PCAOB Extends Deadline For Independence Rules; More

Companies will have a 60-day reprieve from compliance with certain auditor independence rules, following a technical amendment that has little impact on the new rule itself.

The Public Company Accounting Oversight Board adopted some technical amendments last week to its new rules on auditor ethics and independence, which the Board adopted in July to create greater separation of audit and tax services. The Board said after discussing the rules with the Securities and Exchange Commission, it decided to remove the word “cause” from its rule giving auditors specific responsibility to avoid breaching independence rules.

In its technical amendment, the Board says the word change is intended to avoid possible misperception that the rule relates to any federal securities laws. “The rule, as amended, should be interpreted and understood to be the same as the rule adopted by the board in July,” the Board said in its release.

Because of the late change, the PCAOB extended by 60 days the effective dates for its new rules barring auditors from setting contingent fees, prohibiting aggressive tax planning services, and barring audit firms from providing tax services to senior managers. The extension is intended to give reasonable time for the affected firms to prepare internal policies and procedures, train their employees, and terminate or complete any ongoing engagements affected by the rules, the Board said.

AICPA Offers Help To Smooth Rough Spots In Lease Accounting

For companies that may still be re-examining their lease accounting following the “Great Lease Restatement Of 2005,” as one analyst dubbed it, the American Institute of Certified Public Accountants has issued some Technical Practice Aids to explain some specific lease accounting trouble spots.

The TPAs address lease terms for accounting purposes, which may differ from the terms stated in the lease documents; recognition of rent expense, especially related to rent holidays or rent increases; recognition of leasehold improvements; and landlord incentive allowances.

Ciesielski

“They’re not really ground-breakers,” said Jack Ciesielski, owner of advisory firm R.G. Associates. “They’re more of an aid for understanding the specific issues that everyone was scrambling to clean up in the Great Lease Restatement of 2005.”

In February, the Securities and Exchange Commission’s chief accountant, Donald Nicolaisen, sent a letter to AICPA’s Center for Public Company Audit Firms, describing the staff’s position on lease accounting rules. A number of companies, primarily in retail and restaurant businesses, restated financials as a result.

Paul B.W. Miller, an accounting professor at the University of Colorado at Colorado Springs, said the TPAs “appear to be closing the board door after the horses got loose.”

The AICPA Technical Practice Aids are available from the box above, right.

SEC Chief Economist Points Out Conflict In Pension Regs.

Pension rules give plan sponsors an incentive to under-fund their plans and take big investment risks, according to the chief economist of the Securities and Exchange Commission.

In a speech to the Executive Policy Seminar at Georgetown University recently, Chester Spatt, the SEC’s chief economist and director of the Office of Economic Analysis, said the funding and asset allocation decisions regarding pension plans are made by plan sponsors, but the consequences are felt by beneficiaries and the Pension Benefit Guaranty Corporation, creating an incentive conflict that economists call “moral hazard.”

Spatt

“From the moral hazard perspective, the plan sponsor has an incentive to under-fund the plan to the extent permissible and to assume considerable investment risk,” he said, “because the sponsor need not make up any shortfall that arises if the funding of the plan turns out to be inadequate provided the sponsor terminates the plan in bankruptcy.”

Spatt said plan sponsors generally interpret that their payment of an insurance premium to the PBGC, which backs corporate-sponsored pension plans in the event of default, as evidence that they are assuming the full cost of the guarantee that the PBGC provides. In fact, Spatt said, “the current premia are a tiny fraction of the current obligations for plans that have recently terminated, suggesting that the level of premia is too low for at least some firms.”

The absence of a risk-based premium as at the heart of the incentive conflict, Spatt said. “If the guarantee were fully priced in a fashion consistent with the plan’s actual default risk … then the plan sponsor would internalize the costs, thereby eliminating the moral hazard problem,” he said.

The Financial Accounting Standards Board has begun a comprehensive project to overhaul pension accounting rules, and Congress is gearing up with a number of pension and executive compensation reform initiatives moving through the pipelines.