Accounting standards

The Securities and Exchange Commission unanimously approved the 2005 budget for the Public Company Accounting Oversight Board, which requested $137 million for the body charged with policing the accounting profession. Initially, the board submitted a 2005 budget request of $152.5 million, a dramatic increase from the $103 million it had been allocated in 2004. However, when its hiring goals for 2004 fell short, it slashed that request by roughly 15 percent. The SEC approval, however, did not come without controversy, as two commissioners -- Paul Atkins and Cynthia Glassman -- reportedly ignored the objections of their boss, SEC Chairman William Donaldson, and extended an invitation to PCAOB Chairman William McDonough to attend the budget meeting. An invitation was also extended to Robert Herz, chairman of the Financial Accounting Standards Board. Neither attended the meeting. Last year's approval of the PCAOB budget had been done behind closed doors.

Federal penalties for taxpayers accused of tax evasion, failure to file a return, or making false statements to the Internal Revenue Service could increase dramatically later this year if Congress approves legislation being pushed by Sen. Russ Feingold, D-Wis., to sweeten tax deductions for charitable volunteers. Under the bill, the current $100,000 fine for attempting to "evade or defeat tax" liabilities would jump to $250,000, penalties for more serious violations would double to $1 million per offense, and the maximum of prison terms facing taxpayers would rise from five years to 10 years. At the same time, taxpayers charged with "willful failure to file returns, supply information or pay tax" would face felony rather than misdemeanor charges, with maximum penalties climbing to 10 years, up from 12 months currently. Feingold's bill would also double the federal penalties for making false statements to IRS to as much as $1 million and/or five years in prison. These sharply increased penalties are buried in the fine print of a bill that Feingold said is needed to provide equitable tax treatment for volunteers who use their cars for charitable activities. Under current law, these volunteers may be reimbursed up to 14 cents per mile for their donated services without triggering a tax consequence for either the organization or the volunteers. If the charitable organization reimburses any more than that, they are required to file an information return indicating the amount, and the volunteers must include the amount over 14 cents per mile in their taxable income. According to Feingold, this is inequitable because the mileage reimbursement level currently permitted for businesses is a more liberal 40.5 cents per mile. In proposing legislation to eliminate this "disparity," Feingold told the Senate that his new bill "today is identical to a measure I introduced in the 107th Congress and the 108th Congress in nearly every respect." Significantly, however, neither of those earlier Senate bills, nor separate legislation introduced in the House earlier this year by Rep. Todd Platts, R-Pa., to increase charitable mileage deductions, contain the tax penalty increases included in Feingold's current measure. In explaining the new bill's tax sanction provisions, the Wisconsin Democrat said that the sharply increased monetary penalties for taxpayers would offset the cost of raising the mileage deduction for charitable volunteers. That represents a tax break that the Congressional Joint Committee on Taxation has estimated would result in a net federal revenue loss of no more than $1 million over five years. "Though the revenue loss is small," Feingold explained, "it is vital that we do everything we can to move toward a balanced budget, and to that end I have included a provision to fully offset the cost of the measure and make it deficit-neutral."

As expected, the Securities and Exchange Commission granted a one-year extension on Sarbanes-Oxley 404 compliance for small companies and foreign issuers that trade in the U.S. Under the SEC's revised guidelines, those firms that fall under those categories -- U.S, firms with a market cap of less than $75 million -- would have to be in 404 compliance for their first fiscal year ending on or after July 15, 2006. Section 404 of SOX requires that a company certify their internal controls and have an attestation to that effect from their outside auditor. Larger U.S. companies are required to be in 404 compliance for the first fiscal year ending on or after Nov. 15, 2004. In April, the SEC has scheduled a public roundtable to discuss concerns about SOX 404 and its time and cost impact on smaller companies.

The Big GAAP vs. Little GAAP debate rages on. An American Institute of CPAs' task force charged with examining private company financial reporting standards wants to begin a process to implement changes in generally accepted accounting principles for private issuer companies. "Fundamental changes should be made in the current GAAP standards-setting process to ensure that the financial reporting needs of private company constituents are met," read the report issued by the institute's task force. The task force, established last year and headed by former AICPA chairman James Castellano, made its determinations based on the input of some 3,700 business owners, public practitioners, financial managers, lenders, investors and sureties. The research was conducted by Omaha, Neb.-based MSR Group, an independent market research firm. "This group did not approach its research with a preconceived notion that issues or problems with GAAP financial reporting for private companies existed," Castellano said. "We wanted to understand if what many of us had been hearing was simply the opinion of a vocal minority or the true expression of concerns by stakeholders of private company financial reporting." Public issuers are required to prepare financials in accordance with GAAP, and privately held companies -- which comprise an overwhelming majority of the roughly 5 million companies in the U.S. -- have traditionally used GAAP as well, thus fueling the protracted public-versus-private-standards debate. The AICPA board -- subject to input from Council -- along with accounting standard-setter the Financial Accounting Standards Board and its overseer, the Financial Accounting Foundation, have agreed to collaborate on possible courses of action. However, FASB and the FAF neither endorsed nor rejected the task force's conclusions. The AICPA, the FAF and FASB agreed that any proposal would need to be fully exposed for public comment and debate. A complete copy of the task force report can be found at: http://www.aicpa.org/members/div/acctstd/pvtco_fincl_reprt/index.htm.

The European Union has reiterated its call for more "home-grown" representation in drafting international accounting standards. The E.U. has demanded more that the current five seats it has on the International Accounting Standards Board, claiming that as of Jan. 1, it was the first to use the international accounting rules ahead of the U.S. At the start of the new year, all publicly traded companies within the 25-nation E.U. were require to use international rules. Last week, former Federal Reserve Chairman Paul Volcker, who serves as chair of the IASB overseer committee, said that Europe was "sufficiently represented on the board," and instead of boosting European representation, more consideration should be given to countries such as India, China and Japan. Both the U.S. and the E.U. have five seats on the IASB. In a speech before a gathering of accounting professionals, Volcker said that representation on the IASB shouldn't be based on "national, political or sectoral interests."

The Securities and Exchange Commission will convene March 3 to consider approval of the 2005 budget for the Public Company Accounting Oversight Board. The oversight body has proposed a 2005 budget of $137.1 million, a figure roughly 10 percent below its initial 2005 request of $152.5 million. The regulator trimmed its initial budget request after it fell behind on its anticipated hiring volume for the coming year. The board said that the $15 million reduction reflected the subsequent reductions in salary, benefits and payroll tax expenses. In addition to okaying the accounting oversight board's 2005 budget, the commission is also expected to discuss issues related to mutual fund redemption fees and credit rating agencies.

The Securities and Exchange Commission has named Joseph A. Hall to the post of managing executive for policy and Martha B. Peterson as counselor to commission chair William Donaldson. Hall will assist Donaldson with enforcement policies, as well as procedures governing both the markets and SEC issuers. He also will serve as Donaldson's main liaison to other SEC commissioners and departments. Hall succeeds Patrick Von Bargen, who recently announced that he would be leaving the regulator for a post in the private sector. Hall joined the SEC in 2003 as senior policy fellow in the Office of the General Counsel, and later served as counsel to Donaldson. Prior to coming aboard at the commission, he was a partner with the firm of Davis Polk & Wardwell in New York. In her new post as Donaldson's counsel, Peterson will advise him on rulemaking and other initiatives. She originally joined the commission in 1987, serving in the Office of the General Counsel and later as counsel to then-chair David Ruder. In a statement, Donaldson said, "Joe and Martha each bring a wealth of experience and knowledge to their positions. I look forward to continuing to work with them to further the best interests of America's investors."

Embattled brand Krispy Kreme, which is currently the subject of a formal probe by the Securities and Exchange Commission, said that it would cooperate with prosecutors who want to interview former executives of the doughnut and coffee retailer, based here. In published reports, the chain said that the executive inquiry, which is being conducted by the U.S. Attorney for the Southern District of New York, is related to the ongoing SEC probe and vowed to cooperate with investigators. The names of the executives to be questioned were not identified. Krispy Kreme, which went public roughly five years ago, has been under investigation for its franchisee buyback procedures, as well as its earnings forecasts. It also faces a number of class-action lawsuits by shareholders. The company's stock, which once closed in on the $50 level, now trades at just over $5. Last month the chain ousted chief executive Scott Livengood and handed the reins over to Stephen F. Cooper, a turnaround specialist, who promptly announced a 25 percent reduction in the number of corporate employees.

The Securities and Exchange Commission said that it would hold its previously announced roundtable on the internal controls requirements of Sarbanes-Oxley on April 13 -- affording both companies and auditors the opportunities to air their grievances on the difficulties and costs of the federal mandate. Since the 2002 passage of the sweeping corporate reform act --Section 404 of which requires a company's executives to attest to the adequacy of its internal controls -- the guidelines have been the subject of frequent complaints from firms and auditors citing the prohibitive costs in both money and time. The SEC is currently mulling a delay for internal controls compliance for both smaller and foreign-based companies, both of whom are required to be in compliance by July 15. After receiving a delay last year, larger companies -- those with a market cap of $700 million and higher -- began complying with the internal controls requirements in November.

Spurred by a recent clarification from the Securities and Exchange Commission, retailers Gymboree Corp. and Kohl's announced separately on Tuesday that they would restate their financial results. Citing the Feb. 7 letter on lease accounting from the SEC's Office of the Chief Accountant, Gymboree announced that it would change the way it accounted for rent holidays, landlord allowances and incentives under operating leases, which, it said in a statement, "is not consistent with the views expressed" in the SEC's interpretation. The San Francisco-based clothing company, which operates over 600 stores, said that it will restate its quarterly financials for 2004, and possibly for earlier periods. Gymboree expected to record an additional non-cash charge for fiscal 2004 of between six and seven cents a share, and that the restatements would reduce 2004 income by as much as 2 cents a quarter. Menomonee Falls, Wis.-based department store operator Kohl's, meanwhile, announced that it would restate financials going back to 1998 in response to the Feb. 7 clarification. The company, which operates over 600 stores, said that the changes would not affect future or historical cash flows, but that it would recognize higher rent expenses over the period covered by the restatements. It said that the higher rent would reduce earnings by 1 cent per share in 1999, 2 cents per share in 2000, 2001 and 2002; and 3 cents per share in 1998, 2003 and 2004. The company is still working with external auditor Ernst & Young on the restatements.

A report by the Treasury Inspector General for Tax Administration absolves the procedures used by the Internal Revenue Service's Tax Exempt and Government Entities Division for reviewing political activities by exempt organizations. While many charities speak out on public issues, the code prohibits Section 501(c)(3) organizations from specific types of political activities. In response to media reports of allegations that the TE/GE Division was examining these types of activities just prior to the 2004 presidential election for politically motivated reasons, the IRS asked the TIGTA to investigate. "This report confirms what we've said all along," said IRS Commissioner Mark W. Everson. "Political considerations played absolutely no part in the inquiries we launched last summer." Everson said that recommendations in the report would be addressed by the IRS and would be in place for future election cycles.

Paul F. Roye, director of the Securities and Exchange Commission's Division of Investment Management -- the division that polices the mutual fund industry -- is leaving to pursue a job in the private sector. Roye, who has served as the unit's director since 1998 and steered it through the explosive market-timing scandals affecting a number of large fund families, had been instrumental in orchestrating a number of initiatives at the regulator, including: o Strengthening the corporate governance regime for mutual funds; o Enhancing ethical standards for funds and investment advisers; and, o Requiring that funds and advisors adopt comprehensive compliance policies and procedures, and designate a chief compliance officer."It has been an honor and a privilege to serve America's investors as the director of the Division of Investment Management," Roye said in a statement. "I will miss my talented and dedicated colleagues in the division who, particularly during the challenges of recent months, have given their all to serve and protect America's investors." A successor has not been named.

In just under two years at the helm of the Public Company Accounting Oversight Board, Chairman William McDonough has gone from being a respected figure in banking to being the most influential - and often feared - figure in accounting.

The American Institute of CPAs' Auditing Standards Board is poised to issue an exposure draft of five proposed statements and amendments to statements relating to auditors' risk assessment.

The Securities and Exchange Commission is looking at an early March timetable in which to offer companies guidance on stock option expensing. According to The Wall Street Journal, SEC chief accountant Don Nicolaisen said that the regulator is close to making a decision on how much leeway to grant companies in applying the options-expensing standards. "But in early March, we'd like to be in a position to at least express key views on what our thinking is," Nicolaisen said. The protracted battle to expense options has come under intense lobbying pressure from pro-options groups, the high-tech sector and lawmakers with large constituencies affected by the options rule issued by the Financial Accounting Standards Board. Last year, the House, led by Rep. Richard Baker, R-La., overwhelmingly passed its own version of options expensing that requires that options be expensed only for a company's top five executives. Last fall, some 50 senators requested that the SEC delay implementing the rule until the regulator could provide valuation guidance.

While agreeing in essence with President Bush's plan to privatize Social Security, Federal Reserve Chairman Alan Greenspan said that change to the 70-year-old program must come gradually. "If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way," Greenspan said in remarks before the Senate Banking Committee. Greenspan concurred with the assessment that the problems with Social Security should be addressed sooner rather than later. including the possibility of raising payroll taxes to help offset transition costs. "Beyond the near term, benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead," Greenspan said. "Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable, and call for action before the leading edge of Baby Boomer retirement becomes evident in 2008." The chairman also said that the economy is sound, with inflation in check, and indicated that the Fed would continue raising short-term interest rates. But he advised that it is ""imperative to restore fiscal discipline," referring to the record budget deficit.

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. But critics of the plan for requiring auditors to provide a more detailed discussion of their views of corporate financial statements are warning the PCAOB that such a shift in auditor reporting standards would create more confusion than enlightenment for most investors. Under the current ground rules, auditor reports filed with the Securities and Exchange Commission must include unqualified opinions "stating that the company's financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conforming with GAAP." Some members of the PCAOB's Standing Advisory Group however, have warned the board that this approach effectively establishes a pass/fail system under which investors are provided with no information to distinguish between companies with borderline financial statements and those with highly accurate statements. "The problem with the current (pass-fail) model is that if you have a company that is trying to push the line as far as they can get away with, the auditor's report would provide that company with essentially the same rating as one that does an excellent job of providing high quality financial information," Consumer Federation of America Investor Protection Director Barbara Roper told the PCAOB. At the Feb. 16 SAG meeting, Roper argued that a change in the auditor reporting model to allow accountants "to provide more insight into the audit report" would make it more difficult for companies to do the bare minimum to achieve a GAAP "passing" grade. Other SAG members disagreed, warning that providing anything more that the auditor's pass-or-fail rating might confuse investors. "The investing public should be able to read a financial statement and pretty much get out of it what's good and what's bad," Dallas CPA Wanda Lorenz told the board. Providing more detailed - but potentially more ambiguous -- information about the auditor's opinion may not be helpful to the average investor, she maintained. Those views were echoed by SAG member Lynn Turner, managing director at proxy researcher Glass-Lewis, who told the board that "because of the level of sophistication of the average investor, you have to keep in simple." In voicing concerns about a shift to more detailed auditor disclosures, Turner - a former Securities and Exchange Commission Chief Accountant - urged the PCAOB to be sensitive to the needs of investors who already find financial reports difficult to understand. "You have to keep it simple," he said. "You have to tell them whether the numbers are right or not right...in simple language."

A survey of 220 businesses revealed that while compliance costs associated with SOX Sections 404 and 302 are front-loaded, once companies are through the process, there is a great deal of proportional value. The poll, conducted jointly by International Data Corp. and RevenueRecognition.com, also noted that a compliance "chasm" exists and that companies that have crossed it have achieved more effective results at less cost. IDC asked respondents to rate the cost of six major Sarbanes-Oxley compliance tasks, and also to judge the effectiveness of those tasks for improving risk management. The cost and effectiveness ratings were roughly even for activities such as documenting accounting policies, certification and sign off on internal controls, certification of financial statements, and responding to external audit attestation processes. However, the cost of documenting internal controls was rated substantially higher than its effectiveness for improving risk management, and the cost of repairing any weaknesses was rated substantially lower than its effectiveness for improving risk management. The survey focused on costs for internal resources and outside consulting from both Big Four and non-Big Four audit firms. The resource requirements to support SOX increased in direct proportion to the size of organization based upon revenue. For public enterprises with more than $1 billion in revenue, the average amount of labor spent on compliance activities was more than 12 person-years. Companies in the $200 million to $1 billion revenue range averaged more than six-and-a-half person-years of effort. Furthermore, the cost of external auditing services increased 52 percent for public companies. Midsized companies with $200 million to $1 billion in revenue reported an 81 percent average increase.

In the wake of a number of national restaurant operators having to restate earnings due to lease accounting errors, the Securities and Exchange Commission advised restaurant companies to assess the impact of such errors in order to determine whether restatements are necessary, according to The Wall Street Journal. In a letter sent to the American Institute of CPAs, SEC chief accountant Don Nicolaisen wrote that restaurateurs who "determine their prior accounting to be in error should state that the restatement results from the correction of errors, or, if restatement was determined by management to be unnecessary, state that the errors were immaterial to prior periods." Operators such as Red Lobster and Olive Garden parent Darden Restaurants Inc.; Brinker International, operator of the Chili's and Macaroni Grill concepts; and Carl's Jr. parent company CKE Restaurants Inc., have all restated financials due to lease accounting errors.

Former Senators Connie Mack and John Breaux, chairman and vice-chairman of the President's Advisory Panel on Federal Tax Reform, have scheduled the panel's first meeting for Feb. 16, 2005. Witnesses will be Fred T. Goldberg, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, and a former commissioner of the Internal Revenue Service; Louis Kaplow, a professor of law and economics at Harvard Law School; William G. Gale, co-director of the Urban-Brookings Tax Policy Center; and Stephen J. Entin, president and executive director at the Institute for Research on the Economics of Taxation. Treasury secretary John Snow will also appear before the panel. "The president has tasked our panel with developing reforms to make the tax code simpler, fairer and more growth-oriented," said Senator Mack. "I look forward to the opportunity to hear from Secretary Snow as well as this distinguished group of experts as we begin the process of examining the problem and formulating solutions." "The current tax system is an unfair burden on Americans," added Senator Breaux. "When it takes the average taxpayer 11 hours to fill out the short tax form, something is wrong. This is a unique opportunity to work in a bipartisan effort and find ways to make the tax system serve Americans better." The witnesses will provide the panel with a historical overview of the current tax system and an understanding of how it evolved and where it is today. The panel will also hear background about tax systems. In particular, the witnesses will explain the difference between a tax on income and a tax on consumption, how the different bases impact the overall functioning of the tax system, and the advantages and disadvantages of each one in terms of simplicity, fairness and economic growth.