FASB Guidance; Why SOX Costs Rise; More

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he staff of the Financial Accounting Standards Board is proposing a narrow exception to existing accounting rules for derivatives, with the recent issuance of tentative implementation guidance related to Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities.

The staff issued Implementation Issue No. B40 in draft form to specify that there are some strict conditions under which a securitized interest in prepayable financial assets would not necessarily invoke the usual requirements to bifurcate the derivative, or break it down to its separate input instruments, for accounting purposes.

The proposed guidance, titled “Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets,” says the intention is to provide a “narrow scope exception” from requirements in Statement 133 that otherwise would require bifurcation if the securitized interest in question meets the criteria the staff established.

FASB is open to comments on the proposed guidance through Dec. 8. Details can be found in the box above, right.

PCAOB Member To State Boards: Help Train Accountants

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tate boards of accountancy must shoulder more of the work in training the accounting profession, to meet the needs of a more rigorous financial reporting and auditing process following Sarbanes-Oxley, according to an audit regulator.

In remarks before the National Association of State Boards of Accountancy recently, Charles Niemeier, a member of the Public Company Accounting Oversight Board, said state boards should study internal control reports with an eye toward weaknesses in accounting personnel.

Niemeier

“A leading cause of reported material weaknesses in corporate controls is a problem with in-house accounting personnel resources, including competency, training and experience,” he said, with half of companies reporting material weaknesses citing personnel problems. That amounts to a “wake-up call,” Niemeier said, “to consider on a broad level whether we are training and qualifying accountants adequately and sufficiently to meet the needs of our economy.”

According to the board member, accountants need more training in not only internal controls, but also in risk assessment, ethics, and valuation to meet a growing need for fair-value accounting.

Grant Thornton: Investors Nonchalant On Auditor Changes

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econd-tier accounting firms—those global firms lingering just below the Big 4 who are often referred to as the “Second Six”—have long contended that public companies unnecessarily fear investor reaction if they hire an audit firm from outside the “big” ranks. Now Grant Thornton says it has empirical evidence to that effect.

Grant Thornton commissioned two separate studies: one of recent investor reaction to new GT public company audit clients and another an investor survey. The firm says the findings suggest that investors don’t punish companies that move away from non-Big 4 firms.

Scott Whisenant, an assistant professor at the University of Houston, was commissioned by GT to study stock-price changes surrounding announcements that Grant Thornton became the auditor of record following the departure of a Big 4 firm. The study examined 244 such companies from 2002 through mid-2006, Whisenant said, finding that the stock prices didn’t show any statistically significant change before and after the announcement. “Apparently investors don’t see a change from the Big Four to Grant Thornton to be a negative event,” Whisenant says.

Even his own independent research findings support the Grant Thornton findings, he adds. “I had done some research in this area myself, and the more recent evidence has shown that there is not a stock price impact on auditor changes.”

Whisenant acknowledges that the study was limited in scope by studying only one firm’s audit clients, and he conceded that the outcome might have been different if it included additional second-tier firms, but that wasn’t Grant Thornton’s focus.

Fusco

In a separate survey also commissioned by the accounting firm, Harris Interactive polled more than 1,000 individual investors and found that the majority said they would not become alarmed by a change away from a Big 4 audit firm.

Cono Fusco, a managing partner at Grant Thornton, says relationships are changing in the post-Sarbanes-Oxley marketplace, but “there are still a number of misperceptions that need to be addressed.” Fusco says investors are becoming increasingly cognizant of a desire for more choice among audit firms and new criteria for how audit firms are selected.

IMA Survey Calls For Rebalancing Of Audit Roles

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n yet another study of SOX implementation problems, the Institute of Management Accountants says management’s de facto reliance on audit-driven guidance proved to be a significant cost driver for Section 404 compliance.

Parveen Gupta, a professor at Lehigh University, oversaw the survey of 400 chief financial officers, controllers, internal auditors, and other SOX compliance-related professionals. He found that about two-thirds of respondents attributed the compliance cost run-ups to management’s lack of guidance on how to decide what constitutes an effective or ineffective internal control system and a redundancy in testing because the audits of financial statements and internal controls were not integrated.

The Securities and Exchange Commission and the PCAOB are working on management-focused guidance and a rewrite of Auditing Standard No. 2, which became management’s best source of guidance for how to assess internal controls—primarily because external auditors insist on using it, often over the objection of corporate managers. The two agencies promised to roll out their intended materials by the end of the year.

Thomson

According to the IMA, half of the survey respondents said they don’t follow the 1992 framework issued by the Committee of Sponsoring Organizations for assessing information-technology controls, but instead followed an emerging framework called COBIT, or control objectives or information and related technology, advocated by the IT Governance Institute. In addition, more than half said they rely more heavily on AS2 than on the COSO framework to guide their internal control assessments.

Management-focused guidance would establish some much-needed balance in the risk-assessment process, says Jeff Thomson, an IMA vice president. “Management needs to be in more of a lead role in determining the controls relative to the risk,” he says. “It’s a subtle technical point, but it would be like balancing the ecosystem in a way that achieves the overarching objective at significantly lower cost.”