Audit

Valuation for financial reporting has long befuddled accounting professionals. Differences among industrial sectors often lead to inconsistencies, and recent new requirements for fair-value reporting have made the process even more confusing.

Do consumers really understand what a fiduciary standards means in the financial services industry? And, perhaps more importantly, do they even care? A new survey from the National Association of Personal Financial Advisors (NAPFA) was unveiled recently at its annual convention in Chicago and it certainly answers those two questions.

Williams & Webster PS, a CPA and business advisory firm with offices in Seattle and Spokane, has been censured by the Public Company Accounting Oversight Board for violations stemming from a 2004 client audit.

The Public Company Accounting Oversight Board is currently accepting 15 member nominations and re-nominations for its Standing Advisory Group. The 31-member SAG is comprised of representatives from audit firms, public companies and the investment community. Appointments are for two-year terms. The audit overseer has also scheduled its next SAG meeting for June 21 in Washington. The focus of the meeting will center on interim standards and fair value. Both the SAG nomination forms and the Webcast for the June meeting can be accessed at www.pcaobus.org. In related PCAOB news, chairman Mark Olson told attendees at a governance and compliance conference late last week, that the simpler language found in Auditing Standard No. 5 on internal controls should help pare down the costs of 404 compliance. Olson said AS5, unlike its predecessor AS2, was written in English and not "audit-speak."

Six of the nation's largest CPA firms have collaborated on a white paper and submitted it in late May to then-Internal Revenue Service Commissioner Mark Everson with a series of recommendations on strategies to close the $300 billion tax gap. The letter, submitted by executives from BDO Seidman, Deloitte, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers, told Everson that strategies to narrow the massive payment fissure should encompass such areas as targeting the service's efforts toward high-risk areas of noncompliance, making better use of technologies, and establishing measurable milestones over reasonable time frames to monitor effectiveness. The paper also held tax preparers' feet to the fire as a part of the problem stating that in some cases, the preparers "failed to inquire for complete facts or otherwise facilitating noncompliance. Initiatives directed at improving the performance of paid tax return preparers and strengthening the integrity of the tax system should be undertaken as part of any strategy to improve voluntary compliance and reduce the tax gap," the paper said.

Yep, it's that time of the year again! CPA Wealth Provider is calling for nominations for its Fifth Annual Financial Planning Awards in any of the following categories: CPA/Financial Planning Firms, Broker/Dealers, and Financial Planning Software Vendors.Winners are those firms or companies that have taken the lead through innovation, efficiency, initiative, or growth in the financial planning area.

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."

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.

Former Senator Paul Sarbanes, D-Md., who, as the head of the Senate Banking Committee, co-authored the sweeping Sarbanes-Oxley Act, said that he supports developing additional guidance for smaller filers but, not surprisingly, he dismisses exempting those companies from compliance with the law's rigid Section 404."Stop and think about that for a moment," Sarbanes said in a speech before attendees at a conference on contemporary accounting issues. "That would mean that you would be exempting 80 percent of public companies from compliance."

My show business career was, to be kind, unremarkable.

Our last column dug into some of the reporting practices used by Hertz Global, specifically its somewhat misleading depreciation of its rental fleet.We noted that Hertz reported the fleet in the 2006 10-K as a long-term asset, showing full cost less accumulated depreciation. It also showed depreciation as an add-back to net income in the operating section of the cash-flow statement. To provide a scale, out of $18.7 billion total assets, the fleet's book value at the end of 2006 was about $7.4 billion, or 40 percent. On the cash-flow statement, the reported operating flow for 2006 was about $2.6 billion, after adding back $1.8 billion of depreciation.

CCH has released a white paper on the recent regulatory guidance from the Securities and Exchange Commission and the Public Company Accounting Oversight Board concerning the internal control provisions of the Sarbanes-Oxley Act.

Taking over the helm of Deloitte Touche Tohmatsu today, chief executive James Quigley and a new leadership team announced their plans to become the largest professional services network within the next two years.Quigley plans to bring a new focus on the Deloitte brand, as well as to build a stronger commitment to the firm’s people. He also wants to strengthen the connection between Deloitte member firms across regions, increase the number of professionals in key markets in Europe and Asia, and showcase the firms’ consulting capabilities as a market differentiator.

Bankrate, which is a leading Internet consumer banking marketplace, has released an interview with Christopher Cox, chairman of the SEC that was conducted as part of Bankrate.com’s Financial Literacy Program. Bankrate does a real service to the community with this interview and I commend them because it helps to put into focus what is actually going on with seniors and also how they can be protected from scams. Moreover, it comes from the person who should know, and does.Cox has first hand knowledge of what’s involved and he relates a tale about his own parents. “Before my mother died a few years ago, she was pestered by a seemingly endless barrage of annuity schemes and unsuitable mortgage offers. Despite the fact that she was suffering from throat cancer and could barely speak, she received unsolicited sales pitches over the phone and even in person. Even though my father was suffering from Alzheimer’s disease, the brokers would prey upon him, as well.”

The Financial Accounting Standards Board has released its most recent annual report, showing strong financials and continuing to focus on a trio of ongoing initiatives.FASB is funded through accounting support fees provided for under the Sarbanes-Oxley