n The Department of the Treasury’s Advisory Committee on the Auditing Profession unveiled a slate of 13 preliminary recommendations for enhancing the profession’s sustainability. The advisory group’s three subcommittees—on human capital, firm structure and finances, and concentration and competition in the profession—outlined draft proposals at the committee’s March 13 meeting, and will further refine these proposals until its final report is issued in July. AICPA President and CEO Barry Melancon is a member of the Treasury Advisory Committee, along with 20 other business and academic thought leaders.
The Subcommittee on Firm Structure and Finances recommended in its draft that the committee:
- Urge the SEC to amend Form 8-K disclosure requirements to characterize appropriately and report every public company auditor change and to require auditing firms to notify the PCAOB of any premature engagement partner changes on public company audit clients.
- Urge the PCAOB and the SEC, in conjunction with other regulators, auditing firms, investors, financial statement users and public companies, to explore the feasibility of firms appointing independent members with full voting power to firm boards and/or advisory boards with meaningful governance responsibilities to improve governance and transparency at public company auditing firms.
- Urge the creation of a center, preferably under the sponsorship of the Committee of Sponsoring Organizations of the Treadway Commission and/or the Center for Audit Quality, for auditing firms and others to share fraud prevention and detection experiences.
- Encourage greater regulatory cooperation and oversight of the public company auditing profession to improve the quality of the audit process and enhance confidence in the profession and financial reporting.
In its preliminary recommendations, the Subcommittee on Concentration and Competition recommended that the committee:
- Promote the growth of smaller auditing firms. The recommendation included requiring disclosure by public companies in proxy reports of any provisions in material agreements with third parties limiting auditor choice.
- Create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms that would include monitoring, through the PCAOB, potential sources of catastrophic risk that would threaten audit quality.
Promote compliance with auditor independence requirements by, among other steps, compiling the SEC and PCAOB independence requirements into a single document and making it accessible online.
- Adopt annual shareholder ratification of public company auditors by all public companies.
Enhance regulatory collaboration and coordination between the PCAOB and its foreign counterparts.
The Subcommittee on Human Capital recommended that the committee:
- Implement market-driven curricula and content for accounting students by, among other things, regularly updating the accounting certification exams to reflect changes in the profession, its relevant standards, and the skills and knowledge required to serve increasingly global capital markets.
- Ensure a supply of qualified financial accounting, audit, and tax faculty to meet demand for the future. One suggestion is to create financial incentives for private-sector institutions to fund both accounting faculty and faculty research, to provide practice materials for academic research and for participation of professionals in behavioral and field study projects.
- Improve the representation and retention of minorities in the auditing profession by, among other things, recruiting minorities from other disciplines and careers, and emphasizing the role of community colleges as a career starting point.
- Develop and maintain consistent demographic and higher education program profile data sets.
A detailed report on the preliminary recommendations is available at www.treas.gov/offices/domestic-finance/acap/. The committee is expected to make final recommendations by summer. “We look forward to deliberating these ideas over the next few months and we, as co-chairs, intend to push the subcommittees farther in certain areas,” co-chairmen Arthur Levitt Jr. and Donald Nicolaisen wrote in a preface to the recommendations. “The subcommittees will continue to work to develop these proposals.”
n Mobility efforts continue with notable success and momentum due to collaborative efforts by the AICPA, NASBA, state societies, state boards and the Accountants Coalition. Consistent with the newly revised UAA, by the end of March, 16 states (Idaho, Illinois, Indiana, Louisiana, Maine, Missouri, New Mexico, Ohio, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin) had achieved “no notification,” meaning there is no requirement for CPAs to provide notice of intent to practice in a state other than in their principal place of business.
Seventeen states had mobility legislation pending at the end of March: Alabama, Arizona, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, Oklahoma and Pennsylvania.
Missouri has mobility regulations in place and has legislation pending to put the no-notification policy into statute. Mississippi’s legislation was signed and becomes effective July 1, 2009. Kentucky passed legislation that was awaiting the governor’s signature as of press time.
n FASB issued Statement no. 161, Disclosures about Derivative Instruments and Hedging Activities, and proposed FASB Staff Position no. 132(R), Employers’ Disclosures about Postretirement Benefit Plan Assets.
Statement no. 161 is designed to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s cash flows, financial position and performance. The standard is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008, with early application encouraged.
Statement no. 161 achieves improvements, according to FASB, by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. It also requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments.
The purpose of the FSP is to get constituents’ feedback on proposed guidance intended to improve the quality of financial reporting by increasing disclosures about the types of assets held in postretirement benefit plans. Respondents have until May 2 to comment on the proposal.
This proposed FSP would amend FASB Statement no. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to improve public and nonpublic employers’ disclosures about postretirement benefit plan assets. Additionally, the proposed FSP includes a technical amendment to Statement no. 132(R) that would require a nonpublic entity to disclose net periodic benefit cost.
The proposed FSP and the new standard are available at www.fasb.org.
n The Regulatory Flexibility Act (RFA) saved small businesses $2.6 billion during fiscal year 2007 and $285 million in annually recurring costs, according to a Small Business Administration Office of Advocacy annual report on the act. The RFA requires agencies proposing regulations to evaluate their economic impact on small entities and consider alternatives. The Office of Advocacy completed a federally mandated (Executive Order 13272) initial training program in 2007 of major regulatory agency rule writers. It also reviewed more than 469 regulations to assess RFA compliance, submitted 30 public comment letters to federal agencies on regulatory proposals, and hosted 29 roundtables to solicit feedback from small entity stakeholders.
“Small firms are better equipped to do what they do best—grow the economy—when they are freed from coping with overly burdensome or duplicative regulations,” said Chief Counsel for Advocacy Thomas Sullivan. “Federal agencies are learning that the RFA and Executive Order 13272 are valuable tools to help them consider the impact of their rules while still meeting regulatory goals.”
The full report is available at www.sba.gov/advo/laws/flex/07regflx.pdf.
n The FDIC’s Deposit Insurance Fund increased its contingent liability for anticipated bank failures and added 51 institutions to its “Problem List” in the fourth quarter of 2007, according to the most recent CFO Report to the Board. The increase in contingent liability for bank failures from $54 million to $124 million represented less than one-quarter of 1% of the total DIF balance, which grew 1% in the fourth quarter to $52.413 billion.
The Problem List now includes 77 institutions with $22.2 billion in assets as of Dec. 31, 2007, marking a 261% increase in problem assets from a year earlier. Three FDIC-insured institutions, with total assets of $2.3 billion and losses of $120 million, failed in 2007. These were the first failures since June 2004.
The complete CFO Report to the Board is available at www.fdic.gov.
n Significant efforts to strengthen financial reporting in recent years have resulted in improvements in corporate governance, the process of preparing financial reports and the auditing of financial reports, according to a report commissioned by the International Federation of Accountants. However, despite improvements to the financial reporting process, the report found that the understandability of financial reports has not improved. The report’s findings were based on an independent global survey of participants in the financial reporting supply chain. The full report, Financial Reporting Supply Chain: Current Perspectives and Directions, is available at www.ifac.org/frsc.
n The International Accounting Standards Board’s fair value measurement project team began a standard-by-standard review of existing fair value measurements in International Financial Reporting Standards. The team will assess whether each standard’s use of a fair value measurement basis was intended to be an exit price. For more information, visit www.iasb.org.