Monday, June 28, 2010

Supreme Court Decides PCAOB Violates Separation of Powers, But Recommends a Cure

Earlier today, the U.S. Supreme Court issued its opinion in the Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. case, which turns on whether the PCAOB, created as part of the Sarbanes-Oxley Act of 2002, violates the U.S. Constitution's appointments clause.

Here are some highlights from the 5-4 ruling today, (Commissioner Breyer dissenting), in which the Supreme Court stated:


1. The District Court had jurisdiction over these claims......

2. The dual for-cause limitations on the removal of Board members contravene the Constitution’s separation of powers. Pp. 10–27....

.....(d)The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission’s good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission’s broad power over Board functions the equivalent of a power to remove Board members. Altering the Board’s budget or powers is not a meaningful way to controlan inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission’s power over the Board is hardly plenary, as the Boardmay take significant enforcement actions largely independently ofthe Commission. Enacting new SEC rules through the required no-tice and comment procedures would be a poor means of micro-managing the Board, and without certain findings, the Act forbidsany general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes-Oxley Act is highly unusual in committing sub-stantial executive authority to officers protected by two layers ofgood-cause removal. Pp. 21–27.

3. The unconstitutional tenure provisions are severable from the remainder of the statute.

Because “[t]he unconstitutionality of a partof an Act does not necessarily defeat or affect the validity of its re-maining provisions,” Champlin Refining Co. v. Corporation Comm’n of Okla., 286 U. S. 210, 234, the “normal rule” is “that partial . . . in-validation is the required course,” Brockett v. Spokane Arcades, Inc., 472 U. S. 491, 504. The Board’s existence does not violate the sepa-ration of powers, but the substantive removal restrictions imposed by§§7211(e)(6) and 7217(d)(3) do. Concluding that the removal restric-tions here are invalid leaves the Board removable by the Commissionat will. With the tenure restrictions excised, the Act remains “ ‘fullyoperative as a law,’ ” New York v. United States, 505 U. S. 144, 186, and nothing in the Act’s text or historical context makes it “evident”that Congress would have preferred no Board at all to a Board whosemembers are removable at will, Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 684. The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission. Pp. 27–29.

4. The Board’s appointment is consistent with the AppointmentsClause. Pp. 29–33.

(a)The Board members are inferior officers whose appointment Congress may permissibly vest in a “Hea[d] of Departmen[t].” Infe-rior officers “are officers whose work is directed and supervised atsome level” by superiors appointed by the President with the Senate’s consent. Edmond v. United States, 520 U. S. 651, 662–663. Because the good-cause restrictions discussed above are unconstitutional andvoid, the Commission possesses the power to remove Board membersat will, in addition to its other oversight authority. Board members are therefore directed and supervised by the Commission. Pp. 29–30.

(b)The Commission is a “Departmen[t]” under the AppointmentsClause. Freytag v. Commissioner, 501 U. S. 868, 887, n. 4, specifi-cally reserved the question whether a “principal agenc[y], such as”the SEC, is a “Departmen[t].” The Court now adopts the reasoning of the concurring Justices in Freytag, who would have concluded that the SEC is such a “Departmen[t]” because it is a freestanding compo-nent of the Executive Branch not subordinate to or contained within any other such component. This reading is consistent with the com-mon, near-contemporary definition of a “department”; with the earlypractice of Congress, see §3, 1 Stat. 234; and with this Court’s cases,which have never invalidated an appointment made by the head ofsuch an establishment. Pp. 30–31.

(c)The several Commissioners, and not the Chairman, are the Commission’s “Hea[d].”

The Commission’s powers are generallyvested in the Commissioners jointly, not the Chairman alone. The Commissioners do not report to the Chairman, who exercises admin-istrative functions subject to the full Commission’s policies. There is no reason why a multimember body may not be the “Hea[d]” of a“Departmen[t]” that it governs. The Appointments Clause necessarily contemplates collective appointments by the “Courts of Law,” Art. II, §2, cl. 2, and each House of Congress appoints its officers col-lectively, see, e.g., Art. I, §2, cl. 5. Practice has also sanctioned the appointment of inferior officers by multimember agencies. Pp. 31–33.
537 F. 3d 667, affirmed in part, reversed in part, and remanded.

Additional Info
A summary of the ruling and addional analysis will be posted later today by our Washington DC office staff on our website,

The NYT has posted a brief article: Supreme Court Orders Changes to Sarbanes-Oxley Act (via the Associated Press).

Friday, June 25, 2010

FASB-IASB Update G20 Leaders With Progress Report On Convergence

Yesterday, FASB and the IASB sent a letter to the G20 Leaders, updating them with details of the modification to their plan for convergence of accounting standards, first noted in a brief letter to the G20 Finance Ministers on June 2nd.

The letter includes a 15-page detailed progress report, which shows some projects moving beyond the original June, 2011 deadline (generally, to no later than "4Q2011") although there are a few references to 2012 and beyond, such as for derecognition and emissions trading schemes.

The FASB-IASB letter emphasizes:

We understand the importance that the G20 Leaders attach to the issue of accounting standards. At the Pittsburgh Summit, held in September 2009, the G20 leaders stated “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...

We also noted that many stakeholders have voiced concerns about their ability to provide high quality input on the large number of major exposure drafts that were planned for publication in the second quarter of this year...

The Pittsburgh Leaders Statement [G20 Leaders Summit, 2009]highlighted the importance of stakeholder engagement. We believe the modified work programme, which phases the publication of exposured drafts and related consultations, enables the broad-based and effective stakeholder participation in due process that is critical to the quality of our standards.

The nature of the comments received on our exposure drafts will determine the extent of the redeliberations necessary and other steps and efforts that will be required to reach this goal.

The last sentence noted above could also significantly impact the ultimate timing of final standards; i.e., the extent and nature of comments received on the FASB-IASB Exposure Drafts (proposals), not only the time it takes the boards to issue the proposals, but the time it takes them to 'redeliberate' the proposals by considerig comment letters received, and feedback received in other outreach, such as at conferences, roundtables, meetings with professional associations, (e.g., FEI's Committee on Corporate Reporting and Committee on Private Company Standards sent the following comment letters to the boards recently regarding the convergence timetable: FEI CCR letter; FEI CPC-S letter).

The June 25 FASB-IASB correspondance to the G20 leaders was addressed to The Honourable Stephen Harper, Prime Minister of Canada, host of the G20 Toronto Summit set to take place June 26-27 in Toronto.

FASB, IASB Release Revenue Recognition ED

Yesterday, the Financial Accounting Standards Board and the International Accounting Standards Board released for public comment their Exposure Draft (ED) of a proposed joint standard on Revenue Recognition. The ED, which carries a comment deadline of Oct. 22, 2010, has is entitled: Revenue Recognition (Topic 605): Revenue from Contracts with Customers (as posted on FASB version) and Revenue From Contracts With Customers (as posted on IASB website).

Major Changes In Proposed Standard
According to FASB-IASB's joint press release:
If adopted, the proposal would create a single revenue recognition standard for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) that would be applied across various industries and capital markets. The publication of this joint proposal represents a significant step forward toward global convergence in one of the most important and pervasive areas in financial reporting. The proposed standard would replace IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. In US GAAP, it would supersede most of the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification.

The core principle of the draft standard is that an entity should recognise revenue from contracts with customers when it transfers goods or services to the customer in the amount of consideration the entity receives, or expects to receive, from the customer.

The proposed standard would improve both IFRSs and US GAAP by:
- removing inconsistencies in existing requirements;
- providing a more robust framework for addressing revenue recognition issues;
- improving comparability across companies, industries and capital markets;
- requiring enhanced disclosure; and
- clarifying the accounting for contract costs.
Public Comments Due in October; Roundtables Coming In November
According to FASB's homepage, public roundtables on the ED will be held on Nov. 5 and 8, 2010.

Links To Additional information
Additional information on what is informally referred to as the "Rev Rec" ED can be found in:

House-Senate Conf. Comm. Agrees On Fin Reg Reform Bill (Dodd-Frank Act), For Vote Next Week

After pulling a 20-hour marathon session, the House and Senate conference committees agreed early this morning on the Financial Regulatory Reform Bill, which will be voted on by the full House and Senate next week, and if passed, sent on to President Barack Obama to sign into law. Here are some of the early morning reports on major news websites:

Congress Reaches Deal on Financial Bill (Edward Wyatt, NYT)
U.S. Lawmakers Reach Accord on New Finance Rules (Damian Paletta, WSJ)
House, Senate Leaders Finalize Details of Sweeping Financial Overhaul (Brady Dennis, WashPost)
U.S. Lawmakers Approve Financial Overhaul; Marathon Session Produces $19 bn levy and Softening of Volcker Rule (Tom Braithwaite, Francesco Guerrera and Justin Baer, FT)

As to timing of when the bill could become law, as noted in the WashPost article cited above:

The dawn compromise set up a potential vote in both houses of Congress next week
that could send the landmark legislation to President Obama by July 4.
Proposed Name of Law: Dodd/Frank Act
Damian Paletta reported in the WSJ Blog this morning that the legislation, if signed into law, would be called the Dodd/Frank Act.

In a statement issued today, Sen. Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, said:

Over the past two years, America has faced the worst financial crisis since the Great Depression. Millions of Americans have lost their homes, their jobs, their savings and their faith in our economy.”

“The American people have called on us to set clear rules of the road for the financial industry to prevent a repeat of the financial collapse that cost so many so dearly.”

“This bill meets that challenge.”
Check Financial Executives International's website,, and this blog, for updates on legislation, accounting and tax news news, practical research reports from our research affiliate, the Financial Executives Research Foundation, and more.

Tuesday, June 22, 2010

Senate, House Conf. Cmte. May Provide Sarbox Exemption For Small Co's

PwC reported in its Breaking News publication yesterday that the House and Senate conference committee working on the Financial Regulatory Reform legislation may provide an exemption from Sarbanes-Oxley Section 404b (external audit of internal control) for small companies (non-accelerated filers, generally defined as co's with less than $75 million market cap).

The PwC article states, in part:

Smaller companies have benefited from a series of temporary deferrals from the internal control audit requirements since they became effective for larger companies in 2004. The most recent deferral expired June 15, 2010. That means absent any further relief, smaller companies would be required to comply with the Sarbanes-Oxley internal control audit requirements for fiscal years ending on or after June 15, 2010 (e.g., June 30, 2010 year-end).

A select group of Senators and Congressmen (commonly referred to as a conference committee) is currently working to reconcile the separate versions of the legislation into a single bill. Although changes are still possible, the conference committee recently took steps to provide smaller companies with a permanent exemption from the Sarbanes-Oxley internal control audit1 requirements. The conference committee has also agreed to direct the SEC to conduct a study on how to reduce the cost of complying with the internal control audit requirements for companies with market capitalizations between $75 million and $250 million.

There are a number of steps that must be completed before any permanent exemption would become effective. The provision must be included in the final, agreed-to legislation — called a conference report; the conference report must be approved by both houses of Congress; and the President must sign the bill into law. It is anticipated that the conference committee will complete its work during the week of June 21, 2010 with a final bill passed and forwarded to the President for his
signature sometime in July. While it is presently unclear, the SEC may need to
amend its rules and forms to facilitate a permanent exemption.

My two cents: (I remind you of the disclaimer on the right side of this blog) I have avoided providing minute-by-minute updates on the Sarbox exemption issue since I think it was very much in play and didn't want to lead anyone down a path of relying on an exemption (or not) until it was fairly certain, particularly given past statements of the SEC last fall when they issued what Chairman Mary Schapiro said at the time would be the final deferral, and given statements issued by organizations such as the Center for Audit Quality, CFA Institute, and Council of Institutional Investors last week arguing against such an exemption. However, as reported by PwC above and others, and in the more detailed Conference Committee Update linked below, it does appear the chance of a potential exemption, even at this very late date, is, if nothing else, a possibility. But it ain't over till its over.

General Conference Committee Update
The House Financial Services Committee, Chaired by Rep. Barney Frank, and the Senate Commitee on Banking, Housing and Urban Affairs, Chaired by Sen. Chris Dodd, issued what appear to be identical press releases yesterday providing a detailed update on the conference committee's progress on the entire bill (not only the Sarbox issue). See House press release, Senate press release.

Wednesday, June 16, 2010

Private Co. Financial Reporting: Time for a New Approach?

Join us on June 22 from 1-2:30 pm EDT (1.5 CPE) for a free webcast on: Private Co. Financial Reporting: Time for a New Approach? The webcast, co-sponsored by Grant Thornton and FEI, will provide an update on the Blue Ribbon Panel on Standard-Setting for Private Co's (which met most recently on May 14, next mtg is July 19, minutes have been posted for the April 12 meeting). The Blue Ribbon Panel was formed jointly this year by the Financial Accounting Foundation (which oversees FASB), the AICPA, and the National Association of State Boards of Accountancy (NASBA).

Speakers on the webcast include GT partner John Hepp, who coauthored a white paper with Gary Illiano on this subject, Meredith Vogel, audit senior manager in GT's National Audit Support group and current FAF Staff fellow supporting the Blue Ribbon Panel, and FEI Committee on Private Company Standards (CPC-S) members George Beckwith (incoming vice-chair, CPC-S, and member of the FASB-AICPA Private Co. Financial Reporting Committee) and Andy Thrower (past chair, CPC-S, past member of FASAC, and member of FASB's Small Business Advisory Committee).

See more details about the webcast, and register here .

UPDATE: You will need to know this to register:

You will receive an email confirmation from LearnLive, GT's webcast platform
provider, with instructions for attending the webcast.

If you need assistance registering please call LearnLive directly at 888.228.0988.
If you have not previously attended a Grant Thornton Thinking webcast powered by LearnLive, follow these instructions:

Go to

Choose "New Student Registration" to create your account.

Enter company pass code "grant" where prompted.

Locate the webcast in the catalog (Course 16954) and sign up.

If you have attended a Grant Thornton webcast within the past year, simply log in to your account.

Please note: To receive CPE credit for attending this webcast, each individual participant must log on to the webcast separately.

Questions? Contact Loryn Wells at or 312.602.8225.

Thursday, June 10, 2010

The World According To GAAP (Or IFRS?)

Last week, the Financial Accounting Standards Board and the International Accounting Standards Board released a joint statement announcing a modification to the convergence timetable established under the FASB-IASB Memorandum of Understanding (MoU), last updated in November '09.

The modification will extend the timetable for some of the major convergence projects, originally slated to be completed by June, 2011.

Letter Sent To G-20 Finance Ministers
You may recall that in September, 2009, the G-20 Leaders (emphasis: G-20 Leaders, not the finance ministers) requested:
"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." (source: G-20 Progress Report, Sept. 25, 2009, as described here.)

Concurrent with issuing their joint statement modifying their convergence MoU last week, FASB and IASB also issued a letter to the Minister of Finance of the Republic of Korea, host of the June 4-5 G-20 Finance Ministers meeting, asking that the joint statement be shared with the other finance ministers.

FASB and the IASB explained in their Joint Statement last week:

“As noted in our March 2010 progress report, we recognize the challenges that arise from seeking effective global stakeholder engagement on a large number of projects. Since publishing the March progress report, stakeholders have voiced concerns about their ability to provide high-quality input on the large number of major Exposure Drafts planned for publication in the second quarter of
this year
Among letters provided by “stakeholders” were two letters sent by FEI Committees, the Committee on Corporate Reporting (CCR letter) and the Committee on Private Company Standards (CPC-S letter). Additional letters can be found here.

SEC Chairman: No Impact On SEC's Timetable for Decision in 2011 on IFRS
In a statement issued on June 2, SEC Chairman Mary Shapiro emphasized the quality and independence of the standard-setting process, in stating:

"Quality financial reporting standards established through an independent process are threshold criteria against which the Commission's future consideration of the role of IFRS in the U.S. reporting system will be based," adding,

"I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers."
A Separate GAAP For Private Companies?
With the focus on convergence shining strongly on the potential impact on public companies in the U.S., private companies are also looking at options currently available to them, such as the IASB's IFRS for Small and Medium Sized Entities (IFRS for SMEs), a condensed, standalone set of standards for use by certain private companies (e.g. companies with 'public accountability such as banks cannot use IFRS for SMEs, and the decision whether to accept IFRS for SMEs for statutory reporting is a country-by-country decision).

In the U.S. since the AICPA previously deemed the IASB to be an accepted standard-setter for purposes of signing off on GAAP audits, by definition, full IFRS and IFRS for SMEs would be acceptable in the U.S. according to AICPA audit standards alone. (Whether they are acceptable or desirable by the SEC, users and preparers, as well as other regulators (part of what will be considered by SEC staff under their 'work plan' announced earlier this year) is still an open question.)

However, since private companies do not have to wait for an SEC decision, they are able to consider now whether they want to contemplate switching to full IFRS or IFRS for SMEs, and some companies have previously used - or may want to continue or begin using, yet another "Other Comprehensive Basis of Accounting" or OCBOA as an alternative to U.S. GAAP set by the FASB, which has always been the case for a portion of private companies, particularly smaller ones, given the complexity of GAAP and the fact that the primary users of private company financial statements have voiced a different set of information needs than the users of public company financial statements.

Blue Ribbon Panel Formed
Prompted in part by the issuance of IFRS for SMEs, and the decision by Canada last year to publish its own 'made in Canada' set of GAAP as an option for Canadian private companies to follow, in light of Canada's decision that Canadian public companies will adopt IFRS by 2011, the question of whether there should be two sets of GAAP - also called 'dual GAAP' or 'differential GAAP' by some, i.e. one set of GAAP for public co's, and one set for private co's, came to a head with the November, 2009 recommendation of the Private Co. Financial Reporting Committee (PCFRC's) to the Financial Accounting Foundation (FAF, overseer of the FASB) to consider the future of financial reporting for private companies, related recommendations of the AICPA Council, leading to the formation this year of the Blue Ribbon Panel on Private Company Accounting, co-sponsored by the FAF, AICPA, and NASBA, as covered previously in this blog.

"Made in Canada" GAAP Available to Canadian Private Cos.
Canada's public companies are moving to IFRS in 2011. This raised the question of whether Canadian Private Co's would move to full IFRS, IFRS for SMEs, or existing Canadian GAAP, or some new form of 'made in Canada' GAAP. After seeking public comment, Canada's accounting standard-setters decided to develop a new set of Canadian GAAP as an alternative for Canadian private co's to use to IFRS.

Background on Canada's new private co GAAP can be found on the Chartered Accountants of Canada (CICA) website, e.g. in CICA's Jan. 2010 ROI Newsletter, and in their archived webinars listed on the last page (pg 16) of CICA's June 2010 FYI Newsletter. I would also like to acknowledge I received much helpful information in previous discussions with Mark Walsh, Principal, Canadian Accounting Standards Board (AcSB), and Gordon Heard, Principal Adviser, The Finance Group, and chair of the private companies subcommittee of FEI Canada's Committee on Corporate Reporting.

Learn More: Grant Thornton-FEI Webcast June 22nd
Learn more on an upcoming free webcast brought to you by Grant Thornton and FEI on June 22nd from 1-2:30 pm EST (1.5 CPE) entitled: "Private Company Financial Reporting: Time for a New Approach?" Speakers include John Hepp, Grant Thornton's national partner in charge of accounting principles, FEI Committee on Private Company Standards members George Beckwith and Andy Thrower, and Meredith Vogel, audit senior manager at GT, currently a staff fellow at the FAF supporting the Blue Ribbon Panel on Standard Setting for Private Companies. Register here for the webcast.