Audit & Accounting

Former Senators Connie Mack and John Breaux, chairman and vice-chairman of the President's Advisory Panel on Federal Tax Reform, have scheduled the panel's first meeting for Feb. 16, 2005. Witnesses will be Fred T. Goldberg, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, and a former commissioner of the Internal Revenue Service; Louis Kaplow, a professor of law and economics at Harvard Law School; William G. Gale, co-director of the Urban-Brookings Tax Policy Center; and Stephen J. Entin, president and executive director at the Institute for Research on the Economics of Taxation. Treasury secretary John Snow will also appear before the panel. "The president has tasked our panel with developing reforms to make the tax code simpler, fairer and more growth-oriented," said Senator Mack. "I look forward to the opportunity to hear from Secretary Snow as well as this distinguished group of experts as we begin the process of examining the problem and formulating solutions." "The current tax system is an unfair burden on Americans," added Senator Breaux. "When it takes the average taxpayer 11 hours to fill out the short tax form, something is wrong. This is a unique opportunity to work in a bipartisan effort and find ways to make the tax system serve Americans better." The witnesses will provide the panel with a historical overview of the current tax system and an understanding of how it evolved and where it is today. The panel will also hear background about tax systems. In particular, the witnesses will explain the difference between a tax on income and a tax on consumption, how the different bases impact the overall functioning of the tax system, and the advantages and disadvantages of each one in terms of simplicity, fairness and economic growth.

Securities and Exchange Commission Chairman William Donaldson said that his agency would examine the possibility of modifying or rewriting some current rules, such as the ones requiring stricter internal controls, granting investors power to nominate board members, and governing the methods in which stocks are traded. In published reports, Donaldson said that, while the regulator might be considering any or all of the above-mentioned refinements, the SEC has not abandoned its plans to impose fines for both individual and company wrongdoers. Donaldson said that he hopes the watchdog will approve a measure that would give shareholders more power to elect board members of their choosing, but the rules in their present form may have to be rewritten. A host of business groups have lobbied against the shareholder-nominating proposal, claiming it would cater to special interest groups.

While the current Social Security system is not in crisis mode, it faces serious problems with regard to solvency and sustainability, according to the Government Accountability Office. The auditor general said that if nothing was changed with the 70-year-old program until 2042, "achieving an actuarial balance" would require a 30 percent reduction in benefits or a 43 percent increase in payroll taxes. The GAO also labeled Social Security's problems "a subset of our nation's overall fiscal challenge." Absent reform, the country would have to choose among escalating federal deficits and debt, gargantuan tax increases, or federal budget cuts. However, the GAO warned that when evaluating any reform measure, financial stability should not be the sole criteria. A equitable balance with regards to benefits, as well as administrative and operational issues, also require consideration. The auditor general added that any changes enacted with Social Security should be made "in the context of the broader challenges facing our nation," such as those concerning private pension systems, Medicare and Medicaid.

A letter drafted by technology sector lobbyists is making its way through Congress asking lawmakers for support in their battle against expensing stock options. The letter, which is scheduled to arrive on the desk of Securities and Exchange Commission Chairman William Donaldson on Monday, Feb. 14, requests that the regulator delay the June 15, 2005, implementation date, and recommends that the agency conduct an impact study on options expensing. The letter, of which WebCPA received a copy, specifically exhorts the regulator to: o Field test valuation methods "to ensure the methods imposed on all public and private companies make sense and not adversely affect our nation's economy." o Conduct, along with the Labor and Commerce Departments, "a comprehensive impact study before any standard is implemented. There is little doubt that the economic, labor and global competitiveness impact of stock option expensing could be severe." A representative for TechNet -- a bipartisan network of technology sector chief executives who represent more than one million employees -- said that he was aware of the letter, but that the group was not the one behind it. "The SEC has to realize that 14 million people own stock options, so it's not just for top executives. It's a much larger issue than that." In July, House lawmakers overwhelmingly passed their own stock option bill, H.R. 3574, which mandates expensing options only for a company's top five executives.

The American Institute of CPAs has joined with the Labor Department's Women's Bureau in an initiative to help educate women about personal financial management. The partnership will combine the financial education efforts of both organizations -- the AICPA's 360 Degrees of Financial Literacy, and the Women's Bureau's Wi$e Up. The joint effort would provide Labor's Wi$e Up program with the institute's financial experts to support its on-line program and teleconference calls, as well as financial education workshops and conferences. The AICPA's 360 Degrees of Financial Literacy was launched last year with the support of state CPA societies. The program encourages CPAs to volunteer to help educate the public on various financial topics.

Securities and Exchange Commission chief accountant Donald Nicolaisen told lawmakers that the regulator is conducting a top-down examination of mortgage-financing concern Fannie Mae. In prepared remarks before a House subcommittee, Nicolaisen said that, although he could not discuss the ongoing investigation, the SEC staff is "thoroughly" investigating accounting practices at the company. In December, the SEC determined that Fannie Mae's accounting practices didn't comply with generally accepted accounting principles, and told the company to restate its financials for the years 2001 through 2004. As a result, company's chief executive and chief financial officer have departed.

The Securities and Exchange Commission said it will host a roundtable -- possibly in April -- to discuss on how auditors and their smaller publicly traded clients are dealing with the Section 404 internal controls requirements of Sarbanes-Oxley. SEC Chairman William Donaldson has asked for an "appropriate delay" for smaller public issuers and non-U.S. companies whose compliance deadline was scheduled for July 15, 2005 and whose market cap is between $75 million and $700 million. Large U.S. companies, above that threshold, are already required to comply with the internal controls mandate as of Nov. 15, 2004. SEC chief accountant Don Nicolaisen said if a delay is provided, companies should use that time to continue documenting and testing internal controls.

As expected, the European Union Commission has mandated that European-listed companies expense stock options. The law, which must be applied retroactively from Jan. 1, 2005, applies to roughly 8,000 companies. Late last year, the E.U. lobbied hard for the expensing rule, but in order for it to be enacted into law it had to be approved by the European Parliament. In the U.S., companies must begin expensing stock options from June 15. Much like in the U.S., where options expensing was met with a flurry of lobbying activity -- especially from the technology sector -- many of Europe's biggest conglomerates had attempted to delay the expensing rule until it became effective in the U.S.

George W. Bush's presidency will be remembered for many things - and if the president has his way, one of those things will be an overhaul of the venerable Social Security system.

A federal judge here denied a motion to dismiss the WorldCom class-action litigation against its auditor - former Big Five firm Andersen - charging that the plaintiffs had "identified a host of audit failures."