SEC issues options-expensing guide

Washington - As expected, the Securities and Exchange Commission has issued guidelines for the expensing of employee stock options.

The guidance, Staff Accounting Bulletin No. 107, "Share-Based Payment," supports the options-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.

"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.

PCAOB exposes controls proposal

Washington - 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.

PCAOB chairman William McDonough said, "Our proposal for a new, voluntary auditor's engagement ... will offer companies an opportunity to provide the investing public added assurance that previously disclosed weaknesses have been corrected."

E&Y files suit against HealthSouth

Birmingham, Ala. - 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.

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 served as HealthSouth's auditor from 1996 to 2002 - the period, prosecutors charged, when earnings were inflated by about $2.7 billion. E&Y is seeking reimbursement of any litigation costs that it must pay in lawsuits related to the HealthSouth fraud, as well as unspecified damages for lost business.

GAO: SEC needs to bolster IT controls

Washington - 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 of unauthorized access or disclosure.

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