Behind the Scenes: Regulatory Review/Preview at SEC/FASB Conference

Behind the Scenes: Regulatory Review/Preview at SEC/FASB Conference
Materiality Integral to MD&A; Proposed Options Standard Seen Critical

By Jay Dismukes and Simon Eskow

The Securities and Exchange Commission has a close eye on management’s assessment of internal controls and on revenue recognition, an area that one SEC official last month characterized as “ripe for abuse.” Meanwhile, the Financial Accounting Standards Board will issue guidance in the coming months to encourage what they hope will be more-transparent financial statements, FASB members said.

While the auditor can help management document internal controls and identify problem areas, SEC Deputy Chief Accountant Scott A. Taub stressed that management, not the auditor, must make the initial evaluation of its internal controls. Taub, who was one of many representatives from the SEC and the FASB presenting at the Jan. 22 Foundation for Accounting Education’s SEC/FASB Conference, said, however, that the auditor will then need to do some of his own “testing” beyond just examining management’s opinion.

Taub also focused his attention on the performance of nonaudit services, encouraging audit committees to look further than prohibited services and conduct “real analysis” of any nonaudit work that could jeopardize independence. All services to be performed by the auditor must have the audit committee’s approval, he said.

Revenue recognition also made Taub’s list of things to look out for; it’s an area that is “ripe for abuse and ripe for errors” and one in which he said the Commission asks a lot of questions.

SEC Chief Accountant Carol Stacey, of the division of corporation finance, picked up where Taub left off, paying special consideration to MD&A (Management’s Discussion and Analysis of Financial Condition and Results of Operations). MD&A, she said, too often sounds like “elevator music” to the SEC and investors when it should instead give a clear indication as to what management is thinking and how it views the company. The SEC wants company management—again, not the auditor—to do the MD&A, focusing on materiality and providing details and forward-looking information, Stacey said.

In a question-and-answer session that followed, both Taub and Stacey shared the SEC’s position on business transactions that include stock valuations.

“We have a real hard time with a valuation other than market price,” said Taub, who noted that restrictions that could affect the value would be taken into account but they would have to be backed by objective evidence. “Gut feels are rarely going to be better than market price.”

Just prior to the Q&A, SEC Chief Accountant Susan Markel delivered a presentation that gave new life to a number of old clichés, effectively illuminating the views of the Commission’s Division of Enforcement.

Case in point: in her “be careful what you ask for or you just might get it” piece, Markel remarked that the SEC has a number of enforcement actions in its arsenal, from cease-and-desist orders to disgorgement of stock options and other compensation.

FASB: Looking at Their Options

The FASB’s agenda will encompass convergence with international standards, along with changes to guidance for business combinations, loan commitments and other issues.

Board member G. Michael Crooch placed special emphasis on a proposal that would force corporations to treat stock options in statements the way other forms of compensation are reported. The FASB is likely to release an exposure draft on the issue by March, but the prospective standard has already engendered much controversy and, Crooch said, some lobbying efforts in Washington.

“There are groups acting to block the stock options standard,” he said. “This is a very serious issue because if in fact we’re told not to do this one, the FASB’s independence is gone. It’s our job to come up with financial statements that allow users to understand what happened in a business. We believe option to be an expense.”

The standard proposes to require stock options to be expensed over the period of vesting, but Crooch said FASB would issue guidance to implement the standard.

Crooch’s comments came during a presentation followed by a panel discussion at the end of the day-long conference. The panel, moderated by CPA Journal Editor-in-Chief Robert H. Colson, included fellow FASB board member Edward Trott and Joseph Ucuzoglu, a manager with Deloitte and Touche.

Trott said that individual investors have been complaining that the options haven’t been expensed already.

“There’s a recognition that current accounting gives you a break if you pay compensation in that particular way,” Trott said.
Ucuzoglu said that he views the issue like any other significant proposal, and as with many changes in standards, talk among Deloitte clients is split on the options issue.

“Some are for it, and some are against it,” Ucuzoglu said. But he implied that too much was made of items being hidden from users. “I believe the market is more transparent than we give it credit for.”

The New York State Society of CPAs’ SEC Practice Committee, chaired by George I. Victor, of Reminick Aarons & Company, LLP, sponsored the conference, which took place at the Hotel Pennsylvania in Manhattan. Along with Victor, Mitchell J. Mertz, of Eisner LLP, and Rita M. Piazza, of Marden, Harrison & Kreuter CPAs P.C., cochaired the event.