Wednesday, September 30, 2009

Fireside Chats, Enforcement This-N-Thats

The SEC Historical Society has scheduled a two-part program on accounting in its Fireside Chats series, which you can log into from in front of your fireplace - or wherever you happen to be - on Oct. 22 and Oct. 28 from 1-2 pm EDT. (Archived webcasts will be available as well.) This particular two-part series is sponsored by Deloitte.

Oct. 22: The Role of Professional Judgment in Accounting and Auditing
Moderator: Prof. Zoe-Vonna Palmrose, former Deputy Chief Accountant, SEC and currently Professor at Marshall School of Business, USC . Speakers: Robert J. Kueppers, Deputy CEO, Deloitte LLP, and Greg Jonas, formerly of Moody's and currently a member of the PCAOB Standing Advisory Group.

Oct. 28: Exploring Principles vs. Rules-Based Accounting and Auditing Standards
Moderator: Prof. Patricia Fairfield, McDonough School of Business, Georgetown University (and formerly an Academic Fellow at the SEC). Speakers: Robert J. Kueppers, Deputy CEO, Deloitte LLP, and Scott A. Taub, former Acting Chief Accountant and Deputy Chief Accountant, SEC and currently Managing Director, Financial Reporting Advisors LLC.

Both of the above topics are keenly of interest in a world that seems to be moving increasingly to IFRS (see our post yesterday on the G-20 call for convergence by June, 2011; see an alternative view on IFRS by Prof. Tom Selling in his blog, The Accounting Onion. Selling served as an Academic Fellow at the SEC in addition to his other experience.)

For further info on the SEC Fireside Chats, see the SEC Historical Society website, Calendar.

SEC Inspector General Issues Reports on Enforcement Division, Inspections
Broc Romanek reports in blog this morning in a post entitled The Coming Overhaul of SEC's Enforcement Division that the SEC's Office of Inspector General issued 2 new reports listing 21 recommendations for improving the Division of Enforcement (OIG Report No. 467), and 37 recommendations for improving the Office of Compliance Inspections & Exams (OIG Report No. 468), respectively.

In addition to some recommendations previously reported when the OIG released its report at the end of August on the SEC's handling of the Madoff affair, (as previously reported, see also SEC's Post-Madoff Reforms), one of the things I found particularly interesting in current (Sept. 29) OIG report on Enforcement (I remind you of the disclaimer posted on the right side of our blog at ) is the reference to 'poaching' on printed pg. 27 (pdf pg. 26) of the report, in which a staff member noted (in response to OIG survey of the Enforcement Division):
Dealing with other enforcement groups is often a hassle, because every office is primarily motivated to guard their own territory and make sure the other office isn't trying to poach the good cases. That said, informal, relationship based contacts with staff in other offices about particular matters is frequently helpful and rewarding. Sometimes I am discouraged from working with other groups because it is viewed as relinquishing control of "our case.”
I imagine the comment on 'poaching' good cases is not unique to the SEC or the government, as I assume prosecutors at various levels in government, and attorneys in private practice, may experience the above sentiment as well. And, even outside of the field of law, breaking down silos and working together for the common good can be a reality of organizational life for any organization; nonetheless I found the comment particularly interesting, in addition to the other subject matter relating to how cases and tips are handled and the OIG's recommendations thereto.

SEC Enforcement Director Robert Khuzami, in the Management Comments (response to OIG recommendations) included in the report, noted: "We concur in all of the recommendations in the report. In fact, Enforcement Division has already taken significant steps toward creating a better organized and effective division" (Read the complete Management Comments in Appendix IV of the report, and OIG response to Management Comments in Appendix V, for details.)

Tuesday, September 29, 2009

G-20 Progress Report - More Detailed than Leaders' Statement - Calls For Convergence by June, 2011

Updating our earlier post from this weekend on the Sept. 25 G-20 Leaders' Statement (which called somewhat generically for convergence by June, 2011), we believe our original interpretation posted on Sept. 26 (i.e. that the G-20 is calling for completion of major convergence projects - such as the FASB-IASB MOU - by June, 2011) was correct, because of wording posted subsequently by the G-20 in an updated Progress Report as detailed below.

Compare the wording in Item 87 of the Progress Report on the Actions of the London and Washington G20 Summits - 5 Septmeber 2009, which states: "Accounting standard setters should take action to make significant progress towards a single set of high quality global accounting standards by the end of 2009," - to the wording in Item 53 in the Progress Report on the Actions to Promote Financial Regulatory Reform Issued by the U.S. Chair of the Pittsburgh G-20 Summit - 25 September 2009, which states: "We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process; and complete their convergence project by June 2011." (emphasis added)

The operative change in wording between the G-20's Sept. 5 Progress report with respect to convergence (generally), and the Sept. 25 Progress Report noted above, is that the G-20 has accelerated its call for global accounting standards convergence from a call for accounting bodies to "make significant progress ... by the end of 2009" to a call for them to "complete their convergence project by June 2011."

The G-20's Sept. 25 Progress Report discusses the matters of financial instruments, off-balance sheet items, provisioning (including loan loss provisions), valuation and impairment under separate items shown in the Progress report - Items 49, 50, 51 and 52 - for which the G-20's request of accounting standard-setters is still stated as requesting completion "by the end of 2009."

I'd like to emphasize this is my interpretation (and I remind you of the disclaimer posted on the right margin of our blog at

Some other personal observations: The FASB-IASB MOU appears to have a generic date of 2011 as the goal for major convergence projects to be completed (without specifying a particular month in 2011) so some observers may interpret the G-20's Sept. 25 Progress Report as putting an earlier target completion date in 2011 (June, 2011) than others may have assumed the FASB-IASB MOU was aiming at (i.e., in theory, 2011 in the FASB-IASB MOU could have been interpreted by some to mean Dec. 31, 2011).

Is the June, 2011 target completion date for convergence being specified by the G-20 to provide more breathing room for the SEC to potentially reach a decision in 2011 on its IFRS Roadmap? The proposed IFRS Roadmap that was issued for public comment by the SEC last fall, as noted in SEC's Aug. 27, 2008 press release (the date the Commission voted in favor of issuing the proposed IFRS Roadmap for public comment) noted that under the proposal: "The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors."

As we noted in an earlier post, various news sources have reported that in the Q&A session following her prepared remarks at Georgetown University on September 18, SEC Chairman Mary L. Schapiro indicated the SEC would formally revisit its proposed IFRS roadmap 'this fall.' More specifically, according to Sarah Lynch of Dow Jones Newswire, in her article, Schapiro Says SEC Will Discuss Transition to IFRS This Fall:
Schapiro signaled Friday [Sept. 18] the issue of switching from using U.S. generally accepted accounting principles to a global standard, however, is still very much on her agenda. "It would be ideal if we can have a single set of high-quality accounting standards that worked globally. The reason for that is it would allow for comparability for very large companies in particular and give investors the ability to make comparisons around the world," she said. "I expect we will speak a little later this fall about what our expectations are with respect to IFRS," she added.

I have reached out to various parties for comment/confirmation of my understanding of the various G-20 reports; while the information in the G-20 Leaders Statement was generic, the information in the Progress reports appears to be more specific. If I receive further information I will add it to this post or a subsequent post.

Saturday, September 26, 2009

G-20 Calls For Convergence By June, 2011 - UPDATE 2

(Sept. 29, 2009 - UPDATE 2: Based on more detailed information in G-20 Progress Report dated Sept. 25, it appears to me, personally, that the G-20 call for convergence by June, 2011 relates to convergence, generally (e.g., FASB-IASB MOU). Read our Sept. 29 post for more info.)

(Sept. 27, 2009- CORRECTION/UPDATE 1: Although para. 14 in the G-20 Leaders' Statement spoke generically of a call for accounting standards setting bodies to "complete their convergence project by June, 2011," upon further contemplation, I believe that statement may specifically relate to the convergence projects on financial instruments, off-balance sheet transactions, valuation and impairment - rather than 'convergence' generally - if it is implying the specific convergence projects cited in para. 6 of the G-20 Finance Ministers' Declaration issued on Sept. 5. (An alternative interpretation, closer to my original interpretation, is the G-20 was calling for completion of the FASB-IASB MOU by June, 2011; the MOU currently specifies "2011" but not "June, 2011.") Copied verbatim below are the paragraphs in question.)

G-20 Leaders Statement, Sept. 25, para. 14 (note there are 2 sets of numbered paragraphs, this is para. 14 in the second set of numbered paragraphs which follows para. 1-31):

"14. We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011. The International Accounting Standards Board’s (IASB) institutional framework should further enhance the involvement of various stakeholders."
G-20 Finance Ministers and Central Bank Governors Declaration Sept. 5, para. 6

"6. Convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the IASB is encouraged to take account of the Basel Committee guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group; and its constitutional review should improve the involvement of stakeholders, including prudential regulators and the emerging markets.")
I am seeking some form of official clarification as to the exact scope of para. 14 in the Sept. 25 G-20 Leaders' Statement and I will update this post if I receive such information.

Our original Sept. 26 blog post follows.

In a communique published by the G-20 at the conclusion of their Summit meeting held Sept. 24-25, 2009 in Pittsburgh, PA, (see Leaders Statement: The Pittsburgh Summit), the G-20 called for a redoubling of efforts to achieve a single set of high quality global accounting standards, and for completion of convergence projects by June, 2011.

It is interesting to see the reference in the G-20 statement to a 'single set' of standards (which implies, for all intents and purposes, worldwide adoption of International Financial Reporting Standards, since over 100 countries including the entire EU are now on, or moving to adopt, IFRS, with Canada slated to adopt IFRS by 1/1/11) as well as the G-20 statement's reference to 'convergence' (which implies to some people a 'common' set of standards, but not necessarily a 'single' set of standards).

With respect to the U.S., various news sources reported last week that in the Q&A session following her prepared remarks at Georgetown University, that SEC Chairman Mary L. Schapiro indicated the SEC would formally revisit its proposed IFRS roadmap 'this fall.' More specifically, according to Sarah Lynch of Dow Jones Newswire, in her article, Schapiro Says SEC Will Discuss Transition to IFRS This Fall:

Schapiro signaled Friday [Sept. 18] the issue of switching from using U.S. generally accepted accounting principles to a global standard, however, is still very much on her agenda. "It would be ideal if we can have a single set of high-quality accounting standards that worked globally. The reason for that is it would allow for comparability for very large companies in particular and give investors the ability to make comparisons around the world," she said. "I expect we will speak a little later this fall about what our expectations are with respect to IFRS," she added.
On the subject of IFRS, Tom Selling posted in The Accounting Onion on Friday: First Missive From the New Chief Accountant: Get Ready To Roll With IFRS.

Getting back to the G-20 Summit, additional highlights from the G-20 Leaders Statement can be found in this FEI Summary. See also wider coverage of the G-20 Summit by Ellen M. Heffes, Editor-in-Chief, Financial Executive Magazine in Financial Executive Magazine Reports From G-20.

Also, see our related blog posts:
Lynn Turner Speaks Out On Financial Regulatory Reform, and
Monitoring Board Issues Statement Of Principles

If you received this blog post from a 'friend' and you'd like to sign up to receive the blog, email and write in Subject line: Sign Up. Or follow us on Twitter at

Lynn Turner Speaks Out on Financial Regulatory Reform

Former SEC Chief Accountant Lynn Turner, now a senior advisor and managing director at LECG, was interviewed on Bloomberg TV yesterday (Sept. 25), on the subject of financial regulatory reform, see the interview here. In the interview, Turner describes some of the administration's proposals for regulatory reform as 'regulation-lite,' lacking some key components that Turner believes are necessary to prevent a recurrence of the economic crisis.

Asked by the Bloomberg newscaster whether proposals presented by the Obama administration at the G-20 Summit would work on a broader global scale, Turner said, "I don't think so; I think you've got to get some fundamentals into the regulation; you've got to get enhanced transparency around what Wall Street and the banks are doing, so the market can discipline themselves; you've got to get much greater accountability for the executives, for the boards, for the people doing these transactions that have become so disruptive; without that accountability and without that transparency, it just will not occur."

Of note: according to Financial Executive Magazine Editor-in-Chief Ellen M. Heffes, in attendance at the G-20 Summit in Pittsburgh, Turner's Bloomberg interview happened to be broadcast on monitors in the press room at the G-20 meeting on Friday. See our separate blog post recapping the results of the G-20 meeting.

Queried by the Bloomberg newscaster for specifics, among the suggestions he made was for Credit Rating Agencies to become more accountable and provide more transparency into their ratings.

Asked whether there is a model regulatory system currently out there he would recommend, Turner noted "No one's system worked, we're really going back to ground zero and creating something from scratch here." Watch the whole Bloomberg interview to hear more.

Turner also recently wrote a paper published by LECG, entitled, Financial Crisis to Reform: Change, or Just High Hopes? (c) 2009, LECG, LLC, used with permission.

The paper provides a succinct and readable summary of the various financial regulatory reform initiatives currently before Congress. Turner is frequently called upon to testify to Congress on issues relating to financial regulation, and has served on numerous advisory boards including the U.S. Treasury Department's Advisory Committee on the Auditing Profession, and the Public Company Accounting Oversight Board's Standing Advisory Group. Turner is also a member of longstanding member of FEI.

Earlier this year, Turner joined LECG, a global expert services and consulting firm which provides independent expert testimony and analysis, original authoritative studies, and strategic advisory services. He is a senior advisor and managing director in the forensic accounting practice. Further information can be found at

Monitoring Board Issues Statement Of Principles

On Sept. 22, 2009 , the Monitoring Board formed to "enhance the [International Accounting Standards Committee Foundation's] public accountability by establishing a link to a Monitoring Board of public authorities... [to] ensure that the Trustees continue to discharge their duties as defined by the IASC Foundation Constitution, as well as approv[e] the appointment or reappointment of [IASCF] Trustees," issued a Statement of ... Principles for Accounting Standards and Standard-Setting. (Monitoring Board Statement of Principles). Members of the Monitoring Board currently include the Chairman of the Emerging Markets Committee of the International Organization of Securities Commissions (IOSCO), the Vice-Chairman of the Technical Committee of IOSCO, the Commissioner of the Financial Services Agency of Japan (JFSA), and the Chairman of the US Securities and Exchange Commission (SEC).

Statements welcoming the Monitoring Board's Statement of Principles were issued by the IASCF (which oversees the International Accounting Standards Board), and the Financial Accounting Foundation or FAF (which oversees the Financial Accounting Standards Board.) (See IASCF Statement; FAF Statement.)

Laying the groundwork for the principles, the Monitoring Board states:
  • [W]e believe that the future strength and integrity of our capital markets depends on both regulators and accounting standard setters reaffirming, at this critical juncture, their commitment to certain fundamental first principles about the purposes that accounting standards serve, and the process by which the standards are determined.

  • The quality of financial reporting, and, by extension, the health and integrity of our capital markets, depends upon vigilant attentiveness to these fundamental principles

  • [E]xpedience should not be permitted to undermine the objectives these principles describe.

  • [W]e also believe a reiteration of these principles, and an explanation for why they are so important, is a valuable exercise given that there have been calls from some quarters for accounting standards to be reformed in ways that could decrease the transparency of public company financial statements, particularly with regard to disclosures of certain types of financial assets made by financial institutions that sell their shares to the public.

  • While we recognise that some observers have claimed that certain current accounting standards impose procyclical burdens on some financial institutions that have publicly traded shares by requiring that these issuers use market-based or otherwise objective and verifiable measures to report to investors the current value of the assets they hold, we believe this claim focuses on a symptom of a problem rather than the problem itself. [NOTE: See cent one under 'my two cents' at the bottom of this post.]

  • Public capital markets, however, are predicated on trust and transparency. Investors trust that an issuer’s disclosure statements, and the accounting standards on which they are based, provide them with a complete, unbiased, fair and comparable view of the issuer’s performance.

  • If that trust is undermined through promulgation of new accounting standards that offer less transparency (for example, by indicating that an investment involves less risk than actually exists), or that are established through a process that deviates from fundamental principles guiding the standard setter’s decisions, investor confidence in our capital markets will suffer, with strong and weak issuers alike facing concomitantly greater capital costs.

Additionally, the Monitoring Board weighs in on the debate about bank regulatory reporting vis-a-vis generally accepted accounting principles:

While it is useful to consider the intersection of banking supervision and financial reporting in light of the recent banking crisis, accounting standards should not be allowed to become a surrogate for robust bank risk management or effective bank supervision. Accessing public capital markets is a choice issuers make, and but one of many choices open to financial institutions. As securities market regulators, we believe it would be a mistake to attempt to rectify today’s banking crisis by placing a burden on the investors in our public capital markets. Accounting standards must be designed to provide investors with information to assist them in efficiently allocating their hard-earned investment money. It is in this context that accounting standards are designed to contribute to a sound, prosperous and more stable financial standard of living.

Principles of Accounting Standards

The Monitoring Board identifies four broad principles which it states are common to the IASCF's and FAF's Conceptual Frameworks. Specifically, the Monitoring Board says, "We view the primary objective of financial reporting as being to provide information on an entity’s financial performance in a way that is useful for decision-making for present and potential investors. To be considered decision-useful, information provided through the application of the accounting standards must, at a minimum, be:

  • relevant
  • reliable
  • understandable, and
  • comparable.

The Monitoring Board defines all these terms in its Statement of Principles. For example, the term 'reliable' is defined by the Monitoring Board as:

Reliable:Information should be reliable in the sense of providing a faithful representation of the events on which it purports to be reporting. This requires the information to be neutral and to depict fairly the reported transactions. Reliability does not necessarily equate with certainty, as judgment, for example for some measurements or estimates of future outcomes, is an inherent aspect of financial reporting.

Regarding the four principles above for accounting standards, the Monitoring Board says: "These attributes are not controversial and enjoy broad support." [Note: see cent two under 'my two cents' at the bottom of this post.]

Principles for Accounting Standard-Setting

Importantly, the Monitoring Board describes not only principles for accounting standards, but also principles for the accounting standard-setting process itself. Specifically, the Monitoring Board states:

"Confidence in the quality and integrity of the standards depends upon independence and transparency in the standard setter’s due process."

These terms are defined by the Monitoring Board as follows:

Independence: Deliberations and, in particular, conclusion on positions in an independent fashion rely on a number of factors.

  • First, the individuals composing the standard setting body must demonstrate professional competency in matters of financial reporting.
  • Further, members with a decision-making role in the standard setting organisation should collectively be reasonably representative of the constituents whose interests the standards seek to address.
  • Finally, the process should remain free of undue pressures from political and corporate interests.


  • Visibility into the standard setting process should be sufficient to enable users to trace the evolution of the standard from thoughtful consideration of alternatives to final positions.
  • Interested parties must be afforded the opportunity to provide input to inform the standard setter’s evaluation of pertinent issues

Tie-In To G-20 Meeting
The Monitoring Board's Statement of Principles, while aimed at the IASCF, sets forth principles that are fundamental to and consistent with those of both the IASCF (and in turn, the IASB) and the FAF (and in turn, FASB). As cited further above, both the IASCF and FAF issued statements welcoming the principles issued by the Monitoring Board.

It is noteworthy that the Monitoring Board's Statement of Principles was published a couple days ahead of the G-20 meeting taking place Sept. 24-25, 2009 in Pittsburgh, PA. The statement issued by the IASCF observed:

"The Trustees recently wrote to the G20 leaders, who are meeting later this week in Pittsburgh, to emphasise ‘the Trustees and the IASB are committed to taking all of the actions necessary within their sphere of responsibility to deal with the issues arising from the financial crisis.' The Trustees believe that the fundamental principles outlined by the Monitoring Board provide an important contribution in reminding the Trustees, the IASB, and stakeholders of the important role that accounting standards play in the functioning of capital markets and the economy at large."

We will report on the results of the G-20 meeting in a separate post.

My two cents
(I remind you of the disclaimer which appears on the right side of this blog.)

Cent 1: Although the G-20 and other international organizations have called for counter-cyclical measures, the Monitoring Board references procylicality indirectly, by stating: "[S]ome observers have claimed that certain current accounting standards impose procyclical burdens ... by requiring ... use [of] market-based or otherwise objective and verifiable measures to report to investors the current value of the assets they hold, we believe this claim focuses on a symptom of a problem rather than the problem itself." The Monitoring Board continues: "Public capital markets... are predicated on trust and transparency. Investors trust that an issuer’s disclosure statements, and the accounting standards on which they are based, provide them with a complete, unbiased, fair and comparable view of the issuer’s performance."

I would note that, although FAS 157, Fair Value Measurement (as referenced in the pre-Codification nomenclature) is based on a 'market participant' view, many of the questions raised with respect to FAS 157 have had to do with the fact that, particularly for 'level 3' assets that lack an active market (or any market at all), a 'market-based' value computed in accordance with FAS 157 may be a 'hypothetical' market-based value, which is not as 'objective' or 'verifiable' as the words above would suggest, and the lack of 'objective, verifiable' market-based measures has been one of the issues raised with respect to requirements for a 'market-based' value vs. e.g. a discounted cash flow based value, particularly in thinly traded or disorderly markets.

The issue with respect to the next sentence noted by the Monitoring Board, referencing investors' desire for 'complete, unbiased, fair and comparable' information, is that some would question if 'market-based' values in thinly traded or disorderly markets meet the criteria of being 'complete, unbiased, and fair' although they could be 'comparable' if, e.g the only quotes available are comparable fire sale prices in a market driven by fear and illiquidity.

Cent 2: I would agree that the four principles for accounting standards outlined by the Monitoring Board (reliable, relevant, understandable and comparable) are 'not controversial' in and of themselves (i.e. as single words), but when you read the Monitoring Board's definition of Reliable cited above, some readers may wonder why the definition does not mention 'verifiability.' (Although, interestingly, the word 'verifiable' is used elsewhere in the Monitoring Board Statement as noted above, but not in the principles themselves, and most significantly not in the definition of Reliable.)

People raising the question about the absence of 'verifiable' within the definition of 'reliable' may base their question on the fact that the traditional definition of 'reliable' as originally constructed under FASB's Concepts Statement No. 2 included not only 'representational faithfulness' as a cornerstone of reliablity, but also that 'verifiability' is a fundamental facet of reliabilty as well. (A useful article on the longstanding definition of reliability (including with respect to verifiability) - and how reliabilty was traditionally balanced with relevance in FASB Concepts Statement No. 2, can be found in Relevance and Reliability, by L. Todd Johnson, originally published in The FASB Report, Feb. 28 ,2005.)

However, those who have been following the development of a revised and converged FASB and IASB Conceptual Framework over the past few years, (for an explanation, see, e.g. Revisiting the Concepts - A New Conceptual Framework Project, by Halsey Bullen and Kimberley Crook, May, 2005) have noticed that, e.g., FASB proposed a change in the definition of 'reliability' by removing 'verifiability' from that definition (another way of looking at it is, by removing 'verifiability' from the definition of 'representational faithfulness,' which is part of 'reliability.')

Why does verifiability (and its corollary, auditability) matter in deeming something 'reliable'? It is one part of the balancing exercise in weighing, e.g. the relevance vs. reliability of two measurement methods, say, fair value and amortized cost, along with other considerations such as cost-benefit, compability and understandability, in determining the proper accounting standard.

As noted further above, the Monitoring Board said in its statement this week that the principles it describes are 'not controversial' and 'enjoy broad support.' However, a review of comment letters submitted on the FASB Discussion Paper/Preliminary Views and subsequent Exposure Draft on the Conceptual Framework - Qualitative Characteristics of Financial Reporting, illustrates that there has been some disagreement among constituents about the proposed removal of 'verifiabilty' from the definition of 'reliability.' (And as noted above, the Monitoring Board's definition of 'reliable' tracks that of the proposed revision to FASB's Conceptual Framework which no longer includes 'verifiable' as part of 'reliable,' rather than the original definition of 'reliable' dating back to Concepts Statement No. 2, which included 'verifiability').

Here are some excerpts from some comment letters on the Exposure Draft to amend Con 2:

Basel committee: We note that the Board now considers the concept of “verifiability” as an enhancing qualitative characteristic and no longer regards it as a required component of “faithful representation”. We do not believe that such a change better conveys the importance of this characteristic and we continue to encourage the Board to expand the portion of the definition provided in paragraph QC20(b). In this regard, this portion of the definition should state that the selected recognition or measurement method, notably for highly illiquid products, should not only be applied properly, but should also be deemed reasonable based on the available evidence. In carrying out our supervisory responsibilities, we insist that the recognition and measurement methods included in banks’ reporting policies and procedures be reasonable and properly applied in their internal financial statement preparation processes.

Staff of the Accounting Standards Board of Canada: Some Advisory Group members question the removal of verifiability from faithful representation. They think that if information is not verifiable, its freedom from material error cannot be determined. To make freedom from material error operational, we think that an explanation is needed of how it can be assessed when it is not verifiable.

PCFRC (FASB-AICPA Private Co. Financial Reporting Committee): The PCFRC believes that relevance, faithful representation, comparability,verifiability, timeliness, and understandability are all essential qualitative characteristics that make financial information useful. These characteristics should not be separated and categorized as either fundamental or enhancing qualitative characteristics. Relegating comparability, verifiability, timeliness, and understandability to secondary importance behind relevance and faithful representation diminishes the perceived importance of those four essential characteristics. Labeling comparability, verifiability, timeliness, and understandability as complementary to relevance and faithful representation fails to do justice to the important role that those four characteristics play in the usefulness of financial reporting. Moreover, the separation of qualitative characteristics into two categories may be unnecessarily distracting and academic.

NYSSCPA comment letter: We believe the fundamental qualitative characteristics are understood and useful. However, we note that the Boards have determined to make relevance the primary characteristic, elevating this quality above faithful representation as indicated in QC 13. The decision to sacrifice degrees of faithful representation (referred to as reliability and verifiability) for relevance (referred to as usefulness) has been reflected in recent years in actual standard setting. The trend has been toward a greater use of fair value, estimates, projections and subjective intent to develop and quantify historical financial data. We believe that this “trade-off” needs to be addressed directly as standards are set. This discussion should be formally documented in the “basis for conclusions” in everyaccounting standard for which this trade-off is a significant issue.

FEI Committee on Corporate Reporting comment letter on 2006 Discussion Paper: [W]e believe there should be a more robust discussion of the relative importance of verifiability in the determination of whether an item is a faithful representation of an underlying economic phenomenon. Without a more robust discussion, we are concerned that, by default, fair value will always be considered the measurement objective that most faithfully represents any economic phenomenon, a position with which we strongly disagree.

Aside from the 2 points raised above ('cent one' and 'cent two'), I do applaud the Monitoring Board's Statement of Principles not only for including reasonable principles, but doing it in a succinct way. And I believe it is particularly noteworthy that 'transparency' of the standard-setting process was emphasized along with independence, because just as some say financial reporting should not be a 'black box,' the same would hold true for the standard-setting process; sunshine boosts confidence.

Thursday, September 24, 2009

PCAOB Issues Report On First Year Implementation of AS5

Earlier today, the Public Company Accounting Oversight Board issued a report on the first year of implemenation of Auditing Standard No. 5 (AS5), An Audit of Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements. (PCAOB press release; PCAOB report.) As noted in PCAOB's press release:
PCAOB Acting Chairman Dan Goelzer said: “This report finds that, in the engagements our inspection teams looked at, auditors generally focused on the areas that presented more significant audit risk. While we are encouraged by the first-year implementation of AS No. 5, there is still room for improvement, and we will continue to review and assess the effectiveness of firms’ integrated audit procedures in 2009.”

PCAOB Director of the Division of Registration and Inspections, George Diacont, said: This report discusses six areas in which auditors may be able to make further improvements in their integrated audits, and I encourage auditors to use this report to do so.”

The PCAOB's report, based on information obtained through inspections, notes:
The inspectors' observations varied both across and within the firms. In each of the areas that inspectors reviewed, inspectors observed instances of inappropriate application of the standard. In general, the areas where inappropriate application was most frequently observed were risk assessment, the evaluation of entity-level controls, and the nature, timing, and extent of the controls testing. Although the observations described in this report were derived from the performance of various engagement teams at certain firms – who constitute a subset of the auditors who performed integrated audits in 2007 and early 2008 – the Board believes that the
observations described in this report can benefit auditors generally, whether they are experienced in performing integrated audits or are performing their first such audits.

Among topics discussed in the report is Use of Work of Others. Highlights include (reformatted/bulleted for emphasis):
  • AS No. 5 provides that the auditor may use the work of others to reduce his or her own work, but the extent to which the auditor does so should depend on the risk associated with the controls being tested, as well as on the competence and objectivity of the individuals performing the work. In the selected areas of the engagements reviewed, the inspectors observed that auditors generally used the work of others in a manner that was related to their assessments of the degree of risk associated with the controls being tested, particularly in lower-risk areas. Similarly, the auditors' use of the work of others in the majority of instances reviewed was consistent with the auditors' assessment of the competence and objectivity of those individuals....
  • The inspectors also identified several instances that presented further opportunities for the auditors to use the work of others when the assessed level of risk was lower, including when testing certain system reports and application controls.
  • The inspectors observed other instances, though, where the extent of the auditor's use of the work of others to reduce the auditor's own work was greater than was appropriate under AS No. 5 considering the level of risk associated with the control being tested (e.g., in the area of controls over journal entries, which generally would be considered higher risk because of the risk of management override or other risk of fraud).
  • In certain instances, the auditors performed few or no procedures to assess the competence of the others relative to the task being performed, or they did not adequately assess the objectivity of the others, particularly where the work was performed by company personnel other than internal auditors.
  • In addition, the inspectors observed numerous instances where the extent of the auditors' retesting of the work of others was seemingly unrelated to the risks involved (e.g., a uniform approach to retesting of 20 percent of the controls tested).
Is SEC Report Soon To Follow?
Issuance of this report by the PCAOB, leads me to believe that perhaps the SEC's Study of the Costs and Benefits of reporting under the current SEC & PCAOB rules implementating Sarbanes-Oxley Section 404 is not far behind (I remind you of the disclaimer on the right side of this blog, this is my personal opinion only).

Specifically, the SEC announced last year (June 20, 2008 press release): "that it received Office of Management and Budget (OMB) approval ... to proceed with data collection for a study of the costs and benefits of Section 404 implementation, focusing on the consequences for smaller companies and the effects of the Section 404 auditor attestation requirements. The results of the study are expected to become available during the extension period. With the extension, smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after Dec. 15, 2009. " See our Sept. 11 blog post for further details.

FEI's research affiliate, the Financial Executives Research Foundation, has published various reports on Sarbanes-Oxley implementation. See, e.g. SOX 404 Optimization: Operational Trends published Nov. 2008. (Note: 1.0 CPE available for this report.) Read more about FERF and its publications here.

Separately, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has issued various publications over the past few years which entities implementating Sarbanes-Oxley Section 404 (and other entities not subject to Sarbox, but implementing similar requirements under AICPA guidance or other best practices) may find helpful, including Guidance for Smaller Public Companies, and Guidance on Monitoring Internal Control Systems. Visit for further information (executive summaries to all COSO publications are available by free download on COSO's website.)

Friday, September 18, 2009

SEC, PCAOB Investor Advisory Committee Developments

Following is an update on some recent developments with the SEC's Investor Advisory Committee (IAC), and a similar committee formed at the PCAOB.

Earlier this week, the SEC announced SEC Investor Advisory Committee Forms Three Subcommittees to Tackle Ambitious Agenda on Behalf of Investors. The three subcommites are:
  • Investor Education (chaired by Dallas Salisbury, president and CEO, Employee Benefit Research Institute)
  • Investor as Purchaser (chaired by Mercer Bullard, founder and president of Fund Democracy, Inc. and associate professor of law, University of Mississippi School of Law)
  • Investor as Shareholder (chaired by Stephen Davis, executive director of Yale School for Management's Millstein Center for Corporate Governance, and board member of Hermes Equity Ownership Service)
The SEC's press release notes that the next meeting of the IAC will be held in early October, and further information is available on the SEC's IAC Spotlight Page. [UPDATE: On Sept. 21, the SEC posted a Sunshine Act Notice, announcing the SEC IAC will meet on Mon. Oct. 5.]

The initial meeting of the SEC IAC took place on July 27; highlights were posted in the July 29 Announcement From the SEC Investor Advisory Committee.

Separately, James Ritchie, publisher of, provided his own summary of the July 27 SEC IAC meeting (see news posts for July). Ritchie, one of the moving forces behind, observed regarding the SEC IAC July 27 meeting:

If there was any real bombshell at the meeting, it was an attempt by Stephen Davis to make a motion that the IAC recommend the Commission adopt a rule requiring all exchange listed companies require majority voting for the election of directors. There appeared to be a consensus belief among IAC members in the value of majority vote requirements, so Davis appears to have been attempting to move the agenda with what he termed a "shovel ready" proposal.

However, it soon became apparent that although other IAC members may believe in majority voting, they want more discussion around mechanics, to tie the issue to part of a larger package, or delay for some other reason. No vote was taken but expect this issue to be one of the first of many out of what appears to be a relatively dynamic committee. The SEC may actually be going back to its roots as the "investor's advocate."
SEC's IAC was formed under the Federal Advisory Committee Act (FACA), and the IAC's Charter notes the committee will have a two-year life (set to terminate June 24, 2011), subject to extension in accordance with FACA. As previously reported, proposed legislation to effect financial regulatory reform includes a provision to make the IAC a permanent committee of the SEC.

PCAOB Announces Members of Its Investor Advisory Group

In a parallel move, the Public Company Accounting Oversight previously announced it would form its own Investor Advisory Group (IAG), and yesterday announced the inaugural members of the PCAOB IAG.

As noted in the PCAOB IAG's Charter, the IAG is formed by the PCAOB under PCAOB's authorities established under the Sarbanes-Oxley Act. (Accordingly, there is no preset time limit on the life of the committee, although the Charter includes a provision that no member of IAG can serve for more than 9 consecutive years.)

Among other differences of note in how the PCAOB IAG will operate vs. the SEC IAC, the PCAOB IAG Charter states: "At the discretion of the Chair, the IAG’s meetings or portions thereof may be open to the public" - which tells me that the PCAOB IAG may also, in theory, hold meetings that are not open to the public/not webcast. This possibility differs from the requirements placed on the SEC IAC by the Federal Advisory Committee Act, Section 10 (a) (1), (as posted on which states: "Each advisory committee meeting shall be open to the public."

My Two Cents: The Role and Composition of Advisory Committees
My two cents (I remind you of the disclaimer which appears in the right margin of this blog):

(1) Readers of this blog will note I am a strong supporter of public (i.e., open to the public/webcast) vs. private advisory meetings, particularly when the advisee (i.e. governement agency, quasi-government agency, or standard-setter) cites "recommendations" or a "consensus" obtained from an official advisory committee as part of the basis of rulemaking.

(2) I have also observed there are benefits to convening a heterogenous vs. homogeneous advisory committee; I believe cross-discussion between representatives of "investors," "preparers/issuers," "auditors," "attorneys," "regulators" etc. in one place at one time can have some useful benefits in providing the regulator/standard-setter with an efficient and effective forum for matching up and hearing counter-arguments (and counter-counter-arguments) on particular issues, taking into account all points of view.

An example of an advisory group which I believe has shown a healthy balance of diverse interests among its membership is PCAOB's Standing Advisory Group or SAG. By convening a diversely populated advisory group like the SAG, regulators gain efficiency and effectiveness in obtaining a 360 degree view, with the benefit of cross-discussion among representatives of different constitutent groups face to face in real time (vs. going back and forth between groups); this is particularly important in achieving the difficult balancing act of weighing costs, benefits, consequences and potential unintended consequences. [UPDATE: Another example of a diversely populated advisory committee would be the SEC's Advisory Committee on Improvements to Financial Reporting or CIFiR, chaired by Robert Pozen, which issued its final report last year.]

The selection of committee members with broad backgrounds, even if their primary constituency belongs in one area or another (e.g. as 'investor representatives') , can also help provide a wider perspective, even within a given constituency. I noted that 4 members named to the PCAOB IAG are also members of FEI (Prof. Joe Carcello, Peter Nachtwey, Robert (Bob) Tarola, and former SEC Chief Accountant Lynn Turner), with three of those 4 having currently or formerly served at some point in their career as CFOs (Nachtwey, Tarola and Turner), among other positions (including positions with audit firms).

Regulators and standard-setters also engage in discussions with a variety of constituents and constituent groups on a more informal basis throughout the year, such as at meetings and conferences, which is also helpful to obtaining that 360 degree view. (For example, FEI's Committee on Corporate Reporting is one of FEI's committees which meets from time to time with regulators, and our annual Current Financial Reporting Issues (CFRI) conference - taking place this year on Nov. 16-17 in NYC) provides an opportunity to receive updates from regulators and for panelists and attendees to ask questions during Q&A.)

So, there are various opportunities for regulators and standard-setters to get feedback from various constituent groups; I just sound a note a caution about convening single-constituency advisory groups (vs. diversely populated or multiple-constituency advisory groups), particularly when they are official advisory committees formed by and for the benefit of the regulator/standard-setter, and when the recommendations of that advisory committee will presumably receive significant weight as part of the basis for conclusions in rulemaking.

For further discussion on this topic, see our earlier post, (which cites to some related remarks by Broc Romanek in blog) Yin-Yang Time for Regulators, Standard-Setters.

Monday, September 14, 2009

FASB-IASB Hold 3rd Roundtable On Financial Instruments

The third in a series of FASB-IASB roundtables on the financial instruments project was held earlier today in Norwalk, CT. (The first two roundtables were held in Tokyo and London.)

The roundtable handout (we understand the handout for today's roundtable is essentially identical to the 14 page handout used at the prior roundtables) includes some tables comparing some of the FASB and IASB's proposals.

Among highlights from today’s roundtable: FASB Technical Director Russell Golden asked panelists to share their views on where the IASB's proposal stood, vs. FASB deliberations to date, on where to draw the line in terms of what items would be carried at fair value vs. some other basis such as amortized cost, and where the line would be drawn on fair value changes being reflected in Other Comprehensive Income vs. Net Income.

Should Business Model Drive Valuation, Recognition?
Some panelists responded they'd like to see dual presentation of amortized cost and fair value for financial instruments (some believe this dual presentation should appear on the balance sheet; others believe dual presentation in the footnotes would be sufficient, with single presentation in the balance sheet).

Hal Schroeder of Carlson Capital said: "If I were in charge of the accounting world, I would have side by side [presentation]," on the balance sheet, and income statement as well.

Kevin Spataro, representing the Group of North American Insurance Enterprises, argued in favor of measurement principles (e.g. fair value vs. amortized cost with some form of impairment) following the entities' business model.

However, another panelist argued that if the business model became the primary driver or trump card for determining the valuation method, that would be a 'non-starter.'

IASB Board Member Jim Leisenring said: "I view 'business model' as a euphemism for free choice; is there any ‘out of bounds’ business model? Is there anything I could do that you wouldn’t say should drive the accounting? The business model is not relevant, period, to accounting, if you are trying to meet the objectives of financial reporting."

GNAIE's Spataro responded, "We are saying, if financial instrument meaurement does not comport with the business model, it doesn’t comport with decision useful [information]."

Leisenring replied, "I think the opposite; is there any boundary to the business model where you’d say that is just too wacko to drive business reporting?"

Another panelist noted that sophisticated analysts have access to information and the ability to back out information from reported earnings to arrive at their view of a firm's core earnings, but that the average investor does not have this ability, therefore, they said, "For the average retail investor who doesn’t have access to what I have access to, fair value accounting is much better."

However, another panelist said, "As users of financial statements, you do look at cash flows, it is cash flows that will service the debt, not changes in fair value."

In terms of 'geography,' there were varying views about putting fair value information (and related changes in fair value) on the balance sheet (or running changes through the income statement) vs. disclosing it in the footnotes.

FASB Board Member Tom Linsmeier noted he has heard anecdotally that information placed in the footnotes is not subject to "as high quality internal controls," as information that appears in the body of the financial statements.

A panelist replied: "I would disagree; not only are notes subject to audit, they are also subject to Sarbanes-Oxley, so as a preparer, we are not applying less due diligence to the notes than the financial statements."

Convergence Challenge
Additionally, a number of panelists noted concern with the fact that there is a timing mismatch - which could, in the view of some, lead to a potential mismatch in substance - between the IASB’s plan to issue some final standards for financial instruments by year end (in order to be responsive to requests made of the IASB by the G-20 and other governmental bodies); vs. FASB’s plan to release proposals on financial instruments this year, with final standards next year.

Rob Esson of the International Association of Insurance Supervisors asked, "How would FASB be able to converge other than by agreeing with the IASB, if the IASB standard is effectively already out there and being applied as of Dec. 31, 2009?"

FASB Board Member Larry Smith replied, "We are participating in meetings of the IASB, where [they are] redeliberating comments they’ve received on [their] ED [Exposure Draft]... we are ttying to influence the thinking of the IASB, so that it is unlikely we’ll have to issue something that is very different than what the IASB issues."

IASB Board Member Jim Leisenring responded to Esson by saying, "I think you know the answer to the question, you heard what [IASB Board Member] Bob Garnett said [last] Thursday, the political demagogues that have insisted on this by 12.31.09, probably will get something by that date." He added, "We will remain absolutely committed to being converged [with FASB], the people who adopt [the new IASB standard as of] 12.31.09 will go through two fundamenatally [different] adoptions; FASB will not rubber stamp [in its own standard, what the IASB does in its standard]."

FASB Chairman Robert Herz added, "Talking personally here, people know I am very committed to convergence, [there are] big advantages from having a single set of high quality standards. That having been said, our U.S. responsibility under the Securities Acts, [and] under the Sabanes-Oxley Act - under the policy statement from the SEC, involves a lot of things, one of which is convergence, stated in [the] goal of assessing the degree to which convergence makes sense to U.S. investors, protection of U.S. investors; we need to go through that assessment, I hope in the end, politics aside, we can [achieve that]... [it is] important to look at all the issues, a lot are interrelated, whereas the IASB believes they can do it [issue financial instruments standards] in a staged fashion... obviously keenly aware of the difficulty of achieving both goals together."

Tom Panther of the American Bankers Association noted, "In our coment letter we expressed some concerns with IASB's 3-phase approach [segmenting, e.g., measurement from impairment], particularly around, sometimes the discussion gets blurred, maybe even here today, [in] the distinction between measurement - what is the model for measurement - and impairment.... We would support much more of a joint project [between FASB and he IASB]; the operational issues on businesses the ABA represents would be extraordinary... we have talked about dual models.. bifurcating on the balance sheet, those types of things really need to get vetted and understood… and the voice of the broader business community just doesn’t have resources to [allocate] to it [i.e., analyzing and commenting on the proposals] at this point in time."

Carlo Pippolo, a Partner at Ernst & Young, made the final remark at the roundtable, saying that in his firm’s view: “ [C]onvergence is something we agree is critically important, ideally, we’d ask the IASB to take more time, deal with a more targeted project rather than, as [IASB Board member] Jim [Leisenring] said, some companies early adopting [the IASB standard this year], and change again down the road [if IASB amends its standard to conform with FASB]; ideally, [we’d like to see] the boards’ issuing final [standards] at the same time.”

We are aware of some issues with email delivery of our blog posts last Thursday Sept. 10 and Friday Sept. 11, respectively. If you did not receive them, you can read them here and here.

Obama To Wall Street: Return To Normalcy Cannot Lead To Complacency

Earlier today, on the one-year anniversary of Lehman Brothers’ downfall - an event viewed as the penultimate trigger point in the credit crisis, leading to a broader economic crisis which the government sought to stem through the Emergency Economic Stabilization Act of 2008, and the American Recovery and Reinvestment Act of 2009 - President Barack Obama gave a speech on Wall Street in which he noted that: “the growing stability resulting from these interventions means we are beginning to return to normalcy. But what I want to emphasize is this: normalcy cannot lead to complacency.”

Obama called for common-sense, financial regulatory reform, adding: "I have urged leaders in Congress to pass regulatory reform this year and both Congressman Frank and Senator Dodd, who are leading this effort, have made it clear that that's what they intend to do."

"Now there will be those who defend the status quo -- there always are," said Obama, adding, "There will be those who argue we should do less or nothing at all. There will be those who engage in revisionist history or have selective memories, and don't seem to recall what we just went through last year. But to them I'd say only this: Do you really believe that the absence of sound regulation one year ago was good for the financial system? Do you believe the resulting decline in markets and wealth and unemployment, the wrenching hardship that families are going through all across the country, was somehow good for our economy? Was that good for the American people?"

On the subject of systemic risk, Obama said:
While holding the Federal Reserve fully accountable for regulation of the largest, most interconnected firms, we'll create an oversight council to bring together regulators from across markets to share information, to identify gaps in regulation, and to tackle issues that don't fit neatly into an organizational chart. We'll also require these financial firms to meet stronger capital and liquidity requirements and observe greater constraints on their risky behavior. That's one of the lessons of the past year. The only way to avoid a crisis of this magnitude is to ensure that large firms can't take risks that threaten our entire financial system, and to make sure that they have the resources to weather even the worst of economic storms.

Even as we've proposed safeguards to make the failure of large and interconnected firms less likely, we've also created -- proposed creating what's called "resolution authority" in the event that such a failure happens and poses a threat to the stability of the financial system. This is intended to put an end to the idea that some firms are "too big to fail."
He reiterated his plan to create a Consumer Financial Protection Agency, and to close regulatory gaps and loopholes domestically and as part of international regulation, a subject he noted will arise at the upcoming G-20 meeting later this month in Pittsburgh.

Read a transcript of Obama’s remarks; here is the list of attendees invited to the speech. (For additional background, see our June 17 post on the U.S. Treasury Department's report issued in June on Financial Regulatory Reform: A New Foundation.)

Republican Response; Other Commentary
House Minority Leader John Boehner (R-OH) issued a response entitled, President Fails to Provide “Clear Exit Strategy” from Continued Washington Bailouts; Boehner's response links to the Comprehensive Financial Regulatory Reform legislation suggested by House Republicans earlier this year.

Related coverage of the President's speech and the topic of financial regulatory reform in general can be found in Forbes, The Banker-in-Chief on Wall Street, and The Hard Truth About Financial Regulation, and in Time, On Finance Reform, Obama's Unlikely Partner, about the Ranking Republican on the Senate Banking Commitee, Richard Shelby (R-AL).

Friday, September 11, 2009

Sarbanes-Oxley, Fair Value, And What Counts

We received the following information from Jonathan Jachym and Leigh Stapleton of the U.S. Chamber of Commerce. The message is directed at small public companies (i.e. non-accelerated filers, generally defined as those with less than $75 million market cap).

The U.S. Chamber’s Center for Capital Market’s Competitiveness is conducting an on-line survey to compile data on the projected costs of Sarbanes-Oxley (SOX) Section 404(b) and its impact on smaller public companies, defined in SEC rules as “non-accelerated filers”.

Sarbanes-Oxley Section 404(b) requires the external auditor to report on the adequacy of the company’s internal control over financial reporting.

In 2007 the Chamber released a similar study, which showed that compliance with Section 404(b) would disproportionately burden small businesses. That study was part of a successful effort to delay compliance with 404(b) for a full year.

Please take a moment to complete the brief survey of eight questions that will inform Capitol Hill and The U.S. Securities and Exchange Commission (SEC) of the impacts that Section 404(b) will have on small business. We appreciate your time and effort in this regard. Here is the link to the U.S. Chamber's online survey on Sarbox 404(b) The survey will be available until next Friday, September 18

Please note FEI is not conducting the above-referenced survey, we are simply sharing the above information about the U.S. Chamber of Commerce survey. If you have any questions about the U.S. Chamber's survey, contact Jonathan L. Jachym, Legal and Regulatory Counsel, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

The most recent survey conducted by FEI relating to audit fees generally was published earlier this year; see FEI's June 3, 2009 press release; full survey results can be obtained from the Financial Executives Research Foundation (FERF) bookstore.

Small Co Implementation of 404(b) Required This Year; SEC Cost-Benefit Study Awaited

As we noted in this blog on Dec. 18, 2008, and Jan. 17, 2009, the SEC's Office of Economic Analysis launched a separate survey last year on the costs and benefits of implementation of the existing rules under Sarbanes-Oxley Section 404. According to SEC's Jan. 16, 2009 press release, the SEC received more than 2,000 responses to its survey.

When the SEC originally announced on June 20, 2008, that it would embark on a study of the costs and benefits of implementation of internal control reporting under the SEC and PCAOB rules issued under the Sarbanes-Oxley Act (specifically Section 404), the Commission concurrently extended the effective date for small public companies of the Sarbanes-Oxley Section 404(b) external audit requirement. Specifically, Section 404(b) requires external auditors to opine on a small companies' internal controls; the 404(b) requirement was extended to fiscal years ending on or after Dec. 15, 2009. (See SEC Final Rule, Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers posted June 26, 2008 and related Technical Amendment.)

The objective of SEC's cost-benefit study was explained in SEC's June 20, 2008 press release as follows:
The SEC staff's cost-benefit study will help determine whether the new management guidance on evaluating the internal controls over financial reporting issued by the Commission in June 2007 and the Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 approved by the Commission in July 2007 are having the intended effect of facilitating more cost-effective internal control evaluations and audits of smaller reporting companies. The study includes gathering new data from a broad array of companies about the costs and benefits of compliance with the Section 404 requirements. The study also pays special attention to those smaller companies that are complying for the first time with the requirements that are currently in effect.

Significantly, the extension of the Section 404(b) requirement for small companies did not impact the deadline for the Section 404(a) requirement for management's report on internal control, which was delayed previously for small public companies, but became effective in 2007. (Large public companies have already been complying with both Section 404(a) and Section 404(b) since 2005.)

Additionally, the extension for small companies with respect to the Section 404(b) external auditor's report on internal control does not impact longstanding requirements for audited financial statements; 404(b) is scoped specifically to the audit of internal control (which will become integrated with the existing audit of the financial statements).

Results of the SEC's survey have not yet been released, and are expected to be included in a broader SEC study of the costs and benefits of Sarbanes-Oxley Section 404, as noted in the SEC press releases cited above.

Resources For Small Public Companies
Small public companies can find resources relating to Sarbanes-Oxley Section 404 on SEC's Spotlight on Internal Control Reporting Provisions, including SEC's 2007 publication: Sarbanes-Oxley Section 404: A Guide for Small Business.

See also PCAOB's webpage on Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements; the webpage includes a link to PCAOB Staff Views on [AS5]: Guidance for Smaller Public Companies.

The PCAOB also is continuing its series of Forums on Auditing in the Small Business Environment; with forums set to take place in Houston Sept. 23, Denver Nov. 3, and Orlando Dec. 1. Preregistration is required; further details on upcoming forums, and links to slides from past forums, are available here.

Additionally, see information published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), including COSO's 2006 Guidance for Smaller Public Companies.

American Enterprise Inst. Holds Forum On Sarbanes-Oxley and the Financial Crisis

In related news, earlier this week, the American Enterprise Institute hosted a forum on: Sarbanes-Oxley and the Financial Crisis. The keynote presentation was given by former Speaker of the House of Representatives (and current AEI senior fellow) Newt Gingrich; additional commentary was provided by former SEC Chairman (and current CEO of Kalorama Partners LLC) Harvey L. Pitt, as well as Hans Bader of the Competitive Enterprise Institute, and AEI resident fellow Alex J. Pollock. Recordings of the program are posted on the American Enterprise Institute's website in video and audio format.

Gingrich emphasized six points in his remarks at the American Enterprise Institute program, according to FEI intern Maxwell Hyman who attended the program:

  1. Sarbanes-Oxley has a devastating effect entrepreneurship and venture capital. The costs of Sarbanes-Oxley compliance delay start up and innovation for small businesses, and cuts into the already low funding of venture capital.

  2. Congress estimated the costs of the bill to small businesses to be around $90,000 dollars, but they are actually upwards $900,000 dollars. Congress has a duty to repeal acts that are 100% over their estimated cost, but Sarbox is about 1000% of the original estimate.

  3. Our economy is beginning to become burdened by regulations like Sarbanes Oxley to a point where the country is at risk of losing its competitive edge against governments that do not have much regulation, such as China which takes a very pragmatic approach to the economy and job growth. Our unemployment rate could easily reach 20%. In these conditions, any measure that prevents startup is suicidal.

  4. Sarbox misdirects the management and the board of directors. Executives and management are focusing on PCAOB and Act compliance instead of creating new and innovative ways to compete in an international market. “The criminalization of Boards of directors is fundamentally irrational if you want economic growth.”

  5. Sarbanes-Oxley was created to punish the public sector for bad accounting practices, but ironically, companies are now moving into the private sector to avoid regulations.

  6. The Act also didn’t contribute any information during the start of the most recent financial meltdown. Many companies were associated with accounting and auditing fraud, but there weren’t any known successes of the PCAOB in finding any wrongdoing. Despite all the costs, there is no net gain from the bill.

ABA Asks Geithner, Bernanke to Raise Fair Value Accounting At G-20

WebCPA reported earlier today: Bankers Want G-20 To Rein In FASB, IASB. The article notes:

The American Bankers Association has written to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke asking them to raise accounting issues at the upcoming G-20 meeting in Pittsburgh in order to curb efforts by standard-setters to expand mark-to-market accounting to loans and debt instruments. In the letter, ABA president and CEO Edward Yingling claimed that the mark-to-market accounting changes proposed by the Financial Accounting Standards Board and the International Accounting Standards Board are at odds with the changes recommended by the G-20 in a statement last week.

"Most experts, including banking leaders, believe that repairs are needed to the accounting model, particularly in the area of provisioning for loan losses,” wrote Yingling. However, he argued that the FASB and IASB proposals go too far and “would undermine the G-20’s efforts to strengthen the financial system.”

Read ABA's Sept. 9, 2009 Letter to Geithner, Bernanke. [NOTE: See our Aug. 13, 2009 post for further details on ABA's concerns with the FASB and IASB financial instruments projects, particularly as relate to fair value.] For related reading, see our Sept. 8 post about the G-20. [UPDATE: We have followed fair value accounting/mark-to-market issues frequently in this blog; for just a few examples, see our posts from Feb. 26, 2009, Feb. 24, 2009, April 20, 2009, April 3, 2009, Nov. 26, 2008, Nov. 23, 2008, and Oct. 13, 2008.]

For another point of view, see Floyd Norris' article in the New York Times, Accountants Misled Us Into The Crisis, and Jonathan Weil's commentary in Bloomberg, Five People Who Stayed Clean in Banking's Bilge.

Remembering 9/11

I feel like no post today would be complete without saying something about 9/11. (These are my views only, see disclaimer in the right margin of this blog.) Perhaps the moment of silence itself which took place earlier today is the most important thing that can be said, if one uses that time and other times to consider the enormity of the losses due to the terrorist attacks carried out by hijacking four planes that brought down One and Two World Trade Center, crashed into the Pentagon in Washington, DC and crashed in Shanksville, PA, that fateful day in 2001. Time spent during such a moment of silence and some time spent during the rest of the year can be used in contemplation of whatever is within one's power though one's personal and family life, job, or service to one's country and home town, to help prevent such tragic events in the future, and to protect and rescue those impacted by such events. Here's coverage of memorial events taking place today as noted in the New York Times, Washington Post, and The Daily American of Somerset County, PA.

I remember sitting in a meeting room in the basement of SEC's old headquarters at 450 Fifth St. NW on 9/11/01, in one of the periodic meetings held between SEC staff and FASB staff. (At the time I worked for the SEC.) I remember vividly the information slowly trickling through the building, particularly from those who had television sets in a couple places in the building (since the internet and phones were down). I also remember many of the people who were in that room and in the building that day, and one thing I'll say is that, although retention of staff is an issue that every organization faces - including the SEC - as noted in the Senate Banking Hearing on the Madoff affair yesterday, I know there are numerous exceptional people who were at the SEC in 2001 and are still there today, or are at the PCAOB today, or FASB today, serving investors and the capital markets. Moreover, I'd like to give a shout-out to all the folks who risk their lives as police, fire and emergency workers, those are the real heroes.

Remembering 9/11 puts into perspective what really counts, and regardless where we stand on issues like Sarbanes-Oxley, or fair value accounting, it's important to remember there's more that brings us together than tears us apart.

(Video credit: Bruce Springsteen performing You're Missing (via YouTube/Tonio19494) from his album released in memory of the victims of 9/11: The Rising.)

Thursday, September 10, 2009

Kotz, Khuzami, Walsh Testimony Posted for Senate Banking Hearing re: Madoff

Moments ago, Senate Banking Committee Chairman Chris Dodd opened the committee's hearing on: Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance. Testimony has been posted on the SEC website for SEC Inspector General H. David Kotz, and for the Robert Khuzami, Director of the SEC's Division of Enforcement & John Walsh, Acting Director, SEC's Office of Compliance Inspections & Examinations (OCIE). Also scheduled to testify: Harry Markopolos. All testimony will be posted on the hearing website linked above. [UPDATE 5:17 pm: The Association of Certified Fraud Examiners (ACFE) has posted Markopolos' testimony here.]

Compliance Week is live-blogging the hearing here.

Tuesday, September 8, 2009

G-20 Finance Ministers Issue Progress Report, Next Steps In Advance of Pittsburgh Summit

As a lead-in to the G-20 meeting set to take place in Pittsburgh on Sept. 24-25, at which President Barack Obama will host the leaders of nations representing 85% of the world's economy, the G-20 Finance Ministers and Central Bank Governors held a meeting in London on Sept. 4-5. At the conclusion of the Sept. 4-5 meeting, the following documents were released:

Accounting Convergence One Among Many Issues
Convergence of accounting standards is one among many issues in the G-20 progress report and declaration. Other issues relate to credit rating agencies, corporate governance (including board oversight of risk and compensation), executive compensation, countercyclical measures, prudential regulation, regulation of systemically significant institutions, non-cooperative (tax) jurisdictions, and more.

The topic of accounting convergence is treated more narrowly (i.e. scoped to specific transactions) in the short-term declaration vs. the longer-term progress report. Topic number 6 in the declaration notes the importance of striving toward:

Convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the IASB is encouraged to take account of the Basel Committee guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group; and its constitutional review should improve the involvement of stakeholders, including prudential regulators and the emerging markets.

In comparison, the longer term, more widely scoped progress report addresses the G-20 leader's prior calls (at the 11/08 and 4/09 G-20 Summits) as follows under Item 87 of the Washington Action Plan:

  • Action plan text: "Accounting standard setters should take action to make significant progress towards a single set of high quality global accounting standards by the end of 2009."
  • Progress made (note the language "converge with or adopt" - emphasis added): "In addition to the specific international convergence activities noted above, nearly all FSB jurisdictions have programmes underway to converge with or adopt the standards of the International Accounting Standards Board by 2012."
Besides convergence, there are various other steps in the topic of Accounting in the progress report to the Washington Action Plan, including reducing complexity, addressing off-balance sheet transactions, increasing involvement of stakeholders, including prudential regulators, in setting/overseeing the establishment of accounting standards, enhancing disclosure relating to complex financial products, and more.

Props to WSJ which provided links to the G-20 doc's next to the article which appeared in yesterday's WSJ, G-20 Sets Broad Bank Pact : Finance Officials Still Working on Likely Sticking Points, Such as Bonus Caps, by Stephen Fidler and Laurence Norman.

Other commentary on IFRS and Accounting: Lagarde, Pounder

More commentary relating to the G-20 generally and accounting specifically can be found in the article, G20: ECB Noyer: Uniform Accounting Key To Stronger Regulation, by Gabriele Parussini, Dow Jones Newswires (via Nasdaq website).

Separately, I highly recommend (reminder: see disclaimer on the right margin of this blog) Bruce Pounder's recent post in his IFRS in Perspective blog, (a fellow blogger in AccountingWEB Bloggers' Crew), specifically his Sept. 6 post on: One Set of Standards vs. One Standard-Setter.

Promoting Transparency In Financial Reporting Act Up For Vote In Congress

[UPDATE 9.9.09: The PTFRA bill passed the House today, see press release issued by Rep. Chris Lee (R-NY), sponsor of the bill]

Congress is set to reprise this week its earlier passage of the Promoting Transparency in Financial Reporting Act. (The House passed the bill in prior sessions, but the bill was never acted on in the Senate). Currently numbered H.R. 2664, the bill would, among other things:

[R]equire annual oral testimony before the [House] Financial Services Committee of the Chairperson or a designee of the Chairperson of the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board, relating to their efforts to promote transparency in financial reporting.

Specifically, as described in H.R. 2664, the PTFRA would require that, beginning in 2009, and for five years thereafter, annual testimony of the SEC, FASB and PCAOB Chairmen (or their designees) would be provided to the House Financial Services Committee on "their efforts to reduce the complexity in financial reporting to provide more accurate and clear financial information to investors, including

  1. reassessing complex and outdated accounting standards;
  2. improving the understandability, consistency, and overall usability of the existing accounting and auditing literature;
  3. developing principles-based accounting standards;
  4. encouraging the use and acceptance of interactive data; and
  5. promoting disclosures in ‘‘plain English’’.
According to The Weekly Leader published by the House Majority Leader's Office on Sept. 3, the PTFRA is among bills to be voted on this week under the House's Suspension rules. (Hat tip to Capitol Hill Reports which reported on the upcoming vote as well.)

Virtually identifical versions of the bill were passed by the House during previous sessions of Congress under the Bush administration but were never voted on in the Senate.

The bill, originally introduced by Rep. Geoff Davis (R-KY) concurrent with a Congressional hearing on Fostering Accurancy and Transparency in Financial Reporting (March 29, 2006 hearing of the Subcommittee on Capital Markets, House Financial Services Committee). (See FEI Summary of the hearing; then-FEI President & CEO Colleen Cunningham testified at the hearing, as well as FASB Chairman Robert Herz, PCAOB's then-Acting Chairman Bill Gradison, and SEC's then-Acting Chief Accountant Scott Taub, in addition to others).

A brief history of the bill appearing in Rep. Davis' bio notes that

The bill would increase Congressional oversight of financial reporting by requiring the government agencies responsible for securities and accounting standards to testify ... on steps they are taking to improve financial reporting regulations. The bill passed the House in both the 109th and 110th Congresses, but has yet to be considered by the Senate.

The bill has been reintroduced in the 111th Congress by Rep. Christopher Lee (R-NY) and is co-sponsored by Rep. Davis, Rep. David Scott [D-GA], Rep. Michael Castle (R-DE) and Rep. Adam Putnam (R-FL).

What Might The Testimony Say?
Among developments which the FASB, PCAOB and SEC Chairmen could potentially include in their testimony, if the bill were to become law, are:

  1. Reducing complexity: FASB's final standards issued earlier this year, such as FAS 166 and 167 amending FAS 140 and FIN 46R on securitization and consolidation (e.g. consolidation of what used to be called QSPEs) reassessing complex and outdated accounting standards; and FASB and IASB's efforts to amend financial instruments standards - with one of the goals being to 'simplify' the accounting (although, as noted in some earlier posts in this blog, some constituents believe some of the proposed 'simplifications' such as a move to fair valuing a broder populations of financial instruments, particularly those that are not actively traded, would not necessarily be a 'simplification.')
  2. Increasing understandability, consistency, usability: At least on the consistency front, FASB's Codification was launched on July 1 as the single source of U.S. GAAP. Since the Codification is still so new, various parties are debating its 'usability,' and some have questioned the two-tiered subscription structure in which basic access and some rudimentary search functionality is free, but users are charged to have access to the Professional View of the Codification, which provides more sophisticated search functions. Some who have commented on this two tiered subscription structure include Professor Bob Jensen, and Broc Romanek of blog. Separately, FASB launched earlier this summer a new project on the Disclosure Framework, which, according to this FASB press release, has the goal of considering certain SEC (e.g. MD&A) and FASB disclosure requirements holistically.
  3. Principles-based: FASB and the IASB have been aiming to issue principles-based accounting standards; (some say both board's have largely done so historically, although many characterize FASB standards as historically being relatively more rules-based than IASB standards, potentially, in part, due to the differing litigation environment in the U.S.)
  4. Interactive reporting: SEC's final rule approved last year mandates that public companies provide exhibits to their filings to include financial reports and certain related information tagged with interactive data, specifically eXtensible Business Reporting Language or XBRL. (The interactive data rule comes into effect this year with the largest public companies, and is being phased in over a three year period by company size). See also the report issued by the SEC last year on its 21st Century Disclosure Initiative, although some aspects of that report may be more or less on hold as the new administration tackles various pressing matters.
  5. Plain English: FASB's Disclosure Framework Project mentioned above, and some of the recommendations in the final report issued last year by SEC's Advisory Committee on Improvements to Financial Reporting. See also SEC's new Investor Advisory Committee, formed earier this year, their ultimate recommendations could potentiall relate to all 5 of these areas. The PCAOB also recently announced it will form an Investor Advisory Committee as well.
My two cents (I reminder you of the disclaimer which appears in the right margin of this blog): The dual aim of promoting transparency and reducing complexity in financial reporting will be important features to consider in all of the above initiatives and those that will follow. Also, assessing the testimony provided under the PTFRA will require an analysis of substance over form, e.g. what does it mean when someone says initiative XYZ will increase 'transparency' vs. lead to information overload; how does initiative ABC simplify something or make it more understandable to users of financial statements, how has the goal of reducing complexity been considered alongside the goal of increasing transparency, etc. Separately, I believe Congress would be performing a legitimate oversight function by requiring annual testimony from the Chairmen of the SEC, FASB and PCAOB on these matters, and this form of oversight can be done in an informational way (more of a carrot than a stick), thereby avoiding impinging on the independence of any of the above agencies/organizations. As always, we invite comments to be posted on these points or other matters of interest with respect to the blog.