Regulatory actions and programs

The Securities and Exchange Commission has awarded a trio of contracts -- totaling $54 million -- to transform the financial statements in its Edgar database to interactive information. The SEC hopes that the spending will propel the agency’s 1980s-vintage public company disclosure system from a form-based electronic filing cabinet to a real-time search tool with interactive capabilities. The investment is a likely precursor to widespread adoption of interactive data filing by companies that report their financial information to the SEC, which has been part of a voluntary pilot program loudly praised by SEC Chairman Christopher Cox. Financial organizations such as the Federal Deposit Insurance Corp., the Federal Reserve and the Comptroller of the Currency all already require banks to use the Extensible Business Reporting Language format. XBRL is a technology that tags financial information through disparate applications and carries it through the business reporting chain. The SEC hasn’t required companies to file their information in an interactive format largely because the XBRL labels haven’t all been completed, and because the commission’s own database can’t utilize the capabilities of the programming language. XBRL US Inc. received one of the contracts, for $5.5 million, to complete the writing of XBRL “taxonomies,” so that every item in a company’s financial statement, such as net income or gross sales, can be assigned a unique computer-readable label. The company, originally formed as a volunteer committee of the American Institute of CPAs, also announced that it will operate independently in the future -- as a nonprofit, member-supported entity of XBRL International Inc. XBRL US will have responsibility for the development of the computer standard in America and is expected to complete the SEC work within a year. The remaining contracts were awarded to: · Keane Federal Systems Inc., for $48 million, to modernize and maintain the database. The contract covers up to a six-year period -- an initial three-year contract term, plus three additional one-year terms. As part of the contract, Keane will partner with other technology firms, including BearingPoint, Microsoft, Rivet Software, EMC and Akamai. · Rivet Software and Wall Street on Demand, for $500,000, to create a new generation of interactive investor tools on the SEC’s Web site. The existing Edgar system is already one of the largest U.S. government presences on the Internet. Over 700,000 documents and data sets are filed on the system each year. However, the information Edgar stores is locked in essentially the same kinds of forms that the SEC has used for 72 years, since it first introduced Form A-1 for securities registration in 1934.

A federal appeals court ruling has essentially thrown the issue of whether shareholders should be able to nominate candidates in corporate board elections back to the Securities and Exchange Commission. A SEC has scheduled an Oct. 18 hearing on the issue, and Chairman Christopher Cox has said he wants the matter resolved before 2007 corporate meetings begin taking place. The Sept. 5 court ruling said that SEC staff improperly allowed American International Group Inc. to block a measure that would have made it easier for investors to nominate their own candidates for the board.

On the heels of the new risk assessment standards rolled out by the American Institute of CPAs, Thomson Tax & Accounting and the PPC brand are offering two new audit tools. PPC’s Smart e-Practice Aids focused on risk assessment, allows users to automatically generate customized audit programs based on risk assessments. Specifically, the aid will:

California’s Franchise Tax Board is in the process of notifying more than 200 corporate taxpayers that their information was made public Sept. 19 when an employee accidentally e-mailed a list of companies under audit. The e-mail distribution list included two writers for BNA, a publisher of print and electronic news, which promptly reported that the listing of taxpayers under audit for tax years 2003 and earlier had been released. The list included the name of the taxpayers, their identification numbers, and the name of the auditor assigned to each case. The tax board is responsible for collecting state personal income taxes, as well as bank and corporate taxes for the entire state. Under California’s Revenue and Taxation Code, the board must notify taxpayers that their information had been disclosed, and the responsible employee can be charged with a misdemeanor. An FTB spokeswoman told BNA that the employee intended to send the message to himself, but accidentally sent the message to a broader distribution list. In a follow-up email sent the same day, he asked recipients to permanently delete the e-mail from their computers. According to BNA, the list includes several well-known corporations in a variety of industries, including entertainment, energy, electronics, and banking. Notes in the file appear to show that several of the taxpayers are being audited for possible participation in abusive tax shelters.

The Public Company Accounting Oversight Board has announced two upcoming meetings -- one for its Standing Advisory Group in Washington, another a Philadelphia forum on auditing in the small business environment. The advisory group, which is comprised of 31 individuals who advise the board on auditing and professional practice standards, will meet on Oct. 5 at the Army and Navy Club in Washington. The group will discuss the board’s proposed standards-setting activities for 2007 and ways of measuring the success of the PCAOB. A panel discussion on the attributes of auditing in a smaller-firm environment and the attributes of auditing smaller issuers will also be held. The meeting is open to the public and will be Web cast on the board’s Web site, www.pcaobus.org, where an agenda is available. Separately, on Oct. 16, the board will host one of its regular forums for small business auditors. The program will be hosted by board member Kayla J. Gillan along with staff from the offices of inspections, enforcement and standards-setting, and will focus on educating smaller registered accounting firms about the board’s work. The forum will be held at the Rittenhouse Hotel and be open to auditors from smaller registered public accounting firms, who can earn continuing professional education credits. The board plans to hold two more forums in New York City and Chicago. Information on how to pre-register for the event, which is a requirement, is available by calling (202) 207-9061.

In 1967, when every automaker was launching its own version of a “muscle car,” Mercury unveiled the Cougar, a sort of hybrid vehicle positioned between luxury sport and high performance, complete with 351-cubic-inch V-8 and a menacing grill that resembled a set of growling chromed teeth. My brother and I were instantly captivated by the car and begged my parents to get one. My father said our two-year-old Comet would do just fine, thank you, but he did point to an ad in a magazine that offered large model replicas of the Cougar at what seemed an unbelievable price of $2.75. We immediately clipped out the order form, emptied our banks and impatiently waited for the next five weeks until our packages arrived. You can probably guess the rest. In lieu of the flashy model pictured in the magazine, what came was actually a drab, olive-green car constructed of soft plastic, with no interior seats and with what appeared to be oversized roofing nails for axels. As I recall, my brother cried and I was thisclose to doing so as well. For once, my father spared us a Carrie Nation-like lecture and simply said, “You boys will find out you usually get what you pay for in life.” I often recall this adventure when the thorny issue of exorbitant executive pay comes up, and specifically how it measures up to company performance and the million-dollar question -- literally -- of do you really get what you pay for? No matter how well a company does with regard to appreciation in share prices and market capitalization, I somehow cannot justify or rationalize an executive compensation plan that is one hundred times the amount earned by the president of the United States. Along those lines, I recently was sent a copy of “Pay Dirt,” a review of executive compensation practices by proxy researcher Glass Lewis & Co. The Glass Lewis pay-for-performance study examined a total of six indicators of shareholder wealth and business performance, including such areas as changes in stock price over a two-year period and two-year changes in book value per share, as well as analyzing the chief executive’s total compensation and the top five executives’ total compensation. The study determined that a large number of companies shell out enormous salaries and perks to executives whose performances fell somewhere between mediocre and poor. Glass Lewis’ research identified 98 executives who were awarded more than $20 million in annual compensation in 2005, with media titan Barry Diller, chairman and CEO of IAC/InterActive Corp., banking the highest comp package in 2005 -- an estimated $85.1 million, a figure that doesn’t include roughly $290 million in exercised stock options. According to Glass Lewis, companies with the worst pay-for-performance result include advertising and media concern Interpublic Group of Cos., investment conglomerate Morgan Stanley, software publisher Ariba Inc. and Vitesse Semiconductor Corp. By contrast, the best ones were search engine Google Inc., Caterpillar Inc. and upscale retailer Nordstrom Inc. And four of last year’s 25 highest-paid chief executives were from companies now under government investigation over past stock-option-granting practices. And in a textbook example of executive logrolling, Glass Lewis unearthed five directors who sit on the compensation committees of at least two companies that received “F” grades in its pay-for-performance ratings for 2005, while two CEOs at companies that received F grades in pay-for-performance ratings for 2005 also sit on the boards of other companies that received Fs. Now, realistically, the Glass Lewis report won’t abolish the practice of absurd compensation packages for residents of the executive suite, But hopefully it will prompt investors to take a closer look at companies in which they have placed their money and demonstrate to the CEOs that their salary is not an annuity, and that they must either step up or step down. And for those that can’t measure up, you can throw in two 1967 Mercury Cougar replicas as part of the severance package.

With their sentencing dates approaching, former Enron chief executive Jeffrey Skilling and former chief financial officer Andrew Fastow are taking divergent routes in the image they portray to the court. Skilling, 52, was ticketed for public intoxication earlier this month in Dallas, according to a report in the Houston Chronicle. The paper said that Skilling, who was not drinking at the time of the arrest, received a $385 ticket on Sept. 9 at about 1:45 a.m. and was briefly detained in a city jail. Public intoxication is a misdemeanor and punishable by a fine of up to $500.

In testimony before lawmakers, Securities and Exchange Commission chairman Christopher Cox defended the Sarbanes-Oxley Act, but sided with critics of the sweeping reform act who maintain that parts of the mandate need to be changed— in particular Section 404.

Nearly one year after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed into law, a study by information and research services provider LexisNexis found that Chapter 7 bankruptcy filings were 71 percent lower than over the same period for 2004.

Despite corporations gaining more experience with complying with the mandates of Sarbanes-Oxley, concerns over the burdens of its implementation have grown over the past several years.

The burgeoning scandal at Hewlett-Packard is undoubtedly tied more directly to privacy concerns and the Constitution than corporate governance and the Sarbanes-Oxley Act, but that doesn't mean some lessons don't spillover from one legal area into the other.

The Securities and Exchange Commission's top accountant has added his thoughts on how to properly account for stock options in the historical financial statements of public companies.

The Securities and Exchange Commission announced that it has filed and settled financial fraud charges against bank holding company Doral Financial Corp.

The Government Accountability Office has released an updated listing of public companies that have made a financial restatement announcement because of financial reporting fraud or accounting errors.

UBIQUITEL RETAINS KPMG: UbiquiTel, a subsidiary and provider of Sprint communications services throughout midsized markets in the Western and Midwestern U.S., named Big Four firm KPMG as its new independent accountant.KPMG replaces PricewaterhouseCoopers as auditor to the Conshohocken, Pa.-based company. According to a filing, PwC's reports on UbiquiTel's financials for the years ended Dec. 31, 2004 and 2005, did not contain any adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle.

Sometimes things become so commonplace that people stop giving them a second thought, even though they deserve one, or even more than one.Like a great many others, recent events have caused us to realize that we may have become complacent about the magnitude of executive compensation. Those at the top rung of corporate America make what seems to everyone but them to be truly staggering amounts of money each year.

Accounting for derivatives has never been easy, but the Governmental Accounting Standards Board has proffered some thoughts on how it might be done, and 85 concerned industry professionals generally agreed - but not completely.GASB project manager Randy Finden said that the bulk of the board's complex preliminary views document could be boiled down to two sentences: "Put all derivatives in the balance sheet at fair value. Fair-value changes will be reported as gains and losses in income, except for hedging gains and losses, which will be reported on the balance sheet as deferrals."

The selection by an entity of its company structure, its fiscal year and its method of accounting are the three main mechanisms that a company can employ in performing substantial tax planning, according to Nicholas Crocetti, CPA, a partner in CBiz Accounting Tax & Advisory."The concept of an accounting method is much broader than what many people believe," he said. "Most companies employ a number of accounting methods. First, they have an overall method of accounting - for example, the cash method, accrual or some form of hybrid method. Additionally, companies need accounting methods for every timing item they encounter in their business, such as how to account for inventory, bad debts, vacation pay and self-insured medical expenses."

A previous article discussed several of the new terms that the new risk assessment standards have introduced to the audit process (Sept. 4-17, 2006, page 36). The following discussion expands on that by addressing in more detail some of the more significant differences between the requirements of the new risk assessment standards and past audit practice.* Audit plans and programs. The audit program is now called the audit plan, but it is still required. The auditor must develop an audit plan in which the auditor documents the audit procedures to be used. The audit plan is more detailed than the audit strategy, and includes the nature, timing and extent of audit procedures to be performed, including risk assessment procedures and planned further audit procedures.

As part of the recently signed pension bill, the Treasury Department and the Internal Revenue Service will have to better define what constitutes "good" condition for donations of clothing or household items.The IRS can deny deductions for donated items such as furniture, appliances, linens or electronics if the items aren't in appropriate condition.