Posts Tagged ‘Accounting standards’

SEC Investigations and Enforcement Related to Financial Reporting and Accounting

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday February 16, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Randall J. Fons, partner and co-chair of the Securities Litigation, Enforcement, and White-Collar Defense Group and the global FCPA and Anti-Corruption Task Force at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Fons.

“One of our goals is to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”
— Mary Jo White, Chair of the SEC, October 9, 2013

“In the end, our view is that we will not know whether there has been an overall reduction in accounting fraud until we devote the resources to find out, which is what we are doing.”
— Andrew Ceresney, Co-Director of the SEC Division of Enforcement, September 19, 2013

“The SEC is ‘Bringin’ Sexy Back’ to Accounting Investigations”
New York Times, June 3, 2013

Much has changed since the collapse of Enron in 2001 and the ensuing avalanche of financial fraud cases brought by the SEC. For example, Sarbanes-Oxley raised auditing standards, imposed certification requirements on public company officers and required enhanced internal controls for public companies. The Public Company Accounting Oversight Board (PCAOB) was formed “to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit
reports.” [1] In pursuit of that goal, the PCAOB has conducted hundreds of audit firm inspections, adopted numerous auditing standards and brought dozens of enforcement actions against auditors for violating PCAOB rules and auditing standards.

…continue reading: SEC Investigations and Enforcement Related to Financial Reporting and Accounting

Does Fair Value Accounting Contribute to Procyclical Leverage?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 13, 2013 at 9:19 am
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Editor’s Note: The following post comes to us from Amir Amel-Zadeh of Judge Business School at the University of Cambridge; Mary Barth, Professor of Accounting at Stanford University; and Wayne Landsman, Professor of Accounting at the University of North Carolina.

Many academic researchers, policy makers, and other practitioners have concluded that fair value accounting can lead to suboptimal real decisions by firms, particularly financial institutions, and result in negative consequences for the financial system. This conclusion is sustained by the belief that fair value accounting was a major factor contributing to the 2008-2009 financial crisis by causing financial institutions to recognize excessive losses, which in turn caused excessive sales of assets and repayment of debt, thereby leading to procyclical accounting leverage. Leverage is procyclical when it decreases during economic downturns and increases during economic upturns. In our paper, Does Fair Value Accounting Contribute to Procyclical Leverage?, which was recently made publicly available on SSRN, we examine whether there exists any link between fair value accounting and procyclical accounting leverage.

To address this question, we develop a model of commercial bank actions taken in response to economic gains and losses on their assets throughout the economic cycle to meet regulatory leverage requirements. We focus on commercial banks because of the central role they play in the financial system and the allegation that their actions in response to fair value losses contributed to the financial crisis. Our model and empirical tests based on the model establish that procyclical accounting leverage for commercial banks only arises because of differences between regulatory and accounting leverage, and not because of fair value accounting.

…continue reading: Does Fair Value Accounting Contribute to Procyclical Leverage?

Measurement in Financial Reporting: The Need for Concepts

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 2, 2013 at 8:53 am
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Editor’s Note: The following post comes to us from Mary Barth, Professor of Accounting at Stanford University.

Measurement concepts in financial reporting are sorely needed. A key role of accounting is to depict economic phenomena in numbers, i.e., to develop measurements to report in financial statements. It is shameful that neither is there a conceptual definition of accounting measurement nor are there concepts guiding standard setters’ choice of measurement base. The Framework has a glaring hole until these concepts are developed. In the paper, Measurement in Financial Reporting: The Need for Concepts, which was recently made publicly available on SSRN, I offer a starting point for developing such concepts by focusing on how the objective of financial reporting, qualitative characteristics of useful financial information, and the asset and liability definitions can be applied to measurement. The Framework should be a coherent whole and, thus, any measurement concepts should flow from, be consistent with, and embody these concepts.

To date the focus of measurement in standard setting has been on individual assets and liabilities, and the lack of concepts for these measurements is obvious. However, aggregate amounts are also fundamental to financial reporting—financial reports include key aggregate amounts such as total assets, total liabilities, and net income. Changes in measurements of assets and liabilities during the reporting period also are fundamental because they determine items of income and expense as well as comprehensive income itself. Thus, if financial reports are to achieve their objective, measurement concepts need to deal with aggregate amounts and changes in measurements, as well as the implications of the measurements for the information revealed in a set of financial statements taken together.

…continue reading: Measurement in Financial Reporting: The Need for Concepts

PCAOB Proposes Significant Changes to Audit Standards

Posted by Amy L. Goodman, Gibson, Dunn & Crutcher LLP, on Saturday August 24, 2013 at 9:40 am
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Editor’s Note: Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman and Michael J. Scanlon.

Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards—running to almost 300 pages—mark a “watershed moment” for auditing in the United States.

The first proposal—The Auditor’s Report on an Audit of Financial Statements—moves well beyond the traditional audit report and would require the following additional statements:

…continue reading: PCAOB Proposes Significant Changes to Audit Standards

MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 22, 2013 at 8:54 am
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Editor’s Note: The following post comes to us from Bill Mayew, Mani Sethuraman, and Mohan Venkatachalam, all of the Accounting Area at Duke University.

In January 2012, the Financial Accounting Standards Board decided by a narrow margin of 4-3 not to require management to perform an assessment of the entity’s ability to continue as a going concern. By May 2012, the FASB reconsidered this requirement and in June 2013 issued an exposure draft that mandates going concern disclosures as part of the financial report. Proponents of this requirement contend that more information is needed from management to inform investors and creditors of impending firm failure, particularly given the spate of recent bankruptcies that have occurred seemingly without warning from either the management or the firm’s auditors. Opponents contend, among other reasons, that managers already disclose sufficient information in their MD&A voluntarily. As such, their view is that an additional disclosure mandate would be an unnecessary imposition on management. In our paper, MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern, which was recently made publicly available on SSRN, we directly inform this debate by assessing whether, to what extent, and when existing disclosures in a firm’s MD&A inform about a firm’s ability to continue as a going concern.

…continue reading: MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern

Tax Avoidance and Geographic Earnings Disclosure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 6, 2013 at 8:47 am
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Editor’s Note: The following post comes to us from Ole-Kristian Hope, Professor of Accounting at the University of Toronto; Mark (Shuai) Ma of the Department of Accounting at the University of Oklahoma; and Wayne Thomas, Professor of Accounting at the University of Oklahoma.

Multinational firms can avoid taxes through structured transactions among different jurisdictions (e.g., Rego 2003), such as reallocating taxable income from high-tax jurisdictions to low-tax ones (Collins et al. 1998). This type of income shifting significantly reduces tax revenues of governments in high-tax jurisdictions and potentially hinders domestic economic growth and other social benefits (e.g., GAO 2008; U.S. Senate 2006). Policy makers around the world, including the United States, European Union, and Canada, have either enacted or are considering regulations related to multinational firms’ cross-jurisdictional income shifting and tax avoidance behavior. However, relatively little is known about multinational corporate tax avoidance behavior (Hanlon and Heitzman 2010), though such knowledge provides a basis for making and enforcing related rules. Further, the relation between firms’ tax avoidance and financial disclosures is not well established. In our paper, Tax Avoidance and Geographic Earnings Disclosure, forthcoming in the Journal of Accounting and Economics, we investigate how geographic earnings disclosure in firms’ financial reports relates to multinational firms’ tax avoidance behavior.

…continue reading: Tax Avoidance and Geographic Earnings Disclosure

Reporting, Accounting, and Auditing in Financial Markets

Posted by Elisse Walter, Commissioner, U.S. Securities and Exchange Commission, on Thursday June 20, 2013 at 9:14 am
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Editor’s Note: Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission and was the Chairman of the SEC from December 2012 to April 2013. This post is based on Commissioner Walter’s recent remarks at the SEC and Financial Reporting Institute Conference, available here. The views expressed in this post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

You may not hear this too often from people outside your profession, but I have always had a passion for accounting and auditing. I think this has its roots in the time I spent with my father, who was a CPA and the CFO of a publicly-held company; he helped me begin to understand just how important accounting is to business and the financial system. Of course, in my more than two decades with the SEC, which included close to a decade in the Division of Corporation Finance, I have developed a deeper and more complete understanding of the critical role accounting and auditing professionals play in our capital markets.

And today, I am pleased to see that we are working to adapt and expand that role to serve investors and other stakeholders even more effectively in the years ahead, by addressing critical issues at a moment of great change and important progress in the worlds of finance and accounting.

…continue reading: Reporting, Accounting, and Auditing in Financial Markets

A “Sea Change” in Public Pension Reporting on the Horizon

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 25, 2013 at 9:19 am
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Editor’s Note: The following post comes to us from Michael A. Moran, Pension Strategist at Goldman Sachs Asset Management. This post is based on a Goldman Sachs white paper by Mr. Moran.

Executive Summary

Recently issued rules by the Governmental Accounting Standards Board (GASB) will notably change the way state and local governments account for and report the results of their defined benefit pension plans. Some plans may see their reported funded percentages fall under the new requirements. A plan’s funded status will now be reflected on the balance sheet, increasing transparency as well as the focus on measures that plan sponsors are taking to address these shortfalls. Funded status and pension expense measures are also likely to be more volatile under the revised reporting standards.

While the new GASB rules change some important aspects of public DB plan reporting, they do not change others. In particular, they neither mandate use of a lower discount rate for calculating liabilities nor higher contribution requirements. These are changes to accounting and financial reporting, not economics. Nonetheless, they do represent a notable change to the calculation and reporting of various pension-related metrics.

Some public DB plan sponsors are already facing significant challenges, such as relatively low funded levels. In addition, given budgetary challenges, some state and local governments do not have the flexibility to increase contributions at this time. All of this is occurring in an environment where long-term expected returns across a wide variety of asset classes have been falling. The GASB changes may add yet another layer of stress, if not complexity, for some public plan sponsors.

This paper reviews the following aspects of the GASB changes:

…continue reading: A “Sea Change” in Public Pension Reporting on the Horizon

Enhancing the Relevance, Credibility and Transparency of Audits

Posted by James R. Doty, Chairman, Public Company Accounting Oversight Board, on Monday December 17, 2012 at 9:13 am
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Editor’s Note: James R. Doty is chairman of the Public Company Accounting Oversight Board. This post is based on Chairman Doty’s remarks before the AICPA National Conference on Current SEC and PCAOB Developments, available here. The views expressed in the post are those of Chairman Doty and should not be attributed to the PCAOB as a whole or any other members or staff.

I. High Quality, Independent Auditing is Critical to Our Economic Success.

As I have learned in this job, getting the accounting right is indeed not the same thing as getting the auditing right. My sense from accountants I talk to is that auditing is receiving well-deserved attention in its own right.

Our economic success depends on the confidence of the users of capital and the providers of capital alike. Corporate managers hire internal accountants — many of you here today — to ensure they have accurate and detailed information on which to base management decisions. Managers ignore opportunities to glean trends and insights from this data at their peril.

Mistakes in this information can send a company into a business line or market that squanders resources. We now know that the true cost of financial misstatement is much greater than stock market fallout, concomitant lawsuits and insurance claims.

…continue reading: Enhancing the Relevance, Credibility and Transparency of Audits

PCAOB Regulatory Initiatives

Posted by James R. Doty, Chairman, Public Company Accounting Oversight Board, on Saturday December 1, 2012 at 9:03 am
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Editor’s Note: James R. Doty is chairman of the Public Company Accounting Oversight Board. This post is based on Chairman Doty’s remarks at the Practising Law Institute’s 44th Annual Securities Regulation Conference, available here. The views expressed in this post are those of Chairman Doty and do not necessarily reflect the view of the PCAOB as a whole or any other Board members or staff.

I am here to talk about the regulatory initiatives of the Public Company Accounting Oversight Board. The PCAOB is deeply engaged in examining ways to enhance the relevance, credibility and transparency of the audit to better serve investors.

The auditing profession has developed a highly skilled body of experts capable of analyzing accounts in a way that draws out truths and insights and sheds light on confused or misleading claims. It plays an indispensable role in making our capital markets fair and strong.

But I believe we are in a high risk period that merits more attention to the audit, not less. When companies make lay-offs, as we’ve seen recently, they often affect the internal audit and compliance staff — the first line of defense for fraud and other corporate malfeasance. This should be a concern to the legal community.

Although we have never needed it more, the audit too has, in the minds of some, become a commodity to be contained with other compliance costs.

In the United States, large audit firms’ revenues from consulting are growing 15 percent a year. Audit fees have stagnated at, basically, the inflation rate. Thus audit practices have shrunk in comparison to audit firms’ other client service lines.

This can weaken the strength of the audit practice in the firm overall. The problem is compounded when audit firms turn their talents to other endeavors that may further damage public views on the relevance and value of audit.

To be relevant, the auditor must speak to and for investors. Fair or not, that is in question today.

…continue reading: PCAOB Regulatory Initiatives

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