Wednesday, April 30, 2008

FEI Releases Results of Seventh Sarbanes-Oxley Section 404 Cost-Benefit Survey

Earlier today (April 30) Financial Executives International (FEI) released its seventh in a series of surveys of the costs and benefits of internal control reporting (management’s report on internal control, and the related auditor’s attestion on internal control) under Sarbanes-Oxley Section 404.

In brief, the FEI survey results released today showed:
- a decrease in total cost of compliance with Section 404 (internal costs within the company to facililate 404 reporting, and external costs, including audit fees).
- an increased sense of benefits from Section 404 (enhanced investor confidence in financial reporting, enhanced reliability of financial reporting, and enhanced ability to prevent and detect fraud). Although showing an increase from prior years, sentiments as to benefits from 404 are still split, as shown in the press release.
- a 5.4% decrease in auditor attestation fees attributable to the Section 404 portion of the integrated audit. (That portion was estimated by this year’s respondents to be 23.7% of total audit fees).
- a 1.8% increase in total audit fees (i.e., for the integrated financial statement audit and internal control audit).

"As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs," said FEI President and CEO Michael P. Cangemi. "While 404 auditor costs also declined 5.4% as the auditor scope of work narrowed, these costs were offset by a reported five percent increase in the average hourly audit rate charged by auditors."

The report containing full survey results is available for free to FEI members, and non-members can purchase a copy of the report for $99 from the online bookstore of FEI’s research affiliate, the Financial Executives Research Foundation (FERF). Questions about reprints and content licensing should be directed to Cheryl Graziano, Vice President, FERF Research & Operations, at 973-765-1064 .

Tuesday, April 29, 2008

Subprime, Credit Crisis Update; SEC Chief Accountant, FASB, PCAOB Chairs At Baruch Zicklin Financial Reporting Conf. May 1

In our continuing coverage of subprime crisis and related market turmoil particularly with respect to related accounting and auditing standards, here are some recent items of interest:

Defining the Credit Crisis in Vinny Catalano’s blog today provides definitions of some of the key terms in the alphabet soup of the credit crisis.

What’s Wrong with Subprime Accounting by Marie Leone in today. Leone covers in depth FASB, IASB and other commentary on matters relating to FAS 157, Fair Value Measurement, FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities. (See some of our related coverage further below.)

How to Revive Securitization Markets, op ed by Robert Pozen, Chair, MFS Financial, in today’s Wall Street Journal. Authoring the op ed in his personal capacity, Pozen hints that the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), which he chairs, may consider recommendations relating to securitization accounting and disclosure at its meeting Friday, May 2nd.

Pozen describes new accounting rules promulgated by FASB in the post-Enron period (FIN 46R and FAS 140), but states, “Unfortunately those rules set the stage for today's liquidity crisis.” He explains that transactions were structured to fall below bright lines in the standards (like 10% voting equity in the securitization trust to consolidate) or to avoid triggering certain disclosure requirements.

Observing that, “Most markets for securitized debt have dried up. The cause is uncertainty: Since no one knows exactly who owns the potential losses from securitized mortgages, many investors stay away,” Pozen posits, “When [[CIFiR] meets on Friday, it can take a big step toward reviving this critical part of our financial market. It should recommend that the regulators require someone to "own" the securitization process as well as require more disclosures about who will bear the losses from the assets underlying these securities.”

Pozen proposes a three part solution: “First, FASB should again revise its rules to allow a sponsor to keep a trust off its balance sheet only if an independent party has sufficient voting equity to fund the trust's normal operations – presumptively at least 10% – and that party has a substantial role in the governance of the trust. Second, this large holder of the trust's voting equity should have the right to select a rating agency for the trust and negotiate a fee arrangement with the agency.” He adds, “Third, the FASB and the SEC should be more specific about the disclosure requirements of trust sponsors with formal or informal obligations to buy up the trust's unsold debt securities, especially if the long-term assets of the trust are mismatched with its short-term liabilities.”

Speech by IASB Chairman Sir David Tweedie in Canada on April 21. Tweedie said: “Time is too short to provide a thorough analysis of the current credit crisis, but it is evident that at the heart of the crisis were bad lending practices. Bad lending was then compounded by the absence of prices in the secondary markets for some structured credit products and concerns about the location and size of potential losses. This in turn led to funding difficulties caused by the reluctance to extend credit to a number of financial institutions thought to hold low-quality liquid assets.” He added, “Financial reporting enters the scene by way of its requirements to value these assets and to alert the markets to risks associated with their existence…. It is undoubtedly difficult to value complex, illiquid, structured credit securities… My personal view is that showing the changes in values of these securities, even if imperfect, provides much needed transparency and enables markets to adjust in a necessary, even if painful manner.”

Tweedie noted, “None of this is to say that the existing IFRSs are perfect, and clearly the IASB is willing to examine how to improve its standards in light of developments.” He referenced the recent recommendations by the G-7 Finance Ministers, endorsing a report of the Financial Stability Forum, that the IASB and other relevant standard-setters take certain actions “within 100 days” relating to, among other matters, fair value accounting and off-balance sheet issues. See our related post on the G-7 here.

2011 emerges as a key date in the continued move of worldwide adoption of IFRS. Tweedie noted over 100 countries are on IFRS now, and said “nearly 150 countries” will have adopted IFRS by 2011. Regarding the timetable for convergence projects under the FASB and IASB’s Memorandum of Understanding (MOU), he said, “My best estimate is that these MoU projects will be completed in 2011.”

With regard to the U.S., Tweedie said, “[W]e are waiting for the SEC to determine whether US companies will have the option to use IFRSs or whether a firm deadline for US adoption will be set. “ He added, “there is reason to believe that IFRSs will be adopted in the United States by US companies in the near future.”

Learn More About IFRS and SEC's Upcoming Roadmap
Learn more about IFRS and the status of SEC’s ‘roadmap’ to consider potentially permitting – or requiring – U.S. companies to file in IFRS – at Financial Executives International's (FEI’s) June 5 conference: “The World Is Moving to IFRS – Are You?” A keynote address will be provided by SEC Corp Fin Director John White. Space is limited, speakers, agenda and registration information can be found at BNA Tax & Accounting is the exclusive sponsor of the conference.

Additionally, the New York State Society of CPA’s Manhattan/Bronx Chapter has a two hour CPE session on “IFRS and U.S. GAAP Convergence” May 13 from 6-8 pm at New York Life, midtown Manhattan.

As previously noted in this blog, the FAF and FASB are holding a conference (which will be webcast) at Baruch College on June 16, “High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting.” Here are the questions that will be addressed at that conference.

Subprime May Come Up At Baruch – Zicklin Center Financial Reporting Conference May 1
Although not outlined as a separate panel, the subject of subprime and the credit crisis may come up at Baruch College’s Zicklin Center for Corporate Integrity Financial Reporting Conference on May 1. This is one of the major conferences on the financial reporting circuit each year. Speakers include SEC Chief Accountant Conrad Hewitt, FASB Chairman Robert Herz, PCAOB Chairman Mark Olson, and other experts. FEI President and CEO Michael P. Cangemi will appear on a panel on “Current Developments in the Private Sector.” FEI member Bob Laux, Director of Financial Accounting and Reporting, Microsoft, Inc., is appearing on a panel on, “Getting Ready for International Accounting Standards in the U.S.”

FEI Coverage of Subprime/Credit Crisis
If you’re new to our blog, here are a few links to some of our past coverage of the subprime/credit crisis:

SEC, Legislative Response to Market Turmoil (NYT's Norris); Rutgers Conference on Credit Crisis; European Parliament on IASB (April 25, 2008)

G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation (April 12, 2008)

IMF, IIF Rec's on Market Turmoil Are Far-Reaching, Include Fair Value, Off-Balance Sheet;
Q&A With Michael Young, Willkie Farr (April 11, 2008)

FASB Votes To Remove QSPE Concept From FAS 140, FIN 46R (April 3)

Treasury Blueprint Today; Pres. Bush Announces Intent to Nominate Aguilar, Walter to SEC;
SEC Letter on Disclosure of FV Info (March 31)

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Sunday, April 27, 2008

Profile of Sen. Jack Reed, Chair of Senate Securities Subcommittee; Presidential Classroom

There’s a “Profile of Sen. Jack Reed” by G. Wayne Miller in Sunday’s (April 27) Providence Journal (ProJo). It is very well written and provides significant insight into Sen. Reed’s life, from his and his parents’ roots to today, which is of interest for this rumored possible vice Presidential candidate or possible Secretary of Defense, who is described as the 17th most powerful senator in one poll cited in the article.

Miller spent time documenting the Senator’s activities recently, including a trip to West Point (Reed’s alma mater), various meetings on Capitol Hill, and numerous interviews with the press (one such interview with NYT’s Floyd Norris saw Reed quoted in, “Why Surprises Still Lurk After Enron,” on Feb. 29, 2008).

Reed has been mentioned from time to time in this blog due to his role as chair of the Securities, Investment and Insurance subcommittee of the Senate Banking Committee which has jurisdiction over the SEC and related areas. For example, it was Reed’s subcommittee that held the watershed hearing on “International Accounting Standards: Opportunities, Challenges, and Global Convergence Issues” on October 24, 2007, shortly before the SEC voted on Nov. 15, 2007 to remove the reconciliation requirement for foreign private issuers. (The SEC is currently considering whether to propose a rule to permit –or require – U.S. companies to file financial statements with the SEC in International Financial Reporting Standards (IFRS) instead of U.S. GAAP. See our IFRS related coverage last week; check out our June 5 conference, “The World is Moving to IFRS – Are You?” at Reed’s subcommittee also presciently convened a hearing a year ago – on April 17, 2007 – on “Subprime Mortgage Market Turmoil: Examining the Role of Securitization.”

ProJo’s Miller and NYT’s Norris noted Reed sent a letter to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in February. The letter, as described by Norris: “ask[ed] detailed questions about what went wrong” with respect to a lack of transparency in the subprime crisis, “and how it should be fixed.” Norris continued, “Getting together answers to [Reed’s] questions could provide the S.E.C. with a road map to determine where the rules failed, as well as where companies failed to apply the rules properly.” The letter was included as Appendix A-2 and A-3 in the March FASAC handouts.

Having read Miller’s profile of Sen. Reed, I noted especially Reed’s take on one of the most important lessons he gleaned from Harvard’s Kennedy School of Government: “I discovered that I wasn’t the smartest guy in the room. And the other thing that I learned, which I think is useful, too, is that there are intellectual skills that are important but there are also temperamental skills: patience, listening to people, preparation, hard work, the ability to get along with people and to develop working relationships.”

Presidential Classroom
I hope many young (and not so young) people are inspired by Reed’s story regarding his dedication to public service.

One resource for high school students (and adults) interested in learning more about public policy and public service which I’ve noted before in this blog - based on my participation as a volunteer instructor for a week in 2003 - is “Presidential Classroom” (PC).

PC is an exceptional one week program for high school students, and adults are encouraged to consider applying to serve for a one week session as a volunteer instructor. (Certain government agencies and certain private sector companies and schools provide leave time to serve as PC volunteer instructors for one week, as part of fulfilling an agency’s or company’s dedication to volunteer service.) Not only is it fascinating to take part as a volunteer instructor at PC to facilitate dialogue among diverse students on public policy issues, it is also exciting to participate in meetings on capitol hill, embassy and federal agency visits.

One of the most important lessons I found as a volunteer instructor at PC, is it really gives you some perspective when you come from a ‘desk job’ and meet fellow instructors who have the courage to risk their lives every day with the police department, fire department, or the military – about half the volunteer instructors I participated with held such positions, the rest were mainly lawyers, sprinkled with a few doctors, judges, scientists and teachers; my roommate was a Marine helicopter pilot.

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Friday, April 25, 2008

SEC, Legislative Response to Market Turmoil (NYT's Norris); Rutgers Conference on Credit Crisis; European Parliament on IASB

The New York Times’ Floyd Norris, reporting on the Senate Banking Committee hearing on credit rating agencies at which SEC Chairman Christopher Cox and others testified earlier this week, notes that the role of credit rating agencies in the debacle is, as his article is entitled, “Where the Fingers Are Pointing.

In response to perceived conflicts of interest, Norris says, “Under the rules that the SEC is expected to propose this summer, rating agencies will be able to try a different business model, one that relies on payments from investors rather than issuers.”

Norrris adds that it appears credit rating agencies may be taking on more of a role of scapegoat than is their due. (He has previously written, as we cited previously in this month, that accounting rules were being overly scapegoated for their alleged role in the subprime meltdown.)

“That the rating process was badly flawed is now clear,” Norris wrote today. “But so was much else.” Among other causes of the credit crisis, he notes, were poor mortgage underwriting standards, and poor risk evaluation by institutional investors, relying too heavily on the credit rating agencies.

Rutgers Conference: “Overcoming The Credit Crisis: The Role of Continuous Assurance and Reporting”
In related news, a conference is being hosted May 9 at the Rutgers University Business School Management Education Center in Newark, NJ on: “Overcoming the Credit Crisis: The Role of Continuous Assurance and Reporting.” More formally, this is the “2008 International Journal of Disclosure and Governance (IJDG) Conference held in conjunction with the 2nd Continuous Reporting Conference at Rutgers University.” FEI President and CEO Michael P. Cangemi is among the speakers at the conference, with other experts in accounting, audit, business and technology.

Topics to be addressed at the conference include: (1) the causes and implications of the credit crisis, (2) the role that fair value accounting has played in the measurement and reporting of bank assets, (3) the need for continuous monitoring and assurance of financial transactions, especially in the light of the massive frauds at Societe Generale, (4) the ability of audit firms to appropriately measure and provide assurance on the risks posed by highly complex derivatives based trading instruments and strategies, (5) the need for accounting standards and internal controls to explicitly adopt a risk management perspective, and (6) the causes of the explosion in restatements of financial statements and the effect they have on the confidence of investors.
Financial Executives International (FEI) and its research affiliate, the Financial Executives Research Foundation (FERF) are among sponsors of the IJDG conference, along with the Institute of Management Accountants (IMA). Sponsors of the Continuous Reporting Conference are IMA, Grant Thornton LLP and the Rutgers Continuous Assurance and Reporting Laboratory. Register for the conference here.

European Parliament Adopts Resolution Calling for Changes to IASB, IASCF Governance, Transparency, and Greater EU Involvement
Yesterday (April 24) the European Parliament (EP) adopted this resolution which affirms that the EP “is firmly convinced that high-quality global accounting standards must be developed.”
The resolution also noted the EP “welcomes… the fact that the IASCF/IASB have sought … improve[ments] … through, inter alia, biannual meetings at which the IASCF reviews the IASB's work, impact assessments for new standards and the introduction of formalised feedback statements for comments received in public consultations.”

However, the EP believes certain changes to the IASB and its parent body, the IASCF’s governance, process and transparency should be made, including increasing the role of the EU.

As noted in our summary of key points from the resolution, among the EPs concerns are that the IASB has a quasi-legislative role without all the checks and balances applied to the legislature or quasi-government bodies like the IMF or World Bank; and concern is expressed about practical aspects vs. what EP perceives as increasingly theoretical nature of IASB standards, as well as significant concerns about IFRS for Small and Medium Sized Entities (SMEs).

Props to BNA’s Arthur Rogers for bringing the EP resolution to our attention, in his article, “EU Lawmakers Call for IASB Reform, Want Bigger Say for EU on Accounting Standards.” Rogers also includes related remarks of EU Internal Markets Commissioner Charlie McCreevy, who stated that the IASB’s proposed IFRS for SMEs standards, at 200 pages, were still “far too complex.”

"I am not going to endorse now or in the future something which no one understands," McCreevy said about the IASB’s IFRS for SMEs Exposure Draft, as quoted by BNA’s Rogers.
Regarding XBRL, McCreevy said he is engaged with discussions with European securities regulators on this subject. Rogers also noted: “McCreevy added that he had discussed XBRL--"a very exciting development"--with SEC Chairman Christopher Cox, during a recent visit to the United States. “

According to BNA’s Rogers, McCreevy said: “any steps towards requiring the use of XBRL in the EU should be subject to a thorough impact analysis, including the economic assessment of costs and benefits.” He added, “I support keeping this agenda point in our regulatory dialogue with the US authorities for the future. These standards will need to be internationally accepted, technologically independent and interoperable.”

If you’re following IFRS developments as they may impact U.S. filers, you won’t want to miss FEI’s June 5 conference in NYC, “The World Is Moving To IFRS – Are You?” For agenda, speakers, and registration info, go to: . For more international news, see our post yesterday, and if you received this blog post from ‘a friend’ and would like to receive our blog posts real-time, enter your email address here.

Thursday, April 24, 2008

European Commission Legis. on Equiv of GAAP to IFRS, U.S. SEC Action on IFRS for U.S. Co's Expected Within Weeks, Some Say

Earlier this week, the European Commission (EC) announced that it intends to propose legislation “within the coming weeks” for a finding of equivalence between IFRS and U.S. GAAP, as well as certain other 3rd country GAAPs. A working paper details the basis of this decision, detailing major differences between certain GAAPs and IFRS in an Annex taken from the recent advice (report) of the Committee of European Securities Regulators (CESR) which we previously reported on here.

Additionally, although the EC acknowledges the US SEC's decision last fall to drop the IFRS reconciliation requirement for countries that report in IFRS as published by the IASB – which included a transitional carve-out for the major difference between IFRS “as adopted by the EU” (re: IAS 39), the EC states: “The European Commission continues with its objective for seeking removal of this reconciliation requirement for all European issuers using IFRS as adopted by the EU. Efforts need to continue to resolve the issue of the carve-out of IAS 39. In this context the Paper calls on the IASB to play a full role."

Hat tip to Joe Kirwin of the Bureau of National Affairs (BNA) who wrote about this development yesterday in his article in BNA's Daily Report for Executives, "European Commission Planning Legislation To Give IFRS Equal Status With U.S. GAAP." BNA does a great job of covering accounting developments on the U.S. and international scene; see these products offered by BNA Tax & Accounting, exclusive sponsor of FEI's upcoming IFRS conference described below.

SEC Rule Proposal on Use of IFRS by U.S. Companies is Expected "In the Next Few Weeks," Says KPMG Chairman, Announcing Formation of IFRS Institute
In announcing the formation of the KPMG IFRS Institute. KPMG Chairman & CEO Tim Flynn stated: "The question about whether the world is going to global standards is no longer ‘if,’ but ‘when.’" Flynn added, "The Securities and Exchange Commission (SEC) is expected to issue a rule proposal in the next few weeks outlining the manner, timing, and eligibility for some U.S. public companies to transition from U.S. Generally Accepted Accounting Principles (GAAP) to IFRS." and were among the first to note the announcement of the formation of KPMG's IFRS Institute.

The KPMG IFRS Institute is the latest in a series of institutes formed by KPMG, including their Audit Committee Institute and [Sarbanes-Oxley Section] 404 Institute. A May 1 webcast is planned, further info is at

Other firms offering IFRS resources online include Deloitte's, which has a great deal of information about IFRS developments. E&Y has IFRS info here, and PwC has IFRS info here.
Bruce Pounder, CEO of Leveraged Logic provides info on his IFRS convergence training and services here.

We will add links to other websites with IFRS info, feel free to email me or post a comment if you have one to recommend.


Separately, the upcoming (May) issue of Financial Executive Magazine features interviews with KPMG International Chairman Tim Flynn, Grant Thornton CEO Ed Nusbaum, PwC U.S. Chairman and Senior Partner Dennis Nally, Deloitte CEO Barry Salzberg, and Ernst & Young Chairman & CEO James Turley in Executive Editor Ellen M. Heffes' Financial Reporting column entitled: "Global Accounting Firm CEOs on Challenges - Transitionaing from GAAP to IFRS - and More." We will update this post to link to the article on May 1.Additionally, see PwC U.S. Chairman and Senior Partner Dennis Nally's remarks delivered at the NYC Chapter of FEI in March, in which he called for a move from U.S. GAAP to IFRS. E&Y's Turley had a similar message in his WSJ oped last fall, "Mind the GAAP." Separately, Compliance Week reported this week, in an article by Tammy Whitehouse, "PCAOB Ponders Global Auditing Standards," reporting on this April 11 speech by PCAOB Board Member Bill Gradison at the American Accounting Association.

More opportunities to learn about IFRS can be found at these conferences:

  • FEI June 5 conference in NYC: "The World Is Moving To IFRS - Are You?" Hear the latest on the status of SEC rulemaking relating to IFRS for U.S. companies from SEC Corp Fin Director John White, gain insights on IFRS from leading financial executives, auditors, and other experts. Space is limited, register now, see speakers and agenda here . BNA Tax & Accounting is the exclusive sponsor of this conference.
  • FAF-FASB June 16 Forum at Baruch College: "High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting." Space is limited, a live webcast will also be available, see details here.

Wednesday, April 23, 2008


No, this post isn’t about the Senate Banking hearing yesterday on credit rating agencies (well, only in part). It’s about a great program offered by the American Accounting Association (AAA) for people interested in becoming Professionally Qualified (PQ) to teach accounting at the college level; and it’s about some recent commentary, like that of Senate Banking Chair Christopher Dodd at a March 4 hearing, reported here, questioning whether some parties were “asleep at the switch” (ZZZ) during the recent credit crisis.

On April 19, AAA held a day-long program to provide information to those interested in becoming Professionally Qualified (PQ) to teach accounting at the college level. We gave some advance info about this program and a related program offered by the Association to Advance Collegiate Schools of Business (AACSB) called the “Bridge” program here, and we noted related comments of former Federal Reserve Board Chairman Paul Volcker on the topic of educating accountants at the March 13 meeting of Treasury’s Advisory Committee on the Auditing Profession (ACAP) here.

AAA’s one-day PQ program and the AACSB’s 5-day Bridge program are geared toward individuals who have significant ‘real-world’ experience in accounting, tax or audit, and are interested in teaching at the college level, but lack a PhD. Generally, holding a Masters degree is preferred but candidates without a Masters may be considered based on experience. The PQ designation is distinct from the “AQ” designation for those who are Academically Qualified to teach by means of holding a PhD.

There are a variety of efforts among academic and professional associations to encourage more PQ professors, in part to help offset the growing shortage of PhDs at a time when accounting student enrollments are growing and professors are retiring, and to add more practical insights to the classroom.

Co-chairs of the AAA’s April 19 PQ program were Kevin Stocks, Director, School of Accountancy and W. Steve Albrecht Professor of Accounting at Brigham Young University, and Susan Crosson, Professor and Coordinator of Accounting, Santa Fe Community College, Gainesville, FL. Stocks and Crosson developed the PQ program, and also chaired the inaugural PQ program in Aug. 2007. There were close to 50 attendees at the April 19 PQ program.

Pictured here (L-R) are: Francine Mellors-Rothenstein, Director of Technical Publications and Research Tools, Ernst & Young, with Peggy Capomaggi, Managing Director-Finance, Morgan Stanley, and myself . (I dropped by the April 19 PQ luncheon, having attended the inaugural program in Chicago last August, and having highly recommended it to a number of people, including Mellors-Rothenstein and Capomaggi who I worked with in the Accounting Policy division at The Chase Manhattan Bank, N.A. (now JPMorgan Chase) back in the days of FDICIA (the FDIC Improvement Act of 1991). Attendees had a varied background, many wore name tags from major audit firms, others work in financial positions in the corporate or nonprofit world.

For information about dates/locations or other information regarding future AAA PQ programs, contact Deirdre Harris, Member Relations and Marketing Manager, at the American Accounting Association (AAA), See also AAA’s Future Accounting Faculty and Programs Projects.

By the way, FEI -the association of senior financial executives - has a special membership category for academics (associate professors and above). By becoming an FEI member, academics (and professionals) benefit by receiving research reports published by the Financial Executives Research Foundation (FERF) - the research affiliate of FEI - at no additional cost. FERF’s practical research may be particularly of interest to academics interested in bridging theory and practice.

In related news, two of the recommendations contained in AACSB’s Feb. 2008 report on the “Impact of Research” recommended that “AACSB should develop mechanisms to strengthen interaction between academics and practicing managers in the production of knowledge in areas of greatest interest,” and that “AACSB should identify and disseminate information about best practices for creating linkages between academic research and practice.”

For academics and financial professionals - FEI member benefits - in addition to FERF research, Financial Executive Magazine, and our weekly e-newsletter, FEI Express - include the opportunity to participate in numerous networking and educational programs at a reduced rate, such as our Summit conference May 4-6 in AZ, our June 5 conference "The World is Moving to IFRS - Are You?”, and our Current Financial Reporting Issues (CFRI) conference in the fall. For further information contact Nancy Ehlers or (973) 765-1099.


Tami Luhby, in her article, “Bank Regulators: Asleep At The Switch,” quoted Senate Banking Committee chair Christopher Dodd’s statement at a March 4 hearing: "Again and again the question has been asked over the past year as our credit markets have grown increasingly impaired: Where were the regulators?...Why didn't they do more? Were they asleep at the switch? And when the alarm went off, did they merely hit the snooze button?" She noted, “Dodd said he will hold another hearing within 60 days to learn what measures regulators are putting into place to address the industry's current problems.” Since March 4, Dodd has held six hearings (including tomorrow’s hearing on the role of sovereign investments) on the “Turmoil in the Credit Markets.” Yesterday’s hearing was on the role of credit rating agencies.
Some would challenge any reference to parties being ‘asleep at the switch’ during the subprime crisis and related market turmoil by saying numerous conditions combined to create a perfect storm of sorts, including subprime interest rate resets, the allegedly looser standards by which some subprime loans were approved, a historic decline in the housing market, with a new light shone on illiquid transactions by new accounting standards (FAS 157) and related guidance of the Center for Audit Quality (CAQ).

In addition to any legislative action that may arise from Dodd’s Senate Banking Committee (or from the House Financial Services Committee chaired by Barney Frank) in response to the credit crisis, immediate action has been called for by the G-7 Finance Ministers, endorsing the report of the Financial Services Forum (FSF), calling for certain actions to be taken by regulators, standard-setters, and the private sector in the next 100 days, as we previously noted in our post: “G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation.”

Going forward, some are questioning what they perceive to be a deregulatory tint to some aspects of the U.S. Treasury’s ‘Blueprint for a Modernized Financial Regulatory Structure’ (summarized in this Executive Summary (public link to WSJ) and this Treasury Department Fact Sheet.)

James Surowiecki of The New Yorker, in his article, “Parsing Paulson,” wrote: “As the press has noted, [Paulson’s] plan would consolidate our myriad and overlapping regulators into fewer, bigger ones. But the most interesting thing about it is something subtler: a push to move from our current system of regulation—often known as “rules-based”—toward a “principles-based” approach.” He explains, “In practice, of course, these distinctions aren’t quite so neat: regulators in a rules-based system still have to interpret the rules, and principles-based systems are hardly rule-free.”

Analogizing a principles-based system to soccer, and a rules-based system to football, Surowiecki said, “Wall Streeters must be soccer fans at heart, because they are huge supporters of the principles-based approach." He warned, "That should, perhaps, make us skeptical: when the fox applauds ideas for henhouse security, watch out. Yet the European experience suggests that a principles-based system has real virtues. It can make life easier for honest corporations, since they have to spend less time complying with overly complex rules, and also thwart dishonest ones, since regulators can spend more time looking at the substance, rather than the minutiae, of corporate bad behavior.”

“So what’s the catch?” asks Surowiecki. “Only this: a principles-based system relies on dedicated, well-funded regulators who are interested in regulating. And, lately, it’s been hard to find those in Washington.”

A more upbeat comment came from House Financial Services Chair Barney Frank on the day the Blueprint was released (March 29): “Secretary Paulson’s plan fundamentally to improve our ability to regulate the financial system is a very constructive step forward in this important debate. He recognizes that the far-reaching innovations that have transformed financial activity have outstripped our ability to preserve economic stability and that both our regulatory institutions and the rules they apply must be significantly enhanced.”

Frank added, “We have not yet analyzed the proposals in detail, and I have disagreements with some specifics... But given the fact that is a contribution to a profound national discussion that cannot be concluded in the months before the election, Secretary Paulson has performed an important service. By rejecting the argument for the status quo; by making it clear that new regulation done properly enhances the function of the market rather than detracts from it; and by explicitly including consumer protection among the core functions of the system he proposes, he has narrowed, albeit by no means removed, the differences between his position and that of many Democrats.”

Regarding the SEC, see “Paulson Blueprint: An Orphaned Public Company Regulatory Function” by Dave Lynn posted earlier this week in blog.

See also Securities Mosaic’s Spotlight on “Paulson’s Proposal” and “Hedge Fund Industry Reports

Tuesday, April 22, 2008

PCAOB Amends Tax Services Rule; Adopts New Rule on Communication With Audit Committees

Earlier today, the Public Company Accounting Oversight Board (PCAOB) voted to adopt an amendment to its Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, to exclude from the scope of the rule tax services provided during the portion of the audit period that precedes the beginning of the professional engagement period.

The amendment was provided to remove an unintended consequence of the original rule which limited the choice of audit firms a company could change to.

In addition, the PCAOB voted to adopt a new rule, Rule 3526, Communication with Audit Committees Concerning Independence, which would supersede the Board's interim independence requirement, Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. The rule would require a registered public accounting firm to communicate to an issuer's audit committee about any relationships between the firm or any of its affiliates and the issuer or persons in financial reporting oversight roles at the issuer that may reasonably be thought to bear on the firm's independence.

The communication with audit committees would be required both before the firm accepts a new engagement pursuant to the standards of the PCAOB and annually for continuing engagements.

Under existing rules, no such communication was required prior to the initial audit engagement.

NOTE: All final PCAOB rules are subject to SEC approval.

UPDATE 11:36 a.m.: Here is the PCAOB's press release on today's vote, which includes the effective dates of the rule amendments/new rule.

Monday, April 21, 2008

SEC Moves XBRL Meeting To May 14; FASB-IASB Discuss Updating MOU

The SEC posted this Notice on April 18 that they have rescheduled the open commission meeting to discuss a proposal on XBRL, originally scheduled for today (April 21), to May 14 at 10am.

As such, the SEC open commission meeting on XBRL will follow the next meeting of the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR, or the "Pozen Committee" for chair Robert Pozen), taking place on May 2nd, to discuss testimony and comment letters received on recommendations contained in CIFiR's Progress Report, including recommendations regarding a phased in approach to mandating adoption of XBRL.

See our related post last week: "SEC General Counsel Says XBRL Proposal Will Be Considered "In the Near Future;" Part of Move to Global Convergence."

Three FEI committees commented on CIFiR's XBRL related proposals, and the other CIFiR recommendations, in comment letters filed on CIFiR's Progress Report. See the letters filed by FEI's Committee on Finance and Information Technology (CFIT), the letter filed by FEI's Committee on Small and Mid-Sized Public Companies (the two separate letters are attached here), and the letter filed by FEI's Committee on Corporate Reporting here.

FASB-IASB Discuss Updating MOU
Separately, FASB and the IASB are holding their semi-annual joint board meeting today. Meeting in London, they are discussing an update to the 2006 Memorandum of Understanding (MOU). See this agenda paper on the MOU for further background.

Thursday, April 17, 2008

In The Year 2025

As the SEC continues to receive comments(as recently as April 15) on the 116-page “Petition for Interpretive Guidance on Climate Risk Disclosure” filed jointly by 22 signatories on Sept. 18, 2007 (there’s also the “Petition for Interpretive Guidance on Business Risk of Global Warming Regulation” filed by the Free Enterprise Action Fund Oct. 22, 2007), President Bush spoke yesterday on “Taking Action to Confront Climate Change,” announcing, “a new national goal to stop the growth in U.S. greenhouse gas emissions by 2025.”

In his speech, the President noted, “To reach our 2025 goal, we will need to more rapidly slow the growth of power sector greenhouse gas emissions so that they peak within 10 to 15 years, and decline thereafter.. . By doing so, we will reduce emission levels in the power sector well below where they were projected to be when we first announced our climate strategy in 2002.”

He added, “There are a number of ways to achieve these reductions, but all responsible approaches depend on accelerating the development and deployment of new technologies."
Reactions to the President’s plan varied, as noted in the article by James Gerstenzang and Richard Simon in today’s Los Angeles Times, “President Bush Offers Goals to Fight Climate Change." and in the AP wire story carried in USAToday, "Bush Revises Strategy on Curbing Greenhouse Gases."

Separately, Elizabeth Williamson reports in today's Wall Street Journal, "Climate Issues Divide U.S. Chamber Of Commerce, Big Members.”

In reading about the announced climate change goal for 2025, I was reminded of the song “In the Year 2525,” recorded by Zager & Evans in 1969. The lyrics begin, “In the year 2525, if man is still alive, if woman can survive…” A later verse says, “In the year 9595 I'm kinda wonderin' if man is gonna be alive, he's taken everything this old earth can give, and he ain’t put back nothing.”

The President’s remarks on climate change followed by about four hours the visit of Pope Benedict XVI to the White House. Did the meeting with the Pope influence the President’s views on climate change (albeit the remarks were prepared in advance of the visit)? Perhaps only they will know.

In addition, the President’s announcement came two days ahead of: “U.S. Governors to Gather at Yale for Climate Change Conference.”
Committees Appointed by Treasury Recommend Best Practices for Hedge Funds

Speaking of clearing the air, “Hedge Funds Need More Oversight, Transparency, Treasury Panels Say,” reports David Cho in today’s Washington Post. He notes, “Two committees appointed by the Treasury Department called yesterday for greater accountability within the secretive world of hedge funds and pressed fund managers to detail their investment activities, saying such moves would help the troubled financial markets.”

Further details on the hedge fund announcement are in Treasury’s April 15 press release, “PWG [Presidents Working Group] Private-Sector Committees Release Best Practices for Hedge Fund Participants.” The two committee reports – the Asset Managers Committee chaired by Eric Mindich of Eton Park Capital, and the Investors Committee chaired by Russell Read of CALPERS – along with other committee information, are available at:

Wednesday, April 16, 2008

SEC To Meet Mon. April 21 To Consider XBRL Proposal

The SEC posted a Sunshine Act Notice yesterday announcing they will hold an open commission meeting on Monday, April 21, at which: "The Commission will consider whether to propose amendments to provide for corporate financial statement information to be filed with the Commission in interactive data format, and a near- and long-term schedule therefor."

Props to Broc Romanek of for bringing this to our attention , and see his related analysis in his blog post today: "Mandatory XBRL: Here It Comes."
Romanek notes that the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR,chaired by Robert Pozen) recommended in its Progress Report(which covered a wide range of issues for improving financial reporting) that the initial XBRL requirements be "furnished," not "filed." Observation: the SEC's Sunsine Act notice uses the word 'filed' although that may be a generic reference.

See also post earlier this week: "SEC General Counsel Says XBRL Proposal Will Be Considered "In the Near Future;" Part of Move to Global Convergence."
Three FEI committees commented on CIFiR's XBRL related proposals, and the other CIFiR recommendations, in comment letters filed on CIFiR's Progress Report. See the letters filed by
FEI's Committee on Finance and Information Technology (CFIT), the letter filed by FEI's Committee on Small and Mid-Sized Public Companies (the two separate letters are attached here), and the letter filed by FEI's Committee on Corporate Reporting here.

Tuesday, April 15, 2008

Senate Finance Hearing Today on Tax Reform; FEI Files Amicus Brief on Textron; More Tax News

What better day than “Tax Day” – April 15 - to provide a tax update? Matt Miller, FEI’s Director of Tax and Economic Policy, tells us that the Senate Finance Committee is holding a hearing at 10am today on, “Tax Fundamentals in Advance of Reform.” See also this “Overview of the Federal Tax System as in Effect for 2008,” published yesterday by the Joint Committee on Taxation, and see our previous post on Treasury’s tax competitiveness study.

Miller reports that today’s Senate Finance Committee hearing will consider the role of the income tax system, options for defining "taxable income," and the impact of these choices on taxpayer behavior. He adds, “It is also rumored that three additional hearings may be scheduled in 2008 on (1) individuals, (2) small business, domestic corporate, and passthrough entities, and (3) multinationals with an emphasis on international activities.” Witnesses at the hearing include Daniel Shaviro of NYU Law School, Michael Graetz of Yale Law School, Jason Furman, Director, The Hamilton Project, Brookings Institution, and Robert Carroll, Vice President for Economic Policy, The Tax Foundation.

Speaking of the Tax Foundation, they report that Tax Freedom Day (the day they calculate you have to work to each year just to pay your taxes) comes three days earlier this year - arriving on April 23, 2008. They also have a nifty pie chart showing “Days Americans Work to Pay Taxes Compared to Other Expenses, 2008” and a map of “Tax Freedom Day by State.”

In other tax-related news, Miller reports that FEI’s Committee on Taxation (COT) and Committee on Corporate Reporting (CCR) filed an amicus brief on April 4 in the Textron case, to support the lower court's decision and to address additional consequences that could result from an adverse ruling. This case deals with attorney-client, tax practitioner-client, and work product privileges with regard to tax accrual papers. Separately, here is the amicus brief filed on April 8 by the U.S. Chamber of Commerce and the Association of Corporate Counsel. And, on the topic of attorney-client privilege, see also Francine McKenna’s April 7 post in her Re: The Auditors blog, “The ‘Assault’ on Privilege – A U.S. Chamber Viewpoint (and Mine).”

FEI’s Miller also tells us, “Senate Finance Committee Chairman Max Baucus is developing a revenue-neutral tax extender bill that would extend 2007 expired tax provisions for two years through the end of 2009, and extend 2008 expiring tax provisions for one year through the end of 2009.” He adds, “Baucus reportedly plans to mark up a tax extender bill before the Memorial Day recess (May 26-30).”

On the business side, a number of newspapers reported yesterday on a study released April 13 by Syracuse University’s Transactional Records Access Clearinghouse (TRAC), entitled, “[IRS] Audits of Large Corporations Slide to All Time Low.” However, some of TRAC’s conclusions are being challenged by the IRS, as noted in the article, “TRAC Asserts 'Historic Collapse in Audits'; [IRS’s] Shott Says Interpretation of Data Is Wrong,” by Alison Bennett in today’s BNA Daily Report for Executives. “IRS Large and Mid-Size Business Division Commissioner Barry Shott criticized the [TRAC] report's findings … saying the drop in large corporate audits reflects numerous factors not mentioned in the document…. Some of these factors include the agency's new focus on specific areas of risk in its audit strategy rather than cumbersome examinations that can take years, alternative dispute resolution techniques that are settling controversial issues before audits even start, a significant trend in mergers and acquisitions that is shrinking the universe of large taxpayers even as it becomes more complex, and a shifting of resources into the partnership arena.” Bennett adds Schott said TRAC ‘simply got it wrong.”

And on the personal tax side, if you’re rushing to file your taxes today, you won’t be alone. “It’s crunch time for millions of procrastinators,” reported Tom Herman in his article in the weekend Wall Street Journal, “Lure of Stimulus Payments May Produce Record Filings.

“Thanks in part to the lure of economic-stimulus payments, record numbers of returns are being filed this year,” said WSJ’s Herman. “Through April 4, the IRS says it had received about 96.8 million returns, up 9.3% from a year earlier.” Additionally, he noted, “the IRS says the agency expects to receive a record 10.3 million extension requests, up from 10 million last year.”

If you find yourself filing your return (or extension request) at the main post office in New York City tonight as the midnight hour approaches, you’re in for a treat! For the fourth year in a row, Steven Zelin, “The Singing CPA,” will be performing outside the James A. Farley Post office, 32nd Street and 8th Ave. in NYC, from 11pm to midnight.

Congrats to Zelin, for headlining the Front Page story in today’s Wall Street Journal, Why Tax Day Makes Mr. Zelin Want To Sing.” The article, by Shelly Banjo, profiles Zelin in print and video, and has links to a slide show of Zelin and other rockin’ accountants like The Accounting Crows and entrants in Turbo Tax’ “Tax Rap” contest hosted by Vanilla Ice last year.

Zelin is a talented musician-singer-songwriter; it’s no wonder WSJ’s Banjo reports he recently gave up his day job as an accountant (except for a select group of clients) to focus on his stand-up comedy and music. We cited Zelin in our year-end 2007 post, in which we provided a preview clip of one of the songs from his new CD, “The Singing CPA.” We noted that his song Major in Accounting, “may help that thorny shortage of PhD issue … and may help increase the number of students majoring in accounting – a field that has already seen a boost in the post Sarbanes-0xley period.” We also provided a clip to his signature song, “Dear I.R.S,” (which alone is worth the price of one of his albums/CD’s on which it appears). I also noted my personal favorite songs on his last album had nothing to do with accounting and were simply great songs about everyday life, exhibiting a real talent for story-telling, like “Bagel Store.” Check out Zelin’s new CD, “The Singing CPA,” on i-tunes. The Tax Prof Blog has posted tracks to the CD here.

By the way, I just discovered there’s a group called The Singing Lawyers, featuring John and Debbie Orenstein (no relation to me) who went to Columbia Law School, where they met on the “Law Revue.” Among other hits, they have a song called “The CPA: Danger is His Middle Name.”

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Monday, April 14, 2008

SEC General Counsel Says XBRL Proposal Will Be Considered "In the Near Future;" Part of Move to Global Convergence

SEC General Counsel Brian Cartwright, in a speech before a committee of the American Bar Association (ABA) on April 12, said, “I predict a release proposing that reporting companies be required to use XBRL in their filings will be considered by the Commission in the near future.”

Cartwright gave a detailed explanation of how XBRL works, after which he said, “So … how hard is it going to be for your clients to tag their financial data? The answer is: not hard at all, even the first time. And easier thereafter.” Detailing his views further, he added:

“I've personally watched financial statements being tagged using XBRL. And it isn't hard — thanks to the magic of computers. You go line item by line item. The tagging software reads the line item description and suggests the tag or tags that are most likely to be appropriate. The software usually makes the right guess, but you can always search for a different tag if you need to. If you're not sure what to choose, you can click and go directly to the corresponding accounting literature descriptions. Trust me, a knowledgeable accountant is not going to have a difficult time doing this.

"Beyond that, in time many companies will be using accounting software that includes XBRL data tagging as an integral part of the system. That will make it cheaper and easier for those companies to prepare their financial statements in the first place, with far less risk of human error. And the financial statements that are produced by that software then will have been tagged automatically."

Cartwright also noted thousands of companies around the world are required by their regulators (e.g. China, Japan) to file in XBRL, so the U.S. in this instance is not a leader, but a follower. He concluded his remarks by noting XBRL is part of a broader movement to global convergence, including a move to global accounting standards.

He said: “At the same time, we're also working to converge to a single global accounting standard. So it's not too hard to envision the day in the not-too-distant future when investors worldwide will be able to access, analyze and compare the financial statements of companies around the world using globally accepted tagging and accounting standards.”

Separately, if you'd like to learn more about global accounting standards - specifically, International Financial Reporting Standards (IFRS) - join us at FEI’s Global Financial Reporting Convergence Conference June 5 in New York City: “The World Is Moving To IFRS: Are You?”

SEC Corp Fin Director John White will be providing an update on the SEC's consideration of whether to permit - or require - U.S. registrants to file with the SEC in IFRS, additional speakers including leading financial executives, auditors, and more! Info is available at - space is limited, register now!

Saturday, April 12, 2008

G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation

In a Joint Statement issued on April 11, the G-7 Finance Ministers “strongly endorsed” recommendations for wide-ranging actions contained in a report presented to them by the Financial Stability Forum (FSF), and recommended that certain actions be undertaken “within the next 100 days” in response to the current market turmoil. This includes a recommendation that the IASB and other relevant standard setters “initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress. "

The G-7 statement supports recommendations contained in the FSF report issued April 11, “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience.” However, the G-7’s 100 day timetable for certain actions is more aggressive than that set forth by FSF.

Actions to be taken within 100 Days
The G-7 state, “We have identified the following recommendations among the immediate priorities for implementation within the next 100 days:

Firms should fully and promptly disclose their risk exposures, write–downs, and fair value estimates for complex and illiquid instruments. We strongly encourage financial institutions to make robust risk disclosures in their upcoming mid-year reporting consistent with leading disclosure practices as set out in the FSF's report.

The International Accounting Standards Board (IASB) and other relevant standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.

Firms should strengthen their risk management practices, supported by supervisors' oversight, including rigorous stress testing. Firms also should strengthen their capital positions as needed.

By July 2008, the Basel Committee should issue revised liquidity risk management guidelines and IOSCO should revise its code of conduct fundamentals for credit rating agencies.”
Additionally, the G-7 endorsed other FSF proposals to be implemented by year-end 2008.

The FSF’s recommendations are summarized in this 10 page press release; if you’d like something more concise, see the 2 page Executive Summary (pdf pages 7-8) of the FSF report. Annex A to the FSF’s report contains the List of Recommendations, and Annex B provides “Leading Practice Disclosures for Selected Exposures.” Annex C lists members of the “Working Group on Market and Institutional Resilience” which authored the report. The U.S. representative was SEC Chairman Christopher Cox.

FSF Recommendations Relating to Accounting, Disclosure
Section III of the FSF report deals with “Enhancing Transparency and Valuation.”

In the subsection “Risk Disclosure by Market Participants,” the FSF’s recommendations include:
- The FSF strongly encourages financial institutions to make robust risk disclosures using the leading disclosure practices summarised in this report, at the time of their upcoming mid-year 2008 reports.

- Going forward, investors, financial industry representatives and auditors should work together to provide risk disclosures that are most relevant to the market conditions at the time of the disclosure.

- The BCBS [Basel Committee on Banking Supervision] will issue by 2009 further guidance to strengthen disclosure requirements under Pillar 3 of Basel II for securitisation exposures, sponsorship of off-balance sheet vehicles, liquidity commitments to ABCP conduits, and valuations.

Recommendations relating to accounting for off-balance sheet vehicles include:

  • The IASB should improve the accounting and disclosure standards for off-balance sheet vehicles on an accelerated basis and work with other standard setters toward international convergence
  • The IASB and the FASB should consider moving directly to exposure drafts on off-balance sheet issues, rather than discussion papers, to meet the urgent need for improved standards

Recommendations relating to accounting standards for valuation (including fair value) include:

  • The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.
  • The IASB will examine its principles and requirements for disclosures about the valuation of financial instruments to identify areas for enhancement in light of lessons learned from the market turmoil.
  • This effort will assess disclosures in year-end 2007 annual reports and draw on the views of investors, firms, auditors, supervisors and regulators about the quality of valuation disclosure practices.
  • The IASB will enhance its guidance on valuing financial instruments when markets are no longer active.
  • To this end, it will set up an expert advisory panel in 2008.
In addition to accounting standards setters, others who should take action regarding valuation, notes the FSF, include financial institutions, the Basel Committee, auditing standard-setters, and others. Specifically, the FSF recommends:

  • Financial institutions should establish rigorous valuation processes and make robust valuation disclosures, including disclosure of valuation methodologies and the uncertainty associated with valuations.
  • The Basel Committee will issue for consultation guidance to enhance the supervisory assessment of banks’ valuation processes and reinforce sound practices in 2008.
  • The International Auditing and Assurance Standards Board (IAASB), major national audit standard setters and relevant regulators should consider the lessons learned during the market turmoil and, where necessary, enhance the guidance for audits of valuations of complex or illiquid financial products and related disclosures.
In related news, see also our posts from earlier this week on recommendations issued by the IMF and IIF, and our post subtitled, EU’s McCreevy, ECOFIN Talk Fair Value.

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Friday, April 11, 2008

IMF, IIF Rec's on Market Turmoil Are Far-Reaching, Include Fair Value, Off-Balance Sheet; Q&A With Michael Young, Willkie Farr

"Market, Market, Dare You Stall, What’s the Fairest Fair Value of All?” is one of the hottest issues in accounting today - along with calls for more transparency around off-balance sheet items – among the multitude of issues being discussed surrounding the subprime crisis and current market turmoil.

Q&A With Michael Young, Willkie Farr
If you couldn’t get into the sold out Directors Roundtable program covering this topic today, we have additional insights from one of the speakers, Michael Young of Willkie Farr & Gallagher, here.

Earlier this week, two major organizations issued policy papers calling for, among other things, a look at how fair value accounting as set forth in FASB’s FAS 157 (Fair Value Measurement) and in related IASB standards reflected, or in some minds may have directly or indirectly impacted, the downward spiral in transaction prices and accounting valuations of subprime mortgage-backed securities and related credit instruments, and potentially the related liquidity of entire firms (e.g. Bear Stearns).

International Monetary Fund (IMF) Report
The International Monetary Fund (IMF)’s April 8 report, “Global Financial Stability Report: Containing Systemic Risks and Restoring Financial Soundness,” provides a wide-ranging analysis of the current market turmoil. Key themes noted in the IMF’s Executive Summary include: (1) a collective failure to appreciate the extent of leverage taken on by a wide range of institutions—banks, monoline insurers, government-sponsored entities, hedge funds—and the associated risks of a disorderly unwinding, (2) a lag of private sector risk management, disclosure, financial sector supervision, and regulation vs. the rapid innovation and shifts in business models, leaving scope for excessive risk-taking, weak underwriting, maturity mismatches, and asset price inflation, (3) overestimates in amount of risk transferred off bank balance sheets, and (4) continuing strain in the financial markets - notwithstanding unprecedented intervention by major central banks – compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based deleveraging.

Regarding accounting, the IMF observes, “The absence of active markets for complex structured credit products and the observed sales at values below the theoretical value of their underlying cash flows have presented challenges to financial institutions as to the degree to which they could be considered 'orderly sales' and hence depended on as a measure of fair value." IMF continues, "The major audit firms have argued collectively that the presence of a price below theoretical valuation does not necessarily represent a distressed sale. In such cases, the auditors require firms to demonstrate why a sale price is not indicative of fair value before accepting a reclassification of an asset to level three. For example, a sale in a thin market at a heavy discount by a liquidator may qualify as a distressed sale, while a similar sale by a solvent entity may not.” IMF notes this approach is to minimize ‘cherry picking’ values.

The ‘distressed sale’ issue is, to some, the crux of the matter in determine fair value in today’s markets – when is an illiquid market a ‘forced sale,’ ‘distressed sale,’ or other than an ‘orderly market’ sale? As we have noted previously, the Center for Audit Quality (CAQ) issued its own guidance on this point, and the SEC recently issued guidance in the form of a ‘sample letter’ sent to companies on fair value disclosures in MD&A. Some, like Bloomberg’s Jon Weil, in his April 2 article, "SEC Fuels New Mark-To-Market Conspiracy Theories," called upon the SEC to ‘set the record straight’ whether they were creating a ‘loophole’ in FAS 157. Others, like Credit Suisse’s David Zion, as we noted previously, noted that the SEC guidance reflected almost verbatim what was in FAS 157. In fact, Emily Chasan of Reuters reported yesterday, “FASB consulted with US SEC on mark-to-market letter.”

The IMF report continued: “External auditors are likely to adopt a cautious approach to minimize the risks of material post-balance-sheet-date writedowns that would leave the auditor open to charges of negligence,” observes IMF. “Hence, the level of additional writedowns in the audited financial statements will likely reflect the convergence of the entity’s valuation assumptions with those adopted by the auditors.” However, IMF cautions, “The adoption of the auditors’ approach raises the risk of a negative bias in the valuations.”

Further, IMF notes: “The prospects of forced sales triggered by fair value below some threshold will need to be examined thoroughly. Ways of guiding firms to review the elements underlying the valuation without being forced to sell would be helpful. The extent to which such fair value “triggers” are either encouraged or mandated in regulation and supervisory guidance would need to be re-evaluated.”

The IMF also supports further consideration of off-balance sheet accounting and disclosure issues. Under the caption “Incentives to Set Up SIVs [Structured Investment Vehicles] and Conduits,” the IMF states: “In principle, Basel II provides less incentive than Basel I to transfer risks to such entities for the purpose of lowering regulatory capital charges. Nonetheless, a strict implementation of Basel II by national supervisors, possibly armed with stronger guidance regarding conditions for risk transfer and appropriate capital relief, will be needed. Accounting standards setters, in cooperation with supervisors, should revisit consolidation rules to address incentives that may encourage a lack of transparency regarding off-balance-sheet activities and risks.”

Institute of International Finance (IIF) Issues Report
Separately, the Institute of International Finance (IIF), a global association of banks, issued a Policy Letter on April 3 in advance of the release of the Interim Report of IIF’s Committee on Market Best Practices (CMBP) issued on April 9. The IIF’s Policy Letter calls for “multiple and coordinated policy responses” and recommends reforms to various industry practices, including: risk management, credit underwriting, liquidity risk management and conduits, valuation (see below), ratings, incentives and compensation.

Regarding ‘valuation,’ the IIF calls for : “strengthening internal governance and framework around valuation processes, and considering means of enhancing the effectiveness of fair value accounting in circumstances where market liquidity has dried up.”

Additionally, the IIF states: “Over the past decade, fair-value / mark-to-market accounting has proven highly valuable in promoting transparency and market discipline and continues generally to be an effective and reliable accounting method for securities in liquid markets." IIF emphasizes: "However, in circumstances where there is no or severely limited liquidity in secondary markets, current valuation methods for certain structured products have the potential to mislead investors and contribute to unintended procyclical consequences which could prolong credit market problems. To help mitigate such risk, there is an urgent need in the present circumstances for refined methodologies or alternative techniques to be considered, obviously in close consultation with accounting standard setters and other public sector bodies in order to preserve the positive features of fair-value accounting while minimizing its unintended negative effects.”

The IIF adds, “Moreover, the official community, including the IMFC, should lend its support to the establishment of a high-level commission to examine broader issues relating to the implementation of fair value accounting in today’s financial markets––while respecting the independent role of the accounting standard setters.”

Further details from the IMF and IIF reports can be found in this summary.

Long standing debate
Going back to the IMF report, one point I found particularly of interest - the IMF stated: “Accounting standard setters will increasingly need to take into account the financial stability implications in their accounting practices and guidance.”

I noted in a number of recent posts that the debate over whether accounting can or should reflect – or impact – economic activity is an ‘age-old’ debate. It reminds me of some quotes from leaders in the profession which I included in a paper I wrote for my favorite professor, Dr. David Solomons, in 1982.

Dale Gerboth wrote in 1973: “The public accounting profession has acquired a unique quasi-legislative power that, in important respects, is self-conferred. Furthermore, its accounting ‘legislation’ affects the economic well-being of thousands of business enterprises and millions of individuals, few of whom had anything to do with giving the profession its power or have a significant say in its use. By any standard, that is a remarkable accomplishment.” [Gerboth, Dale L., "Research, Intuition, and Politics in Accounting Inquiry" The Accounting Review, Vol. 48, No. 3 (July 1973), pp. 475-482, published by the American Accounting Association (cite is on pg 481).]

And, Stephen Zeff wrote in 1978: “The [FASB] board is thus faced with a dilemma which requires a delicate balancing of accounting and nonaccounting variables. Although its decisions should rest – and be seen to rest – chiefly on accounting considerations, it must also study – and be seen to study – the possible adverse economic and social consequences of its proposed actions.” [Zeff, Stephen A., "The Rise of Economic Consequences," Journal of Accountancy, December 1978, pp. 56-63, published by the American Institute of CPAs (cite is on pg. 63).]

It is positive that healthy debate continues on these matters.

Thursday, April 10, 2008

SEC 'Complexity Committee' To Meet May 2 To Consider Comment Letters, Next Steps

The SEC announced that its Advisory Committee on Improving Financial Reporting (CiFIR), chaired by Robert Pozen, will meet on May 2nd in Chicago to consider comment letters and oral testimony received on the recommendations contained in its Feb. 14 progress report.

Three of FEI’s committees filed comment letters on the CiFIR progress report:
FEI’s Committee on Corporate Reporting (CCR)
FEI’s Committee on Small and Mid-Sized Public Companies, and FEI’s Committee on Finance and Information Technology (both letters attached)

Wednesday, April 9, 2008

Treasury Releases Restatements Study

Earlier today, the U.S. Treasury Department released its study of restatements: “The Changing Nature and Consequences of Public Company Financial Restatements .“ Authored by Prof. Susan Scholz of the University of Kansas, the study was commissioned as part of Treasury’s Capital Markets competitiveness initiative.

Highlights noted in a related press release issued by Treasury:

  • Financial restatements grew nearly eighteen-fold from 90 in 1997 to 1,577 in 2006 with acceleration in restatement activity occurring in 2001 before the implementation of the Sarbanes-Oxley Act
  • Restatements associated with fraud and revenue declined after 2001. Fraud was a factor in 29 percent of all 1997 restatements, but only 2 percent of 2006 restatements. The proportion of revenue-related restatements also decreased from 41percent in 1997 to 11 percent in 2006
  • Market reactions to the restatements dampened over the decade study period, while the number of restatements grew. Market reaction to financial restatements tended to be more negative when the restatement involved fraud or revenue errors.
  • Restating companies are typically unprofitable even before the restatement. In the year prior to announcing a restatement, more than half of restating companies reported a net loss.
U.S. Treasury Secretary Henry M. Paulson said, “The information in this study should complement the work underway at the Securities and Exchange Commission and the Financial Accounting Standards Board to improve financial reporting for investors.”

Treasury’s press release adds: “Treasury did not ask the study’s author to develop policy recommendations. The study was intended to inform federal regulators and advisory committees, such as the SEC’s Advisory Committee on Improvements to Financial Reporting.

The goal was to take a clear look at figures often used when discussing U.S. companies’ competitiveness and investor confidence in financial reporting.”

We plan to provide further highlights and commentary on the Treasury study later this week.

Treasury Briefing Today on Restatements Study

The U.S. Treasury Department announced yesterday that it will hold a briefing for the press at 11:30 a.m. EDT today (April 9) on the restatements study it commissioned as part of its capital markets initiative.

As announced last fall, the study is being conducted by Prof. Susan Scholz of the University of Kansas. As noted in that announcement:

"Numerous studies have pointed to a significant increase in the number of financial restatements during the past few years. Many reports attribute the growing number of restatements to increased management and auditor focus on accurate financial reporting due to the mandates in the Sarbanes-Oxley Act and greater financial reporting review and enforcement by financial regulators.

"However some studies suggest that while some financial restatements are clearly material, immaterial financial restatements might pose significant and unwarranted challenges to the capital markets. Immaterial restatements might unnecessarily harm investor confidence by calling into question the credibility of company management, auditors, and the financial reporting system as a whole.

"Professor Scholz will examine the factors triggering public company financial restatements, describe public company financial restatements, analyze the impact of public company financial restatements upon investors and the capital markets, and evaluate the significance of public company financial restatements. The study will focus on restatements from 1997-2006. Treasury intends to make the study's results public by early 2008."

Treasury did not specify in yesterday's announcement if the study will actually be released today, presumably it is close to being released. Actually, a close reading of last fall's announcement (highlighted above) indicates just that the "study's results" will be made public, not necessarily that the full study will be released to the public, so we will see.

Of note in yesterday's announcement was the title of the Treasury study was given as: "The Changing Nature and Consequences of Public Company Financial Restatements."

Although this is a new study, the title if nothing else has parallels to some prior studies Prof. Scholz has published, some of which were coauthored with then-USC professor (and now, SEC Deputy Chief Accountant) Zoe Vonna Palmrose. One such study cited in the working bibliography of Treasury's Advisory Committee on the Auditing Profession (ACAP) is entitled: "The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence From Restatements," by Palmrose and Scholz, published in 2004.

Not only is Treasury ACAP (and Treasury in general) interested in the study's results; the SEC Advisory Committee on Improving Financial Reporting (CiFIR) is also following this issue, and a number of the recommendations in its progress report (released by the SEC for public comment, on which comments were due March 31) are aimed directly and indirectly at reducing unnecessary restatements and providing more transparency around restatements.

We will provide an update on Treasury's restatements study in a blog post later today or tomorrow, including a link to the study if it is released.

Tuesday, April 8, 2008

CESR finds US GAAP Equivalent to IFRS; EU's McCreevy, ECOFIN Talk Fair Value; SEC Updates 8-K Interps

On March 31, the Committee of European Securities Regulators (CESR) issued its final advice to the European Commission on the equivalence of U.S., Japanese, and Chinese GAAP to IFRS. CESR found U.S. GAAP to be equivalent to IFRS, and Japanese GAAP to also be equivalent to IFRS, (subject to the progress of convergence laid out in the “Tokyo Agreement”). CESR deferred its decision on equivalence of Chinese GAAP until a later date, since 2007 is the first year of reporting under the new Chinese GAAP.

CESR Advice More Principles Based Than 2005 Proposal
Based on our reading of CESR's advice issued last week, they appear to have given up the previously proposed requirement contained in their 2005 advice that equivalence of U.S. GAAP be contingent on companies providing 'remedies' in the form of 'rectifying disclosures' to explain significant differences between U.S. GAAP and IFRS. (FEI noted concern with the 2005 proposal’s ‘remedies’ in a joint comment letter filed by FEI’s Committee on Corporate Reporting (CCR) and Globalization Oversight Committee (GOC).

CESR appears to have taken a more principles based - or in their words, 'holistic' - approach to determining equivalence of these 3rd country GAAPs to IFRS, vs. their approach in 2005. CESR notes their approach follows on that laid out in the EU's Dec. 07 determination of the 'equivalence mechanism", which is focused on the general state of convergence efforts and the continued progress on formally laid out convergence efforts like FASB-IASB's MOU which was updated in 2006, rather than being focused so heavily on a standard-by-standard comparison. However, for informational purposes, CESR attaches as an appendix to its advice issued March 31 an updated version of its standard by standard comparison for major differences between U.S. GAAP and IFRS, as it was requested to provide that info by the EU.

The next step is for the European Commission to consider CESR's advice and make a formal determination by mid-2008 on the equivalence of U.S. and the other GAAPs to IFRS.

For other IFRS news see our post yesterday, including a link info about FEI’s upcoming conference on June 5 in NYC: “The World Is Moving To IFRS: Are You?”
McCreevy, ECOFIN on Fair Value and Current Market Turmoil

In other international developments, in an article entitled, "European Finance Ministers Seek Fair Value Accounting Review," Joe Kirwin reports in today’s BNA Daily Report for Executives that fair value accounting as may relate to volatility in credit markets was a subject of discussion at informal meetings of ECOFIN (the Economic and Financial Affairs Council of the European Union) earlier this month.

Additionally, BNA’s Kirwin notes that EU Internal Markets Commissioner Charlie McGreevy (himself a chartered accountant) testified before a committee of the European Parliament on April 1 that fair value accounting issues and other accounting issues (consolidation accounting and risk disclosure) needed to be addressed regarding the recent market turmoil. McCreevy testified, ”There is a growing debate on whether fair value and mark to market measurements may have aggravated the crisis by bringing pro-cyclicality in financial statements. I want to make it clear that I believe that there are some real accounting issues and anomalies to examine, including the interface with the Capital Requirements Directive, such as the consolidation of special purpose entities or the measurement and information disclosed on risk exposures.” He added, “Clearly, these and other issues –such as the impact of mark to market valuation when markets generally become illiquid and irrational- must be thoroughly analysed.”

More About Fair Value Accounting and Subprime
As we noted yesterday, NYT’s Floyd Norris recently criticized those who are blaming accounting standards as being among the ‘scapegoat’ for the current market turmoil.

Perhaps in part to combat the scapegoating which Norris refered to, the CFA Institute is presenting a panel discussion on Thurs. April 10 in NYC, their press release is entitled, “Journalists Invited to Hear Investor Perspective on Fair Value (“Mark To Market”) at CFA Institute Centre for Financial Market Integrity Roundtable.” FASB’s Russell Golden is among the panelists.

Additionally, the Director’s Roundtable is holding a Conference on April 11, 2008 in NYC entitled, “A National Conference on Historic Challenges Arising From Fair Value and Other New Accounting.” Panelists include FASB Chairman Robert Herz, attorney Michael Young of Willkie Farr (who we noted previously wrote this article on “Fair Value Accounting and Subprime,” and others.

As we noted in our March 24 post on “Today’s Market and Accounting, Legal Issues,” a plethora of articles have been written on the subject of fair value accounting and subprime, and we provided a link to a summary of 14 articles, 7 on each side of the fence on the issue of accounting aiding transparency vs. accounting needing to be revised.

I also noted one piece of analysis missing from most of the articles written as of March 24, was to consider the possible role of guidance on valuation in illiquid markets issued in fall 2007 by the Center for Audit Quality (CAQ – affiliated with the AICPA), and the extent to which that guidance may have driven a more conservative approach than FAS 157 itself (and potentially more conservative than the SEC’s subsequent guidance issued in late March contained in SEC’s “Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements).”

A number of people (including NYT’s Floyd Norris and Credit Suisse’ David Zion) have written recently about whether the SEC’s guidance interpreted FAS 157 or not, Zion states the consensus seems to be it did not, and that the SEC's guidance was consistent with FAS 157. But the question remains – in considering issues of how fair value accounting has been implemented during the recent market turmoil - on bringing together not only FAS 157 and the SEC’s recent guidance (sample letter) but also the guidance issued by CAQ - and in the international arena, guidance issued by a coalition of international audit firms last fall. Some may sense a déjà vu factor in considering the CAQ guidance issued by the audit community on applying FAS 157 in illiquid markets, and another set of guidance issued by the auditing profession in the form of a control framework issued by nine audit firms collectively in interpreting PCAOB’s Auditing Standard No. 2 (AS2). The PCAOB noted in its ‘4010’ report on initial implementation of AS2 (see “Use of Judgment,” pg 17) that the internal control framework issued by the nine audit firms “may have driven auditors' decision-making process unduly toward simplistic quantitative thresholds and away from the qualitative evaluation that may have been necessary in the circumstances.” [On this point, it is also interesting to note EU Internal Market Commissioner McCreevy's remarks cited above about the need to consider "the impact of mark to market valuation when markets generally become illiquid and irrational." ]

More generally, the process by which interpretive guidance is issued is among the subjects that SEC’s complexity committee (CiFIR) has been looking at.

The other observation I noted on March 24 is there has been an age-old debate over whether accounting could, or should, reflect economics, and whether accounting could, or should influence economics or be neutral. Members of CIFiR have noted accounting standards do not necessarily reflect the economics of a transaction; even if accounting reflects the economics at inception of a transaction, there can be a divergence between accounting and economics over the life of an asset (liability).

Proponents of fair value accounting are trying to close the gap between accounting and economics, and sometimes, as noted in IASB's recent discussion paper on Reducing Complexity in Reporting Financial Instruments and FASB's related Invitation to Comment, promote fair value as a simplification method. Where the rubber meets the road is in fair valuing nonfinancial assets (liabilities) and thinly traded or nontraded financial assets (liabilties), and in considering issues of reliability and auditability for resulting fair values, as well as relevance. The PCAOB SAG has discussed this issue as well.

SEC Updated 8-K Interps
In other SEC news, props to Broc Romanek of blog who noted on April 4 “Corp Fin Revises Its New Form 8-K Interps” and provided followup info yesterday. See the updated SEC FAQ’s on Form 8-K posted by SEC on April 3.

The interps not only update, but also bring together a large volume of prior interpretive material found in various sources, as stated by the SEC: “These interpretations replace the Form 8-K interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations, the June 13, 2003 Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures and the November 22, 2004 Form 8-K Frequently Asked Questions. Some of the interpretations included here were originally published in the sources noted above, and have been revised in some cases. The bracketed date following each interpretation is the latest date of publication or revision.” Separately, Jenny Anderson reports on the SEC in today's New York Times,” A Fear That the Market’s Watchdog is Losing Its Bite.”