SUMMARY
2004 SEC CONFERENCE:
AN ACCOUNTING & REPORTING UPDATE FOR PUBLIC COMPANIES
WASHINGTON, D.C.
PHOENIX, ARIZONA
CPE INC. President, Mohamed Markar, opened the conference by introducing conference chairperson, Reva Steinberg and conference moderator, Kevin Dolan.
CURRENT REGULATORY ENVIRONMENT
John J. Huber, Partner, Latham & Watkins LLP, discussed how the present disclosure system overlaps with internal control over financial reporting as well as how it affects MD&A and public and private offerings. Disclosure controls and procedures are designed to ensure that information required to be disclosed is properly recorded and disclosed in the time period specified by the SEC. Certification under 302 requires the CEO and CFO to certify disclosure controls and procedures. In June 2003 the SEC clarified that there is a substantial overlap between disclosure controls and procedures and internal control over financial reporting, which is the heart of 404. If a material weakness is identified during a 404 assessment that has not previously been reported under 302, it must be disclosed. The disclosure should answer the question of what would make the CEO or CFO comfortable in terms of making his or her certification. Regarding public and private offerings, internal control is already part of underwriter due diligence. A public company preparing an offering can expect investment bankers and legal counsel to focus on documents such as the management letter and audit committee minutes and to ask to interview members of disclosure committees. He cited ten "rules of the road" regarding 404 compliance:
- Procedure is becoming just as important as substance.
- All of these procedural rules are linked.
- The audit committee is the decision-maker for the 404 process and
should be kept in the loop and consulted regarding its views, earlier rather
than later.
- COSO is king for domestic issues.
- Coordinate with your outside auditor.
- Implementing 404 is a huge undertaking and must be taken seriously;
continual evaluation, testing and updating is essential.
- Coordinate with your existing disclosure controls and procedures.
- 404 is ongoing; it will be built into IT systems for a long time to come.
- 404 is the biggest, most expensive part of SOX.
- 404 is not going away.
All three panelists, including Eric Schuppenhauer, Senior Advisor to the Chief Accountant, SEC, and Scott Frew, Partner, KPMG, answered questions concerning the roles and responsibilities of audit committees. Committees meet more frequently now, and their power and influence have increased. In general, audit committees must be able to exert objective oversight, display independence and ensure that the tone at the top is appropriate.
SEC HOT BUTTONS
Donald Walker, Jr., Senior Assistant Chief Accountant, SEC, discussed the process of working with the SEC. A registrant's first notice of a review is his or her receipt of a comment letter. Questions about filings are not boilerplate; they are tailored to the specific situation. If registrants don't understand a particular comment, they are encouraged to call the staff people listed on the letter to discuss it. Registrants should consult with their auditor and, if need be, the top technical officer in their accounting firm.
To help facilitate the review process, the SEC has added staff and created a new role called "Branch Chief." In the event of a disagreement between the SEC staff and a company on an issue, the appeal route is up through a branch chief to the senior assistant chief accountant. Registrants can contact the Office of the Chief Accountant of the SEC either to appeal a major issue, to engage in pre-consultation about an accounting issue prior to preparing a filing or to consult on an auditing matter. Pre-consultation on major accounting issues is strongly encouraged and can help expedite the review process. Anonymous questions can be addressed to the Chief Accountant's office but callers are not entitled to rely on the answers since no record of these calls is kept. Protocol for consulting with the Office of the Chief Accountant of the SEC is found on the SEC website.
Dixie Johnson, Corporate Partner, Fried Frank Harris Shriver & Jacobson, and
Wendy Hambleton, Partner, BDO Seidman LLP, discussed several hot button topics, including the new 8-K rules, the proposal to make comment letters available to the public, what a shell company can and cannot do, EITF 9522, revenue recognition, comment letters on segments and non-GAAP financial measures. Issues seen as coming on the horizon are the international financial reporting standards and Securities Act reform.
FASB & AICPA UPDATES
Brandon Coleman, Manager, Deloitte & Touche, spoke about regulatory standards, specifically:
FIN 46 - gave a brief background of the standard; explained steps of how to apply it; listed scope exceptions
SFAS 132 (Revised 2003) - standard revised to address new disclosures on plan assets, plan liabilities, payments required to be made, assumptions made and interim period
FSP FAS 106-2 (Accounting for the Medicare Act) - provides prescription drug benefits to sponsors of retiree health care benefit plans; purpose is to provide guidance on how to account for the effects of the Act and what disclosures should be made in the financial statements for the Act
FASB Exposure Draft (Share-Based Payment) - requires that the grant date "fair-value" of all equity-based compensation awards be recognized as compensation expense…effective for fiscal years beginning after December 15, 2004 for public companies (FASB considering deferral); requires that options be measured at fair value; if the value of options not based on market prices, option pricing models should be used
(Black-Scholes, Lattice-Based model)
Proposed Revisions to FASB 141 - Exposure Draft expected to be issued soon; effective for fiscal years beginning after December 15, 2005; significant changes to current purchase accounting procedures; seven proposed changes to FASB 141 mentioned
Other FASB Projects discussed - liabilities and equity (Phase II); performance reporting; revenue recognition; fair value measurement; short-term international convergence; income taxes
SEC ENFORCEMENT ACTIVITIES
Antonia Chion, Associate Director, Division of Enforcement, SEC, and Janet Broeckel, Partner, Pillsbury Winthrop, engaged in a dialogue about the pros and cons, benefits and drawbacks, of SEC investigations for companies. On one hand, the SEC's industry wide sweep policy is a proactive effort to root our problems before they become major ones. On the other, the fact that the sweep is often in tandem with other agencies such as the NYSE or NASD, often creates duplicate requests for information from companies. Companies are sometimes at a loss to know whether an investigation must be disclosed.
In matters of policy, companies sometimes are getting information from the enforcement division that conflicts with policy from other SEC divisions.
SARBANES-OXLEY: PCAOB UPDATE
Daniel Goelzer, PCAOB, discussed the mandate of the Board to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports of public companies its responsibilities and the registration of accounting firms with the Board. In 2003, the PCAOB conducted limited inspections of the Big 4 firms, looking at their professionalism and at selected audit engagements. Inspection reports were issued on August 26, 2004. The Board has issued three new permanent auditing standards: Auditing Standard No. 1 (Reference to the Board standards in audit reports), Auditing Standard No. 2 (Audit of Internal Control) and Auditing Standard No. 3 (Audit Documentation). Priorities for 2004 and 2005 are:
cross-border oversight, developing risk assessment models, full-scale inspections, standard-setting process and enforcement.
SARBANES 404 COMPLIANCE
This session was a panel discussion among Pamela Prior, Director of Internal Control & Analysis at Tasty Baking Co. and Charles Silvey, Vice-President-Internal Audit, Cambrex Corp. and Gary Stauffer, Senior Partner, PWC, who also served as moderator. The session began with Dan Goelzer, the previous speaker, answering questions from his session. Gary Stauffer spoke about where we are now in relation to 404, noting that the compliance task is a major outlay of time and resources, as evidenced by companies spending more than 100,000 hours of time evaluating controls. One concern involves companies that have put together a time frame for compliance and, because of increased efforts needed, have fallen behind their schedules. A PWC survey revealed that approximately 18% of companies surveyed felt unsure about meeting the required deadlines. Other developments are that more deficiencies are being identified than originally anticipated and remediation efforts are also taking longer than anticipated. Complianceweek.com is an excellent source of updated information about 404. Pam Prior spoke about what Tasty Baking Co. has learned to date regarding 404, such as that existing documentation is not as practical as it sounds, executive-level support is important and middle management support is critical. She said that staying focused and ongoing communication at all levels are crucial. Don't make decisions "just to comply;" make internal control decisions that are right for the company and the shareholders. Charles Silvey said that spreadsheets, SAS70s, walkthrough issues, control environment and segregation of duties are five items to watch relative to 404.
MD&A
Sondra Stokes, Associate Chief Accountant, Division of Corporation Finance, SEC, summarized the MD&A requirements. MD&A should: provide a narrative explanation to let investors see through the eyes of management, enhance financial disclosure and provide a context in which information can be analyzed and provide information on the quality of and potential variability of a company's earnings and cash flows as indications that its past performance is indicative of future performance. The SEC's Interpretive Release on MD&A was meant to spur registrants to take a new approach to MD&A so that it accurately reflects management's perspective. In terms of presentation, it should focus on the most important material and information and this information should be reported in a prominent position in the document. Use tables, subheads, etc. to make the MD&A more readable. Provide an overview or introductory section. Content of MD&A should include trends and uncertainties, material forward-looking information on known trends and uncertainties and key indicators of financial condition and operating performance. Paul Vigil, Senior Accounting Manager-Corporate Accounting & Analysis, Microsoft Corp., explained how Microsoft applied the new MD&A guidance in terms of process revisions and content change.
SHARE-BASED PAYMENT PROPOSAL
Donna Stettler, Senior Manager, Executive Compensation Practice, Deloitte Consulting LLP, summarized the main points in the FASB Exposure Draft on Share-Based Payment and the most recent changes. She mentioned the most significant aspects of the proposed accounting standard as: stock option valuation methods, expense accrual patterns, impact of performance vested awards, income tax benefit and transition method and explained each in some detail. Alternatives to stock options include SARs, discounted Stock SARs and stock option pyramiding.
EITF UPDATE
Reva Steinberg, Director-National SEC Department, BDO Seidman LLP, discussed the EITF positions that were reached or became effective in 2004:
Issue 02-14 (Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in the Voting Stock of an Investee but Exercises Significant Influence Through Other Means); Issue 03-1 (The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments); Issue 03-6 (Participating securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share); Issue 03-16 (Accounting for Investments in Limited Liability Companies);
Issue 04-2 (Mineral Rights: Tangible or Intangible); Issue 04-3 (Mining Assets: Impairment and Business Combinations). Emerging issues are: Issue 03-9 (Interaction of Paragraphs 11 and 12 of FASB Statement No. 142 Regarding Determination of the Useful Life and Amortization of an Intangible Asset); Issue 03-13 (Applying the Conditions in Para. 42 of FASB Statement 144 in Determining Whether to Report Discontinued Operations); Issue 04-1 (Accounting for Existing Contracts between the Parties to a Purchase Business Combination); Issue 04-5 (Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights); Issue 04-6 (Mining Industry issue); Issue
04-7 (Determining Whether an Interest is a Variable Interest in a Variable Interest Entity;
and Issue 04-8 (Accounting Issues related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share).
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