Accounting standards

The Securities and Exchange Commission voted to delay the effective date of a Financial Accounting Standards Board rule that requires companies to treat employee stock options as expenses.

The cost of compliance associated with Section 404 of the Sarbanes-Oxley Act are expected to drop significantly for some companies, according to a report commissioned by the Big Four audit firms.

The Securities and Exchange Commission is reportedly expected to change the effective date for new stock option accounting rules that will require companies to include employee stock-option compensation as an expense on their earnings reports, giving most U.S. companies a six-month reprieve.

Maintaining the morale of employees charged with ensuring Sarbanes-Oxley compliance in their companies remains the largest challenge to 404 compliance, according to a just-released survey. Nearly half of the 200 executives participating in the 2005 Financial Executive Report, conducted by Oversight Systems, indicated that employee morale was the largest issue in SOX 404 compliance, while reducing internal and external costs ranked as the second-most-frequently cited challenge to ongoing compliance. "Obviously, complying with Section 404 of Sarbanes-Oxley has been extremely expensive," said Joseph V. Carcello, co-founder and director of research for the University of Tennessee's Corporate Governance Center and an advisor to Oversight Systems. "However, stronger controls lead to real benefits in the form of eliminating waste, eliminating abuse, and [producing] better information for improved decision-making." To reduce the burden on employees and compliance costs, 60 percent of financial executives surveyed said that they are implementing software that automates the manual processes required for compliance. Other survey findings included: o 49 percent said that SOX compliance resulted in reduced risk of fraud and errors; o 48 percent indicated that they now have more efficient financial operations; and, o 31 percent said that error rates have declined. The survey is available at www.oversightsystems.com/survey.html.

The Governmental Accounting Standards Board has released Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports that Contain Basic Financial Statements, a paper providing guidelines for presenting financial disclosure information. The methods include recognition in basic financial statements, disclosure notes to financial statements, and presenting supplementary information. GASB said that the definitions and criteria in Statement No. 3 should aid the board or the preparers of financial reports in determining the best methods to use to communicate information. The concept statement can be ordered through GASB's order department at (800) 748-0659, or via its Web site at www.gasb.org.

Long-distance carrier Global Crossing and three of its former executives have settled a three-year investigation by regulators into the company's accounting practices. The Securities and Exchange Commission yesterday ordered former executive vice president of finance Joseph P. Perrone, former chief financial officer Dan Cohrs, and former chief executive Thomas J. Casey to pay $100,000 fines and demanded that both the company and the executives not commit future violations. The settlement ended a protracted investigation into whether Global Crossing artificially inflated revenue by swapping fiber-optic network capacity with other telecommunications carriers. The company did not admit or deny the findings.

The Securities and Exchange Commission has unveiled the panelists scheduled to participate in the April 13 roundtable on internal controls reporting. The day-long session will feature six separate panels, with topics, including: first-year efforts; reporting to the public; planning and design; documentation and testing of internal control over financial reporting; and the use of judgment in communications and conclusions. Among those scheduled to participate are: Colleen Cunningham, of Financial Executives International; Rebecca McEnally, of the CFA Centre for Financial Market Integrity; Comptroller General David Walker; Edward E. Nusbaum, of Grant Thornton; Lynn E. Turner, of Glass, Lewis & Co.; James S. Turley, of Ernst & Young; Samuel A. DiPiazza, of PricewaterhouseCoopers; and John A. Thain, of the New York Stock Exchange. "The panels are comprised of highly qualified individuals that offer significant expertise and first-hand experience on these matters," said SEC Chairman William Donaldson in a statement. "[The roundtable] is an important part of the commission's overall efforts to study the initial implementation of the internal control reporting provisions."

The Securities and Exchange Commission voted to allow brokers to offer fee-based advisory accounts without being regulated as investment advisors. The new rule would allow brokers to continue offering fee-based accounts without coming under regulation as advisors, provided that they meet certain requirements. According to reports, clients in such accounts must be given explicit disclosure that they are brokerage accounts, not advisory accounts, and that the brokers' interests may not be the same as their clients' interests. Brokers also must offer clients information on whom to contact at the brokerage firm if they have questions on the differences between these accounts. The commission also ordered a 90-day study into whether any changes are required regarding how brokers and advisors are regulated.

In remarks before the Senate Banking Committee, Federal Reserve Chairman Alan Greenspan urged lawmakers to curtail the portfolios of mortgage concerns Fannie Mae and Freddie Mac, stating that stronger regulation may not be sufficient. "Without restrictions on the size of balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for home ownership,'' Greenspan said. Fannie Mae and Freddie Mac are the first and second largest buyers and guarantors of home mortgages, respectively. However, both became embroiled in billion-dollar accounting scandals over the past year, prompting many to call for tighter regulation of the concerns. Fannie Mae, for example, said that it would need to restate earnings by at least $8.4 billion. And earlier this week, Armando Falcon -- director of the Office of Federal Housing Enterprise Oversight, the agency that oversees both Fannie Mae and Freddie Mac -- said that he would step down May 20. Falcon's resignation letter to President Bush comes as lawmakers have introduced legislation that would shutter OFHEO and create a stronger overseer for both.

The Securities and Exchange Commission has unveiled the agenda for next week's day-long meeting on internal controls compliance. The April 13 roundtable will include a series of six panels comprised of representatives of public companies, auditors, investors and attorneys. Section 404 of the sweeping Sarbanes-Oxley Act mandates that public issuers assess the effectiveness of their internal controls over financial reporting. For large companies, compliance became mandatory last year. For smaller companies with a market cap under $700 million and over $75 million compliance becomes mandatory in 2006. The SEC said that it would seek input from executives at larger firms, including feedback on the cost and benefits. The panels will cover such issues as: the first year of compliance, reporting to the public, planning and design, and documentation and testing using judgment in communications and conclusions. In addition to the roundtable, the SEC will seek written feedback from registrants, auditors and others on their experiences in implementing Section 404, and post the comments on its Web site. The roundtable will be Webcast on the commission's Web site at www.sec.gov. Selected other materials related to the roundtable are available at http://www.sec.gov/spotlight/soxcomp.htm.

The Securities and Exchange Commission today named agency veteran Meyer Eisenberg to the post of acting director of the commission's Division of Investment Management. Eisenberg will fill on an interim basis the void created by the recent departure of division director Paul Roye, who left the SEC for a job in the private sector. Since 1998, Eisenberg has served as deputy general counsel for the commission. He previously served at the SEC from 1959 to 1970. During that period, he was the executive assistant to then-chairman Manuel F. Cohen. Current Chairman William Donaldson said in a statement, "Mike is a distinguished member of the securities bar and his history of service to the commission and to the investing public is unmatched." The SEC is actively seeking a full-time replacement for Roye.

American accounting contains an awkward contradiction. Though 99.7 percent of the country's 4.9 million corporations are privately held, a good deal of the country's generally accepted accounting principles are primarily relevant to the financial conditions of public companies traded on equities markets.

Congress is considering new legislation that could streamline accounting procedures for tens of thousands of U.S. companies by liberalizing the rules for the use of the cash accounting method by small business taxpayers.

The General Accountability Office and the Internal Revenue Service have added their own muscle to a Public Company Accounting Oversight Board proposal that would restrict the ability of accountants to provide tax services to audit clients.

If you're a CPA, you've got a headache. In fact, you've probably got several headaches.

The Public Company Accounting Oversight Board voted to send out for comment a measure that outlines audit procedures to ferret out whether Securities and Exchange Commission issuers have fixed previously identified internal controls weaknesses. Although Sections 404 and 302 of the Sarbanes-Oxley Act mandate that both issuers and auditors must complete an annual assessment of internal controls, the standard from the oversight body would establish a voluntary, stand-alone engagement performed only at the request of the client company at any time of the calendar or fiscal year. The public comment period will be 45 days. The rule would subsequently become final pending a vote by the SEC. Although he defined the new standard as "narrower in scope" than the PCAOB's Auditing Standard No. 2, PCAOB chairman William McDonough said, "Our proposal for a new, voluntary, auditor's engagement to attest to management's corrections of individual material weaknesses will offer companies an opportunity to provide the investing public added assurance that previously disclosed weaknesses have been corrected." While board member Daniel Goelzer said that he thinks the new proposal is important, he described it as a "narrowly drawn tool" that he hopes "will be used sparingly."

The Financial Accounting Standards Board has released FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or the costs of taking plants out of service. Under FASB's new guidance, companies would have to immediately recognize on their balance sheets the costs of work that would be needed to close a factory -- such as asbestos clean-up -- even if it's uncertain when, if or how the work would be done. Interpretation 47 is effective no later than the end of fiscal years ending after Dec. 15, 2005 (Dec. 31, 2005, for calendar-year enterprises). Copies of Interpretation 47 are scheduled to be available in April 2005, through the FASB Order Department at (800) 748-0659 or by placing an order on the FASB Web site at www.fasb.org.

The Securities and Exchange Commission named Scott Friestad to the post of associate director of the commission's Division of Enforcement. In that role, Friestad, 42, will serve as a senior official in the division and assist in planning and directing the commission's investigations and other enforcement efforts. He will report to division director Stephen Cutler. Friestad joined the regulator in 1995 as a staff attorney, and his efforts have contributed to SEC enforcement actions involving Regulation FD, public company accounting and disclosure, the Foreign Corrupt Practices Act, insider trading, and broker/dealer regulation. Friestad has also served as a special assistant in the U.S. Attorney's Office for the Southern District of New York, and was a litigator at the New York law firm of Dewey Ballantine.

While 404 may be the three most dreaded numbers that publicly traded companies in the U.S. can imagine, investors and analysts outside the country remained uniformed about the Sarbanes-Oxley rule on internal controls, and are concerned about the impact of negative disclosures. According to a PricewaterhouseCoopers survey of investors and analysts in North America, Europe and Asia who cover U.S.-listed companies, just 60 percent of analysts and investors in Europe, and a scant 40 percent in Japan, admit to some knowledge of SOX 404. Section 404 of SOX requires that the annual reports of all Securities and Exchange Commission-registered companies include a statement by management and the external auditors on the effectiveness of the company's internal controls over financial reporting. Big Four firm PwC polled 55 analysts, 45 investors and 5 credit rating agency analysts between January and February 2005. Some 39 percent of respondents were from the U.S., Mexico and Canada, 38 percent from Europe, and 23 percent from the Asia-Pacific region. Other findings include: o Only about one in four respondents claimed to have a good grasp of how Section 404 will affect mergers and acquisitions. o Nine out of 10 analysts and investors in Asia, where awareness is lowest, said that they would be very likely to sell or mark down shares in a company that was the subject of a negative disclosure, compared to seven in 10 respondents in Europe and the U.S.

Not surprisingly, opponents of expensing stock options have issued responses to the March 29 release of options expensing guidance by the Securities and Exchange Commission. With the release of SAB No. 107, the regulator reaffirmed its support of December's rule by the Financial Accounting Standards Board, which mandates treating employee stock options as an expense. "While the SEC has provided clarity on some issues surrounding the FASB rule, its decision not to further delay implementation is a significant blow to companies that provide broad-based stock option plans, especially those in the high-tech industry," said William T. Archey, president and chief executive of the high-tech trade group AeA. Archey urged Congress to pass H.R. 913, the Broad-Based Stock Option Plan Transparency Act, a measure that would delay implementation long enough to conduct studies on the impact of stock options. Meanwhile, Rick White, president of the International Employee Stock Options Coalition said, "The coalition's mission has been to preserve broad-based employee stock options from draconian accounting rules, because stock options represent a vital economic tool for our nation." The recently issued SEC guidelines however, offer some leeway to companies, with several models from which to choose when estimating the fair value of employee options. The options expensing rule is slated to take effect this summer.