Yes, we have located Bernie Madoff’s blog. Although the authenticity of the blog (and that of its ‘commenters’) is a stretch, it makes for a change of pace in what is otherwise a very somber subject.
The House Financial Services Committee has scheduled a hearing for Jan. 5, 2009 on Assessing the Madoff Ponzi and the Need for Regulatory Reform. Bloomberg’s Ian Katz was among the first to report this development in his Dec. 29 article, “Madoff Hearing Set as House Weighs Regulatory Changes.”
Katz quotes Rep. Paul Kanjorski, chair of the Capital Markets Subcommittee of the House Financial Services Committee saying, “These proceedings will help us to discern whether or not the Securities and Exchange Commission had the resources needed to get the job done, how such a sizable scheme could have evaded detection for so long, and what new safeguards we need to put in place to protect investors.”
Diana B. Henriques of the New York Times notes in her article today, Madoff Case Faces Crucial Disclosure Deadline, that: “[Today is] the deadline for Mr. Madoff to provide federal securities regulators with a full accounting of his and his New York firm’s assets — from real estate to art works to bank accounts.” Additionally, she notes: “Judge Louis L. Stanton of United States District Court, who is handling the civil case against Mr. Madoff, is being urged to consider broadening the protections normally available to investors in failed Wall Street firms to allow for the ‘devastating’ circumstances of the Madoff scandal.”
She reports: “Because Mr. Madoff operated a brokerage firm, some of his direct investors may be covered under the Securities Investor Protection Corporation [SIPC], a federal fund created to cover fraud losses in brokerage accounts.“ However, she notes that many of the victims were not direct customers of the Madoff brokerage firm, but instead had invested in various “feeder funds.” One such investor, Daniel Goldenson, says Henriques: “urged Judge Stanton to consider looking past those feeder funds to the individuals ultimately affected by Mr. Madoff’s collapse,” as far as qualifying for SIPC coverage.
Separately, some, including former SEC Chief Accountant Lynn Turner, have questioned how audit firms like Friehling & Horowitz, the three person firm that allegedly audited Madoff’s books (with one active CPA, former New York State Society of CPAs Rockland County Chapter President David Friehling), could have avoided peer review at the state and federal level.
AICPA spokesman William Roberts has been quoted in various articles (including Madoff's Auditor Under Ethics Probe by CPAs Group by Emily Chasan of Reuters) noting the Friehling & Horowitz firm committed in writing to the AICPA for a number of years that the firm was not engaged in audits – and thus was not subject to AICPA peer review requirements. The fact that the Friehling & Horowitz firm signed off on the Madoff audit reports has triggered the ethics investigation by the AICPA.
As far as state peer review requirements are concerned, I had read in WebCPA on Dec. 18 that the New York State legislature recently passed a bill which was awaiting the governor’s signature which would include some beefed up peer review and other requirements. The article, New York Passes Education Law, stated, “The New York State Senate and Assembly have unanimously passed a groundbreaking bill that would amend the laws governing CPAs and provide greater public protections for their clients.” Regarding peer review, the article said “The bill will also require all New York State CPA firms to register and those that provide attest services will have to undergo peer review every three years (exempting sole proprietors and firms with two or fewer accounting professionals, except if they perform state or municipal governmental audits).” Given the exemption as so described, it would appear firms like Friehling & Horowitz would still not be required to have peer review under the State of New York’s new requirements. I checked with AICPA’s Roberts to see if there was a similar exemption at the AICPA for firms with two or fewer audit professionals as far as peer review is concerned, he replied there was no such exemption.
Human Nature
More recently in WebCPA, Howard Wolosky, Editor in Chief of Practical Accountant, wrote about the Madoff saga and other scandals of recent memory, in an article entitled, Human Nature at Work. Wolosky cited in turn an article by William Barrett in the Jan. 12, 2009 issue of Forbes, Madoff Mess is Nothing New – subtitled: ‘The big lesson in the Madoff scandal? How little financial scams change over time.’
I’ve thought about this phenomena as: in this complex world – based on Madoff’s own admission of committing a Ponzi scheme according to the SEC’s press release – he did it the old fashioned way: he simply lied, and apparently falsified documents to backup his story.
This concept of human nature in connection with the Madoff fraud, including concepts carefully constructed by the perpetrator, characterized by Forbes’ writer Barrett, such as the ‘reputation ruse,’ and the ‘affinity quagmire,’ got me to thinking about an interview I listened to recently of incoming SEC Chairwoman Mary L. Schapiro. It’s actually the Nov. 2, 2005 oral history of Schapiro taken by the SEC Historical Society, one of the links we provided about her in our post on Dec. 18 when she was named incoming chair (subject to Senate confirmation) by President elect Barack Obama. At the time of her interview Schapiro had formerly served as an SEC commissioner and as Chair of the CFTC.
One thing Schapiro talked about, right at the beginning of her 2005 interview conducted by Kenneth Durr, was the relevance her undergraduate major in cultural Anthropology held for her as a law student and then securities regulator. I highly recommend you listen to the entire interview, or you can read the transcript. I remember taking one class in cultural anthropology in college, and it was one of my favorite classes; our term paper assignment was to write about how the characters on a TV show of our choice represented a facet(s) of society or something like that. I distinctly remember picking Gilligan’s Island as the chosen microcosm for my paper. (Maybe you remember: ‘Gilligan, the Skipper too, the Millionaire, and his Wife, the Movie Star, the Professor and Marianne, here on Gilligan’s Isle?) Anyway, it really is relevant today, why, even Thurston Howell III can be found as a commenter on Bernie Madoff’s blog.
As we end a tough year for the economy and the markets, I’ll borrow a phrase often used by outgoing SEC Chairman Christopher Cox when he speaks about and to various groups, beginning with his first public remarks as Chair in August, 2005, speaking to the SEC staff, and I’ll say to all those who serve the broader population in regulatory, enforcement, standard-setting, public policy-making and compliance roles, whether incoming, outgoing, or staying the pace, thank you for all you do, and to all our readers, Happy New Year to You!
Wednesday, 31 December 2008
SEC Releases Report on Mark-to-Market Accounting
On Dec. 30, 2008, three days ahead of a Congressionally imposed deadline, the U.S. Securities and Exchange Commission released its 211 page SEC study and recommendations on mark-to-market accounting. See related SEC press release. The formal title of the report is: Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting.
In brief, although the SEC does not recommend suspending FAS 157, Fair Value Measurement, or mark-to-market accounting, the SEC recommends that further improvements can be made to impairment standards and recommends further guidance on application of fair value accounting standards in illiquid or inactive markets. The SEC also recommends certain improvements to the standard-setting process, such as those recommended by SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR), such as formation of a Financial Reporting Forum consisting of users, preparers and others, to meet periodically with FASB, the SEC and PCAOB. Further details can be found in these FEI summaries: Six Areas Addressed In SEC Study On Mark-to-Market; and Eight Recommendations In SEC’s Report On Mark-to-Market Accounting
My two cents
Here are a few of my own observations (may I remind you of the disclaimer on the side of this blog):
- Exit value, market participants notion: Although the SEC staff concluded that FAS 157 should not be suspended, but that further guidance is needed, the report gives FASB a broad mandate by recommending: “In determining how to address the above issues, [e.g. impairment, fair value in illiquid markets] the FASB should consider which issues could be resolved through a review of the objectives of SFAS No. 157 and which issues would be best addressed by the valuation community.” Some of the SEC's roundtable panelists and commenters, including Kevin Spataro of Allstate (representing GNAIE at SEC's Nov. 21 roundtable) noted the concept of exit value and market participants, pushed forward by the requirement to determine hypothetical market participants' values in illiquid markets, essentially put you in a never-ending continuum of hypothetical values which were not necessarily consistent with the going concern notion. Support for a reexamination of FAS 157, in light of lessons learned through application in the real world during the past year-plus, was voiced in a joint comment letter filed with FASB on Nov. 25, 2008 by FEI’s Committee on Corporate Reporting and the U.S. Chamber of Commerce’s Center for Capital Market Competitiveness. (See FEI CCR-USCC CCMC letter.) The SEC’s Dec. 30 mark-to-market report also reiterated CIFiR’s call for a post-adoption or post-implementation review of accounting standards.
- Bright line? I found it interesting that the SEC refers to 45% as a minority in the following sentence: “From the sample of financial institutions studied …the Staff observed that fair value measurements were used to measure a minority of the assets (45%) and liabilities (15%) included in financial institutions’ balance sheets.” The report continues: ”The percentage of assets for which changes in fair value affected income was significantly less (25%), reflecting the mark-to-market requirements for trading and derivative investments,” and adds: “[F]or those same financial institutions, the Staff observed that fair value measurements did significantly affect financial institutions’ reported income.” Many charts are provided in the report, showing breakdowns by size and type of financial institution and the type and percent of assets carried at fair value with the change in fair value recorded in income vs. Other Comprehensive Income (OCI, a component of equity).
- “Directionally consistent” vs. pro-cyclicality: The SEC acknowledges that there was a diversity in views among panelists at its roundtables and in comment letters as to whether fair value accounting contributed to pro-cyclicality, although the SEC found a general consensus that fair value accounting per se was not the proximate cause of the credit crisis. However, a number of panelists and commenters have referred to fair value accounting as an ‘accelerant’ igniting liquidity spirals, and I am not sure how much comfort those in that camp will receive from the SEC’s finding that: “[W]hile fair value is used to measure certain assets such as trading securities and impairment losses on AFS [available for sale] securities, such declines in value were directionally consistent with the losses on the underlying loans and the current economic conditions, which impacted the value of these securities.”
Whether you agree or disagree with the SEC’s findings, or find yourself somewhere in the middle, the SEC is to be commended for writing a study on a complicated matter in plain English, including a section devoted to The Financial Reporting Framework, which the SEC describes as “a short primer …including the basic accounting concepts necessary to understand the issues discussed in this study.”
It can also be a pleasant addition to find an Appendix which is as interesting as the study itself; that is the case with the SEC’s summary of the 185 comment letters it received on this subject as of December 15, 2008, which appears in Appendix A of the report.
The SEC’s study on mark-to-market accounting may make a best seller’s list (among accountants, some lawyers, and public policy types, at least) as the FASB-IASB joint Financial Crisis Advisory Group begins to meet, and as FASB considers comments received on two proposals issued in December relating to impairment of certain financial instruments (Proposed FSP EITF 99-20-a) and proposed disclosures relating to fair value (Proposed FSP FAS 107-a). Congress will no doubt take an interest in the report, which it expressly required as part of the Emergency Economic Stabilization Act of 2008, as it continues to monitor the health and well-being of the economy.
Tuesday, 30 December 2008
FASB-IASB Fin. Crisis Adv. Group Members Announced; SEC Approves Final Oil & Gas Rules
Earlier today, FASB and the IASB announced the members of their joint Financial Crisis Advisory Group. U.S. members include investor reps and former regulators such as Vanguard founder Jack Bogle, Jerry Corrigan (formerly President of NY Fed) and Gene Ludwig (former Comptroller of the Currency) and Don Nicolaisen (former SEC Chief Accountant, and co-chair of the U.S. Treasury Advisory Committee on the Auditing Profession which issued its report earlier this year). Another U.S. rep is Raudline Etienne, Chief Investment Officer, New York State Common Retirement Fund. As previously announced, the joint advisory group will be co-chaired by former SEC Commissioner Harvey Goldschmid, and Hans Hoogervorst, Chairman, AFM (the Netherlands Authority for the Financial Markets).
According to today's announcement:
In terms of timing, some of the comment letters filed with the SEC relating to its mark-to-market study ask for certain actions to be taken with respect to fair value or mark to market accounting to impact year-end reporting this year, and that other longer-term actions be taken. See, for example, this joint comment letter filed Dec. 19 with the SEC by various industry groups.
Although the FASB-IASB advisory group will consider "significant accounting issues that require urgent and immediate attention by the boards, as well as issues for longer-term consideration," the fact that their first meeting will be held in January 2009, and that they will operate as an advisory group to inform subsequent action of the FASB and IASB may indicate that any 'urgent and immediate actions' following from their advice may not necessarily impact year-end reporting as of 12/31/08, especially in terms of how financial statement items are actually measured and reported, although there could be some impact on disclosures that are subsequently provided, e.g. in 10-Ks.
Comment deadline today on FASB 99-20 Impairment Proposal
However, there is a FASB proposal out for comment that could impact year-end reporting with respect to certain financial instruments. As we reported on Dec. 20, FASB released Proposed FSP EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20, on Dec. 19, and the comment deadline is today (Dec. 30).
We noted previously that the 99-20 proposal will only have an impact if it is ultimately approved by the FASB board after they review comment letters, and that some board members were not entirely in favor of the proposal when it was first discussed, but were willing to propose it for public comment and reach a final decision afterward. The FASB calendar currently shows a board meeting scheduled for Wed. Jan. 7, and that a meeting that had been added Mon. Jan. 5 has now been cancelled.
Separately, FASB and the IASB released on Dec. 24 proposed disclosure guidance in the form of Proposed FSP FAS 107-a, Disclosures about Certain Financial Instruments. (See also the related IASB Exposure Draft: Investments in Debt Securities - an Amendment of IFRS 7, and IASB's related press release. ) The comment deadline deadline on the proposed disclosures in this FASB FSP (and the related IASB ED) is January 15.
SEC Approves Changes To Oil and Gas Company Reporting Requirements
In other news, the SEC issued a press release yesterday announcing "SEC Modernizes Oil and Gas Company Reporting Requirements to Provide Investors With More Meaningful and Comprehensive Disclosure." This action culminates the process taken with SEC's earlier Concept Release and Rule Proposal in this area. SEC states in yesterday's press release: "The full text of the adopting release concerning these amendments will be posted to the SEC Web site as soon as possible."
According to today's announcement:
- "The primary function of the advisory group is to advise the boards about standard-setting implications of (1) the global financial crisis and (2) potential changes to the global regulatory environment. The group will conclude its activities within approximately six months (or less) and will conduct advisory meetings during that time."
In terms of timing, some of the comment letters filed with the SEC relating to its mark-to-market study ask for certain actions to be taken with respect to fair value or mark to market accounting to impact year-end reporting this year, and that other longer-term actions be taken. See, for example, this joint comment letter filed Dec. 19 with the SEC by various industry groups.
Although the FASB-IASB advisory group will consider "significant accounting issues that require urgent and immediate attention by the boards, as well as issues for longer-term consideration," the fact that their first meeting will be held in January 2009, and that they will operate as an advisory group to inform subsequent action of the FASB and IASB may indicate that any 'urgent and immediate actions' following from their advice may not necessarily impact year-end reporting as of 12/31/08, especially in terms of how financial statement items are actually measured and reported, although there could be some impact on disclosures that are subsequently provided, e.g. in 10-Ks.
Comment deadline today on FASB 99-20 Impairment Proposal
However, there is a FASB proposal out for comment that could impact year-end reporting with respect to certain financial instruments. As we reported on Dec. 20, FASB released Proposed FSP EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20, on Dec. 19, and the comment deadline is today (Dec. 30).
We noted previously that the 99-20 proposal will only have an impact if it is ultimately approved by the FASB board after they review comment letters, and that some board members were not entirely in favor of the proposal when it was first discussed, but were willing to propose it for public comment and reach a final decision afterward. The FASB calendar currently shows a board meeting scheduled for Wed. Jan. 7, and that a meeting that had been added Mon. Jan. 5 has now been cancelled.
Separately, FASB and the IASB released on Dec. 24 proposed disclosure guidance in the form of Proposed FSP FAS 107-a, Disclosures about Certain Financial Instruments. (See also the related IASB Exposure Draft: Investments in Debt Securities - an Amendment of IFRS 7, and IASB's related press release. ) The comment deadline deadline on the proposed disclosures in this FASB FSP (and the related IASB ED) is January 15.
SEC Approves Changes To Oil and Gas Company Reporting Requirements
In other news, the SEC issued a press release yesterday announcing "SEC Modernizes Oil and Gas Company Reporting Requirements to Provide Investors With More Meaningful and Comprehensive Disclosure." This action culminates the process taken with SEC's earlier Concept Release and Rule Proposal in this area. SEC states in yesterday's press release: "The full text of the adopting release concerning these amendments will be posted to the SEC Web site as soon as possible."
Wednesday, 24 December 2008
Euro. Comm. Grants Equivalence To U.S. GAAP, More
On Dec. 12, 2008, the European Union (EU) issued a press release announcing: European Commission Grants Equivalence In Relation To Third Country GAAPs. (GAAP refers to Generally Accepted Accounting Principles.) The [European] Commission Decision and related [European] Commission Regulation (EC) No. 1289/2008 were published in the Journal of the European Union on December 19.
Had the European Commission (EC) not reached this equivalency decision, all foreign (non-EU based) companies listed in the EU, which file financial statements with authorities such as stock exchanges in the EU, would have had to begin filing those financial statements in the EU in International Financial Reporting Standards (IFRS), rather than in their home country GAAP (referred to as ‘third country GAAP’).
Like their EU-based counterparts, who were required to file their financial statements in IFRS in the EU beginning in 2005, foreign (non-EU based) companies listed in EU markets would have been required to file in the EU in IFRS as of Jan.1, 2009, to create a level playing field or harmonization.
However, in recognition of ongoing convergence efforts by the countries addressed in the December 12 equivalence decision, the EC, after consultation with the Commission of European Securities Regulators (CESR), made the finding of equivalence in accordance with the ‘equivalence mechanism’ established by the EC one year ago.
U.S., Japan GAAP Found Equivalent; China, Canada, South Korea, India on Transitional Basis
According to the EU’s December 12, 2008 press release, "The measures adopted today, which fall under the Prospectus Directive and Transparency Directive, determine that the GAAPs of US, Japan, China, Canada, South Korea and India are found to be equivalent to International Financial Reporting Standards (IFRS) as adopted by the EU. The Commission will review the situation of some of these countries (China, Canada, South Korea, India) by 2011 at the latest. The Commission will also regularly monitor the ongoing status of equivalence and report to Member States and Parliament where necessary." The press release continues:“Today's measures will mean that foreign companies listed on EU markets will continue to be able to file their financial statements prepared in accordance with those GAAPs (the transitional provisions allowing the use of these GAAPs in the EU would otherwise have expired at the end of 2008).”
Based on the status of convergence efforts (e.g. under the updated Memorandum of Understanding (MOU) between the Financial Accounting Standards Board and the International Accounting Standards Board, and based on the agreement between the Accounting Standards Board of Japan and the IASB), and the fact that the U.S. (under the SEC’s Nov. 2007 decision) and Japan do not require foreign filers to provide a reconciliation from IFRS to U.S. or Japanese GAAP, respectively, the EC found U.S. GAAP and Japan GAAP to be equivalent to IFRS.
Canada, South Korea and India have all formally announced plans to move to IFRS by 2011, and China’s Accounting Standards for Business Enterprises are ‘substantially converged’ with IFRS, and ‘cover nearly all topics under current IFRS,’ notes the EC Regulation adopted on December 12. Therefore, the Regulation states, the EC has approved the equivalency of Canada, China, South Korea and India’s IFRS on a transitional basis until 2011.
Equivalent Appears To Mean No “Remedy” Or Explanation of Significant Differences Required
Marie Leone of CFO.com reported the European Commission (EC) decision on December 12 in her article, “A Holiday Reconciliation Gift From the EU.”
We were wondering if there is still any possibility the EC/EU may require any type of ‘remedy’ or disclosure of significant differences between the equivalent third country GAAP and IFRS, as such ‘remedies’ had been contemplated in earlier draft advice documents issued by the Committee of European Securities Regulators (CESR).
As background, in an evolving series of recommendations (formally called ‘advice’ documents), beginning with CESR’s June, 2005 advice, CESR had initially proposed that countries filing in the EU in ‘equivalent’ GAAP – based on the status of IFRS-GAAP convergence and other factors at that time – would have to provide ‘remedies’ to investors in the form of disclosure of significant differences in reported results based on the third country GAAP vs. IFRS. Some, including FEI’s Committee on Corporate Reporting, in a comment letter filed with CESR on June 24, 2005, found CESR’s 2005 proposed ‘remedy’ tantamount to a reconciliation requirement.
Subsequently, in consideration of the furtherance of convergence efforts between FASB and the IASB and other developments including the U.S. Securities and Exchange Commission’s November, 2007 decision to drop the reconciliation requirement for foreign private issuers in the U.S., and in light of the European Commission’s publication in December, 2007 of a mechanism by which the equivalence of third country GAAPs would be determined, CESR’s March, 2008 advice stated, “It is CESR's view that the EU legislators' approach … reflected in the [European] Commission’s Regulation on the [equivalence] mechanism potentially requires a more holistic outcome-based approach to third country GAAP equivalence to be taken rather than an approach based on an analysis of differences in standards and remedying those differences.”
CESR concluded in March, 2008: “CESR now believes that it is best to base a decision on equivalence on an holistic assessment of the ability of investors to make similar decisions on investments irrespective of the existence of potential lingering differences in presentation and measurement, as long as such differences are taken into account in a sensible long-term work programme between the standard setters concerned and the IASB and there is evidence of such programmes being active pursued.”
We invited some experts to share with us their views on whether the EC Regulation issued on December 12 (published on December 19) requires any explanation of significant differences between IFRS and third country GAAPs (e.g., U.S. or Canadian GAAP) found equivalent to IFRS.
Paul Munter, a partner at audit firm KPMG (see also KPMG’s IFRS Institute) told us, “From my reading of the regulation, it appears that a company can use US GAAP without any reconciliation or other explanation, other than a clear and unreserved statement of compliance with US GAAP. He added, “Nothing in the regulation suggests to me that a company using US GAAP would be required to provide any explanation of the differences between their US GAAP financial statements and what the results would be under IFRS.”
Bruce Pounder, CMA, CFM, DipIFR (ACCA) and president of Leveraged Logic, a provider of IFRS convergence training, told us, “In the [European Commission’s] decision, I see no indication of a requirement to reconcile, provide supplementary financial statements, or provide additional disclosures regarding differences between U.S. GAAP and IFRS.” However, he added, “It will be interesting to see whether a requirement for explanatory disclosures makes it into a subsequent legislative act, which is always a possibility.”
As far as particular requirements are concerned, see the NOTE at the bottom of this post.
Canada, Mexico Already Moving to IFRS
Darla Sycamore, author of the blog “IFRS Canada: The Devil is in the Details,” [see her related website: The IFRS Exorcist] told us, “As you know we [Canada] have a requirement for conversion for public entities [to IFRS] for years beginning January 1, 2011.” She added, that as a practical matter, during the interim period (1.1.09, when the EU would have originally required IFRS by all foreign filers, and 1.1.11 when Canada will have adopted IFRS), “I am delighted that the EU has given recognition to Canada’s convergence efforts.”
Additionally, she believed the regulation would be responsive to a question some had about the applicability of the looming requirement for IFRS reporting in the EU that would have become effective as of 1.1.09 (barring the equivalency decision) with respect to certain non-calendar year-end companies as well. According to her reading of the EC Regulation, Sycamore added, “I think it would seem to allow non calendar year companies such as our banks (that have October 31 year ends) to file in Canadian GAAP for their October 31 year ends.”
By the way, Sycamore's blog was among the first to report on Mexico's Nov. 11 decision to adopt IFRS from 2012 onward, and to permit early adoption. She includes a link courtesy of Bruce Pounder to CINIF's Nov. 11 press release, with a translation by Pounder, in the comments section of the above-linked post.
SEC Roadmap Not Mentioned, But Euro. Comm. Says “Countries Should Be Encouraged To Adopt IFRS”
The EC’s December 12 decision does not mention the U.S. Securities and Exchange Commission’s proposed roadmap released in November, 2008 which proposes various milestones that would be considered by the SEC in determining whether to mandate IFRS filings by U.S. public companies, and proposes a timetable in which the SEC would potentially reach that decision in 2011, and require such filings beginning in 2014 (including some prior year comparative information in IFRS). Additionally, the SEC roadmap proposed permitting certain companies in industries in which IFRS is the most predominantly used standard to ‘early adopt’ IFRS.
By being silent on the SEC roadmap and detailing a rationale for the finding of equivalence based on the status of FASB-IASB convergence and the fact that the SEC dropped the reconciliation requirement for foreign issuers, some may say further progress on the roadmap appeared not to be a condition precedent for the EU’s equivalence decision.
However, the EC regulation does state, “The [European] Commission should continue to monitor, with the technical assistance of CESR, the development of those third country GAAPs in relation to adopted IFRS.” They add: “Countries should be encouraged to adopt IFRS,” and “The EU may determine that the national standards which have been determined to be equivalent may no longer be used in preparing information required … when those respective countries have adopted IFRS as their sole accounting standard.”
The EC’s equivalence decision is welcome news for companies that are listed in the EU that wish to continue filing there in one of the third country GAAPs deemed equivalent to IFRS.
NOTE: We recommend (as always), that reference be made to documents and legislation issued by the EU/EC, and that companies consult with their auditors and legal advisors in determining what the requirements are for filing financial statements and related disclosures in the EU, U.S. or elsewhere.
Had the European Commission (EC) not reached this equivalency decision, all foreign (non-EU based) companies listed in the EU, which file financial statements with authorities such as stock exchanges in the EU, would have had to begin filing those financial statements in the EU in International Financial Reporting Standards (IFRS), rather than in their home country GAAP (referred to as ‘third country GAAP’).
Like their EU-based counterparts, who were required to file their financial statements in IFRS in the EU beginning in 2005, foreign (non-EU based) companies listed in EU markets would have been required to file in the EU in IFRS as of Jan.1, 2009, to create a level playing field or harmonization.
However, in recognition of ongoing convergence efforts by the countries addressed in the December 12 equivalence decision, the EC, after consultation with the Commission of European Securities Regulators (CESR), made the finding of equivalence in accordance with the ‘equivalence mechanism’ established by the EC one year ago.
U.S., Japan GAAP Found Equivalent; China, Canada, South Korea, India on Transitional Basis
According to the EU’s December 12, 2008 press release, "The measures adopted today, which fall under the Prospectus Directive and Transparency Directive, determine that the GAAPs of US, Japan, China, Canada, South Korea and India are found to be equivalent to International Financial Reporting Standards (IFRS) as adopted by the EU. The Commission will review the situation of some of these countries (China, Canada, South Korea, India) by 2011 at the latest. The Commission will also regularly monitor the ongoing status of equivalence and report to Member States and Parliament where necessary." The press release continues:“Today's measures will mean that foreign companies listed on EU markets will continue to be able to file their financial statements prepared in accordance with those GAAPs (the transitional provisions allowing the use of these GAAPs in the EU would otherwise have expired at the end of 2008).”
Based on the status of convergence efforts (e.g. under the updated Memorandum of Understanding (MOU) between the Financial Accounting Standards Board and the International Accounting Standards Board, and based on the agreement between the Accounting Standards Board of Japan and the IASB), and the fact that the U.S. (under the SEC’s Nov. 2007 decision) and Japan do not require foreign filers to provide a reconciliation from IFRS to U.S. or Japanese GAAP, respectively, the EC found U.S. GAAP and Japan GAAP to be equivalent to IFRS.
Canada, South Korea and India have all formally announced plans to move to IFRS by 2011, and China’s Accounting Standards for Business Enterprises are ‘substantially converged’ with IFRS, and ‘cover nearly all topics under current IFRS,’ notes the EC Regulation adopted on December 12. Therefore, the Regulation states, the EC has approved the equivalency of Canada, China, South Korea and India’s IFRS on a transitional basis until 2011.
Equivalent Appears To Mean No “Remedy” Or Explanation of Significant Differences Required
Marie Leone of CFO.com reported the European Commission (EC) decision on December 12 in her article, “A Holiday Reconciliation Gift From the EU.”
We were wondering if there is still any possibility the EC/EU may require any type of ‘remedy’ or disclosure of significant differences between the equivalent third country GAAP and IFRS, as such ‘remedies’ had been contemplated in earlier draft advice documents issued by the Committee of European Securities Regulators (CESR).
As background, in an evolving series of recommendations (formally called ‘advice’ documents), beginning with CESR’s June, 2005 advice, CESR had initially proposed that countries filing in the EU in ‘equivalent’ GAAP – based on the status of IFRS-GAAP convergence and other factors at that time – would have to provide ‘remedies’ to investors in the form of disclosure of significant differences in reported results based on the third country GAAP vs. IFRS. Some, including FEI’s Committee on Corporate Reporting, in a comment letter filed with CESR on June 24, 2005, found CESR’s 2005 proposed ‘remedy’ tantamount to a reconciliation requirement.
Subsequently, in consideration of the furtherance of convergence efforts between FASB and the IASB and other developments including the U.S. Securities and Exchange Commission’s November, 2007 decision to drop the reconciliation requirement for foreign private issuers in the U.S., and in light of the European Commission’s publication in December, 2007 of a mechanism by which the equivalence of third country GAAPs would be determined, CESR’s March, 2008 advice stated, “It is CESR's view that the EU legislators' approach … reflected in the [European] Commission’s Regulation on the [equivalence] mechanism potentially requires a more holistic outcome-based approach to third country GAAP equivalence to be taken rather than an approach based on an analysis of differences in standards and remedying those differences.”
CESR concluded in March, 2008: “CESR now believes that it is best to base a decision on equivalence on an holistic assessment of the ability of investors to make similar decisions on investments irrespective of the existence of potential lingering differences in presentation and measurement, as long as such differences are taken into account in a sensible long-term work programme between the standard setters concerned and the IASB and there is evidence of such programmes being active pursued.”
We invited some experts to share with us their views on whether the EC Regulation issued on December 12 (published on December 19) requires any explanation of significant differences between IFRS and third country GAAPs (e.g., U.S. or Canadian GAAP) found equivalent to IFRS.
Paul Munter, a partner at audit firm KPMG (see also KPMG’s IFRS Institute) told us, “From my reading of the regulation, it appears that a company can use US GAAP without any reconciliation or other explanation, other than a clear and unreserved statement of compliance with US GAAP. He added, “Nothing in the regulation suggests to me that a company using US GAAP would be required to provide any explanation of the differences between their US GAAP financial statements and what the results would be under IFRS.”
Bruce Pounder, CMA, CFM, DipIFR (ACCA) and president of Leveraged Logic, a provider of IFRS convergence training, told us, “In the [European Commission’s] decision, I see no indication of a requirement to reconcile, provide supplementary financial statements, or provide additional disclosures regarding differences between U.S. GAAP and IFRS.” However, he added, “It will be interesting to see whether a requirement for explanatory disclosures makes it into a subsequent legislative act, which is always a possibility.”
As far as particular requirements are concerned, see the NOTE at the bottom of this post.
Canada, Mexico Already Moving to IFRS
Darla Sycamore, author of the blog “IFRS Canada: The Devil is in the Details,” [see her related website: The IFRS Exorcist] told us, “As you know we [Canada] have a requirement for conversion for public entities [to IFRS] for years beginning January 1, 2011.” She added, that as a practical matter, during the interim period (1.1.09, when the EU would have originally required IFRS by all foreign filers, and 1.1.11 when Canada will have adopted IFRS), “I am delighted that the EU has given recognition to Canada’s convergence efforts.”
Additionally, she believed the regulation would be responsive to a question some had about the applicability of the looming requirement for IFRS reporting in the EU that would have become effective as of 1.1.09 (barring the equivalency decision) with respect to certain non-calendar year-end companies as well. According to her reading of the EC Regulation, Sycamore added, “I think it would seem to allow non calendar year companies such as our banks (that have October 31 year ends) to file in Canadian GAAP for their October 31 year ends.”
By the way, Sycamore's blog was among the first to report on Mexico's Nov. 11 decision to adopt IFRS from 2012 onward, and to permit early adoption. She includes a link courtesy of Bruce Pounder to CINIF's Nov. 11 press release, with a translation by Pounder, in the comments section of the above-linked post.
SEC Roadmap Not Mentioned, But Euro. Comm. Says “Countries Should Be Encouraged To Adopt IFRS”
The EC’s December 12 decision does not mention the U.S. Securities and Exchange Commission’s proposed roadmap released in November, 2008 which proposes various milestones that would be considered by the SEC in determining whether to mandate IFRS filings by U.S. public companies, and proposes a timetable in which the SEC would potentially reach that decision in 2011, and require such filings beginning in 2014 (including some prior year comparative information in IFRS). Additionally, the SEC roadmap proposed permitting certain companies in industries in which IFRS is the most predominantly used standard to ‘early adopt’ IFRS.
By being silent on the SEC roadmap and detailing a rationale for the finding of equivalence based on the status of FASB-IASB convergence and the fact that the SEC dropped the reconciliation requirement for foreign issuers, some may say further progress on the roadmap appeared not to be a condition precedent for the EU’s equivalence decision.
However, the EC regulation does state, “The [European] Commission should continue to monitor, with the technical assistance of CESR, the development of those third country GAAPs in relation to adopted IFRS.” They add: “Countries should be encouraged to adopt IFRS,” and “The EU may determine that the national standards which have been determined to be equivalent may no longer be used in preparing information required … when those respective countries have adopted IFRS as their sole accounting standard.”
The EC’s equivalence decision is welcome news for companies that are listed in the EU that wish to continue filing there in one of the third country GAAPs deemed equivalent to IFRS.
NOTE: We recommend (as always), that reference be made to documents and legislation issued by the EU/EC, and that companies consult with their auditors and legal advisors in determining what the requirements are for filing financial statements and related disclosures in the EU, U.S. or elsewhere.
Saturday, 20 December 2008
FASB Releases Proposed Impairment Guidance (Re: 99-20); Today’s Madoff Update
FASB issued a press release Friday night Dec. 19 that it has released the first of two proposed FSPs to address concerns arising from the current financial crisis relating to accounting for financial instruments, and that a second proposed FSP will be issued this week.
- Proposed FSP EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20, was posted Friday night and the comment deadline is December 30, 2008.
- Proposed FSP FAS 107-a, Disclosures about Certain Financial Instruments, will be released within a week, according to FASB, with a comment deadline of January 15, 2009.
It is impressive that FASB kept to its promise of releasing the proposed FSP on Friday, even with the snow-storm that closed FASB’s offices (according to the outbound voice message on their main number) as well as many other offices in the NY-NJ-CT area.
IASB Posts Proposals, Other Documents Relating to Credit Crisis
In the past few days, the IASB has posted a number of documents relating in part to the credit crisis:
- IASCF publishes update on responses to the G20 conclusions (Dec. 17)
- IASB publishes proposed new Consolidation standard as part of comprehensive review of off balance sheet risk (Dec. 18)
- IASB provides update on steps taken in response to the global financial crisis (Dec. 19
Today’s Madoff Update…
Perusing the New York Post for an article on yesterday’s snowstorm (linked in the first item above) – a newspaper not routinely cited in accounting and legal blogs but appreciated by some as giving a more colorful take on things - I noticed they have an article today on, “Madoff’s Auditor Gave Lessons on Ethics.” The article, by Paul Tharp, says of David Friehling, one half of audit firm Friehling & Horowitz, (and by some accounts, one-third of the three person firm) which purportedly audited Madoff’s investment company, states:
- “The little storefront accountant who was supposed to have audited Bernard Madoff's books may have had a blind eye for numbers - but his mouth seemed to work overtime boasting about ethics…. In an accounting magazine, The Trusted Professional, he wrote an article exhorting colleagues not to cheat. “When we see our clients and they ask us to stretch the truth, we are just cheating ourselves," he wrote in the magazine's April issue. "When those clients . . . ask you to stretch (or shrink) the numbers a little bit, remember not only your professional ethics and responsibilities, but your personal ones as a citizen of the United States. If nothing else, remember your basic math."
We told you about Friehling’s April column which appeared in the New York State Society of CPA’s newsletter, Cheating on Taxes is Cheating on Ourselves and his May column, The More You Give, The More You Receive in our post, Madoff: Mystique or Mistake, when the story first broke last week.
The latest news about Madoff’s audit firm, and about some major audit firms that audited “feeder funds” into the Madoff fund, comes via Francine McKenna’s Re: The Auditor’s blog, in her post “If Its Not One Thing, It’s Another – Auditors Getting Sued Over Madoff. Among other info, McKenna provided a link to Madoff’s Auditor… Doesn’t Audit?, by Alyssa Abkowitz, which notes that the AICPA requires member firms registered to audit to submit to the AICPA’s peer review program, and states:
- "Friehling & Horowitz is enrolled in the program but hasn't submitted to a review since 1993, says AICPA spokesman Bill Roberts. That's because the firm has been informing the AICPA -- every year, in writing -- for 15 years that it doesn't perform audits.
- "Meanwhile, Friehling & Horowitz has reportedly done just that for Madoff. For example, the firm's name and signature appears on the 'statement of financial condition' for Madoff Securities dated Oct. 31, 2006. 'The plain fact is that this group hasn't submitted for peer review and appears to have done an audit,' Roberts says. AICPA has now launched an 'ethics investigation,' he says."
The only way I can imagine audit firm Friehling & Horowitz getting out of this unscathed, is if Madoff pulled a Dreier and falsified documents – in Madoff’s case, if he falsified a Friehling & Horowitz auditor’s report. That would also explain the failure of the audit firm to submit to peer review.
However, if the audit firm did in fact conduct the audit, even if they claim they were defrauded by Madoff, - e.g. by being shown fake documents - there is the possibility they could be found negligent for performing inadequate audit procedures (and more specifically, for not performing an audit in accordance with professional standards as established by the AICPA, which sets standards for audits of non-public companies) that may have established the veracity of the claimed assets through some type of third party confirmation. Determining the role of other audit firms with respect to their professional responsibilities in auditing feeder funds may be more complex, as discussed at more length, including a quote by Cynthia Fornelli, Executive Director of the Center for Audit Quality, in McKenna’s Re:The Auditors blog.
Securities Mosaic also posted a Spotlight on Bernard Madoff this week, gathering together a host of documents on the case, including SEC releases and court orders in the Southern District of New York, law firm memos, news stories, blog posts and more.
Friday, 19 December 2008
Party Time
In a break from our regular news (which so far this week has consisted of Madoff: Mystique or Mistake? FASB to Release Proposed Amendment to EITF 99-20 This Week, To Address Concerns About Impairment; SEC Votes to Mandate XBRL, Launches IDEA; SEC Launches Survey of Section 404 Costs, Benefits; and Mary L. Schapiro Named SEC Chair by President-Elect Obama, Subject to Senate Confirm, and FEI Names Marie Hollein President & CEO) we at FEI had our annual Holiday Party (actually, Holiday Luncheon) yesterday.
The office holiday party is a time honored tradition in many firms and associations, although there have been various reports (like this one from CNN) that some firms (particularly TARP bailees) have cut out their parties entirely, and others have cut back.
Maybe not surprisingly, some law firms have taken to distributing memos reminding their employees of the rules of conduct at their holidays, like this one posted on Above The Law (which I'm pretty sure I first saw posted on one of the blogs on Securities Mosaic Blogwatch). There are still some reports of over-the-top parties taking place, but there seem to be more reports of firms cutting back and in some cases redirecting a more limited amount of dollars to charities instead of parties, and encouraging their employees to do the same, as noted in this article in the Atlanta Journal-Constitution.
This Year's Most Popular Gift: The Barack Obama Action Figure!
FEI’s holiday party was pretty much in keeping with our past tradition, which is fun but totally professional. As noted in my post earlier today, FEI staff were the first given the news of our new President and CEO, Marie Hollein being appointed. Our holiday gift from FEI was a shirt (FEI emblem of course) and service awards are given out. The highlight of the party is the gift exchange - and by ‘gift exchange’ - I mean its one of those party activities where you bring in a present you might have received from somebody else at some point and would really like to exchange for something else in some other nicely wrapped package. To add an element of drama, people can ‘steal’ each other’s presents and make the person you ‘steal’ from go back to the table to pick another present.
I was pretty happy with the gift I got in the gift exchange, a Barack Obama Action Figure , until somebody ‘stole’ it from me – I won’t name any names (but it was the Director of Tax and Economic Policy in our Washington D.C. office) - and it was stolen from him as well – a very popular item this year! Although I don’t have a photo from the office party (not that photos were banned as I assume they may be at some office parties…) here’s a photo of some of my colleagues at our staff breakfast this morning – notice how we came in bright and early before the expected 6-12 inches of snow falls!
Music For Your Office Party!
Another perennial item in the gift exchange is a CD from The Singing CPA – whose real name I learned only last year when I picked his CD in the gift exhange -is Steven Zelin. Zelin was featured on the front page of the Wall Street Journal on April 15 this year, and in a related video segment on WSJ.com . This morning, he was interviewed on NPR.
“No Accounting for the Holidays” is the new CD issued this year by Zelin, and it provides some great holiday music that would be appreciated by accountants and others who can relate to the profession. I recommend it for your holiday parties (your office parties, at least) and Zelin has been gracious enough to provide some exclusive clips to us to share with you.
Imagine opening your party with Deck The Halls With Calculators, followed by The Most Deductible Time of the Year. Let’s not forget that favorite, Joy To The World, The Client's Paid, and for a little variety, try Hava Tequila. After all the frivolity, when its time to close (the party, or the books), you can play Go Home Ye Weary CPAs.
If you’d like to order “No Accounting for the Holidays,” priced at $10.40 - you can order it as an mp3 download or CD via CDbaby.com here http://cdbaby.com/cd/zelin4 . Zelin also told us that if you have a rush order for a CD, he’ll fed ex it to you if you add the shipping fee, his contact info (email, phone) are on his website http://www.stevenzelin.com/.
The office holiday party is a time honored tradition in many firms and associations, although there have been various reports (like this one from CNN) that some firms (particularly TARP bailees) have cut out their parties entirely, and others have cut back.
Maybe not surprisingly, some law firms have taken to distributing memos reminding their employees of the rules of conduct at their holidays, like this one posted on Above The Law (which I'm pretty sure I first saw posted on one of the blogs on Securities Mosaic Blogwatch). There are still some reports of over-the-top parties taking place, but there seem to be more reports of firms cutting back and in some cases redirecting a more limited amount of dollars to charities instead of parties, and encouraging their employees to do the same, as noted in this article in the Atlanta Journal-Constitution.
This Year's Most Popular Gift: The Barack Obama Action Figure!
FEI’s holiday party was pretty much in keeping with our past tradition, which is fun but totally professional. As noted in my post earlier today, FEI staff were the first given the news of our new President and CEO, Marie Hollein being appointed. Our holiday gift from FEI was a shirt (FEI emblem of course) and service awards are given out. The highlight of the party is the gift exchange - and by ‘gift exchange’ - I mean its one of those party activities where you bring in a present you might have received from somebody else at some point and would really like to exchange for something else in some other nicely wrapped package. To add an element of drama, people can ‘steal’ each other’s presents and make the person you ‘steal’ from go back to the table to pick another present.
I was pretty happy with the gift I got in the gift exchange, a Barack Obama Action Figure , until somebody ‘stole’ it from me – I won’t name any names (but it was the Director of Tax and Economic Policy in our Washington D.C. office) - and it was stolen from him as well – a very popular item this year! Although I don’t have a photo from the office party (not that photos were banned as I assume they may be at some office parties…) here’s a photo of some of my colleagues at our staff breakfast this morning – notice how we came in bright and early before the expected 6-12 inches of snow falls!
Music For Your Office Party!
Another perennial item in the gift exchange is a CD from The Singing CPA – whose real name I learned only last year when I picked his CD in the gift exhange -is Steven Zelin. Zelin was featured on the front page of the Wall Street Journal on April 15 this year, and in a related video segment on WSJ.com . This morning, he was interviewed on NPR.
“No Accounting for the Holidays” is the new CD issued this year by Zelin, and it provides some great holiday music that would be appreciated by accountants and others who can relate to the profession. I recommend it for your holiday parties (your office parties, at least) and Zelin has been gracious enough to provide some exclusive clips to us to share with you.
Imagine opening your party with Deck The Halls With Calculators, followed by The Most Deductible Time of the Year. Let’s not forget that favorite, Joy To The World, The Client's Paid, and for a little variety, try Hava Tequila. After all the frivolity, when its time to close (the party, or the books), you can play Go Home Ye Weary CPAs.
If you’d like to order “No Accounting for the Holidays,” priced at $10.40 - you can order it as an mp3 download or CD via CDbaby.com here http://cdbaby.com/cd/zelin4 . Zelin also told us that if you have a rush order for a CD, he’ll fed ex it to you if you add the shipping fee, his contact info (email, phone) are on his website http://www.stevenzelin.com/.
FEI Names Marie Hollein President & CEO
Financial Executives International (FEI) issued this press release last night that Marie Hollein has been appointed President and CEO of the organization of 15,000 senior financial executives. Hollein, currently a Managing Director for KPMG's Treasury Practice, will take the helm at FEI effective January 12. Jim Abel served as President and CEO on an interim basis since July while the search was conducted. FEI announced the news to staff first at our holiday luncheon yesterday (more about that in my next post), and staff are very excited to welcome Hollein as our leader, with many of us knowing her as an active and dedicated member of FEI . We also wish Jim Abel well and thank him for his leadership during the search period.