FIN 48, Privately; Fraud Help; IASB Action

The Financial Accounting Standards Board has given non-public companies a one-year extension on compliance with a new rule to disclose uncertain tax positions—a marked departure from its attitude 11 months ago when public companies asked for a delay of their own.

FASB heard requests from advocates for non-public entities, especially its own “Private Company Financial Reporting Committee,” that private company financial statement users, preparers, and accountants are unaware or are just learning about Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

FIN 48 is the controversial pronouncement from FASB that says companies should disclose in their financial statements where they may have weaknesses in their tax positions. Public companies deluged FASB with letters at the beginning of 2007 calling for a delay, but FASB declined, saying the timeline was adequate to study and implement the requirements.

The PCFRC says, however, that private companies do not have the resources to stay abreast of FASB pronouncements as issued and typically learn about them through continuing education programs. Further, the committee told FASB that private companies are confused about how the rules apply to pass-through entities, such as S corporations, where taxes are not reported directly by the entity, but by its shareholders as they realize the income.

“Accounting consistency, comparability, and financial reporting quality may be less than ideal at pass-through entities as they implement FIN 48, absent further clarification and guidance,” the PCFRC wrote to FASB.

The PCFRC also hopes to get FASB to revisit the relevance of FIN 48 to private or smaller companies. “Preliminary research conducted by the PCFRC raises legitimate questions about the usefulness and relevance of the disclosure requirements of FIN 48 to users,” the committee wrote. “Further research is necessary to determine whether the disclosure requirements of FIN 48 provide meaningful information to the lenders, sureties, investors, and others who use private company financial statements.”

Stephen Kunkel, director of taxes at CBIZ, says private companies do not have the same depth of resources to comply with a pronouncement like FIN 48, nor do they have the same audiences for their financial statements. “Clearly the number of users of financial statements for private companies is much smaller than for public companies,” he explains. “For private companies, it’s really just small group of shareholders, the bankers, and the creditors who are reading those statements, and many of those have a good idea of the tax posture of the company.”

Earlier this year, the Internal Revenue Service imposed a new threshold on preparers of tax returns, saying they must view a position as more likely than not to withstand a challenge before asserting the position on the tax return. That’s the same threshold FIN 48 establishes for showing a related tax benefit in the financial statements.

Mattie

Jay Mattie, a private company specialist at PricewaterhouseCoopers, says FASB’s delay for non-public companies will have the effect of putting the reporting requirements for financial statements and tax returns out of step—just as they were about to become more similar.

“Clearly we will have the [more likely than not] requirement in place for tax reporting purposes, but not for financial reporting purposes for private companies,” Mattie says. “It does raise the question of whether the IRS will be deferring [the new requirement] as well, but I haven’t heard any discussion around that.”

Mattie is advising clients that complying with both the accounting and the tax rules will be more straightforward in the long run if they meet the deductibility standard of FIN 48 in the current year, even though they are not required to do so.

“The position taken for financial reporting purposes ought to synchronize with the tax reporting,” he says. “If you apply that threshold in 2007, even though it’s not required because of the deferral, then you apply FIN 48 in 2008, you could be in the position of having to recast your financial reports to get those in sync. The disclosure standard is the most sensitive part of FIN 48. There’s no rule here that they need to meet that standard in 2007, but from a practical standpoint, it would be a reasonable approach for companies to take.”

New Guidance on Managing Fraud Risk

Three professional groups have teamed up to offer new guidance on how companies can better manage the risk of fraud.

The Institute of Internal Auditors, the American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners assembled a task force of 20 fraud experts to develop a summary resource for entities. The guidance, titled “Managing the Business Risk of Fraud: A Practical Guide,” will steer companies in considering their exposure to fraud risks and reacting appropriately to those risks.

The 79-page paper offers direction on the principles, practices, and benefits of an antifraud program and helpful tips to assess an existing antifraud program, improve an existing one, or develop one from scratch. The paper says five principles define an effective antifraud effort: a written fraud risk policy, an assessment of fraud risk exposure, prevention techniques, detection methods, and a reporting process. The paper outlines the steps for putting those five principles into use to manage fraud risk in an organization.

The paper doesn’t break any new ground in identifying or mitigating fraud risks, but it serves as a summation of what the three groups believe is best practice. “Our understanding is that a vast majority of organizations do not have an antifraud program in place, formally or informally, that meets the concepts contained in the five principles contained in the document,” says Dave Richards, president of the Institute of Internal Auditors. “We believe these principles address the core of a proactive fraud deterrence program which organizations should address.”

Richards stresses that an antifraud program is not an explicit requirement of reporting or auditing on internal control over financial reporting, but notes that the paper can help facilitate compliance in that area. “Having a well-defined and documented fraud risk-management process will preclude significant additional work by the external auditor in performing their work to assess fraud risks,” he says. “It could also result in reduced fees charged to assess internal control because management’s approach to assessing fraud risk would be well documented with the techniques identified in the guidance.”

The proposed guidance says organizations that address frauds from within send a clear signal to regulators and stakeholders about board and management attitudes toward fraud and about how the organization’s policies are implemented.

The three groups are accepting comments on the proposed guidance through Dec. 21. A final version of the paper is due to be published in January.

International Accounting Rule maker Gets New Overseer

The body overseeing the development of international accounting standards is planning to revise its governance to increase public accountability for the standard-setting process—and consequently facilitate broader acceptance of the resulting standards.

The trustees of the International Accounting Standards Committee Foundation, which currently oversees the International Accounting Standards Board, plan to form a separate oversight body for IASB that would establish a formal reporting link to securities regulators in countries around the world. The body would approve trustee appointments, review trustee oversight activities, and approve IASB’s budget.

Tom Seidenstein, director of operations and secretary at the IASC Foundation, says the additional oversight body is part of a broad plan announced recently by the trustees to demonstrate their willingness to be held accountable by the public. “Most international organizations are assemblies of government officials and regulators,” he says. “Ours is entirely different. We’re a not-for-profit, private-sector organization, and at the same time, we’re effectively setting law for a number of countries that use our standards.”

Seidenstein says the plan augments the existing structure and is not an “overhaul.” It is intended at least partly to address concerns that have been raised in some countries about how fair IASB’s process may be.

The European Commission, for example, has been critical of IASB governance and has adopted IASB’s body of rules—International Financial Reporting Standards—with its own exceptions. IASB and U.S. regulators and rule makers have been critical of region-specific adaptations of IFRS, saying it exacerbates efforts to get all countries reporting financial results under a single set of rules.

“There have been some questions raised in some jurisdictions regarding the trustee selection process and how the IASC Foundation is connected to official organizations,” Seidenstein says. “This attempts to address those concerns. If we can address those concerns and the board can focus on standard setting, that’s a clear benefit.”

A group of regulatory agencies, including the Securities and Exchange Commission and the European Commission, issued a joint statement applauding the new governance approach. They welcomed an approach that would assure an independent standard-setting process.