Audit & Accounting

Thomas R. Smith, one of the country's leading attorneys in the area of mutual funds, has joined the Investment Management Division of the Securities and Exchange Commission as a senior advisor to Andrew Donohue, the division's director. Prior to joining the SEC, Smith was a partner with the New York office of Sidley Austin LLP, and also served as managing partner at Brown & Wood LLP from 1996 until the firm's merger with Sidley Austin five years later.

In testimony on Capitol Hill, Securities and Exchange Commission Chairman Christopher Cox said that the costs of complying with Sarbanes-Oxley's Section 404 will go down, but reiterated his position that there was no need for another delay in 404 compliance for smaller filers. Testifying before the House Committee on Small Business, Cox said, "The focus of this hearing is on whether the SEC's new guidance for management, and the PCAOB's new standard for auditors, will lower compliance costs for small companies. The answer is yes." Cox said he did not support further delays in the current deadline for small companies -- generally defined as those with less than $75 million market cap -- to file their first management report on internal control. The chairman said the costs of SOX will go down under the SEC's new guidance because companies "will be able to focus on the areas that present the greatest risk of material misstatements in the financials," and will be able to "exercise significant judgment in designing an evaluation tailored to its individual circumstances."

The multi-billion-dollar-gap between what publicly traded companies book as expenses for executive stock options and what they report cost the U.S. Treasury roughly $43 billion between 2004 and 2005, charged Sen. Carl Levin, D-Mich. Levin, who chairs the Homeland Security and Governmental Affairs Committee said at a hearing earlier this week that companies are reporting higher deductions for stock options to the Internal Revenue Service than what they are reporting to their shareholders. Levin said when company directors who approve executive compensation learn that the options, while an expense, also produce a huge tax break, it "becomes a tempting proposition for them to pay their executives with stock options instead of cash." Levin proposed that the massive gap be closed via legislation that requires a uniform reporting standards for options.

Tax, audit and accounting software and services provider CCH, a Wolters Kluwer Co., had added a Sarbanes-Oxley Section 404 internal controls library to its proprietary Accounting Research Manager database. The new offering includes materials such as: * The American Institute of CPAs: professional standards related to internal controls;*The COSO Internal Control Integrated Framework;* Institute of Internal Auditors' "Designing and Writing Message-Based Audit Reports";* Public Company Accounting Oversight Board auditing standards related to internal control; and,* Securities and Exchange Commission rules and releases related to internal controls. For more information, go to www.accountingresearchmanager.com

The allegations in the criminal indictment of two former and two current Ernst & Young partners for tax fraud conspiracy and related crimes arising out of tax shelters promoted by E&Y makes for some very interesting reading. All four worked in a E&Y group first named VIPER (Value Ideas Produce Extraordinary Results), and later renamed SISG (Strategic Individual Solutions Group). One was the former national director of E&Y’s Center for Wealth Planning, another the national director of E&Y's Personal Income Tax and Retirement Planning practice. The basic premise of the U.S. attorney, as stated in the press release, is: “In order to maximize the appearance that the tax shelters were investments undertaken to generate profits, and to minimize the likelihood that the IRS would learn the transactions were actually designed to create tax losses and deductions, the defendants and their co-conspirators created and assisted in creating transactional documents and other materials containing false and fraudulent descriptions of the clients' motivations for entering into the transactions, and their motivations for taking the various steps that would yield the tax benefits.” The tax shelters are described as “cookie-cutter products that would eliminate, reduce or defer large tax liabilities.” One of the allegations is that the defendants worked with law firms to provide E&Y's clients with opinion letters that claimed the tax shelter losses or deductions would "more likely than not" or "should" survive IRS challenge, and the defendants knew those opinions were based upon false and fraudulent statements that omitted material facts. The indictment also alleges that the defendants and their co-conspirators undertook these actions so E&Y could participate in the highly lucrative tax shelter market in which other accounting firms were already participating. In response to the indictment, E&Y issued a press release stating those indicted are two former partners and two partners who have been on administrative leave, that they were part of a small group within the firm that disbanded years ago, and that E&Y voluntarily made many changes and enhancements to their tax practice. It also mentioned that some changes were made pursuant to a 2003 agreement with the IRS, which E&Y proudly proclaimed the IRS Commissioner called a "model for agreements with practitioners.” The indictment explains in detail how the shelters worked and were marketed, contains numerous quotes attributed to the defendants, and has an allegation the fees charged were based on a percentage of the tax savings obtained. Interestingly, there is a claim that three defendants utilized a fraudulent tax shelter with regard to the proceeds they received when E&Y sold its consulting business to Cap Gemini. The more I read, the more it reminded me of Enron’s downfall. As with Enron, there is an accounting firm involved, law firms certifying the validity of very complicated transactions, and financing from a third party. What is different is, unlike in Enron, the originator of the transactions is the accounting firm. I consider this difference to be very significant. But it is obvious, after the demise of Andersen, the government has decided to go after individuals criminally, rather than the firm, so as not to put the future of a Big Four firm in jeopardy. If it goes to a jury trial, how will the government simplify the transactions? What are the perceived smoking guns that it will present? With regard to the defense, will they claim the tax shelters weren’t criminal but very aggressive attempts at tax savings, similar to 1031 exchanges? If successful, the government will probably feel those in accounting firms, because of fear of criminal prosecution, will reign in a firm from engaging in fraudulent activities. I wonder if the government has successfully made that point already simply by indicting four former or current partners of a Big Four firm. A copy of the indictment is at http://online.wsj.com/public/resources/documents/EYIndictment20070530.pdf. The government’s press release is at usdoj.gov/usao/nys/pressreleases/May07/eyindictmentpr.pdf.

A bill that is now before the Connecticut State Senate would give its state comptroller the legal authority to establish GAAP for the state’s financials, thereby sidestepping the Governmental Accounting Standards Board — the standard-setter for governments and municipalities.

The Public Company Accounting Oversight Board issued its 2006 inspection report for Big Four firm Ernst & Young, citing problems in eight of the audit engagements it reviewed.The audit overseer inspectors said that E&Y appeared to have signed off on some audits without having sufficient evidence to support its opinions. However, the number of problems in E&Y's inspected audits declined since last year's report, when the PCAOB cited 10.

When Deborah F. Kretchmar, audit director of Horace Mann Cos., flipped through the introduction of Four Approaches to Enterprise Risk Management ... and Opportunities in Sarbanes-Oxley Compliance, she knew she had to have it."I bought the book because my company is looking at enterprise risk management and thinking about developing a more formal process for it," Kretchmar said. "We have informal processes, but S&P and Moody's are very interested in seeing us move toward a more formal process that they can place more reliance on."

TECUMSEH PRODUCTS JETTISONS PRICEWATERHOUSECOOPERSTecumseh Products Co., a manufacturer of electronic motors and compressors, has dismissed its auditor, Big Four firm PricewaterhouseCoopers, and named Grant Thornton as its new independent accountant. No reason was given for the change in auditors in a federal filing. Tecumseh said that it did not have any disagreements with PwC on financial statement disclosure, accounting principles or audits.

The fact that there has been no Baby Boomer "bust" has been due in large part to the skill of retirement planners, accountants and their clients.The bust was supposed to occur as Boomers began reaching retirement age without having saved enough to retire. This, coupled with the dismantling of the retirement and pension programs at a host of corporations nationwide, could have created the most poverty-stricken generation of retirees since the Great Depression.