Tuesday, July 28, 2009

PCAOB Adopts New Auditing Standard

Got this in an email from the PCAOB:

PCAOB Adopts New Auditing Standard On Engagement Quality Review And Issues Concept Release on Requiring
the Engagement Partner to Sign the Audit Report

Washington, DC, July 28, 2009 – The Public Company Accounting Oversight Board today voted to adopt Auditing Standard No. 7, Engagement Quality Review (EQR), and to issue a Concept Release on requiring the engagement partner to sign the audit report.

The EQR standard provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.

“The EQR standard focuses the engagement quality reviewer’s attention on the areas that are most likely to contain a significant engagement deficiency and increases the likelihood of identifying and correcting those deficiencies before the audit report is issued,” said PCAOB Chairman Mark W. Olson. ”The new standard goes a long way in clarifying the process."

The Sarbanes-Oxley Act of 2002 directs the Board to include in its auditing standards a requirement that each registered public accounting firm "provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance, by a qualified person (as prescribed by the Board) associated with the public accounting firm, other than the person in charge of the audit, or by an independent reviewer (as prescribed by the Board)."

The Board initially proposed the auditing standard on February 26, 2008, and reproposed it on March 4, 2009.

AS No. 7 applies to all audit engagements, and engagements to review interim financial information, conducted pursuant to the standards of the PCAOB. The standard supersedes the Board’s quality control standard, SECPS Requirements of Membership, Section 1000.08(f); 1000.39, Appendix E. The standard, if approved by the U.S. Securities and Exchange Commission (SEC), will become effective for both the EQR of audits and the EQR of interim reviews for fiscal years beginning on or after December 15, 2009.

Separately, the Board also is seeking comment on a Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report. Any such requirement would be in addition to the existing requirement for the audit firm to sign its name on the audit report.

“The PCAOB has discussed the engagement partner signature with its Standing Advisory Group three times, and taken a close look at the Treasury's Advisory Committee recommendations as well as the new signature requirements for Member States in the European Union,” said Chairman Olson. “We want to take a hard look at this issue and its potential benefits for investors, and look forward to a robust and informative comment period.”

The Board is seeking comment on the Concept Release for a 45-day period.

Monday, July 27, 2009

Deloitte Survey Finds Preference for Separate Accounting Rules for Private Firms

WebCPA posted an interesting article that starts with something not surprising at all: "Slightly more than half of small and midsized businesses prefer to have a separate set of accounting standards for private companies."

Many, including myself, have addressed this topic repeatedly. The plain truth is that accounting standards are more complex than ever. Small and midsized businesses that issue GAAP financial statements have been asking for a simpler alternative. IFRS has come out with an "IFRS Light" that may win adoption in the US, but even that is still full of complex rules.

There is an alternative out there already - non GAAP statements. Many small and midsized businesses issue their financial statements on an income tax basis. This is not a perfect alternative because this makes those financial statements more difficult to compare to a GAAP statement, and lenders may not accept income tax basis financial statements.

My opinion: if something doesn't happen to ease the burden on small and midsized businesses, you are going to see more income tax basis statements because the extra cost to produce GAAP statements won't be worth it.

Friday, July 24, 2009

Accountants’ Group Calls for Single Set of International Rules - Bloomberg

Bloomberg posted an interesting article on the continuing debate for a single set of international accounting standards. This is a debate that is going to on for a while.

My opinion: Theoretically a single set of international accounting standards makes sense, and I'm not going to go into all of the reasons for it.

The unsettled question is what are those standards going to be? All of the momentum is behind the International Financial Reporting Standards ("IFRS"). As I've noted previously, the Financial Accounting Standards Board has been working for several years to "converge" US standards to IFRS. Many affected parties in the US are against this process for a host of different reasons. I think ultimately this is where things are going.

The article concludes with something I strongly agree with: the politicians have to stay out of this. Leave this to the standard setters.

SEC Sues CSK Auto Ex-CEO under SOX Clawback - WebCPA

Found the following on WebCPA. It was only a matter of time before the SEC used the Section 304 clawback provisions. Now that they have succeeded, expect the SEC to do more of this.

The Securities and Exchange Commission has asked a court to order the former CEO of CSK Auto Corp. to reimburse the automotive parts company and its shareholders more than $4 million he received in bonuses and stock sale profits while CSK was committing accounting fraud.

The SEC’s enforcement action charges Maynard L. Jenkins of Scottsdale, Ariz., with violations of the Sarbanes-Oxley Act. It is the first action seeking reimbursement under the SOX “clawback” provision (Section 304) from an individual who is not alleged to have otherwise violated the securities laws. The SOX “clawback” provision deprives corporate executives of money that they earned while their companies were misleading investors.

“Jenkins was captain of the ship and profited during the time that CSK was misleading investors about the company's financial health,” said Rosalind R. Tyson, director of the SEC’s Los Angeles Regional Office, in a statement. “The law requires Jenkins to return those proceeds to CSK.”

According to the SEC’s complaint filed in U.S. District Court for the District of Arizona, Jenkins made $2,091,020 in bonuses and $2,018,893 in company stock sales that should have been reimbursed to CSK pursuant to SOX Section 304.

This is the third enforcement action in the SEC's investigation into CSK’s alleged accounting misconduct. In March 2009, the SEC charged four former CSK executives with securities fraud. In May 2009, the SEC brought a settled enforcement action against CSK for filing false financial statements for fiscal years 2002 through 2004.

In July 2008, CSK became a wholly owned subsidiary of O’Reilly Automotive, Inc. According to the SEC’s complaint against Jenkins, CSK was required to prepare an accounting restatement due to its fraudulent conduct. While Jenkins served as CEO, CSK filed two such restatements related to its overstated vendor allowances.

The SEC alleges that, in violation of Section 304, Jenkins failed to reimburse CSK for bonuses, or other incentive-based or equity-based compensation, and profits from the sale of CSK stock he received during the 12-month periods following the filing of each of CSK’s fraudulent financial statements. The SEC’s complaint does not allege that Jenkins engaged in the fraudulent conduct.

Wednesday, July 22, 2009

SEC Offers Email News Digests

Thanks to Rick Telberg at CPA Trendlines whose post on Twitter pointed me to the SEC's new email service for instant, daily, weekly or monthly email digests on all things SEC. I defaulted to signing up for everything and will adjust it down overtime, and I chose the daily digest option.

Companies: New Lease Rules Mean Labor Pains - CFO.com

Found an interesting article on CFO.com on the pushback from over 150 companies on indications on the direction for new lease accounting, and I encourage you to read it.

I agree with a lot of the criticisms of SFAS 13, Accounting for Leases. The brightline tests for whether a lease is operating or capital has always been susceptible to abuse.

On the other hand, I have difficulty accepting the financial calamity some predict from turning what are now off balance sheet operating leases onto the balance sheet as an asset with a corresponding liability. True, ratios will be hurt and could impact existing lending agreements. But all of this information has been (or should be) disclosed in the notes to the financial statements and should be comprehended by the readers and lenders.

This was reminding of an earlier post on mark to market accounting that wondered if that standard caused the financial market meltdown. My opinion and that of an accounting professor from Wayne State University in Detroit was no. Since publishing that post, I asked the same question to another Wayne State accounting professor who completely disagreed with me and his colleague. I am reminded of that comment about putting pig on a lipstick. That was what we were doing before the mark to market rules, and it is pretty much what we are doing with the current lease accounting rules.

Tuesday, July 21, 2009

Updates to SEC Regulations and Staff Interpretations

Thanks to the good folks at The SEC Institute for the following:
SEC Issues SAB 112
In early June the SEC Staff issued SAB 112 to update the codification of SABs, (the Staff Accounting Bulletin Series), in order to make the interpretive guidance consistent with current U.S. GAAP. Most of the revisions deal with material made unnecessary because of SFAS 141R, Business Combinations and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements.

The new SAB and the SAB codification can be found at:


SEC Issues Technical Amendments, including to Regulations S‑X and S‑K
In the same vein, in April the SEC adopted a final rule, Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies, in order to conform them to SFAS 141R and 160.

The final rule can be found at:


SEC Issues new C&DIs on Executive Compensation
In May the SEC staff added new Regulation S‑K C&DI’s related to questions they have received on executive compensation disclosure.

The C&DIs can be accessed at:


Help for New Cover Page Check Box For XBRL

Thanks to the good folks at The SEC Institute for this:

As you likely know, the SEC added a check box on the cover pages of Forms 10‑K and 10‑Q concerning the filing and posting of XBRL (interactive data) files. The wording in the check box is a bit ambiguous, so the staff issued this C&DI to clarify how to complete the check box:

Question 105.04

Question: If a company is not yet required to submit Interactive Data Files with its Exchange Act reports, should it check the box on the cover pages of the reports relating to compliance with Interactive Data File submission requirements?

Answer: No. A company should not start checking the cover page box relating to Interactive Data File compliance until it is required to submit those files. For example, if a company is first required to include an Interactive Data File with its second quarter Form 10‑Q and, as permitted by the grace period rules, includes such file in a Form 10‑Q amendment 30 days after the date the report is due and filed, the company should not check the Interactive Data File box on the cover page of its initial Form 10‑Q. Rather, it should check the box once the first Interactive Data File is submitted — in this case, with the Form 10‑Q amendment. Companies that have been voluntarily submitting Interactive Data Files should not check the box until they are required to submit the files. [Apr. 30, 2009]

You can find this C&DI at:


Monday, July 13, 2009

Friday, July 10, 2009

New Option for Private Companies in Streamlined IFRS

Very interesting article in The Journal of Accountancy that might be a very attractive option for companies: use a slimmed down version of International Financial Reporting Standards ("IFRS") as the basis for accounting instead of US GAAP.

This would be very interesting. Many privately held companies continue to complain, rightfully so, about the complications of US GAAP. Much of the accounting pronouncements coming out these days seem pointed at larger, publicly held companies and can be very difficult and expensive to implement. Privately held companies have been asking for an alternative, essentially a GAAP Lite.

This might be it.

I encourage you to read the article. But I am going to copy one key paragraph:

Private companies in the United States can prepare their financial statements in accordance with U.S. GAAP, an “other comprehensive basis of accounting” (OCBOA), such as cash- or tax-basis; or full IFRS, among others. The governing Council of the AICPA recognizes the IASB as an accounting body for purposes of establishing international financial accounting and reporting principles. Full IFRS and IFRS for SMEs are generally accepted accounting principles.

"SME" stands for small- and medium-size entities.

I admit I have not read these standards yet, but on the surface I can see two potential problems:
  1. Loan agreements often specify US GAAP be used in financial reports provided to the lender. It could take time for banks and other lenders to understand this different basis of accounting and accept it.
  2. Accountants - both those in public accounting and those inside of small- and medium-sized entities don't know this basis of accounting and it will take time to learn how to use it.

That being said, I look forward to following this option.

Thursday, July 9, 2009

Considering BusinessWeek's Article: How Good Is Your Audit Firm?

BusinessWeek recently published an article titled How Good is Your Audit Firm? The Public Company Accounting Oversight Board ("PCAOB"), at the request of the SEC, has been requested "to examine the feasibility of requiring audit firms to periodically report on key indicators of audit quality", and this article explores the subject.

One of the authors is a retired partner at KPMG, and is now, along with the other two authors, a college professor. This explains the looking at the world with rose colored glasses approach suggested in this article.

I agree 100% that audit quality is important. The suggestion to report on input and processes isn't going to change a thing.

The article suggests audit firms, which mind you in the US are privately held, report things like:
  • Years of experience of professional staff by partner, manager and staff level
  • Areas of expertise
  • Relative time spent on client service, administration, training and nonchargeable time
  • Number of public clients per partner
  • Audit firm personnel-retention rates by professional level
  • Specific types of industry relevant training

Most firms already disclose information such as years of experience and areas of expertise. I submit that years of experience is overrated. Yes, generally speaking someone with 20 years of experience knows a lot more than someone with 2 years of experience. But 20 years isn't necessarily better than 10. I have unfortunately seen people with far more experience than me not get it right.

I am very bothered by the notion of disclosing "relative time" because it suggests that hours are an important input in this equation. I don't track my hours. It is not relevant to my clients. My experience and ongoing growth and training is important to them.

The market place drives competition and audit quality. An artificial set of criteria imposed on audit firms isn't going to make things better.

Tuesday, July 7, 2009

Mark to Market Accounting - Did it Cause the Meltdown

I was involved in an interesting discussion last week on "mark to market" accounting. For those not up on the subject (at least 99% of the population falls in that category!), the mark to market rules required banks and other entities to adjust the carrying value of various assets to current market values. That is what they mean by mark to market - as in marking it down.

Most GAAP financial reporting is done on a historical cost basis. There has been an ongoing trend to more fair value reporting, especially as the US account principles start to converge with international standards. One area that has been switched to market value was investments in marketable securities - stocks, bonds, mutual funds, etc. Depending on how you classify these assets impacts how the gain or loss on them is recognized - unrealized gains and losses on securities held for trading purposes directly hit the income statement, while those on available for sale securities go through comprehensive income, a component of the equity section of the balance sheet.

The mark to market rules have gotten a lot of criticism and taken heat as being a cause of the financial market meltdown. Why? Because subprime loans and other financial assets had to be marked down to current value. And that made the companies holding these assets look bad! The argument was that if these rules were done away with then the companies would look better and none of this would have happened.

A large number of members of Congress have written the Securities and Exchange Commission asking that these rules be rescinded for public companies. That alone should tell you the rules are not the problem.

The truth here is that these companies were holding a lot of bad assets. The mark to market rules made this clear. Not having the rules in place would have hidden this information, but either way the companies were holding bad assets.

Did the mark to market rules create the financial meltdown? No. That was going to happen. Did it help accelerate it? Maybe, but that is ok.

Any contrary thoughts?