SEC To Vote on XBRL Dec. 17

The SEC posted a Sunshine Act notice late yesterday (props to XBRL-US for circulating link to the Sunshine Act Notice) that they will hold an open commission meeting on Dec. 17 to “consider whether to adopt amendments to provide for companies' financial statement information to be filed with the Commission in interactive data format, according to a specified phase-in schedule.” Additionally, the commission will vote on whether to approve the PCAOB budget, and certain other matters.

TARP COP's Top Ten

The Congressional Oversight Panel (COP) established under the Emergency Economic Stabilization Act of 2008 (EESA) to “review the current state of the financial markets and the regulatory system” released the first in a series of reports yesterday. The report, “Questions About The $700 Billion Emergency Economic Stabilization Funds,” raises 10 issues about Treasury’s Troubled Asset Relief Program (TARP) and the various programs thereunder including the Capital Purchase Program and the Significant Failing Institutions (SSFI) program. Here are the Ten Questions from COP:

1. What is Treasury’s Strategy?
2. Is the Strategy Working to Stabilize Markets?
3. Is the Strategy Helping to Reduce Foreclosures
4. What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?
5. Is the Public Receiving a Fair Deal?
6. What is Treasury Doing to Help the American Family?
7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?
8. How is Treasury Deciding Which Institutions Receive the Money?
9. What is the Scope of Treasury’s Statutory Authority?
10. Is Treasury Looking Ahead?

The report was presented by the panel’s chair, Elizabeth Warren, at a House Financial Services Committee hearing yesterday on “Oversight Concerns Regarding Treasury Department Conduct of the Troubled Assets Relief Program.” The current members of the panel include three appointed by the majority party, who, as noted in a Nov. 14 post in The Gavel, are Harvard Law Prof. Elizabeth Warren, New York State Banking Commissioner Richard Neiman, and AFL-CIO Associate General Counsel Damon Silvers.

The COP on the beat has not been without controversy itself, since one of its original appointees from the minority party bowed out of consideration, and the other minority member, Rep. Jeb Hensarling testified separately yesterday that he withheld signing off on this first COP report. His objection, he explained, was due in part to some procedural concerns about the panel, and concern about certain language which he believed “could be interpreted as a panel expectation that Treasury should make credit more expensive and less available for Americans.” He noted his concern that such a recommendation “could delay the recovery of our housing market at exactly the wrong time in our nation’s economic history.”

Also testifying at yesterday’s House Financial Services Committee hearing, chaired by Rep. Barney Frank, were Gene Dodaro, Acting Comptroller General, U.S. General Accountability Office, on GAO’s own oversight report on the TARP program, (see GAO testimony and GAO report), and Neel Kashkari, Interim Assistant Secretary for Financial Stability and Assistant Secretary for International Affairs at the U.S. Treasury Department, in charge of overseeing Treasury’s efforts on TARP on behalf of Treasury Secretary Henry Paulson.

Feedback Sought Through Roundtables, Website
As noted in COP’s report, the panel intends to issue another report within 30 days (on Jan. 10) which will endeavor to provide answers to questions such as those raised above regarding TARP. They will accomplish their mission by continuing to interview representatives of the Treasury Department and other officials, and by holding a series of field hearings -the first of which is set to take place next week in Las Vegas, Nevada. Not only is Nevada home to Senate Majority Leader Harry Reid, but the metaphor of gambling will no doubt not be lost on attendees. In fact, FASB Chairman Robert Herz spoke of institutions who were willing to ‘bet the ranch’ in his keynote address at an AICPA conference earlier this week.

COP has also established a website, which can be found at http://www.cop.senate.gov/. The panel notes it intends to use the website not only to post information, but to facilitate public comment and feedback.

Roadmap to Regulatory Reform
As also directed by Congress in Section 125 of EESA, COP has also been charged with issuing a special report to examine the financial regulatory system, and make related recommendations for reform. COP states it will release that report on January 20 (coincidentally, Inauguration Day). “This report will provide a roadmap for a regulatory system that would revitalize Wall Street, protect consumers, and ensure financial stability in our markets,” says the panel.

Recent speeches emanating from the SEC and FASB have cautioned all those considering regulatory reform to consider the separate roles of the SEC (as the investors’ advocate), FASB (as an independent, private sector organization charged with developing accounting standards to enhance transparency) and other agencies such as the banking agencies (charged with prudential supervision and oversight of safety and soundness of financial institutions. See, e.g. the Dec. 8 speech of SEC Chairman Christopher Cox, (see related article by Tim Reason of CFO.com, "Cox: Accounting is Not a Fiscal Policy Tool,") as well as the Nov. 21 speech of SEC Corp Fin Director John White (speech aptly named: “Don’t Throw the Baby Out With the Bathwater”), and in the above-cited Dec. 8 speech by FASB Chairman Robert Herz.

Herz noted in his remarks at the AICPA conference, “[T]o what extent are there contradictory objectives, for example, between safety and soundness vs. investor protection built into our current regulatory architecture.?” He cited similar views of forrmer SEC Chairman Arthur Levitt, in which Levitt had said: “banking regulators have one concern, but it is not investor protection.”

“I believe that it is imperative that this point be borne in mind in any redesign of our regulatory system so that the interests of investors and consumers don’t get shoved aside in favor of other public policy goals,” said Herz. He added, “In that regard, it is critical that accounting standard setting remains independent and oriented toward establishing standards that promote useful and transparent financial information for investors and other users and not be geared to fulfilling other objectives, as some have suggested.”

An example of the intersection of accounting standards and public policy can be seen in the Dec. 3 joint comment letter of the federal banking agencies to FASB on the upcoming changes to FAS 140 and FIN 46R which will impact securitization accounting and transfers of assets. The proposed elimination of the exception for ‘Q’s’ (qualified special purpose entities) has been estimated by some to potentially add billions and possibly trillions of dollars of mortgage-backed and certain other assets back on the balance sheets of financial institutions and other transferees, raising capital adequacy and other concerns.

The banking agencies advise FASB in their letter to work with the IASB on a long term solution, to: “provide financial statement users with a stable and reliable source of information about asset transfers including securitizations.” They add: “We recognize the need for improved transparency of financial reporting for securitization transactions and other off-balance sheet activities. We also understand the desire of the [SEC] and the FASB to provide a short-term fix for the accounting in this complex area in response to the financial turmoil observed since mid-2007.” However, they note, “we are concerned that making short-term changes to the U.S. accounting standards for financial asset transfers and consolidation could have an impact on credit markets in the U.S.”

More Guidance on Fair Value or Impairment Coming by Year-End?
We previously cited the comment letter of the American Bankers Association to U.S. Treasury Secretary Henry Paulson asking that the SEC take immediate action to provide certain guidance on fair value in time for year-end reporting. We also previously we cited the joint comment letter field by FEI’s Committee on Corporate Reporting and the U.S. Chamber of Commerce asking FASB to further defer the effective date of FAS 157, Fair Value Measurement, with respect to nonfinancial assets and liabilities, and to reexamine FAS 157 in its entirety.

In his remarks at the AICPA conference earlier this week, SEC Chairman Christopher Cox noted that preliminary findings in SEC’s Congressionally mandated study of mark to market (fair value) accounting are that further guidance on impairment and on fair valuing in illiquid markets is needed. He stated that the SEC had made a formal request of FASB in October to provide additional guidance on impairment (e.g. Other than temporary impairment or OTTI under FAS 115). Cox added: “Since our October letter, we have encouraged the FASB to address issues including impairment, the convergence of IFRS and U.S. GAAP on this and related topics, and the treatment of so-called EITF 99-20 securities including CDOs and other structured instruments.” He then noted: “As you will hear from Bob Herz and others later today, the FASB is working diligently on these issues, and is mindful of the importance of providing guidance in time for the preparation of annual reports at the end of this year.”

More Reading On…
Further reading on the subject of regulatory reform can be found in the Washington Insights column (this month authored by yours truly) in Financial Executive Magazine, “Congressional Hearings on Financial Regulation on Tap.” (Non-FEI members will be prompted to create a free online login account to read articles from our magazine.)

There are many other thought provoking articles in this month’s Financial Executive Magazine, including the cover story, Fraud’s House of Cards, by former Enron Executive (and founder of The Integrity Institute) Lynn Brewer. There’s also an interview of PCAOB Board Member Charles Niemeier – “Can More… or Less Regulation Fix What’s Wrong,” by Cheryl Graziano, Vice President-Research and Operations of the Financial Executives Research Foundation (FERF) and Ellen Heffes, Editor-in-Chief of the magazine.

You can also read timely updates on international financial reporting issues by Alfred M. King, vice chairman, Marshall & Stevens, and David M. Morris, a member of the International Auditing and Assurance Standards Board’s (IAASB’s) Consultative Advisory Group (CAG) and CEO of MORRIS Consulting. And, don’t miss Managing Editor Marian Raab’s writeup “Treat All Bank Failures Equally, Says Former FDIC Chief,” along with some news about one of my favorite CFO’s, Dunder Mifflin’s David Wallace, in this month’s In Brief column.

PCAOB Alert On Current Economic Environment; Inspection Reports

On Friday, the Public Company Accounting Oversight Board announced that it had issued Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, which addresses six matters:

1. Overall audit considerations
2. Auditing fair value measurements
3. Auditing accounting estimates
4. Auditing the adequacy of disclosures
5. Auditor’s consideration of a company’s ability to continue as a going concern
6. Additional audit considerations for selected reporting areas, listed further below.

Fraud risk considerations, and internal control considerations, are among the issues discussed under overall audit considerations.

Within the guidance on fair value measurements are cites to the SEC-FASB Sept. 30 clarification on fair value in inactive markets, and FASB’s FSP FAS 157-3 on the same topic issued on Oct. 10. Additionally, the PCAOB states its Audit Practice Alert No. 2 issued last year on Matters Related to Auditing Fair Value Measurements of Financial Instruments and the Use of Specialists (which in turn cites other auditing literature) is still relevant.

On the related issue of auditing accounting estimates, PCAOB references existing auditing literature (AU 316, Consideration of Fraud in a Financial Statement Audit) in stating: “When assessing audit differences between estimates best supported by the audit evidence and the estimates included in the financial statements, the auditor should consider whether such differences, even if they are individually reasonable, indicate a possible bias on the part of the company's management, in which case the auditor should reconsider the estimates taken as a whole.”

“As part of the audit, the auditor also should perform a retrospective review of significant accounting estimates reflected in the financial statements of the prior year to determine whether management judgments and assumptions relating to the estimates indicate a possible bias on the part of management,” adds the PCAOB, citing again AU 316 on fraud. “With the benefit of hindsight,” says PCAOB, “a retrospective review should provide the auditor with additional information about whether there may be a possible bias on the part of management in making the current year estimates.”

The discussion in the alert about auditing the adequacy of disclosures specifically cites, among other requirements, AICPA Statement of Position No. 94-6 ("SOP 94-6"), Disclosure of Certain Significant Risks and Uncertainties. The PCAOB adds, citing to AU 431: “If management omits from the financial statements, including the accompanying notes, information that is required by GAAP, the auditor should express a qualified or adverse opinion and should provide the information in his or her report, if practicable, unless its omission from the auditor's report is recognized as appropriate by a specific PCAOB auditing standard.”

The alert cites existing literature on going concern. [In related news, today is the comment deadline to FASB on its Exposure Drafts released Oct. 8 on Going Concern and Subsequent Events. FASB's ED's would move the guidance on these matters from the auditing literature to accounting literature or GAAP, with some changes. Only a few comment letters have been filed so far, here and here, which is not unusual prior to a comment deadline, although a FASB board member recently noted at a board meeting that some constituents have indicated it is difficult to respond to all matters open for comment at the current time.]

“Additional audit considerations” covered in the PCAOB alert include: Consolidation, Contingencies and guarantees, Credit derivatives, Debt obligations, Deferred tax assets, Derivatives (other than credit derivatives), Goodwill, intangible assets and other long-lived assets, Inventory, Other-than-temporary impairment, Pension and other postretirement benefits, Receivables, Restructuring, Revenue recognition, Share-based payments.

Reports on Inspections of Eight Largest Firms, More
In other news, the PCAOB also released on Friday its “Repot on the PCAOB’s 2004, 2005, 2006 and 2007 Inspections of Domestic Annually Inspected Firms.” As noted in PCAOB’s press release, the report summarizes the findings of PCAOB’s inspections of the eight largest U.S. audit firms during the past four years. The PCAOB also posted some new inspection reports (generally, dated in November) on its inspections of firms other than the largest eight firms. See Top Audit Firms Still Have Room to Improve,PCAOB Says in Reviewing Inspection Findings, by Tina Chi in today's BNA Daily Report for Executives. In other news on the audit firm front, see Denise Lugo's article in BNA, Co-Chairman of Treasury Audit Panel Says Big Four Weak on Their Own Disclosure, reporting on former SEC Chief Accountant and co-chair of the Treasury Advisory Committee on the Auditing Profession (ACAP) remarks at a conference last week. ACAP published its final report in October, approving the report for release at its final meeting on September 26, as we reported here.

Also last week, the PCAOB voted to adopt an amendment to Rule 4003 and to issue for public comment a separate proposed amendment to that rule relating to the timing of certain inspections of registered non-U.S. firms. Further details are in PCAOB’s press release