At its meeting earlier today (May 5), the U.S. Treasury Department's Advisory Committee on the Auditing Profession (ACAP), co-chaired by Don Nicolaisen and Arthur Levitt, voted to publish their 153 page Draft Report for a 30 day comment period. (Separately, they have posted a one-page list of "Issues for observation or further discussion" for which the committee has not yet made formal recommendations.) Based on today’s webcast, it appeared there may be some minor modifications to ACAP’s draft report before it is formally posted for public comment, to incorporate some minor changes based on discussion at today's meeting, and some additional comments of committee members. The next ACAP meeting will be June 3.
UPDATE MAY 6: Here is a summary of the recommendations in ACAP's Draft Report.
Monday, May 5, 2008
FBI, IRS, USAO, SEC Subprime Investigations Ongoing; Accounting Update: Roper, Bellaire Weigh In on Principles vs. Rules in WSJ
A slew of federal and state agencies continue to examine whether fraud was a component of the subprime mortgage debacle and related losses on loans and investments in mortgage-backed securities and related derivatives.
The investigation into potential fraud is focusing on at least three fronts, as described in the article “Wall Street, Lenders Face Subprime Scrutiny” by Amir Efrati in today’s Wall Street Journal:
Separately, Lynnley Browning reports in “Government Intensifies Mortgage Investigation,” in today's New York Times that an FBI-IRS led task force formed in January is stepping up its examination of the mortgage crisis and related write-downs and losses. Browning notes this task force includes federal prosecutors from five states.
Accounting Update
On the topic of accounting for subprime, see also: “Rule Clouds American Capital – Revaluing of Loans is Likely to Force Big Write-Downs,” by Peter Eavis in today’s WSJ. Referring to FAS 157, Fair Value Measurement, Eavis says: “The new accounting rule, with its emphasis on sale prices, could force American Capital to write down the value of its loans so those values are more in line with values posted by its peers.” He adds, “These valuation gaps aren’t small.”
See also our summary of last week’s FASB board meeting: “FASB Moves Closer To Proposing Guidance On Credit Derivatives, Hedging.”
Principles vs. Rules and FINRA
Another article of interest in today’s WSJ is an article by Jaime Levy Pessin highlighting a ‘debate’ on the topic of principles vs. rules – with particular emphasis on the Financial Industry Regulatory Authority (FINRA) – including the views of Consumer Federation of America’s Barbara Roper (Roper is also a member of the PCAOB's Standing Advisory Group or SAG), and Financial Services Institute Inc.’s David Bellaire. The article is entitled: “Is It All in the Details? Broad principles vs. nitpicky rules: a debate over the best way to get securities brokers to behave.”
The investigation into potential fraud is focusing on at least three fronts, as described in the article “Wall Street, Lenders Face Subprime Scrutiny” by Amir Efrati in today’s Wall Street Journal:
- “whether officials made misrepresentations in securities filings about a company’s financial posiion and the quality of its mortgage loans, including failing to disclose a rising number of loan defaults, or engaged in questionable accounting to hide losses.”
- “whether companies doctored information about borrowers, such as credit histories, before making loans and selling those loans to banks or Wall Street firms, which packaged them into securities and sold them to investors.”
- “whether brokers at Wall Street firms lied to investors, orally or otherwise, by stating that their investments in vehicles known as collateralized-debt obligations were backed by, for example, corporate debt rather than assets such as subprime-mortgage loans.”
Separately, Lynnley Browning reports in “Government Intensifies Mortgage Investigation,” in today's New York Times that an FBI-IRS led task force formed in January is stepping up its examination of the mortgage crisis and related write-downs and losses. Browning notes this task force includes federal prosecutors from five states.
Accounting Update
On the topic of accounting for subprime, see also: “Rule Clouds American Capital – Revaluing of Loans is Likely to Force Big Write-Downs,” by Peter Eavis in today’s WSJ. Referring to FAS 157, Fair Value Measurement, Eavis says: “The new accounting rule, with its emphasis on sale prices, could force American Capital to write down the value of its loans so those values are more in line with values posted by its peers.” He adds, “These valuation gaps aren’t small.”
See also our summary of last week’s FASB board meeting: “FASB Moves Closer To Proposing Guidance On Credit Derivatives, Hedging.”
Principles vs. Rules and FINRA
Another article of interest in today’s WSJ is an article by Jaime Levy Pessin highlighting a ‘debate’ on the topic of principles vs. rules – with particular emphasis on the Financial Industry Regulatory Authority (FINRA) – including the views of Consumer Federation of America’s Barbara Roper (Roper is also a member of the PCAOB's Standing Advisory Group or SAG), and Financial Services Institute Inc.’s David Bellaire. The article is entitled: “Is It All in the Details? Broad principles vs. nitpicky rules: a debate over the best way to get securities brokers to behave.”
Friday, May 2, 2008
Pozen Committee Updates Rec's: Instead of Specifying Professional Judgment Framework, May Ask SEC To Articulate Policy
A modified view on an earlier recommendation in the Pozen Committee's (more formally, the SEC Advisory Committee on Improvements to Financial Reporting or CIFiR, chaired by Robert Pozen) Feb. 14 progress report outlining a professional judgment framework for accounting decisions will be presented at CIFiR's meeting today in Chicago.
Recommendation That SEC Articulate Policy For Evaluating Judgment
Specifically, the May 2nd report of the audit process and compliance subcommitee (aka “Subcommittee III”), after considering comments received and panel feedback on the suggested professional judgment framework in its Feb 14 report, states:
“Subcommittee III believes that some changes are necessary … to meet the goals established in that Progress Report without the risks that the subcommittee has been concerned about from the beginning, such as the risk that the developed proposal devolve into a checklist based approach to making judgments and the risk that the proposed framework could be used as a shield to protect unreasonable judgments.”
“The primary change that Subcommittee III believes should be made is to refocus the developed proposal away from a recommendation for a framework,” and instead, “have the SEC formally articulate in a statement of policy how the SEC evaluates judgments, including the factors that it uses as part of its evaluation. Therefore, Subcommittee III believes the developed proposal should be changed to formally propose such as statement of policy to be issued.”
The above modified recommendation is subject to discussion by the full CIFiR committee at its meeting today, and further consideration by the subcommittee after more feedback. We previously reported on some feedback on CIFiR’s initial recommendation for a professional judgment framework here, here and here, and in our Q&A with Michael Young of Willkie Farr & Gallagher.
The subcommittee also recommends modifying their recommendations by removing any reference to ‘safe harbor.”
Additionally, the subcommittee recommends removing the word “professional” from the term “professional judgment,” because: “there could be a misunderstanding that the term professional implies that one must have a professional certification in order to make or evaluate a professional judgment.”
All Four Subcommittees To Present Updated Reports Today
All four subcommittees will present modified recommendations and some new recommendations for discussion by the full CIFiR committee today. The reports of the other three subcommittees are: substantive complexity (Subcommittee I), standards-setting (Subcommittee II), and delivering financial information. (Subcommittee IV).
Testimony on CIFiR Rec’s on Substantive Complexity, Standard-SettingPrior to presentation of the updated subcommittee reports, CIFiR will take testimony from two panels commenting on the recommendations pertaining to substantive complexity and standards-setting. (Panels were convened earlier this year to provide feedback on recommendations of the other two subcommittees.)
Among the eight panelists listed on the agenda for today’s CIFiR meeting are former SEC chief accountant Lynn Turner, Citigroup’s Linda Bergen, Council of Institutional Investors’ Jeff Mahoney, BDO Seidman’s Ben Neuhausen, KPMG’s Mark Bielstein, MFS Investment’s Kevin Conn, American Express’ Brooke Richards, and Financial Reporting Advisors’ John Stewart. The first panel just wrapped up, the second panel begins 11 am Central time (noon EDT).
Check back to our blog for followup reporting on today’s Pozen committee meeting. To receive our blog by email, sign up here.
Recommendation That SEC Articulate Policy For Evaluating Judgment
Specifically, the May 2nd report of the audit process and compliance subcommitee (aka “Subcommittee III”), after considering comments received and panel feedback on the suggested professional judgment framework in its Feb 14 report, states:
“Subcommittee III believes that some changes are necessary … to meet the goals established in that Progress Report without the risks that the subcommittee has been concerned about from the beginning, such as the risk that the developed proposal devolve into a checklist based approach to making judgments and the risk that the proposed framework could be used as a shield to protect unreasonable judgments.”
“The primary change that Subcommittee III believes should be made is to refocus the developed proposal away from a recommendation for a framework,” and instead, “have the SEC formally articulate in a statement of policy how the SEC evaluates judgments, including the factors that it uses as part of its evaluation. Therefore, Subcommittee III believes the developed proposal should be changed to formally propose such as statement of policy to be issued.”
The above modified recommendation is subject to discussion by the full CIFiR committee at its meeting today, and further consideration by the subcommittee after more feedback. We previously reported on some feedback on CIFiR’s initial recommendation for a professional judgment framework here, here and here, and in our Q&A with Michael Young of Willkie Farr & Gallagher.
The subcommittee also recommends modifying their recommendations by removing any reference to ‘safe harbor.”
Additionally, the subcommittee recommends removing the word “professional” from the term “professional judgment,” because: “there could be a misunderstanding that the term professional implies that one must have a professional certification in order to make or evaluate a professional judgment.”
All Four Subcommittees To Present Updated Reports Today
All four subcommittees will present modified recommendations and some new recommendations for discussion by the full CIFiR committee today. The reports of the other three subcommittees are: substantive complexity (Subcommittee I), standards-setting (Subcommittee II), and delivering financial information. (Subcommittee IV).
Testimony on CIFiR Rec’s on Substantive Complexity, Standard-SettingPrior to presentation of the updated subcommittee reports, CIFiR will take testimony from two panels commenting on the recommendations pertaining to substantive complexity and standards-setting. (Panels were convened earlier this year to provide feedback on recommendations of the other two subcommittees.)
Among the eight panelists listed on the agenda for today’s CIFiR meeting are former SEC chief accountant Lynn Turner, Citigroup’s Linda Bergen, Council of Institutional Investors’ Jeff Mahoney, BDO Seidman’s Ben Neuhausen, KPMG’s Mark Bielstein, MFS Investment’s Kevin Conn, American Express’ Brooke Richards, and Financial Reporting Advisors’ John Stewart. The first panel just wrapped up, the second panel begins 11 am Central time (noon EDT).
Check back to our blog for followup reporting on today’s Pozen committee meeting. To receive our blog by email, sign up here.
Subscribe to:
Posts (Atom)