Audit & Accounting

The board at financial and credit card services conglomerate American Express Co. engaged Big Four firm Ernst & Young as the auditor for its American Express Financial Advisors unit. The company, headquartered here, said that the board's decision was fueled by the planned spin-off of AEFA to shareholders, which the company announced earlier this month. Minneapolis-based AEFA came under fire recently when the New Hampshire Bureau of Securities Regulation filed a petition for relief in the amount of $17.5 million against it, after an audit revealed a disproportionate amount of American Express funds in clients' financial plans. An investigation revealed management's support of advisors that promoted the firms' poorer-performing funds, as opposed to those of competitors, and backed it up by offering more lucrative incentives for Amex products. PricewaterhouseCoopers will remain the independent accountant for American Express Co. for fiscal 2005.

The Securities and Exchange Commission will convene March 3 to consider approval of the 2005 budget for the Public Company Accounting Oversight Board. The oversight body has proposed a 2005 budget of $137.1 million, a figure roughly 10 percent below its initial 2005 request of $152.5 million. The regulator trimmed its initial budget request after it fell behind on its anticipated hiring volume for the coming year. The board said that the $15 million reduction reflected the subsequent reductions in salary, benefits and payroll tax expenses. In addition to okaying the accounting oversight board's 2005 budget, the commission is also expected to discuss issues related to mutual fund redemption fees and credit rating agencies.

The Securities and Exchange Commission has named Joseph A. Hall to the post of managing executive for policy and Martha B. Peterson as counselor to commission chair William Donaldson. Hall will assist Donaldson with enforcement policies, as well as procedures governing both the markets and SEC issuers. He also will serve as Donaldson's main liaison to other SEC commissioners and departments. Hall succeeds Patrick Von Bargen, who recently announced that he would be leaving the regulator for a post in the private sector. Hall joined the SEC in 2003 as senior policy fellow in the Office of the General Counsel, and later served as counsel to Donaldson. Prior to coming aboard at the commission, he was a partner with the firm of Davis Polk & Wardwell in New York. In her new post as Donaldson's counsel, Peterson will advise him on rulemaking and other initiatives. She originally joined the commission in 1987, serving in the Office of the General Counsel and later as counsel to then-chair David Ruder. In a statement, Donaldson said, "Joe and Martha each bring a wealth of experience and knowledge to their positions. I look forward to continuing to work with them to further the best interests of America's investors."

Embattled brand Krispy Kreme, which is currently the subject of a formal probe by the Securities and Exchange Commission, said that it would cooperate with prosecutors who want to interview former executives of the doughnut and coffee retailer, based here. In published reports, the chain said that the executive inquiry, which is being conducted by the U.S. Attorney for the Southern District of New York, is related to the ongoing SEC probe and vowed to cooperate with investigators. The names of the executives to be questioned were not identified. Krispy Kreme, which went public roughly five years ago, has been under investigation for its franchisee buyback procedures, as well as its earnings forecasts. It also faces a number of class-action lawsuits by shareholders. The company's stock, which once closed in on the $50 level, now trades at just over $5. Last month the chain ousted chief executive Scott Livengood and handed the reins over to Stephen F. Cooper, a turnaround specialist, who promptly announced a 25 percent reduction in the number of corporate employees.

The U.S. Supreme Court agreed to hear arguments on the appeal of the obstruction of justice conviction of former Big Five firm Arthur Andersen. The arguments are scheduled for April 27. In 2002, Andersen was convicted in a Houston courtroom of obstruction of justice charges related to its now-famous shredding of documents for audit client Enron, the Houston-based energy trader. The 5th U.S. Circuit Court of Appeals subsequently upheld the obstruction conviction. The issue before the Supreme Court will be whether the instructions to the jury at the Andersen trial were too vague and broad to determine correctly whether the audit firm obstructed justice. Enron -- once ranked as the country's seventh largest company -- collapsed into bankruptcy in December 2001. Andersen is asking that the high court either acquit the company or grant a new trial with new jury instructions.

Big Four firm Ernst & Young revealed that it plans to set up at least two more offices, and possibly as many as four, in China in 2005, according to firm partner Conway Lee. Lee told China Daily that, "Cities such as Tianjin, Chongqing and Shenyang would be clear next steps in our expansion plan." He added that establishing a presence in those locations will extend the company's reach in the huge market in China, where it currently has nine offices and 4,000 employees. In 2004, E&Y opened locations in Dalian in Northeast China's Liaoning Province, and Wuhan, the capital of Central China's Hubei Province. After 2005, Lee said that the company would grow its China network by two to three offices each year.

The Securities and Exchange Commission said that it would hold its previously announced roundtable on the internal controls requirements of Sarbanes-Oxley on April 13 -- affording both companies and auditors the opportunities to air their grievances on the difficulties and costs of the federal mandate. Since the 2002 passage of the sweeping corporate reform act --Section 404 of which requires a company's executives to attest to the adequacy of its internal controls -- the guidelines have been the subject of frequent complaints from firms and auditors citing the prohibitive costs in both money and time. The SEC is currently mulling a delay for internal controls compliance for both smaller and foreign-based companies, both of whom are required to be in compliance by July 15. After receiving a delay last year, larger companies -- those with a market cap of $700 million and higher -- began complying with the internal controls requirements in November.

Spurred by a recent clarification from the Securities and Exchange Commission, retailers Gymboree Corp. and Kohl's announced separately on Tuesday that they would restate their financial results. Citing the Feb. 7 letter on lease accounting from the SEC's Office of the Chief Accountant, Gymboree announced that it would change the way it accounted for rent holidays, landlord allowances and incentives under operating leases, which, it said in a statement, "is not consistent with the views expressed" in the SEC's interpretation. The San Francisco-based clothing company, which operates over 600 stores, said that it will restate its quarterly financials for 2004, and possibly for earlier periods. Gymboree expected to record an additional non-cash charge for fiscal 2004 of between six and seven cents a share, and that the restatements would reduce 2004 income by as much as 2 cents a quarter. Menomonee Falls, Wis.-based department store operator Kohl's, meanwhile, announced that it would restate financials going back to 1998 in response to the Feb. 7 clarification. The company, which operates over 600 stores, said that the changes would not affect future or historical cash flows, but that it would recognize higher rent expenses over the period covered by the restatements. It said that the higher rent would reduce earnings by 1 cent per share in 1999, 2 cents per share in 2000, 2001 and 2002; and 3 cents per share in 1998, 2003 and 2004. The company is still working with external auditor Ernst & Young on the restatements.

The Governmental Accounting Standards Board has just released its new five-year strategic plan, an effort that kicks off with a series of sweeping surveys on the board's standing with its constituency, as well as a barometer of its progress. Within the next three months, the board will issue the first in the planned survey series, with the inaugural one establishing a baseline on such questions as the percentage of governments that prepare financial statements in accordance with GASB standards, the percentage of auditors who are satisfied with the quality of those standards, and the percentage of users of government financial information who are satisfied with what they get. The new plan, which will guide the board until 2009, offers nothing radically different, but it does include a subtle shift to more emphasis on communication. Given that the effectiveness of communication is difficult to measure, the board will use surveys to track and measure results. Separate surveys will go to government financial officers, auditors, citizens, and other constituent groups who use governmental financial statements. GASB Chairman Robert Attmore said that it's too soon to know which surveys will go out first, but the first should be in the mail before summer. "We're in the accountability business," Attmore said. "We're encouraging other folks to be more open and transparent and try and communicate better about their performance, service efforts and accomplishments, so I thought it was important that we walk the talk." The plan also calls for GASB to encourage more public participation in the process of developing standards. The board will expand and diversify the pool of people called on to serve on task forces and advisory committees. Attmore explained that the board's previous strategic plans specified directions but lacked specific outcomes and performance measures.

The Public Company Accounting Oversight Board named former Ernst & Young partners Greg Wilson and Michael Pauk to head its branch units in Chicago and Denver, respectively. Wilson, a deputy director of inspections, is a retired E&Y audit partner and served in a number of management and administrative posts with the Big Four firm, including directing the audit practice in E&Y's Chicago office and serving as a regional director of human resources. Pauk, a regional associate deputy inspector who most recently operated his own consulting practice, was an E&Y partner in both the Denver practice office and the Cleveland national office. The regional offices support the oversight body's audit inspections program, which is headquartered in Washington. In addition to Denver and Chicago, the PCAOB has offices in New York, Atlanta, Dallas, San Francisco, and Orange County, California.