by Glenn Cheney

Charlottesville, Va. - As director of advocacy and professional standards for the Association for Investment Management and Research, Rebecca McEnally keeps her eye on a broad variety of issues of interest to investors. Global accounting standards fall within her purview. She knows what’s happening in Brussels, Hong Kong, Johannesburg and Norwalk, Conn.

Recently, she traveled to Washington, and sat in on the Senate roundtable hearing on employee stock option compensation. She didn’t see much happening there - nothing new in the arguments for and against the fair-value expensing of such compensation. Some of the arguments, she said later, amounted to repetitions of the same misinformation that has been coming from various sources since the issue came into general discussion in the mid-1990s.

“I think it’s safe to say that the opinions expressed at the roundtable held no surprises,” she said. “It was a fairly spirited discussion, [but] basically they just agreed to disagree.”

Among the misinformation that McEnally sees circulating in the public forum is the argument that the value of stock options cannot be estimated accurately. She points out that financial reports are full of estimates, some of which could be considered “wild.”

She also notes that estimates of the value of stock options in non-compensation contexts have been used successfully. She debunks warnings that expensing such compensation will hamper entrepreneurialism, decimate securities markets, and cut a swath of bankruptcy through the high-tech industry.

Senator Carl Levin, D-Mich., criticized the Senate event as a one-sided attempt to “allow a dozen opponents of stock option expensing to put pressure on the Financial Accounting Standards Board.” Despite Levin’s specific request, neither the AIMR nor any business leaders backing the FASB position were invited to participate.

“This one-sided approach sends exactly the wrong message to investors about Congress’ commitment to accounting reform and FASB’s independence,” Levin said in an official statement. Levin is opposed to SB S. 979, which seeks to derail FASB’s attempt to require the expensing of employee stock options.

Elsewhere in the world of financial reporting standards, McEnally sees progress. Asia has been aggressively grappling with the issue of corporate governance. Singapore has, in her words, “leap-frogged ahead of the U.S.” by enacting legally binding regulations on corporate governance, while the United States continues to depend on less authoritative private-sector initiatives.

Hong Kong is restructuring its securities markets to be more responsive to investors. Both Hong Kong and Singapore have tightened up standards for the de-listing of securities deemed inappropriate for continued trading.

At the other end of Eurasia, the European Union is quickly patching together a workable quilt of regulations based on the best regulations of its member states, with particular preference for U.S. and U.K. accounting standards.

She sees FASB and the International Accounting Standards Board as sincerely interested in converging their standards under the so-called Norwalk Agreement, without trying to pull them toward either side of the Atlantic.

“This project meets quite a bit of skepticism in some circles, but I’m quite convinced that the participants are very serious about it,” McEnally said. “They take the project seriously and they intend to get a proper convergence. The intent is not to converge to U.S. generally accepted accounting principles, as some cynics have expressed, but to look at the international and American standards and select the best, and if need be, if both are seriously flawed, then converge to new standards.”

McEnally is also optimistic about developments at the newly formed Public Company Accounting Oversight Board, which she sees as staffed by eminently competent professionals and endowed with enough power to get the job done.

“For the first time in U.S. market history, we have the setting of public company auditing standards, the review of company audits, the review of audit practitioners’ work, and the enforcement of those standards and the practice all within the same organization,” McEnally said. “People who are most knowledgeable about this issue say that this power is essential. There aren’t too many other organizations where we have such power.”

As to whether this concentration of power will work out well, McEnally said that success depends on the oversight of the Securities and Exchange Commission and its overseer, the U.S. Congress.

She is especially admiring of the board’s new chief accountant and director of professional standards, Douglas R. Carmichael, a retired professor of accountancy at Baruch College, City University of New York, and former vice president of auditing at the American Institute of CPAs.

Carmichael will oversee the board’s efforts to develop auditing standards for public companies, a responsibility that has been taken from the AICPA.

“Professor Carmichael has a keen reputation for being highly critical of auditing standards and the practice of those standards,” she said. “Some have remarked that he has spent his entire career grooming himself for and developing the skills he needs to do the job he’s just been appointed to. I have the impression that he will come into the office with a fat file of ideas for what needs to be done.”

The AIMR is also supporting the tack that FASB is taking toward a new standard - or set of standards - on revenue recognition. Current GAAP is a hard-to-interpret hierarchical hodge-podge of principles that wander between vague and contradictory. All of the recent big corporate scandals and bankruptcies, McEnally explained, have been caused by revenue recognition problems.

The board has announced its intention to move to an asset-liability approach that would match the liabilities and obligations of a given transaction with the related assets and receivables. The difference would be the recognized revenues. This, McEnally explained, would avoid the overly optimistic revenue recognition that often gets companies into financial trouble.

“If companies are required to focus more on the assets that they are generating, the quality of those assets and the probability of collecting them, then some of the problems will go away,” she said. “We are strongly supportive of the FASB effort, and we believe the asset-liability approach is probably the correct one.”

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