A Historical Look at Standards





Some Were Omitted

“New Rules, New Responsibilities” ( JofA, Aug.00, page 53) deals with questions arising from only some of the important new audit committee rules resulting from the SEC’s “blue ribbon committee” initiative. There are other rules companies might need to consider.

For example, the article omits discussion of the newly articulated audit committee responsibility to actively monitor auditor independence. The New York Stock Exchange rule requires the audit committee to recommend that a company’s board of directors “satisfy itself of the outside auditors’ independence.” The National Association of Security Dealers’ rule on this issue is even more nebulous, requiring the audit committee to take, or recommend that the full board take, appropriate action to “oversee the independence of the outside auditor.” Either of these requirements raises questions of implementation and compliance risk for audit committees.

Absent as well is consideration of the implications of the new directive that the outside auditor be accountable to the audit committee rather than management. Specifically, this involves a new responsibility for audit committees to “select, evaluate and, where appropriate, replace the outside auditor.” There does not appear to be widespread understanding of the appropriate methodology or criteria that should be used for such evaluations or replacements.

Emphasis on audit committee warranties is appropriate, particularly agreement that the financial statements comply with GAAP and are appropriate for filing with the SEC. However, the discussion should have covered the requirement for annual confirmation of various matters. These include audit committee review and reassessment of the adequacy of its charter, the independence and financial literacy of all members and the accounting or financial management expertise of one. The NYSE has developed a formal written affirmation for this purpose.

Curtis C. Verschoor,
Ledger & Quill Research Professor
School of Accountancy
DePaul University

Additional Concerns

“Beyond Section 1031” ( JofA, July00, page 61) was an excellent summary of some of the complexities surrounding this code section and provided practical solutions to construction and reverse exchanges. I offer two other concerns for advisers to consider:

State taxation. While California and Idaho, for example, allow a replacement of in-state property with property located outside their respective states, Oregon does not. An exchange of Oregon property for property located outside the state will be a taxable event in Oregon. Cross-border exchanges need to be reviewed to determine state taxability separate from federal.

Exchanges involving Section 1245 real property. Such property must be exchanged for real property of like-kind. In the agricultural world, this creates complexities in determining what may qualify as replacement property. For example, a controlled atmosphere storage facility for apples (which is section 1245 “other tangible property”) cannot be exchanged for vacant farm land. Since the storage facility is located on land, we have a multiasset exchange of another variety where the replacement property must contain at least as much section 1245 real property as the property relinquished. Thus, while we may acquire section 1245 real property in exchange for non-section-1245 real property, the reverse will create a taxable event.

Christopher W. Hesse, CPA
Director of Taxation
LeMaster & Daniels PLLC
Moses Lake, Washington

Another Look at FASB Interpretation 44

A comment in “FASB Offers More Guidance on Stock Options” ( JofA, July00, page 18) suggests that the inability to reprice options could cause a company to lose all its employees if the value of its stock declines and is not likely to go up in the near future.

I have been involved with financial reporting issues on behalf of the Institute of Management Accountants for over 15 years and we, like most everyone else, were opposed to the FASB conclusions on recognition and measurement of stock compensation. However, as the board worked to clear up the many interpretive questions resulting from the continued use of APB Opinion no. 25, we participated in that due process as well.

I have never objected to the concept that repricing of options makes a fixed plan become a variable plan. That simply makes sense. Rather than reprice, all any company has to do is simply issue new options and leave the “underwater” ones on the table. I realize sometimes that requires the action of stockholders to approve additional shares, but if the action is appropriate, there should be no problem with stockholders.

Frank C. Minter, CPA

A Historical Look at Standards

As I read “Let’s Reassess Accounting Standards” ( JofA, May00, page 82), I reflected upon how we reached the current state of standards the author questions.

Based on my many years of experience in accounting, it seems that the complicated, highly technical accounting standards are the result of the failure of those involved in financial reporting to agree on the purpose of reporting on the results of a company’s operations. Is it to provide the historical results along with an attestation by a CPA, or is it to provide an evaluation of the company based on some value system?

If we believe the attest function is vital, then we should retain the traditional theory of matching costs with related revenues, using an historic cost basis. If we believe the latter, then we should change to a fair-value-based, balance-sheet-oriented system.

The answer to those questions must begin with a study of the evolution of accounting from providing data solely to the owner-manager to also serving absentee owners early in the 20th century, expanding further with the impact of the federal income tax law of 1913. These events resulted in the growth of a theory-of-accounts study to support the expanded role of accounting.

From the beginning, the academics approached the study from an economic basis, since early theoreticians had earned their PhDs in economics. However, the writings of the academics had little effect on the practice of traditional accounting since there was no effective regulatory agency interested in uniform accounting. This began to change as the abuses of the 1920s—watered stock and a blurring of the distinction between capital and income, for example—contributed to the 1929 crash and led to the creation of the SEC.

Although academics continued to advocate an economic basis for accounting, the practice of accounting remained on an ad hoc, pragmatic basis until an attempt was made in the early 1960s to achieve a uniform approach with the Accounting Principles Board. However, because of dissatisfaction with the APB among preparers, academics and public accountants, in 1971 the American Institute of CPAs formed the Wheat committee and the Trueblood committee to study how standards should be established and theory determined.

Unfortunately, the two committees operated independently of each other. The Wheat committee concerned itself with how standards should be set while the Trueblood committee set out to determine the objectives of financial statements.

The Wheat committee concluded that the solution lay in a board independent of the AICPA with broad-based support and did not concern itself with the basis for the standards.

The Trueblood committee’s conclusions, on the other hand, were oriented toward the use of accounting data by those not involved in the operations of a business. The emphasis was on prospective analysis, and the committee recommended that financial statements contain forecast, current value and social responsibility data. The report reflected the long-standing economic bias of the academic community, which was in conflict with the historic-cost-based, matching concept in place in the business world.

FASB, as swiftly as it could after its formation, initiated the conceptual framework project, based on the Trueblood report. The project met with immediate opposition from the preparers and many public accounting firms. The controversy resulted in a slowing down of the implementation of the concepts embodied in the project, but it did not change the goal.

All the preceding has brought us to the point where we must question, as the author did in the article: “Do complicated, highly technical accounting standards really serve the investing public well?”

The author calls upon FASB to update and even change its standards as we move toward international standards. I agree. However, I believe we should go back to our historical roots and develop standards which reflect transactions and emphasize the attest function. A review of standards should also include a review of the concepts contained in the Trueblood report, which have led to the loss of relevancy in financial reporting, driven prospective auditors from the field, and added a degree of subjectivity to financial reporting that exacerbates the problem of “managed earnings.”

Eugene Flegm, CPA
Bonita Springs, Florida

Don’t Forget the Consultant

As a Web designer and the spouse of a “finance guy,” I enjoy reading his copies of the JofA for the technology information. The article, “Launch a Web Site—Now” (June00, page 22) was very informative although it omitted any discussion on servers, server software and the programming it takes to make a Web site “do” what you want it to do.

Somewhere between “After you determine the goals of the site…” and “Whom are we trying to reach?” needs to be a meeting with a consultant. In this meeting, share what you want to do/present on your site, and the consultant will let you know what kind of server, server software and programming is needed to accomplish that goal. Showing your consultant a few examples of Web sites that “do” what you want to do on your own Web site is highly recommended. Showing is often easier than explaining, and seeing is often easier than deciphering.

Otherwise, “bravo!” on the many details that the article addressed.

Karin D. Powell
Tampa, Florida

Letters to the Editor

The opinions and views expressed are those of the letter writers and do not necessarily reflect those of the AICPA.

The JofA encourages readers to write letters on important professional issues in addition to comments on published articles. Because space is limited, letters submitted for publication should be no longer than 500 words. Please include telephone and fax numbers.


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