Monday, October 24, 2011

SEC Ready For Full-Court Press With Senate Confirm of Aguilar, Gallagher

The U.S. Securities and Exchange Commission will be back up to its full panoply of five Commissioners, with the Senate's reappointment of Commissioner Luis Aguilar to a second term, and the appointment of Dan Gallagher as a new Commissioner.

Aguilar, a Dem, began his first term as an SEC Commissioner on July 31, 2008. Gallagher, a Republican (replacing the vacancy created at the end of Commissioner Kathleen Casey's term), formerly served on SEC staff, including as Deputy Director of the Division of Trading and Markets. Gallagher re-joined law firm WilmerHale upon leaving the SEC in 2010 (see 2010 press release).

SEC Chairman Mary L. Schapiro made the following announcement following the Senate's action on Friday:

"I very much appreciate the Senate's confirmation of these nominees. Investors and markets are best served when the SEC benefits from the dedication and broad range of views that a full five-member Commission provides. I look forward to Luis's continued service, and I welcome Dan's return to the agency as we continue our efforts to protect investors and improve our markets and the economy."
Read more in blog and in the Washington Post.

Investment Companies, Investment Properties, Subject of FASB Proposals

The FASB released two proposals (more formally, Exposure Drafts of proposed Accounting Standards Updates) on Friday, relating to investment companies and investment properties, respectively.


The comment period ends on Jan. 5, 2012 for both proposals.

FASB Proposes Deferring OCI Reclass Adjustments

The Financial Accounting Standards Board voted on Friday to propose a deferral of certain requirements in ASU 2011-5, Comprehensive Income, issued earlier this year. Important: the only requirements in that standard which will be deferred - while FASB further deliberates those matters - are the requirements for presentation of ‘reclassification adjustments’ from Other Comprehensive Income (OCI); the remaining provisions of ASU 2011-5 will become effective as originally set forth in that standard (beginning with public companies, for fiscal years, and interim periods within those years, ending after Dec. 15, 2011; private companies are subject to a later effective date in the standard). The action was expected, as noted here.

Proposal Expected Soon; At Least 15-Day Comment Period
An AccountingLink Financial Reporting Alert, published by Ernst & Young on Friday was one of the first reports published in the board’s vote. According to E&Y,

“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”

Reclassification Adjustments aka ‘Recycling’
BNA’s Steven Burkholder, in an article entitled FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”

The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”

Current Disclosure Requirements In Force During Deferral Period
Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.

Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”

Watch for FASB’s proposal (and potentially a related press release) on their website,

Friday, October 21, 2011

SEC FRS Kicks Off With Nov. 8 Roundtable On Measurement Uncertainty; FASB To Meet On Future Scope of Risks and Uncertainties, Going Concern Project

Earlier today, the SEC announced it will hold the inaugural program in its Financial Reporting Series (FRS) on November 8; the focus of the initial roundtable will be Measurement Uncertainty. As we reported in June, the SEC’s FRS will consist of a series of roundtables focused on “the early identification of risks to the financial reporting system.”

In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.

The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS.

Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.

As stated on the SEC’s webpage on the FRS, the objectives of the FRS are as follows:

  • to provide SEC staff, the Financial Accounting Standards Board ("FASB"), and the Public Company Accounting Oversight Board ("PCAOB") with useful information about matters affecting the financial reporting system;

  • for OCA to work closely with both Boards to ensure that they consider the appropriate actions to address emerging issues and changes in the business environment; and

  • for OCA, in coordination with the Division of Corporation Finance (and, where appropriate, other SEC offices or divisions), to consider whether changes to Commission rules and regulations would be appropriate.
See also ‘My Two Cents” at the bottom of this post, regarding an upcoming meeting of the FASB board relating to this subject, and regarding the interplay between FASB, SEC and PCAOB, or more broadly, the need to strike the right balance between the sometimes seemingly conflicting objectives of relevance, reliability and auditability.

Briefing Paper Outlines Issues; Public Comment Sought
As noted on the SEC webpage on Upcoming FRS Roundtables, the focus of the inaugural roundtable will be on:

  • where uncertain measurements provide investors with useful information and how those measurements should be recognized in the financial statements,

  • the information investors need to understand and assess uncertainties,

  • the need for additional guidance on the disclosures associated with uncertainties, and

  • the auditor’s role and responsibility for reporting on uncertainties.
Specific questions the SEC is seeking input on, and additional background information, can be found in this briefing paper prepared by the SEC staff.

The SEC formally invites public comment via Release No. 34-65602 published yesterday, “Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”

As noted in the briefing paper:

  • Uncertainty exists in financial statements where measurements “to a large extent…are based on estimates, judgments, and models rather than exact depictions.” As the level of uncertainty increases, challenges may exist for:

  • financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions,

  • auditors to verify the subjective judgments about those uncertainties, and

  • investors to understand those uncertainties and assess their potential impact on future earnings or cash flows.

Further, the SEC states that the inaugural roundtable “will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown.” Issues of focus will include:

  • Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information.

  • Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information.

  • Auditability — the auditor's role and responsibility for reporting on financial statements with measurement uncertainties.
Here are the questions on which input is sought from panelists and through public comment, in the above-listed Release. As detailed in the Briefing Paper, "The panel discussions will focus on the following questions. Panelists will be encouraged to specify, where applicable, the topic — financial instruments, goodwill, loss contingencies, etc — that their comments address."

  1. Please provide feedback on any topics where the extent of uncertainty is less useful to investors and why a more certain measurement would be preferable. Likewise, provide comments on those topics where a measurement with uncertainty gives investors more useful information and why it is preferable to a more certain measurement.

  2. For those topics where uncertain measurements are useful to investors, how should the uncertainties be incorporated into the measure? Please explain the reasons for the measurement method(s) you selected.

  3. What information do investors utilize to understand uncertainty? Please describe why such information is useful and, if it is not disclosed in the financial statements, indicate its source.

  4. What are the challenges for investors in understanding the nature and extent of measurement uncertainty?

  5. As measurement uncertainty increases, please explain whether (and how, if applicable) it changes the investor’s expectation of preparers and auditors.

  6. For preparers, what are the challenges in or impediments to providing investors with information to understand the nature and extent of measurement uncertainties?

  7. What are the challenges for auditors in evaluating management’s judgments related to measurement uncertainties?

  8. Please provide comments on whether (and how) a change in the auditor’s responsibility or role would enhance the investor’s understanding of the nature and extent of measurement uncertainties.

  9. Please provide any additional comments or suggestions pertinent to how much uncertainty to recognize and how best to communicate it.
Future FRS Programs/Topics
The SEC’s webpage on the FRS states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at or on the FRS webpage.”
More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”

My Two Cents
A couple observations (please see the disclaimer posted on the right side of this blog).

Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern).

FASB recently discussed this project during an Education Session, and as shown in FASB’s calendar and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):

“The Board will discuss whether to continue with the project as it is currently designed or modify the scope to provide guidance on assessing an entity’s ability to continue as a going concern.”

As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.

Francine McKenna, managing editor of Re:TheAuditors has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 Going, Going, Gone.
Of course, the subject of Going Concern is not to be confused with the popular ‘accounting tabloid,’ Going Concern.

Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see my earlier post from Sept. 2009.

Saturday, October 15, 2011

Get The Latest FASB, SEC, IASB Updates At FEI CFRI; Consider Hall of Fame, IFRS Boot Camp

If you’re a regular reader of this blog, or you otherwise are tasked with following developments at, and/or implementing changes in accounting and financial reporting rules emanating from the FASB, SEC or IASB, you won’t want to miss this year’s FEI Current Financial Reporting Issues conference.

Set to take place November 14-15 at the Marriott Marquis Times Square hotel in New York City, this is the 30th year of FEI’s CFRI conference. Included among the speakers will be FASB Chairman Leslie Seidman, IASB Vice Chairman Ian Mackintosh, and SEC Chief Accountant Jim Kroeker.

While you are in NYC for CFRI, consider attending FEI’s Hall of Fame Gala Monday night November 14, or the post-conference IFRS Boot Camp on November 16. The Hall of Fame and IFRS Boot Camp are available by separate registration (they are not part of the CFRI program).

The Hall of Fame Gala, taking place at Gotham Hall in Manhattan, will celebrate the induction of this year’s Hall of Fame inductees: Robert C. Butler, Judy C. Lewent, and David B. Rickard. Proceeds of the Hall of Fame Gala benefit the Financial Executives Research Foundation (FERF).

Read more about all three events in this FEI press release; or visit the related webpages on agenda, speakers, and registration info for: CFRI, Hall of Fame, and IFRS Boot Camp.

FASB Releases Proposed 'Technical Corrections' To Codification

On Friday, October 14, the FASB released a 214-page set of proposed technical corrections to the Accounting Standards Codification.

The proposed changes, which cover a wide variety of areas. Included among the proposed changes are include certain ‘conforming’ changes to reflect FAS 157, Fair Value Measurement, in certain parts of the Codification that were not previously updated (e.g. to change certain references from ‘market value,’ or ‘mark to market’ to ‘fair value.’)

According to the board, the proposed changes to the Codification are aimed at being ‘technical’ in nature, vs. ‘pervasive’ or ‘substantive.’ As explained in FASB’s press release (reformatted into bullets)

  • Periodically, the FASB updates the Codification for technical corrections and clarifications that are deemed necessary.

  • The amendments included in this proposed Update cover a wide range of Topics and are generally nonsubstantive in nature.

  • Many of the proposed amendments update terminology to conform with Topic 820 (Fair Value Measurement).

  • The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.
Importantly, FASB notes in the Exposure Draft of the proposed changes to the Codification:

The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.

However, it is possible that certain proposed amendments may result in a change to existing practice.

The effective date of the proposed amendments would be determined after the Board considers comments on the proposal.

The comment deadline is Dec. 13, 2011.

FASB To Meet This Week on Deferring Certain Aspects of ASU 2011-05: Comprehensive Income

The FASB board is set to meet Friday, October 21, to discuss “whether to defer the effective date of the presentation requirements for classification adjustments in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The information about the board meeting – set to take place on Friday, following a series of FASB-IASB joint board meetings taking place on Wednesday and Thursday – appears in FASB’s calendar.

The addition of this matter to the board’s agenda was announced on Thursday by FASB chairman Leslie Seidman.

The particular aspect of ASU 2011-05 which the board will consider delaying is the requirement for separate presentation of items reclassified from other comprehensive income [OCI] to net income. Additional information on this matter can be found in KPMG’s Defining Issues.

Tuesday, October 11, 2011

PCAOB Proposes Disclosure of Engagement Partner, Other Firms In Audit

Earlier today, the Public Company Accounting Oversight Board voted to release proposed amendments to its standards to require disclosure of the name of the audit engagement partner, and disclosure of certain other persons and firms associated with the audit. The PCAOB’s press release and related documents are linked at the bottom of this post.

The proposal follows from a recommendation of the U.S. Treasury Advisory Committee on the Auditing Profession published in 2008, and a PCAOB Concept Release issued in 2009, including consideration of comment letters received on that Concept Release, and input received by the PCAOB by its Standing Advisory Group, Investor Advisory Group, and others. For background, particularly regarding the move to require ‘disclosure’ vs. ‘signature’ by the engagement partner, and a discussion about potential liability issues arising from such disclosure or signature, see our earlier blog post.

PCAOB Chief auditor Marty Baumann outlined today’s proposal as requiring disclosure of the:
· Name of the engagement partner [to be disclosed], in the audit report
· Name of the engagement partner, [to be disclosed] in the annual report filed by each registered audit firm with the PCAOB [Form 2]
· Names, locations, and extent of participation of other persons and firms who took part in the audit

Disclosure Of Engagement Partner For Most Recent Audit Period Only

Dima Andriyenko of the PCAOB staff said disclosure of the engagement partner signature would be required by adding the following sentence to the auditor’s report: "The engagement partner responsible for the audit for the period ended [date] was [name of engagement partner]."

He also noted that while the audit report relates to financial statements of more than one year; based on comments received on the earlier Concept Release, the PCAOB’s current proposal recommends disclosure of the engagement partner for the most recent period’s audit only.

3% Threshold For Disclosure of Other Audit Firms, Persons
Lisa Calandriello of the PCAOB staff explained the scope of the proposed requirement to disclose the names and locations of other independent accounting firms or persons who participated in the audit, and how that determination is to be made with respect to considerations relating to contractual relationships with those other persons/firms, and with respect to taking responsibility as the “principal audit firm” for work performed by other audit firms/persons as described in AU 543, Part of Audit Performed by Other Independent Auditors, or in a supervisory role as specified in AS 10, Supervision of the Audit Engagement.

Calandriello described a 3% threshold for determining whether another audit firm/person needed to be disclosed: "If the percentage of total audit hours [performed by another person or audit firm] attributed to the audit … is 3 % or more, then this firm or person [would be] disclosed separately. [The proposal], would not require separate disclosure of firms or persons whose participation is below3%, such firms or persons would either be disclosed as a group, or disclosed separately, as determined by the audit firm issuing the audit report."

Unanimous Vote; 90-Day Comment Period
The board voted unanimously in favor of releasing for public comment the proposal on disclosure of the engagement partner and certain other firms/persons involved in the audit. The staff recommended, a 90-day comment period, noted Calandriello; ending Jan. 9, 2012.

Comment Sought On Legal Liability, Disclosure Of Additional Parties
The board members’ opening statements, and in particular, the Question and Answer period between the board members and staff, highlighted a number of issues on which there is still some uncertainty and/or the board is specifically seeking comment in the proposing release.

Will disclosure of the engagement partner, as required in the proposing release (or an engagement partner signature, as still preferred by board member Steve Harris, although he concurred with issuing the proposing release) increase the personal liability of the engagement partner? Matters specifically discussed in the Q&A, particularly in questions posed by board member Dan Goelzer (a lawyer) and board member Jay Hanson (an auditor, who asked for a ‘plain English’ explanation of the legal issues), and in responses provided by the PCAOB’s General Counsel, Gordon Seymour, centered on liability as enforced by the SEC under Securities Act Section 7 and Section 11, and liability under the anti-fraud provisions of Section 10b, particularly in light of the recent Janus decision [Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011)], as to who the ‘maker’ of a statement is.

Here is an excerpt from the discussion re: engagement partner liability: GOELZER: Let’s turn to liability, the elephant in the room. Treasury ACAP said signature should not impose any greater liability on the partner than they would otherwise have; ACAP went on to discuss possibility of the SEC offering a safe harbor; does the [PCAOB] staff believe the switch from [considering requiring an engagement partner] signature to disclosure [of the name of the engagement partner] would obviate the need for a safe harbor? PCAOB GC GORDON SEYMOUR: ACAP referred to the possibility of a safe harbor regarding Section 11 of the Securities Act of ’33. The SEC administers Section 11, [and the SEC] would have to decide if … [disclosure of the engagement partner] would subject that individual to Section 11 liability, which raises in turn whether the SEC would promulgate a safe harbor; yes, that’s an issue, we’ve had discussions with the SEC, as to their willingness to promulgate a safe harbor, [it is not yet determined], we’ll continue to have discussions with the SEC staff. GOELZER: Section 11 is under the SEC’s control, whether or not they’ll accept a Section 7 consent, that will drive Section 11 liability. …

SEYMOUR [later, in response to question posed by board member Jay Hanson]: There are two provisions in the Federal Securities laws, that could be enforced b y regulatory, and private actions, Section 7 and 11 work in tandem, Section 10b is another, 10b is a fraud based claim, the recent decision in Janus clarifies who the ‘maker’ of a statement is; at the time of [the board’s 2009] Concept Release on an [engagement partner] signature requirement, the law was more uncertain, predated Janus, many commenters thought a signature requirement would make the signer the ‘maker’ of the statement; , we have questions whether there are implications post-Janus on signature requirement; Section 7 and 11 [of the Securities Act] relates to securities offerings, companies [e.g. audit firms] named in a registration statement have to file a ‘consent’ and therefore have potential liability for statements potentially false in the that registration statement; the issue is whether the SEC would require a Section 7 consent; it is clear today an audit firm would be such an expert and face that potential liability, the only issue here is whether the SEC would also see that individual as an ‘expert’ if they are seen [disclosed] in that audit report, therefore that individual could face liability [under Section 11] if they couldn’t show they acted with due diligence. The SEC could issue a safe harbor rule, we understand ACAP recommended [that].

Another issue discussed in the Q&A at the board meeting, on which the PCAOB specifically seeks comment in the proposing release, is whether disclosure of any additional partners should be required, specifically, the Engagement Quality Review [EQR] partner, or the ‘Appendix K’ review partner. As explained by Deputy Chief Auditor Jennifer Rand: “there are certain exceptions to disclosure of other firms or persons, EQR is one, Appendix K review [is another, as well as], specialists, internal audit, use of work of others. Lisa also talked about the construct of disclosure in 1 of 2 buckets: those firms you take responsibility for under AU 543, the other is under AS10 [which] the board issued a year ago…. [In contrast] Engagement quality review is intended to be an objective look at the audit; outside the audit, that person does not perform audit procedures, not involved in role of performing audit work; [but] making sure the opinion was appropriately issued; we thought under construct of AU 543 and AS10, EQR didn’t meet that construct, the release includes questions whether eng quality reviewer should be disclosed.” In response to a question from Chairman Jim Doty on why the ‘Appendix K’ review partner was excluded, Rand replied: “Appendix K is a requirement the board adopted in 2003 from the AICPA’s SEC practice section, which had requirements that went to its member firms; Appendix K requires firms that had been members of the SEC Practice Section to have filings reviewed of foreign affiliated firms before it comes into the US market, to have someone knowledgeable about U.S. rules [conduct a review].” She said the reasoning behind not requiring disclosure of Appendix K review partner was similar to that in not requiring disclosure of the EQR partner.

3% threshold for disclosure of other firms or individuals (outside the principal audit firm) performing part of the audit: In response to a board member’s question, Baumann noted that the 3% figure was arrived at after the staff concluded there should be a threshold, and they determined the 3% threshold to be reasonable for this purpose. Staff pointed out the 3% threshold differs from the board’s 20% threshold which determines which audit firms must be registered with, and inspected by, the PCAOB (firms performing 20% or more of audits of a public company). Therefore, some nonregistered audit firms may be disclosed under this proposals 3% threshold, and some registered audit firms involved in less than 3% of the work on a particular audit may not necessarily be disclosed in that particular audit report.
Information will be searchable: in response to a question from Goelzer, PCAOB staff member Mary Peters said that the names of engagement partners as disclosed in PCAOB’s Form 2 will be searchable on the PCAOB website.

Will Enhanced ‘Accountability’ Mindset Drive Increase In Audit Procedures, Cost?
Also during the Q&A , board member Daniel Goelzer raised a specific line of questions on the subject of cost-benefit, centering on whether changes in attitude (i.e., a presumed enhanced sense of ‘accountability’ on the part of an engagement partner whose name was disclosed) would lead to changes in behavior, and specifically to changes in audit procedures – which could in turn potentially drive increased costs. Although PCAOB staff said ‘no new procedures’ were required under this proposal (which could potentially be used to assert no additional costs were likely to arise), the potential for the engagement partner to drive increased procedures that result in simply covering their liability, but do not add to audit quality, and the potential for increased audit procedures that actually increase audit quality, is certainly there, and is something that commenters may want to consider.

Following are some excerpts from the Q&A during today’s PCAOB board meeting, regarding cost-benefit of the proposal for disclosure of the name of the engagement partner: GOELZER asked Baumann to describe the ‘specific behavioral changes the staff expects from a signature or disclosure requirement. ‘ BAUMANN replied that the staff ‘expect it would enhance a sense of accountability; ….inspection results show there is room for substantial improvement in professional skepticism and other areas, and the enhanced accountability from a disclosure of the engagement partner is expected to [be helpful].” ANDRIYENKO added that ‘the proposal does not require any additional audit procedures.’ GOELZER: “Do you plan to do a cost/benefit analysis, if people are going to perform audits differently, I think there has to be some analysis of the costs.” BAUMANN: “On the surface, inclusion of [engagement partner] signature would require no cost; whether the auditor suddenly feels he or she has to perform more procedures just because their name is there, … as to the assertion we heard from the [audit] firms that they already felt accountable signing the audit firms’ name, whether additional procedures [in some cases are necessary].. that would be a positive benefit; additional costs are not quite known. We are looking for input on this proposal on issues of cost and benefit.” GOELZER: [As referenced earlier in the meeting and in the proposal] the EU requires signature of [engagement partner]natural person on audits, do you know if there has been behavioral research on changes from that? BAUMANN: audit quality is a very hard thing to define; measuring improvements in audit quality is a difficult thing, a period of time is needed to assess improvements, there isn’t a lot of history whether engagement partner signature [in the EU] has changed audit quality; one study showed no apparent change, but those researchers used ….. things that are not necessarily linked to audit quality. “ANDRIYENKO : “One study on the effect of engagement partner signature in one European country; failed to document any relationship in audit quality based on parameters of the study; however, [the study also] failed to unconditionally conclude there is no relationship between audit quality, changes in audit quality, and [the EU] requirement for engagement partner signature.” GOELZER: It seems to me there are several things going on, one is whether they [the engagement partner] would feel more accountable, one is whether they would act differently, .. whether they are doing self protective things that wouldn’t improve audits, staff should [look at that]. The other is disclosure/transparency matter; [for example] you know who [a public company’s] directors are, officers, a lot of information required to be disclosed about people involved with public companies, do you know if the SEC has ever considered requiring disclosure of the names of engagement partners? PCAOB staff: “The SEC staff talked about some matters staff was considering, they had not presented it to the commission, I am not aware if that has advanced to the commission; not aware of other activity.”

Links to PCAOB Documents

The following documents relating to today’s PCAOB board vote to release proposed amendments requiring disclosure of the name of the engagement partner, and disclosure of certain other firms and individuals (outside the principal audit firm), have been issued by the PCAOB:
PCAOB Press release Oct. 11, 2011
Statement of Chairman Jim Doty
Statement of Board Member Dan Goelzer
Statement of Board Member Lew Ferguson
Statement of Board Member Steven B. Harris
Statement of Board Member Jay Hanson
Watch for a link to the proposed rule (and the archived webcast) to be posted here.

Monday, October 10, 2011

PCAOB May Propose Engagement Partner ‘Disclosure’ Tuesday

The Public Company Accounting Oversight Board is scheduled to vote tomorrow on whether to propose that audit firms should (1) disclose the name of the audit engagement partner in the audit report, (2) disclose the names of each audit engagement partner for each engagement reported in the audit firm’s Annual Report Form filed with the PCAOB, and (3) disclose the names of “other accounting firms and certain other participants that took part in the audit.”

Disclosure, vs. Signature
My two cents (see disclaimer posted on the right side of this blog): I believe it is significant and intentional that the PCAOB’s press release announcing tomorrow’s meeting uses the words ‘disclosure’ and ‘disclose’ rather than the previously common vernacular of engagement partner “signature.”

The latter term ties back to the Final Report and recommendations published in 2008 by the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP), (see recommendation 6, Subcommittee on Firm Structure and Finances) which recommended that regulators, the auditing profession, and other bodies, as applicable: “Urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report), and to the PCAOB’s 2009 Concept Release issued for public comment, entitled, “Concept Release on Requiring the Engagement Partner to Sign the Audit.”

ACAP described the potential benefits from such a requirement as “increase[ing] transparency and accountability.” :

As also recognized by ACAP, one of the most contentious issues surrounding a potential engagement partner signature requirement was whether the value-added by such a signature would offset any potential additional legal liability to that partner.

Additionally, concerns have been voiced in ACAP and at prior discussions of the PCAOB Standing Advisory Group about any unintended consequences other potential reputational risks arising from the association of one partner’s name (instead of the firm’s name generically, as is the case today) with one particular audit, vis-à-vis other audits headed up by that particular partner, as well as potential client’s consideration of taking on that particular partner and his/her firm, based on particular audits for which that partner signed off.

Some questioned the impact this could have on auditor’s behavior as well, not only in the desired direction of ‘accountability’ but on the flipside, potentially causing the opposite effect, in which some questioned whether putting their name on the line associated with ‘good’ and ‘bad’ audits could potentially cause an auditor to hesitate to cause a negative consequence to a client, since his/her name would be publicly attached to that particular client, and in turn impact other clients, the investing public, and regulator’s views about that partners’ other audit clients.

Safe Harbor: Necessary? Provided?
Concern about legal liability in particular may be the driving force behind why a call for ‘engagement partner signature,’ floated a few years ago in its Concept Release, is now at the proposal stage but appears targeted at engagement partner ‘disclosure’ rather than signature. I assume that the presumed benefits anyone is looking for from a signature requirement would be satisfied by a disclosure (rather than signature) requirement.

At a 2009 PCAOB Standing Advisory Group Meeting, SAG member Jeff Mahoney, General Counsel of the Council of Institutional Investors (also a member of ACAP), noted that footnote 87 (in the section pertaining to the Subcommittee on Firm Structure and Finances) in ACAP’s Final Report (numbered page VII: 20 of that report) spoke of the belief that the same kind of “Safe Harbor” available to the audit committee ‘financial expert” by the Securities and Exchange Commission in the SEC’s Final Rule requiring disclosure of the name of the audit committee ‘financial expert, could form the model for a safe harbor for a safe harbor for audit firm engagement partners under any requirement to disclose them by name. (See the safe harbor in the SEC’s Final Rule.: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8817)

Here is what the relevant sentence in ACAPs report said, which includes footnote 87:

The Committee notes the signature requirement should not impose on any signing partner any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of an auditing firm.[87]”

87 This language is similar to safe harbor language the SEC promulgated in its rulemaking pursuant to Sarbanes-Oxley’s Section 407 for audit committee financial experts. See SEC, Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Release No. 33-8177 (Jan. 23, 2003).

Here is what the SEC’s Final Rule on disclosure of the audit committee financial expert says re: Safe Harbor:

5. Safe Harbor from Liability for Audit Committee Financial Experts

Several commenters urged us to clarify that the designation or identification of an audit committee financial expert will not increase or decrease his or her duties, obligations or potential liability as an audit committee member. A few recommended a formal safe harbor from liability for audit committee financial experts. Unlike the provisions of the Act that impose substantive requirements,34 the requirements contemplated by Section 407 are entirely disclosure-based. We find no support in the Sarbanes-Oxley Act or in related legislative history that Congress intended to change the duties, obligations or liability of any audit committee member, including the audit committee financial expert, through this provision.

In the proposing release, we stated that we did not believe that the mere designation of the audit committee financial expert would impose a higher degree of individual responsibility or obligation on that person. Nor did we intend for the designation to decrease the duties and obligations of other audit committee members or the board of directors.

We continue to believe that it would adversely affect the operation of the audit committee and its vital role in our financial reporting and public disclosure system, and systems of corporate governance more generally, if courts were to conclude that the designation and public identification of an audit committee financial expert affected such person's duties, obligations or liability as an audit committee member or board member. We find that it would be adverse to the interests of investors and to the operation of markets and therefore would not be in the public interest, if the designation and identification affected the duties, obligations or liabilities to which any member of the company's audit committee or board is subject. To codify this position, we are including a safe harbor in the new audit committee disclosure item to clarify that:

A person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for purposes of Section 11 of the Securities Act,35 as a result of being designated or identified as an audit committee financial expert pursuant to the new disclosure item;

The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification; and The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.36

This safe harbor clarifies that any information in a registration statement reviewed
by the audit committee financial expert is not "expertised" unless such person is acting in the capacity of some other type of traditionally recognized expert.

Similarly, because the audit committee financial expert is not an expert for purposes of Section 11,37 he or she is not subject to a higher level of due diligence with respect to any portion of the registration statement as a result of his or her designation or
identification as an audit committee financial expert.

In adopting this safe harbor, we wish to emphasize that all directors bear significant responsibility. State law generally imposes a fiduciary duty upon directors to protect the interests of a company's shareholders. This duty requires a director to inform
himself or herself of relevant facts and to use a "critical eye" in assessing information prior to acting on a matter.38 Our new rule provides that whether a person is, or is not, an audit committee financial expert does not alter his or her duties, obligations or liabilities. We believe this should be the case under federal and state law.
However, I for one wonder if the reference to what an ‘expert’ means, as relating to those experts who ‘certify’ certain information, takes the SEC financial expert safe harbor type language out of the water if applied to a named engagement partner; see e.g. footnote 37 of the above-referenced SEC rule, which states:

37 Section 11 of the Securities Act imposes liability for material misstatements and omissions in a registration statement, but provides a defense to liability for those who perform adequate due diligence. The level of due diligence required depends on the position held by a defendant and the type of information at issue. Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968). The type of information can be categorized as either "expertised," which means information that is prepared or certified by an expert who is named in the registration statement, or "non-expertised." Similarly, a defendant can be characterized either as an "expert" or a "non-expert."
Whether disclosure (vs. signature), potentially paired with some type of Safe Harbor language, will entirely protect the named partner(s) from incurring potential additional legal liability remains to be seen, and it will be interesting to hear the PCAOB board and staff members’ discussion, as well as the discussion in the proposing release, around this point. It will also be interesting to hear the scope of potential disclosure requirements of “other accounting firms and certain other participants that took part in the audit.”

The PCAOB’s open meeting, slated for 9:30 am (ET) Tues. Oct. 11, will be webcast.

Friday, October 7, 2011

Economists Martin Feldstein, Robert Rubin: Highlights From the World Business Forum

Economists Martin Feldstein and Robert Rubin gave their prognosis of the U.S. and global economic, speaking on a panel October 6 at the World Business Forum 2011. The panel was moderated by Alan S. Murray of the Wall Street Journal. Over 4,000 were in attendance at the program.

The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program. You can read highlights by going to the FEI blog on twitter,, and scroll down to view our tweets on Feldstein, Rubin and Murray's panel. We will be posting a direct link to an excerpt of our tweets on this panel, watch for updates to this post for that link.

For additional coverage of Feldstein's and Rubin's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub; the twitter hashtag for the program was #wbf11.

Follow the FEI blog on Twitter @feiblog at Visit the FEI blog at; sign up to receive blog posts via email, by sending an email to, and write in Subject line: Sign up.

Bruno Ferrari, Secretary of the Economy, Mexico, Speaks At World Business Forum

On October 6, 2011 Bruno Ferrari, Secretary of the Economy, Mexico, was interviewed by Daniel Doctoroff, President of Bloomberg LP, at the World Business Forum 2011 in New York City.

See highlights of Ferrari's remarks, from our live-tweeting at the program. (If you have trouble viewing the page, click on the image to zoom in.)

For additional coverage of Ferrari's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub. Follow the FEI blog on Twitter @feiblog at Visit the FEI blog at; sign up to receive blog posts via email, by sending an email to, and write in Subject line: Sign up.

Seth Godin, Gary Hamel on Management: World Business Forum

Well known authors, speakers and 'guru's' (I won't limit them to management or social media gurus) Seth Godin and Prof. Gary Hamel spoke on Managing Teams & Talent, and Management Innovation, respectively, at the World Business Forum 2011 in New York City. In separate presentations, they touched to some extent on each other's topics as well. Their remarks were very well received by the audience of over 4,000. The FEI blog was part of the WBF11 Blogger's Hub and we live-tweeted from the program.

Read: Seth Godin's remarks as tweeted by the FEI Blog (click on the image if it is too small to read) and Gary Hamel's remarks as tweeted by the FEI Blog (click on the image if it is too small to read).

For additional coverage of Godin and Hamel's remarks, and other speakers at the World Business Forum, visit the websites and twitter pages listed at the WBF 2011's Blogger's Hub.

You can also search on twitter for all tweets from the program, e.g. by going to and searching for hashtag #wbf11.

Wednesday, October 5, 2011

IASB’s Hoogervorst Makes Case For IFRS Adoption in US; Goldschmid Warns of ‘The Dark Side’ if SEC Says No

With a decision looming by the U.S. Securities and Exchange Commission on whether to permit or require U.S. public companies to file with the SEC using International Financial Reporting Standards, the Chairman of the International Accounting Standards Board, Hans Hoogervorst, called upon the SEC to reach a positive decision in support of IFRS. Hoogervorst’s remarks were in a speech delivered earlier today at an AICPA-IASB conference.

Reasons in favor of one set of global accounting standards, noted Hoogervorst, included ’commercial advantages’ for international companies. Citing a joint comment letter filed with the SEC earlier this year by Ford Motor Company, Archer-Daniels-Midland, the Bank of New York Mellon, Kellogg, Chrysler, and United Continental Holdings, Hoogervorst noted the letter “call[ed] for the adoption of IFRSs in the United States,” adding, “Clearly, this is an important issue to them, as it is to other major preparers that share similar views. Note: see the comment letter filed with the SEC earlier this year by FEI’s Committee on Corporate Reporting.

Hoogervorst also made the case that a move to IFRS would benefit U.S. investors. Observing that, “The US’s current share of global market capitalisation now stands at just over 30%,compared to an average of 45% between 1996 and 2006,” Hoogervorst cited a comment letter by one of the largest ‘investors,’ public pension fund CalPERS (the California Public Employees’ Retirement System, in which CalPERS said: “the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors’ trust in financial reporting.” Hoogervorst added, “To me, that says it all. US investors, preparers and capital market providers recognise the substantial benefits that come from everyone speaking the same financial language, while securities regulators understand that, without it, opportunities for regulatory arbitrage will remain. That is why I believe that the case for global accounting standards, and with it the case for US adoption of IFRSs, remains compelling.”

Here are some excerpts from Hoogervorst's speech, as to why he believes the US should adopt IFRS: 

Quality: Citing academic studies and the progress of convergence work between IFRS and U.S. GAAP, Hoogervorst said: “While I am not dismissing [there are] differences, I am not convinced by the arguments that one set of standards is clearly superior to the other.”

Actual Usage of IFRS: Hoogervorst spoke of the high degree of adoption of IFRS worldwide, and countered arguments about the extent of usage of opt-outs in Europe, saying, “I have heard it argued that few major economies actually use IFRSs. Some even say that Europe does not use IFRSs due to the optionality of nine paragraphs of IAS 39 Financial Instruments. Yet this option is used by less than 30 companies. That is less than 1% of listed companies in Europe. The other 99%, some 8,000 listed European companies, all use full IFRSs.”

Consistent application: Hoogervorst acknowledged, “A more compelling criticism of IFRSs is that inconsistent application of the standards makes international comparison more difficult. However,” he added, “the same is true when you have different accounting standards… A major comfort to the United States should be that if you adopt IFRSs the SEC will remain in full control of enforcement.”

Preparedness and costs: Hoogervorst said: “Many American companies worry about the costs of adopting IFRSs. Let’s not beat about the bush; these are real costs. Therefore it would be reasonable that a relatively long transitional period is provided, particularly for smaller publicly traded companies. An option to allow early adoption of IFRSs also seems sensible for those companies that can already see substantial net benefits of IFRSs” As to preparedness in the U.S., he noted: “Convergence has brought IFRSs and US GAAP much closer together. There is already a lot of IFRS knowledge in the United States. The SEC has built-up a substantial IFRS competence, overseeing the financial statements of a growing number of foreign private issuers listed in the United States. Many large preparers already have IFRS expertise within their organisations through international subsidiaries. The CFA Institute now teaches IFRS financial statement analysis to all CFA Program students studying in the United States and elsewhere. From this year, students sitting the  AICPA’s CPA exam will be tested on IFRSs.”

Sovereignty: Another argument used against US adoption of IFRSs is the perceived loss in sovereignty. The SEC Staff Paper specifically addresses this point. It makes it clear that the FASB and the SEC will continue to have ultimate responsibility for accounting standards regardless of whether the United States moves forward with IFRSs. Obviously, participation in any international agreement, whether it is the World Trade Organisation or IFRS standards, requires negotiation and cooperation. The United States will continue to have a great deal of input into the standard-setting process. The knowledge base within the FASB is too valuable to the IASB to be excluded. In addition to the role of the FASB, the United States has, and will continue to have, a great deal of influence within the IASB. Four out of the fifteen board members are American and they certainly play a significant role

Independence of the IASB: Hoogervorst said: "I have never worked in an organisation that is so transparent in its activities, and that consults so widely. As for political pressure: I can only admit that it can be there. But this is not unique to the IASB. In the heat of the financial crisis, both the IASB and the FASB were put under intense pressure to relax our rules. It was not a pretty picture. Pressure on the boards is a fact of life. Our work affects many business interests that often find the willing ears of politicians. But I think that, as the IASB grows and diversifies, it will become much more difficult for special interests to force their issues onto the board. On a more personal note, I did not leave politics to make accounting political. Quite the opposite; I will use all my political skills to keep accounting as apolitical as possible.

Of interest particularly regarding sovereignty, see also Hoogervorst’s remarks made earlier this week at a meeting of the Economic and Monetary Affairs (ECON) Committee of the European Parliament, Hoogervorst noted the support the IASB has received from Europe – both from the government sector and the private sector, and called for continuing support, telling the European group: We will continue to increase the sense of trust and buy-in among those who have adopted our standards. We will continue to strengthen the institutional relationships between the IASB and Europe, in the same way as we are doing in other parts of the world. That is how we, as an independent standard-setter, must reciprocate your trust. This will continue to be a priority of the IASB as the organisation evolves into a global standard-setting authority.”

Goldschmid Warns of ‘The Dark Side’ If SEC Says No

IFRS Foundation Trustee (and former SEC Commissioner and General Counsel) Harvey Goldschmid, whose remarks followed those of Hoogervorst at today’s AICPA-IASB conference, supported Hoogervorst’s call for the SEC to vote in favor of a move to IFRS.

Goldschmid outlined in detail why he believes (as his speech is titled): U.S. Incorporation of IFRS is a National Imperative.

My two cents (I remind you of the disclaimer posted on the right side of this blog): I found the section of Goldschmid’s remarks entitled ‘The Dark Side’ to be of the most interest, in which he relates the potential negative impact if the SEC decides not to permit or require IFRS in the U.S.

Goldschmid provided a disclaimer early in his remarks, saying, “Today, particularly if I say something with which my Trustee colleagues disagree, I am speaking only for myself.” He also expressly emphasized that his remarks on this point were not meant as “any kind of threat.” However, I personally don’t recall seeing these arguments laid out in such specific terms before, as to how the U.S. (SEC, FASB, etc.) could get shut out (my words, not his) of the international accounting standard-setting community if we don’t take a seat at the table among adopters of the IFRS standards. Here is what he said:  

What if the SEC fails to commit to incorporation in the next period of months or simply says “no”? I see two basic scenarios; one would be bad for the U.S. and the other far worse…..

In my first scenario, the coalition of nations supporting IFRS would break apart. Rather than two sets of accounting standards, IFRS and U.S. GAAP, we would have a number of regional GAAPs, or we would go back to pre-2000 fragmentation. At a minimum, a number of national or regional accounting systems would exist. The cost of fragmentation, in terms of lack of transparency and comparability, higher accounting expenses, inefficiency, etc., would be extremely large.

The second scenario is far worse from a U.S. perspective. The coalition in support of IFRS would hold together, and the U.S. would become isolated in this area. There would be few, if any, U.S. members of the International Accounting Standards Board or U.S. Trustees. The SEC would be removed from the Monitoring Board. The U.S. would no longer play the large and constructive role it now plays in IFRS development and oversight.

I believe that without active U.S. participation the overall quality of the international accounting standards would deteriorate. Remember, there is less concern about transparency and investor protection in some other parts of the world.

I also believe that the U.S. could not remain out of a global system forever.

In a year like 2020 or 2030, the U.S. would be forced to adopt international accounting standards, but I predict, it would be adopting weaker IFRS standards than now exist. The U.S. would then - - as opposed to now - - have only a very small seat at IFRS drafting and governance tables.

In other action today, the IASB posted an updated version of its IFRS Learning Resources (aka IFRS Resources List), containing links to places on the IASB’s website, and the websites of accounting firms and others providing information relating to IFRS.

Awaiting SEC Decision

The SEC announced in its Work Plan for the Consideration of Incorporating IFRS Into the U.S. Financial Reporting System, published Feb. 24, 2010 that it anticipates making a decision in 2011 on whether to permit or require use of IFRS by U.S. public companies. There is a little bit of wiggle room in the 2011 decision target, in the formal terminology, which states: “Following successful completion of the Work Plan and the FASB-IASB convergence projects according to their current work plan, the Commission will be in a position in 2011 to determine whether to incorporate IFRS into the U.S. domestic reporting system.”

The IFRS Foundation’s Goldschmid noted in his speech earlier today how uncompleted convergence projects could be handled in a world in which the SEC decides favorably to move to IFRS.

Goldschmid said: “[T]he SEC, in its planning, has prudently focused on minimizing disruption and cost. The SEC Staff Paper, titled “Exploring a Possible Method of Incorporation,” dated May 26, 2011, sets forth a phased approach to adoption of IFRS through an incorporation mechanism. The SEC’s framework is realistic and sound. Basically, if I understand the approach correctly, existing IASB/FASB converged standards would be incorporated into U.S. GAAP. Not yet completed convergence projects (e.g., leasing and revenue recognition) would be completed and incorporated. FASB would stop writing new standards to prevent confusion and divergence. FASB, which would continue to play a critical role as the U.S. national standard setter, would endorse and incorporate remaining, non-converged IFRS standards over five to seven years. Similarly, FASB would continuously evaluate and endorse new IFRS standards. As a result of this process, U.S. public corporations would be complying with both U.S. GAAP and IFRS.”

Separately, the SEC states in its IFRS Work Plan that: “The staff will provide public progress reports on the Work Plan beginning no later than October 2010 and frequently thereafter until the work is complete.”

Personally (I remind you again of the disclaimer posted on the right side of this blog), I wouldn’t be surprised if another progress report on the SEC’s IFRS Work Plan is published sometime this month, since I believe the last one was published last October (see SEC Progress report on Work Plan, published 10.29.10), although some may consider the SEC staff paper published 5.26.11 to effectively incorporate a progress report as well.  

Whether the SEC Commissioners actually meet and decide on IFRS in October, November, or December of this year (or later), a critically important point is that this step would solely be a decision on whether or not to permit or require IFRS. Within that decision lies a separate decision as to the effective date for adoption (incorporation) of IFRS in the U.S.

Goldschmid addressed this point as well, in his speech earlier today, saying:

The largest concern I have heard from the U.S. business community is that Dodd-Frank implementation, and other changes caused by the financial crisis and the current economic downturn, make 2011 and 2012 the wrong years to create new burdens. The basic answer to this concern is that an SEC decision to commit to IFRS in the coming months will not be disruptive. The effective date - - when IFRS would be required for the largest U.S. public corporations - - will not come until 2016, at the earliest. (An even later date, in my view, makes sense for small public corporations.) The year 2016 or 2017, for large public corporations, would provide ample time for planning, education, training, and retooling. The SEC is already used to reviewing IFRS filings, which now come from foreign private issuers. It is an unambiguous SEC commitment to incorporation that is essential in the coming months. That would create the certainty and incentives for our large issuers, investment analysts, accounting firms, and business schools to be ready by a year like 2016.”

Personally, (you read the part about the disclaimer on the right side of this blog, right?) I think 2017 or even 2018 has a pretty good ring to it, as far as any earliest mandatory effective date, starting with the largest public companies, phasing in at a later date for smaller public companies, if a decision comes down from the SEC in 2011 or 2012.

PCAOB Update

The Public Company Accounting Oversight Board has received over 140 comment letters; as of the September 30 comment deadline, on its Concept Release on the Auditor’s Reporting Model.

If the ideas in the Concept Release move forward to proposed and final rulemaking, they could mark significant changes in the language of the auditor’s report – and, in turn, in the way that audits are conducted.

(Although directed at public company audits, any resultant changes in PCAOB audit standards could also indirectly impact private company audits, to the extent audit firms that service both types of clients move to incorporate one set of standard practices in their audits (and to the extent there is harmony with AICPA requirements for audits of nonpublic companies).

In addition to the comment letter process, the PCAOB also invited feedback on the Concept Release at a September 15 roundtable; an unofficial transcript of the roundtable was recently posted.

FEI Views on Auditor’s Reporting Model
In a comment letter filed last week, FEI’s Committee on Corporate Reporting provided its views on the PCAOB’s Concept Release on the Auditor’s Reporting Model. Read more in the FEI CCR letter.

Next Up: Auditor Independence, Audit Firm Rotation
Another document on which the PCAOB seeks public comment is the Concept Release on Auditor Independence and Audit Firm Rotation. The comment period on that Concept Release closes December 14.

Staff Alert on Emerging Markets
In other PCAOB-related news, the audit regulator published a staff audit practice alert earlier this week, entitled: Staff Audit Practice Alert No. 8: Audit Risks in Certain Emerging Markets. See also the related press release.

McKenna, Weil Weigh In Re: PCAOB Board Vacancy
Writers Francine McKenna and Jonathan Weil recently weighed in on prospects for filing the current vacancy at the PCAOB Board. Read McKenna’s post in Forbes online, and Weil’s article in Bloomberg’s The Ticker. Hat tip to Broc Romanek of

UPDATE 10/6:
Office of Internal Oversight & Performance Assurance (IOPA) Issues Two ReportsOn October 5, the PCAOB posted on its website two reports that were recently issued by its office of Internal Oversight and Performance Assurance (IOPA), including the related transmittal letters accompanying the reports; the letters were sent by PCAOB Chairman Jim Doty to SEC Chairman Mary L. Schapiro. The two reports were on the PCAOB's:
IT Governance and Staffing, and
Controls Over Employee Internet Activity

Tuesday, October 4, 2011

The Meaning & Significance of 'Undue Cost or Effort,' 'Impracticable' in Accounting Standards; IASB Draft Q&A

Among five draft Q&As relating to International Financial Reporting Standards for Small and Medium Sized Entities (IFRS for SMEs) released for public comment by the IASB last week, the one that piqued my interest in particular was: Interpretation of ‘Undue Cost or Effort’ and ‘Impracticable.’

The IASB’s draft Q&A pertaining to IFRS for SMEs states:

‘Impracticable’ is defined in the IFRS for SMEs as follows: ‘Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’, therefore, generally only covers situations where information is unavailable, for example where data, that has not been collected at the time of an event, is impossible to create at a later point, rather than situations where the data could be obtained but it would be expensive or time consuming to do so. ’….

…. Impracticable is defined in the IFRS for SMEs in the same way as under full IFRSs. The definition refers to effort, but not to cost. Therefore, some people have concluded that if the data required in order to apply a principle in an IFRS can be obtained, an entity must do so regardless of cost….

It could be argued that ‘every reasonable effort to do so’ would not include spending excessive resources in order to comply with a requirement. However, enquiries to the IASB concerning the difference between ‘impracticable’ and ‘undue cost or effort’ suggest that the IFRS for SMEs is not clear as to whether cost alone would render a requirement impracticable.
Undue Cost or Effort
Further, the draft Q&A pertaining to IFRS for SMEs states:

‘Undue cost or effort’ is deliberately not defined in the IFRS for SMEs as it will depend on the SME’s specific circumstances and management’s professional judgment in assessing the costs and benefits. That assessment should include a
consideration of how the economic decisions of the users of the financial statements could be affected by the availability of the information. Applying a requirement would result in ‘undue cost or effort’ because of either excessive cost (e.g. through valuers’ fees) or excessive endeavors by employees in comparison to the benefits that the users of the SME’s financial statements would receive from having the information.

…Where ‘undue cost or effort’ is used together with ‘impracticable’, this should be applied in the same way as ‘undue cost or effort’ on its own. ‘Undue cost or effort’ is used either instead of, or together with, ‘impracticable’ for certain requirements in
the IFRS for SMEs in order to include cost or burden as factors to take into
account when deciding whether to obtain or determine the information.

To include an exemption for impracticability alone would mean that an SME would be required to follow the requirements if it is possible to obtain or determine the information, regardless of the cost or effort required. For example, an SME would be expected to engage a valuer, actuary or other professional to make a particular measurement, regardless of the cost, provided the valuer expects to be able to develop a reliable valuation of the asset.

… The inclusion of ‘undue cost or effort’ for certain requirements in the IFRS for SMEs is intended to clarify that cost is a consideration when applying that requirement. Although there is no direct reference to benefits in the term, in order to assess whether cost and effort is ‘undue’ SMEs would have to make an assessment of how important the information is to users.
Why Does This Matter?
My two cents (please note the disclaimer posted on the right side of this blog): Although IFRS for SMEs, a condensed, simplified, and self-contained set of IFRS, about 1/10 the size of full IFRS, may be elected for use (e.g., as an alternative to full IFRS, or, theoretically, as an alternative to U.S. GAAP) by private companies only (i.e., those that are not publicly listed , and even then, only those that do not have ‘public accountability’ such as banks and certain other entities), I believe this draft Q&A is something worth studying and watching how it evolves, whether you work for (or are indirectly involved in some capacity such as auditing or investing in) a private company or public company, and whether you that company (ies) follow IFRS or U.S. GAAP.

Here is why: The Draft Q&A notes that the definition of the term ‘impracticable’ applicable to IFRS for SMEs is the same as that in full IFRS. Therefore it will be interesting to see if any potential changes to the definition applicable to IFRS for SMEs would then raise questions with regard to whether the definition of ‘impracticable’ in full IFRS (as well as usage of ‘undue cost and effort’ in full IFRS) should be considered/reconsidered. Thus, with potential engagement of consideration of implications for full IFRS, the private co/public co (or small co/large co) dividing line may not be as relevant.

Similarly, with convergence a priority – although on particular matters the FASB and the IASB can ‘agree to disagree,’ it will be interesting to see if the consideration/reconsideration of the definitions of these key terms will take place at some future date in a parallel manner by the FASB and its constituents.

Why does this matter? The significance of the terms ‘undue cost or effort’ and ‘impracticable’ in terms of accounting standard-setting, is that development of (and revision of) GAAP standards theoretically takes into account cost-benefit considerations, and the above terms are sometimes specifically used in defending or arguing against particular accounting treatments. In certain instances, ‘practicability’ exceptions are also provided, and those exceptions do not necessarily relate only to private companies or small companies, particularly if ‘new information’ has to be developed to satisfy a particular accounting requirement, which cannot readily be recreated after-the-fact (this point relates particularly to the transition method or method of adoption set forth in a new standard(s), such as retroactive, retrospective, or current/going-forward basis).

I would add that, again in my personal opinion, in terms of a common sense definition of ‘impracticable,’ (although I am not certain how this lines up with any definition(s) of the term in existing U.S. GAAP standards or concept statements, or in the FASB’s Standards of Procedure which govern how they set standards, and I would welcome anyone to provide insights they have via a comment on this blog or an email to me), I would not have thought that a cost of something close to ‘infinity’ would not be considered as rendering a particular requirement ‘impracticable,’ even if it is theoretically ‘possible’ to obtain/develop/recreate said information. In fact, if impracticable meant ‘impossible’ if not used in conjunction with ‘without undue cost or effort,’ then I would think that the term perhaps should never be used alone, without the ‘undue cost or effort’ proviso. What do you think?

The comment deadline on the five draft Q&As on IFRS for SMEs released for comment on September 28, will end November 30. See related press release.
In related news on the private company front, see our post earlier today, FAF Proposes Private Co Standards Improvement Council To Modify GAAP For Private Co’s – PCSIC’s Recommendations Would Be Subject To Public Comment, FASB Ratification . See also: Plan to Simplify US Private Company Accounts by Helen Thomas in the Financial Times published earlier today, and Big GAAP/Little GAAP: A Possible Solution? published 12/21/10 in the Cherry, Beckaert & Holland Blog.