Third-Party Confirmations Eyed; More

In light of regulatory action against fraudulent third-party audit confirmations, some law firms are advising their clients to proceed more carefully when asked to provide such confirmations.

Lipman

“We’re cautioning our clients regarding providing third-party confirmations, as are most major law firms,” said Frederick Lipman, partner with Blank Rome and president of the Association of Audit Committee Members. Lipman said the firm advises its clients to run all responses to audit confirmation requests through the accounting department, rather than sales or marketing functions, so the company can have confidence in the accuracy of the information it provides.

Auditors often confirm figures in the financial statements of public companies by asking third parties, such as vendors or customers, to verify invoices, outstanding balances, terms of transactions, or other details, says Bruce Webb, a partner in McGladrey & Pullen’s national office of audit and accounting. Companies receiving such requests are under no legal obligation to provide the confirmations, but they often do as a business courtesy to the company being audited.

While providing such a confirmation doesn’t constitute a filing with the Securities and Exchange Commission, the SEC nonetheless has chased such third parties with enforcement actions when they found evidence that the confirmations were bogus, provided either in collusion with the public company or under pressure to falsify financials.

Poss

Steve Poss, a senior partner with Goodwin Procter, says the SEC has tightened its focus on gatekeepers—those “who may not be making actual SEC filings or disclosures, but who may have some involvement in the process by which they get made.” Poss says the SEC believes it and the public should be able to rely on confirmations without concern for whether there’s a “side letter or wink-and-nod deal” providing terms to the contrary.

“We’re not saying they shouldn’t provide” confirmations, Lipman says. “We’re saying if you plan to provide them, it should be done by one person through the accounting department, someone with finance expertise who knows what the company is providing.”

Webb at McGladrey & Pullen is unaware of any change in the number of entities that provide third-party confirmations when asked, “and if it were happening at our firm, I would know it,” he says. In virtually any audit, a certain number of third-party confirmation requests will not be answered, he adds. Some companies decline or ignore such requests simply because their systems won’t allow such confirmations to be issued conveniently or at all.

Poss says a clear moral to the story of the SEC’s expressed interest in third-party confirmations is that companies should establish policies on how to review and to respond to requests for confirmations from auditors of other entities.

Chuck Landes, director of the Auditing and Attest Standards team at the American Institute of Certified Public Accountants, said the AICPA’s Auditing Standards Board has considered providing guidance on third-party audit confirmations, perhaps even in concert with the International Auditing and Assurance Standards Board, but no action has been taken so far.

Coenen

Tracy Coenen, a forensic accountant with Sequence Inc., said audit confirmations are seen as a “nuisance,” but most third parties understand their importance to the audit process and shouldn’t fear SEC action by complying. “If companies are confirming amounts honestly, and have documentation that supports their figures, they should have no fear of responding to a confirmation request,” she says.

Report: Outsourced Finance, Accounting Functions Growing

A research firm focused solely on finance and accounting outsourcing says the practice is growing, with Accenture and Capgemini winning the biggest share of new business in the past few years.

FAO Research Inc. issued a report saying it identified 67 long-term, multiprocess, often global outsourcing arrangements signed in 2005, 39 of them in 2005 and 28 of them in 2004. It says companies such as Dunn & Bradstreet, General Electric, Kodak and Proctor & Gamble are among companies that have signed such outsourcing agreements.

The research firm says companies are motivated by a variety of cost and technology concerns, including compliance issues, to outsource the finance and accounting function.

Ross

“Companies in industries facing heavy regulatory scrutiny are the most likely candidates to consider finance and accounting outsourcing,” says Lisa Ross, founder and chief executive of FAO Research. “By leveraging an outsourcer’s lower cost base, modern technological infrastructure, industry expertise, global operations and economies of scale, companies seeking greater internal control to facilitate industry-specific regulations are increasingly seeking out FAO as a means to mitigate risks and ensure compliance.”

In its report, “The World’s Biggest F&A Outsourcing Contracts, 2004-2005: An Overview and Global Market Analysis,” the firm predicts that by the end of 2006, there will be an additional 60 percent growth in the number of FAO contracts penned compared with 2005. FAO is selling the full report, but providing a summary of first quarter 2006 insights for free.

EITF Paper On Revenue Recognition Under Complex Contracts

A member of the Emerging Issues Task Force of the Financial Accounting Standards Board has published a white paper providing his views on how companies can apply EITF’s advice on recognizing revenue when complex contracts intermingle multiple goods and services.

Sondhi

The task force published EITF 00-21: Revenue Arrangements with Multiple Deliverables in 2003 to help companies sort out how to report the revenue generated from complex contract arrangements. EITF member Tony Sondhi wrote up eight pages of his own guidance about how he envisions companies should apply the provisions of EITF 00-21, with several examples.

The paper is available at RevenueRecognition.com, a website focused solely on revenue management and related issues. The advice is timely, the site says, because the impact of the pronouncement is becoming more profound as companies bundle product and service offerings to improve their competitive edge.