Regulatory actions and programs

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.

In just under two years at the helm of the Public Company Accounting Oversight Board, Chairman William McDonough has gone from being a respected figure in banking to being the most influential - and often feared - figure in accounting.

The American Institute of CPAs' Auditing Standards Board is poised to issue an exposure draft of five proposed statements and amendments to statements relating to auditors' risk assessment.

In 2004, some 1,600 companies told their independent accountants that their services would no longer be required, an eye-opening jump of 78 percent in auditor changes from the prior year, according to a study conducted by proxy researcher Glass Lewis & Co. The report found that the auditor switching hit the Big Four firms the hardest, with Ernst & Young posting a net client loss of 200, while the aggregate client exits for E&Y, PricewaterhouseCoopers, KPMG and Deloitte hit 400. Conversely, the national firms have picked up much of the client largesse emanating from the Big Four, with Chicago-based BDO Seidman adding 109 new audit clients last year. The Glass Lewis report said that audit clients who revealed why they switched audit firms said that the top reasons for changing accountants included Sarbanes-Oxley prohibitions and lower audit fees, among others. According to published reports, the 2,500-plus companies than changed auditors over the past two years represent more than 25 percent of the Securities and Exchange Commission issuers in the United States.

Scott Sullivan, the former finance chief of WorldCom and star witness for the prosecution in the ongoing fraud trial of former WorldCom CEO Bernie Ebbers, said in cross-examination that his desire to hit earnings targets superceded following the law. "I knew it was wrong and I knew it was against the law," Sullivan said under cross-examination by defense attorney Reid Weingarten. "But I thought we would make it through. I went along with hitting the earnings-per-share number." This week, Sullivan has been under fire from Weingarten, attorney for the 63-year-old Ebbers, who is on trial at U.S. District Court here for securities fraud, conspiracy and filing false documents with the Securities and Exchange Commission. The resulting $11 billion accounting fraud at the telecommunications company resulted in the largest bankruptcy filing in U.S. history. Sullivan had previously plead guilty to fraud and agreed to testify against Ebbers in return for a lighter sentence than the potential 25-year prison term he could face. He will be sentenced following Ebbers' trial. If convicted on all counts, Ebbers could be sentenced to as much as 85 years in prison. Sullivan has repeatedly testified that he was alone with his former chief executive when he was told to "hit the numbers." Over several days of grueling questioning, Weingarten has tried to portray Sullivan and not Ebbers as the mastermind behind the accounting fraud at WorldCom because of his accounting expertise. Earlier in the week, Weingarten hacked away at Sullivan's credibility by raising such issues as drug use, and showing the jury videotapes of meetings with Wall Street analysts where Sullivan deliberately masked the true financial picture of the company.

The Securities and Exchange Commission is looking at an early March timetable in which to offer companies guidance on stock option expensing. According to The Wall Street Journal, SEC chief accountant Don Nicolaisen said that the regulator is close to making a decision on how much leeway to grant companies in applying the options-expensing standards. "But in early March, we'd like to be in a position to at least express key views on what our thinking is," Nicolaisen said. The protracted battle to expense options has come under intense lobbying pressure from pro-options groups, the high-tech sector and lawmakers with large constituencies affected by the options rule issued by the Financial Accounting Standards Board. Last year, the House, led by Rep. Richard Baker, R-La., overwhelmingly passed its own version of options expensing that requires that options be expensed only for a company's top five executives. Last fall, some 50 senators requested that the SEC delay implementing the rule until the regulator could provide valuation guidance.

While agreeing in essence with President Bush's plan to privatize Social Security, Federal Reserve Chairman Alan Greenspan said that change to the 70-year-old program must come gradually. "If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way," Greenspan said in remarks before the Senate Banking Committee. Greenspan concurred with the assessment that the problems with Social Security should be addressed sooner rather than later. including the possibility of raising payroll taxes to help offset transition costs. "Beyond the near term, benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead," Greenspan said. "Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable, and call for action before the leading edge of Baby Boomer retirement becomes evident in 2008." The chairman also said that the economy is sound, with inflation in check, and indicated that the Fed would continue raising short-term interest rates. But he advised that it is ""imperative to restore fiscal discipline," referring to the record budget deficit.

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. But critics of the plan for requiring auditors to provide a more detailed discussion of their views of corporate financial statements are warning the PCAOB that such a shift in auditor reporting standards would create more confusion than enlightenment for most investors. Under the current ground rules, auditor reports filed with the Securities and Exchange Commission must include unqualified opinions "stating that the company's financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conforming with GAAP." Some members of the PCAOB's Standing Advisory Group however, have warned the board that this approach effectively establishes a pass/fail system under which investors are provided with no information to distinguish between companies with borderline financial statements and those with highly accurate statements. "The problem with the current (pass-fail) model is that if you have a company that is trying to push the line as far as they can get away with, the auditor's report would provide that company with essentially the same rating as one that does an excellent job of providing high quality financial information," Consumer Federation of America Investor Protection Director Barbara Roper told the PCAOB. At the Feb. 16 SAG meeting, Roper argued that a change in the auditor reporting model to allow accountants "to provide more insight into the audit report" would make it more difficult for companies to do the bare minimum to achieve a GAAP "passing" grade. Other SAG members disagreed, warning that providing anything more that the auditor's pass-or-fail rating might confuse investors. "The investing public should be able to read a financial statement and pretty much get out of it what's good and what's bad," Dallas CPA Wanda Lorenz told the board. Providing more detailed - but potentially more ambiguous -- information about the auditor's opinion may not be helpful to the average investor, she maintained. Those views were echoed by SAG member Lynn Turner, managing director at proxy researcher Glass-Lewis, who told the board that "because of the level of sophistication of the average investor, you have to keep in simple." In voicing concerns about a shift to more detailed auditor disclosures, Turner - a former Securities and Exchange Commission Chief Accountant - urged the PCAOB to be sensitive to the needs of investors who already find financial reports difficult to understand. "You have to keep it simple," he said. "You have to tell them whether the numbers are right or not right...in simple language."