Financial Executives International (FEI) presents:
26th Annual Current Financial Reporting Issues (CFRI)
November 12-13, 2007, Marriott Marquis, New York City
Financial Executive’s editors attended the two-day conference and have distilled some key points from several of the sessions. Obviously, this is only a small part of what those who attended the conference have learned. See also "KPMG Defining Issues: FEI Financial Reporting Conference" under "Other Summaries" below.
FEI President and CEO Michael P. Cangemi opened the Current Financial Reporting Issues conference remarking that “as 2008 looms, the entire subject of accounting standards seems to be somewhat in flux. FASB and IASB are working closely with each other doing joint projects and working towards common standards, but the results aren’t yet fully discernable.”
Indeed, he added, “this uncertainty is compounding the concerns that preparers, [of financial statements] in general, have about resources.” As an example of pressure on resources, Cangemi noted, “Subject matter experts are required in many aspects of accounting – citing financial instruments, pensions, business combinations, among others.
Along with tight resources, he said, “the compliance burdens of Sarbanes-Oxley are still with us and it remains to be seen if [PCAOB’s] Auditing Standard No. 5. (AS5) will indeed present an improvement over its predecessor [AS2].”
Marsha L. Hunt, vice president and corporate controller of Cummins Inc. and the 2007conference chair, welcomed those in attendance and gave an overview of the sessions that would be presented over the next two days.
The first general session, “FASB Update,” featured FASB Chairman Robert H. Herz, IASB Vice Chairman Thomas E. Jones and Russell Golden, director Technical Application and Implementation Activities for FASB, providing updates of key issues. The session was moderated by Gary Kabureck, vice president and chief accounting officer for Xerox Corp.
One sign of what’s going on with FASB/IASB, noted Herz, is that the two organizations are giving more presentations together about shared accounting standards, as well as working on more joint projects. The duo of Herz and Jones has been speaking in the world’s major markets – about progress of reaching their “ultimate goal of a single set of high quality standards around the world.”
Globalization of capital markets, he said, is a market-driven force, and the convergence of accounting standards would support the global markets. Benefits of shared standards include: a global language for global capital markets, attracting investment through transparency, reducing the cost of capital, increasing worldwide investment and reducing costs.
He traced the steps from the 2005 “roadmap” introduced by then SEC Chief Accountant Don Nicolaisen that involved dropping the reconciliation requirement to U.S. GAAP for foreign filers, the 2006 Memorandum of Understanding (MoU), indicated milestones reached, current projects and projections.
Jones quipped, “Our job is to make sure the pain is shared equally.” Jones also discussed progress from the global perspectives and noted some areas where divisions remain, particularly those countries that have carved out sections of IFRS. On a separate, but corresponding note, Jones said he expects the SEC to approve the measure to allow foreign filers in the U.S. to file in IFRS [when it votes on November 15] and not have to reconcile to U.S. GAAP.
Although optimistic, Herz noted several sticking points: “You want principles,” he said, “but can you handle principles?” Also, the U.S. standards have been flush with rules, details and specialized industry standards. Moving to IFRS has other potential problems: funding for IASB needs to be secure and the organization made sustainable for the long run, training for people, internal systems, auditors, etc. He doesn’t endorce a “two-GAAP system,” and said standards cannot be “open-ended without an endgame, that endgame being “a single set of high-quality standards.”
Bottom line, Herz reiterated his call for a blueprint – a national plan and said he believed that in 10 years from now even stock market trading as we know it, will be obsolete.
Jones says he can see it in sight. Indeed, the night earlier as he was inducted into the Financial Executives International’s Hall of Fame at a gala at Cipriani 23rd Street, he said it’s been his “quest for 20 years,” [for comparable accounting standards] since he had “kept the books for CitiCorp.’s business in over 100 countries.“ A single set of standards, he said, would eliminate cost, confusion and lack of comparability.
In the second general session, moderated by Lawrence J. Salva, senior vice president, chief accounting officer and controller, Comcast Corp. and former chair of FEI’s Committee on Corporate Reporting (CCR), “Usefulness and Delivery of Financial Statements Today,” three panelists provided the perspectives of preparers and investors.
Gregory Jonas, managing director of Accounting Specialists Group, Moody’s Investors Service, provided the user perspective of financial statements, saying two views are key: both the operating and financial views.
CFRI attendees participate in the
debate of traditional financial statements
The eight themes he said were important to investors include: understand the business engine; analyze segments separately; separate core from peripheral, usual from weird; obtain a forward-looking perspective; understand management’s perspective; understand uncertainty of information and risks; compare performance; and understand changes promptly. Among what needs to be done to improve financial statements for users, he said are: areas of frequent problems, such as revenue recognition and hedging and globalization of standards and infrastructure. And, among the top tensions, he listed management perspective versus comparability and relevance versus reliability.
Jeffrey P. Mahoney, general counsel, Council of Institutional Investors addressed the influence of international standards and listed 10 investor issues with international convergence. Among them: Major gaps exist and improvements are needed; reconciliation benefits may be lost; preparers, auditors and regulators still gaining familiarity with IFRS; limited U.S. control and influence and uncertain independence of standard setting (relating to funding and government involvement).
The FASB perspective, providing an update on FASB’s Financial Statement Presentation project – a joint project with IASB – was given by FASB Board Member Donald M. Young. The project, which began in 2004, is expected to present a Preliminary Views document in the second quarter 2008. Young described the working principles and working format in detail and indicated samples documents were available for conference attendees in the hand-out book.
Salva presented the preparer perspective, noting communication mechanism, types of information, obstacles, compliance vs. clear communication and delivery mechanisms for preparers. Among the obstacles, he said, are regulatory (GAAP vs. Non GAAP), legal (furnish vs. file), competitive and tax disclosure/cost.
Robert C. Pozen
Chairman, SEC Advisory Committee on Improvements to Financial Reporting
In the session preceding lunch, Robert C. Pozen, chairman, MFS Investment Management and chairman, SEC Advisory Committee on Improvements to Financial Reporting delivered a keynote address on the progress of his committee, known as CIFR or the Pozen Committee. Much of what Pozen said furthered the goals he outlined in the November issue of Financial Executive, Financial Reporting column, in his interview with Editor-in-Chief Jeffrey Marshall and Executive Editor Ellen M. Heffes.
Basically, he said “whatever you give investors, they want more,” and that we need to do a better job with the [U.S.] financial reporting focus. He reiterated that his committee “won’t revolutionize accounting,” but, rather, the committee is trying to come up with solutions that are practical, doable and workable.
Among some of his comments (related to the five specific CIFR subcommittees, he commented: “We need to quickly come up with our views to work on XBRL,” since the SEC is moving full-steam ahead on it. He recognizes that if the committee wants to add its input to the SEC it needs to do so quickly. He believes, in general, we need to have a significant decrease in restatements, a better roadmap for auditors, support of FASB to narrow GAAP to a few authoritative sources, replace certain bright-line rules and have better disclosure on others. He said what’s needed is ”accounting that reflects economic reality,” and favors moving from industry standards to activity-based standards.
Finally, Pozen said the committee would hold several town halls, to get feedback on the proposals it makes. In closing, he said he’s “cautiously optimistic we’ll get something done.”
– Ellen M. Heffes
The session kicked off with a detailed and frequently fascinating talk by Cynthia Cooper, the former internal auditor with WorldCom Inc. whose whistle-blowing on the financial fraud there helped send the telecom giant into oblivion and its top executives, including its CFO and controller, to prison.
Cooper, who is writing a book about the episode, described the myriad difficulties she and her internal audit team faced in moving from suspicions about fraud to certainty, and the resistance she faced from CFO Scott Sullivan and Controller David Myers. She painted a picture of continually defying their wishes and creating a back channel through the IT function where the transactions could be examined.
She described how Sullivan constantly assured her and others that a significant revenue shortfall was a one-time event and would be made up in later quarters. Meanwhile, two key accounting managers had been directed to falsify entries and were close to quitting.
Cooper described how conversations with the external auditor – at KPMG, which had taken over the account after Arthur Andersen collapsed – and Myers convinced her that there was “no support” for the treatment of various transactions and accounts, including a “prepaid capacity” item that no one could adequately explain to her.
While a vital defense against fraud, whistle-blowing takes a severe toll on those who undertake it, Cooper said, and many lose their jobs and can’t find others; she acknowledged her own bout with depression after she came forward. She is a firm believer in 24-hour hotlines, noting that WorldCom didn’t have one.
In the third general session following Cooper’s address, a group of high-ranking U.S. Securities and Exchange Commission (SEC) officials offered an update on various initiatives. Chief Accountant Conrad Hewitt updated the audience on eXtensible Business Reporting Language (XBRL), Auditing Standard 5 (AS5) and the new Committee on the Improvement of Financial Reporting (CIFR). Hewitt noted the recent formation of the Office of Interactive Disclosure, headed by David Blaszkowsky, adding that the taxonomies being prepared to facilitate tagging of financial data will be available for public review in December.
Hewitt said the commission is still seeking companies to join its voluntary XBRL filing program, arguing that the process facilitates benchmarking, modeling and intercompany comparability. The SEC currently has divided the corporate universe into 10 industry groups for XBRL taxonomies, he added, and companies need to decide which group they belong to.
Hewitt deemed AS5 “a completely different standard” than its predecessor, AS2, and pointed out the importance now given to auditor judgment. “The audit committee has a tremendous responsibility under Sarbanes-Oxley, and they need to exercise that,” he said.
Director, Division of Corporation Finance,
U.S. Securities and Exchange Commission
John White, director of the Division of Corporate Finance, provided some context for the ongoing move toward issuing financial statements in International Financial Reporting Standards (IFRS). Currently, some 1,100 foreign issuers are registered with the SEC, and 900 of those report in local GAAP or IFRS before reconciling their statements to U.S. GAAP. He noted that there will be no jurisdictional allowance for IFRS filers – all must conform to the standards as issued by the International Accounting Standards Board (IASB).
White noted that the comment period on the release allowing U.S. companies to report in IFRS has just closed, and the agency will be digesting comments.
The controversial issue of “shareholder access” – allowing shareholders to nominate directors and place them on the ballot along with company nominees – drew a record 34,000 comment letters, White said. It’s the “most highly charged issue” at the SEC, he said, but SEC Chairman Christopher Cox has promised that it will be resolved before the end of the year.
The fourth general session featured the annual Q&A with regulators, with top SEC officials joined by FASB Chairman Robert Herz and Russell Golden, chair of FASB’s Emerging Issues Task Force (EITF). Asked if was truly in favor of adaptation of IFRS “as soon as possible,” Herz said that the standards must be “strong and viable.” The IASB may need more secure funding, and governance concerns must also be addressed, he said. IFRS can still be improved, he said, noting that “gaps” remain in certain areas. Hewitt noted that any SEC decision to permit companies to report in either U.S. GAAP or IFRS isn’t intended to add to complexity.
Commenting on several ongoing accounting projects, Herz noted that FASB has an active project on leases and will probably be ready for a first-stage document late next year. IASB is coming out soon with a document on pensions that would shift the line somewhat between accounting for defined-benefit and defined-contribution plans, he noted. A revenue recognition project between FASB and IASB, Herz added, is being complicated by the fact that “we are starting from opposite poles” – U.S. GAAP has 200 pieces of literature with some mention of the subject, while the IASB has no overall standard and only a “very general treatment” of it.
Hewitt said that the SEC is in discussions with the Internal Revenue Service to see if it will consider changing its insistence on LIFO (last-in, first-out) accounting treatment for tax purposes. IFRS currently does not allow LIFO accounting.
-- Jeffrey Marshall
KPMG Defining Issues: FEI Financial Reporting Conference (published Nov. 20, 2007)