BroadPeak Executive Forum

Audit Firm Bigs Cite Lust for Global Standards

The CEOs of the Big Four plus two say that melding global financial-reporting standards is the top accounting priority among a range of stakeholders.

Marie Leone
CFO.com | US

January 16, 2008

The push for a single set of global accounting standards has reached fever pitch. At least that's what the heads of major accounting firms are claiming. After two years of convening roundtables in such financial centers as Cape Town, Tokyo, New York, Santiago, and Paris, a group of jet-setting chief executives from the world's six largest accounting firms concluded that CFOs, investors, and regulators show "near-universal" support for moving toward a single set of global accounting standards.

The findings were released at the Global Public Policy Symposium, held in New York this week, and echoed the same call for a single set of standards that the accounting firm CEOs laid out in their own position paper on principles-based accounting, also released at the conclave.

While convergence was foremost on the mind of stakeholders, they also show support for common auditing standards and consistent regulatory oversight, according to the report. Prevention and detection of fraud and the future of business reporting came in third and fourth, respectively, on the list of accounting concerns.

The report, "A Global Dialogue with Capital Markets Stakeholders," was authored by Samuel Di Piazza of PricewaterhouseCoopers; Timothy Flynn, KPMG International; David McDonnell, Grant Thornton International; James Quigley, Deloitte Touche Tohmatsu; Frans Samyn, BDO International; and James Turley, Ernst and Young.

While "virtually all stakeholders" backed the idea of one set of principles-based standards, they worry about countries that rely on "overly prescriptive rules-based" standards — including the United States, according to the report. Specifically, the stakeholders felt that current legal and regulatory environments contribute to unnecessarily rigid rules. What's more, they identified a lack of education and training in applying and interpreting International Financial Reporting Standards, the current global accounting rules.

The stakeholders also expressed concern about the ability of smaller businesses to shift to IFRS. In fact, some stakeholders wondered whether IFRS was the right set standards for small and medium businesses, according the audit chieftains' report.

As expected, the stakeholders were keen on audit quality, emphasizing that auditors should be accountable to shareholders rather than management to assure that quality isn't compromised. They also touted the Sarbanes-Oxley Act as being the force behind changing the relationship between auditors and management, requiring that outside auditors are hired by and report to audit committees rather than management.

The stakeholders wanted to see a single set of auditing standards as well as a universal set of "auditor independence" rules to wipe out complications associated with multiple definitions of the term.

The constituents generally agreed that regulatory oversight has steadily improved and cited steps taken by the European Union to bring more consistency to its decisions as a big factor in the improvement. They also cited efforts by the International Forum of Independent Audit Regulators to improve cross-border communication as another successful step toward a common audit approach.

They also believe that an ounce of prevention is worth a pound of cure when it comes to fraud, and want to attack financial misdeeds through prevention as well as detection. Nevertheless, the stakeholders admitted that everyone — auditors, investors, management, and regulators — must do their parts to thwart fraud.

The report also looked to the future of business reporting. One regulator said, according to the report, that while financial reporting may meet requirements set out in the rules, it sometimes doesn't provide the actual information needed to understand what's happening within a company. The suggested cure: customizing data for different end-users, an endorsement for adopting the data-tagging computer language called XBRL (extendable business reporting language) for filing financial results.

Stakeholders also broadly agreed that non-financial information is increasingly important in assessing company performance. But they could not agree on what disclosures would strike the right balance between transparency and releasing sensitive information.

Timeliness in reporting was championed, but "real time" reporting was nixed. The reason: It would lead to market inefficiencies because analysts would spend too much time updating models and ultimately lose sight of long-term analysis.

Sarbox's Influence Seeps into Nonprofits

Tax-exempt organizations are slowly making changes to their governance policies, following demands by proponents of the Sarbanes-Oxley Act's virtues.

Sarah Johnson
CFO.com | US

December 05, 2007

Five years after companies began complying with the Sarbanes-Oxley Act, nonprofit organizations have gotten into the rhythm of improving their governance policies and internal-controls documentation.

In a recent survey of nonprofit executives and board members, Grant Thornton found that 92 percent have implemented new accounting policies and procedures within the past few years, compared to only 59 percent who last year said they had new policies in place.

In many ways the call for changes in financial-reporting procedures at not-for-profits organizations — which notoriously have a reputation for nontransparent financial information and lack of consistent, regulatory oversight — are tied to the corporate scandals earlier this decade and Sarbox.

The governance mantras inherent in the 2002 law for publicly traded companies have been carried over to the nonprofit sector from the corporate suits who sit on the not-for-profit boards. "They are generally regarded as good practices," says Larry Ladd, the accounting firm's director of higher education practice. The organizations' audit committees are also taking their work more seriously than in the past, he adds.

Nonprofits have also been motivated by other mandates more directly aimed at them. The Internal Revenue Service has recently made changes to its Form 990, which nonprofits with more than $25,000 in revenue are required to fill out each year. And earlier this year the IRS proposed further revisions to the form, which is publicly available and often used by donors and watchdog groups to review a nonprofit's financial activities.

However, in its survey of 603 representatives who hold posts at universities, religious organizations, among other nonprofits, Grant Thornton reported a slow trend of boards getting more involved in the submissions of Form 990s. Currently, only 30 percent have a policy that requires the board or one of its committees to review the forms.

In addition, nonprofits have recently adjusted to new accounting rules that require them to change how they treat alternative investments, such as private equity funds and hedge funds, on their books.

As                                   CFO magazine reported earlier this year, proper accounting for nonprofits' financials can be hindered by demands by potential donors for keeping their fund-raising and overhead costs down. To meet those requests, some nonprofits either leave out their fund-raising costs by not reporting them at all, and some create separate, supporting organizations to carry those costs.

While demands for better transparency of nonprofits is slow-moving, the changes underfoot by the IRS and nonprofits' boards have brought about some progress in recent years.

For example, nine out of 10 nonprofits have a conflict-of-interest policy in place, a request made by the IRS last year. These types of policies discourage officers and directors from taking actions in matters related to an investment fund in which they serve a prominent role. In addition, 68 percent have a whistle-blower policy, another new requirement the IRS is expected to implement.

The IRS is also starting to ask for more detailed finance information from nonprofits, including data related to executive compensation (sound familiar?). This concept will be a new one for some nonprofits; 6 percent of the respondents reported their board never talks about how much they pay their executives, despite the fact that very subject has resulted in negative press for some organizations.

Congress itself has also joined the fray by holding hearings earlier this year to explore the accountability of nonprofit organizations and scrutinize the financial mishaps at the Smithsonian Institution, for example. The government's increased interest in nonprofits' financials should come as no surprise considering it essentially acts as their largest donor. "Because it is granting tax exemptions, the government has the right to expect at least full disclosures and increased transparency," says Ladd.

SEC Snubs Proxy Access

The 3-1 decision is a bitter pill for shareholder activists who wanted to democratize corporate boardrooms.

Stephen Taub
CFO.com | US

November 29, 2007

The Securities and Exchange Commission on Wednesday specifically authorized companies to deny including in proxy statements shareholder resolutions relating to director nominations.

Supporters saw the hotly debated measure, widely known as proxy access, as a way to further democratize corporate boardrooms. Trade groups backed by corporations have vehemently opposed it, asserting that it would let special interests use it to pursue their narrow agendas.

"I am obviously disappointed," Annette Nazareth, currently the only Democrat on the commission, reportedly said. The decision "stands in the way of shareholders' rights to elect directors," she added.

Nazareth was the lone dissenter in the 3-to-1 vote. One of the commission’s Democratic seats is currently vacant.

The SEC considered two competing proposals. The other, supported by Nazareth and many shareholder activists, would have allowed shareholders who own 5 percent of a company to propose changes to bylaws regarding director nominations. Then shareholders would have been able to vote on those proposals, thus allowing them to put their own director candidates on the ballots.

SEC chairman Christopher Cox had gone on record in saying he wanted some sort of policy in place in time for the 2008 proxy season.

The American Federation of State, County and Municipal Employees (AFSCME), which has been a leader in the pro-proxy access movement, reportedly threatened to sue the SEC if the more restrictive rule were adopted.

In response to Wednesday’s vote, Social Investment Forum chairman Tim Smith, who also is senior vice president of Walden Asset Management, and SIF chief executive Lisa Woll said in a joint statement: "We strongly oppose the SEC decision to limit the rights of shareholders to participate in the nomination of directors. We join with those investors who urge the Commission to reconsider immediately this anti-investor decision. Nominating directors for a vote is a basic shareowner right that deserves respect — not intrusive government limits that harm shareholders."

They asserted that "most U.S. investors, when polled, believe that the SEC should be further opening up corporate boardrooms, rather than shielding them from the scrutiny and feedback legitimately offered by the investors who are stakeholders in these publicly owned companies."

Several years ago, the SEC proposed a policy that would have permitted shareholders to nominate directors under certain circumstances. But after hosting a roundtable discussion on the issue and reading through mountains of comments, it never formally voted on the issue.

The Dark Side of Global Accounting Standards

Expect loose standard-setting in the oil and gas industries and a ton of litigation if convergence hurtles down its current track, critics say.

David M. Katz
CFO.com | US

November 15, 2007

If the Securities and Exchange Commission on Thursday votes as expected and allows non-U.S. issuers here to report their financials in line with International Financial Reporting Standards without reconciling them with Generally Accepted Accounting Principles, the United States will have crossed a point of no return in the movement toward a single set of global accounting standards, some experts feel.

But that doesn't mean that many key players won't cross that line without a fair amount of kicking and screaming.

Speaking at a roundtable discussion on global accounting standards at New York University's Stern School of Business on Monday, Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board, said that he was "a bit troubled by the speed" of the SEC's march toward the convergence of U.S. and international accounting standards. "If we eliminate reconciliation, what have we done? I have some fear that we're crossing the Rubicon — that we've lost leverage in order to get closer [to global uniformity]."

Leverage by U.S. regulators and standard-setters to push for rigor in converged standards could be lost, as well as the clout to hold individual companies to international rules, Niemeier told CFO.com. At the roundtable, the audit firm overseer disputed a basic premise of the proponents of convergence: that if the international standards are adopted in the United States, it would produce a clearer system based on solid principles rather than rule-based minutiae. "Some say Europe is principles-based. I beg to differ. It's younger," he said, suggesting that much of the detail in GAAP is justified by long-standing experience. Some speakers said that IFRS lacks the detail provided under GAAP to provide adequate financial reporting in a number of specific industries in the United States, particularly oil and gas and insurance.

By contrast, critics of U.S. GAAP's complexity, including the SEC's own advisory committee, consider industry specific guidance to be one of the U.S. accounting system's major flaws.

At the same time, many roundtable participants worried that the U.S. legal system — also blamed for the complexity of U.S. GAAP — might trip up global accounting standards too. Under the U.S. legal system, they said, auditors feel they must adhere closely to preset rules in order to avoid being sued. In order for IFRS to take hold in the United States, there needs to be "a change in the way we look at litigation in America, where it's a mark of honor to sue someone," said Stern accounting professor Seymour Jones at the roundtable.

Even a decision by the SEC to recognize the International Accounting Standards Board (which sets IFRS) as a bona fide standards setter could get tested in a U.S. court, according to Stanley Siegel, an NYU law professor. "Nothing is going to stop an American litigant who has bought shares in an American company or a Brazilian company" issuing stock in the United States from questioning the validity of the SEC's choice of IASB under Section 108 of the Sarbanes-Oxley Act, he said. (Sarbox 108 enables the SEC to designate a standard setting body's accounting principles as "generally accepted.").

Indeed, many seem to feel that the SEC is moving ahead too swiftly and without adequate planning for what truly looms as a major step in the direction of converged international accounting standards. Even Financial Accounting Standards Board chairman Robert Herz, perhaps convergence's prime U.S. spear carrier feels that "a national plan" for convergence needs to be in place before target dates are set. "Before you get to a timetable," the key players need to determine "what are the tasks to be done." High on the plan's priority list should be educational and regulatory requirements. Underscoring the point about education, Nieimeier said in an interview that few people at PCAOB understand IFRS.

Read the entire article at CFO.com

What's Your Fraud Score?

Receive the wrong grade on this test, and your auditor may be scouring your company's financial statements for evidence of earnings management.

Marie Leone, CFO.com

August 20, 2007

A new research report contains formulas to help auditors and investors predict the likelihood that a public company is playing earnings management games. Sponsored by the Big Four accounting firms, the report, "Predicting Material Accounting Manipulations," explains how to calculate a "fraud score" for public companies, thereby identifying which corporate books deserve further scrutiny.

A fraud score that exceeds 1.00 is a "red flag" indicating that a company may be toying with how it accounts for cash and accruals so that it can ultimately boost stock prices, says study co-author Weili Ge, an accounting professor at the University of Washington. The mathematical model, presented in the paper released in late June, hunts for abnormal patterns in five key areas where manipulation likely takes place: accrual quality (in terms of the number of accruals being booked), financial performance (including earnings growth, cash margins, and transaction management), nonfinancial performance (order backlog and employee head count), off-balance-sheet activities (operating leases and pension assumptions), and market-based measures (valuations and price-to-earnings ratio).

Essentially, the model detects mismatched metrics in each key area. For example, the math may flag a company that has recorded an atypical increase in the number of accruals even though it has declining cash margins, a situation that can occur when receivables and inventory numbers are manipulated. Similarly, the model draws attention to unusual increases in the number of operating leases a company carries. Since leases allow companies to record lower expenses early on in the life of the contracts, an abnormal spike may indicate that a manager is focused on "financial statement window-dressing," says the report.

The model also notes changes in employee head count and total assets. Managers attempting to mask deteriorating financial performance often reduce the number of workers to boost the bottom line. But if they also overstate assets, the drop in workforce numbers will seem out of sync with economic reality.

Read the entire article at CFO.com

SEC Removes Terrorism Tool amid Backlash

Chairman Christopher Cox takes down the list but doesn't rule out releasing another version.

Alan Rappeport, CFO.com

July 24, 2007

The Securities and Exchange Commission removed the controversial terrorism tool from its website on Friday evening, nearly a month after it launched.

The tool drew ire from companies, business lobby groups, and the House Committee on Financial Services, which argued that it had unfairly "blacklisted" companies for having exposure to five countries deemed to be state sponsors of terrorism. Critics said that some of the relationships were negligible or outdated.

The tool's detractors also said the tool was subject to misinterpretations because it relied solely on simple search terms and companies' annual reports. For instance, if a company said in its report that it had previously "divested" from one of the countries, it would still have appeared on the SEC's list.

In a statement released on Friday, SEC Chairman Christopher Cox said the SEC has temporarily suspending the tool while it undergoes reconstruction. However, any reincarnation of the tool could be vastly different, if it happens at all. "Our staff is considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts, and others to easily discover this disclosure without need of an SEC-provided Web tool at all," Cox said, indicating that eXtensible business reporting language, or XBRL, may have a hand in the solution.

Read the entire article at CFO.com

How to Simplify Accounting in One Year

A new federal advisory committee, headed by MFS chairman Robert Pozen, has one year to make recommendations to the SEC.

Sarah Johnson, CFO.com

June 28, 2007

The Securities and Exchange Commission has established a committee to figure out how to take complexity out of financial reporting. Headed by Robert Pozen, chairman of MFS Investment Management, the group will submit a report to the SEC by next August.

The advisory committee's tasks include looking at how accounting and reporting standards are set, and whether some of these rules create unnecessary cost for companies. The group's considerations will range from the minor — such as whether 10-Ks should include a simplified summary of a company's financial standing — to the major — such as how technology can improve the usability of financial reports. For example, companies' increased use of XBRL (extensible business reporting language) could lead to financial reports that can be drilled down via a few clicks on a computer, noted Robert Herz, chairman of the Financial Accounting Standards Board, during an SEC press conference on Wednesday. He envisions a financial report that allows investors to quickly move from top-line revenue numbers to the revenue and profit margin of one product within a few mouse clicks.

Read the entire article at CFO.com

Quick Quiz: What's a Reporting Entity?

In the small-business arena, where people often own or control a number of small businesses, the answer can get complicated pretty quickly.

Cheryl Rosen, CFO.com

June 25, 2007

Before you can translate words into another language, you have to be sure you understand what they mean in your own country. Even the English definitions of the most basic accounting terms — such as "reporting entity" — can be interpreted differently at small private businesses and at large public companies. Ideas that fit one group like a glove don't easily apply to another.

Such confusion was obvious at a discussion at Wednesday's meeting of the Financial Accounting Standards Board's Small Business Advisory Committee, where FASB's Ron Bossio asked for feedback on what a reporting entity might actually be. As part of their Joint Conceptual Framework Project, FASB and the International Accounting Standards Board (IASB) have been unearthing gaps between the ways different groups think about financial reporting. Their goal: to try to bridge those hiatuses in a way that will make future international decision-making easier. But first FASB must reconcile the differences between small- and big-company concepts at home.

   

The boards' current definition of a reporting entity is a "circumscribed area of economic interest that chooses to, or is required to, prepare general purpose external financial reports" and that "controls" the power and benefits of other entities, according to a handout circulated at the meeting. That seems straightforward enough when a group of companies is controlled by a Berkshire Hathaway or a General Electric, for example.

But in the small-business arena, where people often own or control a number of small businesses, things get complicated pretty quickly. "The brother-sister kind of relationship, where two entities are aligned, is pretty common in the small-business environment," said Bossio. Further complicating the issue are cases in which the parent is, well, a human parent, say one named John Smith, who owns Company A and Company B. Must Smith include the assets of the "parent" — his house and his car, for example — in a combined financial statement that also includes the accounts of his two businesses?

Read the entire article at CFO.com

Paulson Not Budging on Small-Company 404 Extension

The Treasury Secretary's stance on internal-controls compliance seems to represent a subtle shift away from a strong preference for rolling back Sarbox.

David M. Katz, CFO.com

June 20, 2007

Pushed by a Congressman to stretch the deadline for small-company compliance with the Sarbanes-Oxley Act's internal-controls provision, Treasury Secretary Henry Paulson held firm on Wednesday to the current filing date of early 2008.

While acknowledging that the burden of Sarbox 404 compliance should fall "less and less" on small companies, Paulson said: "With regard to small business, they have a need also to have good control systems."

Testifying before the House Financial Services Committee, he said that after discussions with Public Company Accounting Oversight Board Chairman Mark Olson and Securities and Exchange Commission Chairman Christopher Cox, he was comfortable that recent rule changes by the PCAOB and SEC had adequately addressed the problems with earlier implementations of 404 and suggested that a change in the deadline wasn't needed.

Paulson's stance on 404 compliance at the hearing seemed to represent a subtle shift from what has heretofore seemed to be strong preference for rolling back Sarbox. Indeed, in response to a question at the hearing about what he thought were the major impediments to foreign countries listing on U.S. exchanges, he suggested that accounting changes under Sarbox were one of the key reasons for the flight of capital.

But the accounting changes are only one of a number of obstacles to competitiveness set up by the 2002 act. "When people say 'Sarbanes- Oxley," they are using that as code for a lot of things," Paulson observed, noting that Sarbox-mandated changes in board structures and alterations in governance requirements by the stock exchanges were included under that code, along with the accounting changes.

Read the entire article at CFO.com

Public Company Accounting Oversight Board Votes on Internal Controls May 24, 2007

If a new standard is adopted, it would replace the controversial Auditing Standard No. 2, which has been hit hard for being based too heavily on rules rather than principles.

David M. Katz, CFO.com

May 17, 2007

The Public Company Accounting Oversight Board will vote on a final standard on auditing internal controls over financial reporting on May 24. If it's adopted, the new standard will replace the controversial Auditing Standard No. 2, which has been hit hard for being based too heavily on rules rather than principles.

The proposed replacement has been widely referred to as AS5. The PCAOB also plans to vote on a related independence rule and conforming amendments to the board’s auditing standards.

The PCAOB also will vote on two recommendations to amend its rules on inspections of firms that audit 100 or fewer issuers. The first recommendation is to remove a requirement that the board regularly inspect each registered public accounting firm that plays a "substantial role" in audits but does not issue audit reports. The Sarbanes-Oxley Act only requires the PCAOB to inspect registered firms that regularly issue audit reports.

The second recommendation is a staff proposal for the board to vote on whether to keep a rule in place that extends the time period during which the board must conduct the first and second inspections of smaller firms that registered in 2003 and 2004. The rule, 4003(d), sunsets on June 30.

This article is from CFO.com