AICPA Establishes a Language for Electronic-Based Financial Reporting

The AICPA recently laid the foundation for a bridge that will allow CPAs to move more readily from a paper to an electronic economy. Using XFRML (extensible financial reporting markup language), the AICPA high tech task force developed a prototype that will help make electronic publishing of financial information a reality.

The new financial reporting language, XFRML, is derived from XML (extensible markup language). Like its close relative HTML, which is used on the Web, XML is used to code or tag information. The coded information is then accessible to many users across all programs.

The AICPA task force used its prototype and XFRML to create the first full set of XML-based financial statements. XFRML uses the same standards set forth by the World Wide Web Consortium (W3C) in February 1998 for XML.

XFRML, which adheres to the existing rules for financial reporting, will have a significant effect on how financial data is exchanged in the future. IBM, Lotus, Microsoft, Oracle and other major software vendors have thrown their support behind XFRML as the language of business information exchange.

Publication of financial information in XFRML can save enormous amounts of time in researching and exporting information into other "XML-aware" applications.

For instance, before XFRML, if an investor wanted to examine all publicly traded health care providers with at least 500 clinics, a current ratio in excess of 1.75 to 1 and a "clean" opinion from their auditors, it would have been a time-consuming research project. An investor would have had to search the Edgar database (www.sec.gov/edgar hp.htm) and also do a manual search using a particular SIC code.

Using XML-based search tools, an investor will be able to accomplish this research in minutes, if not seconds, with a few simple keystrokes. Moreover, once the information is gathered, it can be imported into another XML application (an Excel spreadsheet, for example) by clicking on a menu item.

The next step in building this electronic/digital bridge will be to expand the application of the pilot project. To that end, several more prototypes will be deployed during the next six months. The next phase of the project will go beyond financial reporting and will involve developing models for XML-based financial transactions in collaboration with other groups.

XFRML is how financial reporting will be done in the digital 21st century. It will allow companies, investors, and industry analysts a way to prepare, publish, exchange and analyze financial reports and the information they contain. It will also allow financial information to be reliably and automatically extracted or exchanged between computer applications.  

—Wayne E. Harding, CPA, Great Plains Software, Englewood, Colorado, former chairman of the AICPA high tech task force and member of the information technology practices subcommittee.  

ABA Urges One-Stop Shopping

The legal profession is one step closer to allowing lawyers to partner and share profits with nonlawyers, such as CPAs. A special commission of the American Bar Association has recommended that the law profession rewrite its rules of conduct to allow fee-sharing between lawyers and other owners of multidisciplinary practices. If adopted by the ABA and state bar associations, these revisions would pave the way for one-stop-shopping companies offering customers legal and accounting services under one roof.

Multidisciplinary practices are the norm in Europe where international accounting firms, such as Arthur Andersen and KPMG, provide legal services, including litigation. However, court-imposed rules of conduct in the United States prohibit mixed-professional partnerships. So, although CPA firms are among the largest employers of attorneys in the United States, lawyers working in the U.S.-based firms can offer clients only consulting and tax advice.

These restrictions would be altered under the commission's recommendations for revising the ABA Model Rules of Professional Conduct. "These changes would allow clients more options in where they obtain legal services and lawyers more choices in how they serve clients," said Sherwin P. Simmons of Miami, chairman of the ABA commission on multidisciplinary practice. Along with allowing lawyers and nonlawyers to share fees, the commission suggests certain safeguards be put in place to ensure independence and protect professional judgment--applying legal ethics rules to all multidisciplinary practices and subjecting them to court regulation, for example.

"This is the beginning of an evolution in the merging of the two professions," said Gary S. Shamis, partner of Saltz Shamis & Goldfarb Inc. in Cleveland and chairman of the AICPA management of an accounting practice committee. "This is what the marketplace wants."

Shamis predicts that large multidisciplinary practices will offer legal services matching the new services provided by CPA firms, such as personal financial planning, estate planning and the creation of wills. "These changes, good or bad, are inevitable," said Shamis. He said his firm was approached in the last six months by two regional law firms trying to position themselves for the future.

To many, the ABA commission's report simply endorses what is already happening in the marketplace. Stanley H. Freundlich, managing partner of David Berdon & Co. in New York City, said his firm has brokered large mergers and real estate transactions with other law firms--hiring law firms when necessary and, in turn, being hired by other firms. "We have been charging our own fees and working with law firms for one client for years," said Freundlich.  

Not everyone supports the change

The commission's recommendations were presented to the ABA house of delegates in August. Many state bar associations ask that a decision on the report be deferred to give their members more time to examine the proposals. Stuart A. Hoberman, shareholder and member of the board of Wilentz, Goldman and Spitzer, a Woodbridge, New Jersey, law firm, and chairman of the New Jersey state bar commission on multidisciplinary practice, told the JofA that the state bar voted against the ABA commission's recommendations. "We were concerned with the conflict-of-interest and independence issues that were raised by the commission's report," said Hoberman. "We felt the ABA report raised more issues than it resolved and it could be more harmful than helpful to the consumer."

Hoberman is most concerned about protecting a client's confidential information and the potential conflict of loyalties that could occur in a multidisciplinary practice. Freundlich agrees that independence issues will be a concern if lawyers and CPAs share a partnership, especially for attest clients. "One solution is to set up an indepen dent attest practice, not unlike what currently is being done by consolidator companies, such as American Express and HRB Business Services," said Freundlich.

Freundlich believes the independence issues will be solved and multidisciplinary practices will eventually be ratified. "It's a marketplace decision," said Freundlich. "Clients are looking for companies that can fulfill all their needs--and that includes legal, accounting, general business and tax work, as well as serving as a trusted adviser."

Copies of the commission's report are available online at www.abanet.org .

Low Pay a Sore Point With CPAs

A recent survey, A Look at Accountants' Job Satisfaction, found many CPAs are dissatisfied with their jobs because of current compensation levels. Public practitioners were the most displeased, but CPAs in industry and not-for-profit organizations complained about inadequate wages as well.

CPAs in industry, in addition to their concerns about money, felt they were less fulfilled in their jobs than their counterparts in public practice, according to the study.

"The CPAs reported significant unfulfilled needs in all categories," said one of the study's three authors, Joyce A. Strawser, PhD, of Seton Hall University. "Compensation created the greatest dissatisfaction and was followed closely by perceived deficiencies in self-actualization (fulfillment through personal growth and development) and security."

James C. Flagg, CPA, PhD, and Sarah A. Holmes, CPA, PhD, both professors at Texas A&M University, conducted the study with Strawser. They surveyed 920 CPAs to measure how well the CPAs felt their career needs were being met.

Based on their findings, the authors predicted "the profession's difficulties in recruiting and retaining quality practitioners are likely to continue unless employers take action to increase job satisfaction." The authors offered employers these recommendations:

• Increase levels of compensation for all CPAs.
• Encourage CPAs to be proactive in planning their careers.
• Implement a mentoring system with those who can support and advise less experienced employees.
• Encourage employees to participate in volunteer work and professional organizations to increase their sense of accomplishment.
• Do timely and detailed evaluations of employees to increase their perception of job security.
• Create a work environment in which employees feel valued.
• Reduce abusive work practices, such as excessive overtime.
• Limit unrealistic employee expectations by being honest about the nature and demands of the job.  

Washington Furor Over Loan Loss Reserves

Are banks with generous loan loss reserves practicing conservative accounting or earnings manipulation? That's the heart of a Washington, D.C., brouhaha that prompted a House subcommittee to hold a heated hearing on accounting for loan loss reserves.

The differences between groups on both sides of the issue are subtle. However, disagreements on emphasis, timing and exactly where to draw the line could have important consequences for banks operating in a volatile world economy. Historically, banks have gotten into trouble when they failed to build up allowances for loan losses in prosperous times. As a result, regulators have smiled on increases in reserves within the restrictions imposed by GAAP, considering them to be appropriately conservative accounting.

The U.S. economy has been riding a drawn-out cyclical crest for some time now. Nonetheless, the SEC, which has been conducting an independent campaign against earnings manipulation, has chosen this time to warn banks against padding loan loss reserves. The commission is concerned that loan loss reserves potentially could be used to smooth earnings. This might be particularly tempting if implementation of FASB no. 133, Accounting for Derivative Instruments and Hedging Activities, causes bank earnings to swing erratically, as it is expected to. The SEC first drew attention to its thinking on allowances for loan losses last year when it delayed the acquisition of Crestar Financial Corp. by SunTrust Banks Inc. until Sun took a one-time reduction in its loan loss reserves.

The issue became even more inflammatory last May, when the Federal Reserve Board (the Fed) surprised other bank regulatory agencies and the banking industry by apparently ratifying the SEC's stand. The Fed issued guidance to financial institutions on FASB Viewpoint no. 126-B, "Application of FASB Statements 5 and 114 to a Loan Portfolio," which had been published April 12. Although the Fed's guidance explicitly allowed for the possibility that banks might still legitimately increase their allowances for loan losses under GAAP, it was not seen that way by the banking industry.

That reaction to the Fed's endorsement of FASB's staff-written implementation paper was fueled by language expressly stating that a creditor may not "simply increase (or not decrease) the allowance for loan losses in 'good' economic times to provide for losses expected to occur in the future." Nonetheless, the FASB paper does leave some "wiggle room" when evaluating smaller loans as a group under Statement no. 5 or a group of loans with risk characteristics in common.

The Fed's guidance led bankers and bank regulators to worry that it, albeit indirectly, was encouraging reductions in allowances for loan losses at a point in the business cycle when prudence dictates such reserves should be increasing. The banking industry turned to legislators for help, and the House consequently held its hearing.

On June 16, the House Banking and Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit heard testimony on accounting for loan loss reserves. Representatives of the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and Robert Morris Associates (RMA), a banking industry association, all were distressed that the FASB paper, and the SEC's concerns with excessive reserves, sent the wrong signal to banks. Both Democratic and Republican subcommittee members loudly voiced support for the group, as did other representatives of the banking industry.

Summing up the banking industry's ire over the timing of the SEC's moves, RMA President Allen Sanborn testified, "I believe that we are in what I would characterize as the ninth year of a seven year economic cycle....For the SEC to begin questioning reserves at this point in the business cycle is, fundamentally, very bad public policy."

SEC General Counsel Harvey Goldschmid argued that the SEC does not want banks to "artificially lower loan loss reserves"—it merely wants them to comply with GAAP. Goldschmid held that, consistent with the SEC's broader concerns about transparency issues, it believes excessive loan loss reserves obscure investors' ability to detect imminent problems. If banks are worried about a volatile economy, the SEC would prefer to see them increase their capital, not their loan loss reserves.

All sides agree that banking institutions should be following GAAP, but the relevant principles—in FASB statements no. 5 and no. 114—could be made clearer. The AICPA has organized an eight-member task force on accounting for loan losses. The task force, chaired by Pricewaterhouse Coopers partner Martin F. Baumann, has set up a schedule to resolve several fuzzy issues, including the distinction between current and future losses; how to reconcile application of FASB Statements no. 114, Accounting by Creditors for Impairment of a Loan, and no. 5, Accounting for Contingencies ; and acceptable methods for measuring loss incurred—especially whether some of the newer models of credit risk may be used, what disclosure should be required in footnotes to facilitate comparisons between institutions and what documentation should be offered in support of estimated loan losses. The task force's prospectus has already been approved by AcSEC and comes before FASB for approval on September 8.

According to Baumann, the task force's mission is "to narrow the boundaries" of what is acceptable under GAAP and, where there is still room for differences, "to enhance the disclosure." The task force, in consultation with observers from the OCC, the SEC and FASB, plans to issue a proposed statement of position for public comment in August 2000, to be finalized in the second quarter of 2001.

Under the specter of legislative interference implied by the House subcommittee hearing, the government agencies' joint working group issued a statement listing points of agreement on July 12. The letter, from the SEC, the Fed, the FDIC, the OCC and the OTS, included a quote from SEC chairman Arthur Levitt saying that the commission's actions should not be interpreted as an indication that it views current loan loss reserves as too high. The joint working group is charged with issuing guidance on disclosure and documentation that will meet the needs of all the government agencies. Its deadline: March 2000.

Shedding Light on Fraud

Fraud occurred more frequently in smaller companies (companies with less than $100 million in total assets) than in larger ones, according to a COSO study. Other findings of the study, which analyzed cases of fraudulent financial reporting at more than 200 companies, include the following:

• Stephen G. Butler, chairman and CEO of KPMG LLP, was elected to a two-year term on the board of directors of the U.S. Chamber of Commerce. The 100-member board meets three times a year in Washington and is responsible for formulating the national body's overall policy and strategy. The group represents more than three million businesses and organizations throughout the nation.

IAFP + ICFP = FPA

• The Institute of Certified Financial Planners (ICFP) and the International Association for Financial Planning (IAFP) merged to form the Financial Planning Association (FPA). The new organization will begin operations January 1, 2000, and will follow the agenda set by its predecessors.

HRB Acquires McGladrey & Pullen

• H & R Block, Inc., and the top-10 firm, McGladrey & Pullen, LLP, signed an agreement by which Block will pay $240 million and assume $50 million in pension liabilities to acquire almost all the nonattest assets of McGladrey & Pullen. This transaction represents the largest acquisition of an accounting firm by a financial services company to date.

Minneapolis-based McGladrey & Pullen, the eighth accounting firm to be acquired by Block, is the seventh largest certified public accounting and consulting firm in the United States. In 1998, it generated approximately $300 million in services to midsize companies and tax-exempt organizations.

Block intends to integrate all the firms it has acquired, including McGladrey & Pullen, into a new company known as RSM McGladrey Inc. Block estimates that RSM McGladrey will have approximately 470 managing directors, 4,000 employees and 70 offices in the United States. McGladrey & Pullen's attest business will continue to be owned by that firm's partners. Block's individual tax return business too will remain separate from RSM McGladrey.