CPE INC. President, Mohamed Markar, opened the conference by thanking everyone for coming to the fourth annual SEC Conference. Noting that the conference is proof of CPE INC.’s commitment to keeping those who handle SEC matters up-to-date, he then introduced conference chairperson, Reva Steinberg, and conference moderator, Kevin Dolan.

Chairperson Reva Steinberg, said that the past year has been a tumultuous time, noting that the SEC has completed its mandated rule making under Sarbanes-Oxley, the PCAOB has kicked into high gear, corporate governance has undergone a facelift and several new accounting rules have been put in place to provide more transparency and accountability.

SARBANES-OXLEY: ONE YEAR LATER

John Olson, Senior Partner, Gibson Dunn & Crutcher, stated that, in response to mandates resulting from Sarbanes-Oxley 2002, the SEC has adopted 15 new and different regulations. He felt that, among the many provisions of Sarbanes-Oxley, two that will receive great attention are: loan prohibitions for company executives (in response to real or perceived abuses of company funds), resulting in what he believes will be extremely close scrutiny into what boards, executives and management know about understanding and controlling senior executive compensation, and the requirement that, following a financial restatement as a result of misconduct, CEOs and CFOs must disgorge all compensations received in the year following the year when correct information should have been made public. He noted that some companies are already disclosing executive compensation (ex: GE).

Scott A. Reed, Partner, KPMG’s Audit Committee Institute (ACI), stated that audit committees now face major new challenges such as: balancing practicality and priorities with new governance requirements; focusing not only on the form (reporting, meeting requirements, etc.) but the substance; implementing required changes in attitude, culture and approach; and reducing the tendency to simply “check off” requirements instead of actually “thinking.” Audit committees are now meeting between five and six times a year. He enumerated key elements of audit committee oversight and expressed the opinion that audit committees should be comprised of financial experts plus a mix of other backgrounds (ex: Human Resources, IT, Operations).

Thomas J. Kim, Associate, Latham & Watkins, said that the SEC started the reform process prior to Sarbanes-Oxley and that the SEC is starting other initiatives not specifically required by Sarbanes-Oxley. He noted that, with the advent of Sarbanes-Oxley, there have been many more enforcement actions filed than previously against both company directors and officers. Between October 2002 and July 2003, the SEC filed 443 enforcement actions and, during Donaldson’s tenure the SEC has sought to bar 95 executives and directors from holding those positions with public companies.

SEC HOT BUTTONS

Chad Kokenge, Professional Accounting Fellow, SEC, led off by explaining significant Sarbanes-Oxley initiatives such as the establishment of the PCAOB, CEO and CFO certifications, non-GAAP financial measures, codes of ethics for senior executives and who should sit on audit committees.

Donald A. Walker, Jr., Senior Assistant Chief Accountant, SEC Division of Corporation Finance, explained the Staff Review process in detail regarding the frequency and levels of review. He stated that accounting firms must register with the PCAOB by October 22, 2003 and that, with heightened SEC vigilance of reporting activities, registrants should document accounting decisions to reduce SEC comments. He noted that the SEC is open to questions and appeals and is willing to work with registrants.

Wendy M. Hambleton, Partner, BDO Seidman LLP, discussed recent rule-making activity. She stated that the Acceleration of Periodic Report Filing applies to domestic companies that have a market capitalization of $75M or more, have been a reporting company for at least 12 months and have filed at least one Form 10-K and do not qualify as small business issuers. Conditions for use of non-GAAP financial measures were reviewed, with the provision that they can be used if accompanied by appropriate disclosure information. However, there are prohibitions to their use. Other hot button topics mentioned were: revenue recognition, related party transactions, income statement classification and recognition of identifiable intangible assets.

Michael Ussery, CFO, Primidom Lending Corporation, spoke of disclosure in MD&A off-balance sheet arrangements and contractual obligations, specifically, the disclosure threshold, purchase obligations and effective dates for filings. He discussed SAB 103, additional Form 8-K disclosure requirements and acceleration of filing date and reviewed the results of the Fortune 500 Review.

LUNCHEON PRESENTATION

Frank Nothaft, Chief Economist, Freddie Mac, spoke on trends he sees in recent economic growth. He sees growth accelerating in the second half of 2003 and into 2004 at a rate of about 4-5%. Interest rates will remain modest and housing prices will see a 3-5% growth per year through the balance of the decade. Reasons for economic growth are government spending at a rate of 10% a year, investment spending, though it fell for eight straight quarters, is now increasing in the areas of computers and information technology, and strong consumer spending. Another reason is that home equity, which benefits three-fourths of families and is a more lasting kind of wealth, grew by $2 trillion over 3 years. This record refinancing rate offset stock market losses. Unemployment should drop to about 5½% by the end of 2004.

FASB & AICPA UPDATE

Joseph B. Ucuzoglu, Senior Manager, Deloitte & Touche LLP, presented recently issued FASB Statements, specifically, 146, 148, 149 and 150, and their implications for reporting requirements. He also discussed recently issued FASB Interpretations 45 and 46 as well as AcSEC Developments regarding property, plant and equipment; loan loss allowances, acquired loans and “cheap stock.” On the matter of stock-based compensation, the voluntary nature of FAS 123 is being eliminated in favor of fair value accounting for stock options. Areas of disagreement between the FASB and the IASB involve methods of accounting for forfeitures, income taxes and awards granted to employees and nonemployees. FIN 46 has a pervasive effect on traditional special purpose entities as well as joint ventures, closely tied suppliers and equity method investees.

NEW RULES OF STOCK EXCHANGES – NYSE (BREAKOUT SESSION)

Glenn W. Tyranski, Vice President, NYSE, Financial Compliance, stated that the NYSE listed companies are relevant to today’s economy and positioned well to address future markets. The two largest sectors are technology, media and telecom (23%) and financial (22%). Over the past five years, the NYSE has consistently attracted 90% or more of qualified IPO proceeds. Performance in 2002 (94%) surpassed this historical rate. In terms of quality of listed companies, less than 1% of listed companies are below any of the quantitative continued listing standards.

NEW RULES OF STOCK EXCHANGES – NASDAQ (BREAKOUT SESSION)

Arnold Golub, Chief Counsel, NASDAQ, Listing Qualifications Department, stated that key considerations to help restore investor confidence require adopting significant listing standards that are clear and objective, reflect the diversity in size and age of companies and that avoid “the law of unintended consequences.” Specific goals should be to empower shareholders, independent directors and audit committees and to enhance disclosure and transparency.

SFAS 150 – DEBT VS. EQUITY (BREAKOUT SESSION)

Jay Hanson, Partner, McGladrey & Pullen LLP, spoke about SFAS 150, noting that it allows instruments previously included in equity to be reported as liabilities. This will result in a decrease to the stated net equity of the entity and will impact the income statement. Forthcoming additional accounting guidance will impact puttable stock, contingently redeemable stock and convertible bonds. The freestanding financial instruments addressed by FAS 150 are mandatorily redeemable shares, obligations to repurchase the issuer’s equity shares and certain obligations to issue a variable number of shares and how these are to be reported under FAS 150. He finished with a discussion of presentation and disclosure matters for these instruments as affected by FAS 150. The effective date for public companies’ disclosure under FAS 150 began May 31, 2003.

FIN 46 – VARIABLE INTEREST ENTITIES (BREAKOUT SESSION)

Jeffrey Ellis, Partner, Grant Thornton LLP, began by noting that on the day previous to the conference the FASB stated that there is a deferral of the effective date of FIN 46 for public companies but that the deferral only applies in very limited circumstances. He went on to discuss the technical aspects of consolidating variable interest entities under FIN 46. He stated that the objective of FIN 46 is to require an investor to consolidate a variable interest entity when it’s exposed to either a majority of its expected losses or a majority of its expected residual rewards through its ownership of variable interests. FIN 46 excludes certain entities such as not-for-profit entities, pension and OPEB trusts and QSPEs and former QSPEs. In addition to deciding if an entity is a variable interest entity you must determine the primary beneficiary, which is the person exposed to the majority of the losses.

April Francois, Vice President of Accounting Policy, Bank of America, spoke about general implementation issues brought about by FIN 46 and particular issues about understanding and applying FIN 46. Finance professionals need to realize that every legal entity must determine whether it is in the voting model or variable interest model as laid out by FIN 46. The scope of FIN 46 is extremely broad, impacting not just SPVs but joint ventures, partnerships and wholly owned subsidiaries and such business units as capital markets, treasury, asset management and commercial lending/leasing. FIN 46 also affects accounting terminology (expected loss, silos, primary beneficiary). The monitoring process will be ongoing for both new and existing structures.

HOW TO DETECT & DETER FRAUD (BREAKOUT SESSION)

Jennifer Lindsay, KPMG Forensic Services, said that it is estimated that 6% of economic activity is fraudulent, totaling approximately $420 billion a year. KPMG’s Fraud Survey revealed that 77% of all businesses suffered fraud within a one-year period and that the existence of fraud is common among all employee levels. The likelihood of fraud increases when opportunity, incentive and concealment exist. Strengthening board oversight (being confident that processes are in place to address risk, compliance problems and crises), creating a culture of values and ethics, having effective personnel policies, compliance programs and reporting and response plans are deterrents to fraud. Warning signs of fraud are: earnings consistently meet or exceed expectations; smooth and gradual reported earnings with no volatility; large adjustments near reporting deadlines; poor ethics and compliance programs; lack of meaningful board oversight; and high pressure, high-performance-based systems.

REVENUE RECOGNITION ACCOUNTING ISSUES (BREAKOUT SESSION)

Joseph B. Ucuzoglu, Senior Manager, Deloitte & Touche LLP, covered four topics he felt were crucial for revenue recognition: EITF 00-21, long term service contracts, consideration given by a vendor to a retailer and the issue of gross vs. net accounting. If you already have accounting guidance telling you how to split apart your multiple element arrangement, EITF 00-21 does not apply. If existing GAAP does not tell you how to split apart the elements, the arrangement is subject to EITF 00-21. Allocation of different elements is based on relative fair value. You can use the residual method if you only have the fair value of undelivered elements. Objective evidence of fair value under EITF 00-21 includes price lists for items that are sold separately, third party evidence (other companies selling the same items) or honest efforts to arrive at fair value if you are the sole vendor for a particular item. Under 00-21, vendors are required to disclose their accounting policy for recognition of revenue from multiple deliverable arrangements and the description and nature of such arrangements. The FASB Project is an attempt to develop a comprehensive revenue recognition standard that will tie together the ad hoc literature that has been developed so far.

SEC ENFORCEMENT ACTIVITIES

Susan Markel, Chief Accountant, SEC Division of Enforcement, and William R. Baker III, Partner, Latham & Watkins, defined financial fraud as intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements, may entail gross and deliberate distortion of financial records, falsified transactions or the misapplication of accounting principles. Fraud is different from errors. Fraud occurs when there is incentive, opportunity and rationalization of the act and often begins with companies “making the numbers.” Sometimes there is an exit strategy to alleviate the fraud. The SEC will bring more than 600 enforcement actions by the end of 2003 with the largest percentage for financial fraud. Types of cases include premature revenue recognition, excess reserves to smooth earnings, improperly capitalizing costs, changing estimates to make the numbers, top-side journal entries and earnings management. Speakers provided details of actions and penalties against several prominent companies found guilty of fraud. New enforcement tools provided by Sarbanes-Oxley include the PCAOB, CEO/CFO certifications and Fair Funds.

SARBANES-OXLEY: PCAOB

Daniel L. Goelzer, founding member of the Public Company Accounting Oversight Board, stated that the board was created by the Sarbanes-Oxley Act in July 2002. Its purpose is to replace self-regulation of the accounting profession with a formal regulatory procedure overseen by the board. Responsibilities are to register accounting firms, inspect registered firms, set auditing standards and conduct an enforcement program. The PCAOB operates under the oversight of the SEC, but it is not a government agency. There are five members appointed by the SEC, each member with a five-year term. Staff is scheduled to be about 200 people by the end of 2003. Current main offices are in Washington, D.C. and New York. Fees will be paid by public companies proportionate to their market capital. Firms that audit public companies must register with the PCAOB by October 22, 2003. Foreign firms have until April 19, 2004 to register. While the board has a blueprint for the discharge of its responsibilities, additional rulemaking and administrative practice will further clarify its activities. It will be several years before the board’s regulatory structure is complete.

MD&A

Nathaniel Cartmell, Partner, Pillsbury Winthrop LLP, defined MD&A as a narrative explanation of financial statements that’s focused on two things: matters that would have had an impact on future operations and have not had an impact in the past or those that had an impact in the past but will not in the future. The purpose of MD&A is to enable investors to see a company through management’s eyes, to improve overall financial disclosure and to provide information about the quality and potential variability of the company’s earnings and cash flows so that investors can judge the likelihood that past performance is indicative of future performance. Regulation S-K does not provide specific guidance about what should be disclosed.

Michael Ussery, CFO, Primidom Lending Corporation and Panel Moderator, stated that the requirements of MD&A focus mainly on liquidity, capital resources, results of operations and off-balance sheet arrangements. Short-term liquidity is discussed on an overall corporate basis and the long-term on a project-by-project basis. Capital resource should be discussed in terms of planned commitments of the firm. Source of capital commitments should be identified (starting with your own capital budget). Results of operations should focus on trends with a meaningful discussion. MD&A must be current as of the date filed. Implications of FR-61 and its partial replacement by FR-67 regarding off-balance sheet arrangements were discussed. The MD&A should include a discussion of critical accounting policies and their impact on the company as reflected in the financial statements.

Mara Ransom, Attorney, SEC Division of Corporation Finance, reiterated the MD&A objectives and provided some guidance into what the SEC is looking for. MD&A narrative must be a clear explanation of what’s going on with the company as seen by management, must provide a clear context in which the numbers can be analyzed and must provide information about the quality and variability of the company’s cash flow as indicators of future performance. The Fortune 500 Project and the Comment Process will help get the SEC’s message out to practitioners as to what the commission is looking for.

STOCK-BASED COMPENSATION: RIPE FOR REFORM

Benjamin Neuhausen, National Director of Accounting, BDO Seidman LLP, began by stating that companies can choose between two pronouncements they can follow to account for stock-based compensation programs: APB Opinion 25 (intrinsic value method) and FASB 123 (fair value method). Most companies still use APB 25 but there is a strong movement toward using FASB 123 in the belief that the accounting is more transparent (a bow to corporate governance considerations) and because 123 levels the playing field between different kinds of equity boards. Mr. Neuhausen felt that 123 would probably be mandatory by 2005 reporting. The IASB and FASB have announced a program to harmonize US and international accounting standards, with stock-based compensation one area of interest. The IASB will have a final statement out by early 2004 and the FASB should have an exposure draft out by the 1st quarter of 2004 and a final statement by the end of 2004. Controversial issues to be faced are: whether the plan is compensatory, when and how to measure compensation and when to record compensation.

Eric Larre, Senior Consultant, Towers Perrin, discussed practical reform in the area of stock-based compensation. He stated that finance and legal departments are having a much greater role in the development of long-term incentive policy. Controversy surrounds the question of what should be the direction of executive compensation, and variables such as election year, global recession, ownership guidelines, bull and bear market and others all complicate the issue. In a 2002 study, Towers Perrin found that the future design of executive compensation is moving toward being driven by economic impact as much as by accounting treatment. Some changes that have occurred in 2003 include: pay targeted above the 50th percentile is being challenged; peer group composition is being scrutinized; competitive data is being more closely studied and, in some cases, rejected; and shareholder approval rates of new plans or share allocations are dropping.

SARBANES 404 COMPLIANCE

Robert J. Lipstein, National Partner-in-Charge, Sarbanes-Oxley 404 Services, KPMG, stated that KPMG is working with companies to apprise them of all the requirements necessary to comply with 404. Results of a KPMG survey regarding companies’ planning, scope, estimated cost, staffing, status and implementation of 404 efforts revealed the following. The more sophisticated companies are more actively involved with 404 compliance efforts, whereas middle market companies are waiting to learn from the bigger companies. Objectives companies hoped to reap from 404 compliance include a better understanding and improvement of internal controls, policies and procedures. Everyone has underestimated the level of planning and scoping required—it takes many months. Companies are looking for software to use; this decision should not be made until a company is into the 404 process. Most companies have Finance leading the 404 team, which includes an average of six people, and are using narratives and flowcharts to document controls. The biggest challenges faced are time and resource constraints, maintaining 404 as a priority, inconsistent levels of documentation across the organization and the documentation of all processes. KPMG feels that communication of the following steps is crucial to the organization: project sponsorship and oversight, planning and scoping the evaluation, documentation of all controls, evaluation and design of operating effectiveness and the report on internal controls. First year costs of 404 compliance in dollars and time are not yet known. Identifying significant controls, usually through a committee and through an external auditor, is crucial.

EITF UPDATE

Reva B. Steinberg, Director, National SEC Department, BDO Seidman LLP, and conference chairperson, began by noting the new rules resulting from EITF meetings in January 2003 and May 15, 2003. She then discussed the issues and requirements of EITFs 00-21, 01-8, 02-2, 02-9, 02-14, 02-18, 03-1, 03-2, 03-3, 03-4, 03-5, 03-6, 03-7, 03-8, 03-9, 03-10 and 03-11.