Accounting standards

The Securities and Exchange Commission has not implemented effective information system controls to protect sensitive data according to a searing report from the Government Accountability Office. As part of its 2004 audit of the SEC's financials, the GAO assessed the effectiveness of the regulator's controls within its information systems -- the barriers that protect the confidentiality and availability of sensitive financial data. The auditor general found that the commission had not implemented "with any consistency," electronic access controls including user accounts, passwords and network security. Additionally, the GAO unearthed weaknesses in other information system controls including physical security and segregation of computer functions. As a result, sensitive data such as payroll, personal information and financial transactions, were at risk for unauthorized access or disclosure. The office recommended that the SEC chair William Donaldson direct his CIO to bolster its agency-wide security program. The SEC said that "significant progress" was already being made to address the failings.

Expert witnesses at the fifth meeting of the President's Advisory Panel on Federal Tax Reform here, advised the reform group to proceed with extreme caution with regard to the adoption of a national sales tax and changes to the Earned Income Tax Credit. Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities, told the panel that a consumption tax could be implemented but would carry with it a string of collateral problems such as calls for exemptions and exclusions. Louisiana treasurer John Kennedy said that a sales tax was "not as simple as it might first appear." He added that a sales-and-use tax provides 37 percent of the state's revenue, but advised the panel to examine any and all issues Louisiana had with the state-wide levy. When addressing the merits of the EITC Kennedy also told the panel that it had "done more than any other program to lift people out of poverty." Greenstein pointed out that the EITC increases work efforts while slashing welfare among single parents. Next week the Tax Reform panel will host its sixth meeting, scheduled for March 31, at Fort Mason Center, Landmark Building A, San Francisco. The meeting is scheduled to begin at 9 a.m.

Expensing for employee stock options would slash post-tax earnings by an average of 22 percent for companies in the Nasdaq 100, and by 5 percent for firms residing in the S&P 500, according to a just-released analysis of options expensing by financial services conglomerate Bear Stearns. The report analyzed the 2004 stock option disclosures in the 10Ks filed by companies that were listed on the S&P 500 and Nasdaq 100 indexes as of Dec. 31, 2004. In December, the Financial Accounting Standards Board released FAS 123, a standard that would require Securities and Exchange Commission issuer companies to treat options as an expanse on financials by the third quarter 2005. That ruling has come under a hail of criticism, particularly from various stock option advocacy groups and the technology sector. With regard to technology and the impact of options expensing, the report said that some $44.43 billion in reported net income for a total of 80 IT companies would be reduced an aggregate of 25 percent. Meanwhile, 87 consumer discretionary companies with $39.4 billion in earnings and 55 heath care concerns with $58.2 billion in net income would experience a 9 percent decline.

The Internal Revenue Service has clarified in Rev. Rul. 2005-11 that interest paid on a loan that is refinanced more than once will retain its status as qualified housing interest, to the extent that the amount of the loan is not increased. That interest is deductible for alternative minimum tax purposes. Any other interest on amounts borrowed that are not used to acquire, construct or substantially improve any property that was a principal residence or qualified residence may not be deducted for AMT purposes, the service said. Revised instructions to Form 6251, which include a worksheet to help taxpayers determine the correct home mortgage interest adjustment, will be posted on the IRS Web site, www.irs.gov

Compliance with Section 404 of the Sarbanes-Oxley Act has become a far more expensive proposition than originally thought, as the average cost of complying with the internal controls mandate has hit $4.36 million, a 39 percent jump from 2004 estimates, according to a recent survey from Financial Executives International. The organization of financial professionals, which surveyed 217 public companies with average revenues of $5 billion and asked them to gauge their Section 404 compliance costs, said that the out-of-pocket increase stems from a 66 percent leap in external costs for consulting, software and other vendors, and a 58 percent increase in the fees charged by external auditors. In a breakdown, FEI said that 404 compliance averaged $1.34 million for internal costs, $1.72 million for external costs and $1.30 million for auditor fees. The auditor fees are in addition to companies' financial statement audit fees. Some 55 percent of the participants in the FEI poll indicated that Section 404 gives investors and other external audiences more confidence in a company's financial reports. However, 94 percent of all companies surveyed said that the costs of 404 compliance exceed the benefits. In order to improve the effectiveness and efficiency of the Section 404 compliance process, the companies participating in the poll issued the following recommendations: o Allow for a more risk-based audit approach (71 percent); o Reduce the degree of documentation (66 percent); o Provide flexibility for remediating control problems in the fourth quarter (60 percent); o Increase the judgment allowed in aggregating deficiencies (55 percent); and, o Permit roll-forward procedures (54 percent).

Despite outcries from companies and auditors on stringent corporate reform measures, Stephen Cutler, the director of enforcement at the Securities and Exchange Commission, said that the regulator does not plan to ease up anytime soon. According to Dow Jones, Cutler told an audience of corporate directors at Duke University that it would be a mistake to slow down on the reforms adopted in 2002 as a result of Sarbanes-Oxley. "I don't think anyone wants to return to the environment that allowed the scandals of Enron, WorldCom, Tyco and Adelphia to take seed and flourish," Cutler said. He also revealed that over the past two years, the SEC has collected more than $2 billion in fines. But he added that, despite increased vigilance and tougher measures, there remains a high frequency of financial restatements.

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 bill, introduced by Sen. Olympia Snowe, R-Maine, dovetails neatly with President Bush's drive to streamline the federal tax code -- a move that she said is needed to improve the efficiency of the U.S. tax system "and strengthen our overall economy." The main thrust of her legislation, however, is to provide relief for small businesses from "the burdensome record-keeping requirements that they must deal with currently in paying their income taxes." Some companies already enjoy such relief under rules set by Congress, allowing many small businesses with annual income under $5 million to use cash accounting. Cash accounting recognizes revenue and expenses when cash is received or disbursed, as opposed to when it is earned or incurred. Larger companies, however, are required to follow the accrual method of accounting, which Snowe said "tends to impose additional financial and administrative costs that should be eliminated." Under her proposal, the "obsolete $5 million threshold" for use of cash accounting would double to $10 million -- a change that would allow many more small business owners "to satisfy their tax obligation in a cheaper, more efficient manner," she told lawmakers. As a result, these entrepreneurs "will be able to invest more time and resources into their business," Snowe said. In urging other lawmakers to support her proposed accounting change, the senator argued that small businesses are overwhelmed by the complexity of today's tax system and by the burden of complying with unneeded accounting requirements.

The Securities and Exchange Commission appointed New York attorney Lee S. Richards III as the independent examiner for Islandia, N.Y.-based software manufacturer Computer Associates. Richards will serve as examiner for a minimum of 18 months. His appointment was part of an agreement that CA signed in September to end an investigation onto accounting fraud. In his new role, Richards, a partner in the New York law firm of Richards Spears Kibbe & Orbe LLP, will oversee compliance with the settlement, make best practices recommendations to the board, and revamp the company's finance and accounting departments. The SEC settlement stems from a $2.2 billion accounting fraud that ultimately led to the ouster of several top managers, including chief executive Sanjay Kumar. The company had been backdating purchase orders and keeping the books open past the period close.

The Internal Revenue Service Oversight Board released a report requesting an additional $11.6 billion in funding for fiscal year 2006, a 9 percent increase over the Bush administration's recommendation. President Bush is required to submit the board's request, without revision, to Congress along with his own request. "One of the board's roles is to provide a private sector perspective," observed board chairman Raymond T. Wagner Jr. "And from this vantage point, it makes perfect sense to make the additional investments in enforcement that will pay for themselves many times over. The IRS and administration estimates show that every dollar invested in enforcement generates four dollars in increased revenues." The board estimated that an additional $435 million for enforcement would result in $1.74 billion in additional tax revenue. The board also called for additional funding toward maintaining and improving customer service and supporting the Business Systems Modernization program, which is replacing the agency's antiquated computer system. In its report, the board stated that its recommendations are backed by taxpayers. Those surveyed in its annual tax compliance survey called for additional funding for the IRS -- 62 percent favored more funding for enforcement and 64 percent favored more taxpayer assistance.

Washington - Regulators at the Public Company Accounting Oversight Board are wrestling with proposals to abandon the current "pass/fail" auditor reporting model for informing investors of the accuracy of corporate financial statements - a move that could require independent accountants to provide considerably more information about the veracity of their clients' financial reports.Whether the additional work and information will translate into more useful data for investors was a matter of considerable debate during the latest meeting of the PCAOB's Standing Advisory Group.

Accounting for social policy obligations has long confounded the preparers and users of governmental financial reports.The controversy currently surrounding the gargantuan obligations of the Social Security Administration is an example of the difficulties of dealing with long-term, big-number obligations of vaguely defined liability.

Brussels - Following the start of 2005, when the EU's International Financial Reporting Standards ventured out of port, so to speak, users might have hoped that only the odd technical hitch or two remained to be solved, and that the arrival of IFRS accountancy standardization to the economic zone's 7,000 listed companies would be smooth sailing.Subsequently, European investors, who previously faced a tangle of variegated regulations - which led to confusion over how companies were performing - would then be able to balance performance with performance.

The Governmental Accounting Standards Board has released its new five-year strategic plan, an effort that kicks off with a series of sweeping surveys of the board's standing with its constituency, as well as a barometer of its progress.

The constant headlines of regulators' actions against broker/dealers recall the image of falling dominoes.

Despite the Securities and Exchange Commission giving the okay for companies to voluntarily file reports using XBRL, and the Federal Deposit Insurance Corp. being poised to require quarterly call reports in the tagged data format, the United States still lags behind Europe, Asia and Australia in the adoption and implementation of the Extensible Business Reporting Language.Now more than five years old, XBRL is the financial reporting derivation of Extensible Mark-up Language, or XML - a framework that establishes individual "tags" for elements in structured documents, allowing specific elements to be immediately accessed and aggregated.

The President's Advisory Panel on Federal Tax Reform will hold its fourth meeting on Wednesday, March 16, at the University of Chicago Graduate School of Business Gleacher Center. Witnesses will provide perspectives on the impact of the tax laws on important taxpayer decisions and how the tax system treats investment alternatives. Panel I, on taxes and individual decisions, will hear testimony from James J. Heckman, a Nobel Laureate in Economics and professor of economics at the University of Chicago. Panel II will examine taxes and investment alternatives. Its witnesses include Brian Wesbury, chief investment strategist at Claymore Securities Inc.; Kathleen Kennedy, an associate professor of law and director of the Center for Tax Law and Employee Benefits at John Marshall Law School; Dr. Susan Dynarski, assistant professor of public policy at the Kennedy School of Government at Harvard University; and Armond Dinverno, principal and co-president of Balasa Dinverno & Foltz LLC. Panel III, on taxation of financial instruments, will hear David Weisbach, a professor of law at the University of Chicago; and Robert McDonald, a professor of finance at the Kellogg School of Management at Northwestern University.

Adecco, the world's largest staffing firm, announced Tuesday that the Securities and Exchange Commission had closed its investigation into the Swiss company's accounting, with no recommendation for enforcement action. The probe was initiated after Adecco's uncovering of accounting irregularities at its North American unit early in 2004 caused it to delay financial reports. Swiss authorities launched a similar investigation. The firm's own independent examination found no fraud, but did report minor accounting control weaknesses at Adecco Staffing North America. Uncertainty about the company's financials cost its investors billions of dollars in market value, and led to the resignation of the chairman, finance chief and head of its North American operations. In June 2004, a new board of directors and new co-chairmen were appointed to try and restore confidence in the firm. Adecco's stock rose on news of the end of the SEC's probe, though it was still almost 20 percent below where it stood before the discovery of the accounting problems.

As part of a deal reached Monday with its regulator, mortgage giant Fannie Mae agreed to a number of corporate governance and management changes. The new practices, which supplement an earlier agreement meant to satisfy the Office of Federal Housing Enterprise Oversight regarding Fannie Mae's governance, include: * Separating the duties of the chairman and the chief executive officer; * Establishing a compliance and ethics office that can communicate directly with OFHEO; * Strengthening accounting rules; and, * Implementing policies to prevent the falsifying of signatures. Last year, OFHEO discovered significant problems with the mortgage giant's practices, including juggling the books to meet targets that triggered executive bonuses. The revelations led to the resignation of chairman and CEO Franklin Raines and chief financial officer Timothy Howard in December. The Securities and Exchange Commission said that from 2001 to mid-2004, Fannie Mae's accounting practices didn't comply with the requirements related to accounting for deferred purchase price adjustments and for derivatives and hedging activities, and advised the company that it should, among other things, restate its financial statements to eliminate the use of hedge accounting. In February, SEC chief accountant Donald Nicolaisen announced that the commission would conduct a thorough, top-down examination of the mortgage financing concern.

Accounting irregularities have brought a flurry of troubles down on Delphi Corp., the world's largest maker of auto parts, leading to the need for a $200-plus million restatement and a host of corporate changes, including the departure of its chief financial officer. In a filing with the Securities and Exchange Commission, the company, based here, said that it had overstated its cash flow for 2000 by about $200 million due to improper accounting for prior transactions involving the receipt of rebates, credits and lump-sum payments, as well as certain off-balance sheet transactions. It also said that improper accounting regarding rebate transactions lead to a $61 million overstatement of income in 2001. The company discovered the irregularities in an ongoing investigation that was prompted by an SEC inquiry last July. Following the filing, Delphi's board expressed a lack of confidence in vice chairman and chief financial officer Alan Dawes; he resigned last Friday. Chief accountant and controller Paul Free also resigned, and John Blahnik, vice president of treasury, mergers and acquisitions, and new markets, was re-assigned to a lesser position. Chief accounting officer and controller John D. Sheehan is acting as CFO for now, reporting to chairman and chief executive J.T. Battenberg, who will retire later this year. The company's stock suffered this week as a result of the news, and on Tuesday Moody's cut Delphi's debt rating to junk. Also on Tuesday, the company announced that it would cut health benefits for retirees by dropping coverage once they are eligible for Medicare, starting in 2007. The cuts could save the company half a billion dollars over time.

Fast-food titan McDonald's Corp. said that it would pare down its equity-based compensation, such as stock options, and replace it in some cases with cash-based incentives, The Wall Street Journal reported. In its annual report, the global burger chain said that its decision stemmed in part from the options expensing rule adopted by the Financial Accounting Standards Board in December. McDonald's said that it will start complying with the options-expensing mandate during the current first quarter, and added that it would have to restate its financial results from some prior periods to reflect the previously unrecognized compensation expense.