Audit & Accounting

The Securities and Exchange Commission is reportedly expected to change the effective date for new stock option accounting rules that will require companies to include employee stock-option compensation as an expense on their earnings reports, giving most U.S. companies a six-month reprieve.

Maintaining the morale of employees charged with ensuring Sarbanes-Oxley compliance in their companies remains the largest challenge to 404 compliance, according to a just-released survey. Nearly half of the 200 executives participating in the 2005 Financial Executive Report, conducted by Oversight Systems, indicated that employee morale was the largest issue in SOX 404 compliance, while reducing internal and external costs ranked as the second-most-frequently cited challenge to ongoing compliance. "Obviously, complying with Section 404 of Sarbanes-Oxley has been extremely expensive," said Joseph V. Carcello, co-founder and director of research for the University of Tennessee's Corporate Governance Center and an advisor to Oversight Systems. "However, stronger controls lead to real benefits in the form of eliminating waste, eliminating abuse, and [producing] better information for improved decision-making." To reduce the burden on employees and compliance costs, 60 percent of financial executives surveyed said that they are implementing software that automates the manual processes required for compliance. Other survey findings included: o 49 percent said that SOX compliance resulted in reduced risk of fraud and errors; o 48 percent indicated that they now have more efficient financial operations; and, o 31 percent said that error rates have declined. The survey is available at www.oversightsystems.com/survey.html.

The Governmental Accounting Standards Board has released Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports that Contain Basic Financial Statements, a paper providing guidelines for presenting financial disclosure information. The methods include recognition in basic financial statements, disclosure notes to financial statements, and presenting supplementary information. GASB said that the definitions and criteria in Statement No. 3 should aid the board or the preparers of financial reports in determining the best methods to use to communicate information. The concept statement can be ordered through GASB's order department at (800) 748-0659, or via its Web site at www.gasb.org.

Long-distance carrier Global Crossing and three of its former executives have settled a three-year investigation by regulators into the company's accounting practices. The Securities and Exchange Commission yesterday ordered former executive vice president of finance Joseph P. Perrone, former chief financial officer Dan Cohrs, and former chief executive Thomas J. Casey to pay $100,000 fines and demanded that both the company and the executives not commit future violations. The settlement ended a protracted investigation into whether Global Crossing artificially inflated revenue by swapping fiber-optic network capacity with other telecommunications carriers. The company did not admit or deny the findings.

-- Tax audits by the Internal Revenue Service on companies in the financial sector are undertaken far less frequently than those in other sectors such as manufacturing, agriculture and mining, according to a report from Syracuse University's Transactional Records Access Clearinghouse. The financial services sector -- which includes banks, insurance companies and brokerage firms -- received less than one-fifth of the audit frequency of other sectors during the years 2002 to 2004. The TRAC study examined the audit rates of companies in a number of sectors, each of which had at least $250 million in assets. "The very low attention being given to the financial sector by the IRS is particularly surprising in light of the leading role this industry plays in the country's economy, including the level of income subject to federal corporate income taxes," the report stated. However, the IRS contended that the TRAC data was flawed due to the fact that an audit of a financial concern would be reported as a manufacturing sector audit if the branch conducting the examination did not have a financial industry specialist on staff.

The Securities and Exchange Commission has unveiled the panelists scheduled to participate in the April 13 roundtable on internal controls reporting. The day-long session will feature six separate panels, with topics, including: first-year efforts; reporting to the public; planning and design; documentation and testing of internal control over financial reporting; and the use of judgment in communications and conclusions. Among those scheduled to participate are: Colleen Cunningham, of Financial Executives International; Rebecca McEnally, of the CFA Centre for Financial Market Integrity; Comptroller General David Walker; Edward E. Nusbaum, of Grant Thornton; Lynn E. Turner, of Glass, Lewis & Co.; James S. Turley, of Ernst & Young; Samuel A. DiPiazza, of PricewaterhouseCoopers; and John A. Thain, of the New York Stock Exchange. "The panels are comprised of highly qualified individuals that offer significant expertise and first-hand experience on these matters," said SEC Chairman William Donaldson in a statement. "[The roundtable] is an important part of the commission's overall efforts to study the initial implementation of the internal control reporting provisions."

The Securities and Exchange Commission voted to allow brokers to offer fee-based advisory accounts without being regulated as investment advisors. The new rule would allow brokers to continue offering fee-based accounts without coming under regulation as advisors, provided that they meet certain requirements. According to reports, clients in such accounts must be given explicit disclosure that they are brokerage accounts, not advisory accounts, and that the brokers' interests may not be the same as their clients' interests. Brokers also must offer clients information on whom to contact at the brokerage firm if they have questions on the differences between these accounts. The commission also ordered a 90-day study into whether any changes are required regarding how brokers and advisors are regulated.

In remarks before the Senate Banking Committee, Federal Reserve Chairman Alan Greenspan urged lawmakers to curtail the portfolios of mortgage concerns Fannie Mae and Freddie Mac, stating that stronger regulation may not be sufficient. "Without restrictions on the size of balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for home ownership,'' Greenspan said. Fannie Mae and Freddie Mac are the first and second largest buyers and guarantors of home mortgages, respectively. However, both became embroiled in billion-dollar accounting scandals over the past year, prompting many to call for tighter regulation of the concerns. Fannie Mae, for example, said that it would need to restate earnings by at least $8.4 billion. And earlier this week, Armando Falcon -- director of the Office of Federal Housing Enterprise Oversight, the agency that oversees both Fannie Mae and Freddie Mac -- said that he would step down May 20. Falcon's resignation letter to President Bush comes as lawmakers have introduced legislation that would shutter OFHEO and create a stronger overseer for both.

Nearly three-fourths of workers participating in a retirement savings poll said that employers' matching contributions of up to 5 percent of their salaries would greatly influence their decision to join a savings plan at work. In its 15th annual Retirement Confidence Survey, the Employee Benefit Research Institute found that, in addition to matching employer funds, 65 percent of workers were more likely to join a company-sponsored retirement plan if the plan offered an investment option that automatically provided workers with a more conservative allocation as their retirement date approached, while 56 percent said that they would join up if the plan contained a provision that raised employee contributions by a fixed percentage when they received a pay raise. The annual study measures attitudes of workers and retirees toward saving, retirement planning and financial security. A majority of those polled admitted to being behind in their retirement savings, yet confident that they'll reach their savings goal by retirement. Some 69 percent indicated that they or their spouse had accrued some savings for retirement -- the survey's highest level in more than 10 years.

The Securities and Exchange Commission has unveiled the agenda for next week's day-long meeting on internal controls compliance. The April 13 roundtable will include a series of six panels comprised of representatives of public companies, auditors, investors and attorneys. Section 404 of the sweeping Sarbanes-Oxley Act mandates that public issuers assess the effectiveness of their internal controls over financial reporting. For large companies, compliance became mandatory last year. For smaller companies with a market cap under $700 million and over $75 million compliance becomes mandatory in 2006. The SEC said that it would seek input from executives at larger firms, including feedback on the cost and benefits. The panels will cover such issues as: the first year of compliance, reporting to the public, planning and design, and documentation and testing using judgment in communications and conclusions. In addition to the roundtable, the SEC will seek written feedback from registrants, auditors and others on their experiences in implementing Section 404, and post the comments on its Web site. The roundtable will be Webcast on the commission's Web site at www.sec.gov. Selected other materials related to the roundtable are available at http://www.sec.gov/spotlight/soxcomp.htm.