Audit

Fast-food titan McDonald's Corp. said that it would pare down its equity-based compensation, such as stock options, and replace it in some cases with cash-based incentives, The Wall Street Journal reported. In its annual report, the global burger chain said that its decision stemmed in part from the options expensing rule adopted by the Financial Accounting Standards Board in December. McDonald's said that it will start complying with the options-expensing mandate during the current first quarter, and added that it would have to restate its financial results from some prior periods to reflect the previously unrecognized compensation expense.

Ending its competitive bidding process, retirement services provider TIAA-CREF appointed Big Four firm PricewaterhouseCoopers as its auditor for its 2005 fiscal year. PwC succeeds Ernst & Young as the company's independent accountant. Separately, TIAA-CREF said that Martin Gruber resigned as a trustee of the College Retirement Equities Fund and the TIAA-CREF Funds. Gruber's resignation marked the third resignation of a trustee over the past several months, after regulators launched an inquiry into E&Y's independent relationship with the benefits provider. Two former trustees, William H. Waltrip and Stephen H. Ross, resigned Nov. 30 after a conflict of interest with E&Y was discovered. Ernst will complete CREF's 2004 audits. TIAA-CREF said that it expects no qualified opinions or disagreements on accounting matters with E&Y.

Like a mammoth iceberg where just a fraction lies above the surface, the scope of the audit fraud at the Roslyn, N.Y., School District has, incredibly, passed the $11 million mark. A report on the fraud, released by New York State Comptroller Alan Hevesi, documented a far bigger plundering by former officials that previously thought as recently as late last year, when the losses at the Long Island district were estimated to be roughly $3 million. The report showed that former district officials siphoned funds from district coffers for items such as payments on personal mortgages on homes in New York and Florida, $609,000 spent at Home Depot, over $200,000 on lease payments for luxury cars, and more than $100,00 on trips to Las Vegas, San Francisco and a flight to London on the Concorde. Charged in the scandal are former Roslyn Schools superintendent Dr. Frank Tassone, former assistant superintendent for business Pamela Gluckin, and a former clerk, Deborah Rigano. All three are waiting indictment by the Nassau County Grand Jury. In addition, the state probe, which combed over district audits over an eight-year-period, has implicated an additional 26 people involved in the audit scam. The firm that audited the Roslyn Schools, Miller Lily & Pearce, which audited over 50 additional school districts and whose affiliate sold financial software to some 250 districts across New York state, recently shut its doors.

The Securities and Exchange Commission unanimously approved the 2005 budget for the Public Company Accounting Oversight Board, which requested $137 million for the body charged with policing the accounting profession. Initially, the board submitted a 2005 budget request of $152.5 million, a dramatic increase from the $103 million it had been allocated in 2004. However, when its hiring goals for 2004 fell short, it slashed that request by roughly 15 percent. The SEC approval, however, did not come without controversy, as two commissioners -- Paul Atkins and Cynthia Glassman -- reportedly ignored the objections of their boss, SEC Chairman William Donaldson, and extended an invitation to PCAOB Chairman William McDonough to attend the budget meeting. An invitation was also extended to Robert Herz, chairman of the Financial Accounting Standards Board. Neither attended the meeting. Last year's approval of the PCAOB budget had been done behind closed doors.

As expected, the Securities and Exchange Commission granted a one-year extension on Sarbanes-Oxley 404 compliance for small companies and foreign issuers that trade in the U.S. Under the SEC's revised guidelines, those firms that fall under those categories -- U.S, firms with a market cap of less than $75 million -- would have to be in 404 compliance for their first fiscal year ending on or after July 15, 2006. Section 404 of SOX requires that a company certify their internal controls and have an attestation to that effect from their outside auditor. Larger U.S. companies are required to be in 404 compliance for the first fiscal year ending on or after Nov. 15, 2004. In April, the SEC has scheduled a public roundtable to discuss concerns about SOX 404 and its time and cost impact on smaller companies.

National consumer electronics retailer Best Buy has hired Big Four firm Deloitte & Touche its new auditor, according to a federal filing. Best Buy had previously reported that it would jettison its independent accountant, Ernst & Young, following the audit of its financials for the year ended Feb. 26. Best Buy's new fiscal year began Feb. 27.

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."

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.

Paul F. Roye, director of the Securities and Exchange Commission's Division of Investment Management -- the division that polices the mutual fund industry -- is leaving to pursue a job in the private sector. Roye, who has served as the unit's director since 1998 and steered it through the explosive market-timing scandals affecting a number of large fund families, had been instrumental in orchestrating a number of initiatives at the regulator, including: o Strengthening the corporate governance regime for mutual funds; o Enhancing ethical standards for funds and investment advisers; and, o Requiring that funds and advisors adopt comprehensive compliance policies and procedures, and designate a chief compliance officer."It has been an honor and a privilege to serve America's investors as the director of the Division of Investment Management," Roye said in a statement. "I will miss my talented and dedicated colleagues in the division who, particularly during the challenges of recent months, have given their all to serve and protect America's investors." A successor has not been named.

A critic from Washington-based think tank the American Enterprise Institute has called on Congress to terminate the Public Company Accounting Oversight Board within five years and fold the oversight body into the Securities and Exchange Commission.

The American Institute of CPAs' Auditing Standards Board is poised to issue an exposure draft of five proposed statements and amendments to statements relating to auditors' risk assessment.

In 2004, some 1,600 companies told their independent accountants that their services would no longer be required, an eye-opening jump of 78 percent in auditor changes from the prior year, according to a study conducted by proxy researcher Glass Lewis & Co. The report found that the auditor switching hit the Big Four firms the hardest, with Ernst & Young posting a net client loss of 200, while the aggregate client exits for E&Y, PricewaterhouseCoopers, KPMG and Deloitte hit 400. Conversely, the national firms have picked up much of the client largesse emanating from the Big Four, with Chicago-based BDO Seidman adding 109 new audit clients last year. The Glass Lewis report said that audit clients who revealed why they switched audit firms said that the top reasons for changing accountants included Sarbanes-Oxley prohibitions and lower audit fees, among others. According to published reports, the 2,500-plus companies than changed auditors over the past two years represent more than 25 percent of the Securities and Exchange Commission issuers in the United States.

Scott Sullivan, the former finance chief of WorldCom and star witness for the prosecution in the ongoing fraud trial of former WorldCom CEO Bernie Ebbers, said in cross-examination that his desire to hit earnings targets superceded following the law. "I knew it was wrong and I knew it was against the law," Sullivan said under cross-examination by defense attorney Reid Weingarten. "But I thought we would make it through. I went along with hitting the earnings-per-share number." This week, Sullivan has been under fire from Weingarten, attorney for the 63-year-old Ebbers, who is on trial at U.S. District Court here for securities fraud, conspiracy and filing false documents with the Securities and Exchange Commission. The resulting $11 billion accounting fraud at the telecommunications company resulted in the largest bankruptcy filing in U.S. history. Sullivan had previously plead guilty to fraud and agreed to testify against Ebbers in return for a lighter sentence than the potential 25-year prison term he could face. He will be sentenced following Ebbers' trial. If convicted on all counts, Ebbers could be sentenced to as much as 85 years in prison. Sullivan has repeatedly testified that he was alone with his former chief executive when he was told to "hit the numbers." Over several days of grueling questioning, Weingarten has tried to portray Sullivan and not Ebbers as the mastermind behind the accounting fraud at WorldCom because of his accounting expertise. Earlier in the week, Weingarten hacked away at Sullivan's credibility by raising such issues as drug use, and showing the jury videotapes of meetings with Wall Street analysts where Sullivan deliberately masked the true financial picture of the company.