Diversity In Focus In SEC Commissioner Aguilar's Remarks, FEI Initiatives

SEC Commissioner Luis Aguilar, in a series of recent speeches and statements, has been speaking out on the need for corporate boardrooms, regulators, and the SEC itself, to increase diversity among its ranks, including senior ranks. He also included a reminder about an SEC rule promulgated in 2009 requiring public companies to disclose more about their policies related to nominating a diverse board, and the companies' evaluation of the effectiveness of those policies.

In remarks before the 2011 Hispanic Association of Corporate Responsiblity-Corporate Directors Summit on April 30, Aguilar focused on:

the need for corporate America and its regulators to embrace this nation’s growing diversity. It is past time to see the diversity of our nation reflected in corporate boardrooms, in the financial industry, and in the government.

The State of Diversity Today
Among the points noted in Commissioner Aguilar's speech, supplemented by his May 2 statement - strongly titled "The Abysmal Lack of Diversity in Corporate Boardrooms is Growing Worse" - were:

• Boardrooms: Citing statistics from a 2008 report published by the Alliance for Board Diversity, Aguilar stated, "There is a persistent lack of diversity in corporate boardrooms across this country — and women and minorities remain woefully underrepresented.' Citing from the ABD's May 2, 2011 report, he noted that diversity among women and minorities in corporate boardrooms decreased from 2004-2010.




• Senior management: "Unfortunately, corporate boardrooms are not the only place where diversity is lacking. The lack of diversity in the securities industry is particularly acute. The most recent Government Accountability Office report on employment in the financial services industry found that the percentages of African Americans and Hispanics in senior-level management positions were just 2.8 % and 3%, respectively. Clearly, the industry must do substantially better."




• The SEC: "I would be hiding the ball if I didn’t also point out the lack of diversity at the SEC. While 32 percent of the SEC work force comprised people of color in 2010, only 19% of our attorneys were people of color. The most telling numbers are of our senior officers. As of fiscal year 2010, the SEC’s senior officers were approximately 90% white, 3% African-American, 2% Hispanic and 2% Asian. The gender breakdown among these senior officers is 69% male and 31% female."... He added: "Moreover, I find it puzzling that the SEC, an agency known for championing full and fair disclosure, does not publicly release its EEOC data on its workplace diversity. All covered federal agencies, of which the SEC is one, are required to file an annual report with the Equal Employment Opportunity Commission, entitled the 'Federal Agency Annual EEO Program Status Report.' Many federal agencies, including ones with much larger workforces—most notably, the United States Army, the Department of Veterans Affairs, and the Department of the Interior—publically disclose these reports which include data regarding the gender, racial, and ethnic makeup of their respective workforces. I think it is past time that the SEC should do the same." He added, "It is absolutely clear that the SEC is not doing enough to recruit, retain, and advance minority candidates at the professional and senior leadership levels," and stated, "I am committed to improving the diversity of the SEC’s workforce and I am continuing to work closely with our Office of Human Resources to do just that."




• Financial Regulators: "Section 342 of the Dodd-Frank Act requires that the SEC undertake significant efforts to recruit and promote employees from all backgrounds. In particular, Section 342 requires that the SEC, and all other financial regulators, establish a new Office of Minority and Women Inclusion. Many of our financial regulator counterparts, like the FDIC, the Federal Reserve, and the Department of Treasury have already established this program and have the new office, director and staff in place. I look forward to the SEC establishing its office and quickly catching up to our counterparts."

SEC Notes Weaknesses In Compliance With Disclosure Requirements

Regarding SEC disclosure requirements for identifying diverse board nominees, Aguilar noted that:

[I]n late 2009, the Commission adopted a rule to assess a company's commitment to developing and maintaining a diverse board. In summary, public companies are now required to disclose whether diversity is a factor in considering candidates for nomination to the board of directors, and how the company assesses how effective the policy has been.

...Just recently the SEC staff reviewed the disclosures made by several hundred companies resulting from the new diversity disclosure requirement. From this review, the staff issued a number of comment letters. The results of this review seem to indicate that there are two primary areas of compliance weakness.

First, some companies are failing to disclose important information regarding their board of director diversity policies. These companies are drawing a false distinction that disclosure is only required if the company has a “formal” policy, rather than an “informal policy.” These companies and their advisors need to go back and review the rule. The rule states companies must disclose “whether, and if so how, a nominating committee considers diversity in identifying nominees for director.” But it does not end there. It also states that if a company has a “policy with regard to the consideration of diversity in identifying director nominees,” the company must disclose “how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.” This disclosure does not depend on whether the policy is defined as “formal” or “informal.” Moreover, these companies seem to have forgotten why investors asked for this disclosure, and why the SEC promulgated this rule — it is because investors care about board diversity issues and it is an important factor when they make investment and voting decisions. Investors do not care if the diversity policy is formal or informal; they care about the substance of the policy and whether it is effective.

Second, for those companies who do disclose they have a policy, we are seeing incomplete disclosure regarding the evaluation of the effectiveness of the policy. Thus, companies are complying with the first prong of the rule but not the second—which requires the company to disclose how it evaluates the diversity policy’s effectiveness. It is important that all companies — not just those with good stories to tell — comply with both prongs of the rule. The rule requires companies to be transparent about how they treat diversity and full compliance with the rule is the only way to achieve this goal.

Commissioner Aguilar added:

I know these companies can do a better job. I have asked the SEC staff to continue to monitor this situation to make sure companies are transparent about their diversity policies.

Resources
Commissioner Aguilar identified a number of organizations that compile lists of highly qualified women and minority candidates for board positions. Refer to the text of his remarks and the footnotes thereto.

FEI Diversity and Inclusion Initiatives
In addition to the resources listed in Commissioner Aguilar's speech, another source of talent can be found at Financial Executives International, an association of over 15,000 senior financial executives. FEI has a long-standing Director's Registry and Resume Bank of FEI members seeking positions as directors or in senior management. These resources are available in FEI's Career Center.

Additionally, FEI launched a Diversity and Inclusion initiative, whose Mission Statement states:

Our mission is to increase diversity of FEI’s membership to reflect the diversity of our profession and builds a culture of inclusion. This culture is one that embraces and leverages the differences and similarities of each FEI member, with the goal of enhancing the networking, advocacy and leadership that defines FEI. As a global leader, a diverse perspective is essential to our continued success and one of our greatest values is having an inclusive environment that respects each individual and enables our members to reach their full potential.

Other points noted on FEI's Diversity & Inclusion webpage:

Why is increasing diversity so important for FEI?

• Diversity is the face of the business world today and will be even more so in the future
  


• Diversity is important to our members’ employers and they have been moving forward in implementing initiatives and strategies of their own
  


• Increasing diversity is simply, good business
  


• Increasing diversity of thought, experience, backgrounds, and points of view will lead to stronger [FEI] Chapters and expand the pool of potential Chapter leaders and committee members

Taylor Hawes, CFO Intellectual Property & Licensing at Microsoft, and Chairman of FEI's Diversity Committee, notes:

“ Diversity is important to FEI and to good business; especially when diverse populations account for over 44% of the global GDP and within the U.S. over $9 trillion dollars. Financial Executives International has a national diversity task force focused on increasing the diversity and inclusion of our membership. Activities ranging from combined networking - such as our programs held in conjunction with ALPFA (Association of Latino Professionals in Finance and Accounting), NABA (National Association of Black Accountants, Inc.) & ASCEND (Pan Asian Leaders in Finance and Accounting) - and professional development and networking events brings recognition and focus to the importance of creating an environment that celebrates our similarities as well as our differences."

Read more about these activities on FEI's Diversity Initiatives webpage. FEI members, prospective members and others interested in learning more about FEI's diversity and inclusion initiatives, contact Jackie Major, Senior Associate, Chapter Support at jmajor@financialexecutives.org.

Post-Implementation Review; New Standards, Too: Subject of FASB, IASB Webcasts

Webcasts are set to take place later this week and next week covering (1) FASB’s post-implementation review process, and (2) four recently issued IASB standards, respectively.

This Friday, the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board and the Governmental Accounting Standards Board, is hosting a webcast explaining the next phase of its post-implementation review process. The May 20 webcast, set to take place at 1pm EST, will feature FAF President and CEO Terri Polley, FASB Chairman Leslie Seidman, and Post-Implementation Review Leader Mark Schroeder discussing the pilot test of the post-implementation review process, and an upcoming stakeholder survey. Learn more about the FAF/FASB webcast, and register here.

Next week, the IASB will be holding a webcast on May 23 on its new fair value measurement standard, IFRS 13 (as previously reported, IFRS 13 was issued by the IASB concurrent with FASB's release of ASU 2011-04 on fair value measurement). A separate webcast will be held on May 25 on IASB’s new standards on off-balance sheet arrangements and joint arrangements (IFRS 10, 11 and 12). The IASB has also published a series of Frequently Asked Questions, project summaries and feedback statements on the new standards. Read more about the IASB webcasts and summaries of the new standards.

FASB, IASB Publish Converged Fair Value Measurement Standards

Earlier today, FASB and the IASB published converged standards on fair value measurement and disclosure, with FASB's issuance of Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which updates the FASB Codification on fair value measurement (previously predominantly from FAS 157, Fair Value Measurement), and the IASB's issuance of IFRS 13, Fair Value Measurement.

Effective Date
As noted in the FASB in Focus providing highlights of the accounting standards update: "The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011."

Highlights
Following are some highlights from FASB ASU 2011-04, from the FASB in Focus:

"The concepts of highest and best use and valuation premise in a fair value measurement should be applied only when measuring the fair value of nonfinancial
assets.

"Similar to comparable guidance for liabilities, the fair value of an instrument classified within a reporting entity’s shareholders’ equity should be measured from the perspective of a market participant that holds that instrument as an asset.

"For fair value measurements categorized within Level 3 of the fair value hierarchy, a reporting entity is required to disclose quantitative information about the unobservable inputs used in the measurements.

"The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include the following:
▪▪Provided that certain criteria are met, a reporting entity that holds a group of financial assets and financial liabilities that exposes it to market risks and counterparty credit risk may apply an exception to the requirements in Topic 820, which permits the fair value of those financial instruments to be measured on the basis of the reporting entity’s net risk exposure.
▪▪Premiums or discounts may be applied in a fair value measurement to the extent that they are consistent with the unit of account and market participants would consider them in a transaction for the asset or liability. However, adjustments commonly referred to as blockage factors are not permitted in fair value measurements.
▪▪A reporting entity must disclose the following information about fair value measurements:
--For fair value measurements categorized within Level 3 of the fair value hierarchy:
• The valuation processes used by the reporting entity.
• A narrative description
of the sensitivity of the fair value measurement to changes in unobservable
inputs and the interrelationships between those unobservable inputs, if any.

--The use of a nonfinancial asset if it differs from the highest and best use assumed in the fair value measurement.
--For items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed, the level of the fair value hierarchy in which that measurement is categorized. "

Nonpublic entities
As stated in the FASB in Focus: "The Board concluded that certain disclosure requirements in this Update should not be required for nonpublic reporting entities, such as the requirement to disclose any transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers."

Remaining Differences Between IFRS and U.S. GAAP In Converged Standard
Those looking for a detailed mapping between the provisions of IFRS 13 and FASB's Codification as updated by ASU 2011-04 can refer to the Table of Concordance posted by the boards.

Some of the remaining differences between the newly converged standards, as described in the FASB in Focus, include: "There are some different disclosure requirements about fair value measurements.

"The most significant difference is that IFRSs require a quantitative sensitivity analysis for financial instruments that are measured at fair value and categorized within Level 3 of the fair value hierarchy. U.S. GAAP does not require a quantitative sensitivity analysis disclosure.

"There are different requirements about whether, and in what circumstances, an entity with an investment in an investment company may use the reported net asset value as a measure of fair value."

Additional Information
FASB and IASB have published some very helpful information, accessible on their websites, to assist constituents in learning about the changes to the current FASB, IASB standards. These include: IASB-FASB joint press releasel; FASB podcast featuring FASB Director of Communications Neal McGarity and FASB Board Member Russ Golden; IASB podcast featuring IASB Director of Communications Mark Byatt, IASB Board Member Warren McGregor, and IASB Project Manager Hilary Eastman (NOTE: podcast is currently accessible from this webpage); FASB in Focus (May 12, 2011); IASB Project Summary and Feedback Statement (May, 2011)

IFRS 10, 11, 12 Issued On Off-Balance Sheet, Joint Arrangements
In other action, the IASB published three additional IFRS standards today: IFRS 10, 11 and 12 amending their current standards with respect to off-balance sheet and joint arrangements. As noted in the IASB's press release: "The completion of this review brings the accounting treatment for off balance sheet activities in International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) broadly into alignment, and concludes an important element of the IASB’s comprehensive response to the financial crisis.

•IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

•IFRS 11 Joint Arrangements provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities.

•IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

Keeping Up With Change!
How can you keep up with the latest FASB developments? Check out the FASB Update sessions taking place in May and June, cosponsored by Executive Enterprises Institute and FEI.

No Silver Bullet for Audit Profession, Says PCAOB's Doty

In remarks at Baruch College yesterday, PCAOB Chairman Jim Doty said there was “no silver bullet” to address the challenges facing auditors, the audit model, and by extension, audit regulation today. Doty’s remarks were made in a keynote address at the Zicklin Center for Corporate Integrity’s 10th annual Financial Reporting Conference. Other speakers included FASB Chairman Leslie Seidman, SEC Chief Accountant Jim Kroeker, and other representatives of regulatory agencies and the private sector, including FEI President and CEO Marie Hollein.



Doty named three forces at work impacting auditors vis-à-vis maintaining the public trust:

1. the payment model: the auditor is hired and fired by the company itself. The Sarbanes-Oxley Act's reform to shift hiring and oversight of the auditor from management to the audit committee may in practice have proved insufficient to counteract that conflict and others facing the auditors. As with management, audit committees may see their job as negotiating the lowest audit fee, not championing auditor objectivity and independence from management. In this environment, not surprisingly, the scope of the audit has not grown, even if society's expectations have. As the guardian of a cultural value, the audit is arguably as important as electricity or water. But if it is to retain that lofty status, auditors and the PCAOB need to do our best to make sure the audit is useful.




2. The statutory franchise… [which] protects the profession as a whole from the risks of obsolescence, thereby reducing auditors' need to adapt to investor needs. As a result, auditors don't have a natural incentive to evolve their reports to what investors want.




3. Conflict of interest…[and] the incentives of others in the environment auditors operate in … deter the profession itself from innovating the audit to meet public expectations the way, say, a technology company would, or a properly incentivized service company would.

Too Big To Fail? Too Important To Leave Unregulated
Saying, “There is no silver bullet to address these challenges,” Doty added, “There are as many or more problems with structural alternatives such as a third-party payor or insurance-based system; and in a dispersed ownership society, eliminating the audit requirement would be impractical and outright reckless. Therefore, our initiatives should go to reducing risks that follow from these conflicts and challenging incentives that weaken investor protection by applying counter-weight."

Referencing a recent statement in a report published by the U.K.’s House of Lords, that “There is inevitably a connection between the assessment of the Big Four's performance and the question . . . of market concentration,” Doty countered: “I do not believe that the global audit firm networks themselves pose systemic risk to our economy. But initiatives to shrink the global firms would likely further weaken their ability to audit the large, multi-national companies that may themselves be systemically important.”

“The global audit firm is not too big to fail, it is too important to leave unregulated,” said Doty. He continued, “To protect investors, governments should regulate such firms, not cripple them.”
Concept Release Coming in “Early Summer” on The Auditor’s Report
Doty noted, “The PCAOB is engaged in a broad dialogue with investors, auditors, audit committees, preparers and others to consider how the auditor's report can be changed to provide more useful, relevant and timely information. The central questions emerging in our dialogue are: What should auditors' responsibilities to the investing public be? What can auditors be expected to do? And, how do we close the expectation gap in a meaningful way? "

He added, “We expect to issue a concept release in the early summer summarizing and analyzing the input we've received. That concept release may result in the first substantial changes to the reporting model in more than half a century. The release will explore various possibilities and seek specific feedback.”

Standard-setting initiatives
Among the standard-setting initiatives outlined by the PCAOB Chairman were:

• improving audits of fair value measurements,




• improving communications among affiliated firms in global networks engaged in multi-national audits




• global quality controls, and




• improving auditors' communications with audit committees.

“Our improvements in standards are not intended to be traps or trip-wires for auditors,” emphasized Doty. “We write standards so that expectations are clear.”

Also addressed in Doty’s remarks were matters relating to PCAOB oversight and inspections of US and multinational audit firms.

See More
If you are interested in the subject of audit regulation, check out a program being offered by the Stan Ross School of Accountancy at Baruch College on Monday May 9: Changes in the Regulatory Environment and their Effects on Audits and Auditors. Featured speaker at the program, which will take place from 5:30-6:30 pm, is Peggy Wood, Professional Standards Partner at Grant Thornton LLP and President of the New York State Society of Certified Public Accountants. Pre-registration is required; there is no fee to attend.

Read More
Further reading on the subject of audit regulation can be found in Francine McKenna’s Re:The Auditors Blog (McKenna is always interesting, always controversial) and Jim Petersen’s Re: Balance Blog (Petersen’s point of view is formidable, with his background as a former senior in-house lawyer and partner at one of the largest global audit firms.)

Economic Optimism Dips Slightly in U.S., Europe: FEI-Baruch CFO Outlook Survey

The recently released survey results of the quarterly CFO Outlook Survey, conducted by FEI and Baruch College's Zicklin School of Business, show a dip in optimism for the 1Q 2011. In addition to surveying CFO confidence and optimism levels in the U.S. and Europe, the survey addresses CFO views on the potential impact of world events, Dodd-Frank implementation, and adoption of social media. Read the press release for more details.

PCFRC To Meet With FASB This Week

The Private Company Financial Reporting Committee (PCFRC), formed jointly by the Financial Accounting Standards Board and the AICPA in 2007 to advise FASB on matters relating to private companies vis-à-vis existing and proposed accounting standards, is slated to meet with members of the FASB board and staff later this week, in a public meeting which will be webcast.

The PCFRC will also meet with representatives of the Financial Accounting Foundation, which oversees the FASB. As previously reported, the FAF is conducting outreach on standard-setting for private companies, including with respect to the recommendations made earlier this year by a blue ribbon panel on private company standard-setting. See the comment letter filed by FEI's Committee on Private Company Standards (CPC-S).

The agenda, linked in the PCFRC meeting materials, notes there will be general updates and discussion of various FAF and FASB initiatives under way to study potential improvements in the standard setting process as relates to private company constituents, and more specific discussion of particular accounting standards.

George Beckwith, Chairman of FEI’s Committee on Private Company Standards (CPC-S), serves as a member of the PCFRC in his personal capacity, along with a number of other FEI members. (See PCFRC roster).

FASB Issues Accounting Standards Update On Repos

On Friday, the Financial Accounting Standards Board released an Accounting Standards Update on repos. The full title the document, ASU 2011-03, is: Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.

As noted in FASB's press release:

The Update is intended to improve financial reporting of repurchase agreements
(“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.

The Board revisited its standards on transfers and servicing to respond to concerns from financial statement users who felt the criteria for determining effective
control for such transactions should be improved,” stated FASB Chairman Leslie
F. Seidman. “The new guidance improves transparency by eliminating consideration
of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control.”

In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and
Servicing, prescribes when an entity may or may not recognize a sale upon the
transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.

The amendments in this Update are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion.