In the wake of a recent wave of restatements to correct lease-related accounting errors, the U.S. Securities and Exchange Commission’s chief accountant has issued a letter to a professional accounting group reiterating the rules.
SEC’s Donald Nicolaisen focused the letter on three issues related to lease accounting: depreciation of the costs to improve leased property, how to recognize periods of free or reduced rent, and how to account for landlord incentives to make improvements. Nicolaisen addressed the letter to Robert Keuppers, chairman of the Center for Public Company Audit Firms, which is an arm of the American Institute of Certified Public Accountants.
“This accounting has existed for a long time,” said CPCAF director Lillian Ceynowa. “The rules themselves haven’t changed. The letter reiterates what the accounting standards are.”
Bahnson
Paul Bahnson, chair of the Department of Accountancy at Boise State University, said Generally Accepted Accounting Principles provide different treatment for an operating lease compared with a capital lease. “An operating lease is a liability that gets off-balance-sheet treatment,” Bahnson said. “Companies will carefully craft their leases to keep them off the balance sheet.” He said lease accounting rules contain “shades of gray,” making their application in some areas subject to interpretation.
CKE Restaurants said it caught its accounting mistakes, amounting to a $2.1 million understatement of rent expense, while reviewing financial statements in compliance with Sarbanes-Oxley.
“Now that it’s known that there’s been low-grade accounting for leases making some headlines, firms and their auditors will check to see if their own policies make sense,” says Jack Ciesielski, a CPA and owner of research firm R.G. Associates on his industry Web site. “Expect more lease-driven restatements, and not just in one industry or in clients of one audit firm.”
The letter from Nicolaisen is available from the box above, right.
Canadian Securities Administrators Propose Internal Control Rules
A dozen of Canada’s provincial and territorial securities commissions have banned together under the Canadian Securities Administrators to propose new internal control measures for Toronto Stock Exchange issuers and new certification requirements for all issuers. Only British Columbia is not on board with the new proposals.
The new rules, exposed in draft form for public comment, closely model the internal control certification requirements of Sarbanes-Oxley Section 404 in the United States, said Eric Pelletier, a spokesman for the Ontario Securities Commission. One provision is to deem compliance with Sarbanes-Oxley as adequate to meet Canadian requirements, he said.
“We have many large issuers in Canada who also do business in the U.S. markets,” he said. “We don’t want to make it any more difficult for them.”
Canada has not experienced any massive corporate failure on the scale of Enron or Worldcom, which spawned the U.S. rules, but some companies—like Ontario-based Nortel—have been accused of governance breakdowns, and officials are taking heed.
“This is not just a matter of keeping up with the Joneses. It’s a matter of keeping ahead of the problem,” said David Brown, chair and CEO of the Ontario commission in a speech promoting the new rules. “No country can afford to sit back and think it can’t happen to them. If we have learned anything, it is that no country is immune to corporate or individual greed.”
Leech
Tim Leech, a Canadian-based consultant and chief methodology officer with Paisley Consulting, says the Canadian documentation rules are more defined than in the U.S. “They have assisted users by clarifying documentation/evidence must be maintained on the same basis as tax records,” Leech said. “The U.S. is unclear” on what documents must be retained related to Sarbanes-Oxley rules.
Securities regulation is a power relegated to provinces and territories, not the federal government, in Canada. If adopted, the new rules would not apply to British Columbia issuers. There is a movement afoot to press for a national regulator, Pelletier said, but in the meantime, “We’re trying to collaborate to try to get the same end result.”
IFAC Takes Proactive Role To Bolster Accounting Profession
Accounting leaders from around the globe gathered recently in London to establish an agenda for how the accounting profession can contribute to economic growth and development. The International Federation of Accountants convened the session, attended by the heads or representatives of 30 member bodies, regional accountancy groups, the World Bank and the United Nations.
Ward
Attendees agreed the group should address a number of issues, including professional responsibility in financial reporting, the role of accountants in corporate governance, the need for accountancy in developing nations, and practices in small and medium enterprises. The IFAC already is active in facilitating convergence to a more unified approach to accounting.
“Achieving convergence to international standards is one of IFAC’s most fundamental goals and is central to our mission of protecting the public interest,” said Graham Ward, IFAC president. “A lack of convergence creates confusion, encourages errors and facilitates fraud.”
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