Earlier today (April 30) Financial Executives International (FEI) released its seventh in a series of surveys of the costs and benefits of internal control reporting (management’s report on internal control, and the related auditor’s attestion on internal control) under Sarbanes-Oxley Section 404.
In brief, the FEI survey results released today showed:
- a decrease in total cost of compliance with Section 404 (internal costs within the company to facililate 404 reporting, and external costs, including audit fees).
- an increased sense of benefits from Section 404 (enhanced investor confidence in financial reporting, enhanced reliability of financial reporting, and enhanced ability to prevent and detect fraud). Although showing an increase from prior years, sentiments as to benefits from 404 are still split, as shown in the press release.
- a 5.4% decrease in auditor attestation fees attributable to the Section 404 portion of the integrated audit. (That portion was estimated by this year’s respondents to be 23.7% of total audit fees).
- a 1.8% increase in total audit fees (i.e., for the integrated financial statement audit and internal control audit).
"As companies continue to find efficiencies in complying with Section 404 and make compliance part of a routine practice, we have seen a continued decline in costs," said FEI President and CEO Michael P. Cangemi. "While 404 auditor costs also declined 5.4% as the auditor scope of work narrowed, these costs were offset by a reported five percent increase in the average hourly audit rate charged by auditors."
The report containing full survey results is available for free to FEI members, and non-members can purchase a copy of the report for $99 from the online bookstore of FEI’s research affiliate, the Financial Executives Research Foundation (FERF). Questions about reprints and content licensing should be directed to Cheryl Graziano, Vice President, FERF Research & Operations, at 973-765-1064 cgraziano@financialexecutives.org .
Wednesday, April 30, 2008
Tuesday, April 29, 2008
Subprime, Credit Crisis Update; SEC Chief Accountant, FASB, PCAOB Chairs At Baruch Zicklin Financial Reporting Conf. May 1
In our continuing coverage of subprime crisis and related market turmoil particularly with respect to related accounting and auditing standards, here are some recent items of interest:
Defining the Credit Crisis in Vinny Catalano’s blog today provides definitions of some of the key terms in the alphabet soup of the credit crisis.
What’s Wrong with Subprime Accounting by Marie Leone in CFO.com today. Leone covers in depth FASB, IASB and other commentary on matters relating to FAS 157, Fair Value Measurement, FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities. (See some of our related coverage further below.)
How to Revive Securitization Markets, op ed by Robert Pozen, Chair, MFS Financial, in today’s Wall Street Journal. Authoring the op ed in his personal capacity, Pozen hints that the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), which he chairs, may consider recommendations relating to securitization accounting and disclosure at its meeting Friday, May 2nd.
Pozen describes new accounting rules promulgated by FASB in the post-Enron period (FIN 46R and FAS 140), but states, “Unfortunately those rules set the stage for today's liquidity crisis.” He explains that transactions were structured to fall below bright lines in the standards (like 10% voting equity in the securitization trust to consolidate) or to avoid triggering certain disclosure requirements.
Observing that, “Most markets for securitized debt have dried up. The cause is uncertainty: Since no one knows exactly who owns the potential losses from securitized mortgages, many investors stay away,” Pozen posits, “When [[CIFiR] meets on Friday, it can take a big step toward reviving this critical part of our financial market. It should recommend that the regulators require someone to "own" the securitization process as well as require more disclosures about who will bear the losses from the assets underlying these securities.”
Pozen proposes a three part solution: “First, FASB should again revise its rules to allow a sponsor to keep a trust off its balance sheet only if an independent party has sufficient voting equity to fund the trust's normal operations – presumptively at least 10% – and that party has a substantial role in the governance of the trust. Second, this large holder of the trust's voting equity should have the right to select a rating agency for the trust and negotiate a fee arrangement with the agency.” He adds, “Third, the FASB and the SEC should be more specific about the disclosure requirements of trust sponsors with formal or informal obligations to buy up the trust's unsold debt securities, especially if the long-term assets of the trust are mismatched with its short-term liabilities.”
Speech by IASB Chairman Sir David Tweedie in Canada on April 21. Tweedie said: “Time is too short to provide a thorough analysis of the current credit crisis, but it is evident that at the heart of the crisis were bad lending practices. Bad lending was then compounded by the absence of prices in the secondary markets for some structured credit products and concerns about the location and size of potential losses. This in turn led to funding difficulties caused by the reluctance to extend credit to a number of financial institutions thought to hold low-quality liquid assets.” He added, “Financial reporting enters the scene by way of its requirements to value these assets and to alert the markets to risks associated with their existence…. It is undoubtedly difficult to value complex, illiquid, structured credit securities… My personal view is that showing the changes in values of these securities, even if imperfect, provides much needed transparency and enables markets to adjust in a necessary, even if painful manner.”
Tweedie noted, “None of this is to say that the existing IFRSs are perfect, and clearly the IASB is willing to examine how to improve its standards in light of developments.” He referenced the recent recommendations by the G-7 Finance Ministers, endorsing a report of the Financial Stability Forum, that the IASB and other relevant standard-setters take certain actions “within 100 days” relating to, among other matters, fair value accounting and off-balance sheet issues. See our related post on the G-7 here.
2011 emerges as a key date in the continued move of worldwide adoption of IFRS. Tweedie noted over 100 countries are on IFRS now, and said “nearly 150 countries” will have adopted IFRS by 2011. Regarding the timetable for convergence projects under the FASB and IASB’s Memorandum of Understanding (MOU), he said, “My best estimate is that these MoU projects will be completed in 2011.”
With regard to the U.S., Tweedie said, “[W]e are waiting for the SEC to determine whether US companies will have the option to use IFRSs or whether a firm deadline for US adoption will be set. “ He added, “there is reason to believe that IFRSs will be adopted in the United States by US companies in the near future.”
Learn More About IFRS and SEC's Upcoming Roadmap
Learn more about IFRS and the status of SEC’s ‘roadmap’ to consider potentially permitting – or requiring – U.S. companies to file in IFRS – at Financial Executives International's (FEI’s) June 5 conference: “The World Is Moving to IFRS – Are You?” A keynote address will be provided by SEC Corp Fin Director John White. Space is limited, speakers, agenda and registration information can be found at www.financialexecutives.org/ifrs. BNA Tax & Accounting is the exclusive sponsor of the conference.
Additionally, the New York State Society of CPA’s Manhattan/Bronx Chapter has a two hour CPE session on “IFRS and U.S. GAAP Convergence” May 13 from 6-8 pm at New York Life, midtown Manhattan.
As previously noted in this blog, the FAF and FASB are holding a conference (which will be webcast) at Baruch College on June 16, “High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting.” Here are the questions that will be addressed at that conference.
Subprime May Come Up At Baruch – Zicklin Center Financial Reporting Conference May 1
Although not outlined as a separate panel, the subject of subprime and the credit crisis may come up at Baruch College’s Zicklin Center for Corporate Integrity Financial Reporting Conference on May 1. This is one of the major conferences on the financial reporting circuit each year. Speakers include SEC Chief Accountant Conrad Hewitt, FASB Chairman Robert Herz, PCAOB Chairman Mark Olson, and other experts. FEI President and CEO Michael P. Cangemi will appear on a panel on “Current Developments in the Private Sector.” FEI member Bob Laux, Director of Financial Accounting and Reporting, Microsoft, Inc., is appearing on a panel on, “Getting Ready for International Accounting Standards in the U.S.”
FEI Coverage of Subprime/Credit Crisis
If you’re new to our blog, here are a few links to some of our past coverage of the subprime/credit crisis:
SEC, Legislative Response to Market Turmoil (NYT's Norris); Rutgers Conference on Credit Crisis; European Parliament on IASB (April 25, 2008)
G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation (April 12, 2008)
IMF, IIF Rec's on Market Turmoil Are Far-Reaching, Include Fair Value, Off-Balance Sheet;
Q&A With Michael Young, Willkie Farr (April 11, 2008)
FASB Votes To Remove QSPE Concept From FAS 140, FIN 46R (April 3)
Treasury Blueprint Today; Pres. Bush Announces Intent to Nominate Aguilar, Walter to SEC;
SEC Letter on Disclosure of FV Info (March 31)
If you received this blog post from ‘a friend’ and would like to receive our blog real-time, enter your email address here.
Defining the Credit Crisis in Vinny Catalano’s blog today provides definitions of some of the key terms in the alphabet soup of the credit crisis.
What’s Wrong with Subprime Accounting by Marie Leone in CFO.com today. Leone covers in depth FASB, IASB and other commentary on matters relating to FAS 157, Fair Value Measurement, FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities. (See some of our related coverage further below.)
How to Revive Securitization Markets, op ed by Robert Pozen, Chair, MFS Financial, in today’s Wall Street Journal. Authoring the op ed in his personal capacity, Pozen hints that the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), which he chairs, may consider recommendations relating to securitization accounting and disclosure at its meeting Friday, May 2nd.
Pozen describes new accounting rules promulgated by FASB in the post-Enron period (FIN 46R and FAS 140), but states, “Unfortunately those rules set the stage for today's liquidity crisis.” He explains that transactions were structured to fall below bright lines in the standards (like 10% voting equity in the securitization trust to consolidate) or to avoid triggering certain disclosure requirements.
Observing that, “Most markets for securitized debt have dried up. The cause is uncertainty: Since no one knows exactly who owns the potential losses from securitized mortgages, many investors stay away,” Pozen posits, “When [[CIFiR] meets on Friday, it can take a big step toward reviving this critical part of our financial market. It should recommend that the regulators require someone to "own" the securitization process as well as require more disclosures about who will bear the losses from the assets underlying these securities.”
Pozen proposes a three part solution: “First, FASB should again revise its rules to allow a sponsor to keep a trust off its balance sheet only if an independent party has sufficient voting equity to fund the trust's normal operations – presumptively at least 10% – and that party has a substantial role in the governance of the trust. Second, this large holder of the trust's voting equity should have the right to select a rating agency for the trust and negotiate a fee arrangement with the agency.” He adds, “Third, the FASB and the SEC should be more specific about the disclosure requirements of trust sponsors with formal or informal obligations to buy up the trust's unsold debt securities, especially if the long-term assets of the trust are mismatched with its short-term liabilities.”
Speech by IASB Chairman Sir David Tweedie in Canada on April 21. Tweedie said: “Time is too short to provide a thorough analysis of the current credit crisis, but it is evident that at the heart of the crisis were bad lending practices. Bad lending was then compounded by the absence of prices in the secondary markets for some structured credit products and concerns about the location and size of potential losses. This in turn led to funding difficulties caused by the reluctance to extend credit to a number of financial institutions thought to hold low-quality liquid assets.” He added, “Financial reporting enters the scene by way of its requirements to value these assets and to alert the markets to risks associated with their existence…. It is undoubtedly difficult to value complex, illiquid, structured credit securities… My personal view is that showing the changes in values of these securities, even if imperfect, provides much needed transparency and enables markets to adjust in a necessary, even if painful manner.”
Tweedie noted, “None of this is to say that the existing IFRSs are perfect, and clearly the IASB is willing to examine how to improve its standards in light of developments.” He referenced the recent recommendations by the G-7 Finance Ministers, endorsing a report of the Financial Stability Forum, that the IASB and other relevant standard-setters take certain actions “within 100 days” relating to, among other matters, fair value accounting and off-balance sheet issues. See our related post on the G-7 here.
2011 emerges as a key date in the continued move of worldwide adoption of IFRS. Tweedie noted over 100 countries are on IFRS now, and said “nearly 150 countries” will have adopted IFRS by 2011. Regarding the timetable for convergence projects under the FASB and IASB’s Memorandum of Understanding (MOU), he said, “My best estimate is that these MoU projects will be completed in 2011.”
With regard to the U.S., Tweedie said, “[W]e are waiting for the SEC to determine whether US companies will have the option to use IFRSs or whether a firm deadline for US adoption will be set. “ He added, “there is reason to believe that IFRSs will be adopted in the United States by US companies in the near future.”
Learn More About IFRS and SEC's Upcoming Roadmap
Learn more about IFRS and the status of SEC’s ‘roadmap’ to consider potentially permitting – or requiring – U.S. companies to file in IFRS – at Financial Executives International's (FEI’s) June 5 conference: “The World Is Moving to IFRS – Are You?” A keynote address will be provided by SEC Corp Fin Director John White. Space is limited, speakers, agenda and registration information can be found at www.financialexecutives.org/ifrs. BNA Tax & Accounting is the exclusive sponsor of the conference.
Additionally, the New York State Society of CPA’s Manhattan/Bronx Chapter has a two hour CPE session on “IFRS and U.S. GAAP Convergence” May 13 from 6-8 pm at New York Life, midtown Manhattan.
As previously noted in this blog, the FAF and FASB are holding a conference (which will be webcast) at Baruch College on June 16, “High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting.” Here are the questions that will be addressed at that conference.
Subprime May Come Up At Baruch – Zicklin Center Financial Reporting Conference May 1
Although not outlined as a separate panel, the subject of subprime and the credit crisis may come up at Baruch College’s Zicklin Center for Corporate Integrity Financial Reporting Conference on May 1. This is one of the major conferences on the financial reporting circuit each year. Speakers include SEC Chief Accountant Conrad Hewitt, FASB Chairman Robert Herz, PCAOB Chairman Mark Olson, and other experts. FEI President and CEO Michael P. Cangemi will appear on a panel on “Current Developments in the Private Sector.” FEI member Bob Laux, Director of Financial Accounting and Reporting, Microsoft, Inc., is appearing on a panel on, “Getting Ready for International Accounting Standards in the U.S.”
FEI Coverage of Subprime/Credit Crisis
If you’re new to our blog, here are a few links to some of our past coverage of the subprime/credit crisis:
SEC, Legislative Response to Market Turmoil (NYT's Norris); Rutgers Conference on Credit Crisis; European Parliament on IASB (April 25, 2008)
G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation (April 12, 2008)
IMF, IIF Rec's on Market Turmoil Are Far-Reaching, Include Fair Value, Off-Balance Sheet;
Q&A With Michael Young, Willkie Farr (April 11, 2008)
FASB Votes To Remove QSPE Concept From FAS 140, FIN 46R (April 3)
Treasury Blueprint Today; Pres. Bush Announces Intent to Nominate Aguilar, Walter to SEC;
SEC Letter on Disclosure of FV Info (March 31)
If you received this blog post from ‘a friend’ and would like to receive our blog real-time, enter your email address here.
Sunday, April 27, 2008
Profile of Sen. Jack Reed, Chair of Senate Securities Subcommittee; Presidential Classroom
There’s a “Profile of Sen. Jack Reed” by G. Wayne Miller in Sunday’s (April 27) Providence Journal (ProJo). It is very well written and provides significant insight into Sen. Reed’s life, from his and his parents’ roots to today, which is of interest for this rumored possible vice Presidential candidate or possible Secretary of Defense, who is described as the 17th most powerful senator in one poll cited in the article.
Miller spent time documenting the Senator’s activities recently, including a trip to West Point (Reed’s alma mater), various meetings on Capitol Hill, and numerous interviews with the press (one such interview with NYT’s Floyd Norris saw Reed quoted in, “Why Surprises Still Lurk After Enron,” on Feb. 29, 2008).
Reed has been mentioned from time to time in this blog due to his role as chair of the Securities, Investment and Insurance subcommittee of the Senate Banking Committee which has jurisdiction over the SEC and related areas. For example, it was Reed’s subcommittee that held the watershed hearing on “International Accounting Standards: Opportunities, Challenges, and Global Convergence Issues” on October 24, 2007, shortly before the SEC voted on Nov. 15, 2007 to remove the reconciliation requirement for foreign private issuers. (The SEC is currently considering whether to propose a rule to permit –or require – U.S. companies to file financial statements with the SEC in International Financial Reporting Standards (IFRS) instead of U.S. GAAP. See our IFRS related coverage last week; check out our June 5 conference, “The World is Moving to IFRS – Are You?” at www.financialexecutives.org/ifrs.) Reed’s subcommittee also presciently convened a hearing a year ago – on April 17, 2007 – on “Subprime Mortgage Market Turmoil: Examining the Role of Securitization.”
ProJo’s Miller and NYT’s Norris noted Reed sent a letter to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in February. The letter, as described by Norris: “ask[ed] detailed questions about what went wrong” with respect to a lack of transparency in the subprime crisis, “and how it should be fixed.” Norris continued, “Getting together answers to [Reed’s] questions could provide the S.E.C. with a road map to determine where the rules failed, as well as where companies failed to apply the rules properly.” The letter was included as Appendix A-2 and A-3 in the March FASAC handouts.
Having read Miller’s profile of Sen. Reed, I noted especially Reed’s take on one of the most important lessons he gleaned from Harvard’s Kennedy School of Government: “I discovered that I wasn’t the smartest guy in the room. And the other thing that I learned, which I think is useful, too, is that there are intellectual skills that are important but there are also temperamental skills: patience, listening to people, preparation, hard work, the ability to get along with people and to develop working relationships.”
Presidential Classroom
I hope many young (and not so young) people are inspired by Reed’s story regarding his dedication to public service.
One resource for high school students (and adults) interested in learning more about public policy and public service which I’ve noted before in this blog - based on my participation as a volunteer instructor for a week in 2003 - is “Presidential Classroom” (PC).
PC is an exceptional one week program for high school students, and adults are encouraged to consider applying to serve for a one week session as a volunteer instructor. (Certain government agencies and certain private sector companies and schools provide leave time to serve as PC volunteer instructors for one week, as part of fulfilling an agency’s or company’s dedication to volunteer service.) Not only is it fascinating to take part as a volunteer instructor at PC to facilitate dialogue among diverse students on public policy issues, it is also exciting to participate in meetings on capitol hill, embassy and federal agency visits.
One of the most important lessons I found as a volunteer instructor at PC, is it really gives you some perspective when you come from a ‘desk job’ and meet fellow instructors who have the courage to risk their lives every day with the police department, fire department, or the military – about half the volunteer instructors I participated with held such positions, the rest were mainly lawyers, sprinkled with a few doctors, judges, scientists and teachers; my roommate was a Marine helicopter pilot.
Feel free to share this post with ‘a friend;’ and if you received this from ‘a friend’ and would like to get our blog posts real-time, sign up by sending an email to blogs@financialexecutives.org and writing in Subject line: Sign Up.
Miller spent time documenting the Senator’s activities recently, including a trip to West Point (Reed’s alma mater), various meetings on Capitol Hill, and numerous interviews with the press (one such interview with NYT’s Floyd Norris saw Reed quoted in, “Why Surprises Still Lurk After Enron,” on Feb. 29, 2008).
Reed has been mentioned from time to time in this blog due to his role as chair of the Securities, Investment and Insurance subcommittee of the Senate Banking Committee which has jurisdiction over the SEC and related areas. For example, it was Reed’s subcommittee that held the watershed hearing on “International Accounting Standards: Opportunities, Challenges, and Global Convergence Issues” on October 24, 2007, shortly before the SEC voted on Nov. 15, 2007 to remove the reconciliation requirement for foreign private issuers. (The SEC is currently considering whether to propose a rule to permit –or require – U.S. companies to file financial statements with the SEC in International Financial Reporting Standards (IFRS) instead of U.S. GAAP. See our IFRS related coverage last week; check out our June 5 conference, “The World is Moving to IFRS – Are You?” at www.financialexecutives.org/ifrs.) Reed’s subcommittee also presciently convened a hearing a year ago – on April 17, 2007 – on “Subprime Mortgage Market Turmoil: Examining the Role of Securitization.”
ProJo’s Miller and NYT’s Norris noted Reed sent a letter to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in February. The letter, as described by Norris: “ask[ed] detailed questions about what went wrong” with respect to a lack of transparency in the subprime crisis, “and how it should be fixed.” Norris continued, “Getting together answers to [Reed’s] questions could provide the S.E.C. with a road map to determine where the rules failed, as well as where companies failed to apply the rules properly.” The letter was included as Appendix A-2 and A-3 in the March FASAC handouts.
Having read Miller’s profile of Sen. Reed, I noted especially Reed’s take on one of the most important lessons he gleaned from Harvard’s Kennedy School of Government: “I discovered that I wasn’t the smartest guy in the room. And the other thing that I learned, which I think is useful, too, is that there are intellectual skills that are important but there are also temperamental skills: patience, listening to people, preparation, hard work, the ability to get along with people and to develop working relationships.”
Presidential Classroom
I hope many young (and not so young) people are inspired by Reed’s story regarding his dedication to public service.
One resource for high school students (and adults) interested in learning more about public policy and public service which I’ve noted before in this blog - based on my participation as a volunteer instructor for a week in 2003 - is “Presidential Classroom” (PC).
PC is an exceptional one week program for high school students, and adults are encouraged to consider applying to serve for a one week session as a volunteer instructor. (Certain government agencies and certain private sector companies and schools provide leave time to serve as PC volunteer instructors for one week, as part of fulfilling an agency’s or company’s dedication to volunteer service.) Not only is it fascinating to take part as a volunteer instructor at PC to facilitate dialogue among diverse students on public policy issues, it is also exciting to participate in meetings on capitol hill, embassy and federal agency visits.
One of the most important lessons I found as a volunteer instructor at PC, is it really gives you some perspective when you come from a ‘desk job’ and meet fellow instructors who have the courage to risk their lives every day with the police department, fire department, or the military – about half the volunteer instructors I participated with held such positions, the rest were mainly lawyers, sprinkled with a few doctors, judges, scientists and teachers; my roommate was a Marine helicopter pilot.
Feel free to share this post with ‘a friend;’ and if you received this from ‘a friend’ and would like to get our blog posts real-time, sign up by sending an email to blogs@financialexecutives.org and writing in Subject line: Sign Up.
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