Audit

The Internal Revenue Service ruled that a partial termination of a qualified plan occurred where 23 percent of a plan's participants were no longer active due to the closing of one of the employer's four locations. Therefore, all plan participants were fully vested. Under Code Section 411(d)(3), a plan is required to provide that, upon its partial termination, the rights of all affected employees to benefits up to the date of the termination must be non-forfeitable. Under the regs, the IRS uses a facts and circumstances test to determine whether a partial termination has occurred. The IRS ruled that if the turnover rate is 20 percent or more, there is a presumption that a partial termination of the plan has occurred. The IRS determined the turnover rate by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period - in this case, the plan year - by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. The 20 percent threshold merely creates a presumption, according to the IRS. Facts and circumstances indicating that the turnover rate for an applicable period is routine, and not the result of a shutdown as in this instance, favor a finding that there is no partial termination. The IRS also noted that a partial termination of a qualified plan can also occur for reasons other than turnover. For instance, a partial termination can occur due to plan amendments that adversely affect the rights of employees to vest in benefits under the plan, plan amendments that exclude a group of employees who have previously been covered by the plan, or the reduction or cessation of future benefit accruals resulting in a potential reversion to the employer.

Broker/dealer H.D. Vest Financial Services said that its assets under management in advisory accounts recently passed the $5 billion mark. The company said that figure helped propel its total assets under management to roughly $25 billion. The company began offering advisory solutions in 1987, and currently supports over 1,900 independent advisory consultants in its system of 5,500 advisors.

Florida A&M University has been given a six-month window to straighten out its accounting problem or risk losing its accreditation by the Southern Association of Colleges and Schools. The school has come under fire after a state auditor revealed that the school's inspector general's office had gone 40 months without any formal reports on internal investigations, and that $39 million in transactions and budget amendments were made without approval of the school's board of trustees. In addition the school has some $1.8 million in missing receipts for athletic-event tickets and $11,000 in bad checks were written by the administration. Students attending an unaccredited school are typically not eligible for financial aid.

Prosecutors are urging a U.S. district Judge to dismiss indictments against 13 of executives of Big Four firm KPMG on charges of marketing illegal tax shelters. According to The Wall Street Journal U.S. District Judge Lewis A. Kaplan had previously ruled that the government had overreached in its years-long investigation, violating the defendants' constitutional rights to counsel and due process. In a June 22 filing in federal court in Manhattan, prosecutors said that Kaplan's decision showed that there was a fundamental flaw in the proceedings and that he must dismiss the indictments. As a result, 13 of the 18 defendants may now never stand trial, including the accounting giant's former vice chairman, Jeffrey Stein, the highest-ranking executive named in the indictment. However, legal experts opined the petition was a strategy to allow allowing prosecutors to appeal Kaplan's ruling, a maneuver that may yet allow prosecutors to resume the proceedings against all 18 of the defendants. The indictments were initially handed down in 2005 accusing the defendants of selling fraudulent tax shelters from 1996 through 2002, that cost the government some $2.5 billion in revenues. In striking an agreement to escape a potentially fatal criminal indictment that could have shuttered the firm, KPMG agreed to pay a $456 million fine to the federal government and spend the next 16 months on probation overseen by a federal monitor. The firm also agreed to close its tax business for high-net-worth individuals. Kaplan has scheduled a hearing July 2. A decision regarding the government's argument, as well as the motions to dismiss the indictments, could be issued this summer.

After collating some 80 comment letters on valuation guidance for financial reporting, the Financial Accounting Standards Board unveiled plans to form a resource group on the subject. Specifically, the cadre will provide the standard-setter with input on potential clarifying guidance on issues relating to the application FASB Statement No. 157 on Fair Value Measurements. FASB said the composition of the group will comprise of a cross section of constituents and added that its initial meeting will be sometime during the third quarter of 2007.

The Joint Committee on Taxation has issued a report on the individual alternative minimum tax in advance of a Senate Finance Committee hearing scheduled for Wed., June 27. The JCT report listed several selected reform options, which include: indexing or increasing the exemption amounts; allowing the deduction for personal exemptions and standard deductions to be used when computing the AMT; permitting state and local taxes against the AMT; reducing the minimum tax rates; eliminating the phase-out of the minimum tax exemption; allowing nonrefundable personal credits to offset the minimum tax after 2006; and repealing the AMT. The report is available at: http://www.house.gov/jct/x-38-07.pdf.

The LexisNexis Tax Center platform will now include exclusive content from Ernst & Young's International GAAP Online. Written by the International Financial Reporting Group of Ernst & Young, International GAAP Online includes the full text of every International Financial Reporting Standard and a set of model IFRS financial statements. LexisNexis has also paired with Danielle Rolfes, tax attorney and CPA with Ivins, Phillips & Barker, to present information on FIN 48. "There's a sea change that's less about the mechanics of FIN 48 and more abut rigorous accounting to give investors enhanced insight into companies' overall income tax positions and the consequent ability to scrutinize and compare," said Rolfes. LexisNexis launched its Tax Center last year to help streamline analysis of tax strategies across the broadest array of tax publishers available on a single platform, including LexisNexis, CCH, BNA, Tax Analysts, the ABA Section of Taxation and Matthew Bender.

Many of my friends are already retired, whether they have money or not. And, I keep hearing all the time the same question: When will I pack it in? After all, I’ve been at this for the past 45 years and you know something, I still love it. I may be one of the few people who on a Sunday night has trouble sleeping because I can’t wait to get to the office Monday morning.

Though financial reporting and Sarbanes-Oxley Section 404 oversight remain a top priority for audit committees, other areas such as IT are fast rising as high-risk concerns, according to a survey sponsored by Big Four firm KPMG. According to the 2006-2007 Public Company Audit Committee Member Survey, conducted by KPMG's Audit Committee Institute and the National Association of Corporate Directors, just 15 percent of 282 audit committee members participating the survey indicated that they were "very satisfied" with their company's oversight of IT, while 20 percent admitted that their IT risk oversight needed improvement. Some 90 percent of respondents said the audit committee should devote more agenda time to upgrading IT risk oversight. Despite ongoing challenges posed by complex accounting standards and Section 404 compliance, most audit committee respondents were confident of their oversight in that area. About 80 percent of audit committees were "very satisfied" with their oversight of management's accounting judgments and estimates and some 60 percent said they were "very satisfied" with the amount of time the audit committee spends discussing the issue. For more information on the survey, visit: www.kpmg.com/aci.

The Internal Revenue Service is expanding an outreach effort to ensure that public schools throughout the United States are complying with the universal availability requirement for retirement annuities they may offer.Some schools and school districts may be overlooking offering employees the opportunity to participate in these retirement plans. To assess the level of compliance, the IRS's Employee Plans Compliance Unit has started sending questionnaires to public school districts in all 50 states under the 403(b) Universal Availability project. A 403(b) plan is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. "Our pilot project in three states showed fairly widespread noncompliance by schools with the universal availability requirement for 403(b) plans," said Joseph Grant, director of the IRS Employee Plans Division. "But we believe most of it was due to a lack of understanding about what the law requires, not a deliberate failure to comply." "We know from our pilot project and from talking to representatives from schools and districts across the country that most of the problems stem from either misunderstanding the law or from confusion because of differing rules in various states," said Grant. "The project will give schools the chance to identify problems with their plans and to correct them on their own."

The head of the body that oversees both the Financial Accounting Standards Board and the Governmental Accounting Standards Board has petitioned Connecticut Governor Jodi Rell to veto a measure that would allow the state comptroller to set accounting standards and bypass GASB. Robert J. DeSantis, president and chief executive of the Financial Accounting Foundation, wrote to Rell requesting that she veto the legislation, which has already passed in both the Connecticut House and Senate. The legislation "threatens the integrity and objectivity of the independent standard-setting process and is a step backwards for public trust, government accountability, financial transparency and the state's investors," DeSantis wrote. Barry Melancon, president and chief executive of the American Institute of CPAs, also sent Rell correspondence urging a veto.

Deloitte Financial Advisory Services LLC, a unit of the Big Four firm, has launched a new think tank designed to analyze fraud, corruption and other issues facing the global business community. The Deloitte Forensic Center will focus on exploring fraud-prevention issues with attorneys, regulators, academic experts, investigators and accountants involved in forensic matters. Areas of study will be decided by an informal, independent panel of advisors -- one of whom is former Federal Reserve Chairman Paul Volcker -- and lead by Frank Hydoski, director of Deloitte Financial Advisory Services, and Deloitte partner Toby Bishop. Hydoski and Bishop are full-time members of Deloitte FAS's Forensic & Dispute Services Team. The directors anticipate each area of study, when decided, will take about four months to publish its findings, and expect two to three more topics to be explored within the next year. "A number of our practitioners have noticed business leaders are increasingly asking us questions," Bishop said during a press conference at the center's launch. "It was a risk most organizations didn't have to deal with. What we've seen over the last 10 years is an evolution [that] fraud and corruption are endemic issues." Bishop said that another goal of the DFC is to play a role in "thought leadership" on fraud and corruption issues, and to take the information the organization already has on such matters and figure out how to apply it more effectively. For example, in trying to find what techniques work best to limit the prevalence of corruption, the group will ask questions addressing whether it is better to approach change within the corporate culture through anti-corruption policies or work on the governmental level to create preventive laws. "Fraud has increased over the last decade in its reach and impact but many business leaders have grown up in an era where it's not a big deal, it happened to bad companies," Bishop said. "If they choose not to deal with it, they are in for some unpleasant surprises. But persuading people that they need to do something about it is very hard."

The Public Company Accounting Oversight Board has identified deficiencies in eight audits performed by Big Four firm Deloitte during an inspection of the firm conducted over a six-month period in 2006. The audit overseer said that in some cases, the audit deficiencies "were of such significance that it appeared to the inspection team that the firm, at the time it issued its audit report, had not obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements." The audit clients are not identified in the PCAOB's inspection report. A response letter to the board by the Big Four firm raised objections to the findings in two of the audits. Deloitte said that it was committed to "the highest standards of audit quality." The firm said that it has already begun work to address the board's concerns over the remaining audit reports. The report can be accessed at: http://www.pcaobus.org/Inspections/Public_Reports/index.aspx

The Public Company Accounting Oversight Board named insider C. Gregory Scates as deputy chief auditor. In that role, Scates, 53, will provide technical direction in the development of the board's standards. He will report to Tom Ray, the PCAOB's chief auditor and director of professional standards. Scates, who came aboard the PCAOB in 2003, helped develop Auditing Standards Nos. 1 and 3, which deal with reporting on audits in accordance with the standards of the PCAOB and audit documentation. He also has developed staff guidance on technical auditing matters, and led various current standards-setting projects. Prior to joining the PCAOB, Mr. Scates was associate chief accountant in the division of enforcement at the Securities and Exchange Commission.

The Center for Audit Quality, a affiliated group of the American Institute of CPAs, has signed on to the Aspen Principles, a set of guidelines focused on business practices, investment practices and the long-term competitiveness of U.S. business. Prompted by concerns about the short-term pressures on publicly traded companies and rising public sentiment against excessive executive compensation, the signing of the four-page document by 12 members of The Aspen Institute Corporate Values Strategy Group is the culmination of a two-year process. The Aspen Institute Business and Society Program spearheaded the lengthy initiative in collaboration with the Council of Institutional Investors and the Business Roundtable. Key provisions of the Aspen Principles call for: * Companies to stop providing quarterly earnings guidance to analysts and to not respond to analyst estimates. * Corporate boards to communicate with "long-term- oriented investors" on senior executive compensation. * Requiring senior executives to hold stock they are given for at least some period beyond their tenure with the company, thus tying them to the long-term growth of the company. * Banning senior executives from hedging the risk of long-term-oriented stock option compensation. * Providing for "clawbacks," which involve recouping senior executive compensation awarded based on the achievement of performance targets subsequently slashed or wiped out by corporate financial restatements. Other organizations that have signed the Aspen Principles include the AFL-CIO, PepsiCo, Pfizer and Xerox. Separately, the CAQ said that it would host a panel discussion and luncheon July 30 at the National Press Club in Washington to mark the fifth anniversary of the passage of Sarbanes-Oxley.

In a three-year-old legal fray that resulted in a mistrial in March, a jury here has found global audit firm BDO Seidman guilty for its failure to detect audit fraud that prompted a Florida financial services company to declare bankruptcy. The verdict stems from a suit filed in 2004 by Banco Espirito Santo SA, a Portuguese bank that charged BDO with failing to uncover some $170 million of fraud at financial services firm E.S. Bankest, a former partner of the bank.

The Treasury is seeking nominations for its previously announced strategy to establish an Advisory Committee on the Auditing Profession -- a committee charged with studying the accounting profession and ways to keep the auditing profession vibrant and the U.S. capital markets competitive. Last month, Treasury selected former Securities and Exchange Commission Chairman Arthur Levitt and former SEC chief accountant Donald Nicholaisen to help lead the effort. The committee is expected to take about a year to study topics such as the concentration of the Big Four and their exposure to potentially crippling shareholder lawsuits. The panel is scheduled to begin its work in the fall. Nominations should be sent to ACAPmembership@do.treas.gov or Advisory Committee on the Auditing Profession Membership, Office of Financial Institutions Policy, Department of the Treasury, Main Treasury Building, Room 1418, 1500 Pennsylvania Avenue, NW., Washington, D.C. 20220. Nominations must be received on or before July 11, 2007.

One month after four employees of Big Four firm Ernst & Young were charged with conspiracy to commit tax fraud, a former employee of the audit firm has pled guilty to similar charges. Dallas-based E&Y employee Belle Six entered her plea in Federal District Court in Manhattan. Six, who worked in the firm's Viper Group that created and sold tax shelters, will, according to her agreement, forfeit some $13 million she received as compensation.

E&Y DECLINES RE-ELECTION AT TELETECH

Recently, Accounting Today printed both an article by Joel Jameson (March 19-April 1, 2007, page 14) and a letter from Alfred King (April 16-May 6, 2007, page 8) that rebutted our long-espoused view that financial reporting should be based on market values.