CPA Leads Financial Execs

This month, retiring P. Norman Roy handed the gavel to Phil Livingston, who, at age 41, became the new president of the Financial Executives Institute. Livingston, a CPA and member of the AICPA, brings an eclectic background in business, technology and public accounting to the FEI. Until his new appointment, he was senior vice president and CFO of Catalina Marketing Corp., a $250 million supplier of electronic marketing services. Before that, as CFO of Celestial Seasonings, he managed the IPO of the specialty tea manufacturer, and he's also held positions at Kenetech Corp. and Genentech Inc. He started his accounting career at Arthur Young (now Ernst & Young).

The Journal of Accountancy spoke to Livingston about his plans for the FEI—and the areas where financial management and the CPA designation meet. Of equal concern to both the FEI and the AICPA, for example, are recent SEC initiatives in earnings management and similar accounting issues. "The SEC challenges both financial managers and public accountants," said Livingston. "We support that at the FEI. But we'd like to remind everyone that the United States has a great system, and we hope there isn't too much tinkering with it."

As for the FEI itself, Livingston said his priority is helping busy members in a complex world. "We need to provide compact services for people with little time." He wants to build community through the FEI, especially by using its Web site, www.fei.org. He proposed member forums: "The FEI is a great place to share common problems, and common solutions." Some of those common solutions, in fact, could involve both the AICPA and the FEI—Livingston said he enjoyed sharing ideas with fellow attendees when he was a speaker at the fall 1998 AICPA Industry Conference. He appreciates the value of the designation himself: "Accounting is a great background for financial management—my CPA training gave me a solid grounding in the technical issues of running a business." And if things get tough, Livingston can always turn to skills he learned in his first job out of college—as a member of the 1980-81 Oakland Raiders football team.

What's Hot , What's Not

When it comes to financial accounting standards, it seems, some topics are simply more popular than others. Each year, to order its priorities, the FASB surveys its own board members, its director of research and technical activities, Financial Accounting Standards Advisory Council members and a few others to determine what topics it should add to its agenda. The topics and projects are then ranked on a scale of 1 (place it on the agenda right now even if it means postponing another active project) to 5 (no interest at all in adding it to agenda). What do the standard setters think is important this year, and what can wait?

Leading the pack are four items with rankings from 2.3 to 3.5. The FASB posted these results, along with a list of the "also rans" and comments from survey respondents, on its Web site ( www.fasb.org ) in a 137-page, PDF-format report. Comments below are taken from this report.

A matter of opinion
The survey results showed widespread disagreement among respondents about some issues. Revenue recognition is one example. The SEC's Arthur Levitt has made this a major issue with his frequent comments, and the AICPA has responded with a report summarizing current guidance (see "Highlights," JofA, Mar.99, page 4). However, is this a serious standards problem? One respondent, giving it a 1 (urgent) rating, felt this topic was fundamental to financial accounting and that the FASB needed to take a leadership role. However, another, giving it only a 4 rating, said widely publicized problems such as those at Cendant and Sunbeam were a result of misapplication of GAAP or audit mishandling, not a lack of standards.

Reserve accounting also was subject to debate. One FASAC member felt this topic fell under asset impairment or the definition of a constructive liability and suggested it be handled under other board topics, "at a higher level." However another gave it a 1 rating, saying "misapplication of Statement no. 5, Accounting for Contingencies, combined with the restructuring actions taken by firms, is the most serious detriment to credible financial reporting today–'public enemy number one.'" Two respondents cited the SEC's involvement in this area, but drew different conclusions; one said Levitt's project on earnings management was "too new to influence the board's agenda at this juncture" and gave it a 5. The other said, "This topic has received significant attention from the SEC and I believe that comprehensive guidance is needed in this area" and gave it a 2.

The survey, which is online for the first time, also covered a draft of proposed agenda decision guidelines that include preparing a prospectus for public comment.

FASB No. 75 Sails Into the Sunset

In 1980, the FASB issued Statement no. 35, Accounting and Reporting by Defined Benefit Pension Plans, which applied to the private sector and–as there was no GASB then–to state and local governments as well. Two years later, however, the FASB deferred the statement's applicability to state and local governments. And in 1983, Statement no. 75, Deferral of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental Units, made that postponement indefinite and retroactive to December 15, 1980.

Why the repeated deferrals? By the early 1980s, GASB was already in the planning stages. In preparation, the National Council on Governmental Accounting (NCGA) was also considering deferral of its own pension guidance, which differed from Statement no. 35. So, in issuing Statement no. 75, FASB said "mutual deferral of both Statement 35 and NCGA Statement 6 is appropriate while discussions relating to the formation and operation of the GASB are in progress." In the following years, GASB published its own guidance on pension accounting for state and local governments.

In February of this year, FASB realized deferral of Statement no. 35 was no longer necessary. It issued Statement no. 135, Rescission of FASB Statement No. 75 and Technical Corrections, which clarifies that GASB guidance applies to state and local governments and also makes several technical changes to some existing FASB standards. It is effective for financial statements for fiscal years ending after February 15, 1999, with earlier application encouraged.

Y2K x 50

Much of the national attention on Y2K has focused on the federal government—will the IRS be able to process returns? Will Social Security checks stop coming? But each state government also has its own systems to examine, and, under the principle of e pluribus unum, state auditors have banded together to determine how serious the problem is for them. The National State Auditors Association (NSAA) conducted a survey and issued a report with the goal of sharing information and possible solutions.

Year 2000: State Compliance Efforts describes the problem and tabulates the results for the 27 states that responded to the survey. The report draws heavily on GAO information and guidance, but also mentions issues individual states brought up:

• Critical systems, such as those found in police departments and motor vehicle bureaus, have a high risk of failure.

• Statewide plans to ensure funding and resources to address Y2K are insufficient or nonexistent.

• State agencies tend to be overly optimistic about their ability to handle the problem.

• Agencies have not addressed embedded systems or developed contingency and backup plans.

Below are some key results of the survey. The complete report and survey (about 30 pages) is available at the Illinois auditor general's Web site, www.state.il. us/auditor.

The Gravy Train Is Slowing Down

In 1998 U.S. companies announced the layoff of 677,795 workers. The workforce reductions set a record thus far for the decade. The figure for December alone, which was double the November layoff number (51,642) and 77% larger than for December 1997 (58, 293), may give a bitter taste of things to come.

Note: all figures are based on announced layoffs

ISB Lays Down the Law on Discussions With Audit Committees

Nearly two years ago, amidst frustration over the state of auditor independence regulations, the Independence Standards Board (ISB) came into being as part of an agreement between the AICPA and the SEC. Its mission is to improve the standards relating to auditor independence—"the historic soul of the auditing profession," according to ISB Chairman William T. Allen. In the ISB's annual report, he noted that the profession needs "a conceptual understanding of what we mean by independence." In fact, the development of a conceptual framework for auditor independence is the board's most fundamental project. Although completion of the framework is two years away, the board has issued its first statement, proving it is not merely an academic think tank.

ISB Standard no. 1, Independence Discussions with Audit Committees, is brief and to the point. At least annually, the auditor of a public company has to

• Disclose to the audit committee of the company (or the board of directors if there is no audit committee), in writing, all relationships between the auditor and its related entities and the company and its related entities that in the auditor's professional judgment may reasonably be thought to bear on independence.

• Confirm in the letter that, in its professional judgment, it is independent of the company within the meaning of the securities acts.

• Discuss its independence with the audit committee.

The statement is effective for audits of companies with fiscal years ending after July 15, 1999, with earlier application encouraged. The SECPS plans to issue implementation guidance to its members.

What it means
"This is not a recommendation," cautioned ISB director Susan McGrath in an interview with the Journal. "This is a rule." She further said it had the same weight as an SAS, except that ASB standards apply to all audits while ISB standards apply only to audits of public companies. And although the ISB has no authority over the way boards or their audit committees operate, this standard will have as much effect on them as it does on the auditors: The statement ensures that these committees will have to address the issue of their auditors' independence annually. In fact, in the statement's "Background and Basis for Conclusions," the ISB wrote, "The board believes that the proposed pronouncement will improve corporate governance by affording to audit committees a mandated opportunity to deepen their understanding of auditor independence issues."

The text of the new standard appears in "Official Releases," page 102. It is also posted, as a three-page document, on the ISB Web site, www.cpaindependence.org, which has more details about ISB activities.

Also from the ISB
In addition to its rule-making tasks, the ISB fields independence questions from practitioners. CPAs are welcome to make informal queries by phone. However, they must submit official requests for consultation in writing, and only those written requests and responses may be relied on for SEC purposes. Until board ratification, responses are applicable only for the parties making the requests. To reach the ISB staff, write to the Independence Standards Board, 1211 Avenue of the Americas, 6th floor, New York, New York, 10036; phone: 212-596-6133; fax: 212-596-6137; e-mail: ISB@cpaindependence.org.

The State of the States

In 1955, the Tennessee general assembly elected a new comptroller of the treasury, 32-year-old William R. Snodgrass, who had served as director of the budget. And, every two years until his retirement in 1999, the general assembly reelected him. For more than four decades, while overseeing audits of state and local government entities (in Tennessee, the comptroller is the state auditor), Snodgrass also found time to serve on the Financial Accounting Foundation, the Governmental Accounting Standards Advisory Council (which assists GASB) and as president of the National Association of State Auditors, Comptrollers and Treasurers. Snodgrass was a witness to—and participant in—major changes in government accounting. He spoke to the Journal of Accountancy about the changing patterns in state finance over the years.

"When I first became comptroller, there wasn't a lot of sophistication in the audits or financial accounting in local governments throughout the nation," he said. "In Tennessee, for example, municipalities were required to do only what local charters required, and that meant very little." Not until the late 1950s and 1960s did state laws mandate audits for all government entities, he pointed out. Today, the comptroller's office has the power to audit any government entity. It audits 88 of the 95 county governments and reviews the work of public accounting firms that audit other counties and all municipalities. "But this is not just Tennessee—the movement toward a high level of professionalism and standards for the review of all public funds has been nationwide."

Snodgrass remembers life before GASB and was involved in the transfer of power from a council—associated with the GFOA—which was perceived as not being independent. But an even thornier problem was "bringing order out of chaos," especially for money coming from the federal government. "There was no orderly process for the audit of federal funds. Federal auditors overlapped in some areas and ignored others." Years of effort by state and government authorities finally culminated in the single audit concept adopted in federal legislation.

For Tomorrow's Comptrollers
Looking into the future, Snodgrass envisions problems where finance issues blur into political issues. He sees less money flowing from Washington, forcing states to consider their own positions carefully. "Look at us. Even in a good economy, Tennessee is having problems because we have no personal income tax. Our sales tax can't keep up." On the other hand, he hinted that Tennessee's government could be a model for other states because it shields the comptroller from much of the political process. "The governor is the only official elected statewide. Every other official is appointed or is elected by the state legislature. So you don't waste your time raising funds and campaigning. You don't need to do a lot of public posturing."

When asked what new regulations he foresees, Snodgrass replied, "The GASB has come a long way. I can't say that my philosophy is the same as what some of them are pursuing, but now that I'm retired I'm no longer going to worry myself."

The state legislature has given Snodgrass the title "comptroller emeritus" and is naming a state building after him.

Short takes, notes and items of interest

Fellows Find Path to Success
¤ The SEC's Office of the Chief Accountant recently selected two professional accounting fellows, who will study and help develop rule proposals and work with both standard-setting bodies and registrants. Serving two-year terms are Dominick J. Ragone, a senior manager in PricewaterhouseCoopers' capital market advisory services group in New York, and Scott A. Taub, an experienced manager in Arthur Andersen's professional standards group in Chicago. CPAs who wonder what such a position could do for their careers should note the fellowship program boasts SEC Chief Accountant Lynn E. Turner as one of its alumni .

Business Valuation Rolls On
¤ The AICPA administered its second accredited-in-business valuation (ABV) examination in November 1998; 329 of the 440 candidates who sat for it passed. The next exam will be November 1, 1999. More details about the ABV designation are available at www.aicpa.org .

Honors for CPA/Teacher/Author
¤ The Federation of Schools of Accountancy gave Jan R. Williams, CPA, PhD, the 1998 Joseph A. Silvoso/FSA Faculty Award of Merit, which is co-sponsored by KPMG LLP. Williams is Ernst & Young Professor of Accounting and associate dean in the College of Business Administration, University of Tennessee, Knoxville, and president-elect of the AAA. Since 1993 he has written Harcourt Brace's Miller GAAP Guide .

Online Winners
¤ AccountingNet, Great Plains and John Wiley & Sons announced the winners of Account for Your Future scholarships—Brian Durst (University of Wisconsin at Madison), Ted Sheen (University of Tennessee) and Denesh Gunasekerampulle (North Dakota State University). The program is run entirely online. Chosen from among more than 600 student applicants worldwide, each winner gets $1,000. Students are judged on academic record, communication skills and their understanding of, and interest in, the relationship between accounting and technology. For details, go to www.accountingnet.com .

He's True to His School
¤ CPAs are known for their skills in managing money, but Gordon Ford is likely to be remembered for the money he gave away. He just donated $10 million to his alma mater, Western Kentucky University, and the grateful institution renamed its business school the Gordon Ford College of Business. Additionally, the school has established a new position, the Mattie Newman Ford Professor of Entrepreneurial Studies, named in honor of Ford's mother, also a WKU graduate. Ford is a former vice president of the Institute and a former editorial adviser to the Journal. He was a founding partner of Yeager, Ford and Warren in Louisville, Kentucky, which later merged with Coopers & Lybrand (now PricewaterhouseCoopers). In February, Ford celebrated his 60th anniversary as a member of the AICPA .