Audit & Accounting

Apple Computer Inc. said that chief executive Steve Jobs knew about the company’s practice of backdating stock options awarded to executives, but wasn’t aware of the full accounting implications. Apple made the announcement after wrapping up a three-month internal investigation into the timing of stock option grants that resulted in the resignation of former chief financial officer Fred Anderson from its board of directors. Apple also said in a statement that it had expressed concerns to the Securities and Exchange Commission about actions, related to stock option grants, taken by two former officers.

The European Commission has rolled out a study arguing for a cap on the liabilities of auditing firms. Conducted by a London-based consulting firm, London Economics, the study says that a cap would reduce market concentration and help the Big Four firms -- which are the same across the pond as they are in the United States -- retain experienced staff. The major firms have all publicly lobbied for a cap, saying that legislating the change would shield them from the potentially ruinous lawsuits often filed in the wake of corporate scandals. According to the study, firms in the European Union currently face nearly a dozen claims ranging from costs between $220 million and $1 billion, in addition to another handful of claiming each totaling damages of more than $1billion. The study also noted that the commercial insurance taken out by the firm’s would cover less than 5 percent of some of the larger claims. The study also says that smaller accounting firms are unlikely to become a major alternative to the Big Four due to the high barriers to entry. The United Kingdom is in the process of introducing legislation that would allow auditors to ink proportionate liability agreements with corporate clients -- making them responsible for only their own errors. European Union internal market commissioner Charlie McCreevy has said he supports a fixed cap on liability claims, and the European Commission has promised to issue its own report on auditor liability before the end of the year. Caps already exist in five EU member states -- Germany, Austria, Belgium, Greece and Slovenia – however, opponents of the measure say that offering auditors the refuge of limited liability could lead to audit complacency.

A “practice privilege” requirement introduced in Illinois -- which would have required out-of-state CPAs to register with a state agency -- appears on the verge of meeting a fate close to a similar proposal in California. That fate being, in this case, compromise. Both the Illinois CPA Society and the American Institute of CPAs had objected to the new registration requirement -- with the society requesting a delay to the law’s Oct. 1 effective date and the institute voicing its concerns over the “onerous” stipulation in a Sept. 28 letter to Illinois Gov. Rod Blagojevich. Contained in a broader piece of legislation that made changes to the regulation and licensing of CPAs in the state, the Illinois Department of Financial and Professional Regulation would have required CPAs from other states to apply for temporary practice privilege or obtain full licensure as a CPA in the state of Illinois, regardless of whether the CPA or client ever entered the state. According to the AICPA, thousands of CPAs from across the country could have been impacted. On Sept. 29, the Illinois regulation department filed an emergency amendment, which read that out-of-state accountants would not have to follow the new requirement, “So long as the individual CPA is temporarily practicing in this state incidental to practice in another state and does not solicit Illinois clients nor have a physical presence in Illinois.” After much debate, a requirement that would have required out-of-state CPAs doing business in California to register with the state’s Board of Accountancy never made it out of committee this past June. Several taxpayer groups said that not requiring the registration could make it easier for accounting firms to market improper tax shelters without proper oversight. Proponents of the bill, including the state Board of Accountancy and the California CPA Society, said that their intention was merely to eliminate unnecessary red tape for neighboring accountants to provide basic services across state lines.

A yearlong audit revealed that the AFL-CIO has some tightening to do over its own internal financial controls and record keeping. A spokesman from the Labor Department saidthatthe audit found problems beyond “mere technical bookkeeping errors” -- pointing specifically to the lack of travel policy for AFL-CIO officers, poor reporting of travel expenses for spouses, improper handling of credit card charges and missing loan documents -- according to published reports. The department released a 14-page letter that suggested improvements in financial procedures for the federation, which represents more than 50 unions and 9 million workers and is one of the largest shareholders in public companies, with more than $400 billion in assets. A spokeswoman for the federation said that the group plans to comply with the department's recommendations. In a letter to the federation's executive council, federation president John Sweeney did note that the audit raised no questions regarding the federation's expenditure of funds on behalf of workers. He also took a political shot at the White House, saying that the scope of the audit reveals that, "enforcing the nation's worker protection laws has taken a back seat to union oversight in the Bush administration." Less than a month ago, the federation sent a letter to the Big Four, specifically asking for more information about the role that the major accounting firms might have played in the handling of stock options grants the government is now investigating in a separate matter.

The Public Company Accounting Oversight Board announced that chief administrative officer Paul Schneider and public affairs director Christi Harlan will leave the board this month. Schneider joined the PCAOB in January 2003 as interim chief administrative officer, taking responsibility for a variety of start-up related activities. He was named chief administrative officer four months later. PCAOB Chairman Mark Olson said Schneider was instrumental in leading the selection of key personnel to head the board’s administrative offices, including information technology, finance, human resources and facilities management, as well as managing the budget and design aspects of the board’s benefit plans. Before joining the board, Schneider was the managing principal of Vector Recovery Group LLC, a turnaround management firm that provided restructuring and crisis management services. He has not announced his future plans. Harlan joined the board in April 2003, and said in a statement that she would be leaving to seek a new venture in public service. Harlan came to the PCAOB from the Securities and Exchange Commission, where she served as public affairs director from January 2002 until April 2003. Prior to her SEC service, Harlan was director of external affairs at the Federal Emergency Management Agency and communications director for the Senate Committee on Banking, Housing and Urban Affairs.

KPMG LLP has admitted 134 new partners in its 2006 class. A year ago, the Big Four firm admitted a record 166 new partners. Chairman and chief executive Timothy Flynn said in statement that the partners have each distinguished themselves by delivering KPMG’s promise of professionalism, reflected the firm’s focus on creating “an unmatched client experience, rooted in quality service and professional advice based on deep industry knowledge, regulatory knowledge and the highest standards of integrity.” Of the total new partners, 54 work in the audit practice, 36 in the advisory practice, 25 in tax and an additional 19 in national support services. With the addition of the new group, the firm’s U.S. partnership now totals 1,742 partners. KPMG LLP, the U.S. member firm of KPMG International, employs about 20,000 workers throughout 93 offices across the country. KPMG International’s member firms have 104,000 professionals, including 6,700 partners, in 144 countries.

A $39.5 million settlement between PricewaterhouseCoopers and investors in a mortgage loan fund is a done deal, now that the California Supreme Court has officially dismissed the original filing. The state’s highest court had agreed to hear the case back in March, just days before the plaintiffs reached a settlement after agreeing to mediation with the Big Four firm. That settlement has since received approval from both a federal bankruptcy court as well as the Alameda County Superior Court. Both sides requested a dismissal of the case in early September. The plaintiffs sued PwC in 2002, accusing the firm of abetting a fraudulent scheme carried out by then general partner, James Hillman, of two partnerships in which they had invested. Hillman and the director of the mortgage fund were sued in 2001 by the Securities and Exchange Commission. According to court filings, PwC audited the financial statements of the two partnerships in 1999, but ended its audit after telling Hillman he had given the firm falsified audit reports. The case itself had questioned whether PwC was required to inform investors of the fraudulent scheme. The money will go into a fund established under a global settlement agreement reached in federal court in 2002, and be distributed to plaintiffs.

The Internal Revenue Service has launched its much-anticipated Income Verification Express Service or IVES, a program offering immediate electronic delivery of client tax and income information to financial lenders such as mortgage companies.

Lawmakers have passed a provision as part of the sweeping Financial Services Regulatory Relief Act of 2006, that exempts CPAs from the Gramm-Leach-Bliley Act’s requirement that they send clients an annual privacy notice.

Just one week after the Treasury Department released a report on its strategy for closing the $300 billion tax gap, the ranking minority member of the Senate Finance Committee labeled the plan “incomplete” and not credible.Sen. Max Baucus, D-Mont., said he would continue to hold up the nomination of Eric Solomon as the assistant Treasury secretary for tax policy.