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.

Federal penalties for taxpayers accused of tax evasion, failure to file a return, or making false statements to the Internal Revenue Service could increase dramatically later this year if Congress approves legislation being pushed by Sen. Russ Feingold, D-Wis., to sweeten tax deductions for charitable volunteers. Under the bill, the current $100,000 fine for attempting to "evade or defeat tax" liabilities would jump to $250,000, penalties for more serious violations would double to $1 million per offense, and the maximum of prison terms facing taxpayers would rise from five years to 10 years. At the same time, taxpayers charged with "willful failure to file returns, supply information or pay tax" would face felony rather than misdemeanor charges, with maximum penalties climbing to 10 years, up from 12 months currently. Feingold's bill would also double the federal penalties for making false statements to IRS to as much as $1 million and/or five years in prison. These sharply increased penalties are buried in the fine print of a bill that Feingold said is needed to provide equitable tax treatment for volunteers who use their cars for charitable activities. Under current law, these volunteers may be reimbursed up to 14 cents per mile for their donated services without triggering a tax consequence for either the organization or the volunteers. If the charitable organization reimburses any more than that, they are required to file an information return indicating the amount, and the volunteers must include the amount over 14 cents per mile in their taxable income. According to Feingold, this is inequitable because the mileage reimbursement level currently permitted for businesses is a more liberal 40.5 cents per mile. In proposing legislation to eliminate this "disparity," Feingold told the Senate that his new bill "today is identical to a measure I introduced in the 107th Congress and the 108th Congress in nearly every respect." Significantly, however, neither of those earlier Senate bills, nor separate legislation introduced in the House earlier this year by Rep. Todd Platts, R-Pa., to increase charitable mileage deductions, contain the tax penalty increases included in Feingold's current measure. In explaining the new bill's tax sanction provisions, the Wisconsin Democrat said that the sharply increased monetary penalties for taxpayers would offset the cost of raising the mileage deduction for charitable volunteers. That represents a tax break that the Congressional Joint Committee on Taxation has estimated would result in a net federal revenue loss of no more than $1 million over five years. "Though the revenue loss is small," Feingold explained, "it is vital that we do everything we can to move toward a balanced budget, and to that end I have included a provision to fully offset the cost of the measure and make it deficit-neutral."

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.

The Big GAAP vs. Little GAAP debate rages on. An American Institute of CPAs' task force charged with examining private company financial reporting standards wants to begin a process to implement changes in generally accepted accounting principles for private issuer companies. "Fundamental changes should be made in the current GAAP standards-setting process to ensure that the financial reporting needs of private company constituents are met," read the report issued by the institute's task force. The task force, established last year and headed by former AICPA chairman James Castellano, made its determinations based on the input of some 3,700 business owners, public practitioners, financial managers, lenders, investors and sureties. The research was conducted by Omaha, Neb.-based MSR Group, an independent market research firm. "This group did not approach its research with a preconceived notion that issues or problems with GAAP financial reporting for private companies existed," Castellano said. "We wanted to understand if what many of us had been hearing was simply the opinion of a vocal minority or the true expression of concerns by stakeholders of private company financial reporting." Public issuers are required to prepare financials in accordance with GAAP, and privately held companies -- which comprise an overwhelming majority of the roughly 5 million companies in the U.S. -- have traditionally used GAAP as well, thus fueling the protracted public-versus-private-standards debate. The AICPA board -- subject to input from Council -- along with accounting standard-setter the Financial Accounting Standards Board and its overseer, the Financial Accounting Foundation, have agreed to collaborate on possible courses of action. However, FASB and the FAF neither endorsed nor rejected the task force's conclusions. The AICPA, the FAF and FASB agreed that any proposal would need to be fully exposed for public comment and debate. A complete copy of the task force report can be found at: http://www.aicpa.org/members/div/acctstd/pvtco_fincl_reprt/index.htm.

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 European Union has reiterated its call for more "home-grown" representation in drafting international accounting standards. The E.U. has demanded more that the current five seats it has on the International Accounting Standards Board, claiming that as of Jan. 1, it was the first to use the international accounting rules ahead of the U.S. At the start of the new year, all publicly traded companies within the 25-nation E.U. were require to use international rules. Last week, former Federal Reserve Chairman Paul Volcker, who serves as chair of the IASB overseer committee, said that Europe was "sufficiently represented on the board," and instead of boosting European representation, more consideration should be given to countries such as India, China and Japan. Both the U.S. and the E.U. have five seats on the IASB. In a speech before a gathering of accounting professionals, Volcker said that representation on the IASB shouldn't be based on "national, political or sectoral interests."

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."

Embattled brand Krispy Kreme, which is currently the subject of a formal probe by the Securities and Exchange Commission, said that it would cooperate with prosecutors who want to interview former executives of the doughnut and coffee retailer, based here. In published reports, the chain said that the executive inquiry, which is being conducted by the U.S. Attorney for the Southern District of New York, is related to the ongoing SEC probe and vowed to cooperate with investigators. The names of the executives to be questioned were not identified. Krispy Kreme, which went public roughly five years ago, has been under investigation for its franchisee buyback procedures, as well as its earnings forecasts. It also faces a number of class-action lawsuits by shareholders. The company's stock, which once closed in on the $50 level, now trades at just over $5. Last month the chain ousted chief executive Scott Livengood and handed the reins over to Stephen F. Cooper, a turnaround specialist, who promptly announced a 25 percent reduction in the number of corporate employees.

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.

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.

A report by the Treasury Inspector General for Tax Administration absolves the procedures used by the Internal Revenue Service's Tax Exempt and Government Entities Division for reviewing political activities by exempt organizations. While many charities speak out on public issues, the code prohibits Section 501(c)(3) organizations from specific types of political activities. In response to media reports of allegations that the TE/GE Division was examining these types of activities just prior to the 2004 presidential election for politically motivated reasons, the IRS asked the TIGTA to investigate. "This report confirms what we've said all along," said IRS Commissioner Mark W. Everson. "Political considerations played absolutely no part in the inquiries we launched last summer." Everson said that recommendations in the report would be addressed by the IRS and would be in place for future election cycles.

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.

AARP, the high-profile lobbying group for the roughly 36 million Americans over 50, has come out swinging in the fight over Social Security reform with the release of a poll showing a lack of support for President Bush's plan to allow investors to divert some of their Social Security taxes into private accounts.

Some of your clients may not yet have made their contributions to traditional or Roth IRAs for 2004, but plan to make them before filing their 2004 income tax returns. Others may be planning to contribute the maximum amount possible to their IRAs for 2005 as soon as possible.