Thursday, December 31, 2009

Subsequent Events Proposal Issued By FASB; Final ASUs Incorporating FAS 166, 167 Into Codification

A few days prior to year-end, FASB released a Proposed Accounting Standards Update—Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. (See the Proposed ASU-Subsequent Events). The main provisions are as follows:

  • An entity that files or furnishes financial statements with the SEC would be required to evaluate subsequent events through the date that the financial statements are issued.
  • If an entity does not file or furnish financial statements with the SEC, it would evaluate subsequent events through the date the financial statements are available to be issued unless the entity has a current expectation of widely distributing its financial statements to its shareholders and other financial statements users, in which case it would evaluate subsequent events through the date that the financial statements are issued.
  • An entity that files or furnishes fiancial statements with the SEC would not be required to disclose the date through wich subsequent events have been evaluated. This change would alleviate potential conflicts between Subtopic 855-10 and the SEC's requiremens.
  • The glossary of Topic 855 would be amended to remove the definition of a public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated. Based on the proposed amendments, that definition would no longer be necessary for purposes of Topic 855.

Issue Raised Following Issuance of FAS 165, Subsequent Events
As noted in the Background Information and Basis for Conclusions section in the proposed ASU, an issue regarding application of FAS 165, Subsequent Events, arose after that statement was issued on May 28, 2009. As described in para. BC2 and BC3 of the proposed ASU (reformatted into bullets):

  • After the issuance of its guidance on subsequent events in Topic 855 (originally issued as FASB Statement No. 165, Subsequent Events), the Board was informed that the SEC has specific requirements related to the identification and disclosure of subsequent events that potnetially conflucted with certain aspects of the guidance.
  • Furthermore, SEC requirements are clear on registrants' responsiblities for evaluating subsequent events.
  • This proposed Update would amend U.S. GAAP to no longer require disclosure of either the original issuance date when an entity files or furnishes financial statements with the SEC.
  • However, the board decided to clarify that this proposed Update would have no effect on disclosure of the original issuance date for an entity that does not file or furnish financial statements with the SEC.
  • When the Board issued its subequent events guidance, it was primarily concerned that the disclosure of the date for the evaluation of subsequent events be updated when an entity resated its financial statements, that is, revised for either correction of an error or retrospective application of U.S. GAAP.
  • Therefore, the Board decided to clarify which reissuances would be subject to those disclosures by replacing the term reissuance with restated. Restated financial statements include financial statements revised as a result of correction of an error or retrospective application of U.S. GAAP.

The comment deadline on the Proposed ASU on Subsequent Events is Jan. 28, 2010.

Final ASUs Issued Incorporating FAS 166, 167 Into Codification
Separately, on December 23, FASB posted two final ASUs, which communicate that FASB has formally place FAS 166 and FAS 167 into the FASB codification:

· ASU No. 2009-17—Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
· ASU No. 2009-16—Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets

Read about some earlier FASB-IASB-SEC-PCAOB releases here, and see info about an upcoming deadline to apply for the SEC Professional Accounting Fellow (PAF) program here.

Happy New Year to all of our readers, your families, colleagues and friends!

Tuesday, December 29, 2009

SEC Seeks PAFs: Jan. 13 Deadline


In case you did not notice the Notice earlier this year in the SEC News Digest, the SEC's Office of the Chief Accountant is now accepting applications for Professional Accounting Fellow (PAF) positions, with an application deadline of Jan. 13, 2010. PAF's generally serve for two years (although some have extended their term, and some have joined permanent staff at the Commission at the conclusion of their PAF-hood.)

As described in the notice included in the Oct. 8, 2009 SEC News Digest:
The PAF program, which began in 1972, is designed to provide participating fellows with outstanding opportunities for public service to investors, personal development, and career advancement. During their fellowship, the successful candidates will be involved in the study and development of rule proposals under the federal securities laws, liaison with accounting, auditing and other professional standard-setting bodies, and consultation with registrants on reporting matters. The Office of the Chief Accountant plans to select up to seven candidates for the following positions:

...up to three candidates with significant experience in the application of U.S. GAAP and/or International Financial Reporting Standards (areas of specialty may include, but are not limited to, accounting topics such as revenue recognition, compensation, business combinations, and financial instruments);

... one candidate with significant experience in performing and reviewing valuations for financial reporting purposes (areas of specialty may include, but are not limited to, business enterprise valuations, financial instruments and other complex securities, along with intangible assets); candidate with significant experience with International Financial Reporting Standards and/or International Standards on Auditing; and

...up to two candidates with significant experience in internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act and analyzing and implementing auditing, independence, and/or quality control standards.

Application Requires Essay
The PAF application requires, in addition to completion of specified application forms, "an eight-to-twelve page essay ...on a subject directly related to a current accounting or auditing topic," and the application deadline is Jan. 13, 2010.

Further details about the current PAF program, the required essay, and application process can be found in the notice in the Oct. 8, 2009 SEC News Digest.

Conditions of Appointment
For background only - NOT to be relied upon, here is some background information on "Conditions of Appointment" regarding the PAF program that was posted on the SEC website about the PAF program in Nov. 2002. The information about "Conditions of Appointment" is not addressed in the Oct. 8, 2009 News Digest notice, and you may find it of interest; however, I emphasize, do not rely on info from the Nov. 2002 posting, contact the SEC (contact info is provided in Oct. 8, 2009 News Digest linked above) if you have any questions.

My Two Cents
Full disclosure: As disclosed in my bio linked in the right margin of this blog, (and I remind you of the disclaimer posted there as well), I have worked in the SEC's Office of the Chief Accountant (Dec. 1999-Jan. 2004) and I highly, highly recommend working there, as permanent staff (i.e. regular hire program), or as a PAF (2 year program).

For those of you who are not certain you want to leave the private sector to join the federal government but wish to experience working for the SEC for a specified period of time, the PAF program may be right for you. This is particulary the case if you believe you can bring something of value to the SEC through your experience in the field (note: external auditors and internal finance staff can apply for the PAF program) and likewise, if you believe working at the SEC will help inform your career (and career path) when you return to the private sector.

Perhaps the greatest value in working for the SEC - in addition to learning the nuts and bolts of how the SEC conducts its work from the inside - which can be helpful in learning how to avoid being called into the Commission other than for a friendly roundtable, and in learning how to be most responsive to the Commission when you are back on the outside - may be in how the experience impacts the attitudes of people who go back out into private practice. That is, there is an intangible value to working for the SEC that quite possibly exceeds any tangible value you can ascribe to it.

I encourage others who have worked at the Commission (or anyone who has had an employee serve in the PAF program) to post comments on their experience; you can do so anonymously, or you can provide your name.

UPDATE: An alternate view regarding pros and cons of the PAF program, is that some may view aspects of it as being symbolic of a perceived 'revolving door' syndrome at the SEC. In related news, H.R. 4173, the financial regulatory reform legislation passed earlier this month in the House (which still awaits Senate action, and then conference) includes Section 7414, "Study on SEC Revolving Door." Specifically, Sec. 7414 would require the GAO to conduct a study with respect to SEC employees working for financial institutions after they leave the SEC, including, among other things: "if the volume of employees of the Securities and Exchange Commission who are later employed by financial institutions has led to inefficiencies in enforcement;... if employees of the Securities and Exchange Commission who are later employed by financial institutions have engaged in information sharing or assisted such institutions in circumventing Federal rules and regulations while employed by such Commission...[and] other additional issues as may be raised during the course of the study conducted under this subsection." GAO must submit a report to Congress on this study, within one year of enactment of the law. As noted above, the financial regulatory reform bill is still pending in the Senate. Additional info on H.R. 4173 (particularly on aspects relating to accounting and auditing) can be found in our Dec. 12 post.

Wednesday, December 23, 2009

Holiday Reading ...

FEI staff at our annual holiday party 12.18.09

This holiday season, there's no lack of interesting material to read (and listen to) before and after opening your presents, courtesy of the FASB, SEC, IASB and PCAOB!

Yesterday, the SEC released transition guidance on its new proxy disclosure rules on risk, compensation and governance. As noted by Broc Romanek last week in blog, the "Big Question" about the new rules approved by the SEC last week was "when do they take effect." The transition guidance issued today, in the form of a Corp Fin Compliance and Disclosure Interpretation entitled Proxy Disclosure Enhancements Transition, presumably is aimed at addressing that question.

Also yesterday, the SEC posted for public comment proposed amendments to Rule 163. As noted in SEC's press release, the proposal would further facilitate the ability of certain large companies (those meeting the SEC's definition of Well Known Seasoned Issuer or WKSI) to communicate with broader groups of potential investors and gauge the level of interest in the market for their securities offerings, by allowing them to authorize an underwriter or dealer to communicate with potential investors on their behalf about potential securities offerings prior to filing registration statements for such offerings.

Under current rules, as noted in the press release, WKSIs are permitted to communicate directly with potential investors before filing a registration statement, but cannot authorize an underwriter or dealer to communicate with potential investors on their behalf. As also noted in the press release: "A WKSI is an issuer that is current and timely in its Exchange Act reports for at least one year and has either $700 million of publicly-held shares or has issued $1 billion of non-convertible securities, other than common equity, in registered offerings for cash in the preceding three years." The comment deadline on the proposal is 30 days after publication in the Federal Register.

Further, as reported last week, the SEC announced that it has reopened the comment period on its proposal on Facilitating Shareholder Director Nominations; the 30-day comment period ends Jan. 19, 2010.

For those of you interested in FASB updates, a new version of FASB's Update was issued last week called FASB Update - Financial Statement User Edition. In addition, four proposed Accounting Standards Updates were released for comment by FASB last week, emanating from EITF consensuses, and each carries a comment deadline of Feb. 12, 2010: (1) Proposed ASU: Receivables (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset; (2) Proposed ASU: Financial Services - Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts; (3) Proposed ASU: Entertainment - Casinos (Topic 924): Casino Base Jackpot Liabilities; (4) Proposed ASU: Compensation - Stock Compensation (Topic 718): Effect of Denominating the Excercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.

In other news yesterday, the PCAOB posted on its website a Summary Report of its Office of Internal Oversight and Performance Inspections (IOPA) on: International Inspections. (See IOPA summary report.) And as we reported last week, the PCAOB released for comment reproposed risk assessment standards, with a comment deadline of March 2. Separately, the PCAOB announced yesterday that it is launching an Academic Fellowship Program (presumably, analogous to SEC's Academic Fellow program).

On the IASB front, the December, 2009 IASB Update was posted yesterday. Separately, in what may be a first for a standard-setter/regulator that I can recall, IASB Chairman Sir David Tweedie posted a holiday message entitled A Message of Thanks, which reviews major accomplishments of the past year, and closes: "2009 has been a challenging year, but one that has also resulted in improvements to financial reporting and continued progress along the path towards global standards. I wish you all an enjoyable break and thank you for your continued support and cooperation."

And of course, there's no shortage of blogs to read. Check out some that we frequent ourselves, in the blogroll on the right side of this blog. Among the many excellent blogs out there, we often turn to and Securities Mosaic Blogwatch for up to the minute securities news. And among other go-to blogs, we'd like to thank Francine McKenna of Re: The Auditors and Prof. David Albrecht of The Summa for citing the FEI blog among others in Albrecht's recent post, featured also by McKenna, A Vote for Blogs, and note our appreciation to forensic fraud investigator Tracey Coenen, author of, for recent nice words about the FEI blog. You can also get insights from a wide variety of accounting blogs at AccountingWeb Blogger's Crew. A new entrant to the blogging scene is the BNA Accounting Blog.

And Twitter! - don't get me started about Twitter - there are so many great folks out there who have provided great leads and great wisdom in 140-characters or less; you can follow the FEI blog on twitter at For the unintiated (and the initiated get a kick out of it too), Jon Stewart did a great bit on Twitter last March, it's since been taken off YouTube and even Comedy Central's website, if anyone has a link to it, please post in a comment.

Lights, Camera, Action!
Joining the ranks of regulators and standard-setters offering archived podcasts of board meetings and roundtables (with the PCAOB's podcasts for the past few years being on the leading edge of that movement), the IASB announced this week that it will offer Podcast Summaries of IASB Board Meetings. The podcast summaries will be prepared by IASB staff, and are designed to be short summaries, lasting approximately 30 minutes. The IASB's podcasts will be available on and, on a delayed basis, on iTunes. (Maybe one day we'll see an iPhone app with all things IASB; remember, you read it here first!)

If you are really ready to tune into something on the cusp of Web 3.0, check out the FASB Research Initiative (FASRI) Roundtables in the virtual world of Second Life. Even if you don't know an Avatar from an elevator, you can watch the live or archived roundtables - which are conducted in Second Life - via webcast. Visit the FASRI Roundtable Calendar for upcoming events, such as the Jan. 12 roundtable featuring IASB Board Member Jim Leisenring. Past events are also listed, with many featuring FASB and IASB board and staff members, leading academics, and featured guest speakers, including Microsoft's Bob Laux, who spoke on "The Preparer's Perspective" in July. Once you find the date of the program you'd like to watch, go to the FASRI viewer, click on the "On Demand" button that will appear at the bottom of the viewer (after the HBO-signature-like static disappears) and click on the date of the program you wish to watch (if it is an archived program). FASRI also has a blog and other information, check it out at FASRI’s Director is Prof. Robert Bloomfield, Professor of Accounting at Cornell University. Round Table Discussions are run jointly by Prof. Bloomfield and the FASB Research Fellow, Jeffrey Hales.

And, if you'd like to see what CPA's are doing in Second Life, check out There, you can learn about programs held on CPA Island, a portal in Second Life developed by the cutting edge folks at the Maryland Association of CPAs (MACPA).

Getting back to holiday programming... if you've read this blog for a few years, you'll know we're a fan of The Singing CPA By day, he's mild-mannered CPA Steven Zelin, featured on the front page of the WSJ last year, and in this video. Zelin's album, "No Accounting for the Holidays," makes a great stocking stuffer (and party entertainment!). He has been gracious enough to provide the FEI blog with some exclusive clips to share with you, including, The Most Deductible Time of the Year, Joy To The World, The Client's Paid, Hava Tequila, and Go Home Ye Weary CPAs. Info about ordering Zelin's music (or arranging personal appearances) can be found on his website, And yes, there is also a group called The Singing Lawyers (John and Debbie Orenstein - no relation to me or my library director husband) - although watch this space, you may see a song or two from me in the new year.

Happy Holidays!
Although we're not done reporting on year-end news, we thought we'd take this opportunity to wish all our blog readers a Happy Holiday Season! Pictured here is a photo from FEI's annual holiday party which took place last week at the Headquarters Plaza Hotel in Morristown, NJ. Our NJ HQ office staff always enjoy being joined by staff from our Washington, D.C. Government Affairs office for the annual gift (re-gift) exchange, and this year was no exception, with the most wanted items including the ever-popular White House Christmas Ornament, the regifted 1989 Happy Holidays Barbie, and Susan Boyle's Debut CD (from the Britain's Got Talent/YouTube sensation). We received a holiday present from FEI, along with candy provided by this year's FEI Chairman, Jerry Urich, Director, External Reporting and Compliance, The Hershey Company.

In keeping with the spirit of the holiday season, FEI staff also brought to the party personal donations of clothing, food and other items, amounting to three large boxes of goods, donated immediately after the party to The Market Street Mission.

Public service announcement (I remind you of the disclaimer on the right side of this blog): As we head into year-end, and the attendant holiday parties (and busy season), remember: friends don't let friends drive drunk. And, friends don't let friends drive drowsy, so put down the Codification, or your IFRS-to-GAAP translator, or Code of Federal Reg's, and have a Happy Holiday Season!

Monday, December 21, 2009

2010 Top Challenges For Financial Executives

Each year Financial Executive magazine publishes the FEI President and CEO’s insights on the top challenges that financial executives will face in the upcoming year.

This year's list, by FEI President and CEO Marie N. Hollein, will be published in the Financial Reporting column of the January-February 2010 issue of the magazine; you can get a head start on the New Year by reading: FEI CEO: 2010 Top Challenges For Financial Executives. In brief, the FEI President and CEO's 2010 list includes:
  • Economic Recovery and the U.S. Fiscal Outlook
  • Health-Care Reform
  • Employee Benefits
  • Financial Regulatory Reform
  • Global Convergence of U.S. GAAP and IFRS
  • Financial Instruments
  • Financial Statement Presentation
  • Revenue Recognition
  • Business Taxation

Friday, December 18, 2009

FEI Applauds Formation Of Blue Ribbon Panel On Private Co. Accounting Standards

On Dec. 18, 2009 Financial Executives International issued a statement applauding the formation of the Blue Ribbon Panel on private company accounting standards. The panel was announced jointly by the AICPA, the Financial Accounting Foundation, and the National Association of State Boards of Accountancy on December 17. Read the FEI Statement issued today; see yesterday's blog post for additional background.

Thursday, December 17, 2009

Blue Ribbon Panel On Private Company Accounting Standards Formed

Earlier today, the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy (NASBA) announced the joint sponsorship of a Blue Ribbon Panel on private company accounting standards. According to a joint press release issued by the three organizations, the Blue Ribbon Panel will:

Provide recommendations on the future of standard setting for private companies, including whether separate, standalone accounting standards for private companies are needed. Members of the panel will represent a cross-section of financial reporting constituencies, including lenders, investors and owners as well as preparers, auditors, and regulators.
The chairman and members of the panel will be named in January. Read the joint press release for further details.

FASB Advisory Committees Discuss Issue
We reported on December 4 in FASB Advisory Committee Calls for FAF To Consider Private Company GAAP that the FASB-AICPA Private Company Financial Reporting Committee (PCFRC) had formally called on the FAF (through a letter sent to the FAF in November) to take the lead in considering what the future of financial reporting should be for private companies, suggesting five general models to consider, ranging from creating a new set of standalone private company U.S. GAAP - similar to the recent decision in Canada - or to make a policy decision as to U.S. private companies following IFRS or IFRS for Small and Medium Sized Entities. (The AICPA recognizes the IASB as a standard-setter for purposes of audited financial reports, and private companies that are not issuers (i.e. not subject to SEC regulation) are not dependent on any decision by the SEC with respect to SEC's IFRS Roadmap for public companies. Some private companies in the U.S. are beginning to consider the potential pros and cons of switching to IFRS for SMEs, issued by the IASB earlier this year as a simplified, (250-page), self contained set of IFRS, vs. full IFRS.

Noted in our Dec. 4 post were PCFRC's recommendations, as well as a separate recommendation made by FASB Small Business Advisory Committee (SBAC) member Andy Thrower. Additional information is provided in a subsequent comment that Thrower posted on our blog (scroll down to view the comment).

FEI's Committee on Private Companies-Standards
FEI's Committee on Private Companies - Standards (CPC-S), chaired by William Koch, VP and CFO, Development Dimensions International, monitors developments relating to private company financial reporting, and responds to proposals issued by the Financial Accounting Standards Board and International Accounting Standards Board on behalf of FEI members from private companies. If you are an FEI member interested in joining CPC-S (or if you are not currently an FEI member but meet FEI's eligibility criteria and would be interested in joining FEI and CPC-S), please contact

Your Response Needed For Annual Technology Issues Survey

FEI’s Committee on Finance and Information Technology (CFIT) and FEI's research affiliate, the Financial Executives Research Foundation (FERF) are conducting the Twelfth Annual Survey of Technology Issues for Financial Executives. Survey results are analyzed by Gartner.

You are invited to complete the survey, which is estimated to take less than 20 minutes of your time (the number of survey questions has been reduced 25% from last year). Responses will be held in strictest confidence, and will only be used in the preparation of the FERF Executive Report. Survey participants receive a complimentary copy of the Report when published in March 2010, as well as a special Gartner Research Notes on a related finance function topic.

Take the Technology Issues survey here. (If you would like to print the survey questions before starting the survey, click here.)

FEI members: If you have already responded, please ignore this request; your participation and ongoing support are always appreciated. Non-members of FEI may respond to the survey.

If you have any questions about the survey, or have any suggestions on how to improve it, please contact Bill Sinnett, FERF Director of Research via phone, 973.765.1004.

PCAOB Reproposes Risk Assessment Standards; 75-Day Comment Period

Earlier today, the Public Company Accounting Oversight Board voted to repropose a suite of seven auditing standards relating to risk assessment and the auditor's response to risk, including risk of fraud. The reproposal includes changes made in response to comments received on the original proposal and other refinements. There will be a 75-day comment period, ending March 2, 2010.

[UPDATE: According to the PCAOB's press release: "the proposing release, text of the reproposed auditing standards, and related amendments to PCAOB standards will be available on the Web site under Rulemaking Docket No. 026. An archive of the Webcast and a podcast of the Open Board Meeting also will be available later today on the Web site at ( Summarized below are some highlights of the reproposed rulemaking, based on my listening to the webcast of the open meeting. Reference should be made to the actual rule proposals, when they are posted on the PCAOB's website at the links noted above.]

Changes from Current Practice Outlined In Appendix 9
Associate Chief Auditor Keith Wilson explained that similar to the original proposal, an appendix will be included (Appendix 10) which compares the proposed standard to related International Standards on Auditing (ISAs), issued by the International Auditing and Assurance Standards Board (IAASB) and to related standards issued by the Auditing Standards Board (ASB) of the AICPA.

In response to a question from Chairman Dan Goelzer, and a related comment by Board Member Charlie Niemeier, Wilson noted that there is a separate appendix in the proposal (Appendix 9) which - although not a word by word comparison to existing standards - explains how the proposal would change current practice.

Business Risk, Fraud Risk
Board member Steve Harris said during the open meeting:

Risk taking is inherent in any business; therefore management should be able to identify, understand, and then mitigate those risks; the importance of understanding business risk … naturally flows over into audit risk… these standards more clearly articulate the auditors' responsibility to consider business risk as a very important element of audit risk."

Harris added: "The standards require the auditor to do the homework necessary to assess risk of error or fraud in the financial statements," and, "while [the auditor's risk assessment] do[es] not prevent poor decision making by management," the auditor's risk assessment is in the interest of investors." Also said Harris, "Another important improvement, is integration of, and emphasis on, the auditors' responsibility to consider the risk of fraud throughout the entire audit process... rather than approaching assessment of fraud risk as a [separate/standalone] exercise."

Materiality Definition Will Use Court Definition, Not FASB Definition
Among wording changes in the reproposal (vs. the original proposal) which Goelzer asked about is a change in how "materiality" is described. The reproposal uses the court's definition [TSC vs. Northway], Goelzer said, which focuses on whether an omitted fact would have a substantial likelihood of impacting the judgment of a reasonable person [investor], whereas the FASB Concepts Statement No. 2 definition of materiality (used in the original proposal) focused on whether it is probable that the magnitude of an item would have impacted the judgement of a reasonable person.

Asked by Goelzer why this change was made, Wilson responded:

"Two things caused us to change our approach: (1) FASB issued its Codification [in July], and did not include Concepts Statements, [which] causes one to conclude the Concepts Statement is not part of the [FASB's financial reporting] framework, and 2) the standard that applies for financial statements of public companies ... the court’s articulation of federal securities law, that is the standard that takes the day. As a practical matter, I think what FASB tried to do, was to have an accountant's description that parallels the court’s articulation of materiality. So, I think to the extent auditors have been thinking about materiality from the concept of a reasonable investor before, then they would have been thinking about both quantitative and qualitative factors."

The court definition, as pointed out by Goelzer, focuses on whether an omitted fact would have a substantial likelihood of impacting the judgment of a reasonable person [investor], whereas the FASB CON 2 definition focused on whether it is probable that the magnitude of an item would have impacted the judgement of a reasonable person.

Board member Steve Harris emphasized in earlier remarks:

these proposed standards give explicit direction to the auditor that the level of materiality should be based on quantitative and qualitative facts that would influence the judgment of the investor.

Chief Auditor Marty Baumann noted:

An important point here is we did not want to change practice, the fundamental definition is the one the court provides, [and that was] the most critical decision in making sure nothing changed."

Goelzer responded to Baumann: " That was the point I was hoping to bring out, we are not the ultimate [definers] of materiality," [vs. deferring/referring to the court's definition].

Another question relating to materiality, said Goelzer, was that the reproposal includes a lit of sixteen qualitative factors in making the judgment of whether something was material. He said: "The factors remaind me a little of SAB 99, but other things are not in SAB 99... like the costs of making the correction... and offsetting [effects of different misstatements].

Wilson responded:

Consistent with what Marty just said, we are retaining something we already have in existing auditing interpretations, not developing a new set of critera, trying to provide information [which appears] in existing standards, [because] based on comments [on the original proposal], it appeared auditors would like some additional factors, [we are] proposing to retain what we have now.
Baumann added:

Those factors were in the interim standards [note: 'interim standards' are the initial standards adopted on an interim basis by the PCAOB when it was first formed, based on existing standards of the AICPA ASB, pending further review by PCAOB]; we decided to carry those forward, [we are] not changing anything with respect to the definition of materiality.

Following the 75-day comment period on the reproposal, Goelzer noted: "I hope that depending on the nature of comments we receive, we will consider discussing with the SAG [PCAOB's Standing Advisory Group]," adding, "the next SAG meeting is next April, shortly after the comment period ends."

Conceptual Framework; Codification
A couple of broader issues were raised by board members at today's meeting, for future consideration. (1) Niemeier recommended the PCAOB focus on a conceptual framework, stating: "I have concerns that to date we haven’t adequately thought through how our standards relate to each other. (2) Goelzer asked about considering whether to Codify the PCAOB's standards, along with existing interim standards (anaologous to FASB's recent Codification). Baumann responded that in terms of priority, the standard-setting efforts were currently being directed at proposing new or amended standards that they believe would significantly improve audit quality, but that staff would consider issues around a potential Codification at a future date after the priority standard setting projects were completed; Goelzer agreed with this prioritization.

Wednesday, December 16, 2009

Proxy Disclosure Of Stock-Based Comp To Change Under SEC Final Rule Approved Today; Other Disclosures Relate To Governance, Risk and Compensation

At an open commission meeting earlier today, the U.S. Securities and Exchange Commission voted 4-1 (Commissioner Kathleen Casey objecting) to approve a Final Rule requiring new disclosures relating to risk, compensation and corporate governance. See the SEC press release: SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance, and SEC's Final Rule: Proxy Disclosure Enhancements. Under the new rule, proxy disclosure of stock-based compensation in the Summary Compensation Table will shift from focusing on the annual amount of stock-based compensation provided in the financial statements, to disclosure of the aggregate grant date fair value of awards when they are granted, as detailed further below.

Effective date:

  • The Final Rule is effective Feb. 28, 2010.
  • With respect to changes in how stock-based compensation is to be reported in the Summary Compensation Table in the proxy statement, those changes are effective for fiscal years ending on or after Dec. 20, 2009. Transition provisions will require comparative information to be recomputed for the past two years.

Major Provisions of Final Rule
The major provisions in the Final Rule approved by the commission today, as outlined in SEC's press release, include:

  • Require Disclosure of a Company's Compensation Policies and Practices as They Relate to the Company's Risk Management:
  • Enhance Information About Directors and Nominees:
  • Disclose How Diversity Is Considered in the Director Nomination Process:
  • Provide Information About Board Leadership Structure and the Board's Role in Risk Oversight
  • Require Quicker Reporting of Voting Results
  • Revise the Summary Compensation Table (for share-based awards, described below)
  • Enhance Disclosure About Compensation Consultants

Change to Proxy Disclosure of Stock-based Comp

The SEC's press release notes that proxy disclosure of stock-based compensation will change as follows:

The amended rule requires companies to report the value of options when they are awarded to executives (the aggregate grant date fair value), instead of the current requirement to report the annual accounting charge.

As described by Corp Fin staff member Sean Harrison during the open commission meeting, the Final Rule will require disclosure of the full grant date fair value (in accordance with FASB Codification Topic 718) He noted this is a change from the current SEC disclosure requirement, which calls for disclosure of the “dollar amount recognized for financial statement reporting purposes.” He added, “The amendment would include an instruction clarifying the amount to be included in the [compensation] tables is the value at grant date based on probable outcome.. not maximum potential value… [However] maximum potential [value] would be .. disclosed in footnotes.”

In response to a question from Chairman Mary L. Schapiro, Corp Fin Director Meredith Cross explained:

Under the current rules, the disclosure of the accounting charge flows through year after year after year, not withstanding whatever it is that the comp committee is doing in a given year. As a result, there is a significant disconnect between the option amount recorded in the Summary Compensation Table, and what the comp committee has been doing in paying the executives. The rule as changed would include a number that is reflective of what the comp committee thought they should pay the executives , which we think is much more consistent with the purposes of our rule.

The Final Rule states:

We are persuaded that the value of performance awards reported in the Summary Compensation Table, Grants of Plan-Based Awards Table and Director Compensation Table should be computed based upon the probable outcome of the performance condition(s) as of the grant date because that value better reflects how compensation committees take performance-contingent vesting conditions into account in granting such awards. We are adopting new Instructions to these tables to clarify that this amount will be consistent with the grant date estimate of compensation cost to be recognized over the service period, excluding the effect of forfeitures. To provide investors additional information about an award’s potential maximum value subject to changes in performance outcome, we will also require in the Summary Compensation Table and Director Compensation Table footnote disclosure of the maximum value assuming the highest level of performance conditions is probable. Such footnote disclosure will permit investors to understand an award’s maximum value without raising the concerns associated with requiring its tabular disclosure....

...To facilitate year-to-year comparisons, consistent with our proposal, we will implement the Summary Compensation Table amendments by requiring companies providing Item 402 disclosure for a fiscal year ending on or after December 20, 2009 to present recomputed disclosure for each preceding fiscal year required to be included in the table, so that the stock awards and option awards columns present the applicable full grant date fair values, and the total compensation column is correspondingly recomputed. The stock awards and option awards columns amounts should be computed based on the individual award grant date fair values reported in the applicable year’s Grants of Plan-Based Awards Table, except that awards with performance conditions should be recomputed to report grant date fair value based on the probable outcome as of the grant date, consistent with FASB ASC Topic 718. In addition, if a person who would be a named executive officer for the most recent fiscal year (2009) also was disclosed as a named executive officer for 2007, but not for 2008, the named executive officer’s compensation for each of those three fiscal years must be reported pursuant to the amendments.82 However, companies are not required to include different named executive officers for any preceding fiscal year based on recomputing total compensation for those years pursuant to the amendments, or to amend prior years’ Item 402 disclosure in previously filed Forms 10-K or other filings.

NOTE: By making the above change, the SEC is in effect reversing what was described by some as a 'midnight' change in regulation, when the SEC issued a press release on Friday, Dec. 22, 2006, calling for proxy disclosure of stock-based comp based on annual, rather than aggregate, amounts.

Board Oversight Of Risk Management
One change made in the Final Rule vs. the proposed rule was noted in a question raised by Commissioner Kathleen Casey during the open commission meeting, and in Corp Fin Director Cross's response, shown below.

[Regarding] Board oversight of risk management, how do we anticipate issuers complying with this requirement; are there any changes you made from the proposal?

The principal change we made was to change to 'risk oversight' instead of risk management,' we meant that [risk oversight], we fixed it, since the board oversees risk, does not manage risk.

COSO Thought Papers on Risk Oversight, ERM
Separately, (not specified in the SEC rule, but on a related topic) the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a four-page thought paper in October on, Effective Enterprise Risk Oversight: The Role of The Board of Directors. Additionally, in November, COSO released a 24-page thought paper entitled, Strengthening Enterprise Risk Management for Strategic Advantage. The papers are avaialable by free download from COSO's website,

FEI is one of the founding members of COSO. We have a limited number of hard copies of the 24-page thought paper, if you would like us to send you a copy, please email me to request one.

Disclosures Relating to Risk and Compensation
During today's open commission meeting, Cross explained another change made from the earlier proposal, relating to disclosures regarding risk and compensation:

The amendments we are recommending today would require companies to address their compensation policies and practices for all employees - not just executive officers - if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. This disclosure threshhold - 'reasonably likely to have a material adverse effect' - was revised from the proposals in response to comments; and we believe it will elicit disclosures about incentives in a company's compenation policies and practices that would be most relevant to investors.
Refer to SEC's press release, which provides a useful and very readable summary of additional key components of the Final Rule.

SEC Reopens Public Comment Period on Shareholder Proxy Access
Separately, the SEC announced earlier this week that it is re-opening the public comment period for its shareholder director nomination proposal (aka shareholder proxy access). The new comment deadline will end 30 days after publication of the release in the Federal Register

During today's open commission meeting, Commissioner Elisse Walter noted:
As Oliver Wendell Holmes said, “The great thing in the world is not so much where we stand, as the direction where we are moving.”
Note: Walter's statement above may resonate not only with respect to the proxy disclosure matters voted on today, but also with respect to the upcoming consideration of the proxy access rules, a topic on which various groups among the SEC's constituents have some strongly held (and in some cases, diametrically opposed) views.

Saturday, December 12, 2009

H.R. 4173, Wall Street Reform and Consumer Protection Act, Passes House; Summary of Accounting and Audit Related Provisions

Yesterday, the House of Representatives passed by a 223-202 vote, its version of a comprehensive financial regulatory reform bill, entitled H.R. 4173, the Wall Street Reform and Consumer Protection Act. Separately, the Senate still has to vote on its version of the bill. See the House Financial Services Committee press release issued upon passage of the bill in the House, and the response in the Minority press release.

Major Sections of Bill
Major sections of H.R. 4173 include:
• Financial Stability Improvement Act
• Corporate and Financial Institution Compensation Fairness Act
• Over-the-Counter Derivatives Markets Act
• Consumer Financial Protection Agency Act
• Private Fund Investment Advisers Registration Act
• Accountability and Transparency in Rating Agencies Act,
• Investor Protection Act.

Additionally, H.R. 4173 creates a Federal Insurance Office.

Accounting Standards and Auditing Related Provisions
Following are highlights of provisions of the Act relating to accounting standards-setting and auditing (with respect to auditing, particularly as relates to Sarbanes-Oxley Section 404(b), the audit of internal control over financial reporting.) Related Sections of the Act are supplied in brackets.

Systemic risk council (Financial Services Oversight Council) will monitor domestic and international accounting developments, comment on proposals, and advise Congress: The Financial Services Oversight Council would advise Congress on domestic and international related accounting developments, monitor international regulatory developments, including both insurance and accounting developments, and to identify those developments that may conflict with the policies of the United States or place United States financial services firms or United States financial markets at a competitive disadvantage, and review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard, or procedure. Note: an earlier version of this amendment was submitted by Rep. Perlmutter/Rep. Lucas. The ultimate wording is more narrow in the sense that it does not require any formal change to the FASB oversight model; however this langauge is also broader than the original amendment in terms of language relating to international developments. [Section 1001 (c)]
Observation 1: I remind you of the disclaimer in the right margin of this blog: I wonder if the langauge in Section 1001 (c) shown above, by referencing responsibility for assessing international developments in accounting with respect to U.S. policies and competitiveness, may be one among many potential precursors to potential movement toward one global set of accounting standards, a subject under consideration as part of the SEC's proposed IFRS roadmap released last year for public comment.
Banking agencies and SEC would study impact of FAS 166, 167 vis-a-vis changes in statutory credit retention risk: The Board of Governors of the Federal Reserve System, in coordination and consultation with the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission, would study the combined impact by each individual class of asset backed security of—the new credit risk retention requirements contained in the Act, together with FAS 166 and FAS 167 (which amended FAS 140 and FIN 46R regarding off-balance sheet treatment of securitizations and other asset sales) and would submit a report to Congress on the results of their study, within 90 days of enactment of the Act. [Section 1502 (b)]

Congress states findings on complexity, transparency in financial reporting; require annual testimony of SEC, FASB, PCAOB: Congress states its 'findings' on the importance of transparency in financial reporting, and its view on how complexity in financial reporting has contributed to cost. The Act calls upon the Chairmen of the SEC, FASB and PCAOB to provide annual testimony to Congress on efforts to reduce complexity and increase transparency of financial reporting. (Note: similar bills passed Congress in the past with this provision, but may not have passed the Senate in the past.) [Sec. 7407]

Financial Reporting Forum to make recommendations to Congress: A Financial Reporting Forum would be created, consisting of the Chairmen of the FASB, SEC, bank regulatory agencies, and certain others to be appointed by the SEC (including a representative of a financial institution, a non-financial institution, auditors, and investors). The Financial Reporting Forum would meet at least quarterly, to: "discuss immediate and long-term issues critical to financial reporting," and would "issue an annual report to the Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters." [NOTE: An earlier version of this provision was submitted by Rep. Miller.] [Sec. 7417]

Change in scope, and possibly name of PCAOB to AOB? Certain language in the Act replaces references to "public companies" or "issuers" with references to "issuers, brokers and dealers," to bring the audits of private broker-dealers (think: Madoff) under the purview of the PCAOB. There are also references in H.R. 4173 [Sections 7601 and 7610] to changing certain references in the Sarbanes-Oxley Act from "Public Company Accounting Oversight Board" to "Accounting Oversight Board." [Sec. 7601, Sec. 7610]
Observation 2: Once again, I remind you of the disclaimer in the right margin of this blog, I wonder if, by removing references to "public" companies or "issuers," and leaving certain references generically to "companies," (without inserting the specific new replacement language that seems to be inserted in some - but not all - instances, with the new language consisting of "issuers, brokers and dealers") if there could be unintended consequences of all private co. audits (not just private co brokers and dealers) inadvertently coming under the scope of the PCAOB? If anyone has insights on this, feel free to post a comment. Separately, I'm not sure if PCAOB would have to officially change its name to AOB, or if the change from PCAOB to AOB only has to be reflected in the legislation for some legal reason.] [Sec. 7601, Sec. 7610]

Small Co. (Nonaccelerated filers, i.e. less Than $75 million public float) Exemption From Sarbanes-Oxley Section 404(b): The Wall Street Reform Act (H.R. 4173) would amend the Sarbanes-Oxley Act to exempt nonaccelerated filers (generally defined by the SEC as public companies with less than $75 million public float) from the requirement for an external audit of internal control under Sarbanes-Oxley Section 404(b). [NOTE: The Senate has not yet acted on this provision, and may reject this provision, so companies should still rely on the SEC's Oct. 2 statement, in which the SEC said it did not intend to provide a permanent exemption for smaller companies. Note also that the proposed exemption in H.R. 4173 applies only to Section 404(b)-the external auditors report on internal control; it does not change the requirements in Section 404(a)-management's report on internal control, and it does not change the longstanding requirements for public companies of all sizes to have an external audit of their financial statements.] [Sec. 7606]

Accelerated filers (i.e. bigger than $75 million, less than $700 million) - potential exemption after study conducted? Sec. 7416, subsection (a) of H.R. 4173 would require GAO and the SEC to "each" conduct a study of the cost-benefit of Sarbox 404(b) for " issuers who are not accelerated or large accelerated filers as defined by Commission Rule 12b-2." Additionally, "On or before June 1, 2010, the [GAO] and [SEC] shall submit separate reports to Congress containing the findings and conclusions of the studies required under subsection (a), together with such recommendations for regulatory, legislative, or administrative action as may be appropriate....Requirements under section 404(b) of the Sarbanes-Oxley Act of 2002 on issuers described under subsection (a) shall not become effective until the results of the report are delivered, but in no case before June 1, 2011." [Sec. 7416]
Observation 3: Once again, I remind you of the disclaimer in the right margin of this blog - I'm not sure how to interpret the reference to Sarbox 404(b) "shall not become effective" for (by process of elimination) "accelerated" filers in particular (i..e those who are larger than nonaccelerated filers (with less than $75 million public float), and yet smaller than 'large' accelerated filers with over $700 million public float). If anyone has an interpretation of how this language would impact "accelerated" (but not "large" accelerated) filers, please inform us by posting a comment.)] [Sec. 7416]

Study to consider whether to provide new type of exemption from 404(b) based on size and revenue: Congress notes that the SEC Advisory Committee on Smaller Public Companies recommended that companies with less than $787 million public float, and less than $250 million revenue, be considered smaller public companies. Congress asks the SEC to "conduct a study of the inclusion of revenue as a criteria used in defining smaller reporting company as defined under the Commission’s Rule 12b-2 to account for smaller public companies with public floats less than $700,000,000 and revenues less than $250,000,000." The study is to be provided to Congress within 180 days of enactment of the Act.[Sec. 7416]

PCAOB Ombudsman Created: The Act would create an ombudsman at the PCAOB, available to issuers and auditors. [Sec. 7609]

And, There's More!
Further details, including excerpts from the pertinent sections cited above, can be found in the FEI summary, Accounting Standards and Audit-Related Provisions of H.R. 4173. The detailed summary can only be downloaded only by FEI members; if you are eligible for FEI membership, why don't you consider joining FEI to receive all the benefits of FEI's networking opportunities (national committees, local chapters, conferences) and educational resources (including our members-only web summaries, e-newsletter, free reports from our research affiliate, the Financial Executives Research Foundation (FERF), and more!)

Additional information on H.R. 4173 can be found in:
Bill Summary (2 pages) - House Financial Services Committee
Bill Highlights (3 pages) - House Financial Services Committee
Section-by-Section summaries - House Financial Services Committee

Some other financial blogs/publications that have provided early coverage of H.R. 4173 include the Maryland Association of CPA's blog, CPA Success, WebCPA, and the AICPA JofA.

Thursday, December 10, 2009

SEC's Khuzami 'Skeptical' of Auditors' Claims on Privilege

In remarks at an AICPA conference earlier this week, SEC Enforcement Director Robert Khuzami said:

We have seen a number of audit firms withhold subpoenaed documents and assert work product privilege on behalf of an audit client. We are skeptical of such claims, especially after the recent en banc decision in Textron which held that tax accrual work papers prepared by in-house counsel were not entitled to work product privilege.

As background, Khuzami explained that in the Textron case: "the IRS sought those work papers and the company refused, claiming work product privilege. The court rejected that argument, noting that the 'work product privilege is aimed at protecting work done for litigation, not in preparing financial statements.'

He added: "the First Circuit’s common sense analysis is how we evaluate these types of assertions of privilege." Specifically, Khuzami warned:
We do not see how the audit documentation prepared by or relied on by an auditor in connection with an audit report can be privileged, or how any claimed privilege hasn’t been waived. Audit documentation is collected or prepared for the purpose of issuing an audit opinion, not for the purpose of litigation. And sharing the work product with auditors, who are supposed to be “public watchdogs,” strongly undermines any such claim.

My two cents (I remind you of the disclaimer on the right side of this blog): From a layperson's perspective (i.e. as an accountant, not a lawyer), I was surprised by Khuzami's statement (and, in turn, the related statement of the First Circuit) that implies documentation prepared in contemplation of potential litigation - and documentation prepared to support tax accruals, litigation accruals, or other financial statement items - are necessarily mutually exclusive; I can see how certain documentation could be understood to potentially fulfill both purposes (although I am aware that there are specified practices and Federal Rules of Evidence, etc. with respect to maintaining and protecting privilege.)

Notably, there appears to be some precedent in certain circuits (although not the First Circuit) in which preparation of certain documents in anticipation of potential litigation as a 'primary motivating purpose' - even if not the sole purpose - of creating the documentation, satisfies some Circuit Courts that the documents should be considered privileged. See: The pursuit of transparency does not trump the work product privilege, by Michelle M. Henkle, Tax Executive Magazine, May-June 2008.

However, in the event that detailed workpapers prepared solely for litigation are to retain privilege, companies are at risk of waiving the privilege by disclosing that information to their auditors to back up tax accruals, litigation accruals, or other items. Thus, companies are is in a catch-22 situation: if their audit firm insists on viewing certain documentation (which the client viewed as privileged) in support of, e.g., a tax accrual - as opposed to agreeing to alternate means of becoming satisfied with the accruals - companies may have to choose between potentially waiving privilege, or enduring the wrath of their auditor (which theoretically could result in, e.g., a qualified audit opinion, or in the auditor resigning from the engagement.)

I asked Stan Keller of law firm Edwards Angell Palmer & Dodge LLP about Khuzami's remarks on privilege. Keller serves as Chair of the American Bar Association's Committee on Audit Responses, and has served as a member of ABA's Task Force on Attorney-Client Privilege. Here's what Keller said:

The Textron decision represents one Circuit's view and is contrary to the position of several other Circuits providing broader work product protection. Indeed, Textron has petitioned the U.S. Supreme Court to grant certiorari review. I would think the SEC should also be concerned about the ability of issuers to share information with their auditors to insure the integrity of financial reporting and the effectiveness of audits.
Later, I was able to track down Susan Hackett, Senior Vice President and General Counsel of the Association of Corporate Counsel, who is leading ACC's advocacy efforts on Privilege Protection, for her views. I shared with her Stan Keller's comments which I received earlier in the day; here's what Hackett had to say:
Stan’s right about this decision being such a deviation from other authority defining attorney work product protections. ACC will join many others in the legal and business community to protest this latest ruling and request that the Supreme Court set the record straight. This decision hamstrings public companies’ in-house lawyers from advising auditors and corporate financial managers in a manner that promotes accuracy and transparency in financial reporting and certification. It eviscerates the notion that the in-house lawyer can share legal assessments with company auditors without risking waiving the client’s privilege; so is the message that in-house lawyers and auditors shouldn’t talk? Or that they should only talk when they can provide happy news that they wouldn’t mind seeing on the front page tomorrow? According to the court that issued this most recent ruling, ‘any lawyer’ would call Textron’s counsel’s assessment of potential liability mere tax or business documents, not litigation documents that would afford them work product protections. But by ‘any lawyer,’ the court is certainly not referring to the 24,000 in-house counsel members of ACC.
Other Topics Covered by Khuzami:
'Cooperation Initiative, Fraud, Audit Committees, Clawbacks
Khuzami - who as noted in this press release formerly served as a federal prosecutor for 11 years with the United States Attorney's Office for the Southern District of New York, and as General Counsel for the Americas at Deutsche Bank - also covered these topics in his remarks at the AICPA conference:
  • Changes in the Enforcement Division
  • The Division's new 'Cooperation Initiative' (which, he noted, could pose conflicts of interest for certain attorney-client relationships)
  • Financial Statement and Accounting Fraud (detailing some recent high profile cases)
  • The Role of Audit Committees
  • "Clawback” Under Section 304 of the Sarbanes-Oxley Act, and
  • Hedge Funds and Derivatives
Enforcement Associate Chief Accountant's Advice For Preparers, Auditors
Jason Flemmons, Associate Chief Accountant in the SEC's Division of Enforcement, followed Khuzami's remarks at the AICPA conference, by detailing more of the Division's efforts on financial statement and accounting fraud. Here's a few highlights from Flemmons' remarks:
Recent conditions have put significant strain on core necessities such as financial solvency and access to credit. I firmly believe that these additional pressures have only increased the risk and motivation for companies to commit financial fraud. Challenging economic times are not immune to financial skullduggery. To the contrary, financial fraud is 100% recession proof.

Accordingly, I can assure you that our staff remains more committed than ever to protecting the investing public and sanctioning those who break the rules. I also believe that the initiatives that Rob and the Chairman have undertaken in their brief time at the Commission will greatly strengthen the Division and maximize our effectiveness. For example, by delegating formal order authority to the Division’s senior officers, the number of formal investigations opened this year has more than doubled....

...with respect to financial statement preparers, I believe that the root causes of our enforcement actions are not driven by the individual accounting issues involved, but rather by two much more basic principles: integrity and transparency. Accordingly, the themes that I will briefly address today are not esoteric accounting concepts, but are rather much more fundamental. Make no mistake, the types of accounting issues that we encounter run the gamut, ranging from novel FAS 133, multiple element arrangement and tax accounting abuses to simply making the numbers up. However, the accounting improprieties cited in our enforcement actions against preparers are the product of integrity and/or transparency defects, not the other way around. I am hopeful that these comments will serve as effective reminders and helpful advice on how to stay out of trouble as we approach the end of the calendar year and, for many registrants, 2009 fiscal year end.

Under the heading of 'integrity' Flemmons focused on two topics: accounting estimates, and how companies handle the discovery of problems in financial reporting. Under the heading of 'transparency,' he focused on the importance of avoiding intentionally distorting MD&A trends, and to avoid 'fiddling" or manipulating non-GAAP metrics in a way that is misleading (noting as an example the recent case against SafeNet, the first action brought against a company under Reg G.)

Flemmons also warned preparers: "Misleading an outside auditor is in itself a violation of Commission rules. We have charged more than 500 individuals with lying to auditors since Sarbanes Oxley was enacted, including dozens this past year."

On the flip-side, he warned auditors:
An important topic that I want to emphasize today is that the existence of management fraud does not provide an automatic exemption to auditors from SEC enforcement action. In fact, many, if not most, of our cases against outside auditors have arisen from financial frauds by client management who went to great lengths to mislead auditors....A common thread in many of our enforcement actions against outside auditors is the failure to demonstrate professional skepticism by obtaining persuasive audit evidence. It is not enough to obtain
suggestive, but opaque, evidence....The Commission has also brought many actions that involved very well designed audits that would have exposed financial frauds had the fundamental principles of due care, professional skepticism and audit evidence been properly applied. In these instances the auditors had the equivalent of first down and goal on the one yard line and elected to punt.

Flemmons, who according to this bio, was formerly a litigation consultant in the Financial Advisory Services practice at PwC before joining the SEC in 2000, has a speaking style (i.e. in writing) that reminds me of former SEC Chief Accountant Lynn Turner, in terms of some of the illustrative langauge and persuasiveness. Flemmons wrapped up his remarks:
I would like to close with a reminder that everyone in this room is a gatekeeper. From the accounting clerk of a public company to the CFO, or from a first year audit staff to a national office partner at a public accounting firm, each and every one of you plays a crucial role in maintaining a capital market system of the highest caliber and integrity. I urge all of you to take your gatekeeping responsibilities seriously and with utmost alacrity. By working together, we will continue to promote and protect the most prestigious and influential securities markets in the world.

Wednesday, December 9, 2009

FASB Chairman Calls For 'Decoupling' GAAP and RAP

In remarks at the AICPA's national conference on current SEC and PCAOB developments, FASB Chairman Robert H. Herz called for:

a greater decoupling of bank regulation from U.S. GAAP reporting requirements. Doing so could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy.

In an oblique reference to the Perlmutter-Lucas amendment which passed the House Financial Services Committee in November as part of its systemic risk bill (still subject to consideration by the full House, with the Senate separately considering its own bill), Herz noted:
in the past year there have been calls from certain parties to change the objectives of financial reporting and the approach to accounting standard setting in the U.S. The focus of these calls, not surprising in a time of severe financial crisis, has been on the accounting for financial instruments and reporting by financial institutions.... I was pleased to note that the House Financial Services Committee, within the context of its recent markup of the systemic risk regulator bill, seemed to confirm the point that accounting standards should continue to be set through an independent process...

... During the markup of the systemic regulator bill, Chairman Frank noted that accounting principles should not be viewed to be so immutable that their impact on policy should not be considered. I agree with that, and I think the Chairman would also agree that accounting standards should not be so malleable that they fail to meet their objective of helping to properly inform investors and markets or that they should be purposefully designed to try to dampen business, market, and economic cycles.

Some may view Herz' remarks as hearkening to a return to the 'GAAP-RAP' era in which differences between regulatory accounting principles set forth by bank supervisory agencies differed to a greater extent from U.S. GAAP than the limited differences in practice today. In some cases, certain bank regulators have also raised this issue, resulting in some backlash, as noted by Tom Beisner of CPA firm The Whitlock Company in his March 9 post, Accounting for Loan Losses - GAAP vs. RAP - Not Again!

At the AICPA conference, Herz distinguished between the role of accounting standard-setters and the role of banking regulators as follows:

Our focus as accounting standard setters is on the communication of relevant, reliable, transparent, timely, and unbiased financial information on corporate performance and financial condition to investors and the capital markets. ...

The mandate of the Federal Reserve and other banking regulators relates to ensuring the safety and soundness of banks and the overall stability of the financial system... .that’s not to say that the accounting standards we set for the benefit of investors cannot also serve the needs of regulators. Usually they do....But it may not be possible to find common ground in every case, not because we aren’t communicating, but because our different missions take us down different roads.

For example, while investors might benefit from seeing bank assets such as tradable securities and even loans reported at “fair value,” regulators might deem cost accounting as the proper way of valuing certain assets for the purpose of assigning capital reserve requirements...

Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation.

My two cents (I remind you of the disclaimer on the right side of this blog): Taking a cue from blogger Prof. David Albrecht of The Summa, who sometimes takes to referencing philosophical principles, I believe the FASB Chairman makes a very valid point that the purposes of accounting standard setting (i.e. in communicating "relevant, reliable, transparent, timely and unbiased information," as noted by Herz) and the purposes of systemic regulation (ensuring the safety and soundness of banks and the overall financial system, as noted by Herz) are distinct.

Thus it would be a false syllogism of sorts for people to say:

1. accounting (e.g. fair value accounting) causes procyclicality
2. procyclicality causes systemic risk, therefore
3. systemic risk regulators should oversee accounting

However, I believe that the fact that banks and their regulators may appear to be more vocal in criticizing, e.g. certain fair value GAAP requirements or other accounting standards is not entirely (partially or principally, perhaps, but not entirely) due to concern about the impact on bank capital requirements, but also due to legitimate concern in line with the core foundational issues of accounting standard-setting as articulated by the FASB Chairman: i.e., the relevance, reliability, transparency, timeliness, and freedom from bias of the reported information that results from a particular accounting standard.

Separately, on the fair value front, Matthew Lamoreaux of the Journal of Accountancy notes in his article, FASB Defends Fair Value, Calls for Separation From Banking Regulation, that:
On Monday, the AICPA’s Accounting Standards Executive Committee (AcSEC) issued a comment letter to FASB in which the committee indicated that it favors an approach that would measure “many but not all” financial instruments at fair value. The AcSEC letter cited a 30-year fixed rate mortgage loan held to maturity as an example of a financial instrument that should not be measured and recorded on the balance sheet at fair value.

In my view, it doesn't necessarily come down to an either-or choice between staying true to the principles of accounting standard setting or staying true to the mission of bank regulators, rather, it comes down to a focus on those core issues of accounting standard-setting (relevance, reliability, transparency, timeliness, and freedom from bias), and how varying views of constituents are weighed and balanced by the standard-setter in reaching a decision on an accounting principle.

As stated by SEC Commissioner Elisse Walter, in a separate speech at the AICPA conference:

The FASB's deliberative process has fostered strong financial reporting and promoted broad acceptance of our accounting standards. That process includes important safeguards for all users of financial statements, including obtaining feedback from groups such as individual investors, institutional investors, lenders, analysts, auditors, financial statement preparers, regulators, academics, and various other parties. These processes are designed to ensure that the competing interests and demands of the various groups are carefully and independently identified and balanced. Those transparent processes, in turn, are essential to ensuring that accounting standards remain current while promoting credible, comparable financial information.

Herz closed his remarks by thanking constituents for taking an active role in the standard-setting process by providing feedback to the boards (the FASB and IASB), noting:

Our attempt to bridge the divide on fair value is unlikely to stem continued criticism from certain parties, but my hope is that all interested parties will respect our process and choose to participate in it...

I know that most of you at this conference agree that we should aspire to financial reporting that’s geared to providing relevant, “decision useful,” and transparent financial information to investors and the capital markets, based on accounting standards established through an open and thorough due process that strives to be as independent, objective, and neutral as possible. So whether it’s the FASB or the IASB, it’s absolutely critical that these basic tenets underpinning accounting standards, standard setting, financial reporting, and our capital markets be preserved and protected. Our thanks to the many organizations and individuals that have been working hard to ensure that this continues to be the case through their strong support and participation in our activities.

There's a lot of thoughtful material covered in Herz' 18-page speech beyond what's cited above; for a more complete understanding, read the full text of Herz' speech.

IFRS Roadmap Action Expected In Early 2010, Says SEC's Walter

In remarks at an AICPA conference earlier today, SEC Commissioner Elisse Walter noted:
Chairman Schapiro has said that we would soon turn to the proposed IFRS Roadmap, and we are doing just that. At this stage in our review process, I expect we will likely consider further action sometime in early 2010

She noted that over 200 comment letters were received on the proposed IFRS roadmap published last year, and that:
We are, as always, carefully reading all of these responses — most of them, more than once. The comment letters raise a number of complex issues, including issues related to the workability of various aspects of the proposed approach. We are very thankful to all who took the time to share their knowledge and experience with us.

Regarding the potential role of the FASB in a converged world, she said:
one significant issue raised in the comment letters — whether there is a continuing role for the FASB if we move to one set of global accounting standards. FASB has been instrumental in helping to make the vision of global accounting standards start to become a reality. I will, of course, keep an open mind on these issues, but, to say the least, I am eager to explore the continuing role of FASB in the event global standards are adopted.

In her introductory remarks, Walter reviewed the history of the interaction of the accounting profession and the Commission, and noted not only that she formerly was a deputy director in SEC's Division of Corporation Finance in the 1980's and early 1990's, but also that she was a math major and her father was a CPA who served as CFO of a public company.

Other major topics, in addition to IFRS, covered in Walter's remarks included independence in setting accounting standards, and "accountants as gatekeepers." Some excerpts:

Independence in setting accounting standards
I believe that any and all regulatory reform measures undertaken by Congress and the Administration must maintain the process for setting accounting standards as an independent function. Oversight of the independent private-sector standard setter should not become entangled with other regulatory priorities, such as addressing systemic risk....

Of course the price for independence is that standard setters must be accountable for their work. Accounting standards must keep pace with the real world to stay relevant, must be refined over time to address weaknesses, and must continue to be reviewed to identify improvements.

Accountants as gatekeepers

Even as the Commission considers these important initiatives intended to improve the nature and quality of financial reporting for investors and the efficiency of our markets, the Commission also remains keenly focused on other needed changes in regulation. Here, too, accountants are front and center because of the role they play as important gatekeepers.

While the Commission's staff reviews filings, conducts inspections of certain market participants, and performs other oversight activities, these functions do not include a detailed review of all financial information at the level conducted by the accounting profession. The integrity of the financial reporting system, therefore, relies heavily, as it must, on you to be primarily responsible for the large volume of financial information that undergirds the Commission's full disclosure system.

See Walter's speech for her complete remarks.

Separately, if you want to read another opinion about accountants as gatekeepers, see Francine McKenna's post yesterday, They Weren't There: Auditors and the Financial Crisis, in her blog, Re: The Auditors.

Monday, December 7, 2009

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

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

Kroeker outlined six general areas that the SEC would have to "carefully consider...fully understand and address" regarding the potential use of IFRS by U.S. companies. He added that this list is not all-inclusive. The six areas are:
  1. U.S. Investor understanding of and perspectives on IFRS;
  2. The development and application of IFRS for use as the single set of globally accepted accounting standards for U.S. issuers;
  3. The impact on the U.S. regulatory environment;
  4. Preparer considerations, including, among other matters:
    - changes to accounting systems,
    - changes to contractual agreements,
    - corporate governance considerations, and
    - litigation contingencies;
  5. Human capital readiness; and
  6. The role of the FASB in achieving the goal of a single global standard.
Kroeker noted, "I expect that you will hear more from us on this topic in the near term."

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

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

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

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

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

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

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

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

In this regard, it is interest to look back at an earlier post in this blog from Dec. 11, 2007, entitled: "FASB Could Become Part of IASB, Herz Reportedly Tells IFAC Conference; SEC To Meet Next Week." Here's what our post from Dec. 11, 2007 said:
There’s been a flurry of reporting on FASB Chairman Bob Herz’ remarks at the International Federation of Accountants (IFAC) 30th anniversary World Accountancy Forum earlier this week, in which Herz is reported to have said that in light of the move toward one global standard setter – and, as he has previously stated, that one global standard setter will one day be the IASB - FASB can essentially become a branch or satellite office of the IASB. This was reported in FASB Sees Its Future as Part of IASB,” Accountancy Age, Dec. 7, “FASB Could Become Branch of IASB,” Webcpa, Dec. 6, and “FASB Members Suggest board Could Become IASB ‘Satellite’ or U.S. Office,” BNA Daily Report for Executives, Dec. 7.The BNA article notes not only Herz remarks at IFAC on Dec. 4, but similar remarks by FASB board member Michael Crooch at yesterday’s (Dec. 6) FASB Accounting Standards Advisory Council (FASAC) meeting.

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