AUDITING
The Center for Audit Quality submitted a wide-ranging comment letter to the U.S. Treasury Department’s Advisory Committee on the Auditing Profession touching on subjects including changes resulting from the Sarbanes-Oxley Act, basic audit quality functions, ethics and compliance.

The letter is co-signed by CAQ Governing Board Chairman James S. Turley, chairman and CEO of Ernst & Young LLP, and CAQ Executive Director Cynthia M. Fornelli.

“In working to make public company audits more reliable and relevant to investors, the CAQ views the deliberations of the Advisory Committee as an extraordinary opportunity to identify rational and realistic approaches that will result in a more sustainable auditing profession for decades to come,” the letter states. It is available at http://thecaq.org/members/pdfs/Treasurycommentletterfinal11302007.pdf.

The PCAOB approved a $144.6 million budget for calendar year 2008. The majority of the board’s expenses would be associated with hiring and retaining experienced auditors to conduct inspections of registered public accounting firms. More than 1,800 public accounting firms have registered with the board, including approximately 830 firms based outside the U.S. Firms with more than 100 public company audit clients must be inspected annually; firms having up to 100 public company audit clients must be inspected at least once every three years.

The 2008 budget projects that the board will assess $134.5 million in accounting support fees paid by issuers.

The proposed 2008 outlay is an increase of approximately 6% from the PCAOB’s 2007 budget of $136.4 million. The board’s budget is subject to SEC approval.

©2008 AICPA

BANKING
Third-quarter net income for the U.S. banking industry dropped to its lowest level in four years, the FDIC reported. The total earnings for federally insured banks of $28.7 billion marks a 24.7% decline from the third quarter of 2006 and is the first time since the first quarter of 2003 that earnings dropped below $30 billion. The industry’s return on assets was 0.92%, the lowest since the fourth quarter of 1992.

The earnings decline was largely blamed on increases in loan-loss provisions and declines in noninterest income. Banks set aside $16.6 billion in loan-loss provisions in the quarter, the most since the second quarter of 1987 and a 122% increase from the prior-year period.

The complete Quarterly Banking Profile is available at www2.fdic.gov/qbp/index.asp.

Earnings at the nation’s thrifts fell 84% in the third quarter of 2007 from the prior-year period, according to a report by the Office of Thrift Supervision (OTS). The industry’s net income of $704 million was down from $4.29 billion in the third quarter of 2006. Return on assets was 0.18% in the quarter, down from 1.08% in the third quarter of 2006. The earnings decline was attributed primarily to sharp increases in loan-loss provisions and losses on sales of loans. Thrifts heavily engaged in originating mortgages for sale in secondary markets bore the brunt of the decline.

Troubled assets, which include noncurrent loans and repossessed assets, were 1.19% of assets at the end of the quarter, up from 0.95% in the second quarter of 2007 and 0.64% in the prior-year period. Loan-loss provisions increased to 0.92% of average assets in the third quarter, compared to 0.38% in the previous quarter and 0.22% a year ago.

Thrifts originated about 30% of all 1–4 family loans nationwide in the third quarter. The OTS supervised 831 thrifts at the end of the quarter with $1.57 trillion in assets.

The earnings report and links to thrift industry highlights, charts and selected indicators are available at www.ots.treas.gov.

©2008 AICPA

FINANCIAL REPORTING
FASB issued a preliminary views document, Financial Instruments With Characteristics of Equity, to solicit feedback on the board’s proposal to simplify and improve financial reporting for such instruments. The proposal is a step in developing a single standard that would replace a 60-plus piece patchwork of existing guidance that often raises application questions and has been a source of many restatements, according to FASB.

The PV describes the board’s preferred “basic ownership” approach, which limits the instruments that can be classified as equity to the lowest residual interests in an entity. “The basic ownership approach would represent a major change to current accounting and reporting,” FASB board member Tom Linsmeier said in a news release. “That change is needed to achieve two key objectives. The first is to provide investors with understandable information about the relative priority of claims on an entity’s net assets and income. The second is to develop a less complex approach, which also should reduce existing opportunities to structure arrangements to achieve a desired accounting result.”

Comments are due May 30. For information, go to www.fasb.org/draft/
pv_liab_and_equity.pdf.

The International Accounting Standards Board (IASB) also will publish FASB’s PV in early 2008 for comment by its constituents. FASB and the IASB will use the feedback to determine the best way to develop a common standard.

Members of FASB’s Investors Technical Advisory Committee (ITAC) called on the SEC’s Office of the Chief Accountant to encourage registrants to make more robust disclosures on the fair value hierarchies they’ve used and to make those disclosures when they release their earnings. ITAC also recommended that the Office of the Chief Accountant work with the Center for Audit Quality to establish a best practices document about the reporting of fair value information in conjunction with earnings releases. ITAC members are investment professionals charged with providing independent technical advice to FASB from investors’ perspective.

The reporting of third-quarter earnings for certain consolidated supervised entities “was disappointing for investors and underscored a troubling problem with our earnings reporting system,” ITAC member Jack Ciesielski wrote in a letter to SEC Chief Accountant Conrad Hewitt. Ciesielski noted that while earnings releases and conference calls make some aspects of the income statement visible to investors, there were only “oblique references, if any,” in those communications to the effects of FASB Statement no. 157, Fair Value Measurements, and Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities.

“While we realize that the information required by those standards will be contained in the Form 10-Qs when they are filed, the disclosures regarding the fair value effects of the two standards—and the veracity of the figures reported—will be stale by the time they are available to the public,” Ciesielski wrote.

ITAC suggested that firms consider synchronizing the filing of 10-Qs more closely with their earnings release dates. The ITAC letter is available at www.fasb.org/investors_technical
_advisory_committee/11-02-07_fvr.pdf.

©2008 AICPA

GOVERNMENT
GASB issued Statement no. 52, Land and Other Real Estate Investments Held as Investment by Endowments. This statement requires that endowments report their land and other real estate investments at fair value, improving the quality of financial reporting and creating reporting consistency among similar entities. The statement requires governments to:

Report the changes in fair value as investment income.

Disclose the methods and significant assumptions employed to determine fair value and provide other information currently presented for other investments reported at fair value.

The statement will become effective for periods beginning after June 15, 2008, but earlier implementation is encouraged. For more information, go to www.gasb.org.

©2008 AICPA

MUTUAL FUNDS
The SEC published a prototype “summary prospectus” for mutual funds. The proposed streamlined prospectus would let investors quickly learn key information about a mutual fund. The proposed prospectus includes:

Investment objectives.

Costs.

Principal investment strategies, risks and performance.

Top 10 portfolio holdings.

Identity of investment advisers and portfolio managers.

Brief purchase, sale and tax information.

Information about broker compensation and conflicts.

The SEC is seeking public comment by Feb. 28. For more information, visit www.sec.gov/investor/enhanceddisclosure.htm.

©2008 AICPA

PENSIONS
The Pension Benefit Guaranty Corporation’s insurance program for single-employer pension plans reported a deficit of $13.1 billion at the end of fiscal year 2007. The Annual Management Report showed an improvement over the previous year’s $18.1 billion shortfall.

As of Sept. 30, 2007, the program reported assets of $67.2 billion and liabilities of $80.4 billion. Investment income of $4.7 billion and a $2.8 billion actuarial credit based on higher valuation interest rate factors were credited with shrinking the deficit. Premium income was $1.48 billion vs. $1.44 billion in 2006.

In 2007 no new large pension plans were classified as probable losses on the PBGC balance sheet. The report also said the PBGC’s potential exposure to pension losses from financially weak companies fell to $66 billion from $73 billion in 2006.

The PBGC’s fiscal year 2007 Annual Management Report is available at www.pbgc.gov/
docs/2007AMR.pdf.

©2008 AICPA

XBRL
The trustees of the IASC Foundation, the parent organization of the International Accounting Standards Board, announced the inaugural membership of its XBRL Advisory Council and XBRL Quality Review Team. The XBRL Advisory Council will provide strategic advice to the trustees and the foundation’s XBRL team on the future development and adoption of the XBRL Taxonomy for International Financial Reporting Standards (IFRS). For more information, visit www.iasb.org/xbrl/index.html.

©2008 AICPA

FYI
Wayne Carnall, CPA, has been named chief accountant of the SEC’s Division of Corporation Finance. Carnall will be the principal adviser to John White, director of the division, on accounting and auditing matters.

©2008 AICPA

CORRECTION
The article “Make Direct Marketing Pay Off” (Dec. 07, page 38) misstated the headquarters location for the firm Stonefield Josephson. It is based in Los Angeles. The JofA regrets the error.

©2008 AICPA