Audit & Accounting

In yet another step toward global accounting standards convergence, the Financial Accounting Standards Board and the International Accounting Standards Board each published exposure drafts containing joint proposals for accounting for business combinations.The proposals include a draft standard that the two boards developed in their first major joint project, which could be used for both domestic and cross-border financial reporting. The proposed standard would replace the existing requirements of the IASB's IFRS 3 and FASB's Statement No. 141.The drafts retain the fundamental requirement of IFRS 3 and Statement 141 to account for all business combinations using a single method -- where one party is always identified as acquiring the other. The principal changes being proposed include a requirement to measure the business acquired at fair value, and to recognize the goodwill attributable to any non-controlling or minority interests.The exposure drafts are available on FASB's Web site at www.fasb.org, and on the IASB's Web site at www.iasb.org. The comment period ends Oct. 28, 2005. Both boards said that they would hold public roundtable meetings to gather additional input on the proposals.

Extensible Business Reporting Language, or XBRL, the technology that tags financial information through disparate applications and carries it through the business reporting chain, can lower costs and provide enhanced analytical capabilities for users, preparers and consumers of financial statements. "It usually takes two years for data to go from the corporate reporting chain to actual economic policy-making," said Mike Willis, a partner at Big Four firm PricewaterhouseCoopers and founding chairman of XBRL International. "Paper in the reporting process doesn't cut it; it's too manual and too expensive." Willis, one of the nation's leading authorities and proponents of XBRL, led a session titled, "Business Reporting in XBRL -- Tagging for U.S. GAAP" at the AICPA Information Technology Conference, here. Currently, XBRL International has 350 member organizations in 24 countries. In the United States, XBRL reporting programs are underway at the Securities and Exchange Commission and the Federal Deposit Insurance Corp. However, it has been slower to gain traction domestically. "Information labels are inconsistent from one application to another, such as ERP to Excel," said Willis. "Information goes in one direction -- there's no shared context." As an example, Willis said that large companies that have stakeholders in other countries have to publish annual reports or financial statements in other languages. In XBRL, the information is tagged and flowed into indigenous spreadsheets so that users don't have to be fluent in English to find the desired categories. "Accountants by nature tend to be reactive," Willis said. "But they need to be proactive with XBRL, or their relevancy in external reporting will dwindle."

The Securities and Exchange Commisson has settled with KPMG Canada and two of its partners for the audit firm's lack of independence related to its audit of Southwestern Water Exploration Co., a now-bankrupt Colorado-based concern.KPMG Canada provided bookkeeping services to Southwestern and then audited its own work, issuing what were supposed to be independent audit reports on Southwestern's financials for the years 1999-2002.The SEC's order censures KPMG Canada without the firm admitting or denying guilt. KPMG Canada also agreed to adopt new auditor independence policies and procedures and pay $73,682 -- its fees for the audit of Southwestern, plus interest.In addition, two KPMG Canada partners -- Gary Bentham, the audit engagement partner, and John Gordon, the concurring and SEC reviewing partner -- are prohibited from auditing SEC issuers for two years and nine months, respectively.

The chief financial officer of advertising giant Interpublic Group, which is the subject of a newly widened probe by the Securities and Exchange Commission, has stepped down. Robert Thompson had been CFO of the company for just a year; his successor, who will not be named until late July, will be Interpublic's fourth CFO in two years. In a statement, Interpublic chairman and chief executive Michael Roth said, "Bob and I have independently come to the conclusion that the next steps in our company's progress will require new financial leadership." The SEC, which had been investigating the company's accounting due to restatements made in 2002, recently expanded its probe to include its accounting for the many acquisitions that it made from 1996 through 2001, as well as for other issues. Interpublic has yet to file statements for 2004, citing material weaknesses in internal controls and the time required to complete its Sarbanes-Oxley Section 404 report. It also suggested that it might have improperly consolidated the results of some of the companies it acquired, and might have to restate prior results.

In a divisive 3-2 vote, the Securities and Exchange Commission amended and re-approved a proposed rule requiring the directors of mutual funds to be independent that had been ruled against by a federal court a little more than a week ago. Ruling in a suit brought by the U.S. Chamber of Commerce, the court said that the commission had not taken into account any alternatives and did not consider the costs of the rule, which would require that at least 75 percent of a fund's directors be independent. To address the court's concerns, the amended rule added details about compliance costs and other matters. "We've done the right thing," SEC Chairman William Donaldson said in a statement, adding that the SEC had laid out in detail what implementation would costs funds, and that it had concluded that simply disclosing whether or not directors were independent would not be adequate. Yesterday's vote was seen by some as a rush to get the rule implemented, since Donaldson is due to step down today, thus changing the balance of opinion at the commission. The Chamber of Commerce promised to sue again.

As one of the first companies to comply with the impending rule requiring the treatment of employee stock options as an expense, IBM might reasonably have expected a pat on the back. Instead, its reward is an investigation by the Securities and Exchange Commission. The company announced on Monday that it was cooperating with an informal SEC investigation into its financial reports for the first quarter ended March 31, in which IBM had expensed stock options, even though at the time the rule was not due to go into effect until June 15. (Implementation has since been delayed by another six months.) IBM said that it had been informed by the SEC that the investigation was not an indication that the company had violated any laws, and an IBM spokesperson said that they had no reason to believe that the financial statements or their treatment of stock options was inaccurate.According to published reports, the focus of the SEC's investigation was the way that IBM disclosed its expensing method, with some suggesting it might have been misleading. The company took a charge of 10 cents a share for options, while analysts had expected 14 cents.

Gathering here for their annual world meeting, 250 leaders from the member firms of Deloitte Touche Tohmatsu said that they expected the firms' aggregate revenues to hit $18 billion, with growth of more than 10 percent for fiscal year 2005.At the meeting, held earlier this month, Deloitte CEO William G. Parrett noted that this was the member firms' twelfth year of aggregate growth, adding, "The growth has been the direct result of the increased demand for services: Simply, it is a case of increased service hours across member firm markets."The firms said that audit and enterprise risk services had seen the strongest growth, at 15 percent, followed by financial advisory services and consulting growth, at 9 percent each. Parrett took the consulting growth as a sign that keeping its capabilities in that area "was the right strategic decision for Deloitte." Growth was particularly strong in the Asia Pacific/Japan region, at 15 percent, led by expansive growth in China. The Americas and Europe/Middle East/Afria regions saw 10 percent growth each. The firm leaders also considered a number of strategic scenarios during the meeting, including key competitor moves, major legal developments that could impair current business models and heighten risk, and new regulatory developments.

Federal prosecutors have charged a California lawyer with taking illegal payoffs to act as a plaintiff in lawsuits brought by an unnamed New York law firm that has been identified in published reports as securities class-action giant Milberg Weiss. The indictment, handed down last week, alleges that Seymour Lazar acted as lead plaintiff in dozens of corporate class-action suits filed by Milberg Weiss in return for a share of the attorneys' fees, which is illegal -- though paying a bonus to lead plaintiffs is not. It said that Lazar had received at least $2.4 million in "secret and illegal kickbacks" from the firm, and that the firm had filed false and misleading court documents and hid the payments from the courts. In comments reported in the Washington Post, Lazar's lawyer characterized the payments as common fee-splitting practice, and said that the charges were an attempt to get Lazar to say negative things about Milberg Weiss. The law firm, through a spokeswoman, acknowledged that it was the firm in question, and in various reports said that it was cooperating with the government, and that the accusations were "baseless." The indictment is part of a three-year investigation into the practices of Milberg Weiss Bershad Hynes & Lerach, which split last year into two entities based separately in New York and San Diego.

In a deal motivated in part by stricter regulation, Citigroup announced Friday that it will swap its asset management business for the broker/dealer business of Baltimore-based Legg Mason. Citi will get $1.5 billion in common and preferred Legg Mason shares as part of the $3.7 billion deal, which lets the company ditch the less-profitable business of creating its own asset management products, while avoiding the conflict of interest of having its sales force promote both in-house and external funds. Under a separate arrangement, Citi will continue to be able to offer its clients its asset management products. Legg Mason will gain approximately $437 billion of assets under management. The deal, which had been under discussion for some time, is expected to close toward the end of the year. Separately, Legg Mason announced that it was paying $800 million for 80 percent of hedge fund company Permal Group, with an option to buy the rest. Permal is one of the largest fund-of-funds operators in the industry, with around $20 billion under management.

Porter Keadle Moore is reaping benefits from presenting annual seminars on two hot topics: going private in the age of Sarbanes-Oxley, and the benefits from bankers' perspectives of S corporations. "Going Private, Staying Private" was put together in six weeks to address the large number of public company clients and prospects that had been inquiring about deregistering from the Securities and Exchange Commission to avoid the headaches of SOX compliance, according to the Atlanta-based firm's director of marketing, Laura Snyder. The half-day seminar drew 75 attendees, and was co-sponsored by PKM and a law firm. Topics included how to structure and execute such transactions; a valuation, funding and liquidity discussion with investment bankers; real-life anecdotes on community reaction; and tips on staying private. The second seminar, "New Rules Make S Corp a Better Bet for Banks," was the fourth annual forum on the topic of S corps. This year, the seminar drew some 90 attendees from across the country, and focused on the regulatory changes that make S corps a stronger structure for closely held businesses. The two-day event was co-sponsored by PKM, a law firm and a correspondent bank, and featured a panel of bank executives who discussed their conversion to S corporations, and outlined the new S corp basics, including regulatory changes, core financial benefits of S corp election, ways to structure a sale, shareholder issues and shareholder agreement, growing an S corp versus a C corp, employee stock ownership plans, compensation strategies, and raising capital. The goal is to draw between 65 and 150 clients, prospects and referral sources to each event, says Snyder. "Because we charge for these events and share the remaining expenses between the co-hosts, the cost for each seminar typically ranges from $750 to $6,500. In addition, we enhance our value to existing clients, and typically generate new business from one or two prospects that has ranged from $17,000 at one event to $64,000 at another." The invitation list is assembled from the client/prospect databases of the seminar hosts, and contains some 3,000 names. "Because a large portion of the target audience is registered with the SEC, the database information is available to the public," Snyder says. Snyder adds that these seminars "establish PKM as an expert on S corporation taxation and other hot accounting issues; disseminate details regarding tax law and accounting regulation changes to clients and prospects; demonstrate the cooperative working relationship between the seminar hosts; enhance the firm's partnership with seminar hosts, thus increasing referrals; generate new business; and provide an opportunity for CPE credit for bank attendees, firm presenters and firm attendees."