Auditor Relationship, Audit Fees, and Risk Management: FEI-FERF Report

Earlier today, results of the latest FEI Audit Fee Survey, conducted by FEI's research affiliate, the Financial Executives Research Foundation (FERF), were released.

This year's survey, sponsored by NYSE-Euronext, was expanded as in recent years to include audit fees in total (i.e., not only Sarbanes-Oxley Section 404-related fees, which was the objective of the audit fee survey when first launched). Information on total audit fees is now the focus of the survey, since Sarbanes-Oxley Section 404 fees are generally not broken out as much by auditors as in prior years, and have been blended into the integrated audit fee.

Public and Private Companies Surveyed
The survey results include results for both private and public companies, with results broken out within public companies for accelerated and nonaccelerated filers.

243 survey responses were received in total, representing executives from 98 U.S. publicly-held companies (consisting of 82 accelerated filers and 16 nonaccelerated filers), 124 U.S. privately-held companies, three foreign companies and 21 non-profit organizations.

Modest Changes In Audit Fees

• Audit fees for public company accelerated filers increased by 2%, on average;


• Audit fees for public company nonaccelerated filers increased by 3%, on average; and


• Audit fees for private companies remained flat, on average.

Auditor Relationship

• the relationship with auditors was rated ‘neutral to good’ on average by both public and private companies.


• 21 years was the weighted average number of years of the client-auditor relationship for the public company survey respondents, compared with 8 years for the private company respondents

Note: see also our recent blog post, PCAOB To Consider Mandatory Audit Firm Rotation.

Risk Management
For the first time, the Audit Fee Survey included questions about risk management. Questions addressed such topics as whether survey respondents currently have a company-wide risk management process in place, rolled out to the whole company, or used at headquarters.

Read more in FEI's press release.
Access the full Audit Fee Survey report.

PCAOB To Consider Mandatory Audit Firm Rotation

In a keynote speech last week entitled Rethinking the Relevance, Credibility and Transparency of Audits, Public Company Accounting Oversight Board Chairman Jim Doty called for a reexamination of whether there should be a move to mandatory audit firm rotation. Doty delivered the speech at USC's 30th Annual SEC and Financial Reporting Institute.

Mandatory Audit Firm Rotation, More, Coming In Concept Release
Referencing the importance of independence and skepticism, Doty said, “I believe it is incumbent on the PCAOB to take up the debate about firm tenure and examine it, with rigorous analysis and the weight of evidence in support and against. I don't have a predetermined idea as to whether the PCAOB ultimately should adopt term limits. My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public.

“As such,” he continued, “the [PCAOB] board plans to issue another concept release to explore whether there are other approaches we could take that could more systematically insulate auditors from the forces that pull them away from the necessary mindset.”

Auditor's Reporting Model - Concept Release Coming
As reported in March, the PCAOB plans to issue a concept release for public comment on the Auditor's Reporting Model. Doty added in last week's speech that the PCAOB expects to issue the above-referenced concept release on enhancing auditor's independence and skepticism "around the same time that we issue the concept release on the auditor's reporting model, in order that they can be considered together in a holistic manner."

FEI’s Committee on Corporate Reporting will be closely following these issues to provide thoughtful and practical input from the prepararer's point of view.

Don't Want To Miss A Thing

(video: Don't Want To Miss a Thing by Aerosmith, via YouTube)

With everyone present and accounted for following the failed 'end of the world' (NYT) two weeks ago (BTW, where are the millions of dollars in Rapture contributions (Yahoo)?) the need to meet mandatory CPE requirements (AICPA) and stay current on the latest SEC and FASB developments continues (not to mention the PCAOB and IASB). Like the theme song from the doomsday action flick, Armageddon, if you Don't Want to Miss a Thing (Aerosmith), check out the hot topics to be covered at these upcoming webcasts and conferences:

• Private Company Perspective: Effects of Complex Regulatory Issues (E&Y webcast, June 9, 1pm local time)


• IFRS: What Does The Latest SEC Announcement Mean For You? (Deloitte webcast, June 13, 2pm EDT)


• FASB Update For Nonpublic Entities (FASB In Focus webcast, June 17, 1pm EDT) (NEW: FASB 'In Focus' Webcasts now offer CPE!)


• SEC Division of Corporation Finance Update On Financial Reporting Matters (CAQ webcast featuring staff from the SEC's Division of Corp Fin, June 24, 1 pm EDT) (Featured speakers include Corp Fin Deputy Chief Accountants Craig Olinger and Nili Shah, and Associate Chief Accountants Mark Shannon and Ryan Milne; topics include loss contingencies, taxes, segment reporting, IFRS workplan, and more.)


• Washington Policy Conference (FEI, Sept. 26-27, Washington, DC) (Keynote speakers include the Hon. Michael G. Oxley, and the Hon. Fred Malek, see speaker bios)


• Current Financial Reporting Issues (CFRI) Conference (FEI, Nov. 14-15, NYC)


• FEI Hall of Fame Induction/Gala (FEI, Nov. 14, NYC)

Beswick's 'Condorsement' and Herz' 'Improve and Adopt'

'Condorsement,' a term coined by SEC Deputy Chief Accountant Paul Beswick in his speech at the Dec. 2010 AICPA Conference, referencing an approach somewhere "in between" ... "convergence or... endorsement" of International Financial Reporting Standards, forms the basis of the proposal floated for public comment in the SEC Staff Paper on IFRS released on Friday.


Interestingly, the term 'condorsement' was used only once in that paper, and personally (now would be a good time to remind you of the disclaimer posted on the right side of this blog) I believe the term 'condorsement' was used sparingly because the SEC staff wanted to emphasize the sovereignty factor, and attention-to-high-quality factor, presumably subsumed under the proposed approach of Endorsement (ongoing Endorsement of IFRS by the FASB for use in the U.S.) prior to Incorporation of IFRS into U.S. GAAP, the central message of the staff paper. Thus, the emphasis was on thoughtful, paced Endorsement, potentially subduing some of the criticism (such as that of Albrecht & Selling) pointed at the Convergence half of the Con-dorsement equation, particularly as relate to a 'big-bang' type of wholesale movement to IFRS - something the SEC will continue to obtain feedback on, at its upcoming (July 7) roundtable on IFRS.


On the subject of Condorsement, one thing I find fascinating is the extent to which former FASB Chairman Bob Herz' 'Improve and Adopt' approach - first introduced in his testimony at a Senate Banking Committee, Securities Subcommittee hearing on Oct. 24, 2007 - can be viewed as a possible precursor to Beswick's "Condorsement."


Here's what Herz told Sen. Reed's subcommittee in 2007 about 'Improve and Adopt:"

We expect that the myriad changes to the U.S. financial reporting infrastructure would take a number of years to complete. During that time, the FASB and IASB should continue our cooperative efforts to develop common, high-quality standards in key areas where neither existing U.S. GAAP nor IFRS provides relevant information for investors. Those common standards, issued by both the FASB and IASB, would be adopted by companies in the U.S. and internationally when issued. In other areas that are not the subject of those joint improvement projects, we envision that U.S. public companies would adopt the IFRS standards “as is” over a period of years. The adoption of those IFRS standards by U.S. companies would complete the migration to an improved version of IFRS.

We believe there are many advantages to employing such an “improve and adopt” approach in transitioning to IFRS. Financial statement users both domestically and internationally will benefit from the continued, cooperative efforts by the FASB and IASB to improve, simplify, and converge financial reporting in those areas of existing U.S. GAAP and IFRS that are clearly deficient. Under this approach, new standards or existing IFRS will be gradually adopted over a period of several years, smoothing the transition process and avoiding the capacity constraints that might develop in an abrupt mandated switch to IFRS. Moreover, this approach permits the Boards to focus their resources on improving standards in areas important to investors, rather than on eliminating narrow differences among our many existing standards.

Compare that with Beswick's description of Condorsement in his Dec. 2010 speech:

...[W]hat would be a reasonable approach for the U.S.? In our October update we highlighted that the majority of jurisdictions are following either a convergence or an endorsement approach. In my opinion, if the U.S. were to move to IFRS, somewhere in between could be the right approach. I will call it a "condorsement" approach. Yes, I admit I just made up a word. And by the way, the patent is pending as we speak.

So how would this approach work? Well, to begin, U.S. GAAP would continue to exist. The IASB and the FASB would finish the major projects in their MOU. The FASB would not begin work on any major new projects in the normal course. Rather, a new set of priorities would be established where the FASB would work to converge existing U.S. GAAP to IFRS over a period of time for standards that are not on the IASB's agenda. This is not meant to be an MOU2 but rather would entail making sure that, on a standard by standard basis, existing IFRS standards are suitable for our capital markets.

At the same time, the FASB would have a process where they would consider new standards issued by the IASB for incorporation into U.S. GAAP and then integrate such standards into the U.S. codification. The ideal would be to incorporate such standards as issued by the IASB without modification. However, criteria would need to be established for FASB's consideration of endorsing or incorporating standards — for example whether incorporating a given standard is in the interests of U.S. investors or the U.S. capital markets. Sir David Tweedie has indicated in speeches that the IASB has already started thinking about their agenda after the completion of the MOU. I would expect the FASB to participate in the IFRS standard setting process much like other jurisdictions do. At the same time, I would expect that the IASB would take seriously the input of the U.S. in their deliberations.

So why consider this approach? I believe this approach is worthy of consideration and may work in the U.S. for various reasons, including the depth of the U.S. markets; the quality of our existing standards;, and, quite frankly, the existing consistency at the objectives level between many areas in U.S. GAAP and IFRS.
It is clear to me that this is in fact a method of incorporating a single set of standards into the U.S. market. But it also acknowledges our responsibility to the U.S. capital
markets and provides mechanisms to ensure that the standards must be high quality prior to their incorporation. If new standards of sufficiently high quality were incorporated into U.S. GAAP, the process of creating new differences would stop. Further differences would be eliminated one by one as new high quality global solutions are achieved.

It is important to note that the calculus of moving using a "big bang" date from existing standards to an alternative set of accounting standards presents a different set of costs and benefits, and different challenges for the U.S. as compared to other jurisdictions. While our evaluation of the differences between U.S. GAAP and IFRS is ongoing, it seems clear that, in a number of major areas, the two sets of standards are consistent at the objectives level. Take, for example, PP&E, Share-Based Payments, or even Income Taxes. While I'm not at all suggesting that there are not differences, when the two bodies of standards are compared, the differences appear in many cases to be in the method of application as opposed to the objective of the standards. Requiring retroactive adoption, or even requiring new systems to be put in place prospectively on a big bang adoption date is something that requires serious consideration as to
whether they're necessary. This is particularly true where the IASB may be
considering modifications to their existing standards to avoid the imposition of
a "two-step" change.

Further, in the U.S. we have such a wide spectrum of companies that are currently using U.S. GAAP. The cost-benefit consideration is very different for many of these companies. For example, a large Fortune 50 company has different economic considerations (both as to costs and potential benefits) as compared to a small public company in Iowa. We need to be act very deliberatively and understand fully the benefits before we create the potential for such a significant burden on U.S. companies; particularly smaller public companies and private companies.

This approach may be appealing to some as it seems to provide for a way forward in achieving the broader objective, maintains our vital interest in the U.S. capital markets, and appears to do so in a way that would manage the burden of achieving the objective to an acceptable level. If the change is gradual, and if the smaller companies can learn from the larger companies, then the cost of incorporating a global set of standards should be decreased.

However, there are a number of questions that would need to be answered under such an approach. One of the most significant questions that needs to be considered is "Should the largest companies be required or allowed to move to IFRS prior to the FASB completing its condorsement efforts?"

In any case let me reiterate that all I have done is I've outlined an idea. Don't shoot me as it is just that, an idea. But I hope it demonstrates that we are serious in considering how to achieve the broad objective, to do so in a way that maintains the protections to U.S. investors we have been afforded though our standard setting processes to date, and to do so in a way that minimizes the cost ultimately born by the U.S. investing public.

Risks
So why shouldn't we just commit right now and move? As we noted in the progress report there are still some significant areas we are considering, including the quality of the standards, and the governance and funding of the IASB. In the meantime there are some potential pitfalls that remain before the Commission makes its
decision.

First and foremost, the efforts of the IASB and the FASB on the MOU projects need to result in high-quality accounting standards. If the efforts focus on meeting deadlines as opposed to producing high-quality accounting standards, it would be very difficult to see how we will end up with unified standards. I hope the Boards take the time they need to get the standards right and, if that means taking time past June 2011, I would be very supportive. Recently I was talking with an IASB Board member on the timing for completion of the MOU projects. The Board member noted that when they explain to their grandkids what they did while serving on the IASB, they hoped they could say they issued high-quality accounting standards rather than saying they issued an accounting standard by a specific date.

Another potential pitfall involves some of the sales literature and advertising I have recently observed by the larger firms that market their ability to help with the IFRS transition. I have seen advertising that creates the impression that the process will be challenging and painful. The implication is a company will not be able to convert to IFRS without outside help. I will note this type of tactic, as some have referred to them as "scare tactics", not only has the potential to put the profession in a bad light, they also reinforce some myths on the conversion to IFRS and could potentially hinder our ability to incorporate IFRS. Let me point out that the Commission has not yet made a decision on whether to incorporate nor have there been any decisions on the best method to do so. In the staff's efforts to complete the Work Plan, we intend to consider ways to lessen the burden on converting to IFRS while at the same time protecting the interests of investors.

As further detailed in last week's SEC Staff Paper, on which comments are due by July 31:

The FASB would continue to promulgate U.S. GAAP primarily through its endorsement of standards promulgated by the IASB. Under the framework, due to
the FASB’s participation in the IASB’s standard setting process, the FASB should be in a position to readily endorse (i.e., incorporate directly into U.S. GAAP) the vast majority of the IASB’s modifications to IFRS. However, the FASB would retain the authority to modify or add to the requirements of the IFRSs incorporated into U.S. GAAP, similar to other jurisdictions, and such U.S.-specific modifications would be subject to an established incorporation protocol. Such a protocol could entail the FASB determining whether the IASB’s modification to IFRS (either by means of issuance of a new standard or amendment of an existing standard) met a pre-established threshold—for example, a threshold that incorporates the consideration of the public interest and the protection of investors. If the IASB’s modification reaches that threshold, the FASB would incorporate fully the IASB’s adopted standard into U.S. GAAP. If the FASB concludes to the contrary, in incorporating the standard, it would need to determine whether it should modify the requirements of the standard, retain relevant U.S. GAAP, or find an alternative solution. Before making any modifications, the FASB could discuss the situation with other national standard setters to understand their perspectives on the issue and the approaches they have taken for endorsement of that standard in their respective jurisdictions.

In addition to incorporating new IFRS amendments into U.S. GAAP, the FASB also would exercise its authority as the national standard setter when it found, based on its experience in the ongoing interpretation or application of IFRSs incorporated into U.S. GAAP, that supplemental or interpretive guidance was needed for the benefit of U.S. constituents.

Although Herz' "improve and adopt" model circa 2007 is not precisely the same as Beswick's 2010-2011 "condorsement" model (which lies at the heart of last week's SEC Staff Paper), I believe at the very least that Herz, through his 'improve and adopt' model, can be viewed as the uncle, if not the father of condorsement.

Preparers Concerned About Change In Direction In FASB, IASB Leasing Proposal

Given the pervasiveness of leasing as a business practice and the potential impact of changes in lease accounting rules, FEI’s Committee on Corporate Reporting (CCR) has been following this project with great interest. Last week, several members tuned in to the webcast of the FASB-IASB joint board meeting and shared their views with me on the latest developments. In the view of those members, the changes voted on by the boards erased the substantial progress that had been made in redeliberations and made the standard more difficult and expensive to implement. [NOTE: Let me remind you of the disclaimer posted in the right margin of this blog; the disclaimer applies to my comments as well as those of the FEI members noted herein.] In brief, according to these members, the Boards decided to:

1. Require front-end loaded expense recognition for all leases


2. Eliminate special accommodations for short-term leases


3. Reinstitute a complex approach to determining lease term

Refer to FASB’s official Summary of Board Decisions for full results of the meeting.

The decisions reached at last week’s FASB-IASB board meeting on leasing are in direct conflict with what CCR recommended in its comment letter on the Leasing Exposure Draft.

Additional insight on decisions reached in the discussion of the leasing project at last week’s joint board meeting can be viewed on the archived webcast of the meeting, which will be posted here.

According to one CCR member, “What is so disappointing about these developments is that they have occurred after unprecedented outreach and consultation, which served to clarify what investors say they want from a new leasing standard. The Boards appeared to listen and had made changes that were directly responsive to what they heard. Now, with time running out, much of this progress has been undone.” Details follow.

Pattern of Expense Recognition
According to the CCR members following the leasing project, last Tuesday the FASB voted 6-1 to keep it simple and force the expense recognition pattern for leases to equal the rental cost recorded under lease accounting today while a majority of the IASB wanted to revert to the much-criticized ED principle that front-end loads expense.

By Thursday, the IASB view had prevailed. The IASB was not in favor of an approach to depreciation of the asset that was other than straight line (e.g., some had suggested a sinking-fund approach that would effectively offset the accretion of the liability using the interest method). The consequence of the IASB’s decision, in the view of these CCR members, is that the expense of the lease is overstated in the early years and understated in the later years. During outreach, as observed by the CCR members, investors were emphatic that this approach was not helpful to them. John Smith, an IASB member from the US (formerly a partner with Deloitte and Touche), had noted that investors will simply have to make adjustments to the reported amounts if they don’t like front-end loading. This raises the question of whether the changes arising from this project will make the accounting more useful or understandable for users.

According to the CCR members, this decision raises complications in a number of important areas, including making it very difficult to deal with large numbers of small dollar leases through materiality. They point out that companies are going to need to compute the expense under both old GAAP and new GAAP in order to make the case that it is immaterial. Having to go through the trouble of doing so could compel many companies, say the CCR member, to decide to make the systems changes to actually book them that way, which could mean incurring hundreds of millions of dollars in IT costs – all to produce financial results that analysts are going to adjust back to eliminate the front-end loading.

Eliminate the accommodation for short term leases

For those leases with a maximum term of 12 months or less, the ED proposed that they be recorded on balance sheet, but granted preparers “relief” by not requiring them to discount recorded amounts.

In redeliberations, the Boards had tentatively decided to ease the burden further by allowing short term leases to be accounted for just like operating leases are today.

However, last week the Boards signaled that they plan to eliminate any relief for short term leases.

Defining the lease term
The ED would have lessees recognize lease assets and liabilities on the basis of the longest possible lease term that was “more likely than not” to occur. During outreach, note the CCR members, this approach was widely criticized by preparers and users.

During redeliberations, the Boards voted to further simplify by moving the definition of lease term to the definition used today. Last Thursday, the Boards decided to reverse course and factor lessee intent into the decision. As a result, lessees and lessors will need to consider contract, asset and other entity specific factors when determining the lease term at inception and each time that term is reassessed. The CCR members observe that this will be very challenging for preparers at do for each individual lease.

CCR members tuning into the most recent deliberations on the leasing project also raised questions about the process. After significant efforts to gather constituent feedback, the Boards, in the view of CCR members following the leasing project, appear to be backing away from acting on what they heard. In particular, these members believe, the desire to finish the leasing project seems to be more important than improving the principles of the final standard.

Warren McGregor, an IASB Board member (and a career standard setter), made it clear that anything other than the ED’s approach on expense recognition would require re-exposure of the proposal and delay issuing the final standard. Accordingly, CCR members following this project believe, the more likely path the Boards will follow will be to post the revised conclusions to the Leasing proposal in the form of a Staff Draft on their websites for informal review.

The CCR members note that the posting of a Staff Draft is not the same level of due process as posting a formal Exposure Draft for public comment. The process, they explain, would be much like so-called “fatal flaw” drafts, in which a principle will only be reconsidered if there is something obviously (and fatally) wrong with it. Therefore, they note, if a company responds to the ‘staff draft’ by reiterating the concerns they expressed in their response (comment letter) to the earlier Exposure Draft, the response they will likely get is the following: the Boards carefully considered these arguments in their due process deliberations, and the company has not identified any new information that would cause the Boards to change their minds.

As previously reported, FEI President and CEO Marie Hollein had written to both Boards last month, applauding the boards decision to take the time necessary on the remaining major convergence projects, and asking that the boards formally publicize and seek comment on the revised conclusions under these projects by formally re-exposing them for public comment, each with at least a 90-day comment period. (See FEI April 19, 2011 comment letter to FASB, IASB.) The above discussion on leasing, note the CCR members following this project, underscores the importance of the recommendation made in Hollein's letter.

SEC Releases Staff Paper on FASB Endorsement Of IFRS, Incorporating IFRS Into U.S. GAAP

Yesterday, the SEC quietly posted a "Staff Paper" on the "Incorporation" of IFRS into the financial reporting system for U.S. issuers. As noted in the Request for Comment at the conclusion of the IFRS Staff Paper (emphasis added):

The Commission has yet to make a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers. This Staff Paper describes how one possible incorporation approach could be used to incorporate IFRS into the financial reporting system for U.S. issuers, if the Commission were to choose to do so. However, the Staff acknowledges that this is not the only possible approach of incorporation. Other possible methods of incorporation have been explored previously in much greater detail (e.g., providing for optional use or specifying mandatory, date-certain incorporation). Given the extensive discussion on these other alternatives and given the consideration by the Commission as to whether or when IFRS may be incorporated into the U.S. financial reporting system, the Staff is interested in constituents’ views on the framework and any other possible approaches of incorporation of IFRS, including views on those approaches explored previously. Feedback can be provided through the SEC website by following the link below. Feedback would be most helpful if received before July 31, 2011.

Here is the new 'approach' to possible 'incorporation' of IFRS into the financial reporting system for U.S. public co's, described in the SEC's IFRS Staff Paper (emphasis added):

The Staff’s discussion in this Staff Paper is not intended to suggest that the Commission has determined to incorporate IFRS or that the discussed framework is the preferred approach or would be the only possible approach. The framework is presented to illustrate that:

1. The decision faced by the Commission in an effort to achieve a single set of high-quality, globally accepted accounting standards is not necessarily a binary decision (i.e., either to require the use of IFRS by all U.S. issuers immediately or not);

2. Incorporation of IFRS is not inconsistent with the SEC maintaining its ultimate authority over U.S. accounting standard setting; and

3. There are potential ways to accomplish the broad objective of pursuing a single set of high-quality, globally accepted accounting standards while minimizing cost, effort, and other transition obstacles.

The framework explored in this Staff Paper is predicated on several principles.

First, U.S. GAAP would be retained, but the Financial Accounting Standards Board (“FASB”) would incorporate IFRS into U.S. GAAP over a defined period of time, with a focus on minimizing transition costs, particularly for smaller issuers. The FASB would incorporate newly issued or amended IFRSs into U.S. GAAP pursuant to an established endorsement protocol. This would require a change to how the FASB currently operates. Similar to other jurisdictions, the endorsement protocol would provide the Commission and the FASB the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors. Such framework would share many key features of other major jurisdictions’ processes for incorporating IFRSs into their respective national financial reporting frameworks. However, whereas many countries chose to align existing accounting standards with IFRS through a “first-time adoption” of IFRS and thereafter keep pace with new or amended IFRSs through endorsement procedures, the framework explored in this Staff Paper would include a transitional period during which existing differences between IFRS and U.S. GAAP would be eliminated through ongoing FASB standard-setting efforts.

While certain operational aspects of the framework are discussed in this Staff Paper, the framework represents only one possible approach to incorporation of IFRS. The details of this framework, and other potential methods of incorporation, would need to be subject to further review and development, if and when the Commission determines that IFRS should be incorporated into the financial reporting system for U.S. issuers. Lastly, in various forums, the notion of an early-adoption option for U.S. issuers to use IFRS has been discussed. While the consideration of an option is beyond the scope of this Staff Paper, the Staff is continuing to consider the possible mechanics and implications of an option for U.S. issuers and how it would work in the context of the framework or otherwise.

As previously reported, the SEC is holding a public roundtable (on the incorporation of IFRS into the U.S. public company financial reporting system) on July 7.

My Three Cents
[I remind you of the disclaimer posted on the right side of this blog.] This opinion section is usually labelled 'my two cents' but the question of moving to IFRS is such a big issue it requires an expansion to three cents.

In general, the issue of whether and when to permit or require U.S. public companies to report to the SEC (and, in order to not have to maintain 2 sets of books, to other regulatory bodies, including the IRS) using International Financial Reporting Standards published by the International Accounting Standards Board, instead of U.S. Generally Accepted Accounting Principles published by the U.S. Financial Accounting Standards Board, has been a divisive issue, with emotions running high on both sides of the issue, not to mention both sides of the Atlantic and Pacific. But, is there as much of a gulf, or are the parties really an ocean apart?

The key flashpoints between the two sides, in my view, involve three issues. Here is a synopsis and my view on how the SEC's IFRS Staff Paper addresses these points:

1. the question of whether it should be a mandatory requirement for public companies to move to IFRS, and if so, timing thereof ('date certain' being far enough out to allow sufficient transition time), vs. optional permission to report under IFRS instead of US GAAP. The SEC's IFRS Staff Paper clearly states that a move to IFRS is not necessary a 'binary' (aka all-in, all at once) decision, and emphasizes that indeed, the SEC has not yet reached any final decision. In fact, I would applaud the SEC for having the courage to take the time to explore new avenues (such as standard-by-standard 'endorsement' of IFRS by the U.S. FASB for incorporation into the U.S financial reporting system, the approach highlighted in the IFRS Staff Paper), rather than trying to close in on a final decision this early in 2011, or even by year-end 2011, if they determine that further time is necessary to reach a decision on this issue which could change the face of financial reporting, having incredibly significant consequences for investors, preparers, auditors, regulators, and others.



2. as a subpoint to the question of whether there should be a mandatory move to IFRS in the US, some folks that are more in the 'when' camp (vs. the 'if' camp) would like sufficient time to be afforded to thoughfully minimize remaining differences between US GAAP and IFRS while still maintaining high quality standards, and to allow sufficient time for all parties (preparers, auditors, academics, lenders, investors, regulators, board of directors members, and others) to sufficiently transition before the 'live' move to IFRS takes place. This would be to avoid a 'perfect storm' or unintended consequences or misunderstandings of the information provided in the financial statements under IFRS vs. US GAAP, including as relate to legal covenants that currently reference US GAAP-based threshholds (i.e. dollar amounts measured in US GAAP-based reports) or minimums/maximums. Once again the SEC is to be applauded for circulating a new concept for incorporation that is more of a compromise concept, and more akin to what other jurisdictions are doing in terms of 'endorsement' of new IFRS standards, as outlined in the SEC's Staff Paper. The SEC staff have clearly been doing their homework and they are to be commended for proactively seeking broad public comment on the new ideas they have developed based on their continuing outreach, rather than limiting themselves to ideas floated in the original IFRS roadmap proposal.



3. the 'sovereignty' issue: whether the US as a nation would give up its role (assigned to the SEC by Congress through the Securities Acts, and traditionally delegated by the SEC to the U.S. FASB, with additional formal authority over this arrangement baked in through the Sarbanes-Oxley Act) in accounting standard-setting. The SEC's IFRS staff paper addresses this issue head-on by stating that US GAAP would be retained (albeit by transitioning to IFRS over time as the FASB vets new IFRS standards for incorporation into U.S. GAAP), and that a mechanism would be provided for the SEC and FASB to "modify or supplement IFRS when in the public interest." Whether the various vocal (and less vocal) parties agree that the FASB 'endorsement' followed by 'incorporation' approach sufficiently addresses their concerns about sovereignty remains to be seen, and the best place for all views to be placed on this and other issues is through the comment letter process and by following and participating actively in the SEC's (as well as FASB's, the PCAOB's, and IASB's) outreach activities.

SEC Adopts Whistleblower Rule By 3-2 Vote, Encouraging - But Not Requiring - Internal Reporting First

The SEC's whistleblower rule (final rule, press release) adopted in a 3-2 vote by the Commission yesterday, has received criticism in some circles mainly because it encourages - but does not require - whistleblowers to report their assertions internally within their company first, before going to the SEC.

As noted in the NYSE-Euronext Inside the Beltway blog, the proposed rule which preceded the final rule "received 240 comments and over 1300 form letters." That blog also notes:

Commissioners Casey and Paredes, the two Republicans on the Commission, voted
against the final rules and argued that, despite this change, the regulations would diminish the effectiveness of internal compliance programs. Commissioner Casey predicted the SEC would be flooded with tips and that companies would face
significant cost increases for legal fees required to respond. Schapiro said,
however, that the final rules “expand upon the incentives for whistleblowers to
report internally where appropriate to do so.”

A major goal of the new whistleblower rule, as required under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is to authorize the SEC to pay a 'bounty' or reward to whistleblowers providing information on alleged securities law violations, who meet certain requirements.

Previously, only those whistleblowers alleging violations of insider trading laws were eligible for bounty payments; the lack of a broader whistleblower bounty program was emphasized in the course of the investigation of ponzi schemer Bernard Madoff, where whistleblower Harry Markopolous was not eligible for such a bounty (although that did not stop Markopolous from submitting detailed allegations to the SEC).

The change in the rule, as set forth in the Dodd-Frank Act, is to encourage more potential whistleblowers to come forward by providing them with a financial incentive.

However, one of the arguments against the SEC rule in its proposed, and now final, form, is that the rule fails to take advantage of internal compliance systems within companies, and in the view of some, could weaken those compliance systems, by not requiring whistleblowers to present their allegations through those existing compliance systems and going direct to the SEC. A counterargument put forth by others, however, is that a requirement to present a whistleblower complaint internally before going to the SEC is that the whistleblower may avoid making the complaint due to fear of retribution. The SEC tried to reach a compromise in the wording of the final rule to navigate this chasm involving the desire to, one the one hand, encourage but not require internal reporting, and on the other hand, discourage retribution:

• the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement
  


• the rules... [p]rovide that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.
  

As reported earlier today by Broc Romanek in TheCorporateCounsel.net blog:

House Representative Michael Grimm (R-NY) has introduced a bill that seeks to change the whistleblower provision in Dodd-Frank. Some believe the bill was introduced to put pressure on the SEC ahead of its rulemaking. This May 24th letter from a group of groups asks Congress to leave the whistleblower provision
intact

Romanek's blog post also provides links to some law firm memos issued yesterday on the SEC's final whistleblower rule.

Here are some links to additional articles and points of view:

SEC Adopts Its Revised Rules for Whistleblowers (NYT DealBook)

U.S. Chamber Warns New Whistleblower Rules Will Undermine Corporate Compliance Programs (US Chamber of Commerce press release)

Association of Corporate Counsel Frustrated by Today’s SEC Ruling on Whistleblowing Bounty Provisions of Dodd-Frank Law -- In-house Counsel Warn of Adverse Effect on Corporate Compliance and Internal Reporting

Reactions to SEC Whistleblower Rules Fall Predictably (WSJ Corruption Currents blog)

The Government Will Pay You Big Bucks to Find the Next Madoff (Forbes Working Capital blog)