenda for the meeting, "we will give short shrift to [our scheduled discussion of] independence, accountability, transparency in our open meeting, but will come back to that in our closed meeting." (See my related comment under 'my two cents,' below.)
My two cents
(I direct you to the disclaimer in the right margin of this blog, that these views are solely my own.)
I was disappointed that only one hour of FCAG's seven hour May 22 meeting was open to the public (and webcast), with the remaining time spent by FCAG in closed session. I say this because I believe sunshine serves an important purpose in informing the public about the basis of conclusions reached by a group - any group - and may even indirectly impact the dynamics and decision-making process of the group.
Here is what FCAG was originally slated to discuss in public session, according to its agenda: "How (and by whom) should oversight be exercised over accounting standard-setters on a national (or international) basis in order to ensure appropriate independence, accountability, and transparency in the standard-setting process?" However, as noted above, FCAG ran out of time during the one hour allotted to its public session, and therefore discussed the item above during its closed session.
When FCAG was first formed, I noted in this blog on 10.28.08: " I found it significant that the [FCAG] will meet in the sunshine, as stated in the [FASB-IASB] Oct. 20 press release: 'the advisory group will meet in public session with webcasting facilities available to all interested parties.' By holding meetings open to the public, this group will differ from existing advisory groups formed previously by IASB and FASB to advise them on fair value accounting issues, which have met in private, releasing brief summary points identifying issues discussed (in the case of FASB), and releasing a draft discussion document (soon to be finalized), as well as brief summaries of meetings (in the case of IASB). Specifically, the existing groups are FASB’s Valuation Resource Group (VRG) and IASB’s Expert Advisory Panel (EAP). Whether the form or substance of any recommendations coming from the [FCAG] will differ from previous output from the VRG or EAP due to the public nature of meetings is an unknown, but the fact that the meetings will be open to the public, to some, may enhance confidence in the process." [Note: in the original post last year, I refered to FCAG generically as a Global Advisory Group or GAG, references to GAG in this quote have been changed to FCAG. Additionally, in 2009, FASB's VRG changed its practice and began meeting in open session.]
Separately, FCAG's Charter states: "In order to provide the boards and others in the financial reporting system with the benefits of their advice, the advisory group will generally meet in public sessions, with webcasting facilities available to all interested parties. The advisory meetings also may involve private sessions, at the discretion of the co-chairs." Additionally, the Charter states: "Conduct of its Activities: Advisory group meetings are the primary mechanism that will be used to provide input to the IASB and FASB. The advisory group’s role is not to reach a consensus or to vote on the issues that it considers at its meetings. For that reason, it is important to convene the advisory members as a group so that the boards can hear the individual members’ views and members can hear and respond to each other’s views."
Although the charter states FCAG's role is not to reach a consensus, and stresses the importance of convening the members as a group so all views can be heard in such meetings, it appears FCAG's approach has evolved in that it plans to issue a final report in July, which presumably - in my estimation, based on listening to a number of FCAG meetings - will include statements expressing areas in which FCAG has reached 'consensus,' 'agreement,' or 'recommendations.'
If it is the case that 'consensus' views, areas of 'agreement' or 'recommendations' of the group are to be included in FCAG's final report, as I expect they will, it would be helpful to understand - preferably via a public meeting - what the word 'consensus' really means, i.e., does it represent the views of 51% of the group - or 99% of the group? Were members of the group asked to vote in an individual roll call vote, in a call of 'all yeas' and 'all nays,' or did one of the co-chairs state, 'I believe we have reached a consensus ...' and no one or only a few people objected to that statement? To the extent less than 100% of a group voted in favor of a consensus, were the remaining views diametrically opposed to the consensus, or was there only a slight difference in opinion? Is there only one alternative view, or are there many alternative views? Votes taken in public meetings serve to answer these questions.
One way of shedding some light on potential dissenting views among the FCAG members could be by listing any dissenting views in the final report. However, there can be dynamics at play in any group, wherein someone with a view that differs from the consensus still does not want to have their view characterized as a 'dissent,' and if that person's views were not previously given sunlight through discussion at a public meeting, the public (and the target(s) of any such recommendations) may not be informed as to the strength, or nuanced tone, of any such 'consensus.'
It will be interesting to see how FCAG allocates the public and closed portions of its final meeting on July 10, and if any formal votes are taken in the public session. Since FCAG was formed to advise FASB and the IASB, any 'consensus views,' 'recommendations' or 'areas of agreement' contained in FCAG's final report will likely be aimed at the boards; and in my estimation, based on discussion at the May 22 meeting and prior meetings - at which concern was expressed about political and other pressures placed on the boards - I would not be surprised to see some of the recommendations aimed at parties external to the FASB and IASB. All the more reason why sunshine on the decision process would be valuable, and perhaps strengthen the process itself.
Thursday, May 21, 2009
With over 60 workshops to choose from, some are targeted at Maryland businesses, but many are of a general interest nature, on topics ranging from XBRL and Enhanced Business Reporting to fair value accounting, tips on obtaining Small Business Administration loans, sustainability and 'green' initiatives, value pricing, technology trends, cost containment, the dynamics of fraud, Web 2.0 and social media, leadership, ethics and more.
The conference provides three program tracks, although you can pick and choose workshops from more than one track: (1) Public Company, Large Corporate and Banking; (2) Small– Mid-size Business; and (3) Leadership for High Potential Financial Professionals.
FEI Baltimore Chapter is a proud associate sponsor of MD BIZ Expo, other associate sponsors include the Association for Corporate Growth, the Greater Baltimore Technology Council, Maryland Bankers Association, Maryland Chamber of Commerce, National Federation of Independent Business, the U.S. Small Business Administration, and more. The conference has numerous corporate and audit firm sponsors as well, and you can visit these organizations in the Exhibit Hall.
Be sure to stop by the FEI Baltimore Chapter table outside the Exhibit Hall, where you can meet FEI Baltimore Chapter President Donald A. McConnell, VP & Chief Financial Officer, KCI Technologies, Inc, and other members of the chapter. In addition, numerous speakers at the conference are FEI members, including:
- Colleen Cunningham, Global Managing Director, Finance and Accounting, Resources Global Professionals, and former President and CEO, FEI, speaking on Regulatory Panel: The New World Order
- Tom Foard, CPA, EVP and CFO, Publishers Circulation Fulfillment, speaking on Business Performance Management
- Ken Kelly, CPA, Sr. VP and Controller, McCormick & Co., Inc., speaking on XBRL & the SEC Mandate
- Bob Laux, Sr. Director, Financial Accounting and Reporting, Microsoft Corporation, speaking on Enhanced Business Reporting (EBR 360)
- Robert Tarola, CPA, Right Advisory, LLC, former Sr. VP and CFO, W.R. Grace & Co., speaking on XBRL and the Future of Assurance
I will be spending some time at the FEI Baltimore Chapter table outside the exhibit hall - stop by and say Hi! Or, you can see me observing and participating on these panels, respectively, at the end of each day:
# 121 - Regulatory Panel - The New World Order Tues. June 16, 4:30-5:20 pm
Panelists: Colleen Cunningham (Resources Global, formerly President of FEI,) Joannne O'Rourke Hindman, Special Advisor to Board Member Steven B. Harris, Public Company Accounting Oversight Board (PCAOB,) and Susan Webster (Managing Editor, BNA's Accounting Policy & Practice Report) with moderator Francine McKenna, President, McKenna Partners, and author of the blog re: The Auditors)
# 226 - Web 2.0 & Social Media Wed. June 17 - 4:10-5:00 pm
Panelists: Francine McKenna, CPA, President, McKenna Partners, and author of the blog: Re: The Auditors; Rick Telberg, President & CEO, Bay Street Group LLC, and Editor of CPA Trendlines; Edith Orenstein, Director, Accounting Policy Analysis, Financial Executives International and author of the FEI Financial Reporting Blog; Alexandra DeFelice , Sr. Editor, Accounting Technology and Accounting Today; Bill Kennedy, a member of the AccountingWeb Blogger's Crew, and author of the Energized Accounting Blog; and Will Burns, Director of Communications, Maryland Chamber of Commerce and author of the Maryland Chamber Blog, with moderator Bill Sheridan, E-Communications Manager/Editor, MACPA, and co-author, with MACPA Executive Director Tom Hood, of MACPA's blogs, including CPA Success and CPA Island.
Like I said earlier, people from MACPA, like Bill Sheridan and Tom Hood are among the nicest people you'll ever meet, willing to go the extra mile to share their knowledge with you, (e.g. I remember when they provided a free lesson for FEI staff on the uses and benefits of offering programs, educational sessions, and networking sessions in the virtual world of Second Life developed by Linden Lab, inviting us to spend some time with them on CPA Island, created by MACPA as an island - a professional development oasis, if you will - in Second Life), and in finding ways to work together for the benefit of the greater good of our respective association members and the public at large. It's no wonder Hood was selected by AccountingWeb as this year's recipient of the CPA Association Employee of the Year Award.
Want to learn more? See this list of Who's attending the MD Biz Expo, and this List of workshops . Registration is $250 for MACPA members and members of sponsoring organizations (including FEI members); and $400 for all others. Details can be found on the registration page.
Wednesday, May 20, 2009
The UPI article, President Signs Mortgage, Fraud Bills, notes:
- the mortgage-related Act "expands an existing $300 billion program that encourages lenders to write down an individual's mortgage if the homeowner agrees to pay an insurance premium."
- the fraud-related Act, FERA, "authorizes $490 million over two years to hire fraud prosecutors, increase enforcement actions and add funds to the Secret Service and Housing and Urban Development Inspector General."
Additional information on the Helping Families Save Their Homes Act can be found in this summary posted yesterday on the House Financial Services Committee website.
We previously provided some highlights of FERA last week, based on the House and Senate versions of the bill as of May 12.
UPDATE 8:00 PM EDT:
As noted in the White House Blog:
- The Fraud Enforcement and Recovery Act gives the federal government more tools to crack down on the kind of fraud that put thousands of hardworking families at risk of losing their homes despite doing everything right to live within their means. It expands the Department of Justice’s ability to prosecute at virtually every step of the process from predatory lending on Main Street to the manipulation on Wall Street. It also creates a bipartisan Financial Crisis Inquiry Commission to investigate the financial practices that brought us to this point, so that we make sure it never happens again.
According to this White House Fact Sheet, FERA:
- authorizes up to $165 million in new resources for FY 2010 and 2011 to hire fraud prosecutors and investigators.... The legislation authorizes $140 million for the FBI, $50 million for U.S. Attorney’s Offices; $20 million for the Criminal Division, $15 million for the Civil Division, $5 million for the Tax Division, $30 million for the US Postal Inspection Service, $30 million for the Inspector General at the Department of Housing and Urban Development, $20 million for the Secret Service, and $21 million for the Securities and Exchange Commission.
- creates a bipartisan Financial Crisis Inquiry Commission [see below] to investigate the financial practices that brought us to this point, so that we make sure it never happens again.
- amends the definition of a "financial institution" in the criminal code, extending Federal laws to private mortgage brokers and companies that are not directly regulated or insured by the Federal Government. This will expand the Department of Justice’s authority to prosecute mortgage fraud involving private mortgage institutions under a variety of statutes.
- changes the mortgage applications statute to make it a crime to make a materially false statement or to willfully overvalue a property in order to influence any action by a mortgage lending business. Currently, the offense only applies to federally-regulated institutions.
- amends the major fraud statute to protect funds expended under TARP and the Recovery Act.
- amends the Federal securities statute to cover fraud schemes involving commodity futures and options. Currently, the statute does not reach frauds involving options or futures, which include some of the derivatives and other financial products that were part of the financial collapse
- modifies the False Claims Act (FCA) to eliminate the requirement that a false claim be presented to a federal official, or that it directly involve federal funds, and amend the FCA reverse false claims provision to ensure that the knowing retention of an overpayment is a violation.
Accounting Among Issues To Be Examined By Financial Crisis Inquiry Commission
According to the House version of the bill dated May 6, as noted in our May 12 post, the issues to be examined by the Financial Crisis Inquiry Commission include fraud and abuse in the financial sector, federal and state regulators response to the crisis, capital requirements, the role of credit rating agencies, and numerous other matters, including "accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles."
Hat tip to Cady North, Manager of Government Affairs in FEI's Washington DC office for alerting us to the legislation was expected to be signed this afternoon/this evening. FEI members interested in following developments with respect to Financial Regulation Reform, contact Cady at firstname.lastname@example.org.
At an open commission meeting earlier today, the U.S. Securities and Exchange Commission voted 3-2 to release a proposal on shareholder proxy access (i.e., providing shareholders access to nominate directors through the proxy process). UPDATE 5:45 pm: Here is the SEC's press release summarizing the proposal. According to the press release, there will be a 60-day comment period on the proposal. The remainder of this blog post is based on the remarks of the SEC commissioners and staff at today's open commission meeting.
Certain minimum thresholds of percentage of shares owned, and holding periods, will be required for shareholders or groups of shareholders to nominate directors, and the nominating shareholder(s) will be required to certify that they are not seeking to effect a change of control in the company. The two Republican appointees, Commissioner Troy Paredes and Commissioner Kathleen Casey voted against releasing the proposal; Chairman Mary L. Schapiro (an Independent) and the two Democrat appointees Elisse Walter and Luis Aguilar voted for releasing the proposal.
‘The Time Has Come To Resolve This Debate’
In her opening remarks, Chairman Schapiro observed, “No less than three times in recent memory has the Commission considered the question of amending our proxy rules to address so-called ‘“proxy access.’ She added, “The time has come to resolve this debate.” Echoing this view, Commissioner Walter said – quoting Victor Hugo, “There is nothing more powerful than an idea whose time has come.” Similarly, Commissioner Aguilar said, “Now is the time to finally take seriously the realities of proxy voting.”
Two Rules Addressed in Proposal
The proposal is aimed at strengthening shareholder rights in two ways, by establishing requirements, including minimum ownership and holding period requirements, and related disclosures, for shareholders or groups of shareholders to nominate directors, and by proposing a means for shareholders to propose amendments to a company’s governing documents relating to the shareholder nomination process.
Brian Breheny, Deputy Director for Legal and Regulatory Policy in the Division of Corporation Finance, and Lily Brown, Senior Special Counsel to the Director of the Division of Corporation Finance, outlined further details of the proposal. According to Breheny and Brown, the proposal includes a new Rule 14a11 for shareholder nomination of directors, and this new rule would apply to all companies with a class of equity securities subject to the Exchange Act’s proxy rules, that is, not only to operating companies, but also to investment companies regulated under Section 8 of the Investment Company Act. However, they said, the rule would not apply if shareholders do not have the right to nominate directors under state law, or under the company’s governing documents. The proposal also would amend Rule 14a8 regarding shareholder proposals to amend or request amendments to the companies governing documents relating to the right to nominate directors.
Minimum Threshholds of Ownership, Holding Periods, To Nominate Directors
Breheny and Brown explained the proposed new Rule 14a11 includes certain minimum ownership thresholds and holding periods, among other requirements, for shareholders or groups of shareholders to nominate directors through the proxy process, as summarized below. (Note: The section immediately below regarding minimum ownership thresshold has been updated to conform to the language in the SEC's press release linked above; references to 'worldwide market value' below pertain to public companies; the same quantitative threshholds below apply to investment companies, but the applicable term for investment companies is 'net assets'.)
- Minimum ownership threshold - tiered based on company size, percents listed below pertain to percent of the shares to be voted: less than $75 million worldwide market cap (non-accelerated filers)-5% ownership; $75 million to $699 million worldwide market cap- 3% ownership; $700 million worldwide market cap and above-1% ownership.
- Minimum holding period (for all size companies): one year
- Disclosure, certification, and other requirements: Shareholders or groups of shareholders that meet the specified criteria above would also be required to: Provide a notice of intent to the company; represent their intent to continue to hold the securities through the annual meeting date [note: reference should be made to the proposal to confirm if that is the specified date]; certify they are not seeking to control the company (also referred to as ‘lack of control intent’); meet new disclosure provisions [Note: the SEC staff specified that the nominating shareholder or group of shareholders would be liable for any false or misleading statements included in the company’s proxy materials which they had provided to the company], and, meet certain other requirements.
Separately, under the proposed amendments to Rule 14a8, Brown explained “The election exclusion would be narrowed, thereby allowing more shareholder proposals that are not otherwise excludable under 14a8” that would amend, or request to amend, the governing documents of the company with respect to shareholder nomination of directors.
Casey, Paredes Dissent Over "Paternalism," "Encroachment"
All five commissioners expressed their appreciation to the SEC staff for their hard work in crafting the proposals, including the two dissenting commissioners, Casey and Paredes.
Calling the proposal an ‘example of paternalism,” Commissioner Casey’s dissent focused on encroachment of the proposal on states’ rights to regulate corporations. “Let there be no doubt," said Casey, "the proposed rules would regulate [what is] normally [within the] province of the states… including the conditions under which… eligibility requirements, minimum ownership and holding… requirements for those seeking proxy access… matters that properly go to the heart of states’ [rights to regulate corporations].. or to shareholders.” Thus, she added the proposals are not simply procedural changes.
The other dissenting commissioner, Commissioner Paredes, said “Unfortunately, I am not able to support the proposal, especially [proposed rule] 14a11 dictating a direct right of access to company proxy materials, [which] encroaches far too much on internal corporate [governance]… .. [which is in the] traditional domain of state corporate law.” He added, “The whole of the proposal … reaches too far past the point of disclosure or voting process, but the fundamental essence of the proposal is to realign control at the federal level; even if a majority of company shareholders determine 14a11 is not in the company’s best interests, the proposal nonetheless would force the company into the 14a11 regime… nor can the board, even when in compliance with its fiduciary duties, choose for the company not to be subject to 14a11.”
Paredes Offers Counterproposal
Paredes also provided an example whereby the proposed rule could potentially trump more stringent rules proposed by shareholders or in state law with respect to minimum share ownership requirements or holding period.
“None of this is to say nothing should be done when it comes to … the regime for shareholder voting,” said Paredes. He then offered what he described as a ‘counterproposal’: “Amend 14a8 to permit shareholders to include in proxy materials a bylaw proposal to allow [a] process for nominating directors, so long as the company has adopted a provision specifically allowing [that]; .. such a rule would accommodate… and place on firm[er] ground,,, would not require the Commission to assert itself in corporate governance by drawing lines; the Commission is not well positioned to decide who is in and who is out, yet under the proposal the Commission is voting on today, shareholders have no choice but to accept mandatory [bright lines/rules].” Paredes added that other areas relating to shareholder rights are also in need of attending, mentioning among those areas e-proxy and ‘empty voting.’
Can the System Withstand This Change Now?
Chairman Schapiro, before calling for the vote, asked Breheny, “Can the system withstand this change now?”
Breheny responded, “There are lots of areas involved, I think if we were to go forward, and I know your office has asked us to put together some meetings, debates, discussions over the next couple of moths, I do think the system can handle it, I’m sure once the release goes out.. I think it can work.” He referenced some matters the NYSE-Euronext is presently considering, adding, “people are concerned about [quorum], even with the NYSE [proposal]… your [staff] have asked us to put some groups together to start to think about this.”
Commission Urges Public Comment
Schapiro noted the proposals attempt to “strike the appropriate balance between facilitating shareholder rights and understanding the logistical mechanics of putting together proxy materials and holding annual shareholder meetings,” and encouraged public comment as to “whether we have reached the right balance.”
Among the particulars that Commission especially seeks comment on are timeline issues, i.e. if the timeline for various steps to occur in the shareholder director nomination process as outlined in the proposal are reasonable.
Links to documents posted today by the SEC relating to this rule proposal:
SEC Press Release
Statements of: Chairman Schapiro, Commissioner Aguilar, Commissioner Paredes, Commissioner Walter.
Remarks of: Lillian Brown, Senior Special Counsel, Division of Corporation Finance.
For more details from today's SEC meeting, see this FEI Summary.
Have you ever thought about teaching accounting at the college level? Would you like to help instill practical insights into the college curriculum? Do you have a desire to give back to the community by supporting education? Would you like to help equip today's college students with practical knowledge, taught from the perspective of your experience in the field, and potentially identify new hires for your firm? Have you thought about exploring a potential new career or second career in teaching, whether you are presently working, in transition between jobs, retired, or thinking about retirement?
If you answered yes to any of the above questions, did you put the dream of teaching aside because you thought only those with PhD's could teach at the college level? If that's the case, you may not be aware that colleges today encourage a diverse faculty pool, including professors who hold PhDs and are deemed Academically Qualified (AQ) to teach, as well as a certain number of professors who do not hold a PhD but have substantial experience in accounting or finance, and are deemed Professionally Qualified (PQ) to teach.
Would you find it worthwhile to spend a weekend learning more about teaching from master teachers in a program sponsored by the American Accounting Association (AAA), the professional association of accounting professors? Then consider signing up for AAA’s 2nd Annual Conference on Teaching and Learning in Accounting (CTLA), set to take place Saturday August 1-Sunday August 2, 2009 in New York City. The program is held in conjunction with AAA's Annual Meeting Aug. 1-5 in New York City. Separate registration for CTLA is required and space is limited; early registration is encouraged.
Steven Zelin, The Singing CPA, has taught some continuing ed courses at Baruch College and for CPE Inc., and is thinking about signing up for the CTLA program. He says, "I feel that professionals who teach or are considering teaching should attend a program like AAA's CTLA program to get the inside scoop on the most effective techniques for teaching and also build a support network as they transition onto this new path. It sounds like a terrific way to focus on the art of teaching and learn new and different ways to engage your students."
Zelin notes (warning: shameless plug), "Of course the best way to prepare for class is to invest in Steven Zelin CDs." Zelin adds: "Here's a quote from a professor, Beau Baez: 'I am a tax and business professor and I loved Steven's album. I use humor in my classroom and have already played one of his songs for my class." Curious if the endorsement from 'Beau Baez' was for real, I tracked him down and learned that Beau Baez is indeed an Assistant Professor at the Charlotte School of Law. Given his interest in music, I asked if he is related to Joan Baez. His reply: "I am related to Joan Baez, though not the Joan you are thinking about—my brother married a girl named Joan." Albeit this was just a brief email exchange, I got the feeling Baez is an earnest professor; the tag line on his email was a quote by Herbert Spencer: "Education has for its object the formation of character."
Readers of this blog may recall I've talked about the CTLA (and predecessor PQ) program from time to time, including last April when I met some of my favorite former colleagues from an earlier stint at The Chase Manhattan Bank, at AAA's PQ program last year.
More recently, I attended my first Chase Alumni Association event in NYC, where I ran into some more of my favorite former colleagues. One of them (who shall remain nameless) is now teaching full-time, and I asked him how he likes teaching. His answer was: "I wish I had done this 20 years ago." If you have an interest in teaching, and you don't want to have to say - 20 years from now - "I wish I had done this 20 years ago," then check out AAA's CTLA program. Read more about the program, including some insights from FEI member and AAA immediate past-president Gary J. Previts, and FEI member Mark Moyer, a past participant in AAA's PQ program, in this FEI Summary. (Note: FEI summaries are usually accessible only to FEI members, but our summary on AAA CTLA is open access to everyone.)
Monday, May 18, 2009
FAS 140 and FIN 46R: Effective Date
FASB considered requests to defer the effective date of both standards due to cost and implementation concerns, but weighed those requests against user needs to receive the information on a timely basis, and on balance, voted to retain the 2010 effective date as originally proposed. Details on the effective date and transition provisions for FAS 140 and FIN 46R are shown on pdf page 14 and 15, respectively of today’s board handout.
FAS 140: Disclosures When There Is Continuing Involvement
In addition, the board agreed to amend a previous decision made on certain FAS 140 disclosure requirements. Specifically, as noted on pg 13 of today’s board handout, the board had decided at its April 1 board meeting to broaden the specific disclosure requirements of FSP 140-4 and FSP FIN46R-8, regarding securitizations and asset-backed financing arrangements accounted for as sales, with continuing involvement, such that the disclosure requirements would apply to all transfers of assets treated as sales with continuing involvement. At today’s board meeting, FASB voted to amend paragraph 17f in the amended standard to remove the prescriptive requirement that had been broadened in April, and instead retain the general, principles-based disclosure requirements in paragraph 16, and perhaps amplify them in the Basis for Conclusions.
More specifically, as stated in today’s FASB Summary of Board Decisions, “The Board affirmed its April 1, 2009 decision that in principle, an entity should disclose information about the nature of its continuing involvement in asset transfers accounted for as sales and the effect of such continuing involvement on its financial statements. However, the Board decided that the specific minimum disclosures for transfers of financial assets in which a transferor has continuing involvement should be required only for securitizations, asset-backed financing arrangements, and similar arrangements that are accounted for as sales.”
FIN 46R: Unpaid Principal As Proxy For Carrying Amount
FASB agreed today to permit unpaid principal to be used as a proxy for carrying amount at transition, for certain transactions only, if the calculation of carrying amount under the standard would otherwise be impracticable. FASB had agreed at a previous board meeting (Jan. 28, 2009) that the transition guidance would be the same as that in FIN 46R, i.e. that the carrying amounts at transition would be computed “[as if] the amendments had been effective when the enterprise first met the conditions to be the primary beneficiary.” FASB had also previously agreed to permit fair value as an alternate method of measuring carrying value, if it was not practicable to measure carrying value as described above. After considering constituent comments that fair value may also not necessarily be practicable for determining the carrying basis at transition - particularly for securitizations and other asset-backed transfers - the board agreed at today’s meeting to add the following language to the final standard, as shown on As noted on pg 16 of pdf page 16 of today’s board handout. “However, if the activities of the entity are primarily related to securitizations or other forms of asset-backed financings and the assets of the entity can be used only to settle obligations of the entity, then the assets and liabilities of the entity, other than those that are required to be measured at fair value, may be measured at their unpaid principal balance at the date this Statement is first applied.” But, that’s not all; the amendment will also say: “This measurement alternative does not obviate the need for the primary beneficiary to recognize accrued interest, an allowance for credit losses, or an other-than-temporary impairment, as appropriate.” Board member Tom Linsmeier said of the addition of unpaid principal as another measurement alternative in specified circumstances: “This is intentionally an accommodation to get this [new standard effective] at the beginning of the next fiscal year; it’s a tradeoff, to me this is a cost-benefit accommodation.”
Fair Value Option
There was a fair amount of discussion at the board meeting on whether – and if so, how - to permit application of FAS 159, the Fair Value Option, to newly consolidated assets under the amended FIN 46R at transition.
Board members voiced concern that companies could potentially cherry pick application of FIN 46R to achieve more favorable results including potentially more favorable capital ratios. There was also some dissatisfaction voiced with respect to the Fair Value Option more generally.
FASB Chairman Robert Herz reflected on the Fair Value Option standard (FAS 159): “I was here when we put in FAS 159, I was optimistic it would be used judiciously, appropriately, in the spirit intended, [but] a lot of that did not happen. Here, assets and liabilities tend to be linked, certainly in ones you call securitizations and asset backed financings, highly related, I saw some comments [regarding the proposed amendment to FIN 46R] … people said they will elect the fair value option, assets have an allowance against them, they want to reduce debt, I think there’s a strong motivation in entities … for those who want to get capital or whatever, to pick and choose [application of the fair value option], and not necessarily in the spirit of what’s intended or relationships intended.” He added, “[Some] might like fair value, but not the confusion, lack of comparability [the fair value option] can introduce; we have [seen] that, and the fact it has provided ability for people to use it in ways not intended by the original idea of achieving better linkage in accounting, more symmetry.” He continued: “My preference would be for no fair value option,” on how to achieve that, he said: “I would like to deal with the fair value option as part of our project on financial instrument recognition and measurement,” a joint project with the IASB, “but I don’t think the conclusion of that project will be effective for transition [on this project].”
Board member Leslie Seidman commented, “I’m in Bob’s [Herz’] camp, as part of the broader financial instruments project, we should absolutely reconsider the fair value option.” She added, “If I had my druthers, on transition I would probably [limit the fair value option to] each major asset class.”
Another view was held by Board member Mark Siegel, who noted he did not want to preclude entities who carry their book of business at fair value from electing to apply the fair value option to VIEs placed on the balance sheet at transition.
After considering the various views of board members, the board considered - but rejected - requiring entities wishing to apply the fair value option to apply it to all VIEs under the FIN 46R transition, and instead, agreed to permit companies to apply the fair value option on an entity-by-entity (i.e. VIE by VIE) basis at transition – but not on an instrument by instrument basis within VIEs. Additionally, as described in FASB’s Summary of Board Decisions: “The Board decided that an enterprise electing the fair value option should disclose its rationale for electing the option for certain entities as well as the impact of that election on the cumulative-effect adjustment to retained earnings.”
Board member Larry Smith was uncomfortable with crafting guidance on applicability of the fair value option to this standard, given that this subject was not addressed in the Exposure Draft of the proposed amendment released for public comment last year. Board member Tom Linsmeier said, “The reason we didn’t expose [the fair value option language] was we had it coming on at fair value; that was the only choice, there would have been no transition issue in the Exposure Draft.” Smith asked, “What allows you to count at fair value subsequent to Day 1?” Linsmeier replied the purpose of the language agreed to today was, “We do not want them to be able to cherry pick.” Smith replied, “I understand, [but] I personally think this is a violation of due process.” Referencing the earlier decision to permit unpaid principal as a practical expedient in determining carrying amount for securitizations, Linsmeier responded, “We never exposed unpaid principal either, that would be a violation of due process [too].”Herz asked Smith if he would dissent from the final amendment to FIN 46R because of the fair value option issue; Smith said he’d have to think about it. Seidman observed, “Any time you craft something from whole cloth” during the final stretch to issuing a new standard, implementation issues can arise. On balance, she noted she did not object to permitting the fair value option on an entity-by-entity (VIE by VIE) basis.
Wrapping up this final meeting on the amendments to FAS 140 and FIN 46R, the board authorized the staff to proceed to final ballot drafts on the amendments. Once approved by the board, the final standards will be issued; the expected issuance date is currently June, 2009 as shown in FASB’s Technical Plan, and in the FASB Briefing Paper (aka ‘plain English summary’) issued earlier today, which provides a high level explanation of the forthcoming amendments to FAS 140 and FIN 46R.
Leasing, Insurance Contracts Also Discussed
Additional subjects covered at today’s FASB board meeting were Leasing and Insurance Contracts. Refer to this FEI Summary and FASB’s Summary of Board Decisions for more information on all topics covered at today’s FASB board meeting.
Want To Learn More?
If you’d like more information on these and other new and proposed FASB standards, sign up for FEI’s June 9 webcast, “What’s New With FASB?” featuring FASB Technical Director Russell Golden, Deloitte Partner Bob Uhl, and Ernst & Young Partner Carlo Pippolo, and moderator Steve Burkholder of BNA. The webcast is free for FEI members, $50 for nonmembers; 1.5 CPE is available; advance registration is required.
Friday, May 15, 2009
Highlights of Proposal
Following are highlights of the proposal, based on information contained in the SEC Press Release issued after the meeting:
- investment advisers with custody of client assets to undergo an annual “surprise exam” by an independent public accountant to verify those assets exist held under custody exist, and disclose in public filings with the Commission, among other things, the identity of the independent public accountant that performs its “surprise exam,” and amend its filings to report if it changes accountants. The accountant would have to report the termination of its engagement with the adviser and, if applicable, any problems with the examination that led to the termination of its engagement. If the accountants find any material discrepancies during the surprise examination, they would have to report them to the Commission.
- investment advisers whose client assets are not held or controlled by a firm independent of the adviser to obtain a written report (commonly called a SAS 70 report), prepared by a PCAOB-registered and inspected accountant, that, among other things: describes the controls in place, tests the operating effectiveness of those controls, and provides the results of those tests.
- investment advisers to comply with reporting requirements (set forth in the proposed rule) designed to alert the SEC staff and investors to potential problems at an adviser, and provide the Commission with important information for risk assessment purposes.
- all custodians holding advisory client assets to directly deliver custodial statements to advisory clients rather than through the investment adviser, and that advisers opening custody accounts for clients instruct those clients to compare account statements they receive from the custodian with those received from the adviser. The Commission notes: "These additional safeguards would make it more difficult for an adviser to prepare false account statements, and more likely that clients would find discrepancies."
There will be a 60-day comment period on the proposed rule amendments (ending 60 days after the proposal is published in the Federal Register.) Read more about the investment adviser proposed rules in: SEC Press Release; Statements at SEC open meeting by: Chairman Mary L. Schapiro, Commissioner Troy A. Paredes.Next Up: Proxy Access
As noted in this Sunshine Act Notice, the SEC will meet on Wednesday, May 20 on the topic of proxy access, specifically, to: "consider whether to propose changes to the federal proxy rules to facilitate director nominations by shareholders." Broc Romanek writes on this subject today in TheCorporateCounsel.net blog in his post: Proposal Rumor: Proxy Access Threshhold of 1% Ownership?
Thursday, May 14, 2009
As background, here are some key points noted in U.S. Moves to Regulate Derivatives Trade by Sarah N. Lynch, Serena Ng, and Damien Paletta in today's WSJ:
- The regulatory overhauls are in response to growing concerns of outsize risk and leverage among derivatives that trade directly between pairs of firms. Much trading in this market, estimated to total hundreds of trillions of dollars, now happens privately, and contracts are typically negotiated over the phone.... According to the Bank for International Settlements, the theoretical value of outstanding over-the-counter derivatives was about $684 trillion as of June 2008, about $458 trillion of which were contracts tied to interest rates.
- The Commodity Futures Modernization Act of 2000 allowed most derivatives to escape U.S. federal regulation, but the scale of problems at AIG, which had dabbled heavily in derivatives, and the financial crisis has caused lawmakers and regulators to rethink that position.
- Federal officials... have said they intend to bring derivatives into the regulatory orbit. Wednesday's proposal, which was laid out in a two-page letter to Congress, was the first time officials added details to their bare-bones ideas.
- The proposal wouldn't require that customized contracts be traded on an exchange. But traders would be subject to record-keeping and reporting requirements. Derivatives dealers and all other institutions with large counterparty exposures would be subject to regulatory oversight to ensure they don't pose systemic risks to the marketplace, including more conservative capital requirements, business-conduct standards, reporting requirements and margin requirements.... To prevent market manipulation, regulators would also be given authority to set limits on derivative positions if they might have a big impact on markets.
Highlights of Proposal
Below are some highlights from the Obama administration's proposal to rein in regulation of OTC derivatives, based on information contained in Treasury's press release.
- Amend the Commodity Exchange Act (CEA) and the securities laws to require clearing of all standardized OTC derivatives through regulated central counterparties (CCPs). The CCPs will impose: robust margin requirements, risk controls, and ensure that customized OTC derivatives are not used solely as a means to avoid using a CCP
- All OTC derivatives dealers and all other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation, which will include: conservative capital requirements , business conduct standards , reporting requirements, initial margin requirements with respect to bilateral credit exposures on both standardized and customized contracts
- Amend the CEA and securities laws to authorize the CFTC and the SEC to impose: recordkeeping and reporting requirements (including audit trails), requirements for all trades not cleared by CCPs to be reported to a regulated trade repository movement of standardized trades onto regulated exchanges and regulated transparent electronic trade execution systems, development of a system for the timely reporting of trades and prompt dissemination of prices and other trade information, and encouragement of regulated institutions to make greater use of regulated exchange-traded derivatives.
- Amend the CEA and securities laws to ensure that the CFTC and the SEC have: clear and unimpeded authority for market regulators to police fraud, market manipulation, and other market abuses, authority to set position limits on OTC derivatives that perform or affect a significant price discovery function with respect to futures markets, and a complete picture of market information from CCPs, trade repositories, and market participants to provide to market regulators.
- Potentially amend CEA and the securities laws -after CFTC and SEC review and submit recommendations - with respect to participation limits, to potentially tighten the limits or to impose additional disclosure requirements or standards of care with respect to the marketing of derivatives to less sophisticated counterparties such as small municipalities.
Legislative Action Required
As noted above, amendments to the CEA and securities laws would be required to effect the proposed reforms. See the related letter from Treasury Secretary Geithner to Senate Majority Leader Harry Reid (Geithner letter to Reid) courtesy of WSJ.com.
SEC, CFTC Support Changes
At the press conference yesterday, Schapiro and Dunn voiced support for the proposed reform of OTC derivatives. (Dunn statement) (Schapiro statement).
Schapiro stated, "No matter how great our capabilities, no regulator can effectively protect investors from unregulated financial instruments." She added, "Today, current federal statutes significantly restrict the ability of financial regulators to obtain reporting or record-keeping in the OTC derivatives market. Yet these are the very types of tools that any regulator would need to identify suspicious trading patterns or better understand systemic risks. In addition, central clearing for credit default swaps and other OTC derivatives would bring to this market much-needed transparency. Such transparency will enable regulators to better monitor transactions that are effected through the use of a central counterparty. Importantly, central clearing would also mitigate the systemic risks created by OTC derivatives."
CFTC's Dunn said, "Today’s announcement clearly articulates a comprehensive plan that will establish a regulatory framework for currently unregulated markets." He added, "What this means for our economy and particularly the markets we regulate: (1) During the current financial crisis, clearing has been a critical and well-tested tool for reducing risk in our markets. Expanding a centralized OTC clearing system would reduce systemic risk and dramatically increase transparency in these previously unregulated markets. (2) Provides clear authority to regulate these markets and ensure they are free from fraud, manipulation and excessive speculation. (3) The price discovery function of our Country’s futures markets is impacted by OTC derivatives. By regulating these contracts and having the ability to set position limits, we will have the ability and necessary information to ensure market integrity."
Financial executives, audit committee members, corporate and outside counsel involved with financial reporting and disclosure, investors, auditors and others won't want to miss this timely webcast brought to you by Financial Executives International (FEI) on June 9, 2009 from 12:00 - 1:30 pm EDT (1.5 CPE for CPAs) featuring:
- FASB Technical Director Russell Golden,
- Carlo Pippolo, Director, Standard Setting, Ernst & Young LLP and
- Bob Uhl, Partner, and National Director of Accounting Standards and Communications, Deloitte & Touche LLP.
And you couldn't ask for a better moderator than Steve Burkholder, Staff Correspondent, Bureau of National Affairs (BNA).
The webcast is free for FEI members; $50 for nonmembers. Register here.
Wednesday, May 13, 2009
Separately, FEI's Senior Director of Government Affairs, Matt Miller tells us that earlier this week, the U.S. Treasury Department announced the release of its "General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals." Also known as the "Greenbook," the document describes the Administration's tax proposals.
In addition, Miller notes, the White House Office of Management and Budget released the annual Analytical Perspectives, which lists and briefly describes the tax proposals in the President's FY 2010 budget. (The full document is 430 pages.) Here is a 16-page excerpt of the tax provisions. See links to the President's transmittal letter and related information here.
If you are interested in FEI's Government Affairs activity, contact Miller at email@example.com , or contact Serena Davila, FEI's Director of Public Affairs, at firstname.lastname@example.org if you have questions pertaining to FEI's Committee on Benefits Finance (CBF).
Tuesday, May 12, 2009
Last week, the U.S. House of Representatives passed its own version (containing certain amendments from the Senate version) of S. 386, the Fraud Enforcement and Recovery Act of 2009 (FERA). The Senate voted 92-4 in favor of the bill on April 28, and the House voted 367-59 in favor of its version of the bill on May 6.
Both versions of the bills would increase funding by over $500 million in aggregate over a two year period (fiscal years 2010, 2011) for certain law enforcement agencies, including U.S. Attorneys Offices, DOJ, FBI, U.S. Postal Inspectors, HUD and the Secret Service.
AMENDED PARAGRAPH: UPDATED MAY 21, 2009: This paragraph originally said only the House version of FERA contained additional funding for the SEC, as we cited from the Senate Judiciary Committee report dated March 23, 2009, "Senator Schumer also offered an amendment to add funding for the Securities and Exchange Commission to the bill, but withdrew the amendment after Senator Grassley opposed it." However, according to "Anonymous" who posted a comment on this original blog post (see "Comments" below) the provision for approximately $20 million in additional funding for the SEC was approved by voice vote in the Senate bill, thus consistent with the House version, and ultimately included in the Act signed by the President on May 20, 2009 (see our May 20, 2009 post).
It also appears some provisions of the bill could potentially increase the SEC’s scope, including amendments to the securities statute “to cover fraud schemes involving commodities futures and options, including derivatives involving … mortgage backed securities.” It is also notable (although not part of the proposed securities law changes) that the bill would broaden the definition of ‘financial institution’ in the criminal code, to sweep in currently unregulated institutions for purposes of federal fraud laws.
Key provisions of the bill
Based on the Senate version of the bill (unless otherwise noted) FERA would:
1. Authorize over $500 million in additional funding for the DOJ, USAO's, FBI, U.S. Postal Inspector, and Secret Service, to fight mortgage related fraud and certain other financial fraud. [The House version of the bill includes $20 million in additional funding (in 2010, and 2011) for SEC investigations and enforcement proceedings involving financial institutions, and $1 million additional funding in 2010, 2011 for the SEC's OIG.
2. Amend the definition of ‘‘financial institution’’ in the criminal code (18 U.S.C. § 20) to extend Federal fraud laws to mortgage lending businesses that are not directly regulated or insured by the Federal Government.
3. Amend the false statements in mortgage applications statute (18 U.S.C. § 1014) to make it a crime to make a materially false statement or to willfully overvalue a property in order to influence any action by a mortgage lending business.
4. Amend the major fraud statute (18 U.S.C. § 1031) to protect funds expended under the Troubled Asset Relief Program and the economic stimulus package, including any government purchases of preferred stock in financial institutions.
5. Amend the Federal securities statute (18 U.S.C. § 1348) to cover fraud schemes involving commodities futures and options, including derivatives involving the mortgage backed securities that caused such damage to our banking system.
6. Amend the Federal money laundering statutes (18 U.S.C. §§ 1956, 1957) to - as stated in the bill: "correct an erroneous Supreme Court decision in 2008 that significantly weakened these statutes. In United States v. Santos, the Supreme Court misinterpreted the money laundering statutes, limiting their scope to only the ‘‘profits’’ of crimes, rather than the ‘‘proceeds’’ of the offenses. 128 S. Ct. 2020 (2008). The Court’s decision was contrary to Congressional intent and will lead to criminals escaping culpability simply by claiming their illegal scams did not make any profit. Indeed, proceeds of ‘‘Ponzi schemes’’ like the Bernard Madoff case, which by their very nature do not include any profit, would be out of the reach of the money laundering statutes under this decision. This flawed decision needs to be corrected immediately, as dozens of significant money laundering cases have already been dismissed.”
7. Amend the False Claims Act (18 U.S.C. § 3729 et seq.). As stated in the bill: "The effectiveness of the False Claims Act has recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds. The False Claims Act must be corrected and clarified in order to protect from fraud the Federal assistance and relief funds expended in response to our current economic crisis."
Financial Crisis Inquiry Commission May Explore Accounting, Much More
Mark-to-market accounting is one of over 20 issues that would be potentially be explored by a Financial Crisis Inquiry Commission (as named in the House version of the FERA bill; with a slightly different name in the Senate version).
Cady North, FEI's Manager of Government Relations, explains: "The bill includes $5 million for the creation of a Select Committee to investigate the economic crisis. The panel would have 10 members, six chosen by congressional Democrats and four by Republicans. The chairman and vice chairman would be from different parties. No elected officials could serve on the panel, which would have subpoena power."
According to the House version of the bill, excerpted below, the Financial Crisis Inquiry Commission (FCIC) would be charged with: "examin[ing] the causes of the current financial and economic crisis in the United States, specifically the role of--
(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;
(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;
(C) the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;
(D) monetary policy and the availability and terms of credit;
(E) accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;
(F) tax treatment of financial products and investments;
(G) capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;
(H) credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;
(I) lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;
(J) affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;
(K) the concept that certain institutions are `too-big-to-fail' and its impact on market expectations;
(L) corporate governance, including the impact of company conversions from partnerships to corporations;
(M) compensation structures;
(N) changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;
(O) the legal and regulatory structure of the United States housing market;
(P) derivatives and unregulated financial products and practices, including credit default swaps;
(R) financial institution reliance on numerical models, including risk models and credit ratings;
(S) the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;
(T) the legal and regulatory structure governing investor and mortrgagor protection;
(U) financial institutions and government-sponsored enterprises; and
(V) the quality of due diligence undertaken by financial institutions;
Additionally, the bill specifies the FCIC would be required to:
- examine the causes of the collapse of each major financial institution that failed
- submit a report,
- refer potential violations of the law to the U.S. Attorney General and State attorney generals, and
- build upon -but not duplicate - the work of other entities (such as congressional committees, GAO, other agencies) to avoid duplication in conducting its examination of these matters.
As to the current status of the bill, FEI's North notes, "From a parliamentary perspective, the House took up the Senate version of the bill (S 386) after replacing the text with its own substitute amendment, incorporating language from several bills." She adds, "As it stands, the Senate has to take up the House version of the bill and either accept their changes or elect to appoint a conference committee to work out differences between the two bills. However, the Senate does not have this bill on their calendar yet, and it is unclear if or when the Senate might take up the House-amended version of the measure. In short, it’s not in conference committee yet, and the ball is in the Senate’s court now. " FEI members interested in following developments with respect to Financial Regulation Reform, contact Cady North at email@example.com .
MADOFF UPDATE: Analysis, Response
While we're on the subject of fraud, here's a few items that relate directly and indirectly to admitted Ponzi schemer Bernard L. Madoff.
The cover story in the current (May/June) issue of Fraud Magazine is: Chasing Madoff: An Interview with Harry Markopolos, CFE, CFA. Markopolos (source: wikipedia, which in and of itself is interesting in that Markopolos has practically become a household name) is the analyst who provided detailed analysis to the SEC regarding his suspicions that Madoff was, at best, front running, and at worst, running the world's largest Ponzi scheme. Fraud Magazine is published by the Association of Certified Fraud Examiners (ACFE); the article is written by Dick Carozza, Editor-in-chief of the magazine. Among highlights in the article, here are a few excerpts from Carozza/Markopolos' Q&A's (these are brief exerpts only from Markopolos' detailed responses in the wide-ranging, 8-page interview)
- What tipped you off? Madoff's name was never on the marketing materials; that was clue No. 1-I've never seen a product offering where the manager's name wasn't listed up front."
- What were the factors that allowed this scheme to continue for so long? The important thing you have to know about Madoff is that he is a brilliant con artist who knew how to prey on human nature like few others. The main emotion he appealed to was human greed, but he was smart enough to address investors fears by showing them a strategy that owned stock market index put options... such that if the stock market ever crashed they would be protected."
[NOTE: on the subject of greed, it was recently reported that a sequel to the movie Wall Street with Michael Douglas reprising his role as Gordon Gekko ('greed is good') is in the works. On the question of whether art imitates life or vice versa, see Michael Smerconish's article in the May 10 Philadelphia Inquirer, "Did Hollywood Inspire the Meltdown Men?" ]
Other subjects addressed in the Fraud magazine interview include red flags discovered by Markopolos, how his investigative team operated, and his interview with the SEC's inspector general, on which he says: "I've spent an entire day giving sworn testimony to the SEC's inspector general team and they impressed me. I was interview No. 60 for them. ... This particular IG has written hard-hitting reports in the past that have pulled no punches, and I am expecting to see his team's best work in the upcoming Madoff report." Markopolos and Michael Chertoff, former Secretary of U.S. Homeland Security and former federal prosecutor, are among the keynoters slated for ACFE's annual fraud conference & exhibition July 12-17 in Las Vegas.
Tonight (May 12), you can tune into The Madoff Affair: Frontline Investigates Madoff Global Fund. The story will air at 9:00 pm ET on PBS. I learned about the upcoming airing of this show in Bernard Madoff's Blog (aka ‘fake Bernie Madoff’s blog;’ ghost written and self-described as 'infotainment').
This Thursday (May 14), the SEC will consider proposing certain rules to strengthen oversight of investment advisers. According to the SEC's May 14 Open Meeting Agenda: "The Commission will consider custody-related matters, including whether to propose amendments to rule 206(4)-2 under the Investment Advisers Act of 1940 and related forms and rules. The proposed amendments would enhance the protections provided advisory clients when they entrust their funds and securities to an investment adviser. If adopted, the amendments would:
- require investment advisers having custody of client funds and securities to obtain a surprise examination by an independent public accountant, and,
- unless the client assets are maintained with an independent custodian, obtain a review of custodial controls from an independent public accountant."