Friday, October 30, 2009

Kroeker, Volcker on Convergence

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

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

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

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

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

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

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

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

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

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

  • financial instruments

  • revenue recognition, and

  • consolidation and derecognition
Read more in the webcpa article.

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

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

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

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

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

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

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

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

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

GT's survey was referenced in the article by Tim Reason entitled, Pro-American Mood Clouds Convergence. Reason also included snippets from the upcoming book by Robert Pozen, chairman of MFS Investment Management's Reason reports that Pozen, chair of the SEC Advisory Committee on Improvements to Financial Reporting which issued its final report last year, believes that adoption of IFRS would only make sense for the largest companies in the U.S., which have international operations. Pozen's book, entitled Too Big To Save?, is due out in November.

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

Thursday, October 29, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One of the more outspoken European leaders on matters relating to accounting has been French Finance Minister Christine Lagarde, who referenced accounting and other matters in her Oct. 7 oped published in the Financial Times, The Crisis Demands That We Finish What We Started . Regarding accounting, she said:
“Further progress is also needed on accounting standards. Regulators should have
their say on their ultimate purpose and ensure they do not promote volatility. Market value must be used, when relevant, in considering how a business uses its assets. But it should not be an excuse for failing to measure, assess and account. This is not a political issue but rather a matter of concern for society."
Lagarde's remarks were covered in articles including The French Finance Chief, Society and Accounting (Gavin Hicks, editor, Accountancy Age), and France’s Lagarde Dissatisfied With Accounting Rule Plan, (Tamora Vidaillet, Reuters.)

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

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

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

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

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

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

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

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

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

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

Thursday, October 22, 2009

IFRS: Results & Invitations

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

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

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

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

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

IFRS Boot Camp

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

Wednesday, October 21, 2009

SEC Seeks Comment on e-Proxy, Strat Plan

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

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

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

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

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

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

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

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

Tuesday, October 20, 2009

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

We have posted our detailed highlights of Day 2 of the PCAOB's Oct. 14-15, 2009 Standing Advisory Group meeting. (This is in addition to highlights of Day 1 posted last week.) Discussion during Day 2 of the SAG meeting focused on:
  • fair value measurements and using the work of specialists,
  • communication with audit committees, and
  • related parties (and certain other matters)

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, October 14, 2009

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

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

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

As in prior years, the standard-setting agenda focuses on the board's current determination of near-term priority projects. Different from prior years, however, the agenda includes 'milestones' for projected dates of finalization of these projects, and the dates go out to 2011. Here are the dozen items listed on PCAOB's standard-setting agenda. [Target dates per PCAOB schedule shown in brackets next to each item.]
  1. Risk Assessment – Comment period on proposals ended Feb. 18, 2009. Staff is working toward re-proposing the standards for public comment. [Re-proposed standards: 4Q2009; Final standard: 3Q2010.]
  2. Audit Confirmations –Comment period on Concept Release ended May 29, 2009. The staff has analyzed the comments received and is discussing with the Board the staff's views on how to address the comments.[Proposed standard: 1Q2010; Final standard: 3Q2010]
  3. Signing the Auditor's Report - Comment period on Concept Release ended Sept. 11, 2009. The staff is analyzing the comments received and will be discussing with the Board the staff's views on how to address the comments.[Board decide whether to proceed with this standard-setting project 4Q2009; if decision to proceed, then proposal 1Q2010; final standard 3Q2010.]
  4. Application of the Sarbanes-Oxley Act's Provision on "Failure to Supervise" – Staff is preparing a draft release for the Board's consideration relating to the Board's application of Section 105(c)(6) of the Act, which authorizes the Board to impose sanctions on firms and individuals for failure to supervise. The release would also seek comment on concepts relating to what, if any, rulemaking or standard-setting might usefully supplement the Board's application of that provision.[1Q2010: consider whether to propose standards; if decision to proceed, proposal 2Q2010; final standard 4Q2010.]
  5. Accounting Estimates, Fair Value Measurements, and Specialists – Staff is evaluating potential revisions to the standards on accounting estimates, fair value measurements, and using the work of a specialist. [Proposal 2Q2010; re-proposed or final standard 4Q2010; adopt final standard 2Q2011.]
  6. Communication with Audit Committees –Staff is developing a briefing paper for the Board's consideration on whether the staff should pursue a standards-setting project. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
  7. Related Parties – Staff is evaluating potential revisions to the related parties auditing standard. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
  8. Global Quality Control Standards, Including Control Over Work of Affiliated Firms – Staff is evaluating potential revisions to the quality control standards. This will include an evaluation of Appendix K. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  9. Principal Auditor – Staff is evaluating potential revisions to the 'principal auditor' auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  10. Going Concern – Staff is monitoring FASB's project on Going Concern, and plans to update the timeline when FASB determines their action plan for the accounting standard. Staff will assess if any conforming amendments are needed to the Board's auditing standards to align with the FASB's final standard, and will evaluate any additional issues and determine whether to pursue a standards-setting project on going concern.[Determine whether to add a project on this 1Q2010.]
  11. Subsequent Events – Staff is evaluating FASB's new accounting standard on subsequent events and analyzing how it may affect the Board's subsequent events auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  12. Applicability of SECPS Requirements to all Registered Firms – Because registered firms (generally non-U.S. firms and some smaller firms) that were not members of the SECPS in April 2003 when the Board adopted certain of the SECPS [AICPA's former SEC Practice Section] requirements are not subject to these interim quality control requirements, the staff is analyzing different options to determine if it is feasible to extend the SECPS requirements to all registered firms. This excludes Appendices E (superseded by AS No. 7) and K (part of global quality control standards standards-setting project). .[1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 1Q2011; adopt final standard 4Q2011.]
The above list of projects is subject to change, noted Baumann, based on review of comment letters received on proposals and concept releases, board input on the agenda, and related effects of actions external to the PCAOB, including legislation, and standard-setting or rulemaking activity by the U.S. Securities and Exchange Commission or the Financial Accounting Standards Board.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More Details from SAG Meeting
If you are an FEI member, you can read more in FEI's seven-page summary of the SAG meeting. Not an FEI member? What are you waiting for? FEI membership entitles you to our members-only news summaries, networking events, discounts on conferences, free reports from FEI's research affiliate, the Financial Executives Research Foundation, and more! Learn more about FEI membership.

COSO Updated Fraud Study Coming; Garrett Proposes Sarbox Exemption

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

Carcello, the Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, said of the upcoming update to COSO's fraud study, "Although not done, we do have some preliminary information:"
  • Fraud continues to be a big problem, well over 300 fraud companies between 1998 and 2007, well over 1,000 enforcement releases related to those 300 fraud companies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, October 7, 2009

More On: Sarbox 404b For Small Cos, AS5

We reported recently on the PCAOB's issuance of its '4010' report on inspection results on the implementation of AS5, its revised standard on internal control audits (replacing AS2), and on the SEC's announcement last week of a final delay of the implementation date for small co's (i..e. 'nonaccelerated filers,' generally defined as public co's with less than $75 million market cap) to file their first auditor's reports on internal control (performed in accordance with PCAOB's AS5), as required under Sarbanes-Oxley Section 404b. (Sarbox Section 404a requires a Management Report on internal control, which small co's already provide.

Large co's have been providing the Management report and auditors report on internal control for a few years already, and declines in costs have been reported; however the subject of overall cost-benefit to small co's was the subject of discussion, and a number of extensions of time for further study by the SEC, given the element of fixed cost that appeared to be associated with the 404b audit of internal control in particular.

The SEC announced this final delay in 404b for small co's (delaying to annual reports filed for fiscal years ending on or after June 15, 2010) as part of their announcement of the release of their study of the costs and benefits of reporting under Sarbanes-Oxley Section 404. The study was undertaken in part to examine any improvement to the cost-benefit equation arising from implementation of PCAOB's AS5 (replacing AS2) on the auditor's report on internal control, and the SEC's updated rules on the management report on internal control.

Further Reading
Some valuable follow-on reporting on these recent SEC and PCAOB developments can be found in the following posts by these bloggers: (they receive some interesting comments on many of their posts as well):

Auditing Standard 5: How Now Brown Cow? Oct. 3, by Francine McKenna, in her blog, Re: The Auditors.

S-OX 404b for Nonaccelerated Filers: A Political Crime Waiting to Happen, Oct. 5 by Prof. Tom Selling, in his blog, The Accounting Onion.

Monday, October 5, 2009

SEC To Release Draft Strat Plan For Public Comment

SEC staff told the SEC's Investor Advisory Committee (IAC) earlier today that the SEC will publish its draft Strategic Plan (SP) for public comment - likely for a 3o day comment period - as soon as the draft is approved for release by the Commission.

Four Goals
The draft SP - similar to the 2004-09 SP - contains 4 overarching goals, summarized on slides 5-8 of today's SEC IAC handout, and listed below. By and large the overarching goals cover the same broad areas as the 2004-09 SP. Changes are shown in brackets; the thrust of the goals as represented in some wording changes and moreso in the detail thereunder may be viewed by some as reflecting renewed rigor in light of events unfolding during the credit crisis and in response to lessons learned (as identified in SEC Office of Inspector General report issued on Aug. 31) regarding the SEC's handling of the Madoff fraud.

The four goals in the draft SP [vs. 2004-09 SP] are:
  1. Foster and enforce compliance with the federal securities laws ["Foster and" is new]
  2. Establish an effective regulatory environment ["Establish" replaces "Sustain;" "effective" replaces "effective and flexible"]
  3. Facilitate access to the information investors need to make informed investment decisions ["Faciliate access" replaces "encourage and promote" - specifically, goal 3 in the 2004-09 SP states: "Encourage and promote informed investment decision making"]
  4. Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital [The draft SP is is a more detailed articulation of goal 4 in the 2004-09 SP which states: "Maximize the Use of SEC Resources"]
Highlights from OCA, Corp Fin Remarks

Below are selected highlights of remarks made by Jeff Minton, Chief Counsel in the SEC’s Office of Chief Accountant, and Shelley Parratt, Deputy Director, Disclosure Operations, SEC’s Division of Corporation Finance, to the SEC's Investor Advisory Committee during the discussion of SEC's draft Strategic Plan (SP) earlier today. (NOTE: These are only a few highlights from Minton’s and Parratt’s remarks; staff from other SEC divisions spoke as well.)

Jeff Minton, OCA:
One of the goals [goal 2, outcome 2.1] of the SEC is to establish and maintain a regulatory environment that promotes high quality:
  • disclosure,
  • financial reporting, and
  • [corporate] governance.

Corporate governance: the SEC [is seeking] enhanced disclosures about:

  • risk management,
  • executive compensation decisions & governance

Proxy voting:

  • The SEC will embark on a comprehensive review of proxy voting [rules].[See similar statement under Shelly Parratt's remarks, below]

Accounting and auditing:

  • The SEC will continue to promote high quality [accounting] standards by independent standard-setters. For example, the SEC will continue to support the FASB’s efforts to improve financial reporting, including recent initiatives to improve off-balance sheet accounting and accounting for financial instruments.
  • The SEC supports…[moving toward] a single set of high quality global standards [and supports] ongoing convergence initiatives between FASB and the IASB.
  • The SEC will continue to oversee the PCAOB with its goal of increasing audit quality through its standard-setting and inspections. [Of note:] The PCAOB has recently formed its own Investor Advisory Group.

Asset-backed securities:

  • SEC is looking to improve registration and disclosure requirements for asset backed securities. [See similar comment under Shelly Parratt's remarks, below]


  • SEC is looking to modernize beneficial ownership reporting requirements to address disclosure obligations for equity swaps and [certain other items]

Shelly Parratt, Corp Fin

Reg S-K:

  • [We are] looking at our core disclosure requirements [in] Reg S-K, those are the core disclosure requirements a company has to provide annually and in its transactional filings, we are going to take a look at those and make sure those are :
    - meeting the needs of modern day investors,
    - eliminate redundancies,
    - bring up to date

Proxy voting, shareholder communications

  • Comprehensive review of proxy voting and shareholder communications [rules] to bring more modern practices into the rules.

Mutual funds:

  • [Part of the disclosure review project will relate to] the mutual fund summary prospectus project that the Division of Investment Management is engaged with. [Susan Nash of the Division of Investment Management gave additional remarks at the IAC meeting.]

Asset-backed securities:

  • [Regarding] specialized categories of issuers and complexity of reporting, [we will be] taking a look at disclosure requirements for securitized products, asset-backed securities [existing Reg AB]; we are looking at those in light of economic events to see whether those are up to date, whether can improve.

Ownership reporting:

  • Increase in complexity of financial instruments is causing us to take a look at some of our disclosure requirements; [this] goes to [our] project on ownership reporting and how derivative securities impact ownership reporting.

Outreach Programs

Rich Hannibal of SEC's Office of Inspections and Examinations was among other SEC staff who presented information about SEC's draft SP at today's IAC meeting. (Susan Nash of the Division of Investment Management also presented information, as did other staff.) In discussing Goal 1 of the draft SP - Foster and enforce compliance with the federal securities laws - Hannibal spoke of some of SEC's outreach efforts as well as some detail regarding compliance inspections and exams. For example, Hannibal noted that the SEC is aiming to:"Enhance communication strategies, make sure information is disseminated broadly, we will have new efforts to increase our communication, maybe through getting more information out through newspaper articles, conferences, through our website, getting more information out through industry."

Although Hannibal's remarks regarding outreach were focused mainly on OCIE, SEC leadership and staff from throughout the Commission provide outreach at a variety of conferences and events, such as the FEI Current Financial Reporting Issues Conference described below.

FEI CFRI Conference
One opportunity where you can hear from SEC leadership and senior staff is by attending FEI's 28th annual Current Financial Reporting Issues (CFRI) conference. Nov. 16-17 at the Marriott Marquis Times Square in NYC. SEC Commissioner Kathleen Casey is providing a keynote speech at CFRI; additional speakers from the SEC include Chief Accountant Jim Kroeker, and Division of Corp Fin Chief Accountant Wayne Carnall. You also won't want to miss remarks by FASB Chairman Robert Herz, FASB Technical Director Russell Golden, CNBC Senior Analyst Ron Insana, and the opportunity to hear from and network with leading financial executives, auditors, board members and more. Register now for CFRI; early bird rates expire October 18.

See our separate blog post regarding remarks of SEC Deputy Chief of Staff Kayla Gillan, Commissioner Elisse Walter, and Commissioner Luis Aguilar, regarding the status of SEC's proposed rules on proxy access.

NOTE: This blog post is based on information discussed during the beginning of SEC's Oct. 5 Investor Advisory Committee (IAC) meeting; further information may have been presented later in the meeting. The IAC subcommitees are holding closed working sessions during their lunch break, and are set to reconvene in public session to present a summary of their deliberations at approximately 2:15 today.

Finalization of Proxy Access Rules Will Be 'As Soon As Practicable,' Gillan Tells Investor Advisory Committee

In remarks at the SEC Investor Advisory Committee meeting taking place earlier today, SEC Deputy Chief of Staff Kayla Gillan commented on the status of SEC's initiatives on proxy access (aka shareholder nomination of directors).

Her remarks and those of Commissioner Elisse Walter and Commissioner Luis Aguilar appeared to have been made in part in response to recent press stories concerning when the SEC may act on finalizing the proposed proxy access rule(s) issued earlier this year. (See, e.g. this post from earlier today in, linking to this Oct. 2 Bloomberg article , Oct. 3 WSJ article, and Oct. 2 NYT article.)

Gillan noted: "The Commission never announced any date it would make these rules; staff ... know[s] this is an important issue... we received over 500 comment letters, most were well over 100 pages each... over 100 questions were asked in the Release, very detailed responses, staff has an obligation and the Commission has an obligation when it adopts rules to consciensciously consider all comments, that takes time… [we] will bring final rules as soon as practicable."

Commissioner Walter added: "There was a sense out there in some quarters that the Commission was going to act so final rules would be adopted before the start of the next proxy season; for myself and the Commissioner to my right [Aguilar], we both would have [wanted that to happen] … [but] we will not sacrifice excellence to speed."

Commissioner Aguilar said: "I was hopeful we would do it this year, but there is something to be said for doing it right, not in a hurry; I am still an optimist, the year is still ticking, I know what I read in the press last week, nobody asked me my thoughts before [that] went into the press."

Ann Yerger of the Council of Institutional Investors, a member of the SEC IAC, said, "We would prefer to see a workable strong rule."Later in the meeting, Gillan noted: "There is a question about even how soon an amendment to Rule 14a-8 can be effected and implemented."

Commissioner Walter observed there are considerations with respect to Rule 14a-8 and Rule14a-11, noting: "I don’t think I fix this as my position, [but] I think better to join them together ... an approach like 14a-11 is very important to put on the table, I worry about what moving ahead with 14a8 will do to public discussion about 14a-11 and whether it could retard that going into effect."Commissioner Aguilar added, "Part of the answer, we alluded to earlier, it is important we get this right… (our) process is designed to get a lot of informed commentary from a lot of informed people."

NOTE: This blog post is based on information discussed during the beginning of SEC's Oct. 5 Investor Advisory Committee (IAC) meeting; further information may have been presented later in the meeting. The IAC subcommitees are holding closed working sessions during their lunch break, and are set to reconvene in public session to present a summary of their deliberations at approximately 2:15 today.

See also our separate blog post for information on the SEC's draft strategic plan presented to the Investor Advisory Committee earlier today.

Friday, October 2, 2009

SEC Extends Sarbanes-Oxley 404b Deadline for Small Cos

Earlier today, the U.S. Securities and Exchange Commission issued a press release announcing that its Study on SOX Internal Controls (referred to informally as SEC's cost-benefit study) has been published.

The press release also notes that the SEC has decided to extend once again the deadline for small public co's (nonaccelerated filers, defined generally as co's with less than $75 million market cap) to file their first auditor's report on internal controls under Sarbanes-Oxley Section 404b.

Without the extension announced today, small co's would have been required to file their first auditors's report on internal control for fiscal years ending on or after Dec. 15, 2009. Under the extension announced today, the new deadline for small co's to file their first auditor's report on internal control will begin with annual reports of companies with fiscal years ending on or after June 15, 2010.

Small public co's, like their large co. brethren, already have filed their first Management report on internal control under Sarbanes-Oxley Section 404a; only large co's (accelerated filers with over $75 million market cap) have been required to file both the management report (Sarbox 404a) and external auditor's report (Sarbox 404b) on internal control so far.

The rationale for the additional extension of the Sarbox 404b external auditor's report on internal control announced today for small public co's, according to the SEC - as stated in its press release - is as follows [I have added some additional explanatory language in brackets for context]:
The extension [granted by the SEC in 2008, providing an extension for small co's to Dec. 15, 2009] was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the [SEC's cost-benefit] study was published less than three months before the December 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.
Companies and their auditors (and bloggers!) will need more time to read the full SEC study to see how its findings can be used to help "better plan for the required auditor attestation."

I found it interesting that the Conclusion to the SEC's study alludes to the possibility of further rulemaking (which, in truth, is always a possibility) in stating:

[T]he evidence from the survey response data shows that the cost of Section 404 compliance decreased following the Commission’s reforms introduced in 2007 and is expected to decrease further based on respondents’ estimates for the fiscal year in progress at the time of the survey. Moreover, the survey participants perceive the reforms to have been a significant catalyst for these changes. This evidence may prove useful in understanding the effects of the 2007 reforms as well as guiding any subsequent regulatory efforts.
I would suspect we will see a final rule, proposed rule, or some kind of exemptive order posted under Regulatory Actions on the SEC's website either later today or in the next few days, to formalize the extension of time for small co's to file their first Sarbox 404b report which was announced in the SEC's press release earlier today.

As noted in this blog last week, once the PCAOB issued its 4010 report on first year implementation of Auditing Standard No. 5, I assumed that issuance of the SEC's cost-benefit study was probably not far behind.

For additional reporting on the subject of small co. implementation of Sarbox 404b, see Sarah Johnson's article published in yesterday (prior to today's SEC's announcement of the extension for small co's) in her Oct. 1 article entitled: Auditor-Small Issuer Controls Spats Seen.