Changes To Reduce Complexity Of Reporting In The Works

The month of May came and went without the Securities and Exchange Commission’s issuance of its long-anticipated study on off-balance sheet accounting. The newest projection for its release is June, according to a speech given by SEC Chief Accountant Donald Nicolaisen at the SEC Financial Reporting Institute Conference in Pasadena, Calif., last week.

Nicolaisen

The study is required by Sarbanes-Oxley and was expected to be released in May. During Nicolaisen’s June 2 remarks, he said the report will be issued “later this month.”

Offering only broad hints about prospective changes ahead, Nicolaisen said his work on the study “confirms for me the need to reduce complexity while at the same time improve both the transparency and usefulness of financial reporting for investors.”

Calling on accountants to brace themselves for change, he continued, “The report also directly addresses a number of long contentious issues, both on and off-balance sheet, where our current accounting models are sometimes complex and where improvements appear necessary." According to Nicolaisen, the increased complexity is not only the result of more detailed rules, but "a desire to reduce volatility in the income statement," and "the development of numerous exceptions to basic principles."

Possibly preparing public companies for changes, Nicolaisen tipped his cap to the internal control provisions of Sarbanes-Oxley. "I recognize that every significant change in accounting will, for many companies, require systems changes and testing to ensure that internal controls are effective before the change in accounting can be made," he said. "It's clear that the FASB has a very difficult job ahead."

Nicolaisen also seemed to be seeking support from the industry at large. "I wanted to tee this up with you today because its success will ultimately be dependent on obtaining your help and support as well as that of other investors, preparers and auditors, " he said. "If we are to achieve real progress in reducing complexity—and its related cost—it will require a willingness to implement change."

Ketz

J. Edward Ketz, accounting professor at Penn State and author of Hidden Financial Risk: Understanding Off Balance Sheet Accounting, said Nicolaisen’s remarks don’t offer any concrete insight into what the report will say.

“He’s playing his cards close to his chest,” he said. “I’m not sure whether there’s any content behind his words. … We’ll just have to wait and see.”

SEC Commissioner Rails Budget Approval Process For PCAOB, FAF

Commissioner Paul Atkins of the Securities and Exchange Commission held true to his word and assured that budgetary discussions surrounding the regulatory and standard-setting bodies it oversees would be made public.

At a March SEC meeting where commissioners planned to review the budgets of the Public Company Accounting Oversight Board and the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, Atkins delivered an admonishing statement criticizing those bodies for not making representatives available to discuss their budgets in an open forum.

Atkins rattled off a series of routine questions that no one was present to answer, then promised to send the questions to the respective bodies in writing and post their replies. “The public deserves to know what we considered when we approve the PCAOB’s budget,” he said. “This is a public meeting for the public’s benefit so it makes sense for the public to hear directly from the entities whose budgets are under consideration.”

As he promised, Atkins sent his questions to the FAF and the PCAOB, and both agencies replied (see box at right for questions and responses).

Edwards

Paul Edwards, chair of the Securities Law Practice Group at law firm McDonald Hopkins and a former SEC staffer, said Atkins was not being critical of either agency, but only insisting that the budget review and approval process be transparent. “He single-handedly made sure that the PCAOB budget approval was done in an open SEC meeting,” Edwards said. “He was vocal that he wants representatives to be present at meetings so they can ask questions and have meaningful dialogue.”

Edwards noted that some of Atkins’ questions seemed fairly basic. “Some of these are questions that you would think an SEC commissioner would already know,” he said. “But then, maybe that was the point. It’s almost like it didn’t matter what the answer was, he just wanted it to be public.”

The PCAOB budget came under SEC heat late in 2004 and was revised after it was publicly submitted for SEC review.

AICPA Advice For Audit Committees With Adverse 404 Opinions

The American Institute of Certified Public Accountants has issued guidance targeted at audit committees on how to proceed after the company gets an adverse opinion on the effectiveness of its internal controls (see box at right).

The guidance provides audit committee members with advice on how to investigate the root cause of internal control problems and how to communicate with various stakeholders—shareholder, employees, vendors, etc.—as the investigation and remediation proceed. The document gives the audit committee an understanding of the responsibilities for internal and external auditors, management, the chief executive officer, as well as questions to pose to each party. It also addresses how to proceed if the investigation begins to point to possible fraud.

FASB Finalizes Standard on Reporting Accounting Changes, Fixing Errors

The Financial Accounting Standards Board has finalized its standard on reporting changes in accounting practices or correcting accounting errors requiring that companies generally follow “retrospective application” when reporting such changes.

That means companies have to look back at prior periods and recalculate figures as if new rules had always been in effect. Retrospective application will apply to such events as a change in method of depreciation, amortization or depletion for long-lived, non-financial assets. It will not be required when such a look-back is “impracticable,” FASB said in a statement.

Crooch

FASB adopted the new approach to make U.S. financial reports more comparable with reports from companies abroad. “This is one example where the Board concluded that the IASB [International Accounting Standards Board] requirements result in better financial reporting,” said Board member Michael Crooch in a statement.

The new rule, Statement No. 154: Accounting Changes and Error Corrections, replaces APB Opinion No. 20 and FASB Statement No. 3, in keeping with the goal to simplify U.S. Generally Accepted Accounting Principles rather than continually amending them.