PCAOB to Push Auditors; Insurance Rules

The Public Company Accounting Oversight Board has adopted two new rules to keep a closer eye on auditing firms, including one that requires firms to provide a comprehensive report of their doings to the PCAOB annually.

The rules apply to all 1,800 firms currently registered to audit public companies in the United States. The annual report would include information about audit reports issued by the firm during the year, certain disciplinary history information about persons who have joined the firm, and information about fees billed to public company audit clients, in various categories of services, as a percentage of the firm’s total fees billed.

The rules also require firms to report a variety of events if they occur, such as certain legal actions taken against the firm, certain kinds of disputes with audit clients, changes in licensing or certifications, and other events that generally signal a possible problem. Firms also are required to report if they move above or below the 100-audit threshold that would change how often they must be inspected by the PCAOB.

Board member Bill Gradison tells Compliance Week the new rules do not require any significantly different type of information beyond what is provided on registration applications or gathered through the inspection processes. Rather, the rules routinize the reporting of information to help the Board manage and update its database on its registered firms, he says.

The PCAOB has spent the past few years developing and tweaking the infrastructure necessary to gather and manage the firm data it needs to regulate the audit firms effectively, Gradison says. The system not only will let the Board better manage the regulatory process, but also facilitate better public access to audit firm data, he says.

The Treasury Department’s Advisory Committee on the Audit Profession has suggested the PCAOB may also want to consider asking firms for more information than they currently provide, most significantly audited financial statements from at least the largest audit firms. The committee also is considering asking the PCAOB to establish audit quality indicators that would essentially create a grading system. The committee is floating those ideas, among others, in its draft report, but hasn’t issued a formal recommendation to the PCAOB.

Gradison says it’s too early to speculate on what new types of information the PCAOB may require now that its IT architecture is fully developed. “It may facilitate giving more focused attention to the transparency recommendations,” he says.

In a prepared statement, PCAOB Chairman Mark Olson said he sees potential for the reporting requirements to grow. “With this foundation in place, the Board can also, in the future, add other reporting and disclosure obligations that may appropriately serve the public interest,” he said.

Fornelli

Cindy Fornelli, executive director of the Center for Audit Quality, says the new reporting structure provides a good foundation should the PCAOB consider requiring any new information from audit firms in the future. “In the CAQ’s view, any additional disclosures should be meaningfully linked to audit quality,” she says.

The Securities and Exchange Commission must approve the rules before they can become effective. The PCAOB envisions the first annual reports will be due by June 30, 2009, for the 12-month period ending March 31, 2009.

Fitch Flags Fair-Value Approach for Insurance Contracts

The ongoing credit crisis is giving users of financial statements good reason to review accounting rulemaking action, especially regarding insurance accounting, Fitch Ratings says.

The liquidity crisis raises a valid question about whether the U.S. notion of how to measure fair value—that is, based solely on exit prices, or prices that would be paid to settle a debt or sell an asset—fit with future plans to rewrite insurance accounting rules.

Fitch is referring to plans under way at the International Accounting Standards Board to update insurance accounting rules contained in International Financial Reporting Standards. The plans would require more use of fair value in accounting for insurance contracts of virtually all kind.

The Financial Accounting Standards Board is still mulling whether it will follow IASB’s lead in revising U.S. Generally Accepted Accounting Principles, says Olu Sonola, director of credit policy for Fitch.

FASB recently finished Financial Accounting Standard No. 163, Accounting for Financial Guarantee Insurance Contracts, to require more disclosure and consistency in reporting around financial guarantee insurance and reinsurance contracts. “FAS 163 was a limited scope standard to address concerns of users with regard to the lack of comparability in how financial guarantees are accounted for,” Sonola says.

In a broader look at insurance accounting, last summer FASB published the IASB view on accounting for insurance contracts (both for insurers and policyholders) with a question of whether FASB should follow IASB’s planned fair-value direction. Fitch published a report recently pointing out that IASB’s plan, which FASB is considering, would rely on an exit value for measuring insurance liabilities. It is defined as the amount an insurer would expect to pay at the reporting date to transfer its rights and obligations to a third party.

While FASB has fully embraced the exit value concept for GAAP, IASB remains undecided about whether other measurement approaches might be more appropriate in certain instances. In its recent report on the project, Fitch points out that the credit crisis provides a good reason for standard setters to think twice about requiring the exit value notion to be applied to insurance contracts when insurance is customized to the policyholder, illiquid. and rarely traded.

“There are inherent difficulties in using current exit value as a basis for determining measurement of a liability where little or no market exists,” Fitch said. “For market prices to be reliable and up-to-date, a liquid market is usually required. Applying prices derived from liquid assets (or liabilities) directly to illiquid assets/liabilities may result in a mis-estimation of the value of these assets and liabilities.”

Companies Begin Warming to IFRS Adoption

U.S. companies are coming around to the idea of adopting International Financial Reporting Standards sometime in the future, according to a recent survey by Deloitte.

If given a choice between sticking with U.S. Generally Accepted Accounting Principles or migrating toward IFRS, 30 percent of CFOs and other senior finance professionals surveyed said they would consider adopting IFRS within the next three years. Only six months earlier, the same survey found 20 percent of respondents would consider making the switch.

In the more recent poll, 28 percent either were undecided or didn’t have enough information yet to make a choice. Corporate finance staffs also are concerned about a lack of expertise, the poll suggested, with two-thirds of respondents saying they lack the necessary skilled resources in U.S. operations to adopt IFRS and one-third saying they see a similar shortage in non-U.S. operations.

Gannon

“It’s coming sooner than a lot companies are thinking,” says D.J. Gannon, with Deloitte & Touche’s IFRS Solutions Center. “We’re seeing an increasing level of interest every day. As companies get more familiar with what’s happening in general in the financial reporting environment, specifically with IFRS, the higher comfort level is eventually going to be there.”

Gannon estimates companies will require three to five years to prepare for IFRS adoption, even if they don’t expect to be among early adopters. “If you’re waiting until you have to adopt IFRS, you can’t wait until that point in time to get ready for it,” he says. “You have to have lead time. If you start today, it will be 2011, 2012 before you can flip that switch and start reporting under IFRS.”

The Big 4 accounting firms have formed education initiatives to help roll IFRS out to U.S. universities and capital markets. In addition, Financial Executives International just formed a national coalition—the Corporate Roundtable on International Financial Reporting—to provide a forum for companies to get ready for the switch to IFRS. FEI hopes to facilitate dialogue on the myriad issues that are sure to crop up around implementation, transition, IT systems, training, standard setting, reporting, and more.