Audit & Accounting

I have always found regional accounting firms fascinating. Just take three recent developments regarding the regional firm of Virchow, Krause & Company. One was that Wells Fargo Insurance Services of Minnesota, a subsidiary of Wells Fargo & Company, acquired Virchow, Krause & Company's Twin Cities employee benefits operations, including the head of the employee benefits practice in Minneapolis and his team. It is a good example of how regional firms view these very specialized practice areas. The acquire them and spin them off reminding me of many businesses that view the acquisition and the selling of a portion of their business as a regular means for increasing profitability.

The Public Company Accounting Oversight Board has faulted eight audits performed by global audit firm Grant Thornton, citing departures from generally accepted accounting principals as well as problems with evaluating financing costs and rental income. During the eight-month process, the PCAOB said it conducted the inspection at the firm's national office in Chicago as well as 13 of its field offices. As with all PCAOB inspection reports, the audit clients remained anonymous. However, in a letter to PCAOB director of inspections, George Diacont, Grant Thornton took umbrage to the board's use of descriptions such as "failed to identify" and "failed to perform" appearing in the reports. It also stated that it has enhanced its training programs and developed additional guidance to address problems in previous inspection reports. Meanwhile, a Grant Thornton spokesperson said, "While we disagree with the some of the terminology used by the PCAOB and disagree with some of the conclusions that were reached, we support the PCAOB's mission to better protect investors through the reports. We think it is an excellent time for the PCAOB to develop recommendations culled from three years of major accounting firm inspections to establish the most effective approaches to auditing, with the investor being the ultimate beneficiary." Earlier this year the audit overseer released its inspection reports on Big Four firms Ernst & Young and Deloitte, both of whom were cited for audit deficiencies in eight of their clients' audits. The report can be viewed at: http://www.pcaobus.org/Inspections/Public_Reports/index.aspx.

The IRS has publicized a new draft version of Form 1118, "Foreign Tax Credit - Corporations," used by U.S. corporations to compute the foreign tax credit for taxes paid or accrued to foreign countries or U.S. possessions. "They adjusted the form to accommodate changes made by the 2004 American Jobs Creation Act," said Selva Ozelli, a New York-based CPA and international tax attorney. Under the act, the number of separate foreign income categories has been reduced from eight to two, and U.S. source income is re-characterized as foreign source income in cases where a taxpayer's foreign tax credit limitation has been reduced in an earlier year due to an overall domestic loss. "The most important change is that they've added a column to help taxpayers determine U.S. income that could be recharacterized due to recapture of overall domestic losses," said Ozelli. "This column will also help them in tracking their balances of overall domestic losses," she said.

The nation's technology companies continue to struggle with the challenges of accounting for stock options, in particular, the guidelines of Financial Accounting Statement 123(R), Share-Based Payment, according to a survey conducted by Grant Thornton of tech company executives. Some 85 percent of those participating in the GT poll said that the overall process of option valuation is significantly more complex than it was before Statement 123(R), while 76 percent indicated that they are outsourcing option valuation as a result of the accounting rule. Roughly 60 percent of those surveyed said their company's compensation committee have become more involved in designing comp programs as a result of 123(R). Grant Thornton surveyed more than 100 technology company executives in the poll.

Two interesting pieces of information have popped up by two highly reputable sources, one dealing with tips on choosing a financial planner and the other showing survey results of the five most frequent mistakes made when selecting such an advisor.

Securities and Exchange Commission Chairman Christopher Cox has established an advisory committee to help make financial reporting more "user-friendly." The SEC Advisory Committee on Improvements to Financial Reporting will examine the U.S. financial reporting system in an effort to reduce complexity, make financial reports clearer to investors reduce costs for preparers and determine how to better capitalize on the use of technology. "Our current system of financial reporting has become unnecessarily complex for investors, companies, and the markets generally," Cox said. "The time is ripe to review how that system can be made less complex and more useful to investors." Robert C. Pozen, chairman of MFS Investment Management in Boston and former vice chairman of Fidelity Investments, was appointed the committee chair. Cox said he expects between 13 and 17 additional members with varied backgrounds to be named to the advisory committee within the next few weeks.Some of the areas the committee will focus on include: * The current approach to setting financial accounting and reporting standards; * The current process of regulating compliance by registrants and financial professionals with accounting and reporting standards; and * The current systems for delivering financial information to investors and accessing that information. Both the Financial Accounting Standards Board and Financial Executives International lauded the development. "This advisory committee represents an important step toward addressing the institutional, structural, cultural, and behavioral issues that create complexity, reduce transparency, and impede usefulness of reported information to investors," said FASB chairman Robert Herz. Meanwhile the 15,000-member FEI said that it "applauds the SEC's announcement today regarding the formation of an SEC Advisory Committee on Improvements to Financial Reporting. We reiterate our belief that the current complexity in accounting and reporting harms the ability of users of financial statements to understand the information provided and impairs the ability of preparers to explain their financial results in a meaningful way."

The Internal Revenue Service ruled that a partial termination of a qualified plan occurred where 23 percent of a plan's participants were no longer active due to the closing of one of the employer's four locations. Therefore, all plan participants were fully vested. Under Code Section 411(d)(3), a plan is required to provide that, upon its partial termination, the rights of all affected employees to benefits up to the date of the termination must be non-forfeitable. Under the regs, the IRS uses a facts and circumstances test to determine whether a partial termination has occurred. The IRS ruled that if the turnover rate is 20 percent or more, there is a presumption that a partial termination of the plan has occurred. The IRS determined the turnover rate by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period - in this case, the plan year - by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. The 20 percent threshold merely creates a presumption, according to the IRS. Facts and circumstances indicating that the turnover rate for an applicable period is routine, and not the result of a shutdown as in this instance, favor a finding that there is no partial termination. The IRS also noted that a partial termination of a qualified plan can also occur for reasons other than turnover. For instance, a partial termination can occur due to plan amendments that adversely affect the rights of employees to vest in benefits under the plan, plan amendments that exclude a group of employees who have previously been covered by the plan, or the reduction or cessation of future benefit accruals resulting in a potential reversion to the employer.

Broker/dealer H.D. Vest Financial Services said that its assets under management in advisory accounts recently passed the $5 billion mark. The company said that figure helped propel its total assets under management to roughly $25 billion. The company began offering advisory solutions in 1987, and currently supports over 1,900 independent advisory consultants in its system of 5,500 advisors.

Florida A&M University has been given a six-month window to straighten out its accounting problem or risk losing its accreditation by the Southern Association of Colleges and Schools. The school has come under fire after a state auditor revealed that the school's inspector general's office had gone 40 months without any formal reports on internal investigations, and that $39 million in transactions and budget amendments were made without approval of the school's board of trustees. In addition the school has some $1.8 million in missing receipts for athletic-event tickets and $11,000 in bad checks were written by the administration. Students attending an unaccredited school are typically not eligible for financial aid.

Prosecutors are urging a U.S. district Judge to dismiss indictments against 13 of executives of Big Four firm KPMG on charges of marketing illegal tax shelters. According to The Wall Street Journal U.S. District Judge Lewis A. Kaplan had previously ruled that the government had overreached in its years-long investigation, violating the defendants' constitutional rights to counsel and due process. In a June 22 filing in federal court in Manhattan, prosecutors said that Kaplan's decision showed that there was a fundamental flaw in the proceedings and that he must dismiss the indictments. As a result, 13 of the 18 defendants may now never stand trial, including the accounting giant's former vice chairman, Jeffrey Stein, the highest-ranking executive named in the indictment. However, legal experts opined the petition was a strategy to allow allowing prosecutors to appeal Kaplan's ruling, a maneuver that may yet allow prosecutors to resume the proceedings against all 18 of the defendants. The indictments were initially handed down in 2005 accusing the defendants of selling fraudulent tax shelters from 1996 through 2002, that cost the government some $2.5 billion in revenues. In striking an agreement to escape a potentially fatal criminal indictment that could have shuttered the firm, KPMG agreed to pay a $456 million fine to the federal government and spend the next 16 months on probation overseen by a federal monitor. The firm also agreed to close its tax business for high-net-worth individuals. Kaplan has scheduled a hearing July 2. A decision regarding the government's argument, as well as the motions to dismiss the indictments, could be issued this summer.