Regulatory actions and programs

Just weeks after a report by New York State Comptroller Alan Hevesi charged three former officials of the Roslyn N.Y. School District with plundering more than $11 million over an eight-year period, a new investigation is examining the district budget, as well as the former supervisor for construction and repair projects. The probe by prosecutors for Nassau County, as well as Hevesi's office, centers on Thomas Galinski, who resigned last year after questions arose surrounding trips to Las Vegas and Atlantic City that were billed to the district. At issue is a $23.9 million bond issue approved five years ago to expand the district's middle school. However, district residents have labeled the work substandard, as evidenced by such things as leaking roofs. The former superintendent, Frank A. Tassone, assistant superintendent Pamela Gluckin and clerk Debra Rigano, who were alleged to have siphoned the money from district coffers, are currently awaiting indictment by the Nassau County Grand Jury. In addition, the state probe has implicated an additional 26 people involved in the audit scam. Meanwhile, the accounting firm that audited the district, 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.

Washington - Regulators at the Public Company Accounting Oversight Board are wrestling with proposals to abandon the current "pass/fail" auditor reporting model for informing investors of the accuracy of corporate financial statements - a move that could require independent accountants to provide considerably more information about the veracity of their clients' financial reports.Whether the additional work and information will translate into more useful data for investors was a matter of considerable debate during the latest meeting of the PCAOB's Standing Advisory Group.

Accounting for social policy obligations has long confounded the preparers and users of governmental financial reports.The controversy currently surrounding the gargantuan obligations of the Social Security Administration is an example of the difficulties of dealing with long-term, big-number obligations of vaguely defined liability.

Brussels - Following the start of 2005, when the EU's International Financial Reporting Standards ventured out of port, so to speak, users might have hoped that only the odd technical hitch or two remained to be solved, and that the arrival of IFRS accountancy standardization to the economic zone's 7,000 listed companies would be smooth sailing.Subsequently, European investors, who previously faced a tangle of variegated regulations - which led to confusion over how companies were performing - would then be able to balance performance with performance.

The Governmental Accounting Standards Board has released its new five-year strategic plan, an effort that kicks off with a series of sweeping surveys of the board's standing with its constituency, as well as a barometer of its progress.

The constant headlines of regulators' actions against broker/dealers recall the image of falling dominoes.

Despite the Securities and Exchange Commission giving the okay for companies to voluntarily file reports using XBRL, and the Federal Deposit Insurance Corp. being poised to require quarterly call reports in the tagged data format, the United States still lags behind Europe, Asia and Australia in the adoption and implementation of the Extensible Business Reporting Language.Now more than five years old, XBRL is the financial reporting derivation of Extensible Mark-up Language, or XML - a framework that establishes individual "tags" for elements in structured documents, allowing specific elements to be immediately accessed and aggregated.

The President's Advisory Panel on Federal Tax Reform will hold its fourth meeting on Wednesday, March 16, at the University of Chicago Graduate School of Business Gleacher Center. Witnesses will provide perspectives on the impact of the tax laws on important taxpayer decisions and how the tax system treats investment alternatives. Panel I, on taxes and individual decisions, will hear testimony from James J. Heckman, a Nobel Laureate in Economics and professor of economics at the University of Chicago. Panel II will examine taxes and investment alternatives. Its witnesses include Brian Wesbury, chief investment strategist at Claymore Securities Inc.; Kathleen Kennedy, an associate professor of law and director of the Center for Tax Law and Employee Benefits at John Marshall Law School; Dr. Susan Dynarski, assistant professor of public policy at the Kennedy School of Government at Harvard University; and Armond Dinverno, principal and co-president of Balasa Dinverno & Foltz LLC. Panel III, on taxation of financial instruments, will hear David Weisbach, a professor of law at the University of Chicago; and Robert McDonald, a professor of finance at the Kellogg School of Management at Northwestern University.

Auditor General David M. Walker said that, while Social Security is staring at a long-term financing problem, the 70-year-old program does not face an "immediate crisis." In testimony before the House Ways and Means Committee, Walker told lawmakers that it would be "prudent" to address the Social Security problem "sooner rather than later." Walker also took President George W. Bush to task for his aggressive selling of his privatization plan, where younger workers would be able to divert a portion of their payroll taxes into private investment accounts. Walker testified that private accounts by themselves would "exacerbate the solvency problem" that Social Security faces, and suggested that Congress first focus on improving the program's financing. The private accounts plan faces stiff opposition from Democrats and even some Republicans. Rep. Charles B. Rangel, D-N.Y., ranking Democrat on the Ways and Means Committee, was quoted as telling Walker that, "Private accounts will not be on the table if you are looking for bipartisanship.''

Adecco, the world's largest staffing firm, announced Tuesday that the Securities and Exchange Commission had closed its investigation into the Swiss company's accounting, with no recommendation for enforcement action. The probe was initiated after Adecco's uncovering of accounting irregularities at its North American unit early in 2004 caused it to delay financial reports. Swiss authorities launched a similar investigation. The firm's own independent examination found no fraud, but did report minor accounting control weaknesses at Adecco Staffing North America. Uncertainty about the company's financials cost its investors billions of dollars in market value, and led to the resignation of the chairman, finance chief and head of its North American operations. In June 2004, a new board of directors and new co-chairmen were appointed to try and restore confidence in the firm. Adecco's stock rose on news of the end of the SEC's probe, though it was still almost 20 percent below where it stood before the discovery of the accounting problems.

As part of a deal reached Monday with its regulator, mortgage giant Fannie Mae agreed to a number of corporate governance and management changes. The new practices, which supplement an earlier agreement meant to satisfy the Office of Federal Housing Enterprise Oversight regarding Fannie Mae's governance, include: * Separating the duties of the chairman and the chief executive officer; * Establishing a compliance and ethics office that can communicate directly with OFHEO; * Strengthening accounting rules; and, * Implementing policies to prevent the falsifying of signatures. Last year, OFHEO discovered significant problems with the mortgage giant's practices, including juggling the books to meet targets that triggered executive bonuses. The revelations led to the resignation of chairman and CEO Franklin Raines and chief financial officer Timothy Howard in December. The Securities and Exchange Commission said that from 2001 to mid-2004, Fannie Mae's accounting practices didn't comply with the requirements related to accounting for deferred purchase price adjustments and for derivatives and hedging activities, and advised the company that it should, among other things, restate its financial statements to eliminate the use of hedge accounting. In February, SEC chief accountant Donald Nicolaisen announced that the commission would conduct a thorough, top-down examination of the mortgage financing concern.

Accounting irregularities have brought a flurry of troubles down on Delphi Corp., the world's largest maker of auto parts, leading to the need for a $200-plus million restatement and a host of corporate changes, including the departure of its chief financial officer. In a filing with the Securities and Exchange Commission, the company, based here, said that it had overstated its cash flow for 2000 by about $200 million due to improper accounting for prior transactions involving the receipt of rebates, credits and lump-sum payments, as well as certain off-balance sheet transactions. It also said that improper accounting regarding rebate transactions lead to a $61 million overstatement of income in 2001. The company discovered the irregularities in an ongoing investigation that was prompted by an SEC inquiry last July. Following the filing, Delphi's board expressed a lack of confidence in vice chairman and chief financial officer Alan Dawes; he resigned last Friday. Chief accountant and controller Paul Free also resigned, and John Blahnik, vice president of treasury, mergers and acquisitions, and new markets, was re-assigned to a lesser position. Chief accounting officer and controller John D. Sheehan is acting as CFO for now, reporting to chairman and chief executive J.T. Battenberg, who will retire later this year. The company's stock suffered this week as a result of the news, and on Tuesday Moody's cut Delphi's debt rating to junk. Also on Tuesday, the company announced that it would cut health benefits for retirees by dropping coverage once they are eligible for Medicare, starting in 2007. The cuts could save the company half a billion dollars over time.

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.

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.