EU institutes mandatory auditor rotation

The European Union recently mandated the rotation of auditors for public companies.  The ruling requires a rotation after 10 years, although there are ways for companies to extend the rotation period, including putting the audit contract out to bid, even if the incumbent firm is chosen again.  European Internal Market and Services Commissioner Michel Barnier was quoted as saying “These new measures will reduce risks of excessive familiarity between statutory auditors and their clients, encourage fresh thinking, and limit conflicts of interest".  

Additionally, there are additional reporting requirements as a result of the audit process, including the requirement to provide a detailed to the company's audit committee that is not necessarily intended for public disclosure.

The PCAOB proposes changes to the Auditor's reporting model

In the drive for greater transparency in financial reporting, the Public Company Accounting Oversight Board (PCAOB) has issued a proposal to enhance audit reports by identifying and reporting on critical audit issues as part of a company's audit.  An article in the Journal of Accountancy identifies four key areas of focus for the proposed standards:

• A statement of auditor independence. This would explain that the auditor is a public accounting firm registered with the PCAOB and is required to be independent with respect to the company.
• Tenure disclosure. The audit firm would disclose the year it began serving as a company’s auditor.
• Other information explanation. The auditor would be required to describe the procedures and evaluation the firm performed on other types of information included in the annual report outside the financial statements.
• Language enhancements. These would change existing language in the auditor’s report related to the auditor’s responsibilities for fraud and notes to the financial statements.

A key component of the proposal would be the requirement to identify and report on critical audit matters, which are defined as matters addressed during the audit that:

• Involved the most difficult, subjective, or complex auditor judgments;
• Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or
• Posed the most difficulty to the auditor in forming an opinion on the financial statements.

When critical audit matters are determined, auditors would be required in their report to:

• Identify the critical audit matter.
• Describe the considerations or reasons that the matter was identified as critical.
• Refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter, when applicable.

Among the other requirements, auditors would be required to evaluate the company's 10-K filing and review selected financial data as well as the Management Discussion & Analysis. 

FASB, IASB to Work on Classification and Measurement of Financial Instruments

As part of the ongoing effort at reporting convergence between FASB and IASB, the Boards will look at the issue of financial instrument classification and measurement.  The Journal of Accountancy has a brief article on topic:  An excerpt is shown below:

FASB and the International Accounting Standards Board (IASB) are working together to reduce differences in their respective classification and measurement models for financial instruments.

The boards announced Friday that they will explore these models jointly, then decide whether to propose amendments to IFRS and U.S. GAAP.

These discussions will take place as part of FASB’s ongoing reconsideration of a Proposed Accounting Standards Update (ASU) on financial instruments. The Proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815), was originally issued in May 2010. The IASB will take the discussions with FASB into consideration in its project to make limited changes to IFRS 9, Financial Instruments, which was issued in November 2009. The IASB’s project was amended in 2010 as a result of its ongoing work to develop a new IFRS on insurance contracts and feedback received on how IFRS 9 applies to particular instruments.

Here's the link to the article:  FASB, IASB to Work on Classification and Measurement of Financial Instruments.

Companies not eager to convert to IFRS

A new survey out by KPMG and the Financial Executives Institute reveals that companies don't plan to convert to IFRS until they have to, even if there is an early adoption period.  The survey polled 900 accounting and finance executives.  Here are some of the highlights:

• 75% of companies said they would wait until they were forced to convert before the did so,
• Only about half the respondents expect the SEC to make a decision in 2011, which is the published timeline for making that decision,
• 65% of executives are worried about implementation costs,
• 88% believe the adoption of IFRS by the United States will increase comparability of financial statements around the world,
• 57% say that the convergence of U.S. GAAP and IFRS is the best approach,
• Only 30% would like to see the U.S. establish a specific date for adoption

You can read the full article here: Ready But Not Eager for IFRS

Many oppose FASB proposal for Loan Mark-to-Market

Reuters is reporting that comments regarding an expansion of the Mark-to-Market rules for loans is running heavily against the proposal.  The expansion would impact loans and other financial instruments.

An exceprt from the article:

The banking industry has opposed the measure, saying it does not make sense to assign market prices to loans that will never be sold.

"Thus far, I think the count is up to about 1,500 or so comment letters," said Lawrence Smith, a board member of FASB, which sets U.S. accounting rules. "I think I've read one that supports what we propose."

One of the considerations impacting this proposal is the goal of FASB to achieve convergence with the IASB.  Mark-to-market accounting is one area where the two governing bodies differ.  The IASB has loans valued at amortized cost.

At Least Some Companies are Filing in XBRL

Earlier this year Grant Thornton released a study showing that a number of companies were not on track to comply with SEC mandates around XBRL reporting.  A press release from WNS details their efforts to comply ahead of time. 

NEW YORK, NY and MUMBAI, INDIA, Jun 17, 2010 (MARKETWIRE via COMTEX) -- WNS (Holdings) Limited /quotes/comstock/13*!wns/quotes/nls/wns (WNS10.13, +0.17, +1.71%) ("WNS"), a leading provider of global business process outsourcing services, today announced that it has filed an amendment to its Annual Report on Form 20-F for the fiscal year ended March 31, 2010, which was originally filed with the Securities and Exchange Commission on June 15, 2010, for the sole purpose of furnishing the financial statements of this Annual Report in XBRL (eXtensible Business Reporting Language) format. XBRL is a language for the electronic communication of business and financial data, which greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

"As a foreign private issuer, utilizing XBRL is not yet mandatory for us. However, we have voluntarily furnished the financial statements of our Annual Report in XBRL format this year along with other domestic filers in an effort to meet and exceed corporate disclosure standards," stated Alok Misra, WNS's Group CFO.

The XBRL version of the financial statements of the Annual Report on Form 20-F for the fiscal year ended March 31, 2010, is available on WNS's corporate Web site at www.wns.com, in the Investor Relations section.

It will be interesting to monitor additional companies that file in XBRL and to note those companies that fail to meet the SEC's 2011 deadline.

Vietnam modifies accounting rules for financial reporting

Vietnam, like a number of developing countries, has been struggling with a significant decline in Foreign Direct Investment (FDI) due to the global economic slowdown.  According to the source Vietnam Briefing, the country in 2009 experienced a 70% decline in FDI relative to 2008.  It should be noted that 2008 represented a banner year in Vietnam for FDI as it reached $64 billion USD, up from around $20 billion USD in 2007.  All of these numbers represent pledged FDI and not actual capital disbursements.

As a way of strengthening its accounting system and to make the country more friendly to FDI, the Vietnamese Ministry of Finance is allowing foreign companies to choose the currency they use to transact business.  Previously they had to report in the Vietnamese dong and file with the government for permission to use a different currency.  These companies now have more flexibility in the base currency for reporting but the chosen currency must be one predominately used for banking transactions and for price quotations.

Read the full article on Vietnam's accounting rule change for financial reporting.

SEC Chairman lays out 2008 agenda

In a February 8th speech to the Practising Law Institute, SEC Chairman Christopher Cox announced his initiatives for 2008.  During the course of his remarks, Chairman Cox noted the increasingly global nature of regulation and emphasized that his agency would work to release a new roadmap that would facilitate the convergence of US GAAP and International Financial Reporting Standards.  This is not a question of "if" but "when".  The other point that the Chairman made was his belief that interactive reporting, his term for the XBRL technology, will become increasingly important.  Interestingly, the surveys I've seen for the CFO agenda puts the implementation of XBRL far down the list of priorities.  If Chairman Cox has his way, CFOs may need to rethink their priorities. 

Below is an excerpt from Chairman Cox's speech:

The same imperatives of ever-faster communications, ever-more-closely linked markets, and truly global competition for capital that underlie our conceptualization of mutual recognition have for several years been driving the project to converge the world's two great accounting systems — U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Because of the significant progress that has been made in developing IFRS as a high-quality accounting standard — and in light of its rapid and growing acceptance around the world — the Commission last year voted unanimously to take the next step on the SEC's "roadmap" announced three years ago. As a result, foreign issuers can now file their financial statements with the SEC using IFRS, without need of keeping a second set of books under U.S. GAAP.

Then, last August, the Commission issued a Concept Release seeking advice on whether U.S. issuers should be allowed to choose to prepare financial statements using IFRS. And in December 2007 we held roundtables on this subject and heard from more than two dozen experts. The many comments the Commission has received make one thing exceptionally clear: the rapidly growing acceptance in the rest of the world of IFRS as a high-quality accounting standard will make the U.S. GAAP-IFRS convergence project increasingly important for U.S. investors and issuers. In 2008, the Division of Corporation Finance and the Office of the Chief Accountant, led by Wayne Carnall and Julie Erhardt, will formally propose to the Commission an updated "roadmap" that lays out a schedule, and appropriate milestones on which the schedule will be conditioned, for continuing the progress that the United States is making in moving to accept IFRS in this country.

The third pillar of this international strategy — the adoption of a global computer language for the exchange of financial information — goes hand in glove with the concepts of a common accounting language and mutual recognition of high-quality securities regulation. A standard data format for sharing financial statements and other information that is important to investors will facilitate the kind of comparisons among global investment options that investors need. The international movement to employ eXtensible Business Reporting Language for this purpose will let investors easily find and compare business and financial data with the same ease of doing a Google or Yahoo! search today. And it promises to let companies prepare their financial information more quickly, more accurately, and for less cost. In 2008, following years of evaluation and experience through the SEC's voluntary XBRL pilot program, the Commission will consider a rule for the use of interactive data by U.S. reporting companies that will parallel efforts already underway in other countries. David Blaszkowsky, who heads the SEC's Office of Interactive Disclosure, has been an important leader in this initiative.

Moving to a Single GAAP Standard

An article at CFO.com highlights the sentiments of the FASB Chair to move to a single GAAP standard for both domestic and foreign companies doing business in the US.  And that standard will not be current US GAAP accounting, but rather one based on International Accounting Standards.  An excerpt from the article.

At an industry conference Friday morning, Financial Accounting Standards Board chairman Robert Herz said he expects that U.S. companies eventually will be made to follow a single accounting standard. That standard, he said, would be International Financial Reporting Standards, not U.S. generally accepted accounting principles.

Herz said he is looking for an "orderly way" to get to a single accounting system and that a national plan would be the way to go about it. The plan would consist of timetables, tasks, and education efforts to move American companies off U.S. GAAP and onto a single global standard. "I don't believe in a two-GAAP system," he said.

The FASB chairman said he objects to providing U.S. issuers with an "unfettered choice" between GAAP and IFRS because it undermines his goal of getting to a single standard. The choice may appeal to some companies, he said, but the standards are written for the benefit of investors, not companies.

For the full article, click here.

SEC Proposes Move Away From US GAAP Reconciliation

The SEC currently has a proposal out to eliminate the requirement that currently exists for foreign companies to reconcile their financial statements to US GAAP.  Under the proposal, companies may avoid the reconciliation process if they follow the English language version of International Financial Reporting Standards. 

The proposal is called Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP.  The release number is 33-8818.  Comments are due by September 24, 2007.

While there may be changes to the proposal based on feedback, my guess is this proposal will be finalized in some form.  There is strong momentum behind the idea of moving to international reporting standards.  This will be a key step in that movement.

Is XBRL on its way to becoming mandatory?

An interesting article in the May 28, 2006 edition of CFO.com questions if the transmission of financial statements in XBRL is on its way to becoming mandatory.  Up until now, the SEC has asked companies to participate in a voluntary program to submit SEC filings in XBRL format.  At the close of the recent program, only 17 companies had submitted its financials in XBRL.  As the article states:

Last October, SEC deputy chief accountant Andrew Bailey told CFO.com that the SEC might indeed want to make XBRL mandatory. That makes Cox's current campaign sound like a clear message to Corporate America. "It's pretty difficult to see the chairman of the SEC give XBRL that much play and not get the message that this is coming down the pike and it is not going to be optional," says Dan Roberts of Grant Thornton. Roberts is chair of the XBRL-US Steering Committee, part of an industry consortium working to develop XBRL in the United States.

So far, that work has been voluntary — and slow. Although XBRL, which stands for eXtensible Business Reporting Language, has been under development in this country for more than five years, it has yet to have much of an impact on financial reporting. "The United States is, to its potential detriment, significantly behind other major markets in its adoption of XBRL," says Roberts.

Indeed, a pilot program by the SEC to encourage companies to report their financial results in XBRL has attracted only 17 companies. And while International Financial Reporting Standards include a full taxonomy — that is, XBRL tags for all major financial reporting line items — the tags for items involving U.S. generally accepted accounting principles are still being written. By some counts, that project, which includes some 3,000 tags, is less than half complete.

Based on these comments, it appears that companies ignore to the move to XBRL at their own peril.

Wanted: A Few Good Companies

The SEC issued a press release a few days ago announcing that they will offer expedited reviews of registration statements if a company is willing to volunteer for a test group.  The group is to submit it's information in XBLR, a technology that , in the words of the press release "holds the promise of transforming the static, text-only documents companies file with the SEC into dynamic financial reports that can be quickly and easily accessed and analyzed".  As part of the test, participating companies will have to track their involvement, including the cost of submitting in XBLR.

I believe that XBLR submission will quickly become the norm.  Best Practice companies are always looking for ways to increase the efficiency of compliance efforts.  This technology will enable companies to reduce manual efforts in preparing financial reports and increase the amount of time dedicated to analysis.  There will be initial costs to cross over to this technology, including training for workers.  The benefit, however, will be better compliance at a reduced cost.  And that can only be good for companies.

Improving Management Information

A recent article in Business Finance magazine, Where Reporting and Consolidation Need to Improve, reports on some interesting survey results.  They surveyed 200 Finance, IT and Line-of-Business employees to find out what they were missing in financial and other management information.

As part of the survey, they noted that 47% of survery respondents said they did not have enough information on their own performance.  Half thinks their company provides too little information on leading indicators and 80% want more information on their competitors.

I'm a little surprised at these statistics, but only because the survey portrays, in my view, an optimistic state of financial reporting.  My experience is that many companies have very little in the way of leading indicators, relying instead on mostly historical financial information to manage their businesses.  Additionally, very few companies I've delt with make any serious attempt to incorporate financial and statistical data from outside their organization.

Part of the problem is the over-reliance on the use of ERP systems for Business Intelligence.  These systems are very good at capturing, aggregating and reporting information throughout an organization, but they have typically lagged behind Point Solutions for their Business Intelligence capabilities.  As a result, historical financil information is provided to employees in abundance while leading, operational and external data is sorely lacking.  As the price of Business Intelligence technologies continues to fall, more companies should take another look at implementing them to ensure their employees have the information they need to make informed and timely decisions.

IFRS on the move

It has long been a commonly held belief among U.S. corporations that international accounting standards would evolve towards U.S. GAAP.  However, it hasn't quite worked out that way.  International accounting standards, under the auspices of the International Accounting Standards Board, have been developing in ways that are not always congruent with U.S. standards.  Additionally, foreign companies may not need to reconcile international reporting requirements to U.S. GAAP before raising capital in the United States.  It'll be interesting to see how these competing interests shape up in the coming years.

CFO.com has an article that discusses this trend in greater detail.  Click here for the full story.