Audit & Accounting

The Public Company Accounting Oversight Board said that it would convene on March 31 to mull over an auditing standard affecting companies that correct weaknesses in their internal controls. The board said that the group would consider a new standard that would permit auditors to report on a company's claim that it has rectified a previously reported material weakness in its internal controls under Sarbanes-Oxley Section 404. The meeting, which is open to the public, will be webcast through the PCAOB's Web site, at www.pcaobus.org.

Accounting errors tucked away in footnotes may be less likely to draw the attention of auditors, says a new report authored by accounting professors from Cornell University and Bentley College. According to The Wall Street Journal, the report said that auditors are more likely to demand that clients correct errors and misstatements when the numbers in question for such things as stock options appear in the books, as opposed to footnotes. The study said that "information location influences reliability." As part of the research project, auditors were questioned as to how they how they would handle a client's underestimation of employee stock options with the client objecting to making an adjustment. One group was told that the client included the cost of stock options on its income statement; others were told that the cost was shown only in a footnote -- with the error being of identical size. The percentage of auditors demanding a correction when the mistake was on the books was far greater than when the error was recorded in a footnote.

The Governmental Accounting Standards Board has released Accounting and Financial Reporting for Pollution Remediation Obligations, a preliminary views document highlighting the board's position on reporting standards for pollution remediation obligations. The obligations address the current or future effects of existing pollution by participating in site assessments and clean-ups. The GASB PV proposed that, once any one of five specified obligating events occurs, governments would be required to estimate the components of expected clean-up costs using an "expected cash flow" measurement, and subsequently to determine whether they should be accrued as a liability or, in some instances, capitalized when goods and services are acquired. GASB said that the deadline for the comment period is June 24, 2005. That will be followed by a public hearing in San Antonio, on June 29.

-- Has Sarbanes-Oxley ushered in the golden age of auditing? According to disclosures by 23 of the 30 companies that comprise the Dow Jones Industrial Average, audit fees rose roughly 40 percent, to $533 million, according to figures from The Wall Street Journal. That number represents nearly twice the percentage rise in audit fees received in 2003 versus 2002. Audit fees generated about 65 percent of the total of $821 million that SEC issuers paid to their audit forms, a stark contrast to four years earlier when audits accounted for just 30 percent of the total monies paid out to the accounting firms. However, the 2002 passage of SOX prohibited a total of nine services to audit clients. The 2004 report stated that most of the 23 companies paid more for audits than for consulting or other services -- with IBM and Johnson & Johnson being two notable exceptions. For example, IBM shelled out more than $21 million for the audit and $55 million in other fees to its independent accountant, Big Four firm PricewaterhouseCoopers. Big Four firm KPMG was the beneficiary of the highest audit largesse, receiving more than $102 million from General Electric Co. of which nearly $80 million of that went to audit services.

The Securities and Exchange Commission has not implemented effective information system controls to protect sensitive data according to a searing report from the Government Accountability Office. As part of its 2004 audit of the SEC's financials, the GAO assessed the effectiveness of the regulator's controls within its information systems -- the barriers that protect the confidentiality and availability of sensitive financial data. The auditor general found that the commission had not implemented "with any consistency," electronic access controls including user accounts, passwords and network security. Additionally, the GAO unearthed weaknesses in other information system controls including physical security and segregation of computer functions. As a result, sensitive data such as payroll, personal information and financial transactions, were at risk for unauthorized access or disclosure. The office recommended that the SEC chair William Donaldson direct his CIO to bolster its agency-wide security program. The SEC said that "significant progress" was already being made to address the failings.

Expert witnesses at the fifth meeting of the President's Advisory Panel on Federal Tax Reform here, advised the reform group to proceed with extreme caution with regard to the adoption of a national sales tax and changes to the Earned Income Tax Credit. Robert Greenstein, founder and executive director of the Center on Budget and Policy Priorities, told the panel that a consumption tax could be implemented but would carry with it a string of collateral problems such as calls for exemptions and exclusions. Louisiana treasurer John Kennedy said that a sales tax was "not as simple as it might first appear." He added that a sales-and-use tax provides 37 percent of the state's revenue, but advised the panel to examine any and all issues Louisiana had with the state-wide levy. When addressing the merits of the EITC Kennedy also told the panel that it had "done more than any other program to lift people out of poverty." Greenstein pointed out that the EITC increases work efforts while slashing welfare among single parents. Next week the Tax Reform panel will host its sixth meeting, scheduled for March 31, at Fort Mason Center, Landmark Building A, San Francisco. The meeting is scheduled to begin at 9 a.m.

Tax information products provider RIA has teamed with Chicago-based financial management concern Parson Consulting in a licensing pact where users of RIA's Checkpoint research service will be given access to Parson's ProAct Sarbanes-Oxley 404 compliance framework. Terms were not disclosed. Under the licensing agreement, Checkpoint users can navigate Parson's ProAct, which includes various overviews of the 404 compliance process with links to related source materials on Checkpoint such as the COSO framework and the Sarbanes-Oxley Act.

Expensing for employee stock options would slash post-tax earnings by an average of 22 percent for companies in the Nasdaq 100, and by 5 percent for firms residing in the S&P 500, according to a just-released analysis of options expensing by financial services conglomerate Bear Stearns. The report analyzed the 2004 stock option disclosures in the 10Ks filed by companies that were listed on the S&P 500 and Nasdaq 100 indexes as of Dec. 31, 2004. In December, the Financial Accounting Standards Board released FAS 123, a standard that would require Securities and Exchange Commission issuer companies to treat options as an expanse on financials by the third quarter 2005. That ruling has come under a hail of criticism, particularly from various stock option advocacy groups and the technology sector. With regard to technology and the impact of options expensing, the report said that some $44.43 billion in reported net income for a total of 80 IT companies would be reduced an aggregate of 25 percent. Meanwhile, 87 consumer discretionary companies with $39.4 billion in earnings and 55 heath care concerns with $58.2 billion in net income would experience a 9 percent decline.

The Internal Revenue Service has clarified in Rev. Rul. 2005-11 that interest paid on a loan that is refinanced more than once will retain its status as qualified housing interest, to the extent that the amount of the loan is not increased. That interest is deductible for alternative minimum tax purposes. Any other interest on amounts borrowed that are not used to acquire, construct or substantially improve any property that was a principal residence or qualified residence may not be deducted for AMT purposes, the service said. Revised instructions to Form 6251, which include a worksheet to help taxpayers determine the correct home mortgage interest adjustment, will be posted on the IRS Web site, www.irs.gov

Compliance with Section 404 of the Sarbanes-Oxley Act has become a far more expensive proposition than originally thought, as the average cost of complying with the internal controls mandate has hit $4.36 million, a 39 percent jump from 2004 estimates, according to a recent survey from Financial Executives International. The organization of financial professionals, which surveyed 217 public companies with average revenues of $5 billion and asked them to gauge their Section 404 compliance costs, said that the out-of-pocket increase stems from a 66 percent leap in external costs for consulting, software and other vendors, and a 58 percent increase in the fees charged by external auditors. In a breakdown, FEI said that 404 compliance averaged $1.34 million for internal costs, $1.72 million for external costs and $1.30 million for auditor fees. The auditor fees are in addition to companies' financial statement audit fees. Some 55 percent of the participants in the FEI poll indicated that Section 404 gives investors and other external audiences more confidence in a company's financial reports. However, 94 percent of all companies surveyed said that the costs of 404 compliance exceed the benefits. In order to improve the effectiveness and efficiency of the Section 404 compliance process, the companies participating in the poll issued the following recommendations: o Allow for a more risk-based audit approach (71 percent); o Reduce the degree of documentation (66 percent); o Provide flexibility for remediating control problems in the fourth quarter (60 percent); o Increase the judgment allowed in aggregating deficiencies (55 percent); and, o Permit roll-forward procedures (54 percent).