FEI Financial Reporting Blog

Kroeker Stresses Importance of Investors in IFRS Decision; Search Is On For Next Chairman Of IASB When Tweedie Retires in 2011

2009-12-07T17:13:00.005-05:00

In remarks earlier today at the AICPA's annual conference on current SEC and PCAOB developments, SEC Chief Accountant Jim Kroeker said, "implementing a single set of global accounting standards for U.S. issuers can, and must, be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC's mission of protecting investors."

Kroeker outlined six general areas that the SEC would have to "carefully consider...fully understand and address" regarding the potential use of IFRS by U.S. companies. He added that this list is not all-inclusive. The six areas are:

U.S. Investor understanding of and perspectives on IFRS;
The development and application of IFRS for use as the single set of globally accepted accounting standards for U.S. issuers;
The impact on the U.S. regulatory environment;
Preparer considerations, including, among other matters:
- changes to accounting systems,
- changes to contractual agreements,
- corporate governance considerations, and
- litigation contingencies;
Human capital readiness; and
The role of the FASB in achieving the goal of a single global standard.

Kroeker noted, "I expect that you will hear more from us on this topic in the near term."

My two cents (I remind you of the disclaimer on the right side of this blog): For those self-appointed "IFRS Watchmen" watching and weighing every utterance coming from the SEC on the status of its proposed IFRS roadmap, most will probably view Kroeker's reference to more info coming in the "near term" as further testimony to the fact that something more definitive is expected from the SEC "this fall" regarding the status of its IFRS roadmap, to use the terminolgy previously used in remarks by SEC Chairman Mary L. Schapiro (as noted in Sept. 18 Dow Jones article), and by Kroeker in an number of speeches earlier this year.

It will be interesting to see if the six areas outlined by Kroeker in his remarks to the AICPA today will form the general outline of the SEC's 'next steps' for its IFRS roadmap. Although he did not use the term 'next steps,' the term has been used in previous speeches, such as in remarks by SEC Commissioner Kathleen Casey at an FEI conference last month when she said: "It is also my hope and expectation that the Commission will soon articulate the next steps to be taken with respect to the use of IFRS by U.S. issuers – further signaling our commitment to this important goal."

Separately, Prof. David Albrecht has indexed some writings on IFRS in his blog, The Summa. At the present time, he notes his posts include everything he's written on the issue, and a summary of some opposing arguments to a move to IFRS. "Yet to write," says Albrecht: "Comparing and Evaluating Both Sides of the IFRS Issue."

Search is On For Next Chair Of IASB, And What About FASB?
In related news on the IFRS front, the International Accounting Standards Committee Foundation (IASCF), parent of the IASB, issued a press release earlier today announcing: "Trustees Seek Nominations for Chair of IASB From 2011." Current IASB Chair, Sir David Tweedie's term, ends on June 30, 2011. (Coincidentially, that is the date by which the G-20 leaders, at their September meeting, called for the FASB and IASB's major convergence projects to be completed by; and FASB and the IASB, in a November joint statement, reaffirmed their commitment to achieving that goal.)

Up until now, the forthcoming changing of the guard at the IASB has been a sleeper issue, at least in the U.S..

However, the potentially bigger sleeper issue in the U.S. is the fact that FASB Chairman Robert Herz' term as chairman of the FASB is currently set to expire on June 30, 2012. In fact. only one of the current board members currently has a term extending past 2012, although a number of board members could potentially be reappointed to a second term (Tom Linsmeier, Larry Smith, Mark Siegel) after their first terms expire. Herz and Leslie Seidman are serving their second terms on the board.

My two cents (does that make four cents today?) (I remind you once more of the disclaimer on the side of this blog): I cannot recall if any FASB board member has ever been reappointed to a third consecutive term, nor do I know if that is permissible under their Rules of Procedure, but there may be some merit to permitting a reappointment to a third term if warranted, given the massive amount of change coming down the pike with the completion of the major convergence projects, initial implementation of those changes, the potential move to IFRS for public co's in the U.S., and looming questions about the future of financial reporting for private companies in the U.S., as noted in our post last week re: private co's.

Of course, as noted in point #6 of the SEC Chief Accountant's remarks at the AICPA conference earlier today, "the role of FASB in achieving the goal of a single global standard" is still something to be reckoned with, and that will particularly be the case in the post-2011 (presumably 'converged') world.

In this regard, it is interest to look back at an earlier post in this blog from Dec. 11, 2007, entitled: "FASB Could Become Part of IASB, Herz Reportedly Tells IFAC Conference; SEC To Meet Next Week." Here's what our post from Dec. 11, 2007 said:

There’s been a flurry of reporting on FASB Chairman Bob Herz’ remarks at the International Federation of Accountants (IFAC) 30th anniversary World Accountancy Forum earlier this week, in which Herz is reported to have said that in light of the move toward one global standard setter – and, as he has previously stated, that one global standard setter will one day be the IASB - FASB can essentially become a branch or satellite office of the IASB. This was reported in FASB Sees Its Future as Part of IASB,” Accountancy Age, Dec. 7, “FASB Could Become Branch of IASB,” Webcpa, Dec. 6, and “FASB Members Suggest board Could Become IASB ‘Satellite’ or U.S. Office,” BNA Daily Report for Executives, Dec. 7.The BNA article notes not only Herz remarks at IFAC on Dec. 4, but similar remarks by FASB board member Michael Crooch at yesterday’s (Dec. 6) FASB Accounting Standards Advisory Council (FASAC) meeting.

BNA describes Herz' remarks at IFAC as “suggest[ing] IASB could have an office ‘in the United States – maybe in Norwalk [Conn.]’ for example, and it ‘might have an office in Japan.’ BNA also notes Crooch told FASAC yesterday: “At some point, the FASB is going to have to be out of the business of writing accounting standards, if you’re going to have one global standard-setter.”

FASB-IASB Financial Crisis Advisory Group To Meet Dec. 15

2009-12-05T20:02:00.001-05:00

The Financial Crisis Advisory Group (FCAG) - a joint advisory group formed by FASB and the IASB in 2008 to advise the two boards on accounting issues relating to the credit crisis (culminating in issuance of the FCAG final report in July, 2009) - will meet in London on December 15 to discuss:

the IASB's and FASB's actions in response to the FCAG final report , and
other developments in the standard-setting and regulatory environments.

Plans for the December meeting had been announced in July, as noted in the cover letter included in FCAG's final report (printed pg iii, pdf pg 4), signed by co-chairs Harvey Goldschmid (a former SEC Commissioner) and Hans Hoogervorst (Chairman of the Management Board of the Netherlands Authority for the Financial Markets or AFM), as well as in the related press release and letter to the G-20. The specific date of Dec. 15 and meeting location were noted in this announcement released by the boards yesterday.

Further background on FCAG can be found on the FCAG webpage, and in our previous posts on FCAG, including: FASB-IASB Financial Crisis Advisory Group Issues Report (July 28), Pressure on FASB, IASB Could Result in Tragedy, FCAG Members Warn (May 23), FASB-IASB Group Updates, Cautions G-20 (April 30), and FASB-IASB Group Discusses Fair Value, Financial Stability (Feb. 15).

Chief Accountant May Speak On IFRS Roadmap Next Week

2009-12-03T13:20:00.003-05:00

In remarks before a FASB advisory group earlier today, an SEC staff member said that SEC's Chief Accountant is expected to speak about the status of SEC’s consideration of its IFRS roadmap when he speaks at an industry conference next week.

NOTE TO READERS: Since next week still falls before the ‘end of fall’ – the time period by which, SEC Chairman Mary L. Schapiro previously said, the SEC will speak publicly on this issue, and given that, as previously pointed out by SEC Chief Accountant Jim Kroeker in earlier remarks at various conferences this year, ‘fall’ ends by Dec. 21 – it is possible Kroeker will largely reiterate previous remarks when he speaks at the annual AICPA National conference on Current SEC and PCAOB Developments next week. However, given the high visibility of SEC staff remarks at the AICPA conference, it is possible Kroeker may use the opportunity to announce something more formal in terms of the SEC’s planned ‘next steps’ for its IFRS roadmap. (According to SEC’s listing of upcoming events, Kroeker is scheduled to speak at the AICPA conference on Mon. Dec. 7.)

“Next Steps” For IFRS Roadmap
Providing an SEC update at this morning’s joint meeting of FASB’s Small Business Advisory Committee (SBAC) and Private Company Financial Reporting Committee (PCFRC) SEC Senior Associate Chief Accountant Jenifer Minke-Girard reiterated key points that had been given by Kroeker at an AICPA-IASCF conference in October, and at FEI’s Current Financial Reporting Issues Conference in November, with respect to the status of the SEC’s IFRS roadmap, which was released by the SEC last November. For example, Minke-Girard noted that over 200 comment letters were received by the April comment deadline, and that the staff has been working since that time in reviewing the comments.

“Most respondents in general were in agreement with the idea of having one global set of standards,” said Minke-Girard; she noted that some commenters did not agree with that position, but that was the general consensus.

However, she added, there were still “a lot of different views whether U.S. companies should go to IFRS, different views on timing, whether we should just let the convergence process work.”

“Certainly a lot of commenters point[ed]] out issues that would need to be addressed,” she added, noting, “[SEC] staff are identifying what are the key issues in moving U.S. companies to IFRS – if that is what the Commission were going to do,” and that the SEC staff, will be “trying to put out some kind of next steps on that.”

SEC Will Be “Putting Out Something Soon”
Commenting on the pressure to announce something more specific, Minke-Girard told attendees at the FASB advisory group meeting, “I realize people have said to me, it’s just that there has been so little from Commission staff this year, people seem to parse every sentence, look for clues.”

After reiterating Kroeker’s earlier statements - that an announcement will be made ‘this fall’ and that fall ends on Dec. 21 - Minke-Girard stated, “For those who will attend the AICPA Conference next week, I expect Jim Kroeker will talk about this next week.” She added that the text of Kroeker’s speech is expected to be posted on the SEC website.

Parsers can take keep themselves busy with this statement offered today by Minke-Girard: “I am authorized to say we will be putting out something soon.”

UPDATE: You can listen to the archived webcast of the FASB PCFRC-SBAC meeting which took place on Dec. 3-4, 2009 at: http://fasb.trz.cc/archive.php

FASB Advisory Cmte. Calls For FAF To Consider Separate Private Co. GAAP

2009-12-04T13:20:00.015-05:00

At a joint meeting of the Financial Accounting Standards Board's Private Company Financial Reporting Committee (PCFRC) and Small Business Advisory Committee (SBAC) held on Dec. 3, 2009, PCFRC Chair Judy O'Dell told the group: "We’ve come to the conclusion it's time to look at a separate set of private company accounting standards."

O'Dell noted that the PCFRC had met with Jack Brennan, Chairman of FASB's parent organization, the Financial Accounting Foundation (FAF), earlier this year, as part of the FAF's 'listening tour.' She added that PCFRC sent a letter to the FAF on November 2nd (PCFRC letter to FAF) which recommended:

[T]he FAF should take a leading role in ensuring the establishment of private company standards. In doing so, the FAF will be helping to shape the future of U.S. private company financial reporting in a manner that is in the best interests of U.S. private company constituents.

The PCFRC noted a number of recent developments led the PCFRC to reach its conclusion, including the issuance earlier this year of a 250-page, self contained set of International Financial Reporting Standards for Small- and Medium-Sized Entities (“IFRS for SMEs”). [NOTE: IFRS for SMEs can only be applied by private companies, but could be considered Generally Accepted Accounting Principles for private companies in the U.S. today, since the AICPA voted a few years ago to recognize the International Accounting Standards Board as a setter of GAAP - and that designation applies to all standards issued by the IASB, including full IFRS, and IFRS for SMEs.] Additionally, PCFRC noted recent decisions in Canada, the U.K., South Africa and elsewhere on how to handle private company GAAP, surveys of financial professionals in the U.S. that demonstrate a preference for differential accounting standards for private companies, and, according to PCFRC, "the increasing number of complicated accounting standards, driven primarily by public company investor and analyst needs, which are often expensive to implement for private companies and provide no real benefit for the users of private company financial reporting."

PCFRC Identifies Five Alternatives for Private Co GAAP
The PCFRC identified five alternatives for the FAF to consider for private company GAAP. As described in more detail in attachment 2b (pdf pgs 24-34) in FASB's Dec. 3 board handout, the alternatives include that private companies could use:

1. IFRS for SMEs,

2. IFRS for SMEs, adapted for the U.S,

3. Full IFRS adapted for private co's in the U.S.

4. U.S. Private Company GAAP - based on a revised set of current GAAP, adapted for private co’s,

5. U.S. Private Company GAAP –using U.S. GAAP as it exists today, modifying it going forward for private co’s

O'Dell, the founding chair of the PCFRC, formed three years ago as a joint advisory committee of the AICPA and FASB, said, "We have worked hard on the PCFRC to closely follow standards, and express the private company viewpoint." She acknowledged, "We've been listened to," but she and certain other PCFRC members expressed some frustration with the results.

As a result, O'Dell said: "More and more, we’ve come to the conclusion it's time to look at a separate set of private company accounting standards. Whether that’s a good idea, whether there are other alternatives, remains to be seen, but it's time to at least start that discussion."

Thrower’s View: FASB Set Public Stds; A New Body Set Private Standards
An alternative recommendation was put forth by SBAC member (and former FASAC member) Andy Thrower, who said: "Looking at the options presented by PCFRC - and I commend them for that - I believe IFRS for SMEs and the newly issued Canadian standards, or at least the draft that was issued, are fundamentally flawed for use in the U.S. environment, and I believe they are fundamentally flawed because they continue to be based on public company or the investor conceptual framework, and I believe attempts to implement those investor principles will not satisfy private company users in this country." Thrower said:

I want to go on the record today, after a long journey, after years of participating in various advisory groups, and my opinion is, the private company input process that we have been using is not working, and is not effective. I don’t believe the [FASB] board could have done anything differently from what it's done, I commend them, I applaud them for their efforts, but I think the mechanism is no longer working. I want to go on record for two things today:

1. I believe that efforts by FASB to include U.S. private company views within U.S. GAAP designed for general purpose external financial reporting should be discontinued; and that the mission of the FASB should be to focus entirely on the investor view of public and registered co's, which I fully support
2. there should be a committee formed consisting of independent individual private company preparers and users, tasked with two things: (i) to develop a proposed financial reporting framework for users of private company financial statements in the US, and (ii) to develop a proposal for both the structure and funding mechanism for a body to develop private company financial reporting standards totally within that framework.

The individual independent committee members should seek, and have moral support, and hopefully financial support from their constituencies, and specifically from the FAF, and the committee should present its work for those two proposals to its constituencies.

The constituencies should comment, approve or disapprove the results of that work,
and I think that mechanism should definitively answer the question, and I believe it would support, if they answer in the affirmative, that there should be a separate path for accounting standards for private companies; in the event the committee can't reach consensus, that would be telling; in the event the constituencies can’t reach [consensus],that would be telling, but in event there is consensus reached and path agreed to, for pursuing separate mechanism for developing private company standards in the US.

Some may view Thrower’s proposal as radically different from the PCFRC’s proposals. However, a common theme shared in Thrower’s proposal and the PCFRC’s five proposals can be seen the detail of the PCFRC proposals shown in attachment 2b (pdf pgs 24-34) in FASB's Dec. 3 board handout .

Specifically, in each of PCFRC’s proposals (with the exception of the possibility of adopting IFRS for SMEs with no modification in the U.S.), the PCFRC notes that: "An accounting board would need to exist to review and modify current U.S. GAAP [or, to review and modify IFRS or IFRS for SMEs, depending on the model chosen], and "A mechanism for funding the standard setting board and their work would need to be identified."

Push-Back on Disclosure Framework Could Reach 'Tea Party' Proportions
As lead-in to his recommendation above, that a new body be established to set private company standards, Thrower noted that the direction FASB is taking in its disclosure framework project - influenced heavily by recommendations made by FASB's Investors Technical Advisory Committee (ITAC), consisting mainly of public company analysts - will likely cause push-back from private companies greater than ever in the past, "potentially of tea party proportions." Specifically, he said:

My concern here is, the push back, from private company constituents on the disclosure framework proposal is going to be a watershed event, I think it will exceed the combined pushback on all the other problems for private companies, FAS 150, FIN 46-R, FIN 48, all those mid-140 FAS standards that caused so much problems, and I think push back here potentially is of tea party proportions, I really do; I don’t think FASB right now, with its current mission, needs to get this type involvement, push-back, get tangled up in that perspective on private companies, I don't think that's the mission right now.

NOTE: On Day 2 of the PCFRC meeting (Dec. 4), FASB Chairman Bob Herz told the PCFRC:

“We are aware of all of your letters, incorporate in our discussion… Like our other advisory groups, the Investors Technical Advisory Group (ITAC), etc., there is a perception that if we don’t act on something [you send us], we don’t agree… Don’t think we are not paying attention…you made a decent point [at yesterday’s joint meeting] about - at what point should there be consideration of private company [issues] in the [standard-setting] process… vs. earlier on in the process.”

FASB Board Member Leslie Seidman added on Dec. 4: “Especially [important] on the Disclosure Framework project… If we have the inclination to provide differential reporting, especially on disclosures, that’s one where we need to be in lockstep.”

Big GAAP/Little GAAP vs. Exceptions To GAAP
In response to the PCFRC's recommendations, and the separate alternative suggested by Thrower, various other SBAC and PCFRC members noted their views, with some favoring, and some not favoring, development of a separate set of private company standards (also called 'differential' reporting or 'big GAAP/little GAAP'.)

A number of SBAC members noted that, due to cost benefit considerations, some private companies were asking their users (e.g., lenders) if they would accept certain exceptions to GAAP (although that may result in a qualified audit opinion) if the specific GAAP requirement was not particularly relevant to the user.

For example, SBAC member Dennis Hein said: "I’ve seen so many exceptions, FIN 46 opened the door on that, the qualified opinion [for private companies] is now becoming the norm, rather than the isolated case.... We are getting so many exceptions out there, I wonder where GAAP is any more.... I don't think two sets of standards, 'big GAAP/little GAAP,' is the answer. Instead, I'd propose additional disclosure requirements for public companies to satisfy that small group of analysts, investors, that want that, and leave GAAP alone, GAAP should be GAAP; if you need additional information give it in schedules, in footnotes, but don't put undue cost out to 95, 98% of companies in the U.S., that are going to get zero benefit out of it."

Similarly, SBAC member Scott Waite said: "I am not in favor of dual standards, certainly not in favor of a separate standard setting body, I am more in favor of scope exceptions perhaps as an answer, I think it's a worthwhile discussion."

SBAC member Mark Ellis said his company follows all GAAP requirements and does not have a qualified report, but is frustrated that the value in applying all the GAAP requirements is negative. For example, he noted:

In effect, family owned private companies that are not going to be sold to anybody in short term, have actually much longer term view than public companies, so when you ask us to value things using fair value based on things very difficult to value, or have big shifts in value because of the way interest rates have moved over the short term, they produce financial statements that are not very valuable to us because we look at things over the longer term; we want to comply, but what we are getting is not of value to us.

My advice would be, let FASB, or whoever FASB feels can do this, take the [IFRS
for] SME standard and decide if it does work for us, if there are differences between U.S. and other countries, maybe we need to give input to the IASB so it can be modified to be more useful to us.

Herz: Consider Market Demand; Network Externalities
Asked for his views, FASB Chairman Robert Herz responded:

I believe in meeting market demand, and if there is a demand for something somewhat different, that needs to be looked at… On the other hand, I believe there are huge network externalities for having an integrated reporting system between public and private companies; not [necessarily] everything the same - even some recognition and measurement differences maybe - but something that is recognizable, that you can teach one off of the other, that gets beyond just education, gets to all sorts of things in the overall system.

My view has been, if ... public companies go to IFRS at some point, maybe [IFRS for] SME makes sense [for private companies] in that context; if we stay with US GAAP as it evolves through convergence, we still should have something vertically integrated, that meets cost benefit tests on both sides - benefits to users and costs to preparers.

Next Steps From FAF 'Listening Tour' Coming Soon
Terry Polley, President of the FAF, noted she had participated in the FAF's listening tour earlier this year, including discussions about private company standard-setting, and mentioned twice that something would be coming "very soon" or “very shortly” from the FAF, as a result. Specifically, Polley said:

This is an issue that we are very much aware of, that the Trustees are very much aware of, as Judy mentioned earlier, Jack and I and several trustees embarked on
listening tour earlier this year, without exception, we went to 5 cities, met with variety of constituents, without exception at every meeting we heard this is an issue. We also met with all FASB’s advisory groups and heard the same thing.

When the [FAF] trustees met in August, spent some time at a very high level, talking about the different findings of the listening tour; Judy and her committee sent a letter to Jack [Brenna, FAF chair] a few weeks ago, so when I tell you that you have the trustees attention, I assure you that you do, and they are taking your concerns seriously, this discussion is important, and discussions going on, how should we best address the issue; what Andy is suggesting, maybe Candy as well, to take a clean look at the issues... Andy outlined one possible outcome, but I think there are probably an array of outcomes.

What I'd like to emphasize, as we embark on this process, which I expect you’ll hear about very shortly, we need to continue this dialogue, with PCFRC, SBAC, many of you come from organizations like the Chamber [of Commerce], various industry groups, it is important to get the attention of your colleagues that are affected by this, so we can get the right kind of input, so we are headed in the right direction. To the extent you can go back and get the word out, that would be helpful, and we will keep you posted very soon on how we are going to take a look at this.

FEI members can read more from the Dec. 3 FASB PCFRC-SBAC meeting (including an update on this morning's PCFRC meeting with FASB) in our detailed summary here. Additionally, FEI members interested in joining FEI's Commmittee on Private Company-Standards, which addresses accounting issues of interest to private companies, can contact me for more information at eorenstein@financialexecutives.org.

PCAOB, Awaiting Supreme Court, Approves Budget

2009-12-01T12:09:00.019-05:00

As the Public Company Accounting Oversight Board awaits Dec. 7 oral argument before the Supreme Court on a case challenging the constitutionality of the PCAOB - Free Enterprise Fund and Beckstead and Watts v. PCAOB and United States of America - the PCAOB board approved a $183 million budget yesterday, representing a 16% increase over 2009. As noted in the PCAOB's press release, the PCAOB budget awaits approval by the U.S. Securities and Exchange Commission.

Supreme Court Case
Regarding the Supreme Court case, Theo Francis provided background in a Nov. 19 article in Business Week, These Men Could Kill Sarbox. "These Men" refers to attorneys Michael A. Carvin and Noel J. Francisco of Jones Day, who are among the team who have taken on the case on behalf of the plaintiffs, audit firm Beckstead & Watts, and conservative group the Free Enterprise Fund. As summarized by Business Week's Francis (reformatted to bullets):

Carvin and Francisco charge that the PCAOB is unconstitutional. They argue that the Constitution requires Presidential appointment of the top members of so powerful a body as the PCAOB. Yet, they point out, PCAOB members are appointed by the Securities & Exchange Commission. The lawyers also contend that PCAOB's members are largely beyond Presidential discipline because of a variety of restrictions on their removal. Since the Constitution requires the President to "take care that the Laws be faithfully executed," the President must have the widest possible power to remove those responsible for the government's executive functions, they say.
The PCAOB argues that it is constitutional. Backers say its members are low-level officers who don't have to be appointed by the President, and say the President and the SEC have plenty of tools to govern the board.
A ruling for Beckstead could invalidate a host of post-Enron reforms.
Because of a drafting quirk, the entire body of Sarbanes-Oxley might fall if a significant legal flaw is found anywhere within the legislation, say some attorneys.
Other lawyers say a ruling for Beckstead could call into question the legitimacy of other regulators' appointments. For example, the fixed terms of the Federal Reserve's seven governors limit the President's ability to remove them—a situation that theoretically could be proved invalid if the court sides with the broadest arguments being made by conservative lawyers filing briefs in the Beckstead case.
But even a less sweeping opinion would probably give Congress time to fix the law so that it conforms with the Constitution. That would give critics a chance to reopen SarbOx to debate—and even make major changes. "You create tremendous advantages for the minority [party] to get substantial amendments," Carvin says.
Separately, the House is considering exempting small companies from key provisions of SarbOx.

A good source of information on the PCAOB case is law firm Akin Gump's SCOTUS Blog , which in turn links to Akin Gump's SCOTUS Wiki. From there, you can find links to the briefs filed in the PCAOB case. Props to Maxwell Hyman, intern in FEI's Government Affairs office in Washington, DC, who has been following the PCAOB case and pointed out the SCOTUS blog and wiki links to me. (I hear Max plans to wait in line outside the Supreme Court early next Monday morning, to get one of the coveted spots for public observers to observe the oral arguments next week!)

Constitution of PCAOB Board
As the world awaits the Supreme Court's decision on the PCAOB's constitutionality, we also await word on the constitution of the board itself, with the rumor mill heating up as to who the SEC plans to appoint to the open board seats on the PCAOB, including as chair of the board.

Following former PCAOB chairman Mark Olson's departure, Dan Goelzer has served as Acting Chairman. Other open board seats (besides that of permanent chair) include that of Charles Niemeier, whose term ended in Oct. 2008 and has remained on the board pending appointment of a successor (Niemeier announced in September his intent to leave the board "in the near future"), and Bill Gradison, whose five year term ends this year. (The continuing PCAOB board member among the five member board, Steven B. Harris, was appointed in June, 2008.)

Earlier today, Bloomberg's Jesse Westbrook and Ian Katz reported on the current speculation as to who the SEC may appoint to fill the vacancies on the PCAOB board. In their article, SEC Said To Consider CFA's Schacht to Lead U.S. Auditor Board. Westbrook and Katz report:

SEC Chairman Mary Schapiro is considering Kurt Schacht, a managing director of the Charlottesville, Virginia-based CFA Institute, to lead the board, according to two people familiar with the deliberations. An appointment may be made this month, said one of the people, who declined to be identified because the deliberations are private....
SEC spokesman John Nester said “the selection process is still under way and no decisions have been made.” Schacht declined to comment yesterday when reached by telephone.Schapiro is also considering Helen Munter, Linda Griggs or John Sturc as candidates to replace Charles Niemeier and Willis Gradison, according to the people. ... Munter, a certified public accountant who worked for Deloitte & Touche LLP, is a deputy director in the PCAOB unit that inspects audit firms. Griggs, a partner at Morgan Lewis & Bockius LLP in Washington, was the top lawyer in the SEC’s office of the chief accountant. Sturc, a partner at Gibson Dunn & Crutcher LLP in Washington, is a former SEC enforcement lawyer.Munter declined to comment. Griggs and Sturc didn’t return phone calls seeking comment.

SAG Appointed
In other PCAOB news, the board announced on Nov. 6 the appointment of new members of its Standing Advisory Group or SAG. Among the ten new SAG members are former FASB Chairman Denny Beresford (now a professor at the Univ. of GA), former SEC Director of the Division of Corp Fin John White (now an attorney with Cravath, Swaine & Moore), and former PCAOB Chief Auditor Doug Carmichael (a professor at Baruch College).

Other new SAG members include Grant Thornton's John Archambault, S&P's Neri Bukspan, PwC's Michael J. Gallagher, Delta Air Lines' Patricia Ann K. (Kiko) Harvey, Mitchell & Titus' Anthony S. Kendall, CalPERS' Mary Hartman Morris, and E&Y's Kevin B. Reilly. The ten new members join 20 other continuing/reappointed members of the SAG.

Why Accounting Matters

2009-11-27T15:59:00.002-05:00

Last week, we reported that two amendments relating to the Financial Accounting Standards Board were approved by the House Financial Services Committee (HFSC) during markup of its systemic risk bill. The bill, more formally called the Financial Stability Improvement Act (FSIA), is part of a broader set of bills being introduced as part of financial regulatory reform, aimed at preventing another credit crisis.

The first of the FASB-related amendments, the Perlmutter/Lucas amendment, would require the systemic risk council created under the FSIA "to review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard or procedure."

The second accounting-related amendment, the Garrett amendment, would require the FASB to study the impact of the minimum credit risk retention rules in the FSIA in combination with the new securitization accounting rules under FAS 166 and FAS 167 (which eliminate off-balance sheet treatment previously available under FAS 140 and FIN 46R), and that FASB "make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending," and report the results within 90 days to the banking regulators and the SEC.

The ultimate fate of the FASB-related amendments approved by the HFSC is not yet known, since the full House still has to consider the entire financial regulatory reform package, as does the Senate. (See Sen. Chris Dodd's (D-CT) earlier comments on the initial version of the Perlmutter/Lucas amendment, which would have transferred oversight of FASB from the SEC to the systemic risk council. The amendment that eventually passed the HFSC was significantly softened, to require review and comment of accounting standards, but did not change the current oversight structure of FASB.) Continued focus on the financial regulatory reform legislation will take place in December.

A Civil War Over Accounting?
The battle over the Perlmutter/Lucas amendment in particular -which, as approved by the HFSC last week was significantly softened ('watered down' per CFO.com's Sarah Johnson; 'gutted' per the Denver Post's Michael Riley) from its initial version proposed in March - rose to the level of Civil War in Corporate America (Ryan Grim, Huffington Post).

Some may have wondered how this level of agitation could occur in a profession that still harbors, in the eyes of some, a "milquetoast" image (Michael Riley, Denver Post).

This post attempts to provide some insight into why emotions can run so high in debates about accounting, by exploring the question of "why accounting matters." I remind you of the disclaimer which appears on the right side of this blog, which applies to the entire content of the blog, including (but not limited to) when posts have sections marked off as 'my observations' or 'my two cents.'

Cent 1 : What Accounting Is Not About: Undue Influence (Undue Pressure)
In a letter dated Nov. 5, 2009 (during the heat of the debate over the original Perlmutter/Lucas amendment, which as originally proposed in March, would have removed the SEC's oversight power over FASB, and transferred that oversight power to a Federal Accounting Oversight Board consisting of banking regulators and the SEC), SEC Chairman Mary L. Schapiro told Rep. Barney Frank (D-MA), chair of the HFSC:

I am deeply concerned about the possible consequences of changing [the current] system to one that would subject accounting standard setters to the supervision of entities with other regulatory missions. It is not that those missions are any less vital to the public interest than the mission entrusted to the SEC. It is just that they are different -- and I fear the potential consequences for our capital markets if investors come to believe that accounting standards serve any purpose other than to report the unvarnished truth. [Note: the reference to 'unvarnished truth is discussed separately later in this post.]

In closing her letter, Schapiro said: "Accounting should be about accounting, and nothing else." When I first read that closing statement, I thought it was a very powerful statement, or sound bite, if you will, but just as sound bites often convey a deeper meaning, I found myself thinking there are other interpretations about what accounting is about, and what it is not about.

Given the subject of the letter, I thought to myself, the sentence could be read to imply, "Accounting should be about accounting, and not about politics." Or, more precisely, substituting in language from the IASCF Monitoring Board's Sept. 22 statement on accounting standards and accounting standard-setting (the SEC is a member of the Monitoring Board), one could end the sentence this way: "Accounting should be about accounting, and not about undue pressures from political and corporate interests."

The word "undue" (as in "undue pressures") as used by the Monitoring Board is very significant: the group did not call for the total exclusion of dialogue with political and corporate interests; on the contrary, the Monitoring Board stated: "Interested parties must be afforded the opportunity to provide input to inform the standard setter’s evaluation of pertinent issues."

In fact, specific to the topic of fair value accounting (which some view as the driving force behind the Perlmutter/Lucas amendment) the Monitoring Board stated:

The IASB and FASB have benefitted from informative input into their financial instruments and fair value measurement standard setting initiatives from a broad range of stakeholders. The recommendations of some constituencies often contradict the strongly held views of others, reflecting the diversity of uses for and desired outcomes of financial reporting... robust participation of interested parties is an essential element of a standard setter’s transparent due process. Equipped with this input, it is the responsibility of the standard setters to evaluate the knowledge they have gained against the overarching objectives of financial reporting and the principles that reinforce those objectives, in a manner engendering independent decision-making.

Understanding the Role of Neutrality and Due Process
While we're on the subject of soundbites, some journalists over the past six months have characterized comments made by FASB and IASB board members and related advisory groups (such as the FASB-IASB Financial Crisis Advisory Group) as calling for no "meddling" by politicians (see, e.g. Politicians Accused of Meddling in Bank Rules (Floyd Norris, NYT, 7.28.09), and Europe Must Stop Its Meddling, Says FASB Chief (Mario Christodoulou, Accountancy Age 10.15.09). More recently, I've seen the word 'tinkering' used by some, in place of where 'meddling' was previously the term du jour.

Although 'meddling' or 'tinkering' are not defined in FASB's Conceptual Framework (which serves as the foundation for standard-setting), the term 'neutrality' is the operative term specified in Concepts Statement No. 2; i.e., the FASB is to exercise 'neutrality' in setting accounting standards. The IASCF Monitoring Board's Sept. 22 statement repeats the importance of neutrality.

In understanding the role of 'neutrality' and independence, of particular note is that it does not require FASB to be walled off from dialogue with outside parties, just that it act in a neutral fashion. See, e.g. Volcker Heartened by Regulators Reaction to Crisis Warns Against Isolation (Steven Burkholder, BNA Daily Report for Executives. Reproduced with permission from Daily Report for Executives, 208 DER I-4 (Oct. 30, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com/)

More recently, BNA's Burkholder reported in, FASB Members Warm to Revised Perlmutter Amendment; SEC Supportive, that FAF spokesman Neal McGarity stated after the revised Perlmutter/Lucas amendment was approved by the HFSC:

The FAF recognizes and is respectful of the need for Congress to maintain and advance the safety and soundness of this country's financial system... The FAF does not oppose the recently adopted Perlmutter amendment because it acknowledges the due process [of accounting standard-setting] which is the backbone of the FAF mission.

The reference to 'due process' in the FAF spokesman's statement above is key, as is transparency of that due process, in engendering confidence in the process. The role of due process was also noted in the IASCF Monitoring Board's Sept. 22 statement, and in the IASB-FASB Nov. 5 joint statement, as follows:

IASCF Monitoring Board statement Sept. 22, 2009: "Visibility into the standard setting process should be sufficient to enable users to trace the evolution of the standard from thoughtful consideration of alternatives to final positions".

IASB -FASB Joint statement Nov. 5, 2009: "We aim to provide a high degree of accountability through appropriate due process, including wide engagement with
stakeholders, and oversight conducted in the public interest. We are consulting widely and will continue to draw on expertise from investors, preparers, auditors, standard-setters, regulators, and others around the world. ... We will set standards following our robust due process procedures that provide visibility into the standard-setting process and require proactive consultation to ensure communication of all points of view and the expressions of opinion at all stages of the process".

If we all were to agree on what accounting should "not" be about (i.e., that it should not be about undue influence or undue pressure), then what would we say accounting "is" about?

Cent 2: What Accounting Is About: Decision-Useful Information
Consistent with FASB's mission statement, the IASCF Monitoring Board's Sept. 22 statement defined what accounting (more generally, financial reporting) is about as follows:

We view the primary objective of financial reporting as being to provide information on an entity’s financial performance in a way that is useful for decision-making for present and potential investors. To be considered decision-useful, information provided through the application of the accounting standards must, at a minimum, be relevant, reliable, understandable and comparable.

The operative words are that financial reporting information aims at being decision-useful, by providing information that is relevant, reliable, understandable and comparable. All of these terms are longstanding fundamental concepts in FASB's Conceptual Framework (specifically, in Concepts Statement No. 2). (Note: an amendment to CON 2 was previously proposed and is set to be issued in final form 4Q2009 according to FASB's current technical plan.)

In considering the concepts noted above, people do not always agree on what 'decision-useful' means in particular contexts, and reasonable people may not always agree on how an accounting standard should be constructed to produce the most "relevant" and "reliable" information (and how to balance those two sometimes opposing forces).

For example, some people may say that fair value information is always the most relevant information ("measurement attribute"), period. Others, however, may question if fair value information in an illiquid, inactive or disorderly market, is any more relevant than information measured by some other means, such as discounted cash flow, or how much emphasis to place on 'market' quotes (e.g. broker quotes) vs. internal cash flow models, in such a market.

Thus, an 'inconvenient truth' in accounting is that, even if there were agreement among reasonable people as to which measurement attribute (e.g. 'fair value' vs. 'historic cost') is more relevant, there is not necessarily going to be universal agreement on which valuation method is most reliable to arrive at 'fair value' for all financial instruments, or how to balance relevance and reliability, in producing 'decision useful' information. You will see such debates if you review the comment letter file on the original proposal for FAS 157, and on current proposals out for comment by FASB and the IASB. It is and always has been a natural and healthy debate across all of standard-setting, as to how to develop standards that result in the most relevant and reliable information.

Since relevance and reliability, as well as understandability and comparability lead to decision usefulness, real world investing and financing decisions take place based on accounting information provided. And that is "why accounting matters."

Accounting Has Economic Consequences
Further on this topic of why accounting matters, Prof. David Albrecht was the first person to write publicly during the heated debate over the Perlmutter/Lucas amendment on the issue of why politics has historically had some role (indirect if not direct) in accounting standard-setting.

Although I disagree with Albrecht's choice of words in captioning his Nov. 18 blog post, I agree with his point that the economic impact of accounting standards has historically driven the engagement of constituents, including their elected representatives, and I urge you to look beyond the caption of his post, and read it for substance in his blog, The Summa.

Indeed, on the subject of economic consequences, in 1978 (5 years after FASB was formed, replacing a series of predecessor boards) FASB issued a call for research on, held a conference on, and produced a related report on, The Economic Consequences of Financial Accounting Standards. (Although I could not find a public link to the original 1978 report, if I recall correctly, it was inconclusive as to the role, if any, which economic considerations should play in accounting standard-setting, although views ran high in both directions; if I'm wrong, I invite blog readers to post a comment on this point.) Further reading on this topic can be found in:

Private Standards, Public Governance: A Look at the Financial Accounting Standards Board (by Prof. William W. Bratton of Georgetown Univ. Law School, published in Boston College Law Review Vol. 48:5, 2007)
Benefits, Costs, and Consequences of Financial Accounting Standards (FASB Special Report published in 1991, posted among meetings materials for May, 2007 meeting of the FASB-AICPA Private Company Financial Reporting Committee),
The Rise of Economic Consequences (Prof. Stephen Zeff, in AICPA Journal of Accountancy, Dec. 1978, pgs. 56-63; note: JofA online archive does not go back to 1978, this link appears on website of Prof. Leandro Canibano of the Univ. of Madrid)
The Standard-Setting Process and its Economic Impact (speech by then-SEC Commissioner Philip A. Loomis at FASB Conference on Economic Consequences, March 22, 1978.)

Separately, I'd like to point out that Albrecht's criticism of some recent SEC statements on accounting standard-setting (in his Nov. 18 blog post) was based on part on a Reuters article reporting on SEC Commissioner Kathleen Casey's remarks at FEI's Current Financial Reporting Issues Conference on Nov. 17, which cited only a portion of Casey's remarks, which were subsequently posted on SEC's website. Refer to the full text of Casey's speech (also available on FEI's website) in which she speaks of, e.g. the need for independence and accountability:

Thus, the goal of standard setting must be to develop high-quality and unbiased accounting standards that promote transparency and that are, in turn, viewed as
credible by our markets. If, however, the standard setting process is subject to undue commercial or political pressure, market participants may lose confidence
in the financial information reported by firms. But while accounting standard setters must be independent, they must also be held accountable. The standard setting process is a delicate balancing act that highlights the importance of the Commission's oversight function. The Commission strives to ensure that this process is not compromised by inappropriate pressure and, at the same time, that the process produces high quality standards that elicit information meeting the needs of investors and other users.

Accounting as Art vs. Science, and the Role of Professional Judgment
As noted further above, SEC Chairman Mary L. Schapiro said in her Nov. 5 letter to Rep. Barney Frank:

"I fear the potential consequences for our capital markets if investors come to believe that accounting standards serve any purpose other than to report the unvarnished truth."

Although I believe the reference to 'unvarnished truth' was meant to express that investors expect accounting standards to be free from bias, the words 'unvarnished truth' trigger a visceral reaction among some in and around the accounting and auditing standard-setting profession, who believe, as stated by Prof. David Albrecht in his blog post noted above: "There is no such thing as universal accounting truth."

Indeed, the notion that information provided by accounting standards represents the absolute 'truth' has been described as an expectation gap, since accounting is replete with estimates and judgment calls. Thus, many believe accounting is more of an art, than a science.

The issue of accounting 'truth' was referenced in remarks of then-SEC Chief Accountant John C. ("Sandy") Burton in a speech in 1973 (at the time FASB was founded to replace its predecessor, the Accounting Principles Board or APB.) Significantly, Burton also refers to FASB's quasi-legislative role (and he is not the only person who has characterized it as such), provides some background on why emotions run high concerning accounting standards, and describes the nature of the relationship between the SEC and FASB. Here is an excerpt of Burton's remarks:

We at SEC are very confident that [FASB] will improve the standards of accounting measurement in a significant fashion. We believe this because we think it is institutionally more appropriately structured for dealing with problems facing it than was the old Accounting Principles Board (APB). The APB was originally designed by a committee that was convinced that research would produce Truth and that the only thing that would be needed after accounting research was done was a body to simply anoint the truth that had become apparent....
Accordingly, it was necessary to develop a body which will be more appropriately structured to perform the required quasi-legislative function than was the part-time APB....
There are a number of areas which deal with financial measurement where people are deeply involved, because their pocketbooks are deeply involved; and there is nothing more emotional than money: So that it seems very likely that as the new Board gets underway; those that find themselves ill at ease with its initial exposure drafts will probably bring the same kind of pressure to bear as they brought against the APB. And I don't think the fact that the members of the FASB are not current practitioners of accounting is going to shield them from this pressure to any great . . extent.
Nevertheless, I am optimistic that they will be able to move expeditiously....It is certainly the intent of SEC and the accounting staff of the SEC to work with the new [FASB] Board as we have worked with the APB. I have characterized our relationship [with FASB] as one of mutual nonsurprise where we both must advise
the other of how we are thinking and what we are doing.

Similarly, in a speech in 1959, then-SEC Chief Accountant Andrew Barr noted:

"Mr. May was an important witness in the hearings on the Securities Exchange Act of 1934. In these hearings his objections to a uniform system of accounting were developed after his opening remark that "The fact of the matter is that accounting, especially industrial accounting, is essentially a matter of judgment, and you cannot put judgment in strait-jackets."

Returning to the present time, but also on the subject of professional judgment, SEC Chief Accountant Jim Kroeker and Division of Corporation Finance Chief Accountant Wayne Carnall were asked in a press session at FEI's Current Financial Reporting Issues Conference about the status of the recommendation of SEC's Advisory Committee on Improvements in Financial Reporting (CIFiR) regarding establishment of a professional judgment framework. (See Recommendation 3.5 regarding a professional judgment framework in CIFiR's Final Report.)

Kroeker replied:

Regardless whether there is any more formal action on a judgment framework [that the points outlined by CIFiR are] the kinds of things we look for in the preclearance process [in the Office of the Chief Accountant], and in the Corp Fin comment process."

The points identified by CIFiR include, noted Kroeker, include whether the accounting transparently reflects the substance of the transaction, whether all relevant accounting literature was reviewed, and the consideration of alternative accounting treatments.

Further commentary on the subject of professional judgment was provided in two Fireside Chats sponsored by Deloitte, broadcast by the SEC Historical Society on Oct. 22, 2009 (featuring Deloitte Deputy CEO Robert J. Kueppers, and former SEC CIFiR and PCAOB SAG member Greg Jonas, moderated by USC Professor and former SEC Deputy Chief Accountant Zoe-Vonna Palmrose), and Oct. 28, 2009 (featuring Kueppers and former SEC Deputy Chief Accountant Scott Taub, moderated Georgetown Professor and former SEC Academic Fellow Patricia Fairfield). These two webcasts can be found under SECHS archived webcasts.

Also on the subject of professional judgment, I asked Prof. David Albrecht (author of blog post cited further above), if, given the increasing emphasis on principles-based accounting, (including, but not limited to, a potential move to IFRS) if accounting theory should be added as a required course for undergraduates majoring in accounting. (My perspective is no doubt influenced by the fact that Dr. David Solomons was my accounting theory professor.) Here is Albrecht's reply:

Should there be a theory class? Probably, as it could deal with broader issues of economics and/or reporting strategies. Will there be? No. Undergraduate and graduate accounting programs won't have any more free space in them than before.
And professors will not change their approach to teaching. [Note: Albrecht separately explained that many accounting professors still heavily rely on lecture-oriented classes vs. cases, with knowledge-oriented tests that promote short-term memorization, but not necessarily retention.]

It is interesting that you mention cases as a preferred tool or approach. I am an enlightened teaching professor. I don't use cases. I tend to use simulations and carefully constructed "what-if" types of problems. Most professors, however, would do a better job of teaching "principles" based financial accounting if they were to switch to cases.In the long run, I think that IFRS will turn into U.S. GAAP. Then we'll be back to where we started.

To wrap up this post on why accounting matters, I'd like to note remarks of then-SEC Chief Accountant Lynn Turner in a speech he gave in 2000, in which he said:

What people too are often saying when they argue that the FASB does not listen, is that the FASB did not give them the answer they wanted, that they did not "obey". In those cases, I challenge both the constituent and the FASB to sit back and say, does the standard faithfully represent the economics of the events and transactions being reported on, in a consistent, comparable and verifiable fashion?....

I believe that high quality accounting standards must be practical and operational, not only in the literature, but in the real world. In fact, I believe we must be able to apply a "litmus test" to each new accounting standard: that it must be operational at all levels, from the CFO, controller and accounting staff who have to implement the standards in practice, to the auditors who have to attest as to whether the company has correctly applied the standards, to enforcement bodies such as the SEC and similar securities regulators around the globe, who are charged with reviewing financial filings and judging whether such filings follow the standard.

Turner's remarks cited above, in a speech given nine years ago, continue to resonate today, as emotions run high over accounting standard-setting. If you'd like to read more on this particular subject, we've posted a few excerpts from past SEC speeches on accounting. (And the SEC website now has speeches posted going back to the 1930's.)

FASB-Related Amendments (Perlmutter/Lucas; Garrett) Pass House Committee

2009-11-19T22:48:00.006-05:00

As reported by Dow Jones Newswire's Sarah Lynch earlier today, U.S. House Panel Approves A Toned-Down Accounting Proposal. The article refers to the Perlmutter/Lucas amendment relating generally to the role that the proposed systemic risk council would play vis-a-vis accounting standard-setting. Separately, an amendment offered by Rep. Scott Garrett, which would require FASB to conduct a study relating to its new standards for securitization accounting, reportedly also passed the House Financial Services Committee today, as detailed further below.

'Toned-Down' Perlmutter/Lucas Amendment
DJ Newswire's Lynch notes in the article linked above:

The House Financial Services Committee agreed by voice vote to a much toned-down proposal Thursday that would allow a systemic risk council of regulators to offer advice about accounting rules that could pose problems to the broader marketplace.

'Toned-down' is an understatement. The amendment was virtually gutted from its original version (as detailed further below), moving from a complete overhaul of FASB oversight via the creation of a Federal Accounting Oversight Board that would take over oversight of FASB from the SEC, to what appears to be a one paragraph amendment (Amendment No. 58) that would add the following item to the list of duties of the Financial Services Oversight Council (the Council), established in the draft systemic risk bill (more formally, the Financial Stability Improvement Act):

To review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard or procedure.

Here's a recap of the history of the Perlmutter/Lucas amendment:

The original version of the amendment, co-sponsored by Rep. Ed Permutter (R-CO) and Rep. Frank Lucas (R-OK), as announced by Perlmutter on March 6 (a week before the House Financial Services Committee's March 12 hearing on mark-to-market accounting) would have created a Federal Accounting Oversight Board, transferring the SEC's oversight authority (vis-a-vis FASB) from the SEC to the FAOB. See Perlmutter's March 6 press release, and Lucas's March 11 press release.
In the weeks preceding Election Day, Perlmutter was expected to formally introduce the amendment to financial reform legislation being drafted by the House committee. See our Nov. 3 post, FASB Oversight Subject of Congressional Interest.
During early November, as the House committee's markup of the systemic risk bill approached, numerous individuals and organizations filed letters with the Chair and Ranking Member of the House Financial Services Committee, Rep. Barney Frank (D-MA) and Rep. Spencer Bachus (R-AL), respectively, to voice support or opposition to the Perlmutter/Lucas amendment, or any amendment more generally, that would impact the independence of accounting standard-setting.
Among those filing letters opposing change to independent standard-setting were SEC Chairman Mary L. Schapiro, FEI's Committee on Corporate Reporting, FEI's Committee on Private Companies - Standards, the AICPA, and a joint letter filed by the Center for Audit Quality, CFA Institute, and Council of Institutional Investors. (Links to these letters are in our Nov. 11 and Nov. 6 posts.)
Among those supporting the Perlmutter/Lucas amendment, as reported in this Nov. 16 Huffington Post article, included the American Bankers Association, Commercial Mortgage Securities Association, Council of Federal Home Loan Banks, Financial Services Roundtable, National Multi Housing Council, National Apartment Association, National Association of Home Builders, and Real Estate Roundtable.
By mid-November, as reported in the Huffington Post, the working draft of the Perlmutter/Lucas amendment had dialed back a bit, no longer calling for removal of the SEC's oversight authority over FASB, but still maintaining certain powers for the Financial Services Oversight Council, including the power to: "suspen[d], modif[y] or eliminat[e] such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate."
The one paragraph version of the Perlmutter/Lucas amendment approved for inclusion in the systemic risk bill by the House Financial Services Committee today, as noted above, makes no change to the SEC's formal oversight authority over the FASB, and provides no 'powers' to the Financial Services Oversight Council with respect to FASB.

The future of the Perlmutter/Lucas amendment depends in part on what the Senate decides (and as we noted last week, Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, has said he sees no need to include in his bill anything relating to FASB independence; whether the final version of Perlmutter/Lucas will be adopted as part of the Senate version of the bill or not remains to be seen.)

My two cents
My two cents (I remind you of the disclaimer posted in the right margin of this blog): The long and short of it is, if indeed the sum-total of the Perlmutter/Lucas amendment as passed by the House committee today is the one paragraph amendment (Amendment No. 58) linked above (and if I'm wrong about that, I hope a commenter on this blog will point that out), then the final version of the Perlmutter/Lucas amendment as passed today appears to me to be pretty much motherhood and apple pie, since FASB and the IASB actively seek input from all of their constituents, financial regulators and otherwise, and the amendment calls for the systemic risk council to provide input to FASB and the SEC on accounting rules.

As noted in a Nov. 18 letter by the Financial Services Roundtable , the FSR supported the 'revised' (i.e. one paragraph) Perlmutter/Lucas amendment, because it: "leaves the current structure at the SEC in place, but provides a much-needed review if accounting principles threaten the safety and soundness of the economy."

By putting this duty for financial regulators to review and comment on FASB standards into law, it may make some people nervous, (perhaps having the provision written into law 'raises the bar' so to speak) but I believe the scaled down version of the amendment (i.e. the one paragraph version passed today) may be looked upon as a significant improvement by some, vs. the earlier, more draconian versions of the amendment which would have directly impacted FASB oversight by removing it from the SEC and placing it with a new board.

NOTE: Still to come: reconciliation of the Perlmutter/Lucas amendment in this systemic risk bill, with the Miller amendment (amendment No. 13) passed earlier by the House committee as part of the Investor Protection Act; the Miller amendment would form a Financial Reporting Forum (tasked with "meet[ing] to discuss immediate and long-term issues critical to financial reporting) - not unlike the FRF proposed by the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR) - except that Miller proposes that the banking regulators be part of the FRF too, and as proposed by Miller, would require the FRF to issue an annual report, including any legislative recommendations.

In addition, I believe that the wording as agreed to today in the one-paragraph Perlmutter/Lucas amendment may transcend some of the earlier debate over whether or not accounting standard setters need to be concerned about the economic impact of their standards, including, potentially, procyclicality or systemic risk per se, or whether systemic risk is solely within the realm of government regulators.

On this point, see Prof. David Albrecht's post today in his blog, The Summa. Albrecht says: "As I blogged yesterday, it is a fact of life that accounting standards frequently have economic consequences. It is government’s responsibility to adjudicate between competing economic interests." (I may have more to say about Albrecht's posts in a future blog post as well.)

Similarly, I don't think the role of systemic risk considerations vis-a-vis investor considerations is as much an all-or-nothing issue as some may have seemingly portrayed it, particularly since the debate that takes place in standard-setting usually isn't over an extreme dichotomy like systemic risk vs. investor transparency, but over more nuanced - 'conceptual,' the standard-setters and their groupies (I place myself in the groupie category) would call it - issues, like breaking down the relevance, reliability, and understandability of particular accounting standards, principles or rules.

Reasonable people can, and do, disagree over what the most relevant or reliable information is, and how to balance those two sometimes competing needs (and other competing needs as well, including theoretical vs. practical, cost vs. benefit). Therefore, to have an all-consuming focus on whether standard-setting can straddle both systemic risk and investor protection considerations, to me, in some respects, is a red herring, like the old Miller Lite Tastes Great! Less Filling! debate.

The fundamental technical questions involved in developing accounting standards that result in information that is relevant and reliable are extremely challenging and perhaps less accessible to the general public than hyped debate pitting overarching issues of systemic risk considerations against investor transparency considerations (case in point: Huff Post's Civil War in Corporate America) but hopefully things will soon return to normal and folks can work together on the shared goal of high quality standard-setting and high quality financial reporting.

Garrett Amendment Requires FASB To Issue Study on FAS 166, 167
Separately, an amendment introduced by Rep. Scott Garrett (R-NJ) (see Garrett's Nov. 18 press release) relating to FAS 166 and FAS 167 (which amended FAS 140 and FIN 46R, removing the exception from off-balance sheet treatment for QSPEs, and changing the related consolidation rules for securitizations and asset sales) was also passed by the House Financial Services Committee, according to a Nov. 19 press release issued by the Commercial Mortgage Securities Association. As described in Garrett's press release:

This amendment would require the Financial Accounting Standards Board (FASB) to conduct a study of the combined impact by each individual asset-backed security of the new credit risk retention requirements contained in the bill and the new securitization accounting rules (FAS 166 and 167) and make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending. This study would be required to be completed in 90 days and in coordination and consultation with the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC).

Given that FAS 166 and FAS 167 are set to take effect on 1/1/10, there may be questions as to how feasible a study taking place over 90 days crossing year-end would be, and what any practical implications of such a study would be, combined with the fact that the Senate has not completed its markup of its version of the financial regulatory reform package, and the ultimate version that will be signed into law is not yet known. Stay tuned.

SEC Commissioner Casey's Keynote Address At FEI CFRI, Additional Conf. Highlights Posted

2009-11-19T14:06:00.003-05:00

The closing keynote address provided by SEC Commissioner Kathleen Casey at FEI's Current Financial Reporting Issues Conference on Nov. 17 has been posted by the SEC here and is also currently posted as headline 1 on FEI's website, www.financialexecutives.org. (Direct link to speech here.) Additional highlights from the FEI CFRI conference, by Ellen M. Heffes, Editor-in-Chief, Financial Executive Magazine, can be found here.

Wayne's World: Carnall Tells FEI Conf. What's In Store From Corp Fin

2009-11-17T21:50:00.004-05:00

If you remember the old 'SEC Regs' Committee of the AICPA (now called the 'CAQ Regs' Committee, under the aegis of AICPA-affiliate, the Center for Audit Quality) you may have heard of it referred to as one of the so-called 'secret societies' in accounting. Based on remarks of SEC Division of Corp Fin Chief Accountant Wayne Carnall at an FEI conference earlier today, the SEC Regs/CAQ Reg's quarter-century-old vault is about to be opened - or rather, made more readily available, on the SEC's website, as part of an update to Corp Fin's Financial Reporting Manual.

Guidance From SEC Regs/CAQ Regs Committee To Be Incorp Into Corp Fin Fin. Reporting Manual
The term 'secret society' is a tongue-in-cheek reference to groups of experts that meet with SEC or FASB staff privately on complex issues, and a kind of mythology grows around such groups, since there is sometimes a black box aspect to the unofficial, quasi-official, or nonauthoritative guidance that is said to have arisen from such meetings.

References to 'secret societies' can be found in transcripts of two meetings of the SEC Advisory Committee on Smaller Public Companies, June 15, 2005, (in a discussion about arcane accounting rules, and the need for guidance, such as FAQs, particularly for smaller public companies) and Feb. 21, 2006 (during a discussion about 'speech GAAP,' or setting Generally Accepted Accounting Principles through speeches by SEC staff, which are not subject to FASB due process, or to SEC due process under the Administrative Procedures Act).

As an aside, SEC Chief Accountant Jim Kroeker also made a reference to 'secret societies' in his remarks at the FEI conference. Referring to FASB's Codification, issued on July 1, which brought all U.S. GAAP into one place, organized by topic, he said, "You don't have to be a member of a secret society" any more to locate guidance on a particular issue.

Carnall explained that the Corp Fin Financial Reporting Manual - written by Corp Fin staff, for Corp Fin staff, which "reflects our views on reporting issues" and "provides guidance for complying with the rules" - and was originally available only through FOIA requests until the SEC decided to make it available on SEC.gov, was updated for the first time in nine years a year ago. He added the Division is committed to updating it quarterly, with the next update coming in December.

With respect to updating the Manual regarding material included in SEC Regs Committee/CAQ Regs Committee minutes, Carnall said:

We meet frequently with the CAQ Regs committee; we have been meeting with them close to forever - they put [minutes] of the meetings on their website. You can have an issue dating back to a meeting in 1995, and have no idea SEC staff expressed a view on it [at a meeting with the SEC Regs/CAQ Regs committee].

We are going through the past 25 years and looking at which information is still relevant, and putting it in the [Corp Fin] Financial Reporting Manual.

There are about 780 or so distinct issues [in the SEC Regs/CAQ Regs committee material] we hope to have done some time in the spring or summer, which means by September [2010].

Coming Soon: Clarification Re: Non-GAAP Disclosures

Carnall also told attendees at the FEI conference (FEI's 28th annual Current Financial Reporting Issues Conference) that Corp Fin plans to issue something "in the near future" regarding non-GAAP disclosures. Specifically, he said:

We are looking at some guidance we have issued, FAQs, other guidance, to determine if we should modify some of our guidance to make more clear what our expectations are - you should look for that in the near future.

During a Q&A session later in the day, he added:

What we have found... a little concerning to myself and our new Division Director [Meredith Cross], we find information on a company website, [but] not in [the company's SEC] filings.
There are very limited situations where we have prohibitions [on certain non-GAAP information] - we are looking at ways we have worded our interpretations.
The overall objective is for the 10-K to be an information document, not a compliance document.

Kroeker added the requirements are, in general:

If you are using [non-GAAP disclosures], explain why they are important, and reconcile to GAAP.

During a session with the press at the conference, Carnall expanded on the reasons why the SEC staff want to issue clarifications in the area of non-GAAP disclosure. He said:

The rule is fine, we have issued FAQs, and [guidance is contained in] the Financial Reporting Manual, but there is a concern that perhaps the way we have worded them has perhaps been more restrictive than intended. People would like to provide more information, and are concerned [whether they are permitted to, based on the current guidance].... [staff is considering] whether to modify that [guidance] to make it more clear what our intent is.

Arnold Hanish, Chairman of FEI's Committee on Corporate Reporting, serving as moderator of the Q&A session with FASB and SEC staff at the conference, said: "It has been brought to my attention a recent Enforcement action was around Reg G, about inappropriate inclusion or exclusion of certain operating expenses."

Although no recent case was specified by name, Carnall referenced an earlier case, noting: "There have been a couple of Enforcement cases involving non-GAAP, the first one, Trump Casinos, highlighted unusual losses but did not highlight [unusual gains]. Rule 12b-20 of the Exchange Act [says] you cannot have a material omission."

In general, he noted, issues with non-GAAP disclosures include whether the disclosure is simply wrong, and cautioned that you 'have to tell the whole story.'

Other Areas of Focus

Carnall noted some areas of focus in Corp Fin filing reviews - noting this is not an all-inclusive list, include impairment of goodwill, income taxes, valuation allownances, APB 23/undistributed earnings, liquidity, going concern, pension assumptions, segments, and other-than-temporary-impairment (OTTI).

Another subject of Carnall's remarks was Materiality. Specifically, he said:

In preparing support why an error is not material, companies take the 8 points in SAB 99 and say 'No' ... concluding the error is not material. Companies should provide company-specific information, go well beyond the 8 bullet points [to demonstrate why an error is not material].

There's More
Kroeker reviewed various SEC rulemaking and policy initiatives, and SEC Commissioner Kathleen Casey gave the closing address at the FEI conference. (If her remarks are posted on the SEC website we will provide a link here or in a separate blog post.)

A great deal of timely information was provided at the two-day FEI Current Financial Reporting Issues Conference; you can get a flavor of a few selected highlights through our blog posts this week, and through reporting by others in attendance from the press, including the WSJ, Bloomberg, BNA, Thomson-Reuters, CFO.com, Compliance Week, WebCPA, AccountingToday, Re: The Auditors, and more, but nothing compares - in terms of the quantity and quality of the experience - to being there in person. Visit FEI's website, http://www.financialexecutives.org/ to learn more about FEI and our upcoming events. If you join FEI by Dec. 31 as part of our Connection Through Association Campaign, you will receive complimentary registration to attend our Summit conference in Las Vegas in the spring.

Both Cost And Fair Value May Be Presented Or Disclosed, As FASB, IASB Proceed On Convergence; LIFO on IRS' List of Convergence Issues

2009-11-16T17:00:00.008-05:00

At day one of FEI's Current Financial Reporting Issues Conference, FASB Technical Director Russell Golden noted that as FASB and the IASB work toward reconciling differences in their financial instruments projects with the hope of arriving at a converged solution, fair value and amortized cost may both end up being displayed in the financial statements or disclosed. Specifically, Golden said:

It might mean both numbers - [amortized] cost and fair value, are relevant, and will be presented, or it may be that both pieces of information are provided through disclosure, so both pieces of information are available to investors.

During a Q&A session with press that followed, IASB Board Member Patrick Finnegan said:

In the process of setting standards on a global basis, in my view, one measurement attribute cannot have primacy over the other. If you measure using historical cost, others feel fair value is more useful; [you] shouldn't have to go hunting for it, it shouldn't be buried.

FASB Chairman Robert Herz added the following significant observation about standard-setting, in response to a question raised in the press session by Michael Rapaport of http://www.wsj.com/:

In standard-setting, you never know where you're going til you get there; the process is important - you learn a lot of things.

Finnegan concurred with Herz' observation later in the session.

In addition, Finnegan distinguished between the perception of volatility, and actual volatility, nothing: "Anything that creates the perception of volatility is unhelpful," but when it comes to actual volatility, those who argue to provide only historical cost information, "therein lies the flaw, if we suppress information in the financial statements, that we [could] somehow hold off [a financial crisis]."

Audit Firms and Convergence
Herz was asked by Francine McKenna of Re: The Auditors what he thought about the major audit firms' push for companies to move to IFRS, and how to respond to critics who may say, 'If the firms are for it [IFRS, etc.] then we probably should be against it."

Herz replied:

I think the firms are genuine in their belief [of the value of convergence] but I think they kind of rushed it... and everyone said, 'here's another [Sarbanes-Oxley] 404.' I told some of the [audit firm] leaders that ultimately, [the goal is] high quality convergence, not just [convergence] for the sake of convergence."

I'm sure Francine will include more details on this exchange in her blog, http://www.retheauditors.com/ , including her unique perspective on some other highlights from the conference.

LIFO and Convergence
Another key question raised during the general session with respect to convergence related to the fact that IFRS precludes LIFO, and at the same time, the IRS in the U.S. says that the same inventory valuation procedure must be used for book and tax; therefore, if U.S. co's were to move to IFRS, they would (i.e., if no further action were taken by the IASB or the IRS, and if the SEC were to permit or mandate a move to IFRS, or if private co's were to elect to adopt IFRS or IFRS for SMEs) presumably not be permitted to use LIFO for tax purposes any longer, if they could not use it for book purposes under IFRS.

Finnegan noted that at last week's SAC (IASB Standards Advisory Council) meeting, the issue was not raised when the SAC discussed post-2011 agenda issues.

Herz indicated the LIFO issue has come up in FASB discussions with the IRS. Specifically, he said:

We meet periodically with the IRS; they have catalogued a fairly lengthy list of things that would be handled [administratively or though legislation, relating to any potential move to IFRS]; other countries do have forms of tax deductions [related to investory], there may be other ways to skin that cat; [including] if they think of some kind of phase in.

We will have other blog posts with highlights from day 1 (today) and day 2 (tomorrow) of FEI's CFRI conference. You can also follow us on twitter at www.twitter.com/feiblog, and read other's commentary on twitter posted using #feicfri.

May Be A 'Silver Lining' to Current Non-Endorsement of IFRS 9 By European Commission, IASB Board Member Says

2009-11-16T15:44:00.002-05:00

In remarks at FEI's 28th annual Current Financial Reporting Issues (CFRI) conference earlier today, International Accounting Standards Board member Patrick Finnegan noted that the IASB's issuance of IFRS 9 (Financial Instruments) last week was met by non-endorsement by the European Commission.

According to a separate report by Duncan Wood Nov. 13 in Risk.net, entitled Confusion Reigns as Europe Fails To Endorse IASB Standard, an unnamed partner at a Big Four audit firm who participated in meetings with the European Financial Reporting Advisory Group (EFRAG) - formally tasked by the EC in 2006 with "provid[ing] advice to the [European] Commission on all issues relating to the application of IFRS in the EU" - said of EFRAG's recommendation to withhold endorsement of IFRS 9: "I assume the IASB will be very unhappy."

Silver Lining
Finnegan told the FEI conference that in his view:

"If there is a silver lining [to the lack of European Commission endorsement of IFRS 9], it is that it will allow us to finish our work under the [valuable] and deliberate process with the FASB."

Finnegan was referring to the fact that the two boards had been working under different timetables to complete their versions of improved Financial Instruments standards, although the boards are aiming to reach a converged standard in this area, along with completing other major convergence projects, by June, 2011, the date reaffirmed in the Nov. 5 IASB-FASB joint statement.

The IASB had been under pressure separately from various authorities, including the G-20, to complete the first phase of its financial instruments project by the end of 2009 (resulting in issuance of IFRS 9, focusing on classification and measurement of financial instruments, on Nov. 12.)

As reported by Wood in Risk.net:

[EFRAG] has promised to revisit endorsement in January, but opinions are split on whether that will happen, with some observers believing the EC would prefer to wait until the second and third phases of the reform have been published. The latter course of action would massively delay a process that European politicians had previously trumpeted as one of extreme urgency. The second phase of the reform, dealing with loan loss accounting, was published last week and the comment period does not close until June, 2010.

In light of presssure directed at the IASB as noted above, they split their project to amend their Financial Instruments standard (IAS 39) in three phases. As previously reported, the IASB recently released for public comment an Exposure Draft of its proposed standard on Financial Instruments: Amortized Cost and Impairment (with comments due June 30, 2010.). The third phase will include the release of an Exposure Draft on Financial Instruments: Hedge Accounting.

In contrast, FASB has been proceeding with a unified approach to amending its Financial Instruments standard(s) - and as noted by FASB Technical Director Russell Golden at the FEI conference today - FASB expects to release an Exposure Draft on Financial Instruments for public comment (addressing measurement, recognition, impairment and hedging) early 1Q2010.

Golden explained that part of the reason the IASB and FASB boards decided to begin holding monthly joint board meetings (by videoconference or in person; previously, the boards met jointly 2-3 times a year)was, in part, to try to avoid 'leap-frogging' wherein one board is working separately on a different phase of a project than the other.

Now, said Golden, "We have asked the leading board [on a particular project] to reconsider, rethink conclusions based on what the other board has done, so they can proceed together." This move to pace convergence projects in tandem, vs. leapfrogging, will apply to convergence projects generally, not only on financial instruments. On the financial instruments project specifically, Golden said, "We may need to make some changes to FAS 157 (Fair Value Measurement), or the IASB may need to make changes," as some differences between the two approaches are significant.

We will have separate blog posts today providing additional highlights from the FEI CFRI conference, including on the subject of convergence and more. Follow the FEI blog on Twitter at www.twitter.com/feiblog; read other's commentary on the conference (and add your own) by following/using hastag #feicfri.

IASB Releases IFRS 9-Financial Instruments (Completes 1st Phase of Project: Classification & Measurement)

2009-11-12T12:31:00.007-05:00

Earlier today, the IASB released IFRS 9, Financial Instruments. As noted in IASB's press release, IASB is engaged in a three-phase project to replace its existing standard, IAS 39, Financial Instruments, Recognition and Measurement, with a new standard, IFRS 9, Financial Instruments. The three phases and related due process documents are listed below.

Final standard, IFRS 9, Financial Instruments, issued today represents completion of the first phase of the project, focusing on Classification and Measurement of Financial Instruments. The press release notes: "The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users. Regarding liabilities, the press release notes: "the IASB decided not to finalise requirements for financial liabilities in IFRS 9 [and] expects to issue final requirements [regarding financial liabilities] during 2010."
Exposure Draft issued last week on the second phase of the project: Financial Instruments: Amortized Cost and Impairment. The comment deadline on the Exposure Draft is June 30, 2010.
Upcoming proposals on Financial Instruments: Hedge Accounting continue to be developed.

Archived IASB Webcast on IFRS 9
A live webcast was convened by the IASB at two separate times earlier today (11am GMT and 2pm GMT) at which questions were taken from the audience. Opening each webcast, IASB Communications Advisor Sonja Horn noted that over 1,000 people were registered for each webcast. Horn introduced Gavin Francis, Director, Capital Markets, IASB and Sue Horn, Senior Technical Consultant, IASB who walked listeners through a slide deck summarizing IFRS 9 and responded to questions from the audience. The archived webcasts have already been posted on the IASB website; (the a.m. webcast begins at approx. 16 minutes into the tape, and the p.m. webcast begins at approx. 17 minutes into the tape). Each webcast lasts approximately 45 minutes (including the Q&A) and the slides summarizing IFRS 9 can be downloaded from the webcast link. Additional information about IFRS 9 can be found on the IASB's Financial Instruments Project Page

FASB Financial Instruments Proposals Expected 1Q2010
As noted in the IASB-FASB joint statement issued on Nov. 5 reaffirming the boards' commitment to convergence by June, 2011, the discussion of progress by IASB and FASB on their respective financial instruments projects notes: "FASB has been developing proposals to replace the equivalent requirements in US GAAP, which it plans to publish for public comment in the first quarter of 2010." The joint statement details how the boards plan to address convergence issues, given that the IASB's three phase approach vs. FASB's unified approach to addressing the financial instruments project.

Learn More
Learn more about current FASB, IASB and SEC developments at FEI's 28th Annual Current Financial Reporting Issues (CFRI) conference taking place on Mon. Nov. 16-Tues. Nov. 17 at the New York Marriott Marquis in NYC. We strongly encourage you to register in advance, but on-site registration is also available. Featured speakers include FASB Chairman Robert Herz, IASB Board Member Patrick Finnegan, SEC Commissioner Kathleen Casey, SEC Chief Accountant Jim Kroeker, SEC Div. of Corp Fin Chief Accountant Wayne Carnall, and other experts.

Separately, FEI's Hall of Fame (sold out) will take place Monday evening, Nov. 16 in NYC, honoring this year's inductees to the Hall of Fame: Dennis Dammerman and Don Nicolaisen.

Also next week: FEI's IFRS Boot Camp, Wed. Nov. 18 in NYC, sponsored by Deloitte. Sign up for this one-day workshop, designed to provide financial executives with practical information, cost-effective approaches, and an overview of time-saving tools for addressing IFRS assessments and conversions in their organizations

If you're betting on a transition to IFRS, consider signing up for the 2-day IFRS Conference Dec. 2-3 in Las Vegas, offered by Executive Enterprises Institute, presented in conjunction with FEI.

Update On Congressional Consideration Re: FASB

2009-11-11T17:00:00.003-05:00

Updating our post last week, FEI Committee on Corporate Reporting (CCR), SEC Chairman, Others Write Congress on Standard-Setting, earlier today, FEI's Committee on Private Companies - Standards Committee (CPC-S) submitted its own letter to Congress (see FEI CPC-S letter) on potential amendments reportedly under consideration by some members of Congress that could impact the independence of the Financial Accounting Standards Board.

The FEI CCR letter filed on Nov. 5, signed by CCR chair Arnold Hanish, stated: "CCR is concerned with recent proposals that would place accounting standards oversight under the jurisdiction of a new oversight board. Acting on such proposals to realign oversight of the Financial Accounting Standards Board (FASB), could change the objectives of financial reporting, harm U.S. capital formation, and potentially politicize the process of setting accounting standards....We urge you to reject any efforts to place accounting standard setting under a new oversight board and continue to support independent accounting standard setting in the United States."

The FEI CPC-S letter filed on Nov. 11, signed by CPC-S Chairman William Koch, stated: "We would like to express our support for the recent letter sent by [FEI CCR] and concur that accounting standard setting should remain in the private sector, by an independent accounting standard setter. Additionally, we would like to expand on CCR's points to reflect the unique observations of privately-held companies."

We noted in our post last week that a number of professional associations have filed letters with Congress against any change to FASB oversight or any tying of systemic risk considerations to the accounting standard-setting process, but an alternate view is held by the American Bankers Association as shown in their testimony at a Congressional hearing last month, linked in our Nov. 6 post.

A more colorful (and perhaps, oversimplified) description of the situation can be found in an article by Ryan Grim appearing in the Nov. 6 edition of the Huffington Post, entitled, Civil War in Corporate America: Banks Battling the Chamber on Accounting Rules. In defense of the Huffington Post, however, they do have access to information like the language of the potential amendment which Rep. Perlmutter (D-CO) was said to be considering offering as an amendment to Section 1103 of the House Financial Services Committee's discussion draft of its systemic risk bill. The Huffington Post said they confirmed with Congressional staff the language of the amendment, and the language was consistent with that circulated by the AICPA last week, along with the AICPA's comment letter to Congress arguing against the amendment. In addition, the Huffington Post posted a copy of SEC Chairman Mary L. Schapiro's letter to Rep. Frank; we had cited some excerpts of that letter in our post last week, based on reporting in BNA.

Yesterday, Sen. Chris Dodd (D-CT), Chairman of the Senate Banking Committee, commented on this issue during the Q&A that followed his press conference announcing the release of the Senate Banking Committee's Discussion Draft of the Financial Reform Bill. Asked by a member of the press whether the Senate bill contains any provision to move FASB oversight to a systemic risk council, Dodd responded:

We didn't do that in this bill. We modified FASB back a few years ago, because for years I've resisted, at various times, there's been efforts to Congressionally decide accounting standards; and just as I don't want - and I say this respectfully of our institution in which I serve - having the Congress decide Federal Reserve policy, setting accounting standards is precarious, so we have strengthened FASB to be far more independent; I'm satisfied how that works today.

You can watch a clip of Dodd's comment on YouTube here.

The House is in recess this week, and will continue with its markup of the systemic risk reform bill when it returns next week.

Links to the Senate Banking Committee's Discussion draft, press release, and summary of the Senate Banking Committee's Financial Reform bill can be found in Broc Romanek's post today in The Corporate Counsel.net blog.

See also: Jack Ciesielski's post earlier this week on: An Accounting Vortex, and the related post by Bill Sheridan today in the Maryland Association of CPA's Blog, CPA Success.

Hinchman Appointed FAF Director of External Relations & Communications
In other news, the Financial Accounting Foundation (FAF) - parent of the FASB and GASB, announced earlier today the appointment of Grace L. Hinchman to the position of Vice President, External Relations & Communications. Hinchman formerly served as Senior Vice President, Public Affairs and Technical Activities, at FEI. According to the FAF press release, Hinchman will be based in Washington, D.C.

Separately, the FAF announced earlier this week that the upcoming Nov. 17 FAF meeting will take place in Washington DC instead of at FAF/FASB HQ in Norwalk, CT, and the entire meeting will be closed to the public.

I wonder (and I remind you of the disclaimer on the right side of this blog ) with the FAF meeting moving to DC next week, could there be a Beer Summit in FASB's future? And who else would be on the invite list? (See, e.g.: Obama Convenes Beer Summit, by Michael O'Brien, The Hill.com, 7/30/09.) More seriously...if you'd like to hear the latest news on FASB, SEC, IASB developments, join us at FEI's Current Financial Reporting (CFRI) conference in NYC next week. And follow @feiblog on Twitter www.twitter.com/feiblog for upcoming news about a tweetup Monday night.

FEI Committee on Corporate Reporting (CCR), SEC Chairman, Others Write Congress On Standard-Setting

2009-11-06T13:00:00.002-05:00

On Nov. 5, 2009 FEI's Committee on Corporate Reporting (CCR) submitted a letter to Rep. Barney Frank and Rep. Spencer Bachus, Chair and Ranking Member, respectively of the House Financial Services Committee. The FEI CCR letter noted: "concer[n] with recent proposals that would place accounting standards oversight under the jurisdiction of a new oversight board."

One such proposal that could impact oversight of accounting standard setting is HR 1349, sponsored by Rep. Ed Perlmutter (D-CO). HR 1349 would amend the Securities Act of 1933 to remove the SEC's oversight role over FASB, and assign that oversight role instead to a Federal Accounting Oversight Board, consisting of the banking regulators, Chairman of the SEC and Chairman of the PCAOB.

As reported earlier this week, Rep. Perlmutter may offer an amendment on the Financial Stability Improvement Act (the bill relating to systemic risk regulation, to be reported as H.R. 3996) to incorporate language from HR 1349.

Following are additional points in the FEI CCR letter:

Acting on such proposals to realign oversight of the Financial Accounting Standards Board (FASB), could change the objectives of financial reporting, harm U.S. capital formation, and potentially politicize the process of setting accounting standards.
We respectfully request that accounting standards oversight should remain under the jurisdiction of the U.S. Securities and Exchange Commission, which is responsible for fair, objective, and transparent reporting for those who invest in our public companies.
We urge you to reject any efforts to place accounting standard setting under a new oversight board and continue to support independent accounting standard setting in the United States.

SEC Chairman States Views
SEC Chairman Mary L. Schapiro sent a letter to Rep. Frank and Rep. Bachus yesterday, reports Steve Burkholder of BNA, in his article entitled SEC Chief Schapiro Cautions Lawmakers on Proposals to Widen Oversight of FASB, Here are some highlights from Burkholder's article:

The chairman of the Securities and Exchange Commission is warning key congressional lawmakers at work on financial regulatory reform that efforts to change oversight of accounting standard-setting could harm the capital markets by undercutting investors' trust in financial reporting and diluting the mission of the rulemakers.
In sternly worded letters dated Nov. 5, Mary Schapiro wrote to the chairman and ranking minority member of the House Financial Services Committee to state that she is “deeply concerned about the possible consequences” of the potential changes.
‘‘It is critical that Congress preserve the independence” of bodies such as the Financial Accounting Standards Board, Schapiro wrote ...[adding]..."[W]hile active engagement and dialogue with a broad spectrum of interested parties improves accounting standards, diluting the mission of the standard-setters does not,” the SEC chairman continued. “Accounting should be about accounting, and not about anything else.”

CII/CAQ/Chamber Letter
As previously reported, other groups that have filed letters against formation of an FAOB include a joint letter of the Council of Institutional Investors, Center for Audit Quality, and U.S. Chamber of Commerce. See, e.g. CAQ Wants Congress to Preserve SEC Oversight of FASB (webcpa.com) . Here are some highlights from the CII/CAQ/Chamber letter:

In adopting the Sarbanes-Oxley Act of 2002, Congress recognized the benefits of having
accounting standards set by an independent body and established a process for the establishment and oversight of financial reporting policy. In doing so, Congress designated the Securities and Exchange Commission (SEC) as the primary agency with oversight over accounting standard setting, given the important role accounting standards play in the Commission’s mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.
By placing the FASB under the jurisdiction of a structure charged with managing systemic risks to the financial markets, accounting rules will be viewed though the narrow lens of a few large companies from specific industries, rather than considerate of the applicability of financial reporting policies to over 15,000 public companies.
Procedure, appropriate oversight and independence are important to ensure the legitimacy of the standards-setting process, and to protect the goals of transparency, relevance, and usefulness in financial reporting that are critical to the success of the U.S. capital markets.

American Bankers Association Testimony
Another point of view is held by the American Bankers Association, which shared its views on this matter within broader testimony at an Oct. 29 hearing of the House Financial Services Committee. Following are some highlights from ABA President Edward Yingling's testimony:

A Systemic Risk Oversight Council could not possibly do its job if does not have oversight authority over accounting rulemaking. This is a major deficiency in the draft legislation.
The Financial Accounting Standards Board (FASB) should continue to function as it does today, but it should no longer report only to the Securities and Exchange Commission (SEC). The SEC’s view is simply too narrow.
Accounting policies contributed to the crisis, as has now been well documented, and yet the SEC is not charged with considering systemic and structural effects. Moving oversight to the systemic risk council, which includes the SEC, will address this problem.
Accounting policy is arcane and difficult, but it was a critical factor in turning a bubble and a recession into a full-fledged panic. If Congress does not address this issue as part of reform, it will not have addressed one of the significant causes of the problems .

Mark-up Continues Today

As shown here, the House Financial Services Committee was slated to continue its markup of the systemic risk bill beginning at 1pm today.

FASB, IASB Reaffirm Convergence By June, 2011

2009-11-05T21:27:00.003-05:00

Earlier today, FASB and the IASB announced the release of a 23-page joint statement which reaffirms their commitment to improve IFRS and U.S. GAAP, and to bring about their convergence through completion of the major convergence projects outlined in the FASB-IASB Memorandum of Understanding by June, 2011. The joint statement outlines plans and milestone targets that will guide completion of the major projects by the June, 2011 target date. The major convergence projects include:

Financial Instruments
Consolidations
Derecognition
Fair Value Measurement
Revenue Recognition
Leases
Financial Instruments with the Characteristics of Equity
Financial Statement Presentation
Other MoU Projects
Other Joint Projects

Strive to Align Project Timetables
In response to concerns voiced about 'leapfrogging' - i.e. when one of the two boards gets ahead of the other on a joint convergence project- the joint statement notes:

We will strive to avoid creating timeline differences like those that have complicated our efforts to improve and align standards for financial instruments and other areas. If such differences do arise, we will work together to eliminate differences between standards as soon as practicable by drawing stakeholders’ attention to each others’ proposals and reviewing our own requirements with a view to addressing differences on a timely basis.

In addition, the joint statement expresses the boards' commitment to: "Fundamental first principles about the purposes of accounting standards and the process by which the standards are determined, as set out in the statement of the Monitoring Board of the International Accounting Standards Committee Foundation, issued on 22 September 2009."

"Single Set," "Common" Set of Standards
It is interesting to note that the FASB-IASB joint statement speaks in some places of converging to a 'single' set of standards, and in other places of converging to a 'common' set of standards. To some, these terms can mean a world of difference. However, the terms are often used interchangably by many different parties. For example, here are some excerpts from the joint statement:

We are redoubling our efforts to achieve a single set of high quality standards within the context of our respective independent standard-setting processes.
Our goal is to develop together common standards that improve financial reporting in the US and internationally and that foster global comparability. Achieving such improvements is consistent with the objectives of the IASB that are set out in the Constitution of the IASC Foundation. It also fulfils the responsibility the FASB has under US law and the Securities and Exchange Commission’s 2003 Policy Statement to consider, in developing standards, whether international convergence is necessary and appropriate in the public interest and investor protection.

Presumably, once a set of 'common standards' is acheived, the next step would be to officially adopt one set (again, presumably, IFRS, which is used in over 100 countries) as the 'single' global standard. FASB Chairman Robert Herz said as much in remarks at various conferences and Congressional hearings in 2007 and 2008. For example, in testimony before the Senate Banking Committee, Securities Subcommittee, in October, 2007, Herz said:

[W]e agree with the Securities and Exchange Commission that a widely used single set of high quality international accounting standards for listed companies would benefit the global capital markets and investors. The ultimate goal, we believe, is a common, high-quality global financial reporting system that can be used for decision-making purposes across the capital markets of the world.
However, achieving the ideal system requires improvements and convergence in various elements of the infrastructure supporting the international capital markets, including a single set of common, high-quality accounting standards, a well-funded, global standard-setting organization, and a global interpretive body to handle guidance and implementation issues.
Improvements are also needed in disclosure requirements; regulatory, enforcement and corporate governance regimes; auditing standards and practices; and education of capital market participants.

Herz first acknowledged that the likely, ultimate 'single' set of accounting standards would one day be an improved version of IFRS, in remarks he gave at an FEI Global Convergence Conference in Sept., 2007, as noted by Marie Leone of CFO.com in Sweeping Away GAAP, 9.28.07.

For some interesting reading on the practical aspects of convergence, see Convergence Doesn't Necessarily Mean the Same, also by Leone, published Nov. 5 in CFO.com, in which she quotes D.J. Gannon of Deloitte and other experts.

Relevant, Transparent, Neutral and Comparable
Appendix B of the joint statement, Shared Goals, Values and Principles, will likely be very significant, taking on perhaps an almost equal role to the Conceptual Framework of the two boards.

The phrase 'relevant, transparent, neutral and comparable' is emphasized, in the context that:

[I]t is critically important to achieve high-quality, globally converged financial reporting standards that provide relevant, transparent, neutral, and comparable financial information, regardless of the geographical location of the entity.

High-quality accounting standards are those that foster the provision of relevant, transparent, neutral, and comparable financial information.

Some may view the only critical missing factor in that list of four factors as 'reliability,' although the decreasing emphasis on 'reliability' in favor of 'transparency' and 'relevance' has been happening for some time now in the boards' proposals to amend the conceptual framework.

FASB's Mission Statement (as described in the April 2009 edition of Facts About FASB) continues to emphasize relevance and reliability:

To accomplish its mission, FASB acts to [i]mprove the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency.

My two cents (I remind you of the disclaimer which appears in the right margin of this blog): The tipping of the scales with what some may perceive as more weight on relevance than reliability within the emerging revised conceptual framework, and statement of goals in today's joint statement, reflects the view of some that information about what an asset is worth today, based on what a market participant or third party would say, is more important to investors (i.e. more 'relevant') than a value based on some other valuation methodolog(ies), which may be more reliable. (Keep in mind, third party information for a nonliquid financial instrument, or a formerly liquid instrument in a disorderly or inactive market, can, in theory, be a quote from a broker who is giving a reference price, but may not necessarily actually want to buy and hold the item.) Caught in the middle, however, are preparers and auditors (not to mention members of the boards' of directors) who have legal liability for the information provided in financial reports, who may prefer keeping the historic balance between relevance and reliablity.

One Paragraph Statement By SEC Chairman
A one paragraph statement was issued by SEC Chairman Mary L. Schapiro, in recognition of the FASB-IASB joint statement, in which she said:

I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors.

Although brief, Schapiro's statement may help pave the way for the SEC to, as Schapiro said at a conference in September: "... speak a little later this fall about what our expectations are with respect to IFRS."

UPDATE: Regarding the status of the SEC's proposed IFRS Roadmap, Reuters' Emily Chasan reports that at a New York State Society of CPAs conference on Nov. 5, SEC Deputy Chief Accountant Julie Erhardt explained that, while commenters on the roadmap generally concurred on moving to a single set of accounting standards, there was no one clear view on how to get there. Read more in Chasan's article, Lack of Accounting Rules Consensus Vexes SEC.

G-20 Finance Ministers Meet This Week
The issuance of the joint statement by IASB and FASB, noting support of the G-20 - specifically, the G-20 Progress Report issued on Sept. 25, which "call[s] on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process; and complete their convergence project by June 2011" - comes one day ahead of the 10th anniversary meeting of the G-20 Finance Ministers and Central Bank Governors, set to take place in St. Andrews, Scotland Nov. 6 and 7. Following are some early reports relating to this week's G-20 Finance Ministers meeting:

A Deluge of G20 Meetings (FT, Nov. 4)
G-20 Will Discuss 'Bubble-Building,' Meirelles Says (Bloomberg, Nov. 3)
France Sets New Bonus Rules for Banks Ahead of G20 (DJ Newswire, Nov. 5)
Big Bank 'Living Wills' Gain Traction in G20 (Globe & Mail, Nov. 5)
Strauss-Kahn Sees G-20 Adopting Timeline, Method on Imbalances (Bloomberg, Nov. 4)

Learn More About IFRS
Learn more about IFRS at FEI's IFRS Boot Camp Nov. 18 in NYC sponsored by Deloitte. Or come to the two-day IFRS conference offered by Executive Enterprises Institute, cosponsored by FEI, Nov. 9-10 in Chicago, or Dec. 2-3 in Las Vegas. And, if you want to get an update on all the hot issues currently in the mix on the financial reporting scene, its not too late to sign up for FEI's 28th Annual Current Financial Reporting Issues (CFRI) conference, Nov. 16-17, at the Marriott Marquis in NYC. Francine McKenna of Re: The Auditors will be among press covering the event, we look forward to seeing you there!

Sarbanes-Oxley Exemption Passes Congressional Committee

2009-11-04T17:30:00.003-05:00

Earlier today, the House Financial Services Committee approved an amendment that would exempt small public companies from the provisions of Sarbanes-Oxley Section 404b. The Garrett/Adler amendment, offered by Rep. Scott Garrett (R-NJ) and Rep. John Adler (D-NJ), was approved in the HFS Committee today by a vote of 37-32, as part of the Investor Protection Act (IPA). The Committee voted in turn, by a vote of 41-28, to approve the IPA. (See: Financial Services Committee Approves Investor Protection Act. )

As noted in Adler's Nov. 3 press release, the Garrett/Adler amendment would not only exempt small businesses (with less than $75 million market cap), but would require the SEC, together with the GAO, to conduct a study directed at reducing the burden of Sarbox 404b on companies with market cap between $75 million and $250 million. Additionally, the amendment calls for the study to "consider whether reducing the compliance burden or a complete exemption for these companies will encourage them to list on exchanges in the United States in their initial public offerings."

The ultimate impact of the Garrett/Adler amendment will depend on whether it remains in the IPA when voted on by the full House of Representatives, and whether it will be included in the Senate’s version of the bill and ultimately signed into law.

Background
Sarbanes-Oxley Section 404a requires a management report on internal control. Companies of all sizes currently provide the management report on internal control. Sarbanes-Oxley Section 404b, the target of the Garrett/Adler amendment, requires an external audit of internal control. Small public companies (non-accelerated filers, generally defined by the SEC as companies with less than $75 million market cap) have not yet been subject to the Sarbox 404b requirement. As described in SEC's Oct. 2 press release issued concurrently with SEC's Sarbox cost-benefit study, the SEC granted a final deferral of the effective date of Sarbox 404b for small companies, extending the deadline to annual reports for fiscal years ending on or after June 15, 2010. See related Final Rule.

Rationale Behind The Garrett/Adler Amendment
Garrett's Oct. 28 press release explained:

Although reforms were made in 2007 to relax the guidelines for smaller companies, businesses of all sizes still report excessive compliance costs, as noted in an SEC report from September 2009. In summarizing survey responses from businesses regarding the benefits of Section 404 compliance, the SEC wrote, “[A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies.

Garrett's initial proposal, cosponsored with Rep. Carolyn Maloney (D-NY) was withdrawn, as was an earlier version of Adler's amendment. According to a report in today's WSJ, Small Business Gets Break in House Financial Overhaul Bill, by Kara Scannell and Damien Paletta:

[White House Chief of Staff Rahm] Emanuel negotiated with Mr. Adler to avoid a more damaging amendment that would have exempted firms already covered by Sarbanes-Oxley, those with market caps of less than $700 million, [House Financial Services Committee Chair Barney] Frank told reporters....

"It's odd that I should be defending the White House," Mr. Garrett said. Mr. Adler said he spoke with White House Chief of Staff Rahm Emanuel three times recently about giving small businesses relief.

House Financial Services Chairman Barney Frank (D., Mass.) and Rep. Paul Kanjorski (D., Pa.) both oppose the amendment, as do left-leaning consumer-advocacy groups.

SEC Chairman Mary L. Schapiro reportedly filed a letter with the House Financial Services Committee on October 16, indicating that she “opposes an exemption,” as reported by Zachary A. Goldfarb in today's Washington Post, Small Public Companies Win Exemption from Audits. However, it is not clear if Schapiro's views changed in light of modifications made over the past week to the earlier versions of the amendments; WSJ's Scannell and Damien reported today that: "SEC Chairman Mary Schapiro said earlier this week that she didn't oppose a move, but 'I don't want to just pass the problems around the map." In related news, see also Frank Seeks House Vote in December on Financial Measures, by Michael R. Crittenden of the WSJ.

My two cents
I remind you of the disclaimer that appears in the right margin of this blog, above the blogroll. I am not going to comment on the exemption provision in the Garrett/Adler amendment, only on the provision calling for GAO and the SEC to perform a cost study. Some may question why a new cost study on Sarbox is required, when the SEC just released its cost-benefit study in September (SEC study).

Cent one: I would submit that the cost-benefit study called for under the Garrett/Adler amendment may add some valuable information. For example, there could be benefits from adding an independent party (GAO) as co-head of a cost study on Sarbox, as compared to the SEC's study published in October, in which the SEC alone studied the cost-benefit of implementation of its own rules, and those of the PCAOB (which the SEC, in turn, is responsible for approving.)

One could contrast this with the decision of Congress last year, in the Emergency Economic Stabilization Act, to call upon solely the SEC (and not GAO) to conduct a study of the impact of the fair value accounting rules, given that the SEC is responsible for oversight of the FASB that issued those rules.

Additionally, although the SEC's cost-benefit study does a good job of detailing assumptions underlying its methodology - including difficulties in obtaining certain data - it is possible further work could be done with alternative assumptions and information.

Here are some verbatim excerpts from the SEC study:

For Section 404(b) compliant companies, the largest cost component is internal labor costs— which can comprise more than 50 percent of the total compliance cost—followed by the estimated portion of total audit fees attributed to ICFR (404(b) audit fees), outside vendor fees, and non-labor cost (see Table 8). [pdf pg 7, printed pg 9, SEC study]
It is important to note that the estimates of internal labor costs presented in this report are based on an assumption about a reasonable hourly rate. The rate adopted for internal labor is $121 per hour, consistent with the rate quoted as of September, 2008 for a junior accountant cited in a report on salaries prepared by the Securities Industry and Financial Markets Association (SIFMA), to which the Commission frequently refers in its rulemakings. This is at the low end of cost estimates that are provided in the SIFMA report for accounting and related services, and above the rate of $50/hour (or $100,000 for 2000 hours) that is assumed in a series of Financial Executives International (“FEI”) reports of survey findings relating to the costs of compliance with Section 404 that date back to 2005. Although our assumed rate is within the range of reasonable estimates for evaluating the overall costs of compliance, it is not intended for use in estimating the cost to an individual company. [pdf pg 14, printed pg 12, SEC study]

Overall, on average, respondents provided estimates of audit fees that are lower than what is reported by Audit Analytics. This is consistent with the disparity between the relatively broad definition of audit fees that applies in SEC filings from which Audit Analytics collects data and the comparatively narrow definition of audit fees provided in the survey questionnaire. Moreover, the differences are significant among the medium ($75-700 million) and larger (>$700 million) companies only, precisely where the broad definition of audit fees adopted for the purpose of SEC’s filings is most likely to lead to a discrepancy relative to the narrower definition in the survey. [pdf pg 37, printed pg 35, SEC study]

The evidence on the experiences of larger companies may be useful in evaluating the extent to which additional improvements to the implementation of Section 404(b) should be undertaken before it becomes applicable to non-accelerated filers. Notwithstanding, it is important to highlight that the analysis in this report is not designed to provide compliance cost estimates for companies that have yet to comply with the relevant requirements of Section 404. [pdf pgs 3-4, printed pgs 1-2, SEC study]

Based on the above, it is possible that further analysis could be done using alternative assumptions or methodology.

Cent two: However, an alternate view could be that the cost study under the Garrett/Adler amendment, aimed at considering the impact on companies with between $75 million and $250 million market cap, could potentially undo compliance by companies that are already required to comply with Sarbox 404b, and presumably may have already integrated the 404b internal control audit into their preexisting financial statement audit.

This could be viewed by some as raising different issues than the exemption of smaller companies with less than $75 million market cap (which have yet to be required to comply with 404b) as set forth in the remainder of the Garrett/Adler amendment. As noted in some of the articles linked above, although some parties favor exemptions, some strongly object to exemptions. For additional views on this topic, see Jim Peterson's Nov. 1 post in his Re: Balance blog.

COSO Releases Thought Paper on ERM

2009-11-04T13:33:00.000-05:00

Earlier today, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a 24-page thought paper entitled Strengthening Enterprise Risk Management for Strategic Advantage. The new thought paper follows the release in October of a four-page thought paper entitled, Effective Enterprise Risk Oversight: The Role of The Board of Directors. FEI is one of the sponsoring organizations of COSO. Read more in COSO’s press release.

The ERM thought papers relate to COSO's 2004 ERM Framework. Separately, COSO issued in 1992 its framework entitled, Internal Control-Integrated Framework, and a number of publications have been issued since that time relating to the internal control framework, including COSO's 2006 Guidance for Smaller Public Companies, and COSO's 2009 Guidance on Monitoring Internal Control Systems. COSO has also engaged a research team to develop an update to its 1999 monograph on Fraud.

The ERM thought papers released today and in October are available by free download on COSO's website, www.coso.org. We will have a limited number of copies at the FEI booth in the Exhibit Hall at our upcoming Current Financial Reporting Issues (CFRI) conference Nov. 16-17 in NYC, stop by our booth for a copy.

FASB Oversight Subject of Congressional Interest

2009-11-03T21:39:00.001-05:00

As we previously reported, Rep. Ed Perlmutter (D-CO) introduced a bill earlier this year (HR 1349), which would create a Federal Accounting Oversight Board (FAOB). More recently, Rep. Gary Miller (R-CA) proposed an amendment to create a Financial Reporting Forum (FRF). The two legislative initiatives vary in terms of how much oversight power the recommended bodies would have over the FASB. Various constituents have spoken out or filed comment letters recently on the proposed legislation that would impact FASB oversight specifically, and on the general subject of accounting standard-setter independence, as detailed below.

Perlmutter's Proposed FAOB Would Take Over Oversight of FASB From SEC
HR 1349, Section 4 would amend the Securities Act of 1933 to remove the SEC's role as the ultimate authority and overseer of accounting standards for public companies (a role which SEC has traditionally delegated to FASB, with oversight by the SEC, as reinforced in the Sarbanes-Oxley Act) and replace the SEC's authority in this area by assigning it to a new body called the Federal Accounting Oversight Board (FAOB). The FAOB as proposed by Perlmutter would focus on, among other things, systemic risk implications of accounting standards, and its five members would include the Chairmen of the Federal Reserve Board, FDIC, SEC and PCAOB, and the Secretary of the Treasury.

We understand that Perlmutter intends to offer an amendment on the Financial Stability Improvement Act (the bill relating to systemic risk regulation) to incorporate language from HR 1349.

Miller's Proposed FRF Has Similarities To CIFiR Proposal
Last week, Rep. Gary Miller (R-CA) offered an amendment to the Investor Protection Act (HR 3817), which some view as a competing amendment to Perlmutter's bill. Miller's amendment, adopted by voice vote by the House Financial Services Committee on October 27, (shown on this list of amendments on the Discussion Draft of the IPA as Amendment No. 13) would create a Financial Reporting Forum (FRF).

Miller's proposed FRF would differ dramatically from Perlmutter's proposed FAOB, primarily because the FRF (as shown in the current version of Miller's amendment) would NOT have oversight authority over the FASB.

In fact, the only duties assigned to the FRF in Miller's amendment would be to:

meet to discuss immediate and long-term issues critical to financial reporting, and
issue an annual report to Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters.

The first duty assigned to the FRF noted above, i.e., to serve as a discussion forum, is analogous to duties of a similarly named FRF contained in Recommendation 2.3 in the final report of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR final report), in which CIFiR recommended that the SEC in turn issue a recommendation to:

Create an FRF [Financial Reporting Forum] that includes key constituents from the preparer, auditor, and investor and other user communities, to meet with representatives from the SEC, the FASB, and the PCAOB to discuss pressures in the financial reporting system overall, both immediate and long-term, and how individual constituents are meeting these challenges. This may require the FASB to re-evaluate the roles and composition of its advisory groups or agenda committees.

However, the second duty assigned to the FRF by Rep. Miller - i.e., for the FRF to report to Congress annually, including any recommendations for legislation relating to financial reporting matters - reaches beyond the duties of the FRF as recommended by CIFiR.

Additionally, the composition of the FRF in Miller's amendment is generally more expansive than that recommended by CIFiR. Most significantly, Miller adds the chairmen of the banking agencies (and the NCUA) to the FRF - in addition to the Chairmen of SEC, FASB and PCAOB - whereas CIFiR only called for representatives of the SEC, FASB and PCAOB (but not the chairmen of those agencies), and did not call for the banking agencies to be included.

Also, the Miller amendment, like the CIFiR recommendation, calls for representatives of auditors and investors (with the Miller amendment expressly calling for those representatives to be appointed by the SEC), although instead of calling for a 'preparer' representative as CIFiR does, the Miller amendment calls for a representative of a financial company, and a nonfinancial company (both to be appointed by the SEC). [NOTE: This could potentially be a significant difference, in that the financial and nonfinancial company reps may or may not necessarily be experts at financial reporting, if they are not from, e.g. the CFO or accounting function at the company.]

Status of Miller and Perlmutter Amendments

According to staff in FEI's Government Affairs office in Washington, D.C., the House Financial Services Committee, chaired by Rep. Barney Frank (D-MA), is engaged in mark-up of both the Financial Stability Improvement Act (FSIA) and the Investor Protection Act (IPA) this week.

We understand that it is possible that both Miller and Perlmutter's amendments may be adopted (in the IPA and FSIA, respectively), with any potential legal conflicts worked out later in the process (i.e., potentially when each regulatory reform bill is packaged together and brought to the full House for a vote sometime in November or December.)

FEI members with questions about the status of this or other legislation can contact Matt Miller, Senior Director, Goverment Affairs, mmiller@financialexecutives.org or Cady North, Manager, Government Affairs cnorth@financialexecutives.org, in our Washington DC office.

Chamber, CII, CAQ Write Congress
Yesterday, a joint letter was filed by the U.S. Chamber of Commerce Center for Capital Market Competitiveness, the Council of Institutional Investors, and the Center for Audit Quality (an affiliate of the AICPA), addressed to the Chairs and Ranking Members of the House Financial Services Committee and its Capital Markets subcommittee, which appears to allude primarily to the Perlmutter amendment, voices continued support for an independent standard-setting process, and objects to any change to FASB oversight. Specifically, the Chamber/CII/CAQ letter (I'll refer to this group later as the 3C's) states:

[W]e are writing to discourage the Committee from taking actions that would potentially impact the independence of accounting standard setting. As the Committee considers reforms to the U.S. financial system as part of the Financial Stability Improvement Act of 2009 (H.R. 3904), we are concerned with recent proposals that would realign the oversight of the Financial Accounting Standards Board (FASB) within the structure of systemic risk....

In adopting the Sarbanes-Oxley Act of 2002, Congress recognized the benefits of having accounting standards set by an independent body and established a process
for the establishment and oversight of financial reporting policy. In doing so, Congress designated the Securities and Exchange Commission (SEC) as the primary agency with oversight over accounting standard setting...

While dialogue and input between standard setters and all stakeholders might be improved, a realignment of oversight within the structure of systemic risk regulation could have adverse impacts on investor confidence, which is of critical importance to the successful operation of the U.S. capital markets.

My two cents

I remind you of the disclaimer posted in the right side of this blog (above the Blogroll). The 3C's letter (the Chamber/CII/CAQ letter) covers a number of points relating to the Perlmutter amendment, which it refers to somewhat obliquely, by referencing recent proposals relating to systemic risk, that would realign oversight of the FASB.

I am going to focus my comments on the Miller amendment calling for a Financial Reporting Forum. I believe Miller's amendment may have a greater likelihood of surviving through the House (and later, Senate, and conference committee) action on the bill, since

it does not threaten to expressly change FASB's oversight model, and
it is a clone (well, maybe not a clone, but a sibling, or let's say a cousin) of the SEC CIFiR Recommendation 2.3 which also called for a Financial Reporting Forum, albeit a more narrowly structured one, with a more narrow scope.

One could view the Miller amendment as being largely motherhood and apple pie, in assigning a Financial Reporting Forum the duty of discussing immediate and long-term issues of importance to financial reporting, which is virtually identical to CIFiR's recommendation.

The fact that Miller also calls for the FRF to report annually to Congress on any legislative proposals relating to financial reporting is not necessarily a bad thing.

On the one hand, some may fear this invitation for legislative proposals could become a Pandora's box, potentially imposing on FASB's independence.
On the other hand, any such legislative recommendations could also potentially have a positive effect by reinforcing or strengthening matters relating to FASB, the SEC or PCAOB.
However, if this duty to present legislative recommendations is viewed as a true roadblock to the Miller amendment, perhaps some will argue to remove this second duty from the FRF (e.g., FRF could still provide an annual report to Congress, without being required to include 'legislative recommendations' per se).

Additionally, it may not necessarily be a bad thing to expand the composition of the FRF, as Miller envisions, from the model envisioned by CIFiR (which included only SEC, FASB, PCAOB, auditor , preparer, and investor reps), to expressly include representatives of the banking agencies.

Related to this, there may be some worthy systemic risk considerations that could be assigned to the FRF, such as described in Perlmutter's amendment, sans the change in oversight powers which Perlmutter includes.

Some may view a suggestion to invite the banking regulators to the table of the proposed Financial Reporting Forum as heresy, or as an ipso facto threat to FASB's independence. I don't see it that way, particularly in light of the lessons learned in today's (hopefully) post-economic crisis environment, in which suggestions have been made in various quarters to bring together multifaceted regulatory agencies to interact more robustly and relate all the various pieces of the puzzle under their realm.

Paul Volcker, Chair of the President's Economic Recovery Advisory Board and former Chairman of the Federal Reserve Board and the International Accounting Standards Committee Foundation (IASCF), sounded a similar theme, I believe, in remarks last week at the AICPA-IASCF convergence conference.

As noted in the excerpts below from the article, Volcker Heartened by Regulators Reaction to Crisis Warns Against Isolation (Steven Burkholder, BNA Daily Report for Executives. Reproduced with permission from Daily Report for Executives, 208 DER I-4 (Oct. 30, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com/):

Volcker... praised the International Accounting Standards Board and its U.S. counterpart Oct. 29 for reacting to the financial crisis sensibly, as he also warned against the dangers of isolation presented by notions of independence and the specialized world in which rulemakers work....

As chairman of IASCF trustees from 2000-05, Volcker said, he was barred from speaking on the substance of rulemaking topics before the international board. However, four years after his service ended, the statute of limitations had run its course, he said.
Speaking more freely, Volcker focused on the need for IASB and rulemakers to be independent. Along those lines, he listed other words that expressed desired qualities in rulemaking: “professionalism,” “expertise," and “uniformity,” which he said also reflected good values in central banking.
“But I think it's also true that the accounting standard setters—and whether you're talking about economists” or central bankers, he continued, “you know an organization that is shrouded in independence can also become a kind of professional cocoon. It can slip into isolation—even, may I say, arrogance.
“In that respect, it is subject to some of the dangers of central banking, and think of themselves as some high priest, or some occult science that ordinary mortals should not touch,” said Volcker. “But the fact is they have to deal—central bankers, or accountants or standard setters—with some really complicated realities that don't always fit very nicely into theoretical concepts.”

I particularly like Volcker's reference to the need for standard-setters (and this could apply to almost anyone) to avoid "think[ing] of themselves as some high priest, or some occult science that ordinary mortals should not touch."

Said another way, [and I did say this, in a column I wrote in the July/August issue of Financial Executive Magazine, entitled Standard-Setters and Sovereignty (free login account required to read article)]:

In this charged atmosphere, the role of sovereign bodies with respect to accounting standard setting continues to be debated. How much oversight or influence of standard-setters by sovereign bodies is too much? When do actions taken in the name of oversight compromise the independence of standard setters? Or, when do such actions “unduly” compromise the independence of standard setters? If FASB and IASB were 100 percent independent, would that make them sovereign, too? This heated debate is likely continue through the summer and beyond.

Balancing relevance and reliability, practical concerns and theoretical constructs, and the needs of a broad range of constituents, is a daunting task for any standard-setting body; FASB and the IASB work hard under the weight of these formidable challenges.

Their efforts were praised by Volcker in his remarks last week, as reported by BNA: "Volcker... was encouraged by progress made to date on both the writing of high-quality standards and their increasing acceptance worldwide."

Kroeker, Volcker on Convergence

2009-10-30T16:30:00.001-04:00

Earlier today, SEC Chief Accountant Jim Kroeker told a conference in New York that regardless of the status of SEC's proposed IFRS Roadmap:

"If the boards [FASB, IASB] share the same objective to improve financial reporting, the boards have agreed that the projects that they’re working on are areas that need improvement, not just under U.S. GAAP but under IFRS, then I think convergence efforts should continue or would continue without an SEC finalization of the roadmap. That isn’t to say that it isn’t important for us then to also determine the role of international reporting standards in the U.S., and I understand how that can help convergence efforts, but I don’t think the absence of a decision should somehow impede efforts.”

Kroeker's remarks as cited above were reported by webcpa's Michael Cohn in, Kroeker: Keep Converging With or Without Roadmap. The remarks were made at day two of the AICPA-IASCF's conference on IFRS in North America: the U.S. Perspective.

Announcement re: IFRS Roadmap 'This Fall' Means By Dec. 21, Kroeker Says

Pressed to give a specific date by which the SEC plans to announce some formal followup action on its proposed IFRS Roadmap, here's how Kroeker responded, according to webcpa's Cohn:

Kroeker reiterated earlier statements that he and SEC Chair Mary Schapiro had made, indicating the SEC was turning its attention this fall to the proposed IFRS roadmap. When asked about the date, Kroeker said, “There will be follow-up on the roadmap this fall.” Asked to define the word “fall,” he noted that the season ends on Dec. 21.

But Kroeker emphasized that the accounting standard-setting boards should not wait for the SEC to make its decision on the final roadmap, and how the roadmap might change in light of the comments the SEC has received.

Both Fair Value and Historical Cost Can Be Important
On the contentious subject of fair value reporting, the webcpa report notes that Kroeker commented:

I think it’s time for the accounting debate to turn away from whether it’s fair value or whether it’s historical cost, but to acknowledge that in some cases both sets of information are important, and then to discuss how best to portray them.

FASB-IASB MOU To Be Updated, Reprioritized
Webcpa's Cohn added that the FASB and IASB plan to update their Memorandum of Understanding - last updated in 2008, and that Kroeker told attendees at the AICPA-IASCF conference he would prioritize resolution of the board's long-term convergence projects by putting the following projects at the top of the list, in this order:

financial instruments

revenue recognition, and

consolidation and derecognition

Read more in the webcpa article.

If Kroeker's speech is posted on the SEC website, we will update this post to add a link here.

Volcker on Convergence
The AICPA Journal of Accountancy has posted a 3 minute video which opens with a clip from Paul Volcker's remarks at the AICPA-IASCF conference yesterday, and includes additional material from an exclusive interview conducted by the JofA. Volcker currently chairs President Barack Obama's Economic Recovery Advisory Board, and formerly served as Chairman of the Federal Reserve Board, and Chairman of the International Accounting Standards Committee Foundation (IASCF) Board of Trustees.

In the JofA video, Volcker speaks of the 'hubris' in the U.S. 20-30 years ago, in which there was a presumption that U.S. accounting standards were the best, and that others should follow the U.S. However, he noted that after the scandals that hit Enron, Worldcom, Global Crossing, and the demise of Arthur Andersen, "there is no necessary perfection in 'Made in the USA' any more."

He also speaks of the benefits of convergence in having one set of accounting standards applied for all worldwide operations of an entity.

On the question of how to protect the independence of standard-setters, Volcker replies, "The real protection is, if the international standards are carefully thought through, they recognize reality, they are appropriate and efficient, and if they are resistant to pressures from particular countries, that reinforces the independence, and it will make it more and more difficult for the Europeans, for the Americans, or anybody else to deviate, so 'do a good job' is the best protection they can have."

Commenting on the G-20 recommendation that convergence to a single set of global standards be achieved by June, 2011, Volcker says he believes that is a practical recommendation, characterizing it as "a needle to the United States to get on with it."

"That doesn't mean the United States has to be supine and just adopt whatever the international people say," says Volcker, adding, "there has got to be a give and take and discussion between the two, to get the best result."

GT Survey, Pozen Weigh In
Volcker's remarks about the U.S. not simply adopting international standards carte blanche, but the need for a give and take, will probably be appreciated by those who are most concerned about giving up control of the determination of accounting standards to an international body.

Grant Thornton released results of a survey yesterday, with the headline: "71% of senior financial executives say that FASB should set U.S. accounting standards, not IASB or Congress."(See GT survey.)

GT's survey was referenced in the CFO.com article by Tim Reason entitled, Pro-American Mood Clouds Convergence. Reason also included snippets from the upcoming book by Robert Pozen, chairman of MFS Investment Management

CFO.com's Reason reports that Pozen, chair of the SEC Advisory Committee on Improvements to Financial Reporting which issued its final report last year, believes that adoption of IFRS would only make sense for the largest companies in the U.S., which have international operations. Pozen's book, entitled Too Big To Save?, is due out in November.

Read more convergence news, see our post yesterday, FASB, IASB To 'Retriple' Efforts To Meet 2011 Convergence Deadline.

FASB, IASB To ‘Retriple’ Efforts To Meet 2011 Convergence Deadline

2009-10-29T16:34:00.002-04:00

This week may stack up as a big one on the global accounting convergence front, with FASB Chairman Robert Herz calling yesterday for 'retripling' the two boards' efforts toward meeting their 2011 convergence target established in the FASB-IASB MOU. Herz’ remarks were reported by BNA's Steve Burkholder in IASB, FASB to Meet Monthly, Plan Aligning Schedules, Substance of Instruments Rules (BNA sub req’d). Monthly meetings could include videoconference meetings as well as in-person meetings, increasing the frequency of joint board meetings from the current practice of 2-3 joint board meetings per year. Additional information on the results of this week's joint board meeting between FASB and the IASB can be found in FASB's Summary of Board Decisions.

The 'retripling' of effort suggested by Herz builds on the call issued by the G-20 Leaders for “our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards …and complete their convergence project by June 2011.”

FASB and IASB leadership are on the speaking circuit in the U.S this week, with Herz and his counterpart at the IASB, Sir David Tweedie, providing a convergence update at an AICPA-IASCF conference in NYC earlier today, and Herz, his fellow board member Mark Siegel, and IASB board member Pat McConnell providing an update at the NYSSA's 16th Annual Financial Reporting Conference, chaired by Mark R. Newsome, CFA.

Status of SEC’s IFRS Roadmap To Become More Clear This Fall
According to the AICPA-IASCF conference website, SEC Chief Accountant Jim Kroeker is scheduled to address the conference tomorrow on: “IFRS in the U.S.: Progress and Plans.” Presumably, he will include an update on the Commission’s plans for finalizing the SEC’s proposed IFRS Roadmap, released last November, with a comment deadline in February this year. Since that time, the SEC has been analyzing comment letters received.

Last month, SEC Chairman Mary L. Schapiro said that the SEC will “speak a little later this fall about what our expectations are with respect to IFRS," as reported by Sarah Lynch, DJ Newswire, in Schapiro Says SEC Will Discuss Transition to IFRS This Fall.

Speaking at an AICPA-SIFMA conference last week, SEC Associate Chief Accountant John W. Albert, referencing the G-20’s recommendation for global convergence to be achieved by June, 2011, said, “The SEC will not be bound by that recommendation. I think the whole purpose of proposing a road map is to add some discipline to the process and keep it [as] emotionless as possible. So I don't see that as causing a change to the road map.” Albert’s statement was reported by BNA’s Stephen Joyce in the Oct. 23 article, SEC Decision on Accounting Convergence Not Affected by G-20 Statement, Official Says. (BNA sub req’d). Invoking the customary disclaimer used in SEC staff speeches, BNA’s Joyce noted that “Albert … said he was speaking for himself and not the SEC.”

Personally, (I remind you of the disclaimer posted in the right side of this blog), I would expect to see more color to be filled in on the SEC’s palette as to their planned next steps on the IFRS roadmap, possibly by the time of the 10th anniversary meeting of the G-20 Finance Ministers and Central Bank Governors set to take place in St. Andrews, Scotland on Nov. 6-7.

Later in November, speakers from the SEC, FASB and IASB are set to appear at FEI’s 28th annual Current Financial Reporting Issues (CFRI) Conference on Nov. 16-17 in NYC, followed by FEI’s one day IFRS Boot Camp, sponsored by Deloitte, on Nov. 18 in NYC.

There May Never Be A 'Perfect Calm'
As we await further word from the SEC on the speed and path on which it plans to take its proposed IFRS Roadmap, I am reminded of remarks made by John White, then-Director of the SEC's Division of Corporation Finance, at an FEI conference in June, 2008.

Noting that, “The use of IFRS has become a global movement," he added, “I think it would be a disservice to U.S. issuers and investors, and the American market as a whole, if the SEC were not looking at IFRS for U.S. companies.” He cautioned, "It would not be appropriate for the U.S capital markets, and the SEC as its regulator, to simply follow the herd. The herd may be running off a cliff.” However, he observed, "the herd may also be running to better, greener pastures."

White referred to "the age-old chicken-and-egg problem… What has to happen first: is it appropriate for the Commission to wait until large swatches of the investment community and other U.S. market constituencies clearly have developed a full and deep understanding of IFRS before U.S. companies are permitted or required to publish IFRS financial statements?"

He spoke of a concept he termed "the perfect calm," which he defined as "the opposite of the perfect storm,” i.e., a situation in which “there is no question that the time for transition has come." "I am not sure we will ever reach that time of a perfect calm," said White in June, 2008. However, he added, "The SEC can play a significant role in advancing the adoption of IFRS by showing leadership, and conviction, in helping to determine whether the U.S. market is ready for IFRS."

I Think We're Alone Now... But That Is Likely To Change

Speaking figuratively, with more than 100 countries currently permitting or requiring listed companies in their jurisdiction (and in some cases, private companies as well) to report under IFRS as published by the IASB, the usage of U.S. GAAP is narrowing to one major market: our own.

Importantly, the European Union has extended permission for listed companies reporting in certain third country GAAP, including specifically U.S. GAAP, to continue to report to listing authorities in the EU for without reconciliation to IFRS, conditioned on the status of, and ongoing efforts of, FASB toward convergence to a common or ‘equivalent’ set of standards with the IASB, as noted in this EU press release issued last year. Canada will also continue to permit certain companies that are cross listed in the U.S. to file in Canada in U.S. GAAP, even after Canada adopts IFRS, as noted here.

However, the impending move of Canada and Mexico to adopt IFRS in 2011 and 2012, respectively will shine an even brighter light on the U.S. in terms of its consideration of whether to permit or require IFRS.

A useful map and timeline showing countries adopting or converging to IFRS can be found on pg. 4 of the IASB's Who We Are and What We Do. Read more about the impact on public companies of Canada’s impending move to IFRS here.

While it is true that U.S. GAAP, established by the Financial Accounting Standards Board (FASB), has been on a path toward convergence with IFRS since the Norwalk Agreement struck by FASB and the IASB in 2002 (applauded by the SEC), FASB Chairman Robert Herz has noted in numerous speeches over the past couple of years that continuing to be engaged in U.S. focused accounting standard-setting projects (see FASB Technical Plan), concurrent with major convergence projects under the FASB-IASB Memorandum of Understanding (MOU), poses a challenge akin to riding two horses. (Herz made this reference most recently on pg. 17 of his prepared remarks at the National Press Club, June 26, 2009.) The question is: how long can someone ride two horses, particularly when the speed or gait may differ.

Additionally, some have suggested that, in a world increasingly moving to IFRS, if the historically unwavering support of the U.S. for the IASB as a global standard-setter, and in support of a global set of accounting standards, remains strong - but stops short of taking a decision to adopt IFRS in the U.S. as of a date certain - that the role of the U.S. could be marginalized with respect to global standard-setting.

For example, IASB Chairman Sir David Tweedie, reportedly said recently that “pressure is increasing for the United States to commit to some date for moving domestic companies to IFRS, even if it’s not as soon as 2014, the date currently suggested under the SEC’s proposed roadmap for IFRS adoption,” adding that, outside the U.S., “There’s a group that’s saying, ‘The United States is not interested. Throw them off the board.’ Tweedie’s remarks were reported by Compliance Week’s Melissa Klein Aguilar, 10/13/09, in IASB Steps Up Calls For SEC To Adopt IFRS (CW sub req’d). NOTE: Look for additional coverage of Tweedie’s remarks in the November edition of Financial Executive magazine.)

In comment letters filed on SEC’s proposed IFRS roadmap, and in other forums, some have come out strongly in favor of adopting IFRS in the U.S., while others are strongly against such a move; yet others are somewhere in the middle: supporting, in concept, a move to a ‘global’ set of standards, but with concerns about the timing of such a move. See, e.g. IFRS- Two Sides of the Story, part of a website established by the AICPA, http://www.blogger.com/Documents%20and%20Settings/eorenstein/Local%20Settings/Temporary%20Internet%20Files/OLK7/www.ifrs.com.

Among the reasons cited by some parties in the U.S., as to their reluctance to move to IFRS from U.S. GAAP, is a fear of political interference from a range of countries, acting with their sovereign interest in mind, which some say could potentially differ from, or dilute, broad or particular interests in the U.S.

One of the more outspoken European leaders on matters relating to accounting has been French Finance Minister Christine Lagarde, who referenced accounting and other matters in her Oct. 7 oped published in the Financial Times, The Crisis Demands That We Finish What We Started . Regarding accounting, she said:

“Further progress is also needed on accounting standards. Regulators should have
their say on their ultimate purpose and ensure they do not promote volatility. Market value must be used, when relevant, in considering how a business uses its assets. But it should not be an excuse for failing to measure, assess and account. This is not a political issue but rather a matter of concern for society."

Lagarde's remarks were covered in articles including The French Finance Chief, Society and Accounting (Gavin Hicks, editor, Accountancy Age), and France’s Lagarde Dissatisfied With Accounting Rule Plan, (Tamora Vidaillet, Reuters.)

Moreover, the fear that some have of non-US interests potentially having a disproportionate influence on IFRS may be viewed by some as an exponential multiplication of an analogous fear some have, that there is too much outside influence by politicians or others in the standard -setting process here in the U.S.; however there is a strongly held alternate view, that politicians have exercised appropriate and necessary oversight, and that other constituents have participated appropriately and necessarily in providing feedback to the standard-setters regarding practical issues, as well as regarding the theoretical underpinning, of accounting standards.

Additional reading on the role of politicians, constituents, and standard-setters can be found in Politicians Accused of Meddling in Bank Rules (Floyd Norris, NYT, 7.28.09), and more recently, Europe Must Stop Its Meddling, Says FASB Chief (Mario Christodoulou, Accountancy Age 10.15.09).

Further on the subject of politics and constituent input, a particularly important document is the Statement of Principles issued by the IASCF Monitoring board, issued earlier this year. Although the Statement held that the accounting standard setting process “should remain free of undue pressures from political and corporate interests,” (I would submit that the word “undue” is highly significant in that sentence), the Statement also noted that “members with a decision-making role in the standard setting organisation should collectively be reasonably representative of the constituents whose interests the standards seek to address.”

Additionally, the IASCF Monitoring Board’s Statement specified that: “Interested parties must be afforded the opportunity to provide input to inform the standard setter’s evaluation of pertinent issues,” adding that “The IASB and FASB have benefitted from informative input into their financial instruments and fair value measurement standard setting initiatives from a broad range of stakeholders,” and that, “robust participation of interested parties is an essential element of a standard setter’s transparent due process.” The Statement continues, “Equipped with this input, it is the responsibility of the standard setters to evaluate the knowledge they have gained against the overarching objectives of financial reporting and the principles that reinforce those objectives, in a manner engendering independent decision-making.”

Personally, (once again, I remind you of the disclaimer on the right side of this blog): I have the sense that over the long run, (i.e., potentially a period of time a few years beyond the proposed 2011 decision date, and proposed 2014 adoption date originally specified in the SEC's proposed IFRS Roadmap) that the U.S. will, at a minimum, be fully converged with IFRS, and at a maximum, may indeed fully adopt IFRS (with respect to SEC requirements for public companies; private company issues are to be separately considered, and will be in a future blog post). Such a move (either to full convergence with, or full adoption of IFRS),will take the U.S. out of the increasingly near-alone category of countries that do not permit or require IFRS.

Reflecting on the subheading of this section, whether you began practicing accounting around the time of the original version of I Think We're Alone Now by Tommy James and the Shondells (1967), or the later version by Tiffany (1987), (or, for all intents and purposes, any time prior to the 2011 anticipated FASB-IASB convergence date) if you are a finance exec, auditor, or investor in the U.S., you were probably steeped in (or have a greater familiarity with) U.S. GAAP vs. IFRS, and you may be looking for some help in understanding the potential impact of increasing convergence with IFRS, if not a full-scale adoption of IFRS. If so, FEI has some programs coming up you may find of interest, listed below.

FEI Upcoming Events, Publications
FEI, an association of senior financial executives, has held and continues to hold conferences to keep our members (and members of the public) apprised of IFRS developments, including our Sept. 2007 Global Financial Reporting Convergence Conference, our June 2008 conference The World Is Moving to IFRS: Are You? sponsored by BNA Tax & Accounting, and our IFRS Boot Camp programs sponsored by Deloitte for the past two years, which immediately follows our annual Current Financial Reporting Issues (CFRI) conference.

This year, our Current Financial Reporting Issues (CFRI) conference is taking place on Nov. 16-17 in NYC, featuring remarks by SEC Commissioner Kathleen Casey, SEC Chief Accountant Jim Kroeker, FASB Chairman Robert Herz, with additional remarks by senior staff of FASB and the IASB, and CNBC Senior Analyst Ron Insana. CFRI is followed by the one-day IFRS Boot Camp on Nov. 18 in NYC sponsored by Deloitte. The IFRS Boot Camp will examine important conversion issues and present a strategic perspective on IFRS transition activities. Participants will explore how to develop an IFRS transition plan that addresses company needs while working to reduce implementation costs. The program includes lectures, case studies, and interactive discussions, so participants can deepen their understanding of the IFRS conversion process and what it means for their organization.

Recently FEI has added more IFRS programming by cosponsoring select IFRS training programs offered by Executive Enterprise Institute. The EEI IFRS conferences are chaired by Prof. Tom Selling, (who in his personal capacity is the author of the Accounting Onion blog), and upcoming programs include a two-day IFRS Conf. Nov. 9-10 in Chicago, and a two-day IFRS Conf. Dec. 2-3 in Las Vegas.

We have also increasingly featured IFRS-related topics in our monthly magazine, Financial Executive, and in reports published by FEI's research affiliate, the Financial Executives Research Foundation (FERF), such as the June 2009 report, IFRS for Midmarket Companies - Tips for Transition. FEI committees are also engaged in commenting on accounting and regulatory proposals of the FASB, IASB, SEC and others, see FEI comment letters. Feel free to contact me directly if you have any questions about FEI membership or programs. If you received this blog post from ‘a friend’ and you’d like to sign up to receive the blog, send an email to blogs@financialexecutives.org and write in Subject line: Sign Up. You can also follow us on Twitter at www.twitter.com/feiblog.

IFRS: Results & Invitations

2009-10-22T09:30:00.006-04:00

As the SEC prepares to "speak a little later this fall about what our expectations are with respect to IFRS" (SEC Chairman Mary L. Schapiro, Sept. 18, 2009 as reported by Sarah Lynch, DJ Newswire, in Schapiro Says SEC Will Discuss Transition to IFRS This Fall), and as FASB and the IASB prepare for the next in their regularly scheduled series of joint board meetings, set to take place in Norwalk, CT next week (agenda, additional materials), we read of new survey results published by the AICPA on the state of CPA's preparedness for a potential move to IFRS in the U.S., as well as a separate IFRS survey on which your input is invited.

AICPA Survey Results Show CPAs Delay On IFRS
Earlier this week, the AICPA released the results of a survey on preparation in the U.S. for a potential move to IFRS. According to the AICPA press release, the survey showed that: “ The U.S. accounting profession delayed taking steps to prepare for adoption of international accounting standards over the last six months after the Securities and Exchange Commission set aside its review of U.S. plans for adoption during the credit crisis.” Read more in AICPA’s detailed survey results.

Although any potential action by the SEC on its IFRS Roadmap would be directed at public companies, there are indirect effects to private companies as well, including questions about whether private companies would choose to adopt IFRS for SMEs, published by the IASB earlier this year. Questions 11-14 in the AICPA's detailed survey results address issues related to private companies.

Your Input Invited On IFRS Survey Conducted by Selling & Walters
Your input is invited on a 12-question survey on IFRS, which is being conducted by two well-known academics with opposing views on potential IFRS adoption in the U.S. in the near-term.: Tom Selling, author of The Accounting Onion (of note: Selling served as an Academic Fellow at the SEC among his other teaching experience), and Pat Walters of Fordham Univ. (of note: Walters formerly served as a Senior Vice President at the CFA Institute, formerly called AIMR.) I understand from Selling that responses to the survey are requested by this week.

[NOTE: FEI is not a sponsor of the Selling-Walters IFRS survey or endorsing it, but I am personally impressed that Selling and Walters, by working together and yet holding opposing views - as described by Selling in his blog - aim to present a balanced survey instrument, rather than a survey designed to obtain a one-sided result.]

IFRS Boot Camp

FEI is holding a one-day 'IFRS Boot Camp' in NYC Nov. 18 sponsored by Deloitte, featuring a number of IFRS experts from the firm. The IFRS Boot Camp follows FEI's annual Current Financial Reporting Issues (CFRI) Conference Nov. 16-17 in NYC. For more programs, see FEI Conferences.

SEC Seeks Comment on e-Proxy, Strat Plan

2009-10-21T11:18:00.001-04:00

The U.S. Securities and Exchange Commission recently released two items for public comment.

SEC Proposes Amendments To e-Proxy
On Oct. 14, 2009 the SEC released Proposed Amendments to Rules Requiring Internet Availability of Proxy Materials (aka 'e-proxy').

The proposal cites findings from a survey conducted by Broadridge Financial Solutions, which indicated a significant drop in retail investor participation in, and understanding of, online-only proxies. (Issuers were required to send shareholders a notice regarding availability of online proxies, but, according to the survey, the boilerplate nature of notices developed under the original rules appears to have confused some investors.

To address this concern, the SEC proposes allowing more flexibility in how issuers present the information to shareholders in the notice, and strongly encourages companies - particularly in light of cost savings obtained by using online proxy voting vs. all paper proxy voting - to launch educational efforts to inform their shareholders how to participate in online proxy voting. These educational efforts, however, may not be used to persuade shareholders to, e.g. vote for the company's proposals in the proxies.

Additionally, the SEC's office of Investor Education will also launch some programs to educate investors on how to participate in online proxy voting. The comment deadline on the proposal is November 20.

Read more about the proposed amendments to e-Proxy in Broc Romanek's post in TheCorporateCounsel.net blog: Surprise: The SEC Proposes Changes to E-Proxy, and Dominic Jones post in IRWebReport, SEC Should Focus on Access in 'Notice and Access.'

SEC Draft Strategic Plan
On October 8th, the SEC announced the release of its Draft Strategic Plan for 2010-2015. See also SEC Release No. 34-60799. The comment deadline is November 16. (See also our related Oct. 5 post, describing some highlights from the draft strategic plan which SEC staff provided to the SEC's Investor Advisory Committee.)

Learn more about the latest developments at the SEC, FASB and IASB by attending FEI's 28th Annual Current Financial Reporting Issues Conference (CFRI) Nov. 16-17 at the New York Marriott Marquis, Times Square, NYC.

Fair Value, Audit Committes, Related Parties Highlights Of Day 2, PCAOB SAG Meeting

2009-10-20T13:32:00.002-04:00

We have posted our detailed highlights of Day 2 of the PCAOB's Oct. 14-15, 2009 Standing Advisory Group meeting. (This is in addition to highlights of Day 1 posted last week.) Discussion during Day 2 of the SAG meeting focused on:

fair value measurements and using the work of specialists,
communication with audit committees, and
related parties (and certain other matters)

In brief, SAG members generally concurred that auditing fair value measurements with a heightened risk of measurement uncertainty should not be labelled across the board as presumptively having a heightened risk of fraud (PCAOB staff had asked if they should label fair value measurement as presumptive risk of fraud), although SAG members concurred such measurements did have an inherent risk and auditors could be encouraged to exercise more professional skepticism regarding such amounts, including not only where fair value measurement appeared in the financial statements, but quantitative and qualitative disclosures in the footnotes.

On the second matter listed above, communication with audit committees, the discussion was kicked off with opening remarks by a panel of SAG members, including Margaret M. (Peggy) Foran, Vice President, Chief Governance Officer, and Corporate Secretary, Prudential; Jamie S. Miller, Vice President, Controller and Chief Accounting Officer, General Electric Company; and Lynn E. Turner, Senior Advisor and Managing Director, LECG, and former Chief Accountant, SEC.

Turner commented that written communications from auditors to the audit committee, and written communications from audit committees to investors, tended to be more boilerplate than he would like to see.

Foran and Miller did not believe auditor communications, in their experience, were overly boilerplate, although they and other SAG members, including Dow Chemical Chief Auditor Doug Anderson, concurred that written communications from auditors to the audit committee may tend more toward boilerplate by their very nature, in terms of establishing compliance with rules, but verbal communications between auditors and audit committees, according to Foran and Miller, were generally robust.

Some SAG members noted they were not aware of any inspection findings criticizing auditors' communication with audit committees, and had not heard of any audit committee members describe any shortfallings in information provided by the auditors; those SAG members asked if this issue was a solution in search of a problem.

Miller suggested it would be useful if, in addition to some refinements of the audit standard, such as changing the language in the standard to encourage more of a two-way dialogue with the audit committee, for information on best practices for audit committee communications to be published.

Some SAG members suggested that, rather than the PCAOB publishing 'best practices,' that other groups could be consulted which provide forums for board members, such as NACD and that various audit firms provide forums such as KPMG's Audit Committee Institute.

Anderson noted that the Canadian Institute of Chartered Accountants (CICA) had published pamphlets for audit committee members, outlining the types of questions they should ask to fulfill their responsiblities. Other SAG members noted they believe issues relating to audit committee operation and structure are more under the realm of the SEC (and the stock exchanges) than the PCAOB.

Joe Carcello, Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, cited various research studies, including one he was currently working on with USC Professor and former SEC Deputy Chief Accountant Zoe-Vonna Palmrose, which he noted could indicate concern about board members being too close to management to be effective.

SEC Deputy Chief Accountant Paul Beswick, an observer at the SAG meeting, said, "It's pretty clear a number of people in the room have some views about the regulation of audit committees or what audit committees are communicating to the public. I will take feedback back to the Commission and share it with the appropriate people, and talk about what are some things we can do to address [those] concerns." He asked Carcello to provide him with more information about the research that he cited.

During the final matter discussed, related parties, some SAG members indicated they would not be as adverse to labelling related party transactions as presumptively having a higher risk of fraud, relative to their objection earlier in the meeting to painting fair value measurements as presumptively having risk of fraud; at least one SAG member noted he had been 'burned' earlier in his career as an auditor, by a related party transaction.

Other SAG members advised the PCAOB to perhaps broaden the scope of the type of transactions they were aiming to encourage more auditor skepticism on, beyond related parties, since there were a variety of other tranactions where related parties are not involved, that should also prompt greater skepticism. They also noted that auditor focus on related parties is sometimes too narrowly focused on whether the issuer is providing required disclosures on related parties, but not sufficiently focused on the risk of financial statement misstatement, or fraud, arising from such transactions.

PCAOB Chief Auditor Marty Baumann closed day 2 of the SAG meeting by thanking SAG members for their feedback, and noted that upcoming SAG meetings were slated to take place on the following dates in 2010: April 7-8, July 15, and Oct. 13-14.

COSO Updated Fraud Study Coming; Garrett Proposes Sarbox Exemption

2009-10-14T22:45:00.004-04:00

At the PCAOB Standing Advisory Group meeting earlier today, SAG member Joe Carcello noted, "As some of you in the room know, we are working with COSO to update our study on fraud [originally published] in 1999." [NOTE: COSO's upcoming updated fraud study, like the earlier COSO fraud study, is based on SEC Accounting and Auditing Enforcement Releases (AAERs) issued during the 10 year period under study.]

Carcello, the Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, said of the upcoming update to COSO's fraud study, "Although not done, we do have some preliminary information:"

Fraud continues to be a big problem, well over 300 fraud companies between 1998 and 2007, well over 1,000 enforcement releases related to those 300 fraud companies.

In the 1999 study we did for COSO, the size of companies was very, very small; someone could say this is only a problem for very tiny companies, although by and large fraud companies tends to be smaller; the size of companies has increased by factor of six;

Stock price declined approx 20%; at first disclosure that there may be an accounting problem [at the fraud companies]; bankruptcy, delisting, material asset sales, were significantly more likely than [for a] matched sample of no fraud companies.

"This is just tidbits from my memory," noted Carcello. "We are still doing a lot of additional work; the reason I mention this is for the [PCAOB] board to understand, and for the SEC to understand, this continues to be a major problem in the capital markets." (Read more about the Oct. 14 PCAOB SAG meeting in our separate post today.)

My two cents
(I remind you of the disclaimer which appears in the right margin of this blog) . When COSO's updated fraud study is released, I believe it will be important to look at statistics with respect to 'fraud companies' (i.e. the 300+ companies found to have been charged with fraud during the 10 year period, as referenced by Carcello at the SAG meeting) vis-a-vis the broader population, or the total universe of public companies, and vis-a-vis the demographic breakdown of all public companies.

For example, statistics as of March, 2005 provided in Table 3 (pdf pg. 181) of the SEC Advisory Committee on Smaller Public Companies (ACSPC) Final Report shows:

31.3% of all public companies are traded on the OTC Bulletin board (1.1% of total market cap.)
33.7% of all public co's are traded on Nasdaq National Market or Nasdaq Capital Market (18.6% of total market cap)
35% of all public co's are traded on NYSE and Amex (80.3% of total market cap)

Additionally, Table 1 of the SEC ASCPC Final Report shows:

44.2% of all public co's are 'small co's' or nonaccelerated filers as defined by the SEC (i.e. those with below $75 million market cap; these companies cumulatively make up 0.5% of total market cap)
32.9% of all public co's have between $75 million and $700 million market cap, approximating SEC's definition of 'accelerated filer" (and make up 5% of total market cap)
22.9% of all public co's have over $700 million market cap, approximating SEC's definition of 'large accelerated filers' (and make up 95% of total market cap)
9,428 was the total number of public companies as of March, 2005, according to the footnote shown with an asterisk immediate below Table 1 in the SEC ASCPC Final Report.

This information is provided as a reference point and segues into the next item below.

Rep. Garrett Calls For Small Co. Exemption From Sarbox 404b
As reported last week by Sarah Lynch in the Wall Street Journal, House Bill Would Exempt Small Firms From SEC Auditing Rules.

The press release issued by the Rep. Scott Garrett's (R-NJ) office on October 8 states: "Garrett’s bill, the “Small Business SOX Compliance Relief Act” is aimed at permanently exempting small businesses (non-accelerated filers) from the burdensome reporting requirements contained within Section 404(b) of the SOX Act."

Garrett's bill, which proposes to exempt small co's only from the Sarbox 404b requirement for an external audit opinion on internal control - not from the Sarbox 404a requirement for a management report on internal control - followed shortly after the SEC announced the results of its cost-benefit study of Section 404, along with a final extension of time for small co's to file their Section 404b auditor's reports on internal control (extending the deadline to fiscal years ending on or after June 15, 2010.) Garrett cites in his press release a number of studies which provided a different assessment of the cost-benefit equation than the SEC came up with in its own study.

As we anticipated in our Oct. 2 post, the SEC followed up its initial announcement of the final delay in 404b for small co's, by memorializing the action in a final rule, posted by the SEC on Oct. 13.

If you missed it earlier, see our Oct. 7 post which links to related commentary by Francine McKenna, author of Re: The Auditors, and Tom Selling, author of The Accounting Onion, on the subject of AS5 and Sarbox 404b. Selling in particular - an advocate of professional skepticism - surprised me by his take on the potential value of Sarbox 404b for small public co's, or (in his view), lack thereof. (He also estimated some 'back of the envelope' calculations approximating some of the statistics listed above.) Although the general view appears to be that the Sarbox 404b issue was put to bed with finality in SEC's most recent release, Rep. Garrett's view may not be so surprising, or at least, he is not alone, when you read Selling's analysis.

PCAOB Announces Ambitious Agenda; May Be Time to 'Dial Up' on Fraud, Silvers Says

2009-10-14T22:50:00.005-04:00

Earlier today, PCAOB Acting Chairman Dan Goelzer told the PCAOB's Standing Advisory Group: "We are embarking on a new phase in standard-setting, [with] a very ambitious standard-setting agenda in the coming year, focusing on some nuts and bolts issues, particularly issues our inspection program has highlighted where standards could be improved or modernized." He added, "In the coming months, we are likely to see more activity with more impact on financial statement auditing than any similar period in the board's existence."

Marty Baumann, Chief Auditor of the PCAOB, reviewed the PCAOB's recent standard-setting activities, including proposed standards, Concept Releases, and final standards issued Oct. 2008-2009. The PCAOB staff also presented a chart in a handout outlining the status of previous SAG standard-setting discussion topics, and presented the PCAOB Office of Chief Auditor (OCA) Standard-Setting Agenda.

As in prior years, the standard-setting agenda focuses on the board's current determination of near-term priority projects. Different from prior years, however, the agenda includes 'milestones' for projected dates of finalization of these projects, and the dates go out to 2011. Here are the dozen items listed on PCAOB's standard-setting agenda. [Target dates per PCAOB schedule shown in brackets next to each item.]

Risk Assessment – Comment period on proposals ended Feb. 18, 2009. Staff is working toward re-proposing the standards for public comment. [Re-proposed standards: 4Q2009; Final standard: 3Q2010.]
Audit Confirmations –Comment period on Concept Release ended May 29, 2009. The staff has analyzed the comments received and is discussing with the Board the staff's views on how to address the comments.[Proposed standard: 1Q2010; Final standard: 3Q2010]
Signing the Auditor's Report - Comment period on Concept Release ended Sept. 11, 2009. The staff is analyzing the comments received and will be discussing with the Board the staff's views on how to address the comments.[Board decide whether to proceed with this standard-setting project 4Q2009; if decision to proceed, then proposal 1Q2010; final standard 3Q2010.]
Application of the Sarbanes-Oxley Act's Provision on "Failure to Supervise" – Staff is preparing a draft release for the Board's consideration relating to the Board's application of Section 105(c)(6) of the Act, which authorizes the Board to impose sanctions on firms and individuals for failure to supervise. The release would also seek comment on concepts relating to what, if any, rulemaking or standard-setting might usefully supplement the Board's application of that provision.[1Q2010: consider whether to propose standards; if decision to proceed, proposal 2Q2010; final standard 4Q2010.]
Accounting Estimates, Fair Value Measurements, and Specialists – Staff is evaluating potential revisions to the standards on accounting estimates, fair value measurements, and using the work of a specialist. [Proposal 2Q2010; re-proposed or final standard 4Q2010; adopt final standard 2Q2011.]
Communication with Audit Committees –Staff is developing a briefing paper for the Board's consideration on whether the staff should pursue a standards-setting project. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
Related Parties – Staff is evaluating potential revisions to the related parties auditing standard. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
Global Quality Control Standards, Including Control Over Work of Affiliated Firms – Staff is evaluating potential revisions to the quality control standards. This will include an evaluation of Appendix K. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
Principal Auditor – Staff is evaluating potential revisions to the 'principal auditor' auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
Going Concern – Staff is monitoring FASB's project on Going Concern, and plans to update the timeline when FASB determines their action plan for the accounting standard. Staff will assess if any conforming amendments are needed to the Board's auditing standards to align with the FASB's final standard, and will evaluate any additional issues and determine whether to pursue a standards-setting project on going concern.[Determine whether to add a project on this 1Q2010.]
Subsequent Events – Staff is evaluating FASB's new accounting standard on subsequent events and analyzing how it may affect the Board's subsequent events auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
Applicability of SECPS Requirements to all Registered Firms – Because registered firms (generally non-U.S. firms and some smaller firms) that were not members of the SECPS in April 2003 when the Board adopted certain of the SECPS [AICPA's former SEC Practice Section] requirements are not subject to these interim quality control requirements, the staff is analyzing different options to determine if it is feasible to extend the SECPS requirements to all registered firms. This excludes Appendices E (superseded by AS No. 7) and K (part of global quality control standards standards-setting project). .[1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 1Q2011; adopt final standard 4Q2011.]

The above list of projects is subject to change, noted Baumann, based on review of comment letters received on proposals and concept releases, board input on the agenda, and related effects of actions external to the PCAOB, including legislation, and standard-setting or rulemaking activity by the U.S. Securities and Exchange Commission or the Financial Accounting Standards Board.

"We Need To Move The Dial" With Respect to Fraud, Silvers Says
Although not part of the PCAOB's formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or 'foundational' standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as 'foundational' standards.

Baumann and other PCAOB staff emphasized that although they do not currently have a standard-setting project on fraud on their agenda, fraud-related aspects are woven into numerous standard-setting projects, including confirmations, risk assessment, and fair value, among others (with particular emphasis in the risk assessment standards).

Damon Silvers, Associate General Counsel, AFL-CIO, and a member of the Congressional Oversight Panel appointed by Congress for the Troubled Asset Relief Program, stated, "The overall fraud standard needs to be strengthened at the same time you undertake this exercise."

In response to questions, Silvers said, "We should not expect that every audit is a forensic audit... that's absolutely not what I'm saying." However, he added, "I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud."

"This was subject to some extensive discussion in the Treasury committee (Treasury's Advisory Committee on the Auditing Profession or ACAP]," said Silvers, adding, "some people, [e.g.] Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don't find fraud, it's the auditors fault; but it's also not my view that looking for fraud is not related to the audit, that doesn't parse with the public's [perception] of the audit profession."

Joe Carcello, Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, said, "I agree with Damon [Silvers], I think an absolute liability standard would be a big mistake. As someone who has spent a lot of my professional career studying fraud, some of these [frauds] are very elaborate, I don't have strong opinion on embedding [in] fraud standard or separate [standards, e.g. risk assessment standards]. (See also our related post today, citing Carcello's remarks on an upcoming COSO fraud study: COSO Updated Fraud Study Coming; Garrett Proposes Sarbox Exemption)

Status of PCAOB's Response to Treasury ACAP Recommendations
Also on the subject of fraud, SAG members asked the PCAOB staff what the status was of PCAOB's response to recommendations directed at the PCAOB included in the final report of the Advisory Committee on the Auditing Profession (ACAP). ACAP was cochaired by former SEC Chairman Arthur Levitt, and former SEC Chief Accountant Don Nicolaisen, and their final report was issued in fall, 2008. A number of SAG members or other individuals from their companies served on ACAP.

Fraud center: Among ACAP's recommendations was that the PCAOB launch a Fraud Center to gather and share information about fraud prevention and detection. A couple of SAG members noted they had heard that the SEC may have placed a budget constraint on the PCAOB with respect to forming a Fraud Center.

Baumann responded, "We are continuing to gather evidence with respect to what we might want to do with respect to [a fraud center]." He added, "That is a bit outside the standard setting area."

Goelzer added, "In this year’s budget, we were given what we asked for in terms of implementation of [ACAP's] recommendations." He noted that the PCAOB's budget authorization approved by the SEC "asks that we consult with the SEC, keep them advised."

"On the fraud center specifically," Goelzer continued, "we do regard that as a priority recommendation; it has real potential to benefit audit quality; we are going through the process of gathering input on how a fraud center would best be structured, and what its responsibilities would be. We will go back to the SEC and tell them... what budget [would be appropriate]. He added he was not aware of any budget limitations with respect to the fraud center.

SEC Chief Accountant Jim Kroeker, an observer at the SAG meeting, added he was not aware of any budget limitations with respect to the fraud center.

Audit quality indicators: Another ACAP recommendation called for the PCAOB to consider requiring large audit firms to provide disclosures relating to a set of audit quality indicators. A number of SAG members encouraged the PCAOB to launch a project in this area.

Baumann replied, "We had a lengthy session on audit quality indicators at a SAG meeting about a year ago, a discussion group and breakout groups, that was a very valuable discussion." He added, "We received significant input at that discussion, a lot of support for the importance of measuring and defining audit quality; on the other hand, for virtually all audit quality indicators we discussed at that meeting, there seemed to be as many potential negative unintended consequences." He noted while there was general agreement that audit quality indicators were a good idea, PCAOB staff believed further exploration would be necessary on this subject due to the potential unintended consequences..

SAG member Lynn Turner, a former chief accountant at the SEC, and a member of ACAP, commented, "Just because people said there are some unintended consequences, that is probably the most overused phrase .... these days... used as a reason by people to not do something."

Ranzilla Cautions On "Presumptions" In Audit Standards
Sam Ranzilla, Audit Partner and National Managing Partner, Audit Quality and Professional Practice, KPMG LLP, referencing comments made earlier in the SAG meeting by Liz Gantnier, Director of Quality Control, Stegman & Company (and a member of the Center for Audit Quality's Professional Practice Executive Committee), said: "I agree with Liz, there is a theme running through the [SAG briefing] papers, to adding requirements in a very prescriptive set of standards."

"I think you ought to think very long and hard about going down a path that is very prescriptive," said Ranzilla, "and I also warn you about the presumptive nature, if you presume something is a risk factor, or is a 'bad thing,' and therefore you go to an extended audit response - but you can avoid that by documenting in some level of detail why you overcame that presumption - human behavior will accept whatever you presumed was in the standard, because the risk of getting second guessed by me as an internal inspector, then the [PCAOB] inspector." As a result, according to Ranzilla, "It might be more efficient to do unnecessary work, than to document why you don't need to do unnecessary work." Therefore, he advised, "Going down the presumptive path is a very significant decision, and one you should not take without a great deal of soul searching."

More Details from SAG Meeting
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