The PCAOB and SEC issued guidance on the registration of auditors of nonpublic broker-dealers. Until recently, auditors of nonpublic broker- dealers were not required to register with the PCAOB as a result of a series of SEC exemptions dating back to 2003. The latest SEC order, issued in December 2006, extended the exemption to cover financial statements for fiscal years ending before Jan. 1, 2009. That exemption expired Dec. 31, triggering a requirement that financial statements of nonpublic broker-dealers for fiscal years ending after Dec. 31, 2008, must be audited by an accounting firm that is registered with the PCAOB.

Auditors of nonpublic broker-dealers must be registered with the PCAOB as of the date of the auditor’s report. The SEC is urging auditors to begin the registration process with the PCAOB as soon as possible.

The new PCAOB and SEC guidance, available at tinyurl.com/ac77ox and tinyurl.com/cknhcu, respectively, addresses the registration process, including timing and fees; the extent to which applications are public and the process for seeking confidentiality; obligations associated with being registered, including periodic reporting and annual fees; and the applicable auditor reporting and independence requirements.

 The International Accounting Standards Board (IASB) issued amendments to IFRS 7, Financial Instruments: Disclosures, that bring the fair value disclosure requirements of IFRS more closely into line with U.S. GAAP.

The amendments form part of the IASB’s focused response to the financial crisis and address the G-20 conclusions aimed at improved transparency and enhanced accounting guidance. The improvements also reflect discussions by the IASB’s Expert Advisory Panel on measuring and disclosing fair values of financial instruments when markets are no longer active.

The amendments to IFRS 7 introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements.

In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. This is aimed at ensuring that the information disclosed enables users of an entity’s financial statements to evaluate the nature and extent of liquidity risk arising from financial instruments and how the entity manages that risk.

The amendments to IFRS 7 apply for annual periods beginning on or after Jan. 1, 2009. However, an entity will not be required to provide comparative disclosures in the first year of application. For more information, visit www.iasb.org.

 The AICPA’s Auditing Standards Board released a proposal redrafting Statement on Auditing Standards (SAS) no. 39, Audit Sampling (AICPA, Professional Standards, vol. 1, AU sec. 350), according to the board’s clarity drafting conventions and to converge with International Standard on Auditing (ISA) no. 530 (Redrafted), Audit Sampling.

While the proposal doesn’t change SAS 39 significantly, according to the ASB, the board is asking for feedback on matters such as whether the proposed SAS should expand on the application guidance of random- based methods to specifically address, for example, block sampling when it is designed to be considered a random-based selection. The ASB decided not to include block sampling as a selection technique in the proposed SAS because selection techniques are addressed more extensively, and in their proper context, in the AICPA Audit Guide Audit Sampling. Comments are due May 29. The proposal is available at tinyurl.com/c28c5r.

As part of its clarity project, the ASB also released proposed Statement on Auditing Standards (SAS), Initial Audit Engagements, Including Reaudits—Opening Balances. The proposal would supersede SAS no. 84, Communications Between Predecessor and Successor Auditors (AICPA, Professional Standards, vol. 1, AU sec. 315). The proposal is available at tinyurl.com/ca4msm.

 The International Auditing and Assurance Standards Board (IAASB) completed its clarity project, an initiative to update and reposition auditing standards in a form that is easier to understand, implement and translate. The clarified standards are effective for audits of financial statements for periods beginning on or after Dec. 15, 2009.

The project closed with the release of the final seven clarified International Standards on Auditing (ISAs). In all, the project gives auditors access to 36 clarified ISAs and a clarified International Standard on Quality Control. The standards are available in a new Clarity Center on the IAASB Web site at www.ifac.org/IAASB.

The IAASB is an independent standard-setting board within the International Federation of Accountants (IFAC). “We anticipate that the completion of the clarity project will bring further momentum to the convergence process,” Jim Sylph, IFAC’s executive director, professional standards, said in a press release.

 The PCAOB announced March 16 that it was seeking SEC approval to raise the 2009 accounting support fee from $151.8 million to $157.4 million. The increase would be a 3.7% hike from the fee the SEC approved in December. The additional funds would be held in reserve until the PCAOB and the SEC have approved a supplemental PCAOB budget.

The PCAOB warned in a letter to the SEC that its normally high collection rate may dip given the flagging economy. The board also wants to consider whether to submit to the SEC a supplemental budget request to implement any new legislation related to oversight of nonpublic broker-dealer auditors, should the PCAOB gain such authority. Separately, the board was mulling a supplemental request to strengthen the PCAOB’s non-U.S. inspections program; enhance documentation of planning and fieldwork of inspections; and enhance the PCAOB’s enforcement resources.

 The PCAOB sought comments for a second time on an auditing standard on Engagement Quality Review (EQR). The board first proposed a new standard on EQR on Feb. 26, 2008. The board has since made extensive changes to the original proposal and is now seeking comment on the revised EQR standard. The proposal would supersede the board’s quality control standard, SECPS Requirements of Membership, Section 1000.08(f).

The proposed standard would apply to all audit engagements and engagements to review interim financial information conducted pursuant to the standards of the PCAOB. It provides a framework for an engagement quality reviewer to objectively evaluate the significant judgments made by the engagement team and the conclusions reached in forming an overall conclusion on the engagement.

“This proposed EQR standard focuses the engagement quality reviewer’s attention on those matters that increase the likelihood of identifying and correcting significant engagement deficiencies before the audit report is issued,” PCAOB Chairman Mark W. Olson said in a press release. Comments on the proposal, available at tinyurl.com/dy9mkh, were due April 20.

 U.S. Comptroller of the Currency John Dugan said the “incurred loss” model banks use to account for loan losses may need to be changed to a more countercyclical approach that would allow provisions to be made earlier in the credit cycle when times are good.

Dugan, who is the administrator of national banks and chief officer of the Office of the Comptroller of the Currency, urged changes to the current accounting model for loan losses in remarks during the annual meeting of the Institute of International Bankers on March 2 in Washington.

“Perversely, as the banking industry experienced a prolonged period of rising and record profits in the booming part of the economic cycle in the earlier part of this decade, the ratio of loan-loss reserves to total loans went down, not up—even though there was broad recognition that the cycle would soon have to turn negative,” he said.

Dugan said that under the incurred loss model, a bank can make a provision to reserves only if it can document that a loss has been “incurred,” meaning the loss is probable and can be reasonably estimated. The easiest way to document those conditions is by referring to historical loss rates and the bank’s own prior loss experience with the type of asset in question.

In a long period of benign economic conditions, recent history becomes a difficult basis of acceptable documentation. Without acceptable documentation, Dugan said, auditors leaned on bankers to reduce provisions or even reduce reserves, resulting in so-called “negative provisioning.” As a result, the industry entered the current downturn without adequate reserves to absorb the losses now being recognized.

Banks and their auditors need to know the degree to which nonhistorical, forward-looking judgmental factors can be used to justify provisions to loan-loss reserves, Dugan said. He suggested changes in the incurred loss model itself may be needed, such to a more forwardlooking “life of the loan” or “expected loss” concept.

Dugan also said current regulatory rules that limit the use of reserves in Tier 2 capital to 1.25% of risk-weighted assets should be revised to remove disincentives to building reserves. Provisions banks have made recently, while a drag on earnings, he said, have not only offset current charge-offs, but have built reserves to substantially higher levels that will help with future loan problems.

“We ought to be talking about capital and reserves, and we ought to be recognizing the fact that, where quarterly losses are caused by reserve-building, that’s a net result that is positive, not negative,” Dugan said. “When a bank takes a loss to build a reserve, it is appropriately recognizing problems that they will see on the horizon, which is all to the good.”

Dugan’s complete remarks are available at www.occ.treas.gov/ftp/release/2009-16a.pdf.

 The nation’s thrifts posted record losses ($13.4 billion) and set aside record amounts in reserves for loan losses ($38.7 billion) in 2008, according to data released by the Office of Thrift Supervision (OTS). However, industry losses of $3 billion in the fourth quarter were an improvement from losses of $8.8 billion in the prior-year quarter and $4.4 billion in the third quarter of 2008. Return on average assets also improved to −1.02% compared with −2.31% in the prior-year quarter and −1.48% in the third quarter of 2008.

The OTS said troubled assets reached their highest level since 1991 and the number of problem thrifts increased to 26 by the end of 2008, up from 11 at the end of 2007.

Then-OTS Director John Reich, who resigned on Feb. 27, said in a press release that the substantial provisions for loan losses put thrifts in a strong position to absorb potential losses and participate in the financial rebound once the nation’s economy emerges from recession.

“I am optimistic that actions taken by thrift managers and boards of directors will position thrifts to be on the leading edge when recovery comes,” he said.

The complete report is available at www.ots.treas.gov.

 Bank failures in 2008 were at their highest level since 1993, and the industry posted a loss of $26.2 billion in the fourth quarter of 2008—the first quarter banks were collectively in the red since the fourth quarter of 1990—according to the FDIC’s Quarterly Banking Profile. At the same time, however, total deposits increased at the fastest rate for a single quarter in 10 years.

The FDIC said 25 insured institutions failed in 2008—12 alone in the fourth quarter. At year-end, 252 insured institutions with $159 billion in assets were on the regulator’s “Problem List,” which comprises institutions the FDIC considers at high risk of failure.

The fourth quarter’s return on assets of −0.77% was the worst ROA since the −1.1% posted in the second quarter of 1987. Banks’ provisions for loan losses swelled to $69.3 billion in the fourth quarter, an increase of more than 100% from $32.1 billion in the prior-year period.

Total deposits rose $307.9 billion (3.5%) in the quarter. Domestic deposits grew by $274.1 billion (3.8%), and interest- bearing deposits grew by $242.9 billion (4.2%). Total assets of insured banks also increased by $250.7 billion (1.8%) in the fourth quarter.

The Quarterly Banking Profile is available at www.fdic.gov.

 Suspicious activity reports (SARs) for suspected mortgage fraud increased 44% in the 12-month period ending June 30, 2008, according to Filing Trends in Mortgage Loan Fraud, a report compiled by the Financial Crimes Enforcement Network (FinCEN). In the most recent reporting period, financial institutions filed 62,084 SARs relating to mortgage fraud compared with 43,054 filings in the period between July 1, 2006, and June 30, 2007.

The mortgage fraud filings represented 9% of all depository institution SARs filed during the period. This made mortgage fraud the third most prevalent category of SAR filing for the second straight year. The first and second most prevalent categories of SARs were Bank Secrecy Act/structuring/Anti Money Laundering (BSA/AML) and check fraud, respectively.

FinCEN said in a press release it will conduct additional analysis in 2009 to examine the relationship between mortgage loan fraud and other financial fraud. Filing Trends in Mortgage Loan Fraud can be downloaded free at www.fincen.gov.

 FinCEN proposed revised rules and new guidance that would permit certain affiliates of depository institutions as well as broker-dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities to share SARs within a corporate organizational structure for purposes consistent with the BSA. FinCEN said it is seeking comment on whether the guidance should apply to other financial institutions in addition to the aforementioned ones.

Consistent with the BSA’s purposes of promoting financial institutions’ efforts to detect and report money laundering and terrorist financing, as well as ensuring the confidentiality of a SAR or any information that would reveal the existence of a SAR, the proposed rules and guidance permit the aforementioned financial institutions to share a SAR, or information that would reveal the existence of the SAR, with an affiliate provided that affiliate is subject to a SAR regulation issued by FinCEN or the Federal Banking Agencies.

FinCEN believes the proposed changes will benefit industry by:

• Helping financial institutions better facilitate compliance with the applicable requirements of the BSA and more effectively implement enterprise-wide risk management.
• Helping financial institutions assess risks based on information regarding suspicious transactions taking place through other affiliates or lines of business within their corporate organizational structures.
• Enabling a filing institution to share the SAR with certain affiliates, thus eliminating the present need to create a separate summary document, which has to be crafted carefully to avoid revealing the existence of the SAR itself.

Comments must be received by June 8. The proposals can be reviewed at www.fincen.gov.

 To address a lack of consistency in fund balance reporting, GASB’s new Statement no. 54, Fund Balance Reporting and Governmental Fund Type Definitions, establishes a hierarchy of fund balance classifications based primarily on the extent to which a government is bound to observe spending constraints imposed upon how resources reported in government funds may be used (see “Official Releases,” May 09, page 85). The new standard is effective for financial statement periods beginning after June 15, 2010.

“Fund balance” is the difference between assets and liabilities in governmental fund financial statements. It is one of the most widely used pieces of information in state and local financial reports. Statement no. 54 distinguishes fund balance between amounts that are considered nonspendable, such as fund balance associated with inventories, and other amounts that are classified based on the relative strength of the constraints that control the purposes for which specific amounts can be spent. Beginning with the most binding constraints, fund balance amounts will be reported under these classifications:

• Restricted. Amounts constrained by external parties, constitutional provision, or enabling legislation.
• Committed. Amounts constrained by a government using its highest level of decision-making authority.
• Assigned. Amounts a government intends to use for a particular purpose.
• Unassigned. Amounts that are not constrained at all will be reported in the general fund.

The new standards also clarify the definitions of individual governmental fund types. The final standard also specifies how economic stabilization or “rainy day” amounts should be reported.

For more information, go to www.gasb.org.

 The Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Concepts (SFFAC) 6, Distinguishing Basic Information, Required Supplementary Information, and Other Accompanying Information. The Statement amends SFFAC 2, Entity and Display, to provide guidance for use by FASAB in determining whether information should be basic information, required supplementary information (RSI), or other accompanying information (OAI).

Existing concepts provide FASAB with guidance on what information should be reported to achieve reporting objectives and identifies different methods that may be used to communicate it to readers, such as financial statements and management’s discussion and analysis (MD&A). SFFAC 6 expands the existing conceptual framework to provide a process FASAB may apply in selecting whether an item of information should be considered basic information, RSI or OAI.

More information is available at www.fasab.gov.

 IFAC has published a Guide to Quality Control for Small- and Medium-Sized Practices. This nonauthoritative implementation guide is intended to help SMPs understand and efficiently apply International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, as redrafted under the IAASB’s clarity project.

The guide uses an integrated case study to illustrate how to implement the requirements of ISQC 1, and includes two sample firm policy manuals and key checklists and forms. It can be downloaded for free at www.ifac.org/Store.

 IFAC also released a study on national initiatives related to the financial reporting supply chain. Based on a survey of its member bodies, the new publication, Developments in the Financial Reporting Supply Chain: Results from a Global Study among IFAC Member Bodies, acknowledges that progress has been made, but also reports that greater attention needs to be given to corporate governance; financial reporting and, in particular, the adoption of suitable reporting standards for small and medium-size enterprises; financial auditing; and the usefulness of financial reports. The free report is available at tinyurl.com/cdgt66.

 The U.S. Small Business Administration announced revisions to procedural guidance governing lender participation and loan processing for the two SBA major loan guarantee programs: 7(a) and 504. The SBA said in a press release that the changes to Standard Operating Procedure 50 10 (5) will make it easier for lenders to use the 7(a) loan guarantee program to refinance an existing line of credit, especially as a part of a complete refinancing of a small business borrower’s debt.

The revision will be cited as SOP 50 10 (5A). It is effective for loans approved on or after March 1, 2009. The current changes are part of the SBA’s stated commitment to update the SOP semiannually. The previous update in August, the first in 10 years, shortened the document from 1,000 pages to 400 pages and converted it to an electronic format with hyperlinks.

For information about the SBA’s programs for small businesses, go to www.sba.gov.

 The SBA also said it is reviewing concerns raised regarding its new limits on financing for goodwill. The SBA’s guidance on Feb. 6 had set a maximum of 50% of the loan amount, up to a maximum of $250,000, for SBA-backed loans used to finance the purchase of goodwill. The agency said it will consider loans for larger goodwill amounts on a case-by-case basis until Aug. 31, 2009. Between now and then, the SBA will study the types of transactions involving substantial goodwill and consider a revision of the current policy when the semiannual update of SOP 50 10 is published in September.

“Goodwill” is the difference between what a buyer pays for an existing business and the book or fair market value of the assets of the business. Goodwill is one of the riskiest assets to finance because it typically has no liquidation value in the event of a default. Comments from lenders and business brokers expressed concerns that the new limits would hinder business acquisitions at a time when many newly unemployed individuals are considering purchasing a business.

For more information on the SBA’s loan programs, go to www.sba.gov.

 The IFAC Board has extended CEO Ian Ball’s term until February 2013. Ball became CEO in March 2002. He previously served IFAC as chair of its Public Sector Committee (now the International Public Sector Accounting Standards Board) and as a member of its nominating committee. Previously, Ball was a professor of accounting and public policy, an international consultant in public management, an accounting standard setter and a senior official in the New Zealand Treasury.

 The Financial Accounting Foundation (FAF) named John J. Brennan chairman of its Board of Trustees. Brennan succeeds Robert Denham. Brennan takes the helm under a revised governance structure approved by the Board of Trustees in 2008.

The chairman’s role has been expanded to reflect additional responsibilities resulting from increasing strategic needs of the organization. The FAF is the independent, private-sector organization responsible for the oversight of FASB and GASB. Brennan is chairman of Vanguard Group Inc., and each of the Vanguard mutual funds, a position he has held since 1998.

Separately, the FAF appointed Jeffrey J. Diermeier, Cynthia P. Eisenhauer and Dennis M. Kass to five-year terms on the Board of Trustees. The appointments were made under new procedures designed to increase participation by FAF constituents in the nominating process and ensure greater independence by the FAF in appointing trustees.

Diermeier served as president and CEO of the Chartered Financial Analyst Institute until his retirement at the end of 2008. Previously, he was global chief investment officer at UBS Global Asset Management. Eisenhauer is a consultant supporting state and local governments in strategic planning and budgeting, as well as an adjunct professor at Iowa State University in its Master of Public Administration program. Previously, she served as chief of staff for then-Iowa Gov. Thomas Vilsack from 2004 to 2007.

Kass is chairman and CEO of Jennison Associates, an institutional, mutual fund and variable annuity investment management firm owned by Prudential. Previously, he was vice chairman and chief fiduciary officer at JP Morgan Fleming Asset Management, where he was responsible for the oversight of the firm’s fiduciary and client activities.