Accounting standards

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.

A letter drafted by technology sector lobbyists is making its way through Congress asking lawmakers for support in their battle against expensing stock options. The letter, which is scheduled to arrive on the desk of Securities and Exchange Commission Chairman William Donaldson on Monday, Feb. 14, requests that the regulator delay the June 15, 2005, implementation date, and recommends that the agency conduct an impact study on options expensing. The letter, of which WebCPA received a copy, specifically exhorts the regulator to: o Field test valuation methods "to ensure the methods imposed on all public and private companies make sense and not adversely affect our nation's economy." o Conduct, along with the Labor and Commerce Departments, "a comprehensive impact study before any standard is implemented. There is little doubt that the economic, labor and global competitiveness impact of stock option expensing could be severe." A representative for TechNet -- a bipartisan network of technology sector chief executives who represent more than one million employees -- said that he was aware of the letter, but that the group was not the one behind it. "The SEC has to realize that 14 million people own stock options, so it's not just for top executives. It's a much larger issue than that." In July, House lawmakers overwhelmingly passed their own stock option bill, H.R. 3574, which mandates expensing options only for a company's top five executives.

Securities and Exchange Commission Chairman William Donaldson said that his agency would examine the possibility of modifying or rewriting some current rules, such as the ones requiring stricter internal controls, granting investors power to nominate board members, and governing the methods in which stocks are traded. In published reports, Donaldson said that, while the regulator might be considering any or all of the above-mentioned refinements, the SEC has not abandoned its plans to impose fines for both individual and company wrongdoers. Donaldson said that he hopes the watchdog will approve a measure that would give shareholders more power to elect board members of their choosing, but the rules in their present form may have to be rewritten. A host of business groups have lobbied against the shareholder-nominating proposal, claiming it would cater to special interest groups.

While the current Social Security system is not in crisis mode, it faces serious problems with regard to solvency and sustainability, according to the Government Accountability Office. The auditor general said that if nothing was changed with the 70-year-old program until 2042, "achieving an actuarial balance" would require a 30 percent reduction in benefits or a 43 percent increase in payroll taxes. The GAO also labeled Social Security's problems "a subset of our nation's overall fiscal challenge." Absent reform, the country would have to choose among escalating federal deficits and debt, gargantuan tax increases, or federal budget cuts. However, the GAO warned that when evaluating any reform measure, financial stability should not be the sole criteria. A equitable balance with regards to benefits, as well as administrative and operational issues, also require consideration. The auditor general added that any changes enacted with Social Security should be made "in the context of the broader challenges facing our nation," such as those concerning private pension systems, Medicare and Medicaid.

Securities and Exchange Commission chief accountant Donald Nicolaisen told lawmakers that the regulator is conducting a top-down examination of mortgage-financing concern Fannie Mae. In prepared remarks before a House subcommittee, Nicolaisen said that, although he could not discuss the ongoing investigation, the SEC staff is "thoroughly" investigating accounting practices at the company. In December, the SEC determined that Fannie Mae's accounting practices didn't comply with generally accepted accounting principles, and told the company to restate its financials for the years 2001 through 2004. As a result, company's chief executive and chief financial officer have departed.

The Securities and Exchange Commission said it will host a roundtable -- possibly in April -- to discuss on how auditors and their smaller publicly traded clients are dealing with the Section 404 internal controls requirements of Sarbanes-Oxley. SEC Chairman William Donaldson has asked for an "appropriate delay" for smaller public issuers and non-U.S. companies whose compliance deadline was scheduled for July 15, 2005 and whose market cap is between $75 million and $700 million. Large U.S. companies, above that threshold, are already required to comply with the internal controls mandate as of Nov. 15, 2004. SEC chief accountant Don Nicolaisen said if a delay is provided, companies should use that time to continue documenting and testing internal controls.

As expected, the European Union Commission has mandated that European-listed companies expense stock options. The law, which must be applied retroactively from Jan. 1, 2005, applies to roughly 8,000 companies. Late last year, the E.U. lobbied hard for the expensing rule, but in order for it to be enacted into law it had to be approved by the European Parliament. In the U.S., companies must begin expensing stock options from June 15. Much like in the U.S., where options expensing was met with a flurry of lobbying activity -- especially from the technology sector -- many of Europe's biggest conglomerates had attempted to delay the expensing rule until it became effective in the U.S.

Just in time for consideration by President Bush's new bipartisan panel on tax reform, National Taxpayer Advocate Nina Olson told Congress that the complexity of the Internal Revenue Code is the most serious problem facing both taxpayers and the Internal Revenue Service.

What's the difference between Enron and the United States government?

President George W. Bush has named two former senators to lead a new nine-member bipartisan panel charged with arriving at options to reform the tax code.

In an effort to aid smaller publicly traded businesses with internal controls compliance, the Committee of Sponsoring Organizations said that it would offer online guidance for internal controls assessment by the summer.

The Financial Accounting Standards Board is going back to that deep, dark place where accounting standards come from - the conceptual framework that underlies it all.

We have been writing on the Conceptual Framework in response to the Financial Accounting Standards Board's announced intent to strengthen it. We've discussed the objective of financial reporting, the political situation and its problems, the overarching importance of cash flows, and the nature of relevance and reliability.

Securities and Exchange Commission chief accountant Donald Nicolaisen is scheduled to testify this week before a House subcommittee about the commission's decision that Fannie Mae violated accounting rules.

Fannie Mae has reportedly recruited former Securities and Exchange Commission chair Richard C. Breeden to help it deal with a potential $9 billion restatement, while its former chief executive has relinquished two board seats.

The American Institute of CPAs named Ben Neuhausen, national director of accounting at BDO Seidman, as chairman-elect of its Accounting Standards Executive Committee.Neuhausen will succeed KPMG's Mark Bilstein in that post following the conclusion of the next AcSEC meeting.As an AcSEC member, Neuhausen chaired the AICPA task force on real estate time-share transactions. He also has served as a member of FASB's Interpretation 46 Resource Group and its Liabilities and Equities Resource Group. From 1979 to 1981, he was a Financial Accounting Standards Board fellow.Prior to joining BDO in 2002, Neuhausen was a partner in the Professional Standards Group at Andersen.The institute's AcSEC unit provides accounting guidance and serves as the organization's voice on financial reporting matters. It includes members from academia, business and industry, and public practice.