In a case that may wind up before the Supreme Court, a small Nevada CPA firm and an anti-tax group have lodged a legal challenge questioning the constitutionality of the Public Company Accounting Oversight Board.The Free Enterprise Fund, which filed the suit in Washington federal court in February, has teamed with Beckstead and Watts LLP, a one-partner firm in Las Vegas, in the litigation against the audit overseer.

E&Y RESIGNS AS A.P. PHARMA AUDITOR: Big Four firm Ernst & Young has resigned as auditor to Redwood City, Calif.-based pharmaceutical concern A.P. Pharma.A federal filing did not state a reason for E&Y's resignation, and a replacement has not been named.

Several columns back, we wrote about a recent report from the CFA Institute called A Comprehensive Business Reporting Model: Financial Reporting for Investors. This monograph is the long-awaited update of the influential Financial Reporting in the 1990s and Beyond.The new report is authored by a committee comprising a veritable who's who of highly experienced financial analysts, and speaks forthrightly about the highly limited usefulness of current generally accepted accounting principles financial reports. (The full report is available free at http://cfapubs.org/ap/issues/v2005n4/toc.html.)

SEC REQUIRES HEDGE FUND REGISTRATION: The Securities and Exchange Commission now requires hedge funds to register as investment advisors. Under the ruling, hedge funds will not have to register their individual funds. Rather, they have to provide basic information about the firm and are required to hire a chief compliance officer. Also, hedge fund firms are now subject to random inspections.Exceptions to the registration mandate include funds with less than $30 million under management, which will not have to register, although funds with $25 million or more are eligible for registration. Hedge funds that "lock up" their investors' money for two or more years or refuse to take new money can also avoid registration. The two-year loophole was meant to protect private equity and venture capital funds from getting caught up in the rule, but some managers invoked the exception to avoid registration.

In the current age of more stringent ethics codes and increased burdens on compliance officers, the level of compliance awareness in financial advisory firms has ratcheted up to new heights.During 2005, audits revealed that almost 80 percent of firms have some sort of conflict of interest not disclosed fully and fairly, with a majority of those issues centering on compensation streams - how and by whom the financial advisor is compensated.

It's not just the Baby Boom generation that is heating up the markets for financial planning and wealth management. Across the industry, the software is getting tighter, more polished and more capable.Driving these changes are four basic trends:

Aon Consulting announced that its financial advisory and litigation consulting services practice has established a Sarbanes-Oxley compliance consulting group. The company also announced that Michel Hagenaar has joined Aon Consulting as a senior director to lead this new group."It is evident that companies of all sizes continue to struggle in achieving SOX compliance in an efficient and cost-effective manner," said chief executive Andrew Appel, in a statement

Although they are supporting new audit rules that give public companies the option to report the elimination of a material weakness in internal control over financial reporting, the Big Four accounting firms have called on the Securities and Exchange Commission to issue more detailed guidance for making these disclosures.At issue: the Public Company Accounting Standards Board's new Auditing Standard No. 4, which recently won SEC approval. That standard allows the management of audited companies to voluntarily commission their auditors to report whether a previously reported material weakness continues to exist - an option that accountants at PricewaterhouseCoopers described as "a useful tool" for providing the public with assurance that a previously reported internal control problem no longer exists.

A handful of boldface names from the financial world lent their signatures to a letter to federal regulators, asking that no public company be exempted from the internal controls provisions of the Sarbanes-Oxley Act.Former Securities and Exchange chair Arthur Levitt, former Federal Reserve chair Paul Volcker and former comptroller general Charles Bowsher joined John Biggs, former chair and chief executive of TIAA-CREF, and John Bogle, former chair of the Vanguard Group Inc., in signing the letter. The Feb. 13 letter was addressed to current SEC chair Christopher Cox and the acting chair of the Public Company Accounting Oversight Board, William Gradison.

Taxation: Everybody does it, but the world has yet to agree on how to account for it.But that may soon change.

The effort to achieve convergence by ushering in a single accountancy system for the global economy is getting hammered in nearly every aspect by one of Europe's key figures in that sector.Pervenche Berès, the chairwoman of the European Parliament's Economic and Monetary Affairs Committee, is warning that the world's present governance system for accountancy institutions could lead to problems, including "the financialization of the [world] economy."

A new proposed Governmental Accounting Standards Board standard on accounting for pollution remediation may not decontaminate America's brownfields, but if adopted, it should make governmental financial statements a little neater.The proposal establishes a consistent way for governments to report certain costs and long-term obligations relating to pollution remediation. Any one of five triggering events would require a government to recognize a liability and apply an expected cash-flow measurement technique to recognize related liabilities, expenses and expenditures.

Congress is currently at work on legislation that includes, among other things, a two-year extension of dividend and capital gains tax cuts that were scheduled to expire at the end of 2008, and a one-year extension of alternative minimum tax relief.Without this relief, the AMT would cause higher taxes starting in 2006 for an estimated 16 million additional taxpayers to whom it was not intended to apply. Perhaps not surprisingly, House Republicans have sought to finalize the dividend and capital gains extension first, even though the AMT problem is much more immediate.

With a proposal that would let companies opt to report selected financial instruments at fair value, the Financial Accounting Standards Board has opened the possibility of a significant move toward more fair value measurement.The board has issued the proposal as an exposure draft in hopes that comments will support it as a reduction in the complexity of accounting and in volatility in earnings.

A federal review of 13 major contracts awarded in the aftermath of Hurricane Katrina pointed to poor communication as the reason behind the waste and mismanagement of some supplies and services that went unused.

The Office of Thrift Supervision approved an application from H&R Block Inc. to organize a federal savings bank in Kansas City, Mo.

Retail drugstore chain CVS Corp. said the Securities and Exchange Commission has launched an informal probe into how the company accounted for a 2000 transaction.

New York's Attorney General filed a $250 million fraud suit against H&R Block Inc., accusing the tax prep giant of steering hundreds of thousands of clients to investment retirement accounts with costs higher than what they would earn back.

Bankruptcy filings rose 10 percent last year, to a record 1.78 million, according to figures released by the federal court system.

After 16 years, the executive director of the Securities and Exchange Commission will step down to pursue opportunities in the private sector.