tag:blogger.com,1999:blog-84313681062384330822024-03-10T23:23:46.379-04:00FEI Financial Reporting Bloghighlights from sec, pcaob, fasb and iasb news- including sarbanes-oxley section 404 requirementsfinancial executives bloghttp://www.blogger.com/profile/11084436965192606339noreply@blogger.comBlogger655125tag:blogger.com,1999:blog-8431368106238433082.post-22267055056597370402011-10-24T13:19:00.000-04:002011-10-24T13:20:03.790-04:00SEC Ready For Full-Court Press With Senate Confirm of Aguilar, GallagherThe U.S. Securities and Exchange Commission will be back up to its full panoply of five Commissioners, with the Senate's reappointment of Commissioner <a href="http://www.sec.gov/about/commissioner/aguilar.htm">Luis Aguilar</a> to a second term, and the appointment of <a href="http://www.wilmerhale.com/daniel_gallagher/">Dan Gallagher</a> as a new Commissioner.<br /><br />Aguilar, a Dem, began his first term as an SEC Commissioner on July 31, 2008. Gallagher, a Republican (replacing the vacancy created at the end of Commissioner Kathleen Casey's term), formerly served on SEC staff, including as Deputy Director of the Division of Trading and Markets. Gallagher re-joined law firm WilmerHale upon leaving the SEC in 2010 (see 2010 <a href="http://www.wilmerhale.com/about/news/newsDetail.aspx?news=2002">press release</a>).<br /><br /><br />SEC Chairman Mary L. Schapiro made the following <a href="http://www.sec.gov/news/press/2011/2011-219.htm">announcement</a> following the Senate's action on Friday:<br /><br /><blockquote>"I very much appreciate the Senate's confirmation of these nominees. Investors and markets are best served when the SEC benefits from the dedication and broad range of views that a full five-member Commission provides. I look forward to Luis's continued service, and I welcome Dan's return to the agency as we continue our efforts to protect investors and improve our markets and the economy."</blockquote>Read more in <a href="http://www.thecorporatecounsel.net/Blog/2011/10/-sec-to-hold-revenue.html">TheCorporateCounsel.net blog</a> and in the <a href="http://www.washingtonpost.com/business/economy/gallagher-aguilar-confirmed-for-sec-posts/2011/10/21/gIQArw1g3L_story.html">Washington Post</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com70tag:blogger.com,1999:blog-8431368106238433082.post-86143626067838783272011-10-24T13:13:00.000-04:002011-10-24T13:14:47.430-04:00FASB Proposes Deferring OCI Reclass AdjustmentsThe Financial Accounting Standards Board voted on Friday to propose a deferral of certain requirements in ASU 2011-5, Comprehensive Income, issued earlier this year. Important: the only requirements in that standard which will be deferred - while FASB further deliberates those matters - are the requirements for presentation of ‘reclassification adjustments’ from Other Comprehensive Income (OCI); the remaining provisions of ASU 2011-5 will become effective as originally set forth in that standard (beginning with public companies, for fiscal years, and interim periods within those years, ending after Dec. 15, 2011; private companies are subject to a later effective date in the standard). The action was expected, as noted <a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/October-2011/FASB-To-Meet-Next-Week-On-Deferring-Certain-Aspect.aspx">here</a>.<br /><br /><strong>Proposal Expected Soon; At Least 15-Day Comment Period<br /></strong>An <a href="http://www.ey.com/echannel/content.nsf/vwAcctglink/UL-en-Services-AccountingLink---Home">AccountingLink</a> Financial Reporting Alert, published by <a href="http://www.ey.com/">Ernst & Young</a> on Friday was one of the first reports published in the board’s vote. According to E&Y,<br /><br />“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”<br /><br /><strong>Reclassification Adjustments aka ‘Recycling’<br /></strong><a href="http://www.bna.com/">BNA’s</a> Steven Burkholder, in an article entitled <a href="http://news.bna.com/drln/DRLNWB/split_display.adp?fedfid=23161935&vname=dernotallissues&fn=23161935&jd=a0c9k9q8g3&split=0">FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments</a>, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”<br /><br />The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”<br /><br /><strong>Current Disclosure Requirements In Force During Deferral Period<br /></strong>Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.<br /><br />Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”<br /><br />Watch for FASB’s proposal (and potentially a related press release) on their website, <a href="http://www.fasb.org/">www.fasb.org</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com12tag:blogger.com,1999:blog-8431368106238433082.post-29754620874713687752011-10-21T13:30:00.000-04:002011-10-21T13:30:50.624-04:00SEC FRS Kicks Off With Nov. 8 Roundtable On Measurement Uncertainty; FASB To Meet On Future Scope of Risks and Uncertainties, Going Concern ProjectEarlier today, the SEC <a href="http://www.sec.gov/news/press/2011/2011-215.htm">announced</a> it will hold the inaugural program in its Financial Reporting Series (FRS) on November 8; the focus of the initial roundtable will be Measurement Uncertainty. As <a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/June-2011/SEC--Financial-Reporting-Series--To-Focus-On-Early.aspx">we reported in June,</a> the SEC’s FRS will consist of a series of roundtables focused on “the early identification of risks to the financial reporting system.”<br /><br />In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.<br /><br />The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS. <br /><br /><strong>SEC FRS vis-a-vis FASB, PCAOB<br /></strong>Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.<br /><br />As stated on the <a href="http://www.sec.gov/about/offices/oca/ocafrseries.htm">SEC’s webpage on the FRS</a>, the objectives of the FRS are as follows:<br /><br /><ul><br /><li>to provide SEC staff, the Financial Accounting Standards Board ("FASB"), and the Public Company Accounting Oversight Board ("PCAOB") with useful information about matters affecting the financial reporting system;</li><br /><li>for OCA to work closely with both Boards to ensure that they consider the appropriate actions to address emerging issues and changes in the business environment; and </li><br /><li>for OCA, in coordination with the Division of Corporation Finance (and, where appropriate, other SEC offices or divisions), to consider whether changes to Commission rules and regulations would be appropriate. </li></ul>See also ‘My Two Cents” at the bottom of this post, regarding an upcoming meeting of the FASB board relating to this subject, and regarding the interplay between FASB, SEC and PCAOB, or more broadly, the need to strike the right balance between the sometimes seemingly conflicting objectives of relevance, reliability and auditability.<br /><br /><strong>Briefing Paper Outlines Issues; Public Comment Sought<br /></strong>As noted on the <a href="http://www.sec.gov/about/offices/oca/ocafrseries-upcoming.htm">SEC webpage on Upcoming FRS Roundtables</a>, the focus of the inaugural roundtable will be on:<br /><br /><ul><br /><li>where uncertain measurements provide investors with useful information and how those measurements should be recognized in the financial statements,</li><br /><li>the information investors need to understand and assess uncertainties,</li><br /><li>the need for additional guidance on the disclosures associated with uncertainties, and</li><br /><li>the auditor’s role and responsibility for reporting on uncertainties.<br /></li></ul>Specific questions the SEC is seeking input on, and additional background information, can be found in this <a href="http://www.sec.gov/about/offices/oca/ocafrseries-briefing-measurement.htm">briefing paper</a> prepared by the SEC staff.<br /><br />The SEC formally invites public comment via Release No. 34-65602 published yesterday, <a href="http://www.sec.gov/rules/other/2011/34-65602.pdf">“Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”</a><br /><br />As noted in the briefing paper:<br /><br /><ul><br /><li>Uncertainty exists in financial statements where measurements “to a large extent…are based on estimates, judgments, and models rather than exact depictions.” As the level of uncertainty increases, challenges may exist for:</li><br /><li>financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions, </li><br /><li>auditors to verify the subjective judgments about those uncertainties, and </li><br /><li>investors to understand those uncertainties and assess their potential impact on future earnings or cash flows. </li></ul><br /><p>Further, the SEC states that the inaugural roundtable “will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown.” Issues of focus will include: </p><br /><ul><br /><li>Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information. </li><br /><li>Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information. </li><br /><li>Auditability — the auditor's role and responsibility for reporting on financial statements with measurement uncertainties.<br /></li></ul>Here are the questions on which input is sought from panelists and through public comment, in the above-listed Release. As detailed in the Briefing Paper, "The panel discussions will focus on the following questions. Panelists will be encouraged to specify, where applicable, the topic — financial instruments, goodwill, loss contingencies, etc — that their comments address."<br /><br /><ol><br /><li>Please provide feedback on any topics where the extent of uncertainty is less useful to investors and why a more certain measurement would be preferable. Likewise, provide comments on those topics where a measurement with uncertainty gives investors more useful information and why it is preferable to a more certain measurement. </li><br /><li>For those topics where uncertain measurements are useful to investors, how should the uncertainties be incorporated into the measure? Please explain the reasons for the measurement method(s) you selected. </li><br /><li>What information do investors utilize to understand uncertainty? Please describe why such information is useful and, if it is not disclosed in the financial statements, indicate its source. </li><br /><li>What are the challenges for investors in understanding the nature and extent of measurement uncertainty? </li><br /><li>As measurement uncertainty increases, please explain whether (and how, if applicable) it changes the investor’s expectation of preparers and auditors. </li><br /><li>For preparers, what are the challenges in or impediments to providing investors with information to understand the nature and extent of measurement uncertainties? </li><br /><li>What are the challenges for auditors in evaluating management’s judgments related to measurement uncertainties? </li><br /><li>Please provide comments on whether (and how) a change in the auditor’s responsibility or role would enhance the investor’s understanding of the nature and extent of measurement uncertainties. </li><br /><li>Please provide any additional comments or suggestions pertinent to how much uncertainty to recognize and how best to communicate it. </li></ol><strong>Future FRS Programs/Topics<br /></strong>The <a href="http://www.sec.gov/about/offices/oca/ocafrseries.htm">SEC’s webpage on the FRS</a> states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at <a href="mailto:FRS@sec.gov" target="_top">FRS@sec.gov</a> or on the FRS webpage.”<br />More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”<br /><br /><strong>My Two Cents<br /></strong>A couple observations (please see the <a href="http://www.financialexecutives.org/blog">disclaimer posted on the right side of this blog</a>).<br /><br />Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: <a href="http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011115">Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern)</a>. <br /><br />FASB recently discussed this project during an Education Session, and as shown in <a href="http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079452">FASB’s calendar</a> and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):<br /><br /><br /><blockquote>“The Board will discuss whether to continue with the project as it is currently designed or modify the scope to provide guidance on assessing an entity’s ability to continue as a going concern.” </blockquote><br />As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article <a href="http://www.reuters.com/article/2011/09/30/usa-accounting-concern-idUSS1E78T0VJ20110930">FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms</a> the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.<br /><br />Francine McKenna, managing editor of <a href="http://retheauditors.com/">Re:TheAuditors</a> has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 <a href="http://retheauditors.com/2009/01/04/going-going-gone-auditors-still-not-concerned-enough-about-client-viability/">Going, Going, Gone</a>.<br />Of course, the subject of Going Concern is not to be confused with the popular ‘<a href="http://goingconcern.com/">accounting tabloid,’ Going Concern</a>.<br /><br />Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see <a href="http://financialexecutives.blogspot.com/search?q=representational+faithfulness&updated-max=2009-09-26T00%3A30%3A00-04%3A00&max-results=20">my earlier post from Sept. 2009</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com7tag:blogger.com,1999:blog-8431368106238433082.post-58267917070189824102011-10-15T17:31:00.001-04:002011-10-15T17:32:39.597-04:00Get The Latest FASB, SEC, IASB Updates At FEI CFRI; Consider Hall of Fame, IFRS Boot CampIf you’re a regular reader of <a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx">this blog</a>, or you otherwise are tasked with following developments at, and/or implementing changes in accounting and financial reporting rules emanating from the FASB, SEC or IASB, you won’t want to miss this year’s FEI Current Financial Reporting Issues conference.<br /><br />Set to take place November 14-15 at the Marriott Marquis Times Square hotel in New York City, this is the 30th year of FEI’s CFRI conference. Included among the speakers will be FASB Chairman Leslie Seidman, IASB Vice Chairman Ian Mackintosh, and SEC Chief Accountant Jim Kroeker.<br /><br />While you are in NYC for CFRI, consider attending FEI’s Hall of Fame Gala Monday night November 14, or the post-conference IFRS Boot Camp on November 16. The Hall of Fame and IFRS Boot Camp are available by separate registration (they are not part of the CFRI program).<br /><br />The Hall of Fame Gala, taking place at Gotham Hall in Manhattan, will celebrate the induction of this year’s Hall of Fame inductees: Robert C. Butler, Judy C. Lewent, and David B. Rickard. Proceeds of the Hall of Fame Gala benefit the Financial Executives Research Foundation (<a href="http://www.financialexecutives.org/KenticoCMS/research/research.aspx">FERF</a>).<br /><br />Read more about all three events in this <a href="http://www.financialexecutives.org/KenticoCMS/News---Publications/Press-Room/2011-Press-Releases/FEI-CFRI-Conference-to-Address-Outlook-on-Financia.aspx">FEI press release</a>; or visit the related webpages on agenda, speakers, and registration info for: <a href="http://www.financialexecutives.org/KenticoCMS/Events/Conferences/Current-Financial-Reporting-Issues-Conference-2011.aspx">CFRI,</a> <a href="http://www.financialexecutives.org/eweb/StartPage.aspx?site=_hof">Hall of Fame</a>, and <a href="http://www.financialexecutives.org/KenticoCMS/Events/Conferences/IFRS-Boot-Camp-2011.aspx">IFRS Boot Camp</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com5tag:blogger.com,1999:blog-8431368106238433082.post-3058967619554755742011-10-15T17:28:00.004-04:002011-10-15T17:31:15.750-04:00FASB Releases Proposed 'Technical Corrections' To CodificationOn Friday, October 14, the FASB released a 214-page set of <a href="http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176159011566">proposed technical corrections</a> to the Accounting Standards Codification.<br /><br />The proposed changes, which cover a wide variety of areas. Included among the proposed changes are include certain ‘conforming’ changes to reflect FAS 157, Fair Value Measurement, in certain parts of the Codification that were not previously updated (e.g. to change certain references from ‘market value,’ or ‘mark to market’ to ‘fair value.’)<br /><br />According to the board, the proposed changes to the Codification are aimed at being ‘technical’ in nature, vs. ‘pervasive’ or ‘substantive.’ As explained in <a href="http://www.fasb.org/cs/ContentServer?site=FASB&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176159013901">FASB’s press release</a> (reformatted into bullets)<br /><br /><br /><ul><br /><li>Periodically, the FASB updates the Codification for technical corrections and clarifications that are deemed necessary.<br /></li><br /><li>The amendments included in this proposed Update cover a wide range of Topics and are generally nonsubstantive in nature.<br /></li><br /><li>Many of the proposed amendments update terminology to conform with Topic 820 (Fair Value Measurement).<br /></li><br /><li>The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.<br /></li></ul>Importantly, FASB notes in the Exposure Draft of the proposed changes to the Codification:<br /><br /><br /><blockquote>The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.<br /></blockquote><br />However, it is possible that certain proposed amendments may result in a change to existing practice.<br /><br />The effective date of the proposed amendments would be determined after the Board considers comments on the proposal.<br /><br />The comment deadline is Dec. 13, 2011.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com3tag:blogger.com,1999:blog-8431368106238433082.post-41324788587990613162011-10-15T17:27:00.002-04:002011-10-15T17:28:43.674-04:00FASB To Meet This Week on Deferring Certain Aspects of ASU 2011-05: Comprehensive IncomeThe FASB board is set to meet Friday, October 21, to discuss “whether to defer the effective date of the presentation requirements for classification adjustments in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The information about the board meeting – set to take place on Friday, following a series of FASB-IASB joint board meetings taking place on Wednesday and Thursday – appears in <a href="http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079452">FASB’s calendar</a>.<br /><br />The addition of this matter to the board’s agenda was <a href="http://www.fasb.org/cs/ContentServer?site=FASB&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176159008163">announced </a>on Thursday by FASB chairman Leslie Seidman.<br /><br />The particular aspect of ASU 2011-05 which the board will consider delaying is the requirement for separate presentation of items reclassified from other comprehensive income [OCI] to net income. Additional information on this matter can be found in <a href="http://www.financialexecutives.org/KenticoCMS/getattachment/FEI_Blogs/Financial-Reporting-Blog/October-2011/FASB-To-Meet-Next-Week-On-Deferring-Certain-Aspect/KPMG-Defining-Issues-11-52-FASB-to-Consider-Deferring-Certain-Aspects-of-Presentation-of-Comprehensive-Income-Standard.pdf.aspx">KPMG’s Defining Issues</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com4tag:blogger.com,1999:blog-8431368106238433082.post-39047754407706587782011-10-11T15:21:00.003-04:002011-10-11T15:29:16.032-04:00PCAOB Proposes Disclosure of Engagement Partner, Other Firms In AuditEarlier today, the Public Company Accounting Oversight Board voted to release proposed amendments to its standards to require disclosure of the name of the audit engagement partner, and disclosure of certain other persons and firms associated with the audit. The PCAOB’s press release and related documents are linked at the bottom of this post.<br /><br />The proposal follows from a recommendation of the U.S. Treasury Advisory Committee on the Auditing Profession published in 2008, and a PCAOB Concept Release issued in 2009, including consideration of comment letters received on that Concept Release, and input received by the PCAOB by its Standing Advisory Group, Investor Advisory Group, and others. For background, particularly regarding the move to require ‘disclosure’ vs. ‘signature’ by the engagement partner, and a discussion about potential liability issues arising from such disclosure or signature, see <a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/October-2011/PCAOB-May-Propose-Engagement-Partner-%E2%80%98Disclosure%E2%80%99-.aspx">our earlier blog post</a>.<br /><br />PCAOB Chief auditor Marty Baumann outlined today’s proposal as requiring disclosure of the:<br />· Name of the engagement partner [to be disclosed], in the audit report<br />· Name of the engagement partner, [to be disclosed] in the annual report filed by each registered audit firm with the PCAOB [Form 2]<br />· Names, locations, and extent of participation of other persons and firms who took part in the audit<br /><br /><b>Disclosure Of Engagement Partner For Most Recent Audit Period Only</b><br /><br />Dima Andriyenko of the PCAOB staff said disclosure of the engagement partner signature would be required by adding the following sentence to the auditor’s report: "The engagement partner responsible for the audit for the period ended [date] was [name of engagement partner]."<br /><br />He also noted that while the audit report relates to financial statements of more than one year; based on comments received on the earlier Concept Release, the PCAOB’s current proposal recommends disclosure of the engagement partner for the most recent period’s audit only.<br /><br /><b>3% Threshold For Disclosure of Other Audit Firms, Persons</b><br />Lisa Calandriello of the PCAOB staff explained the scope of the proposed requirement to disclose the names and locations of other independent accounting firms or persons who participated in the audit, and how that determination is to be made with respect to considerations relating to contractual relationships with those other persons/firms, and with respect to taking responsibility as the “principal audit firm” for work performed by other audit firms/persons as described in <a href="http://pcaobus.org/Standards/Auditing/Pages/AU543.aspx">AU 543, Part of Audit Performed by Other Independent Auditors, </a>or in a supervisory role as specified in <a href="http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_10.aspx">AS 10, Supervision of the Audit Engagement.</a><br /><br />Calandriello described a 3% threshold for determining whether another audit firm/person needed to be disclosed: "If the percentage of total audit hours [performed by another person or audit firm] attributed to the audit … is 3 % or more, then this firm or person [would be] disclosed separately. [The proposal], would not require separate disclosure of firms or persons whose participation is below3%, such firms or persons would either be disclosed as a group, or disclosed separately, as determined by the audit firm issuing the audit report."<br /><br /><b>Unanimous Vote; 90-Day Comment Period</b><br />The board voted unanimously in favor of releasing for public comment the proposal on disclosure of the engagement partner and certain other firms/persons involved in the audit. The staff recommended, a 90-day comment period, noted Calandriello; ending Jan. 9, 2012.<br /><br /><b>Comment Sought On Legal Liability, Disclosure Of Additional Parties</b><br />The board members’ opening statements, and in particular, the Question and Answer period between the board members and staff, highlighted a number of issues on which there is still some uncertainty and/or the board is specifically seeking comment in the proposing release.<br /><br /><b>Will disclosure of the engagement partner,</b> as required in the proposing release (or an engagement partner signature, as still preferred by board member Steve Harris, although he concurred with issuing the proposing release) i<b>ncrease the personal liability of the engagement partner? </b>Matters specifically discussed in the Q&A, particularly in questions posed by board member Dan Goelzer (a lawyer) and board member Jay Hanson (an auditor, who asked for a ‘plain English’ explanation of the legal issues), and in responses provided by the PCAOB’s General Counsel, Gordon Seymour, centered on liability as enforced by the SEC under Securities Act Section 7 and Section 11, and liability under the anti-fraud provisions of Section 10b, particularly in light of the recent Janus decision [Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011)], as to who the ‘maker’ of a statement is.<br /><br />Here is an excerpt from the discussion re: engagement partner liability: <b>GOELZER: Let’s turn to liability, the elephant in the room.</b> Treasury ACAP said signature should not impose any greater liability on the partner than they would otherwise have; ACAP went on to discuss possibility of the SEC offering a safe harbor; does the [PCAOB] staff believe the switch from [considering requiring an engagement partner] signature to disclosure [of the name of the engagement partner] would obviate the need for a safe harbor? PCAOB GC GORDON SEYMOUR: ACAP referred to the possibility of a safe harbor regarding Section 11 of the Securities Act of ’33. The SEC administers Section 11, [and the SEC] would have to decide if … [disclosure of the engagement partner] would subject that individual to Section 11 liability, which raises in turn whether the SEC would promulgate a safe harbor; yes, that’s an issue, we’ve had discussions with the SEC, as to their willingness to promulgate a safe harbor, [it is not yet determined], we’ll continue to have discussions with the SEC staff. GOELZER: Section 11 is under the SEC’s control, whether or not they’ll accept a Section 7 consent, that will drive Section 11 liability. …<br /><br />SEYMOUR [later, in response to question posed by board member Jay Hanson]: There are two provisions in the Federal Securities laws, that could be enforced b y regulatory, and private actions, Section 7 and 11 work in tandem, Section 10b is another, 10b is a fraud based claim, the recent decision in Janus clarifies who the ‘maker’ of a statement is; at the time of [the board’s 2009] Concept Release on an [engagement partner] signature requirement, the law was more uncertain, predated Janus, many commenters thought a signature requirement would make the signer the ‘maker’ of the statement; , we have questions whether there are implications post-Janus on signature requirement; Section 7 and 11 [of the Securities Act] relates to securities offerings, companies [e.g. audit firms] named in a registration statement have to file a ‘consent’ and therefore have potential liability for statements potentially false in the that registration statement; the issue is whether the SEC would require a Section 7 consent; it is clear today an audit firm would be such an expert and face that potential liability, the only issue here is whether the SEC would also see that individual as an ‘expert’ if they are seen [disclosed] in that audit report, therefore that individual could face liability [under Section 11] if they couldn’t show they acted with due diligence. The SEC could issue a safe harbor rule, we understand ACAP recommended [that].<br /><br />Another issue discussed in the Q&A at the board meeting, on which the PCAOB specifically seeks comment in the proposing release, is w<b>hether disclosure of any additional partners</b> should be required, specifically, the Engagement Quality Review [EQR] partner, or the ‘Appendix K’ review partner. As explained by Deputy Chief Auditor Jennifer Rand: “there are certain exceptions to disclosure of other firms or persons, EQR is one, Appendix K review [is another, as well as], specialists, internal audit, use of work of others. Lisa also talked about the construct of disclosure in 1 of 2 buckets: those firms you take responsibility for under AU 543, the other is under AS10 [which] the board issued a year ago…. [In contrast] Engagement quality review is intended to be an objective look at the audit; outside the audit, that person does not perform audit procedures, not involved in role of performing audit work; [but] making sure the opinion was appropriately issued; we thought under construct of AU 543 and AS10, EQR didn’t meet that construct, the release includes questions whether eng quality reviewer should be disclosed.” In response to a question from Chairman Jim Doty on why the ‘Appendix K’ review partner was excluded, Rand replied: “Appendix K is a requirement the board adopted in 2003 from the AICPA’s SEC practice section, which had requirements that went to its member firms; Appendix K requires firms that had been members of the SEC Practice Section to have filings reviewed of foreign affiliated firms before it comes into the US market, to have someone knowledgeable about U.S. rules [conduct a review].” She said the reasoning behind not requiring disclosure of Appendix K review partner was similar to that in not requiring disclosure of the EQR partner.<br /><br /><b>3% threshold for disclosure of other firms or individuals</b> (outside the principal audit firm) performing part of the audit: In response to a board member’s question, Baumann noted that the 3% figure was arrived at after the staff concluded there should be a threshold, and they determined the 3% threshold to be reasonable for this purpose. Staff pointed out the 3% threshold differs from the board’s 20% threshold which determines which audit firms must be registered with, and inspected by, the PCAOB (firms performing 20% or more of audits of a public company). Therefore, some nonregistered audit firms may be disclosed under this proposals 3% threshold, and some registered audit firms involved in less than 3% of the work on a particular audit may not necessarily be disclosed in that particular audit report.<br />Information will be searchable: in response to a question from Goelzer, PCAOB staff member Mary Peters said that the names of engagement partners as disclosed in PCAOB’s Form 2 will be searchable on the PCAOB website.<br /><br /><b>Will Enhanced ‘Accountability’ Mindset Drive Increase In Audit Procedures, Cost?</b><br />Also during the Q&A , board member Daniel Goelzer raised a specific line of questions on the subject of cost-benefit, centering on whether changes in attitude (i.e., a presumed enhanced sense of ‘accountability’ on the part of an engagement partner whose name was disclosed) would lead to changes in behavior, and specifically to changes in audit procedures – which could in turn potentially drive increased costs. Although PCAOB staff said ‘no new procedures’ were required under this proposal (which could potentially be used to assert no additional costs were likely to arise), the potential for the engagement partner to drive increased procedures that result in simply covering their liability, but do not add to audit quality, and the potential for increased audit procedures that actually increase audit quality, is certainly there, and is something that commenters may want to consider.<br /><br />Following are some excerpts from the Q&A during today’s PCAOB board meeting, regarding cost-benefit of the proposal for disclosure of the name of the engagement partner: GOELZER asked Baumann to describe the ‘specific behavioral changes the staff expects from a signature or disclosure requirement. ‘ BAUMANN replied that the staff ‘expect it would enhance a sense of accountability; ….inspection results show there is room for substantial improvement in professional skepticism and other areas, and the enhanced accountability from a disclosure of the engagement partner is expected to [be helpful].” ANDRIYENKO added that ‘the proposal does not require any additional audit procedures.’ GOELZER: “Do you plan to do a cost/benefit analysis, if people are going to perform audits differently, I think there has to be some analysis of the costs.” BAUMANN: “On the surface, inclusion of [engagement partner] signature would require no cost; whether the auditor suddenly feels he or she has to perform more procedures just because their name is there, … as to the assertion we heard from the [audit] firms that they already felt accountable signing the audit firms’ name, whether additional procedures [in some cases are necessary].. that would be a positive benefit; additional costs are not quite known. We are looking for input on this proposal on issues of cost and benefit.” GOELZER: [As referenced earlier in the meeting and in the proposal] the EU requires signature of [engagement partner]natural person on audits, do you know if there has been behavioral research on changes from that? BAUMANN: audit quality is a very hard thing to define; measuring improvements in audit quality is a difficult thing, a period of time is needed to assess improvements, there isn’t a lot of history whether engagement partner signature [in the EU] has changed audit quality; one study showed no apparent change, but those researchers used ….. things that are not necessarily linked to audit quality. “ANDRIYENKO : “One study on the effect of engagement partner signature in one European country; failed to document any relationship in audit quality based on parameters of the study; however, [the study also] failed to unconditionally conclude there is no relationship between audit quality, changes in audit quality, and [the EU] requirement for engagement partner signature.” GOELZER: It seems to me there are several things going on, one is whether they [the engagement partner] would feel more accountable, one is whether they would act differently, .. whether they are doing self protective things that wouldn’t improve audits, staff should [look at that]. The other is disclosure/transparency matter; [for example] you know who [a public company’s] directors are, officers, a lot of information required to be disclosed about people involved with public companies, do you know if the SEC has ever considered requiring disclosure of the names of engagement partners? PCAOB staff: “The SEC staff talked about some matters staff was considering, they had not presented it to the commission, I am not aware if that has advanced to the commission; not aware of other activity.”<br /><br /><div><b>Links to PCAOB Documents</b><br /><br />The following documents relating to today’s PCAOB board vote to release proposed amendments requiring disclosure of the name of the engagement partner, and disclosure of certain other firms and individuals (outside the principal audit firm), have been issued by the PCAOB:<br /><a href="http://pcaobus.org/News/Releases/Pages/10112011_OpenBoardMeeting.aspx">PCAOB Press release Oct. 11, 2011</a><br /><a href="http://pcaobus.org/News/Speech/Pages/10112011_DotyStatement.aspx">Statement of Chairman Jim Doty</a><br /><a href="http://pcaobus.org/News/Speech/Pages/10112011_GoelzerStatement.aspx">Statement of Board Member Dan Goelzer</a><br /><a href="http://pcaobus.org/News/Speech/Pages/10112011_FergusonStatement.aspx">Statement of Board Member Lew Ferguson</a><br /><a href="http://pcaobus.org/News/Speech/Pages/10112011_HarrisStatement.aspx">Statement of Board Member Steven B. Harris</a><br /><a href="http://pcaobus.org/News/Speech/Pages/10112011_HansonStatement.aspx">Statement of Board Member Jay Hanson</a><br />Watch for a link to the proposed rule (and the archived webcast) to be posted <a href="http://pcaobus.org/News/Events/Pages/10112011_OpenBoardMeeting.aspx">here</a>.</div>Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com14tag:blogger.com,1999:blog-8431368106238433082.post-76830703271278669902011-10-10T15:31:00.000-04:002011-10-10T15:32:27.562-04:00PCAOB May Propose Engagement Partner ‘Disclosure’ TuesdayThe Public Company Accounting Oversight Board is scheduled to vote tomorrow on whether to propose that audit firms should (1) disclose the name of the audit engagement partner in the audit report, (2) disclose the names of each audit engagement partner for each engagement reported in the audit firm’s Annual Report Form filed with the PCAOB, and (3) disclose the names of “other accounting firms and certain other participants that took part in the audit.”<br /><br /><br /><br /><strong>Disclosure, vs. Signature<br /></strong>My two cents (see <a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx">disclaimer posted on the right side of this blog</a>): I believe it is significant and intentional that the <a href="http://pcaobus.org/News/Releases/Pages/10062011_OpenBoardMeeting.aspx">PCAOB’s press release</a> announcing tomorrow’s meeting uses the words ‘disclosure’ and ‘disclose’ rather than the previously common vernacular of engagement partner “signature.”<br /><br />The latter term ties back to the Final Report and recommendations published in 2008 by <a href="http://www.treasury.gov/about/organizational-structure/offices/Pages/acap-index.aspx">the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP),</a> (see recommendation 6, Subcommittee on Firm Structure and Finances) which recommended that regulators, the auditing profession, and other bodies, as applicable: “Urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report), and to the <a href="http://pcaobus.org/Rules/Rulemaking/Docket029/2009-07-28_Release_No_2009-005.pdf">PCAOB’s 2009 Concept Release</a> issued for public comment, entitled, “Concept Release on Requiring the Engagement Partner to Sign the Audit.”<br /><br />ACAP described the potential benefits from such a requirement as “increase[ing] transparency and accountability.” :<br /><br />As also recognized by ACAP, one of the most contentious issues surrounding a potential engagement partner signature requirement was whether the value-added by such a signature would offset any potential additional legal liability to that partner.<br /><br />Additionally, concerns have been voiced in ACAP and at prior discussions of the PCAOB Standing Advisory Group about any unintended consequences other potential reputational risks arising from the association of one partner’s name (instead of the firm’s name generically, as is the case today) with one particular audit, vis-à-vis other audits headed up by that particular partner, as well as potential client’s consideration of taking on that particular partner and his/her firm, based on particular audits for which that partner signed off.<br /><br />Some questioned the impact this could have on auditor’s behavior as well, not only in the desired direction of ‘accountability’ but on the flipside, potentially causing the opposite effect, in which some questioned whether putting their name on the line associated with ‘good’ and ‘bad’ audits could potentially cause an auditor to hesitate to cause a negative consequence to a client, since his/her name would be publicly attached to that particular client, and in turn impact other clients, the investing public, and regulator’s views about that partners’ other audit clients.<br /><br /><br /><strong>Safe Harbor: Necessary? Provided?<br /></strong>Concern about legal liability in particular may be the driving force behind why a call for ‘engagement partner signature,’ floated a few years ago in its Concept Release, is now at the proposal stage but appears targeted at engagement partner ‘disclosure’ rather than signature. I assume that the presumed benefits anyone is looking for from a signature requirement would be satisfied by a disclosure (rather than signature) requirement.<br /><br />At <a href="http://pcaobus.org/Rules/Rulemaking/Docket029/2009-10-14_Transcript.pdf">a 2009 PCAOB Standing Advisory Group Meeting,</a> SAG member Jeff Mahoney, General Counsel of the Council of Institutional Investors (also a member of ACAP), noted that footnote 87 (in the section pertaining to the Subcommittee on Firm Structure and Finances) in <a href="http://www.treasury.gov/about/organizational-structure/offices/Documents/final-report.pdf">ACAP’s Final Report</a> (numbered page VII: 20 of that report) spoke of the belief that the same kind of “Safe Harbor” available to the audit committee ‘financial expert” by the Securities and Exchange Commission in the SEC’s Final Rule requiring disclosure of the name of the audit committee ‘financial expert, could form the model for a safe harbor for a safe harbor for audit firm engagement partners under any requirement to disclose them by name. (See the safe harbor in the <a href="http://www.sec.gov/rules/final/33-8177.htm">SEC’s Final Rule.: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8817</a>)<br /><br />Here is what the relevant sentence in ACAPs report said, which includes footnote 87:<br /><br /><br /><br /><br /><blockquote>The Committee notes the signature requirement should not impose on any signing partner any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of an auditing firm.[87]”<br /><br />87 This language is similar to safe harbor language the SEC promulgated in its rulemaking pursuant to Sarbanes-Oxley’s Section 407 for audit committee financial experts. See SEC, Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8177 (Jan. 23, 2003).<br /></blockquote><br />Here is what the SEC’s Final Rule on disclosure of the audit committee financial expert says re: Safe Harbor:<br /><br /><br /><blockquote>5. <strong>Safe Harbor from Liability for Audit Committee Financial Experts<br /></strong><br />Several commenters urged us to clarify that the designation or identification of an audit committee financial expert will not increase or decrease his or her duties, obligations or potential liability as an audit committee member. A few recommended a formal safe harbor from liability for audit committee financial experts. Unlike the provisions of the Act that impose substantive requirements,<a name="footbody_34"></a><a href="http://www.sec.gov/rules/final/33-8177.htm#footnote_34">34</a> the requirements contemplated by Section 407 are entirely disclosure-based. We find no support in the Sarbanes-Oxley Act or in related legislative history that Congress intended to change the duties, obligations or liability of any audit committee member, including the audit committee financial expert, through this provision.<br /><br />In the proposing release, we stated that we did not believe that the mere designation of the audit committee financial expert would impose a higher degree of individual responsibility or obligation on that person. Nor did we intend for the designation to decrease the duties and obligations of other audit committee members or the board of directors.<br /><br />We continue to believe that it would adversely affect the operation of the audit committee and its vital role in our financial reporting and public disclosure system, and systems of corporate governance more generally, if courts were to conclude that the designation and public identification of an audit committee financial expert affected such person's duties, obligations or liability as an audit committee member or board member. We find that it would be adverse to the interests of investors and to the operation of markets and therefore would not be in the public interest, if the designation and identification affected the duties, obligations or liabilities to which any member of the company's audit committee or board is subject. To codify this position, we are including a safe harbor in the new audit committee disclosure item to clarify that:<br /><br />A person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for purposes of Section 11 of the Securities Act,<a name="footbody_35"></a><a href="http://www.sec.gov/rules/final/33-8177.htm#footnote_35">35</a> as a result of being designated or identified as an audit committee financial expert pursuant to the new disclosure item;<br /><br />The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification; and The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.<a name="footbody_36"></a><a href="http://www.sec.gov/rules/final/33-8177.htm#footnote_36">36</a><br /><br />This safe harbor clarifies that any information in a registration statement reviewed<br />by the audit committee financial expert is not "expertised" unless such person is acting in the capacity of some other type of traditionally recognized expert.<br /><br />Similarly, because the audit committee financial expert is not an expert for purposes of Section 11,<a name="footbody_37"></a><a href="http://www.sec.gov/rules/final/33-8177.htm#footnote_37">37</a> he or she is not subject to a higher level of due diligence with respect to any portion of the registration statement as a result of his or her designation or<br />identification as an audit committee financial expert.<br /><br />In adopting this safe harbor, we wish to emphasize that all directors bear significant responsibility. State law generally imposes a fiduciary duty upon directors to protect the interests of a company's shareholders. This duty requires a director to inform<br />himself or herself of relevant facts and to use a "critical eye" in assessing information prior to acting on a matter.<a name="footbody_38"></a><a href="http://www.sec.gov/rules/final/33-8177.htm#footnote_38">38</a> Our new rule provides that whether a person is, or is not, an audit committee financial expert does not alter his or her duties, obligations or liabilities. We believe this should be the case under federal and state law.<br /></blockquote>However, I for one wonder if the reference to what an ‘expert’ means, as relating to those experts who ‘certify’ certain information, takes the SEC financial expert safe harbor type language out of the water if applied to a named engagement partner; see e.g. footnote 37 of the above-referenced SEC rule, which states:<br /><br /><a name="footnote_37"></a><br /><blockquote><a href="http://www.sec.gov/rules/final/33-8177.htm#footbody_37">37</a> Section 11 of the Securities Act imposes liability for material misstatements and omissions in a registration statement, but provides a defense to liability for those who perform adequate due diligence. The level of due diligence required depends on the position held by a defendant and the type of information at issue. Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968). The type of information can be categorized as either "expertised," which means information that is prepared or certified by an expert who is named in the registration statement, or "non-expertised." Similarly, a defendant can be characterized either as an "expert" or a "non-expert."<br /></blockquote>Whether disclosure (vs. signature), potentially paired with some type of Safe Harbor language, will entirely protect the named partner(s) from incurring potential additional legal liability remains to be seen, and it will be interesting to hear the PCAOB board and staff members’ discussion, as well as the discussion in the proposing release, around this point. It will also be interesting to hear the scope of potential disclosure requirements of “other accounting firms and certain other participants that took part in the audit.”<br /><br />The PCAOB’s open meeting, slated for 9:30 am (ET) Tues. Oct. 11, will be <a href="http://pcaobus.org/News/Webcasts/Pages/default.aspx">webcast</a>.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com4tag:blogger.com,1999:blog-8431368106238433082.post-7129941390750218812011-10-07T17:00:00.000-04:002011-10-07T17:04:22.066-04:00Economists Martin Feldstein, Robert Rubin: Highlights From the World Business ForumEconomists Martin Feldstein and Robert Rubin gave their prognosis of the U.S. and global economic, speaking on a panel October 6 at the World Business Forum 2011. The panel was moderated by Alan S. Murray of the Wall Street Journal. Over 4,000 were in attendance at the program.<br /><br />The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program. You can read highlights by going to the FEI blog on twitter, <a href="http://www.twitter.com/feiblog">www.twitter.com/feiblog</a>, and scroll down to view our tweets on Feldstein, Rubin and Murray's panel. We will be posting a direct link to an excerpt of our tweets on this panel, watch for updates to this post for that link.<br /><br />For additional coverage of Feldstein's and Rubin's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the <a href="http://connect.wbfny.com/pages/bloggers_hub">WBF 2011's Blogger's Hub</a>; the twitter hashtag for the program was #wbf11.<br /><br />Follow the FEI blog on Twitter @feiblog at <a href="http://www.twitter.com/feiblog">www.twitter.com/feiblog</a>. Visit the FEI blog at <a href="http://www.financialexecutives.org/blog">www.financialexecutives.org/blog</a>; sign up to receive blog posts via email, by sending an email to <a href="mailto:blogs@financialexecutives.org">blogs@financialexecutives.org</a>, and write in Subject line: Sign up.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com3tag:blogger.com,1999:blog-8431368106238433082.post-72597025780162820012011-10-07T16:58:00.000-04:002011-10-07T16:58:54.269-04:00Bruno Ferrari, Secretary of the Economy, Mexico, Speaks At World Business ForumOn October 6, 2011 <a href="http://special.hsmglobal.com/us/wbfny2011/ferrari-info.php">Bruno Ferrari, Secretary of the Economy, Mexico,</a> was interviewed by <a href="http://www.bloomberg.com/about/management/doctoroff/">Daniel Doctoroff, President of Bloomberg LP</a>, at the <a href="http://special.hsmglobal.com/us/wbfny2011/">World Business Forum 2011</a> in New York City.<br /><br />See <a href="http://www.financialexecutives.org/KenticoCMS/getattachment/News---Publications/news/Bruno-Ferrari,-Mexico-Secretary-Of-The-Economy,-At/FEI-blog-highlights-of-Bruno-Ferrrari-at-WBF11.jpg.aspx"><strong>highlights of Ferrari's remarks</strong></a>, from our live-tweeting at the program. (If you have trouble viewing the page, click on the image to zoom in.) <br /><br />For additional coverage of Ferrari's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the <a href="http://connect.wbfny.com/pages/bloggers_hub">WBF 2011's Blogger's Hub</a>. Follow the FEI blog on Twitter @feiblog at <a href="http://www.twitter.com/feiblog">www.twitter.com/feiblog</a>. Visit the FEI blog at <a href="http://www.financialexecutives.org/blog">www.financialexecutives.org/blog</a>; sign up to receive blog posts via email, by sending an email to <a href="mailto:blogs@financialexecutives.org">blogs@financialexecutives.org</a>, and write in Subject line: Sign up.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com1tag:blogger.com,1999:blog-8431368106238433082.post-80329404624279769972011-10-07T16:56:00.000-04:002011-10-07T21:09:08.413-04:00Seth Godin, Gary Hamel on Management: World Business ForumWell known authors, speakers and 'guru's' (I won't limit them to management or social media gurus) <a href="http://www.sethgodin.com/sg/">Seth Godin </a>and <a href="http://www.garyhamel.com/">Prof. Gary Hamel </a>spoke on Managing Teams & Talent, and Management Innovation, respectively, at the World Business Forum 2011 in New York City. In separate presentations, they touched to some extent on each other's topics as well. Their remarks were very well received by the audience of over 4,000. The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program.<br />
<br />
Read: <a href="http://www.financialexecutives.org/KenticoCMS/getattachment/News---Publications/news/Bruno-Ferrari,-Mexico-Secretary-Of-The-Economy,-At/FEI-blog-tweets-on-Seth-Godin-at-WBF11.jpg.aspx">Seth
Godin's remarks as tweeted by the FEI Blog</a> <em><strong>(click on the image
if it is too small to read)</strong></em> and <a href="http://www.financialexecutives.org/KenticoCMS/getattachment/News---Publications/news/Bruno-Ferrari,-Mexico-Secretary-Of-The-Economy,-At/FEI-blog-tweets-on-Gary-Hamel-at-WBF11.jpg.aspx">Gary
Hamel's remarks as tweeted by the FEI Blog</a> (<em><strong>click on the image
if it is too small to read).</strong></em> <br /><br />For additional coverage of
Godin and Hamel's remarks, and other speakers at the World Business Forum, visit
the websites and twitter pages listed at the <a href="http://connect.wbfny.com/pages/bloggers_hub">WBF 2011's Blogger's Hub</a>.
<br /><br />You can also search on twitter for all tweets from the program, e.g. by
going to <a href="http://www.search.twitter.com/">www.search.twitter.com</a> and
searching for hashtag #wbf11.<br /><br />
<br />Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com4tag:blogger.com,1999:blog-8431368106238433082.post-63300541825047722102011-10-05T20:12:00.000-04:002011-10-05T20:12:42.514-04:00IASB’s Hoogervorst Makes Case For IFRS Adoption in US; Goldschmid Warns of ‘The Dark Side’ if SEC Says No
<span style="font-family: "Arial","sans-serif";">With
a </span><a href="http://www.sec.gov/spotlight/globalaccountingstandards.shtml"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">decision looming</span></span></a><span style="font-family: "Arial","sans-serif";"> by the U.S.
Securities and Exchange Commission on whether to permit or require U.S. public
companies to file with the SEC using International Financial Reporting
Standards, the Chairman of the International Accounting Standards Board, Hans
Hoogervorst, called upon the SEC to reach a positive decision in support of
IFRS. Hoogervorst’s remarks were in a </span><a href="http://www.ifrs.org/News/Announcements+and+Speeches/Hoogervorst+AICPA+speech+Oct+2011.htm"><span style="color: red; font-family: "Arial","sans-serif";">speech</span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="font-size: small;"> delivered earlier
today at an AICPA-IASB conference.</span> <o:p></o:p></span><br />
<br />
<div class="Default" style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif";">Reasons in favor of one set of global accounting
standards, noted Hoogervorst, included ’commercial advantages’ for
international companies. Citing a </span><a href="http://www.sec.gov/comments/4-600/4600-39.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">joint comment letter</span></span></a><span style="font-family: "Arial","sans-serif";"> filed with the SEC earlier this year by Ford Motor
Company, Archer-Daniels-Midland, the Bank of New York Mellon, Kellogg,
Chrysler, and United Continental Holdings, Hoogervorst noted the letter
“call[ed] for the adoption of IFRSs in the United States,” adding, “Clearly,
this is an important issue to them, as it is to other major preparers that
share similar views. Note: see the </span><a href="http://www.sec.gov/comments/4-600/4600-133.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">comment letter</span></span></a><span style="font-family: "Arial","sans-serif";">
filed with the SEC earlier this year by FEI’s Committee on Corporate Reporting.
<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">Hoogervorst also made the case that a move to IFRS would
benefit U.S. investors. Observing that, “The US’s current share of global
market capitalisation</span><span style="font-family: "Arial","sans-serif"; font-size: 7pt;">
</span><span style="font-family: "Arial","sans-serif";">now stands at just over
30%,compared to an average of 45% between 1996 and 2006,” Hoogervorst cited a
comment letter by one of the largest ‘investors,’ public pension fund CalPERS
(the California Public Employees’ Retirement System, in which CalPERS said: “the
SEC has the opportunity to effectively improve accounting standards, and to
regain and increase investors’ trust in financial reporting.” Hoogervorst
added, “To me, that says it all. US investors, preparers and capital market
providers recognise the substantial benefits that come from everyone speaking
the same financial language, while securities regulators understand that,
without it, opportunities for regulatory arbitrage will remain. That is why I
believe that the case for global accounting standards, and with it the case for
US adoption of IFRSs, remains compelling.”<o:p></o:p></span></div>
<br />
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<span style="color: windowtext; font-family: "Arial","sans-serif"; font-size: 11pt; mso-bidi-font-weight: bold;">Here are some excerpts from Hoogervorst's speech, as to why he believes the US should adopt IFRS: </span></div>
<br />
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<span style="font-family: "Arial","sans-serif";"><strong>Quality</strong>: Citing academic studies and the progress of
convergence work between IFRS and U.S. GAAP, Hoogervorst said: “While I am not
dismissing [there are] differences, I am not convinced by the arguments that
one set of standards is clearly superior to the other.”<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";"><strong>Actual Usage of IFRS:</strong> Hoogervorst spoke of the high
degree of adoption of IFRS worldwide, and countered arguments about the extent
of usage of opt-outs in Europe, saying, “I have heard it argued that few major
economies actually use IFRSs. Some even say that Europe does not use IFRSs due
to the optionality of nine paragraphs of IAS 39 <i>Financial Instruments</i>.
Yet this option is used by less than 30 companies. That is less than 1% of
listed companies in Europe. The other 99%, some 8,000 listed European
companies, all use full IFRSs.”<span style="mso-bidi-font-weight: bold;"><o:p></o:p></span></span></div>
<br />
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<span style="font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;"><strong>Consistent application</strong>:</span><span style="font-family: "Arial","sans-serif";"> Hoogervorst acknowledged, “A more
compelling criticism of IFRSs is that inconsistent application of the standards
makes international comparison more difficult. However,” he added, “the same is
true when you have different accounting standards… A major comfort to the
United States should be that if you adopt IFRSs the SEC will remain in full
control of enforcement.”<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";"><strong>Preparedness and costs</strong>: Hoogervorst said: “Many American
companies worry about the costs of adopting IFRSs. Let’s not beat about the
bush; these are real costs. Therefore <b style="mso-bidi-font-weight: normal;">it
would be reasonable that a relatively long transitional period is provided,
particularly for smaller publicly traded companies.</b> An option to allow
early adoption of IFRSs also seems sensible for those companies that can
already see substantial net benefits of IFRSs” As to preparedness in the U.S.,
he noted: “Convergence has brought IFRSs and US GAAP much closer together.
There is already a lot of IFRS knowledge in the United States. The SEC has built-up
a substantial IFRS competence, overseeing the financial statements of a growing
number of foreign private issuers listed in the United States. Many large
preparers already have IFRS expertise within their organisations through
international subsidiaries. The CFA Institute now teaches IFRS financial
statement analysis to all CFA Program students studying in the United States
and elsewhere. From this year, students sitting the<span style="mso-spacerun: yes;"> </span>AICPA’s CPA exam will be tested on IFRSs.”<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";"><strong>Sovereignty</strong>: Another argument used against US adoption of
IFRSs is the perceived loss in sovereignty. The SEC Staff Paper specifically
addresses this point. It makes it clear that the FASB and the SEC will continue
to have ultimate responsibility for accounting standards regardless of whether
the United States moves forward with IFRSs. Obviously, participation in any
international agreement, whether it is the World Trade Organisation or IFRS
standards, requires negotiation and cooperation. The United States will
continue to have a great deal of input into the standard-setting process. The
knowledge base within the FASB is too valuable to the IASB to be excluded. In
addition to the role of the FASB, the United States has, and will continue to
have, a great deal of influence within the IASB. Four out of the fifteen board
members are American and they certainly play a significant role<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;"><strong>Independence of the IASB:</strong> Hoogervorst said: "I have</span><span style="font-family: "Arial","sans-serif";"> never worked in an organisation
that is so transparent in its activities, and that consults so widely. As for
political pressure: I can only admit that it can be there. But this is not
unique to the IASB. In the heat of the financial crisis, both the IASB and the
FASB were put under intense pressure to relax our rules. It was not a pretty
picture. Pressure on the boards is a fact of life. Our work affects many
business interests that often find the willing ears of politicians. But I think
that, as the IASB grows and diversifies, it will become much more difficult for
special interests to force their issues onto the board. On a more personal
note, I did not leave politics to make accounting political. Quite the
opposite; I will use all my political skills to keep accounting as apolitical
as possible.<span style="mso-bidi-font-weight: bold;"><o:p></o:p></span></span></div>
<br />
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<span style="color: windowtext; font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;">Of interest particularly regarding
sovereignty, see also Hoogervorst’s </span><a href="http://www.ifrs.org/News/Announcements+and+Speeches/ECONspeechOct2011.htm"><span style="font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;"><span style="color: blue;">remarks</span></span></a><span style="font-family: "Arial","sans-serif";">
made earlier this week at a meeting of the </span><span style="color: windowtext; font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;">Economic
and Monetary Affairs (ECON) Committee of the European Parliament, Hoogervorst<b>
</b>noted the support the IASB has received from Europe – both from the
government sector and the private sector, and called for continuing support,
telling the European group: <b>“</b></span><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="font-size: small;">We will continue to increase the sense of
trust and buy-in among those who have adopted our standards. We will continue
to strengthen the institutional relationships between the IASB and Europe, in
the same way as we are doing in other parts of the world. That is how we, as an
independent standard-setter, must reciprocate your trust. This will continue to
be a priority of the IASB as the organisation evolves into a global
standard-setting authority.”</span> <o:p></o:p></span></div>
<br />
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<br /></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Goldschmid Warns of ‘The Dark Side’ If
SEC Says No<o:p></o:p></span></b><br />
<br />
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">IFRS
Foundation Trustee (and former SEC Commissioner and General Counsel) Harvey
Goldschmid, whose </span><a href="http://www.ifrs.org/News/Announcements+and+Speeches/Goldschmid+AICPA+speech+Oct+2011.htm"><span style="color: red; font-family: "Arial","sans-serif"; font-size: 11pt;">remarks</span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"> followed those of
Hoogervorst at today’s AICPA-IASB conference, supported Hoogervorst’s call for the SEC to
vote in favor of a move to IFRS. <o:p></o:p></span></div>
<br />
<div class="Default" style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Goldschmid
outlined in detail why he believes (as his speech is titled): U.S.
Incorporation of IFRS is a National Imperative. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">My two cents (I remind you of the </span><a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">disclaimer posted on the right side of
this blog</span></span></a><span style="font-family: "Arial","sans-serif";">): I found
the section of Goldschmid’s remarks entitled ‘The Dark Side’ to be of the most
interest, in which he relates the potential negative impact if the SEC decides
not to permit or require IFRS in the U.S. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">Goldschmid provided a disclaimer early in his remarks,
saying, “Today, particularly if I say something with which my Trustee
colleagues disagree, I am speaking only for myself.” He also expressly emphasized
that his remarks on this point were <b style="mso-bidi-font-weight: normal;">not </b>meant
as “any kind of threat.” However, I personally don’t recall seeing these
arguments laid out in such specific terms before, as to how the U.S. (SEC,
FASB, etc.) could get shut out (my words, not his) of the international
accounting standard-setting community if we don’t take a seat at the table
among adopters of the IFRS standards. Here is what he said: </span><i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";"><o:p> </o:p></span></i></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt 0.5in; mso-layout-grid-align: none;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">What if the SEC fails to commit to
incorporation in the next period of months or simply says “no”? I see two basic
scenarios; one would be bad for the U.S. and the other far worse….. <o:p></o:p></span></i></div>
<br />
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">In my first scenario, the coalition of
nations supporting IFRS would break apart. Rather than two sets of accounting
standards, IFRS and U.S. GAAP, we would have a number of regional GAAPs, or we
would go back to pre-2000 fragmentation. At a minimum, a number of national or
regional accounting systems would exist. The cost of fragmentation, in terms of
lack of transparency and comparability, higher accounting expenses,
inefficiency, etc., would be extremely large.<o:p></o:p></span></i></div>
<br />
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">The second scenario is far worse from
a U.S. perspective. The coalition in support of IFRS would hold together, and
the U.S. would become isolated in this area. <b style="mso-bidi-font-weight: normal;">There would be few, if any, U.S. members of the International
Accounting Standards Board or U.S. Trustees. The SEC would be removed from the
Monitoring Board. The U.S. would no longer play the large and constructive role
it now plays in IFRS development and oversight.<o:p></o:p></b></span></i></div>
<br />
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">I believe that without active U.S.
participation the overall quality of the international accounting standards
would deteriorate. Remember, there is less concern about transparency and
investor protection in some other parts of the world.<o:p></o:p></span></i></div>
<br />
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<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">I
also believe that the U.S. could not remain out of a global system forever.<o:p></o:p></span></i></b></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt 0.5in; mso-layout-grid-align: none;">
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">In
a year like 2020 or 2030, the U.S. would be forced to adopt international
accounting standards, </span></i></b><i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif";">but I predict, it would be adopting
weaker IFRS standards than now exist. <b style="mso-bidi-font-weight: normal;">The
U.S. would then - - as opposed to now - - have only a very small seat at IFRS
drafting and governance tables.<o:p></o:p></b></span></i></div>
<br />
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<br /></div>
<span style="font-family: "Arial","sans-serif";">In other action today, the IASB posted an updated version
of its </span><a href="http://www.ifrs.org/NR/rdonlyres/AF75174C-D5F8-4064-BD61-AD4D0D6300CA/0/ifrsresources01102011.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">IFRS Learning Resources</span></span></a><span style="font-family: "Arial","sans-serif";"> (aka IFRS Resources List), containing
links to places on the IASB’s website, and the websites of accounting firms and
others providing information relating to IFRS. <o:p></o:p></span><br />
<br />
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif";">Awaiting SEC Decision<o:p></o:p></span></b></div>
<br />
<div class="CM26" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif";">The SEC announced in its </span><a href="http://www.sec.gov/rules/other/2010/33-9109.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">Work Plan for the Consideration of
Incorporating IFRS Into the U.S. Financial Reporting System</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="font-size: small;">, published Feb. 24,
2010 that it anticipates making a decision in 2011 on whether to permit or
require use of IFRS by U.S. public companies. There is a little bit of wiggle
room in the 2011 decision target, in the formal terminology, which states: “<span style="color: black;">Following successful completion of the Work Plan and the
FASB-IASB convergence projects </span>according to their current work plan, the
Commission will be in a position in 2011 to determine whether to incorporate
IFRS into the U.S. domestic reporting system.”<o:p></o:p></span></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">The IFRS Foundation’s Goldschmid noted in his speech
earlier today how uncompleted convergence projects could be handled in a world
in which the SEC decides favorably to move to IFRS. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">Goldschmid said: “[T]he SEC, in its planning, has
prudently focused on minimizing disruption and cost. The SEC Staff Paper,
titled “Exploring a Possible Method of Incorporation,” dated May 26, 2011, sets
forth a phased approach to adoption of IFRS through an incorporation mechanism.
The SEC’s framework is realistic and sound. Basically, if I understand the
approach correctly, existing IASB/FASB converged standards would be
incorporated into U.S. GAAP. Not yet completed convergence projects (e.g.,
leasing and revenue recognition) would be completed and incorporated. FASB
would stop writing new standards to prevent confusion and divergence. FASB,
which would continue to play a critical role as the U.S. national standard
setter, would endorse and incorporate remaining, non-converged IFRS standards
over five to seven years. Similarly, FASB would continuously evaluate and
endorse new IFRS standards. As a result of this process, U.S. public
corporations would be complying with both U.S. GAAP and IFRS.”<o:p></o:p></span></div>
<br />
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<span style="font-family: "Arial","sans-serif";">Separately, the SEC states in its IFRS Work Plan that: “<span style="color: black;">The staff will provide public progress reports on the Work
Plan beginning no later than October 2010 and frequently thereafter until the
work is complete.” <o:p></o:p></span></span></div>
<br />
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<span style="color: black; font-family: "Arial","sans-serif";">Personally (I remind you again of the </span><a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">disclaimer posted on the right side of
this blog</span></span></a><span style="color: black; font-family: "Arial","sans-serif";">),
I wouldn’t be surprised if another progress report on the SEC’s IFRS Work Plan is
published sometime this month, since I believe the last one was published last
October (see </span><a href="http://www.sec.gov/spotlight/globalaccountingstandards/workplanprogress102910.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">SEC Progress report on Work Plan,
published 10.29.10</span></span></a><span style="color: black; font-family: "Arial","sans-serif";">), although some may consider the SEC staff paper published
5.26.11 to effectively incorporate a progress report as well. </span><span style="color: black; font-family: "Arial","sans-serif";"><o:p> </o:p></span></div>
<br />
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<span style="color: black; font-family: "Arial","sans-serif";">Whether the SEC Commissioners actually meet
and decide on IFRS in October, November, or December of this year (or later), a
critically important point is that this step would solely be a decision on
whether or not to permit or require IFRS. Within that decision lies a separate
decision as to the effective date for adoption (incorporation) of IFRS in the
U.S. <o:p></o:p></span></div>
<br />
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<span style="color: black; font-family: "Arial","sans-serif";">Goldschmid addressed this point as well, in
his speech earlier today, saying:<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "Times New Roman","serif"; font-size: 13.5pt;">“</span><span style="font-family: "Arial","sans-serif";">The largest concern I have heard from the U.S. business
community is that Dodd-Frank implementation, and other changes caused by the
financial crisis and the current economic downturn, make 2011 and 2012 the
wrong years to create new burdens. The basic answer to this concern is that an
SEC decision to commit to IFRS in the coming months will not be disruptive. The
effective date - - when IFRS would be required for the largest U.S. public
corporations - - will not come until 2016, at the earliest. (An even later
date, in my view, makes sense for small public corporations.) The year 2016 or
2017, for large public corporations, would provide ample time for planning,
education, training, and retooling. The SEC is already used to reviewing IFRS
filings, which now come from foreign private issuers. It is an unambiguous SEC
commitment to incorporation that is essential in the coming months. That would
create the certainty and incentives for our large issuers, investment analysts,
accounting firms, and business schools to be ready by a year like 2016.” </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<br /></div>
<span style="font-family: "Arial","sans-serif";">Personally, (you read the part about the </span><a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">disclaimer on the right side of this
blog</span></span></a><span style="font-family: "Arial","sans-serif";">, right?) I think
2017 or even 2018 has a pretty good ring to it, as far as any earliest
mandatory effective date, starting with the largest public companies, phasing
in at a later date for smaller public companies, if a decision comes down from
the SEC in 2011 or 2012. <o:p></o:p></span><br />
Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com6tag:blogger.com,1999:blog-8431368106238433082.post-79803875168306625432011-10-05T20:05:00.000-04:002011-10-06T09:12:32.100-04:00PCAOB Update<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">The
Public Company Accounting Oversight Board has received </span><a href="http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">over 140 comment
letters</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">;
as of the September 30 comment deadline, on its </span><a href="http://pcaobus.org/Rules/Rulemaking/Docket034/Concept_Release.pdf"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">Concept Release on
the Auditor’s Reporting Model.</span></span></a><br />
<div>
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<br /></div>
<div class="Default" style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">If
the ideas in the Concept Release move forward to proposed and final rulemaking,
they could mark significant changes in the language of the auditor’s report –
and, in turn, in the way that audits are conducted. <o:p></o:p></span></div>
<div class="Default" style="margin: 0in 0in 0pt;">
<br /></div>
<div class="Default" style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">(Although
directed at public company audits, any resultant changes in PCAOB audit
standards could also indirectly impact private company audits, to the extent
audit firms that service both types of clients move to incorporate one set of
standard practices in their audits (and to the extent there is harmony with
AICPA requirements for audits of nonpublic companies). <o:p></o:p></span></div>
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<br /></div>
<div class="Default" style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">In
addition to the comment letter process, the PCAOB also invited feedback on the
Concept Release at a September 15 roundtable; an </span><a href="http://pcaobus.org/Rules/Rulemaking/Docket034/09152011_Roundtable_Transcript.pdf"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">unofficial transcript
of the roundtable</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">
was recently posted. <o:p></o:p></span></div>
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<br /></div>
<div class="Default" style="margin: 0in 0in 0pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">FEI Views on Auditor’s Reporting Model<o:p></o:p></span></b></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">In
a comment letter filed last week, FEI’s Committee on Corporate Reporting
provided its views on the PCAOB’s Concept Release on the Auditor’s Reporting
Model. Read more in the </span><a href="http://pcaobus.org/Rules/Rulemaking/Docket034/132.pdf"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">FEI CCR letter</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">. <o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Next Up: Auditor Independence, Audit
Firm Rotation<o:p></o:p></span></b></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Another
document on which the PCAOB seeks public comment is the </span><a href="http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">Concept Release on Auditor
Independence and Audit Firm Rotation</span></span></a>. <span style="font-family: "Arial","sans-serif"; font-size: 11pt;">The comment period on that Concept Release
closes December 14. <o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Staff Alert on Emerging Markets<o:p></o:p></span></b></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">In
other PCAOB-related news, the audit regulator published a staff audit practice
alert earlier this week, entitled: </span><a href="http://pcaobus.org/Standards/QandA/2011-10-03_APA_8.pdf"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">Staff Audit Practice
Alert No. 8: Audit Risks in Certain Emerging Markets</span></span></a>. <span style="font-family: "Arial","sans-serif"; font-size: 11pt;">See also the related </span><a href="http://pcaobus.org/News/Releases/Pages/10032011_SAPA8.aspx"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">press release.</span></span></a><em><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"> </span></em><em><span style="font-family: "Arial","sans-serif"; font-size: 11pt; font-style: normal; mso-bidi-font-style: italic;"><o:p></o:p></span></em></div>
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<em><b style="mso-bidi-font-weight: normal;"><span style="color: windowtext; font-family: "Arial","sans-serif"; font-size: 11pt;">McKenna,
Weil Weigh In Re: PCAOB Board Vacancy<br />
</span></b></em><span style="font-family: "Arial","sans-serif";">Writers Francine
McKenna and Jonathan Weil recently weighed in on prospects for filing the
current vacancy at the PCAOB Board. Read </span><a href="http://www.forbes.com/sites/francinemckenna/2011/10/03/schapiros-list-choices-to-be-made-at-the-pcaob/"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">McKenna’s post in Forbes online</span></span></a><span style="font-family: "Arial","sans-serif";">, and </span><a href="http://www.bloomberg.com/news/2011-09-30/auditors-auditor-faces-moment-of-truth-the-ticker.html"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">Weil’s article in Bloomberg’s The
Ticker</span></span></a><span style="font-family: "Arial","sans-serif";">. Hat tip to </span><a href="http://www.thecorporatecounsel.net/Blog/2011/10/stas-beneficial-ownership-processing-study.html"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">Broc Romanek of
TheCorporateCounsel.net</span></span></a><span style="font-family: "Arial","sans-serif";">.
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<o:p><span style="color: maroon;"><strong><u><span style="font-family: Arial, Helvetica, sans-serif;">UPDATE 10/6:</span></u></strong></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>
</strong></span></o:p><br />
<o:p><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Office of Internal Oversight & Performance Assurance (IOPA) Issues Two
Reports</strong>On October 5, the PCAOB posted on its website two
reports that were recently issued by its office of Internal Oversight and
Performance Assurance (IOPA), including the related transmittal
letters accompanying the reports; the letters were sent by PCAOB Chairman Jim
Doty to SEC Chairman Mary L. Schapiro. The two reports were on the PCAOB's:<br />-
</span><a href="http://pcaobus.org/InternalOversight/Documents/Review_Summaries/2011_Information_Technology.pdf"><span style="font-family: Arial, Helvetica, sans-serif;">IT
Governance and Staffing</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, and<br />- </span><a href="http://pcaobus.org/InternalOversight/Documents/Review_Summaries/2011_Employee_Internet_Activity_Controls.pdf"><span style="font-family: Arial, Helvetica, sans-serif;">Controls
Over Employee Internet Activity</span></a></o:p></div>
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Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com9tag:blogger.com,1999:blog-8431368106238433082.post-68495153345845624302011-10-04T16:01:00.000-04:002011-10-04T16:01:47.429-04:00The Meaning & Significance of 'Undue Cost or Effort,' 'Impracticable' in Accounting Standards; IASB Draft Q&AAmong <a href="http://www.ifrs.org/IFRS+for+SMEs/Draft.htm">five draft Q&As</a> relating to International Financial Reporting Standards for Small and Medium Sized Entities (IFRS for SMEs) released for public comment by the IASB last week, the one that piqued my interest in particular was: <a href="http://www.ifrs.org/NR/rdonlyres/FE64E7B8-A8FC-4EC0-A1F1-CB53FE3F9D78/0/draftQA2.pdf">Interpretation of ‘Undue Cost or Effort’ and ‘Impracticable.’</a><br /><br /><strong>Impracticable<br /></strong>The IASB’s draft Q&A pertaining to IFRS for SMEs states:<br /><br /><br /><blockquote>‘Impracticable’ is defined in the IFRS for SMEs as follows: ‘Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’, therefore, generally only covers situations where information is unavailable, for example where data, that has not been collected at the time of an event, is impossible to create at a later point, rather than situations where the data could be obtained but it would be expensive or time consuming to do so. ’….<br /><br />…. Impracticable is defined in the IFRS for SMEs in the same way as under full IFRSs. The definition refers to effort, but not to cost. Therefore, some people have concluded that if the data required in order to apply a principle in an IFRS can be obtained, an entity must do so regardless of cost….<br /><br />It could be argued that ‘every reasonable effort to do so’ would not include spending excessive resources in order to comply with a requirement. However, enquiries to the IASB concerning the difference between ‘impracticable’ and ‘undue cost or effort’ suggest that the IFRS for SMEs is not clear as to whether cost alone would render a requirement impracticable.</blockquote><strong>Undue Cost or Effort<br /></strong>Further, the draft Q&A pertaining to IFRS for SMEs states:<br /><br /><blockquote>‘Undue cost or effort’ is deliberately not defined in the IFRS for SMEs as it will depend on the SME’s specific circumstances and management’s professional judgment in assessing the costs and benefits. That assessment should include a<br />consideration of how the economic decisions of the users of the financial statements could be affected by the availability of the information. Applying a requirement would result in ‘undue cost or effort’ because of either excessive cost (e.g. through valuers’ fees) or excessive endeavors by employees in comparison to the benefits that the users of the SME’s financial statements would receive from having the information.<br /><br />…Where ‘undue cost or effort’ is used together with ‘impracticable’, this should be applied in the same way as ‘undue cost or effort’ on its own. ‘Undue cost or effort’ is used either instead of, or together with, ‘impracticable’ for certain requirements in<br />the IFRS for SMEs in order to include cost or burden as factors to take into<br />account when deciding whether to obtain or determine the information.<br /><br />To include an exemption for impracticability alone would mean that an SME would be required to follow the requirements if it is possible to obtain or determine the information, regardless of the cost or effort required. For example, an SME would be expected to engage a valuer, actuary or other professional to make a particular measurement, regardless of the cost, provided the valuer expects to be able to develop a reliable valuation of the asset.<br /><br />… The inclusion of ‘undue cost or effort’ for certain requirements in the IFRS for SMEs is intended to clarify that cost is a consideration when applying that requirement. Although there is no direct reference to benefits in the term, in order to assess whether cost and effort is ‘undue’ SMEs would have to make an assessment of how important the information is to users.</blockquote><strong>Why Does This Matter?<br /></strong>My two cents (please note the <a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx">disclaimer posted on the right side of this blog):</a> Although <a href="http://www.ifrs.org/IFRS+for+SMEs/IFRS+for+SMEs.htm">IFRS for SMEs,</a> a condensed, simplified, and self-contained set of IFRS, about 1/10 the size of full IFRS, may be elected for use (e.g., as an alternative to full IFRS, or, theoretically, as an alternative to U.S. GAAP) by private companies only (i.e., those that are not publicly listed , and even then, only those that do not have ‘public accountability’ such as banks and certain other entities), I believe this draft Q&A is something worth studying and watching how it evolves, whether you work for (or are indirectly involved in some capacity such as auditing or investing in) a private company or public company, and whether you that company (ies) follow IFRS or U.S. GAAP.<br /><br />Here is why: The Draft Q&A notes that the definition of the term ‘impracticable’ applicable to IFRS for SMEs is the same as that in full IFRS. Therefore it will be interesting to see if any potential changes to the definition applicable to IFRS for SMEs would then raise questions with regard to whether the definition of ‘impracticable’ in full IFRS (as well as usage of ‘undue cost and effort’ in full IFRS) should be considered/reconsidered. Thus, with potential engagement of consideration of implications for full IFRS, the private co/public co (or small co/large co) dividing line may not be as relevant.<br /><br />Similarly, with convergence a priority – although on particular matters the FASB and the IASB can ‘agree to disagree,’ it will be interesting to see if the consideration/reconsideration of the definitions of these key terms will take place at some future date in a parallel manner by the FASB and its constituents.<br /><br />Why does this matter? The significance of the terms ‘undue cost or effort’ and ‘impracticable’ in terms of accounting standard-setting, is that development of (and revision of) GAAP standards theoretically takes into account cost-benefit considerations, and the above terms are sometimes specifically used in defending or arguing against particular accounting treatments. In certain instances, ‘practicability’ exceptions are also provided, and those exceptions do not necessarily relate only to private companies or small companies, particularly if ‘new information’ has to be developed to satisfy a particular accounting requirement, which cannot readily be recreated after-the-fact (this point relates particularly to the transition method or method of adoption set forth in a new standard(s), such as retroactive, retrospective, or current/going-forward basis).<br /><br />I would add that, again in my personal opinion, in terms of a common sense definition of ‘impracticable,’ (although I am not certain how this lines up with any definition(s) of the term in existing U.S. GAAP standards or concept statements, or in the FASB’s Standards of Procedure which govern how they set standards, and I would welcome anyone to provide insights they have via a comment on this blog or an email to me), I would not have thought that a cost of something close to ‘infinity’ would not be considered as rendering a particular requirement ‘impracticable,’ even if it is theoretically ‘possible’ to obtain/develop/recreate said information. In fact, if impracticable meant ‘impossible’ if not used in conjunction with ‘without undue cost or effort,’ then I would think that the term perhaps should never be used alone, without the ‘undue cost or effort’ proviso. What do you think?<br /><br />The comment deadline on the five draft Q&As on IFRS for SMEs released for comment on September 28, will end November 30. See related <a href="http://www.ifrs.org/News/Announcements+and+Speeches/draftQAs0911.htm">press release</a>.<br />In related news on the private company front, see our post earlier today, <a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/October-2011/FAF-Proposes-Private-Co-Standards-Improvement-Coun.aspx">FAF Proposes Private Co Standards Improvement Council To Modify GAAP For Private Co’s – PCSIC’s Recommendations Would Be Subject To Public Comment, FASB Ratification</a> . See also: <a href="http://www.ft.com/intl/cms/s/0/62643d2a-edfc-11e0-a491-00144feab49a.html#axzz1ZqFG32J4">Plan to Simplify US Private Company Accounts</a> by Helen Thomas in the Financial Times published earlier today, and <a href="http://blogs.cbh.com/midmarket/?p=2532">Big GAAP/Little GAAP: A Possible Solution?</a> published 12/21/10 in the Cherry, Beckaert & Holland Blog.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com5tag:blogger.com,1999:blog-8431368106238433082.post-26785443866981627422011-10-04T14:30:00.001-04:002011-10-04T16:26:28.121-04:00FAF Proposes Private Co Stds Improvement Council To Modify GAAP For Private Cos, PCSIC Rec's Would Be Subject To Public Comment, FASB RatificationEarlier today, the Financial Accounting Foundation, which oversees the FASB, released its <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Document_C&pagename=Foundation%2FDocument_C%2FFAFDocumentPage&cid=1176158991959">Plan to Establish the Private Company Standards Improvement Council</a> (the ‘Plan’). The PCSIC would review existing U.S. GAAP to recommend modifications and exceptions for private companies; those recommendations would be subject to FASB ratification and public comment (a model similar to that employed by the FASB’s Emerging Issues Task Force. A similar model was suggested in a comment letter to the FAF filed by FEI’s Committee on Private Company Standards earlier this year, noted below). The FAF seeks public comments on its Plan released today; the comment deadline is January 14, 2012.<br /><br /><strong>FAF Recommendation Similar To That Suggested By FEI Committee<br /></strong>George W. Beckwith, Chairman of <a href="http://www.financialexecutives.org/KenticoCMS/Communities/Committees/Private-Company-Standards-(CPC-S).aspx">FEI’s Committee on Private Co. Standards (CPC-S),</a> said: “CPC-S is pleased that the FAF has released a draft for public comment, on how to improve private company standard-setting. This proposal parallels the suggestion made in the <a href="http://www.financialexecutives.org/eweb/upload/FEI/CPC-S%20letter%20to%20FAF%204.15.11.pdf">comment letter sent by CPC-S in April of this year</a>.”<br /><br />He added, “I believe the basic theme of the FAF’s proposal, to form a strong private co committee with the ability to propose and vote on private company exceptions to existing standards changes is a big step and shows FAF has been listening to the concerns of its private company constituents. Having the new group report directly to the FAF board shows the importance FAF has given to private company concerns. Our committee appreciates the work of the Blue Ribbon Panel, FAF, the AICPA and NASBA in helping articulate the issues and identify potential solutions. We plan to carefully review the FAF’s proposal, to provide a comment letter by the Jan. 14 deadline.”<br /><br /><strong>Composition and Authority Of PSCIC<br /></strong>The FAF’s proposed PSCIC would be chaired by “a FASB member with substantial experience with and exposure to private companies during his or her career.” In addition to the chair, the PSCIC would include 11 to 15 members, selected and appointed by the FAF Trustees, based on nominations submitted to the FAF. Members of the PSCIC would “include users, preparers, and practitioners who have significant experience using, preparing, and auditing (and/or compiling and reviewing) private company financial statements.”<br /><br />The PSCIC would review existing U.S. GAAP and – using a set of criteria to be developed jointly with the FASB - develop recommendations for exceptions or modifications to U.S. GAAP, to “address the needs of users of private company financial statements.” As stated in the Plan, “Any proposed changes to existing US GAAP [recommended by the PSCIC] would be subject to ratification by the FASB and undergo thorough due process, including public comment.”<br /><br />In addition to being called upon to study and make recommendations relating proposed modifications/exceptions to existing U.S. GAAP, the PSCIC would also be called upon in an advisory capacity with respect to items under current deliberation by the FASB. Specifically, the Plan states: “For items under active consideration on the FASB’s technical agenda, the PCSIC would serve as the primary source of advice on appropriate treatment for private companies by working actively and closely with FASB members and staff, and providing advice for consideration by the FASB members in their deliberations. In addition, the PCSIC would have the ability to vote to take a position on the appropriate treatment for private companies related to issues under active consideration by the FASB.”<br /><br />As we <a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/July-2011/FAF-Conclusions-On-Private-Co-Standards-Expected-T.aspx">previously reported</a>, a majority of comment letters filed on an ‘unsolicited’ basis (i.e., in advance of release of the FAF’s Plan) providing input to the FAF, particularly with respect to the recommendations released earlier this year by <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Document_C&pagename=Foundation%2FDocument_C%2FFAFDocumentPage&cid=1176158181336">Blue Ribbon Panel (BRP) on Standard Setting For Private Companies) </a>, supported the recommendation of the BRP to form a separate board to set accounting standards for private companies. Many of those letters supporting the BRP recommendations contained similar phrasing, along the lines of a form letter (see July 1 article <a href="http://www.cfo.com/article.cfm/14585413?f=search">Turf War Over Private Company GAAP</a> by Alix Stuart of CFO.com).<br /><br />The FAF, “acknowledge[d] receipt of more than 2,800 unsolicited letters,” [<a href="http://www.accountingfoundation.org/jsp/Foundation/CommentLetter_C/FAFCommentLetterPage&cid=1175805075213&project_id=Unsolicited">now numbering over 3,000 comment letters</a>] “ most of which made similar points in support of the Blue-Ribbon Panel’s recommendation for a separate standard-setting board for private companies.”<br /><br />However, the FAF also observed that, based on information provided during its outreach efforts, “While some practitioners and preparers expressed support for the formation of a separate board as recommended by the Blue-Ribbon Panel, the view was not widely held. In fact, many of those who initially spoke in support of the creation of a new authoritative board, moved away from that view after hearing concerns of others. Such concerns included the likelihood of confusion, the lack of acceptance of new standards by banks and sureties who expect to see US GAAP financial statements, the establishment of a bifurcated profession, a recognition that the formation of a new board and the promulgation of new rules would take years, and a fear that financial statements prepared in accordance to “little GAAP” would be viewed as inferior to “big GAAP” financial statements.”<br /><br />Another reason why the FAF ultimately decided on recommending a PSCIC, vs. a new standard-setting board, as noted in the Plan, is that the FAF Trustees believe that, ‘The FASB should address—and is committed to addressing—complexity, relevance, and cost-benefit issues more broadly, as other constituents, in addition to private companies, have expressed similar concerns.”<br /><br />Further, the FAF observed that, “The FASB has made recent, substantive changes to how it engages with private company constituents, and has demonstrated a greater operational and structural commitment to further address these issues. The Trustees believe it is appropriate to allow a period of time for those efforts to mature and are monitoring those efforts closely.”<br /><br /><strong>Roundtables Coming; Additional Information<br /></strong>In addition to the Plan itself, related documents and material posted by the FAF include this <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=FAFContent_C&pagename=Foundation%2FFAFContent_C%2FFAFNewsPage&cid=1176158992486">press release</a>, and <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Document_C&pagename=Foundation%2FDocument_C%2FFAFDocumentPage&cid=1176158992373">Executive Summary</a>. A podcast featuring FAF President and CEO Terri Polley and FAF Chairman Jack Brennan can also be downloaded <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Page&pagename=Foundation%2FPage%2FFAFSectionPage&cid=1176158985794">here</a>. The FAF also notes that, in addition to seeking comment letters by January 14, public roundtables will be convened on the Plan.<br /><br /><strong><span style="color:#ff6666;">CHANGE TO FEI BLOG'S RSS FEED! </span></strong><br /><span style="color:#000000;">If you are reading this post on google blogger platform because you have bookmarked the google blogger RSS feed, please redirect your feed for this blog to our new platform, which is part of FEI's new website, <a href="http://www.financialexecutives.org/KenticoCMS/CMSPages/FRBRss.aspx">the new RSS feed is here</a>. The google blogger feed for this blog is anticipated to cease in the near future. Look for the <a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx">FEI Financial Reporting Blog on FEI's new website here</a>.</span><br /><strong></strong>Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com3tag:blogger.com,1999:blog-8431368106238433082.post-59333007082911900112011-09-21T16:57:00.001-04:002011-09-21T17:23:20.279-04:00Sarbanes-Oxley Section 404: Will We See More?<!--StartFragment--> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">A</span><span class="Apple-style-span" style="font-size:small;">ppearing at her second Congressional hearing in as many weeks relating to small business capital formation, </span></span><a href="http://www.sec.gov/news/testimony/2011/ts092111mbc-ln.htm"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">SEC Division of Corporation Finance Director Meredith Cross testified to the House Financial Services Committee</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;"> earlier today on various initiatives the SEC is considering to better facilitate small business capital formation, while still adhering to its investor protection mandate. See the link to the<a href="http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=260088"> hearing webpage</a>, which includes links to all testimony and some related proposed legislation. </span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">I found her prepared remarks on Sarbanes-Oxley Section 404 to be of the most interest, as summarized below. (Please note the </span></span><a href="http://www.financialexecutives.org/KenticoCMS/fei_blogs/financial-reporting-blog.aspx"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">disclaimer that appears on the right side of this blog</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">). </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Note: I did not listen to the live webcast of the hearing, this summary is based on written testimony and draft legislation; if other bloggers out there live-blogged (or live-tweeted) the hearing, I invite you to post a comment or send me an email with a link to your blog post or twitter handle.). </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">In her testimony today, SEC’s Cross noted that the Dodd-Frank Act amended Sarbox by exempting non-accelerated filers (i.e. companies with less than $75 million market cap). A footnote in her testimony linked to the </span></span><a href="http://www.sec.gov/news/studies/2011/404bfloat-study.pdf"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">SEC’s study</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">, also mandated by the Dodd-Frank Act, as to whether further exemptions or other improvements could be made with respect to the rules pertaining to Sarbox 404, for companies with over $75 million market cap and less than $250 million market cap; that study concluded there should be no further exemptions, and that further study would be given to potential improvements. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">She reiterated in her testimony today, in language similar to that used in the SEC’s Sarbox study referenced above, that:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-left:.5in"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">The staff encourages activities that have the potential to further improve both the effectiveness and the efficiency of the evaluation of internal controls, while maintaining important investor protection safeguards. For example, with this objective in mind, the staff continues to work with the PCAOB to monitor inspection results and assess the extent to which publishing observations can be useful. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><o:p><span class="Apple-style-span" style="font-size:small;"> </span></o:p></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">She added:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-left:.5in"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">The staff is also observing COSO’s (Committee of Sponsoring Organizations of the Treadway Commission) project to review and update its internal control framework, which is the most common framework used by management and auditors alike in performing assessments of internal control over financial reporting.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">NOTE: We previously reported that an </span></span><a href="http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/Financial-Reporting-Blog/August-2011/COSO-Exposure-Draft,-Updating-Internal-Control-Fra.aspx"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Exposure Draft of the update to COSO’s 1992 Internal Control-Integrated Framework is expected to be released for public comment later this year</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><b><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Congress Gets Into The Act</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></b></p> <p><span style="font-family:Arial;mso-bidi-font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Various members of Congress have circulated proposals to further amend Sarbanes-Oxley Section 404 by increasing the threshold level of exemptions from the Sarbox Section 404(b) auditor’s report on internal control (i.e., increasing the exemption level provided in the Dodd-Frank Act) and in some cases by providing certain opt-outs for companies up to a threshold level of, in some proposals, $1 billion, with some bills specifying the company would need to disclose if it took advantage of that opt-out (aka, what some may describe as ‘comply or explain.”) </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p><span style="font-family:Arial;mso-bidi-font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">For example, Cross referenced draft legislation proposed by Rep. Stephen Fincher (R-TN). Fincher’s draft bill, the</span></span><span class="Apple-style-span" style="font-size:small;"> </span><a href="http://financialservices.house.gov/UploadedFiles/fincherjobbill.pdf"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#32688E;"><span class="Apple-style-span" style="font-size:small;">Small Company Job Growth and Regulatory Relief Act of 2011</span></span></a><span style="font-family: Arial;mso-bidi-font-family:Arial;color:#053C5E;"><span class="Apple-style-span" style="font-size:small;"> would further amend Sarbox 404 by:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoListParagraphCxSpFirst" style="margin-top:13.2pt;margin-right:0in; margin-bottom:13.2pt;margin-left:38.25pt;mso-add-space:auto;text-indent:-.25in; line-height:15.95pt;mso-list:l0 level1 lfo1"><span style="font-family:Symbol;"><span class="Apple-style-span" style="font-size:small;">·</span><span style="font:7.0pt "Times New Roman""><span class="Apple-style-span" style="font-size:small;"> </span></span></span><span style="font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">increasing the threshold level of companies exempted from the Sarbox 404(b) auditor’s report on internal control, from the current level of $75 million, to a level of $500 million, and </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoListParagraphCxSpLast" style="margin-top:13.2pt;margin-right:0in; margin-bottom:13.2pt;margin-left:74.25pt;mso-add-space:auto;text-indent:-.25in; line-height:15.95pt;mso-list:l0 level2 lfo1"><span style="font-family:'Courier New';"><span class="Apple-style-span" style="font-size:small;">o</span><span style="font:7.0pt "Times New Roman""><span class="Apple-style-span" style="font-size:small;"> </span></span></span><span style="font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">provide an additional exemption for companies between $500 million and $1 billion of market cap: “(1) for the first five years following the registration of securities of an issuer that first registers after the enactment of the Small Company Job Growth and Regulatory Relief Act of 2011,” or (2) any report filed pursuant to subsection (a) by an issuer that has opted out of subsection (b), by consent of its shareholders by majority vote.” </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">It appears to me (see the disclaimer on the right side of this blog) that Rep Fincher’s bill is proposing a permanent opt-out from Sarbox 404(b) – if and only if there is majority shareholder approval - for companies with less than $1 billion market cap. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">In contrast, a similar bill in circulation, “</span></span><a href="http://quayle.house.gov/index.cfm?sectionid=49&sectiontree=49&itemid=242"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">The Startup Expansion and Investment Act,”</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;"> sponsored by Rep. Ben Quayle (R-AZ), appears to provide a ‘comply or explain;’ type opt out for a time limited period (10 years) for companies with less than $1 billion market cap. As described in Rep Quayle’s press release:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-left:.5in"><span style="line-height: 115%; color: rgb(68, 68, 68); font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Specifically, the bill allows new companies with a market capitalization under $1 billion to opt-out of regulations within section 404 of the Sarbanes-Oxley Act for the first ten years after going public. To inform investors, a company must clearly disclose in its annual reports that it chose to opt out of section 404.</span></span><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;"><br /><br /></span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Props to former SEC Chief Accountant Lynn E. Turner for bringing the Quayle bill to my attention through an email news listerv he provides. Of course, he added his own commentary to his email, (subject line “Short Memories”), in which he stated, “</span></span><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;">Clearly people have forgotten the hundreds of billions in dollars of losses investors suffered during the corporate financial reporting frauds, and the tens of thousands of jobs lost [from those frauds].”</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;color:black;"><o:p><span class="Apple-style-span" style="font-size:small;"> </span></o:p></span></p> <p class="MsoNormal"><b><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;">CFA Institute, CAQ, and CII Caution Against Further Sarbox Exemptions</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></b></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;">Yesterday, a joint letter was sent by the CFA Institute, the Center for Audit Quality, and the Council of Institutional Investors, to the Chairman (Rep. Spencer Bachus) and Ranking Member (Rep. Barney Frank) of the House Financial Services Committee (sponsor of today’s hearing), stating:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-left:.5in"><span style="line-height: 115%; "><span class="Apple-style-span" style="font-size:small;">We understand that the Committee is considering legislation that could weaken certain investor protections of the Sarbanes-Oxley Act of 2002 (SOX). The Center for Audit Quality, the Council for Institutional Investors, and CFA Institute are writing to urge you to resist efforts to further weaken SOX by exempting even more public companies from compliance with Section 404(b) of the Act, which requires an independent audit of a company’s assessment of its internal controls as a component of its financial statement audit.</span></span><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;"><br /><br /></span></span><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Read more in the </span></span><a href="http://www.thecaq.org/publicpolicy/pdfs/CAQCIICFA404letter92011.pdf"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">CFA Institute, CAQ, CII Sept. 20 letter</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><b><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">SEC IG Issues Report on Conflicts of Interest</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></b></p> <p class="MsoNormal"><span style="line-height: 115%; color: rgb(69, 69, 69); font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">In the interim period between the two Congressional hearings addressing crowdfunding and other small business capital formation matters, the SEC’s Inspector General publicly released his report and recommendations entitled: </span></span><a href="http://www.sec.gov/foia/docs/oig-560.pdf"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Investigation of Conflict of Interest Arising from Former General Counsel's Participation in Madoff-Related Matters</span></span></a><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;">. The report examined the involvement of former SEC General Counsel David M. Becker in certain matters relating to the Madoff liquidation, in light of his having inherited some funds from his late mother’s estate which came from liquidation of an investment in Madoff securities. Becker had received clearance from the SEC Ethics Officer to participate in matters relating to the Madoff liquidation. Among parties sued by the Madoff bankruptcy Trustee for clawback of a certain portion of funds received were the Becker estate.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;color:black;"><span class="Apple-style-span" style="font-size:small;">In response to the IG’s report, SEC Chairman Mary L. Schapiro made the following statement: </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">Last March, after learning about the Trustee’s suit against the Becker estate, I asked for the Inspector General to look into the matter. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">I take his report, which was published today, very seriously.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">It would be inappropriate for me to comment on the Inspector General’s referral to the Department of Justice. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">I do want to state that I’ve known David for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three Chairmen.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">As the Inspector General recommends, we will seek another vote of the Commission on the question of the SEC’s position on the valuation of Madoff victim accounts.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">I believe that the decision the Commission made on that issue was appropriate under the law and in the best interest of investors. </span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p style="margin-left:.5in"><span style="font-family:Arial;mso-bidi-font-family:Arial;color:#454545;"><span class="Apple-style-span" style="font-size:small;">Moving forward, we plan to implement the other recommendations contained in the report as well.</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Of note in </span></span><a href="http://www.sec.gov/news/testimony/2011/ts092111mbc-ln.htm"><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">Cross’s testimony before the House Financial Services Committee today</span></span></a><span style="line-height: 115%; font-family:Arial;"><span class="Apple-style-span" style="font-size:small;">, as shown in footnote/endnote number 1 to her written testimony, was that Cross has voluntarily recused herself from matters relating to ‘crowdfunding,’ and that Lona Nallengara, Deputy Director of the Division of Corp Fin, would provide testimony on crowdfunding specifically, with Cross providing the remainder of today’s testimony. As explained in the footnote:</span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span style="line-height: 115%; font-family:Arial;"><o:p><span class="Apple-style-span" style="font-size:small;"> </span></o:p></span></p> <p class="MsoNormal" style="margin-left:.5in"><span style="color:#454545;"><span class="Apple-style-span" style="font-family:arial;"><span class="Apple-style-span" style="font-size:small;">Ms. Cross’s participation in this testimony does not include matters related to crowdfunding. Prior to joining the Commission staff in June 2009, Ms. Cross served as counsel to a company in connection with its registration under the Securities Act of 1933 of notes offered and sold through its “peer-to-peer” lending platform. Although Ms. Cross has no financial or other interest in her former client or her prior employer, in light of the small number of participants in that market, in order to avoid any appearance concerns, she does not participate in matters involving peer-to-peer lending. Further, since there are some similarities between peer-to-peer lending and some crowdfunding concepts, even though Ms. Cross has been advised by SEC Ethics Counsel that there is no conflict of interest, Ms. Cross has determined that in order to avoid any appearance concerns, she will no longer participate in crowdfunding matters. For purposes of this testimony, Mr. Nallengara will address crowdfunding matters.</span></span><span class="Apple-style-span" style="font-family:arial;"><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></span></p> <p class="MsoNormal"><span style="line-height:115%;font-family: Arial;mso-bidi-font-family:Arial;color:black;"><o:p><span class="Apple-style-span" style="font-size:small;"> </span></o:p></span></p> <p class="MsoNormal"><span style=" line-height: 115%; color:black;"><span class="Apple-style-span" style="font-family:arial;"><span class="Apple-style-span" style="font-size:small;">It appears that Cross’s voluntary recusal from matters relating to crowdfunding (including from providing formal testimony on the matter today), and the related disclosure in footnote 1 of her testimony, reflects an abundance of caution to avoid even the appearance of any potential conflict of interest, particularly in light of the IG’s report and recommendations released yesterday. </span></span><span class="Apple-style-span" style="font-size:small;"><o:p></o:p></span></span></p><p class="MsoNormal"><span class="Apple-style-span" style="font-family:arial, serif;"><span class="Apple-style-span" style=" line-height: 14px;"><span class="Apple-style-span" style="font-size:small;">NOTE to subscribers to our RSS feed: As previously reported, the FEI blog is now housed on FEI's new website, and we encourage you to pick up our new </span><a href="feed://www.financialexecutives.org/KenticoCMS/CMSPages/FRBRss.aspx"><span class="Apple-style-span" style="font-size:small;">RSS feed</span></a><span class="Apple-style-span" style="font-size:small;">.</span></span><span class="Apple-style-span" style=" line-height: 14px;"><span class="Apple-style-span" style="font-size:small;"> </span></span></span></p> <!--EndFragment-->Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com8tag:blogger.com,1999:blog-8431368106238433082.post-52638435028478041112011-09-16T14:01:00.000-04:002011-10-05T20:02:58.709-04:00Schapiro, Pitt, Others Testify On Congressional Proposals On SEC Modernization, Accountability<a href="http://financialservices.house.gov/UploadedFiles/091511schapiro.pdf">SEC Chairman Mary L. Shapiro</a>, <a href="http://financialservices.house.gov/UploadedFiles/091511pitt.pdf">former SEC Chairman Harvey L. Pitt</a>, and other former high ranking officials of the SEC testified at a Congressional hearing yesterday on <a href="http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=258960">"Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission</a>."<br />
<br />
<a href="http://financialservices.house.gov/UploadedFiles/091511saumya.pdf">Shubh Saumya </a>of the Boston Consulting Group was also among those testifying at the hearing, vis-a-vis BCG's recommendations issued to the SEC in March 2011 and followup planning and action taken as noted in the Special Study published by the SEC on September 9: <a href="http://www.sec.gov/news/studies/2011/secorgreformreport-df967.pdf">Report on the Implementation of SEC Organizational Reform Recommendations</a>.<br />
<br />
Also testifying at the hearing were <a href="http://financialservices.house.gov/UploadedFiles/091511atkins.pdf">former SEC Commissioner Paul Atkins</a>, <a href="http://financialservices.house.gov/UploadedFiles/091511crimmins.pdf">former SEC Secretary Jack Katz, former SEC Deputy Chief Litigation Counsel Stephen Crimmins</a>, and <a href="http://financialservices.house.gov/UploadedFiles/091511verret.pdf">George Mason Law Prof J.W. Verret</a>.<br />
<br />
Among the more interesting reporting coming out of the hearing:<br />
<ul>
<li><a href="http://www.washingtonpost.com/business/economy/former-sec-head-opposes-new-regulations/2011/09/15/gIQACpRkUK_story.html">Former SEC Head Opposes New Restrictions, by David Hilzenrath, Washington Post 9/16</a></li>
<br />
<li><a href="http://www.advisorone.com/2011/09/15/in-switch-bachus-backs-more-sec-funds-for-dodd-fra">In Switch, Bachus Backs More SEC Funds For Dodd-Frank, by Melanie Waddell, AdvisorOne, 9/15</a></li>
</ul>
See also <a href="http://financialexecutives.blogspot.com/2011/09/sec-considers-exempting-crowdfunding.html">our post earlier today on a separate Congressional hearing </a>taking place yesterday, relating to the SEC's consideration of 'crowdfunding' and potential exemptions from SEC registration requirments.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com1tag:blogger.com,1999:blog-8431368106238433082.post-6544946258876020642011-09-16T11:49:00.002-04:002011-09-16T13:25:38.707-04:00SEC Considers Exempting Crowdfunding From Reg. Requirements, Corp Fin’s Cross Tells Congress; Forms Advisory Committee on Small and Emerging Co’sAt a <a href="http://oversight.house.gov/index.php?option=com_content&view=article&id=1430%3A9-15-2011-qcrowdfunding-connecting-investors-and-job-creatorsq&catid=34&Itemid=1">Congressional hearing yesterday</a>, the SEC's Director of the Division of Corporation Finance <a href="http://www.sec.gov/news/testimony/2011/ts091511mbc.htm">testified</a> that the SEC staff is currently considering- and a newly formed <a href="http://www.sec.gov/news/press/2011/2011-182.htm">Advisory Committee on Small and Emerging Companies </a>will also consider and provide input on - potential methods to enhance the ability of small businesses to raise capital, including by potentially increasing the minimum size of offerings that would be exempted from SEC registration requirements, including (but not limited to) small business or startup fundings conducted online and/or through social media referred to via as <a href="http://en.wikipedia.org/wiki/Crowd_funding">'crowdfunding.</a>'<br /><br />The term 'crowdfunding' and a possible tie to an exemption from SEC Registration requirements to loosen regulatory burdens on startup companies to encourage capital formation and job growth was popularized recently in a <a href="http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-and-overview">White House Fact Sheet </a>posted in connection with President Barack Obama's proposed <a href="http://www.whitehouse.gov/jobsact">American Jobs Act </a>and related initiatives including the <a href="http://www.startupamericapartnership.org/">Startup America partnership</a>, and further publicised in a number of blog posts by the Administration, e.g. <a href="http://www.whitehouse.gov/blog/2011/09/09/american-jobs-act-fueling-innovation-and-entrepreneurship">here</a> and <a href="http://www.whitehouse.gov/blog/2011/09/13/startup-america-partnership-entrepreneurs-wanted">here</a>. The reference to 'crowdfunding' in the White House Fact Sheet is cited below.<br /><br />A personal observation - and please see the <a href="http://www.financialexecutives.blogspot.com/">disclaimer on the right side of our blog</a>: it is very interesting to see continued references to the challenges of complying with the Sarbanes-Oxley Act, presumably in particular Section 404 on internal control reporting, with respect to challenges to small business and start-ups in particular. This issue was debated not only after Sarbox (resulting in some amendments to the initial SEC and PCAOB rulemaking implementing Sarbox 404) but also during and after the Dodd-Frank Act which provided certain additional exemptions and calls for studies. The continued interest in Sarbox could be the thinking among some that there is something of a fixed cost and/or minimal staffing component to certain of the Sarbox 404 requirements<em>.</em><br /><br /><br /><p>Crowdfunding is referenced in the White House Fact Sheet as follows:<br /></p><br /><br /><blockquote>"As part of the President’s Startup America initiative, the Administration will pursue efforts to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection. This includes working with the SEC to explore ways to address the costs that small and new firms face in complying with Sarbanes-Oxley disclosure and auditing requirements. The administration also supports establishing a “crowdfunding” exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10% of investors’ annual income) and raising the cap on “mini-offerings” (Regulation A) from $5 million to $50 million. This will make it easier for entrepreneurs to raise capital and create jobs."</blockquote>In her <a href="http://www.sec.gov/news/testimony/2011/ts091511mbc.htm">testimony</a> yesterday before the House Committee on Oversight and Government Reform's Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, Corp Fin Director Meredith Cross described 'crowdfunding' and the SEC's consideration of same as follows:<br /><br /><br /><blockquote><br /><br /><p>Generally, the term “crowdfunding” is used to describe a form of capital raising whereby groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal. This funding strategy was initially developed to fund such things as films, books, music recordings, and charitable endeavors. At that time, the individuals providing the funding were more akin to contributors than “investors” and were either simply donating funds or were offered a “perk,” such as a copy of the related book. </p></blockquote>Another personal observation: (I remind you again of the disclaimer posted on the right side of this blog): My own experience with 'crowdfunding' earlier this year was in responding to a request for funding a project posted by a singer-songwriter friend (NB, that would be you), which he posted on <a href="http://www.facebook.com/">facebook</a> , to fund a new CD and songbook. His facebook post, in turn, linked to specific info about his project posted on the crowdfunding webite <a href="http://www.kickstarter.com/">Kickstarter.com </a>, including his funding goal, and total amount raised toward that goal. Those wishing to make a contribution to the project could do so via electronic fund transfer via Amazon. An apparent ongoing debate about kickstarter.com vs. other crowdfunding sites is the fact that kickstarter runs an 'all or nothing' funding collection program, either the goal is met and everyone's pledges are paid, or the goal is not met and (presumably) no one's pledges are collected. Read more about the all-or-nothing kickstarter model and other facts on <a href="http://www.kickstarter.com/help/faq">kickstarter.com's FAQs</a>. Significantly, this was not an 'investment' and did not purport to be a 'security' but I offer this example up for those of you interested in learing about some of the crowdfunding mechanisms out there, such as those referenced in Cross' testimony. (Postscript: my singer-songwriter friend NB met his funding goal.)<br /><br />Following are some additional highlights from <a href="http://www.sec.gov/news/testimony/2011/ts091511mbc.htm">Cross's testimony on crowdfunding</a> yesterday:<br /><br /><blockquote><br /><br /><p>As these capital raising strategies did not provide an opportunity for profit participation, initial crowdfunding efforts did not raise issues under the federal securities laws.<br /><br />…Proponents of crowdfunding are advocating for exemptions from the Securities Act registration requirements for this type of capital raising activity in an effort to assist early stage companies and small businesses. </p><br /><br /><p>...For example, the Commission received a rulemaking petition requesting that the Commission create an exemption from the Securities Act registration requirements for offerings with a $100,000 maximum offering amount that would permit individuals to invest up to a maximum of $100.<br /></p><br /><br /><p>…in considering whether to provide an exemption from the Securities Act registration requirements for capital raising strategies like crowdfunding, the Commission needs to be mindful of its responsibilities both to facilitate capital formation and protect investors.<br /><br />The Commission’s rules previously included an exemption, Rule 504, which allowed a public offering to investors (including non-accredited investors) for securities offerings of up to $1 million, with no prescribed disclosures and no limitations on resales of the securities sold. These offerings were subject only to state blue sky regulation and the antifraud and other civil liability provisions of the federal securities laws. </p><br /><br /><p>In 1999, that exemption was significantly revised due in part to investor protection concerns about fraud in the market in connection with offerings conducted pursuant to this exemption. </p><br /><br /><p>In assessing any possible exemption for crowdfunding, it would be important to consider this experience and build in investor protections to address the issues created under the prior exemption. </p><br /><br /><p>Some of the questions to consider with regard to crowdfunding include:<br />what information — for example, about the business, the planned use of funds raised, and the principals, agents, and finders involved with the business — should be required to be available to investors;<br /><br />what restrictions should there be on participation by individuals or firms that have been convicted or sanctioned in connection with prior securities fraud;<br /><br />should a Commission filing or notice be required so that activities in these offerings could be observed;<br /><br />should securities purchased be freely tradable; and<br /><br />should websites that facilitate crowdfunding investing be subject to regulatory<br />oversight? </p></blockquote><strong>Advisory Committee on Small and Emerging Co's</strong><br />SEC's Cross also told the Congressional subcommittee that input on crowdfunding and other capital formation issues would be sought from the SEC's new Advisory Committee on Small and Emerging Companies. This new advisory committee, and its members, were announced earlier this week in this <a href="http://www.sec.gov/news/press/2011/2011-182.htm">SEC press release</a>.<br /><br /><strong>Bills Introduced To Exempt Certain Crowdfunding<br /></strong>As reported by Bloomberg's Phil Mattingly today, a number of Congressional bills have already been submitted to provide certain exemptions from SEC registration requirements for crowdfunding. See Mattingly's article, <a href="http://www.bloomberg.com/news/2011-09-15/u-s-house-republicans-embrace-obama-push-to-ease-sec-rules.html">U.S. House Republicans Embrace Obama Push to Ease SEC Rules.</a>Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com40tag:blogger.com,1999:blog-8431368106238433082.post-64691283178100442082011-09-07T14:45:00.001-04:002011-09-07T14:46:33.061-04:00NEW! FEI Blog Part of FEI's New Website!Earlier today, Financial Executives International launched a new and improved version of its website, <a href="http://www.financialexecutives.org/KenticoCMS/home.aspx">www.financialexecutives.org</a>. The FEI Financial Reporting Blog will now be housed among its brother and sister posts on FEI's website, providing you one-stop shopping for the latest info on FEI's outstanding conferences, webcasts, advocacy and accounting policy committee activities, career development, and more! For direct access to the blog, you can continue to visit www.financialexecutives.org/blog. <div><br /></div><div><b>NEW RSS FEED: </b></div><div>Those of you who utilize our RSS feed, please note the feed will change, you will need to pick up the feed that appears on our new website next to the FEI Financial Reporting Blog. Our twitter site, www.twitter.com/feiblog has not changed.<br /><br /></div><div><b>CHANGE COMING TO EMAIL DELIVERY:</b><br /><b>*** Our email delivery will also change over to a new method in the coming month or so. If you should notice you do not receive emails that are posted on our site www.financialexecutives.org/blog, please feel free to contact me with questions about your email delivery or any other questions regarding the blog or our new website, and I or our IT team will be happy to get back to you to address any concern you have.</b><br /><br />And of course, we will continue to bring you cutting edge news and analysis of the latest and greatest happenings in the world of financial reporting from the FASB, IASB, SEC and PCAOB, by means of the written word and the <a href="http://financialexecutives.blogspot.com/2011/07/hey-there-bob-pozen.html">occasional music video</a> by which we are known!<br /><br />We invite you to take a tour of FEI's new website; there is also a feedback box to provide real-time feedback.<br /><br /><b>QUESTIONS?</b></div><div>Some finishing touches are still being added to the blog page on this new site, including our blog roll of esteemed blogger colleagues and areas for sponsoring advertisers. Once again, if you have any questions regarding the blog, please do not hesitate to contact me at eorenstein@financialexecutives.org.<br /></div>Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com20tag:blogger.com,1999:blog-8431368106238433082.post-75209813289324847922011-09-06T15:34:00.000-04:002011-09-06T15:35:12.733-04:00SEC Seeks Comment On Plan For Retrospective Review of Existing Reg'sThe SEC published today a request for comment on its plan for conducting its retrospective review of its existing regulations, to be conducted in accordance with a Presidential order issued on July 11 of this year. See <a href="http://www.sec.gov/news/press/2011/2011-178.htm">SEC's press release </a>and <a href="http://www.sec.gov/rules/other/2011/33-9257.pdf">request for information</a>. Comments are due by October 6.<br /><br />As noted in the SEC's press release:<br /><br /><blockquote>The Commission is <a href="http://www.sec.gov/rules/other/2011/33-9257.pdf#page=4">seeking public comment</a> on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process....<br /><br />President Barack Obama issued an order on July 11 that recommended that independent regulatory agencies consider how they might best analyze rules that<br />may be outmoded, ineffective or excessively burdensome, and modify, streamline<br />or repeal them. The order also recommends analysis of regulations that might need to be strengthened or modernized, which may entail new rulemaking.<br /></blockquote>Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com2tag:blogger.com,1999:blog-8431368106238433082.post-76676870694312221372011-09-06T15:27:00.000-04:002011-09-06T15:27:48.865-04:00FAF Proposal On Private Co Standard Setting Coming In A Matter of 'Weeks,' Says FAF's PolleyIn the <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Page&pagename=Foundation%2FPage%2FFAFSectionPage&cid=1176158888116">Sept., 2011 "From the President's Desk</a>" letter issued earlier today, Financial Accounting Foundation President & CEO <a href="http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Page&pagename=Foundation%2FPage%2FFAFSectionPage&cid=1176157787362">Terri Polley </a>said that after receiving an enormous amount of written and in-person feedback on the topic of how best to set accounting standards for private (nonpublic) companies, the FAF plans to release a proposal on this matter for public comment "in the coming weeks."<br /><br />Close to <a href="http://www.accountingfoundation.org/jsp/Foundation/CommentLetter_C/FAFCommentLetterPage&cid=1175805075213&project_id=Unsolicited">2,500 'unsolicited' (i.e., prior to a formal request for comment) letters </a>have been filed with the FAF/FASB on the subject of private co standard-setting so far, with the <a href="http://www.accountingfoundation.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175822665555&blobheader=application%2Fpdf">initial letter </a>having been filed in the spring by <a href="http://www.financialexecutives.org/eweb/DynamicPage.aspx?site=_fei&WebCode=CPCS_Home">FEI's Committee on Private Company Standards, chaired by George Beckwith. </a><br /><br />As noted in Polley's letter, in addition to the longer term strategic decisions being undertaken by the FAF on how best to set accounting standards for private co's (including consideration of the report and recommendations of the Blue Ribbon Panel on Private Co Accounting, issued earlier this year, which recommended formation of a separate board focused on private co accounting standards), FASB is conducting <a href="http://financialexecutives.blogspot.com/2011/08/fasb-invites-private-cos-to-public.html">public hearings </a>next month on particular issues and how best to handle those matters for private companies.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com4tag:blogger.com,1999:blog-8431368106238433082.post-63202880635020715612011-09-06T15:11:00.001-04:002011-09-06T15:13:27.107-04:00FASB Project Aims For Less Disclosures, With More UtilityThe Financial Accounting Standards Board is bringing its consideration of its Disclosure Framework project, first launched in 2009, to the forefront, bringing the results of staff research and a proposed decision framework for the board's first formal consideration last week.<br /><br />The Disclosure Framework project was prompted, in large part, (although not solely by), recommendations contained in the Report and Recommendations of the SEC Advisory Committee on Improvements to Financial Reporting (aka <a href="http://financialexecutives.blogspot.com/2011/08/disclosure-framework-improving.html">CIFiR or The Pozen Committee</a>).<br /><br />As noted in <a href="http://www.fasb.org/cs/ContentServer?site=FASB&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FActionAlertPage&cid=1176158854481">FASB's summary of its Aug. 24 meeting</a> at which the Disclosure Framework project was discussed, the board essentially agreed with the decision approach recommended by the staff, shown in the <a href="http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158853921">board handout</a>, including the fact that the Disclosure Framework would be approached more from the perspective of a Concepts Statement than an individual accounting standard (Accounting Standards Update) per se.<br /><br />Something that jumped out at me in reading FASB's meeting summary was a sentence that seemed to very crisply identify the objective of the Disclosure Framework project, in terms even more precise than those used when the project was first announced in <a href="http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176156338441">FASB's 7/28/09 press release</a>.<br /><br />Specifically, FASB stated in its summary last week that:<br /><br /><br /><blockquote>The desired result [of the Disclosure Framework project] is a <strong>net<br />reduction in disclosure volume</strong> and a <strong>net increase in the<br />utility </strong>of the information disclosed. </blockquote><br />One caveat before leaping on the 'reduction in disclosure volume' and 'increase in utility' goals: (I remind you of the <a href="http://www.financialexecutives.blogspot.com/">disclaimer posted on the right side of this blog</a>) - keep in mind the operative term, "<strong>net</strong>" - that there will be a "net" reduction in disclosure volume (so, leaving the door open for new disclosures to be added, with a concurrent reduction in some other disclosures).<br /><br />Still, the hoped for net decrease in disclosure combined with a net increase in utility of those disclosures would be a welcome development for all those involved in the financial reporting process including preparers, auditors, investors, directors, educators, and others.Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com0tag:blogger.com,1999:blog-8431368106238433082.post-27153088907271909332011-08-30T11:06:00.000-04:002011-08-30T11:07:15.739-04:00Important Message From FEI Re: Power Outage and Changes to BlogDue to Hurricane Irene, FEI Headquarters, located in Morristown, NJ has suffered a major power outage. As soon as power is restored, FEI will be back online. Thank you for your patience.
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<br />Additionally, although there will be delays sending out emails from this blog, check back to the blog at <a href="http://financialexecutives.blogspot.com/">http://financialexecutives.blogspot.com</a> for new blog posts this week. You can also keep up with news from the blog and FEI via our twitter accounts at <a href="http://www.twitter.com/feiblog">www.twitter.com/feiblog</a> and <a href="http://www.twitter.com/feinews">www.twitter.com/feinews</a> .
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<br />In other news, please note the URL to this blog (and the related RSS feed) may change soon in connection with a website update at FEI. Check back to this site for further updates.
<br />Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com7tag:blogger.com,1999:blog-8431368106238433082.post-43816607628919493032011-08-26T14:28:00.000-04:002011-08-26T14:29:27.378-04:00CFOs Invited To New FEI Programs; Sept. 1 Conference CallFEI is sponsoring <a href="http://www.zoomerang.com/Survey/WEB22CYDXFNG6M/">new programs for Chief Financial Officers</a>. The first program will be a conference call for CFOs to share experiences, challenges, and best practices on: <em>The Role of the CFO, </em>Thurs., September 1 from 1:00 – 2:00 PM EDT.
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<br />Use the <a href="http://www.zoomerang.com/Survey/WEB22CYDXFNG6M/">online signup form </a>if you are:
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<br /><li><strong>an FEI member who is a CFO</strong>, to sign up to receive information about future programs for CFOs, or to register specifically for the Sept. 1 conference call; </li>
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<br /><li><strong>an FEI member who wishes to refer the CFO of their company or another company to consider participating in these programs</strong> (nonmembers who are CFOs, referred by an FEI member or a member of the FEI staff, may participate in the Sept. 1 program as well as FEI members who are CFOs.</li>
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<br /><li><strong>a CFO who is not currently a member of FEI, but you have been referred to this program or received an invitation from an FEI member or a member of the FEI staff</strong> (blog readers: you can write "FEI blog" for the name of the person who referred you to this program; participants must be CFOs). </li></ul>
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<br />Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com0tag:blogger.com,1999:blog-8431368106238433082.post-43427937317325583422011-08-26T14:15:00.000-04:002011-08-26T14:16:18.269-04:00Got Social Media? Take the FERF-GT SurveyFEI's research affiliate, the Financial Executives Research Foundation (FERF), in partnership with Grant Thornton, is launching the <a href="http://www.zoomerang.com/Survey/WEB22CT8JDHGEB/">Social Media and Its Associated Risks Survey</a> to look at how social media is changing the face of business in the U.S. and around the world.
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<br />With the scope of social media expanding every day, companies have an opportunity to take advantage of business-building and promotional avenues that were not available only a few years ago. These opportunities come with an accompanying list of new risks, however.
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<br />Through this survey and in-depth follow up interviews, senior financial executives will learn about practical guidance in social media policymaking and risks to be considered in regard to their companies’ social media plans and strategies. The research will also inform senior financial executives about governance issues, corporate policy, a code of ethics around social media, internal control issues and social media audits.
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<br />The good folks at FERF estimate it will take you about 15 minutes to complete the survey. Thank you for your input!
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<br />Take survey <a href="http://www.zoomerang.com/Survey/WEB22CT8JDHGEB/"><strong>here</strong></a><strong>.</strong>
<br />Edith Orensteinhttp://www.blogger.com/profile/13119281392433443408noreply@blogger.com0