Audit

Two weeks after ousting former auditor KPMG LLP, beleaguered mortgage giant Fannie Mae has hired Deloitte & Touche LLP to perform its 2004 audit and to re-audit prior period financial statements that it will restate.

The head of Big Four accounting firm Deloitte defended his firm's work and reportedly suggested that Grant Thornton's former Italian affiliate may have withheld information during audit work on Parmalat, the Italian dairy giant that imploded amid allegations of widespread accounting fraud.

The Public Company Accounting Oversight Board is falling behind in its plan to recruit a small army of veteran auditors for the coming year -- a development that led it to trim its budget for the year and that could lead to frustrating delays in the Sarbanes-Oxley-mandated inspections of the more than 1,400 public accounting firms that have registered to audit the financial statements of publicly traded U.S. corporations.

The Governmental Accounting Standards Board has released Statement No. 46, Net Assets Restricted by Enabling Legislation, an amendment to its Statement No. 34.Statement 46 was drafted to help government entities determine when net assets have been restricted by the passage of enabling legislation, and to specify how those net assets should be reported in financial statements when there are changes in the circumstances surrounding said legislation. Enabling legislation is defined as a specific type of legislation that both authorizes the raising of new resources and imposes legally enforceable limits on how they may be used.

The AARP, the high-profile lobbying group for 36 million Americans over 50, plans to launch a two-week advertising campaign to battle President Bush's proposal to privatize Social Security via the rollout of ownership accounts. The group headquartered here, plans to spend some $5 million on the advertising push to fight the creation of the proposed accounts, which would be funded through payroll taxes. According to reports, the full-page ads are scheduled to appear in roughly 50 newspapers across the country. One of the ads displays a picture of stock traders with the tagline, "Winners and losers are stock market terms. Do you really want them to become retirement terms?" Another shows a couple saying, "If we feel like gambling, we'll play the slots."

National electronics retailer Best Buy Co. said it would dismiss its auditor, Big Four firm Ernst & Young, following the completion of the fiscal 2005 audit -- which ends Feb. 26 -- due to a conflict of interest with a company director. According to a federal filing, Best Buy said the decision to jettison E&Y as its independent accountant stemmed from the May resignation of Mark C. Thompson, a former board and audit committee member. Thompson resigned his post earlier this year after it was revealed that he had an arrangement with E&Y to provide services for $377,500, plus expenses. Best Buy has not named a successor to Ernst and is currently seeking proposals.

The Internal Revenue Service has issued Notice 2005-5 providing guidance on the new automatic (or default) rollover rules for qualified retirement plans. These new rules were added to the Internal Revenue Code as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, but they will not be effective until March 28, 2005, which is the effective date of related final regulations published by the Department of Labor. The guidance answers questions regarding the application of the new requirement and will make it easier for plan sponsors to comply in a timely manner. The new automatic rollover rule requires that mandatory distributions of more than $1,000 from a qualified retirement plan be paid in a direct rollover to an Individual Retirement Account unless the distributee elects to have the amount rolled over to another retirement plan or to receive the distribution directly. EGTRRA also requires that the plan administrator notify the distributee in writing that the distribution may be paid in a direct rollover to an IRA. The guidance responds to comments received by the Department of Labor, Treasury, and the IRS. For example, the guidance clarifies that the automatic rollover requirement applies to governmental and church plans although a transition rule is provided for these plans to comply. The guidance provides that all plans have until the end of 2005 to establish administrative procedures for processing the automatic rollovers and clarifies that rollover IRAs can be set up without the participant's participation. Finally, the guidance includes a sample amendment that plan sponsors can use to amend their plans to comply with the new rule.

Mortgage financing concern Fannie Mae revealed that its former auditor, Big Four firm KPMG, had notified the embattled company that it had discovered indications of weaknesses in its internal controls. In an SEC filing, Fannie Mae disclosed that the Big Four audit firm unearthed deficiencies with regard to its quarterly closing processes and that entries had been made after the books had been closed for the quarter that ended Sept. 30. Last week, Fannie Mae dismissed KPMG as its independent accountant, and on the same day, the board also ousted chief executive Franklin D. Raines and chief financial officer J. Timothy Howard. Currently, the Office of Federal Housing Enterprise Oversight, the entity that regulates Fannie Mae, and its smaller mortgage sibling, Freddie Mac, is investigating the exorbitant severance packages for both Raines and Howard. In September, the OFHEO released a report calling into question the company's accounting practices and charging it with earnings manipulation. As a result, in early December, the SEC ordered Fannie Mae to restate its earnings from 2001-2004, which could potentially erase some $9 billion in profits. Fannie Mae said that in order to help blunt the effect of lost earnings, it is mulling a private stock sale that could be as much as $4 billion.

The Internal Revenue Service has released final regs totaling over 230 pages with rules for plans that permit employees to make pre-tax contributions and for plans that have employer matching contributions or employee after-tax contributions. The existing regulations covering these plans were last updated in 1994. Since then, there have been significant statutory changes. The new regs will be fully effective for plan years beginning on or after Jan. 1, 2006, although employers are permitted to use the new rules for any plan year that ends after Dec. 28, 2004. These comprehensive final rules are the result of a long effort of input gathering from retirement plan participants, sponsors, and service providers. Specifically, they address many of the concerns raised by comments submitted in response to the proposed regulations. These final regulations will make it easier for employers to sponsor plans to help employees save for their retirement and will assist administrators in keeping the plans qualified. The final regulations update and simplify many of the current rules for 401(k) plans. In addition, the new regulations strengthen the nondiscrimination rules that ensure benefits for rank-and-file employees. They require certain employer contributions to be spread over a large group of rank-and-file employees before they can boost the ability of high-paid employees to defer income under the plan.

Douglas Hill, managing general partner of embattled brokerage house Edward D. Jones & Co., intends to leave the company roughly one week after the firm agreed to pay $75 million to settle charges of improper disclosure of revenue-sharing payments. Hill, 60, will retire as managing general partner Dec. 31, but would remain as managing partner through 2005. In addition, Hill is expected to pay $3 million of the agreed-upon fine, while the firm's general partners are expected to shoulder an aggregate of $44 million. Last week, the brokerage firm reached a settlement with the SEC, the New York Stock Exchange and the National Association of Securities Dealers as a result of arrangements that Edward Jones entered into with seven fund groups. The firm had not disclosed the fact that it received millions from the fund families each year for selling their respective products.

Big Four firm Ernst & Young will pay some $125 million to settle ongoing claims stemming from the firm's audit of failed thrift, Superior Bank FSB of Illinois. By virtue of a signed consent order with the Office of Thrift Supervision, E&Y will pay the Federal Deposit Insurance Corp. $85 million as receiver for Hinsdale, Ill.-based Superior, and an additional $40 million in restitution. In the settlement, Ernst & Young didn't admit or deny that its audits failed to comply with any professional accounting standards. The FDIC filed suit against Ernst & Young shortly after Superior Bank was declared insolvent three years ago. The FDIC contended that the audit firm had delayed alerting regulators about improper accounting practices at the banking concern because it was wary that the negative publicity would hinder E&Y's efforts to sell its consulting arm. The suit was dismissed in 2003, but the FDIC subsequently appealed. Ernst & Young said it has since implemented changes to its audit methodology for savings and loan association clients.

Two top executives and auditor KPMG are out this week at Fannie Mae, following the Securities and Exchange Commission's decision that the mortgage giant violated accounting rules, leaving it faced with a massive restatement.

H&R Block Financial Advisors, the investment arm of the tax prep giant, agreed to pay a $500,000 fine and to return $325,000 in clients' mutual fund trading profits to settle charges brought against it by the National Association of Securities Dealers related to the market-timing of mutual fund shares by two of its former financial advisors.

The Global Alliance, an association of top-ranked CPA firms formed last month, has expanded its ranks with the addition of West Coast firm Armanino McKenna LLP to the group.

The American Institute of CPAs has named California accounting professor Robert S. Roussey as the 2004 recipient of its Special Recognition Award, which is presented to individuals who have made substantial contributions to the accounting profession.

PricewaterhouseCoopers said that its fiscal 2004 aggregate net revenues climbed nearly $2 billion to $16.3 billion, an increase of 6 percent in local currencies and just over 13 percent in U.S. dollars.

HIGH-END AND MID-MARKET ACCOUNTINGACCOUNTMATE 6.5

Contact information for the vendors of the Accounting Today 2005 Top 100 Products and Ones to Watch.AccountantsWorld

Marking its 11th consecutive year of aggregate revenue growth, Big Four firm Deloitte Touche Tohmatsu reported global revenue of $16.4 billion, up 8.6 percent over last year.

The Financial Accounting Standards Board has begun to deliberate again on one of its most far-reaching and controversial projects - that of fair value measurement.