Accounting standards

Thomas R. Smith, one of the country's leading attorneys in the area of mutual funds, has joined the Investment Management Division of the Securities and Exchange Commission as a senior advisor to Andrew Donohue, the division's director. Prior to joining the SEC, Smith was a partner with the New York office of Sidley Austin LLP, and also served as managing partner at Brown & Wood LLP from 1996 until the firm's merger with Sidley Austin five years later.

In testimony on Capitol Hill, Securities and Exchange Commission Chairman Christopher Cox said that the costs of complying with Sarbanes-Oxley's Section 404 will go down, but reiterated his position that there was no need for another delay in 404 compliance for smaller filers. Testifying before the House Committee on Small Business, Cox said, "The focus of this hearing is on whether the SEC's new guidance for management, and the PCAOB's new standard for auditors, will lower compliance costs for small companies. The answer is yes." Cox said he did not support further delays in the current deadline for small companies -- generally defined as those with less than $75 million market cap -- to file their first management report on internal control. The chairman said the costs of SOX will go down under the SEC's new guidance because companies "will be able to focus on the areas that present the greatest risk of material misstatements in the financials," and will be able to "exercise significant judgment in designing an evaluation tailored to its individual circumstances."

The multi-billion-dollar-gap between what publicly traded companies book as expenses for executive stock options and what they report cost the U.S. Treasury roughly $43 billion between 2004 and 2005, charged Sen. Carl Levin, D-Mich. Levin, who chairs the Homeland Security and Governmental Affairs Committee said at a hearing earlier this week that companies are reporting higher deductions for stock options to the Internal Revenue Service than what they are reporting to their shareholders. Levin said when company directors who approve executive compensation learn that the options, while an expense, also produce a huge tax break, it "becomes a tempting proposition for them to pay their executives with stock options instead of cash." Levin proposed that the massive gap be closed via legislation that requires a uniform reporting standards for options.

A bill that is now before the Connecticut State Senate would give its state comptroller the legal authority to establish GAAP for the state’s financials, thereby sidestepping the Governmental Accounting Standards Board — the standard-setter for governments and municipalities.

Feeble audit procedures are allowing tax cheats to evade billions of dollars in U.S. tax liabilities each year by hiding funds in offshore accounts, government investigators told Congress.

Moving forward with plans to converge U.S. generally accepted accounting principles with international financial reporting standards, the Financial Accounting Standards Board expects to crank out a host of related proposals in the second half of 2007.Even as the Securities and Exchange Commission proceeds to explore the possibility of allowing foreign companies to use financial reports prepared under IFRS to list on U.S. capital markets, FASB and the International Accounting Standards Board are working together to produce standards that are identical or very similar.

Nexus - the amount of contact between a taxpayer and the state that subjects the taxpayer to taxation - continues to vary widely from state to state. In addition, the nexus for sales and use tax differs from the nexus for income tax.The nexus requirement is derived from the language in two different places in the Constitution - the commerce clause, which prohibits states from unduly burdening interstate commerce, and the due process clause, which requires a minimum connection between a state and an entity it seeks to tax.

Our last column dug into some of the reporting practices used by Hertz Global, specifically its somewhat misleading depreciation of its rental fleet.We noted that Hertz reported the fleet in the 2006 10-K as a long-term asset, showing full cost less accumulated depreciation. It also showed depreciation as an add-back to net income in the operating section of the cash-flow statement. To provide a scale, out of $18.7 billion total assets, the fleet's book value at the end of 2006 was about $7.4 billion, or 40 percent. On the cash-flow statement, the reported operating flow for 2006 was about $2.6 billion, after adding back $1.8 billion of depreciation.

CCH has released a white paper on the recent regulatory guidance from the Securities and Exchange Commission and the Public Company Accounting Oversight Board concerning the internal control provisions of the Sarbanes-Oxley Act.

Bankrate, which is a leading Internet consumer banking marketplace, has released an interview with Christopher Cox, chairman of the SEC that was conducted as part of Bankrate.com’s Financial Literacy Program. Bankrate does a real service to the community with this interview and I commend them because it helps to put into focus what is actually going on with seniors and also how they can be protected from scams. Moreover, it comes from the person who should know, and does.Cox has first hand knowledge of what’s involved and he relates a tale about his own parents. “Before my mother died a few years ago, she was pestered by a seemingly endless barrage of annuity schemes and unsuitable mortgage offers. Despite the fact that she was suffering from throat cancer and could barely speak, she received unsolicited sales pitches over the phone and even in person. Even though my father was suffering from Alzheimer’s disease, the brokers would prey upon him, as well.”

The Financial Accounting Standards Board has released its most recent annual report, showing strong financials and continuing to focus on a trio of ongoing initiatives.FASB is funded through accounting support fees provided for under the Sarbanes-Oxley

The Association of Government Accountants recently hosted a dinner and awards ceremony to honor 11 federal agencies that have been awarded the 2007 Certificate of Excellence in Accountability Reporting -- the highest number awarded since the program began.

The Public Company Accounting Oversight Board voted to adopt Auditing Standard No. 5, which will replace its previous internal control auditing standard, the much-maligned Auditing Standard No. 2.

Financial services provider the Bisys Group will pay $25 million in restitution to settle federal charges that it violated financial reporting rules to artificially inflate earnings by $180 million over three years.

The Securities and Exchange Commission unanimously approved guidance yesterday aimed at helping public companies balance their internal control over financial reporting, while at the same time reducing unnecessary costs, particularly for smaller companies.

Securities and Exchange Commission Chairman Christopher Cox announced that five former chairmen of the commission will join him for a roundtable discussion today.

“A series of accounting irregularities at large companies have deepened public distrust of both accounting and auditing firms.”

Suggesting that accounting firms may have become addicted to the fat audit fees associated with Sarbanes-Oxley compliance efforts, a spokesman for the nation's bankers warned that plans to streamline internal control reporting rules and issue new auditor guidance may not be enough to wean accountants away from wasteful and unnecessary SOX-related audit procedures."Reducing costs and streamlining efforts will only be achieved if the auditing firms have the incentive to make efficiency a priority," American Bankers Association spokesman Thomas Venables told a hearing of the Senate Committee on Small Business and Entrepreneurship.

Although progress has been made with regard to auditor reviews of internal controls, audit firms haven't used the most efficient techniques, according to a report from the Public Company Accounting Oversight Board.The audit watchdog examined a total of 275 audits of internal controls over reporting performed by registered public accounting firms, specifically looking at the second-year implementation of the board's Auditing Standard No. 2 on internal controls.

The popularity of S corporations has skyrocketed, with the number of businesses opting for them rising from 725,000 in 1985 to more than 3 million, according to the most recent statistics.And that growth is well-deserved, according to Richard Thompson, of the CPA and business advisory firm Sikich LLP. "S corporations have become such an important business vehicle because taxpayers understand their extreme value," he said.