Audit & Accounting

The Governmental Accounting Standards Board has released Statement No. 46, Net Assets Restricted by Enabling Legislation, an amendment to its Statement No. 34.Statement 46 was drafted to help government entities determine when net assets have been restricted by the passage of enabling legislation, and to specify how those net assets should be reported in financial statements when there are changes in the circumstances surrounding said legislation. Enabling legislation is defined as a specific type of legislation that both authorizes the raising of new resources and imposes legally enforceable limits on how they may be used.

The AARP, the high-profile lobbying group for 36 million Americans over 50, plans to launch a two-week advertising campaign to battle President Bush's proposal to privatize Social Security via the rollout of ownership accounts. The group headquartered here, plans to spend some $5 million on the advertising push to fight the creation of the proposed accounts, which would be funded through payroll taxes. According to reports, the full-page ads are scheduled to appear in roughly 50 newspapers across the country. One of the ads displays a picture of stock traders with the tagline, "Winners and losers are stock market terms. Do you really want them to become retirement terms?" Another shows a couple saying, "If we feel like gambling, we'll play the slots."

National electronics retailer Best Buy Co. said it would dismiss its auditor, Big Four firm Ernst & Young, following the completion of the fiscal 2005 audit -- which ends Feb. 26 -- due to a conflict of interest with a company director. According to a federal filing, Best Buy said the decision to jettison E&Y as its independent accountant stemmed from the May resignation of Mark C. Thompson, a former board and audit committee member. Thompson resigned his post earlier this year after it was revealed that he had an arrangement with E&Y to provide services for $377,500, plus expenses. Best Buy has not named a successor to Ernst and is currently seeking proposals.

The Internal Revenue Service has issued Notice 2005-5 providing guidance on the new automatic (or default) rollover rules for qualified retirement plans. These new rules were added to the Internal Revenue Code as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, but they will not be effective until March 28, 2005, which is the effective date of related final regulations published by the Department of Labor. The guidance answers questions regarding the application of the new requirement and will make it easier for plan sponsors to comply in a timely manner. The new automatic rollover rule requires that mandatory distributions of more than $1,000 from a qualified retirement plan be paid in a direct rollover to an Individual Retirement Account unless the distributee elects to have the amount rolled over to another retirement plan or to receive the distribution directly. EGTRRA also requires that the plan administrator notify the distributee in writing that the distribution may be paid in a direct rollover to an IRA. The guidance responds to comments received by the Department of Labor, Treasury, and the IRS. For example, the guidance clarifies that the automatic rollover requirement applies to governmental and church plans although a transition rule is provided for these plans to comply. The guidance provides that all plans have until the end of 2005 to establish administrative procedures for processing the automatic rollovers and clarifies that rollover IRAs can be set up without the participant's participation. Finally, the guidance includes a sample amendment that plan sponsors can use to amend their plans to comply with the new rule.

Mortgage financing concern Fannie Mae revealed that its former auditor, Big Four firm KPMG, had notified the embattled company that it had discovered indications of weaknesses in its internal controls. In an SEC filing, Fannie Mae disclosed that the Big Four audit firm unearthed deficiencies with regard to its quarterly closing processes and that entries had been made after the books had been closed for the quarter that ended Sept. 30. Last week, Fannie Mae dismissed KPMG as its independent accountant, and on the same day, the board also ousted chief executive Franklin D. Raines and chief financial officer J. Timothy Howard. Currently, the Office of Federal Housing Enterprise Oversight, the entity that regulates Fannie Mae, and its smaller mortgage sibling, Freddie Mac, is investigating the exorbitant severance packages for both Raines and Howard. In September, the OFHEO released a report calling into question the company's accounting practices and charging it with earnings manipulation. As a result, in early December, the SEC ordered Fannie Mae to restate its earnings from 2001-2004, which could potentially erase some $9 billion in profits. Fannie Mae said that in order to help blunt the effect of lost earnings, it is mulling a private stock sale that could be as much as $4 billion.

The Internal Revenue Service has released final regs totaling over 230 pages with rules for plans that permit employees to make pre-tax contributions and for plans that have employer matching contributions or employee after-tax contributions. The existing regulations covering these plans were last updated in 1994. Since then, there have been significant statutory changes. The new regs will be fully effective for plan years beginning on or after Jan. 1, 2006, although employers are permitted to use the new rules for any plan year that ends after Dec. 28, 2004. These comprehensive final rules are the result of a long effort of input gathering from retirement plan participants, sponsors, and service providers. Specifically, they address many of the concerns raised by comments submitted in response to the proposed regulations. These final regulations will make it easier for employers to sponsor plans to help employees save for their retirement and will assist administrators in keeping the plans qualified. The final regulations update and simplify many of the current rules for 401(k) plans. In addition, the new regulations strengthen the nondiscrimination rules that ensure benefits for rank-and-file employees. They require certain employer contributions to be spread over a large group of rank-and-file employees before they can boost the ability of high-paid employees to defer income under the plan.

Before the end of the year, President Bush intends to select panelists to comprise a bipartisan tax reform commission, which would be charged with reporting any and all recommendations related to reforming the tax code to the Treasury Dept. According to Tax Analysts, the panel's recommendations will be given to Treasury secretary John Snow who in turn, will refer them to the president. However, as previously reported, heading the "to-do" list on the president's second term agenda will be the overhaul of the Social Security system and non-defense spending cuts rather than tax code reform. Most Capitol Hill observers believe that any tax reform would most likely be incremental and not be addressed until 2006.

The Office of Federal Housing Enterprise Oversight, the regulator for troubled mortgage financing concern Fannie Mae, said it would examine the lavish severance packages the company plans to pay ousted chief executive Franklin D. Raines and former chief financial officer J. Timothy Howard. According to an SEC filing, Raines is entitled to receive monthly pension payments of $114,393 for life, or roughly $1.4 million a year. He is also owed $8.7 million in deferred compensation. Raines also holds vested options for 1.6 million shares of stock, plus options for another 368,800 shares. In total, Raines would be due more than $19 million. Howard, also 55, would be eligible for $36,071 in monthly pension payments and deferred compensation of $4 million. He holds vested options for 481,600 shares. Howard is also eligible for $84,000 in salary from Dec. 20, 2004 through January 2005. Both Raines and Howard were ousted last week by the Fannie Mae board. The SEC has ordered the company to restate its financials for the three-year period from 2001-2004. That would reduce earnings by roughly $9 billion.

With a planned overhaul of Social Security and pressing budget issues occupying center stage during the onset of the second Bush administration term, the president's planned reform of the tax code would most likely be pushed back at least one year. According to the Washington Post, the president plans to name a panel to examine the current tax policy but reportedly will assign the Treasury Department to monitor the panel's progress. The report said that Treasury Secretary John Snow would most likely recommend incremental changes to the tax code, rather than more dramatic reforms such as supplanting it with a "flat tax" or national sales tax. A White House spokeswoman, however, maintained that overhauling the tax code remains a priority.

Douglas Hill, managing general partner of embattled brokerage house Edward D. Jones & Co., intends to leave the company roughly one week after the firm agreed to pay $75 million to settle charges of improper disclosure of revenue-sharing payments. Hill, 60, will retire as managing general partner Dec. 31, but would remain as managing partner through 2005. In addition, Hill is expected to pay $3 million of the agreed-upon fine, while the firm's general partners are expected to shoulder an aggregate of $44 million. Last week, the brokerage firm reached a settlement with the SEC, the New York Stock Exchange and the National Association of Securities Dealers as a result of arrangements that Edward Jones entered into with seven fund groups. The firm had not disclosed the fact that it received millions from the fund families each year for selling their respective products.