Audit & Accounting

If you're a CPA, you've got a headache. In fact, you've probably got several headaches.

The Public Company Accounting Oversight Board voted to send out for comment a measure that outlines audit procedures to ferret out whether Securities and Exchange Commission issuers have fixed previously identified internal controls weaknesses. Although Sections 404 and 302 of the Sarbanes-Oxley Act mandate that both issuers and auditors must complete an annual assessment of internal controls, the standard from the oversight body would establish a voluntary, stand-alone engagement performed only at the request of the client company at any time of the calendar or fiscal year. The public comment period will be 45 days. The rule would subsequently become final pending a vote by the SEC. Although he defined the new standard as "narrower in scope" than the PCAOB's Auditing Standard No. 2, PCAOB chairman William McDonough said, "Our proposal for a new, voluntary, auditor's engagement to attest to management's corrections of individual material weaknesses will offer companies an opportunity to provide the investing public added assurance that previously disclosed weaknesses have been corrected." While board member Daniel Goelzer said that he thinks the new proposal is important, he described it as a "narrowly drawn tool" that he hopes "will be used sparingly."

The Financial Accounting Standards Board has released FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or the costs of taking plants out of service. Under FASB's new guidance, companies would have to immediately recognize on their balance sheets the costs of work that would be needed to close a factory -- such as asbestos clean-up -- even if it's uncertain when, if or how the work would be done. Interpretation 47 is effective no later than the end of fiscal years ending after Dec. 15, 2005 (Dec. 31, 2005, for calendar-year enterprises). Copies of Interpretation 47 are scheduled to be available in April 2005, through the FASB Order Department at (800) 748-0659 or by placing an order on the FASB Web site at www.fasb.org.

The Securities and Exchange Commission named Scott Friestad to the post of associate director of the commission's Division of Enforcement. In that role, Friestad, 42, will serve as a senior official in the division and assist in planning and directing the commission's investigations and other enforcement efforts. He will report to division director Stephen Cutler. Friestad joined the regulator in 1995 as a staff attorney, and his efforts have contributed to SEC enforcement actions involving Regulation FD, public company accounting and disclosure, the Foreign Corrupt Practices Act, insider trading, and broker/dealer regulation. Friestad has also served as a special assistant in the U.S. Attorney's Office for the Southern District of New York, and was a litigator at the New York law firm of Dewey Ballantine.

While 404 may be the three most dreaded numbers that publicly traded companies in the U.S. can imagine, investors and analysts outside the country remained uniformed about the Sarbanes-Oxley rule on internal controls, and are concerned about the impact of negative disclosures. According to a PricewaterhouseCoopers survey of investors and analysts in North America, Europe and Asia who cover U.S.-listed companies, just 60 percent of analysts and investors in Europe, and a scant 40 percent in Japan, admit to some knowledge of SOX 404. Section 404 of SOX requires that the annual reports of all Securities and Exchange Commission-registered companies include a statement by management and the external auditors on the effectiveness of the company's internal controls over financial reporting. Big Four firm PwC polled 55 analysts, 45 investors and 5 credit rating agency analysts between January and February 2005. Some 39 percent of respondents were from the U.S., Mexico and Canada, 38 percent from Europe, and 23 percent from the Asia-Pacific region. Other findings include: o Only about one in four respondents claimed to have a good grasp of how Section 404 will affect mergers and acquisitions. o Nine out of 10 analysts and investors in Asia, where awareness is lowest, said that they would be very likely to sell or mark down shares in a company that was the subject of a negative disclosure, compared to seven in 10 respondents in Europe and the U.S.

Not surprisingly, opponents of expensing stock options have issued responses to the March 29 release of options expensing guidance by the Securities and Exchange Commission. With the release of SAB No. 107, the regulator reaffirmed its support of December's rule by the Financial Accounting Standards Board, which mandates treating employee stock options as an expense. "While the SEC has provided clarity on some issues surrounding the FASB rule, its decision not to further delay implementation is a significant blow to companies that provide broad-based stock option plans, especially those in the high-tech industry," said William T. Archey, president and chief executive of the high-tech trade group AeA. Archey urged Congress to pass H.R. 913, the Broad-Based Stock Option Plan Transparency Act, a measure that would delay implementation long enough to conduct studies on the impact of stock options. Meanwhile, Rick White, president of the International Employee Stock Options Coalition said, "The coalition's mission has been to preserve broad-based employee stock options from draconian accounting rules, because stock options represent a vital economic tool for our nation." The recently issued SEC guidelines however, offer some leeway to companies, with several models from which to choose when estimating the fair value of employee options. The options expensing rule is slated to take effect this summer.

The American Institute of CPAs released an exposure draft of proposed business valuation standards that would be applicable to institute members performing valuation standards in tax, mergers and acquisitions, litigation, and financial reporting. Once the standards become finalized, members would be required to comply with them when performing valuation engagements that reach a conclusion of value or an indication of value. Roughly 25,000 institute members currently provide business valuation and forensic and litigation services. For further information, go to www.aicpa.org/bvfls.

Big Four firm Ernst & Young has filed suit against embattled outpatient care provider Health South, charging it with hiding massive accounting fraud from the audit firm and subsequently exposing it to litigation and damaging its reputation. According to the Associated Press, the suit, filed March 18, charged that testimony in the ongoing fraud trial of former HealthSouth CEO Richard Scrushy demonstrated that company executives faked financial documents to hide the fraud from its auditors. Ernst & Young served as HealthSouth's auditor from 1996 to 2002 -- the period, prosecutors charged, when earnings were inflated by about $2.7 billion. Ernst & Young is seeking reimbursement of any litigation costs the auditor must pay in lawsuits related to the HealthSouth fraud, as well as unspecified damages for lost business.

As expected, the Securities and Exchange Commission issued guidelines employee stock option expensing. The guidance, Staff Accounting Bulletin No. 107, "Share-Based Payment," supports the option-expensing rule released in December by the Financial Accounting Standards Board. The guidelines offer companies several models from which to choose when estimating the fair value of employee options. The rule, which requires SEC issuers to treat employee stock options as a business expense, will take effect in July. Currently, publicly held companies can either treat options as an expense, or record the costs in footnotes. "The views expressed by the staff are guidance and do not alter any conclusions reached by FASB in Statement 123R. We will continue to monitor implementation of Statement 123R and will consider the need for additional guidance as necessary," SEC chief accountant Don Nicolaisen said in a statement.

The President's Advisory Panel on Federal Tax Reform has compiled the witness list for the sixth meeting of the group, scheduled for March 31, here. On the first panel, titled "Overview of International Tax Systems," the speakers will be Willard Taylor, a partner at Sullivan & Cromwell LLP; Mihir Desai, an associate professor at the Rock Center for Entrepreneurship of Harvard Business School; Jeffrey Owens, director of the OECD Center on Tax Policy and Administration; Larry Langdon, a partner at Mayer, Brown, Rowe & Maw LLP and former commissioner of the Internal Revenue Service's Large and Mid-Size Business Division. The second panel, "How Taxes Affect Business Decisions," will hear testimony from Paul Otellini, president and chief operating officer of Intel Corp.; and Robert Grady, managing director of The Carlyle Group. The final panel, "Impact of Taxes on Savings, Investment, and Economic Growth," will hear from Michael Boskin, the Tully M. Friedman Professor of Economics and senior fellow at Stanford University and the Hoover Institute; Alan Auerbach, the Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. Also, renowned economist Milton Friedman will speak to the reform panel on "Perspectives on Tax Reform."