CPA Success

Skilling's appeal: More salt in our Enron wounds

Wanna make your blood boil? Think about this one for a second:

A few short months from now, Jeffrey Skilling might go free.

You remember Jeffrey Skilling. He ran a little company called Enron, whose implosion destroyed wealth, lives and dreams and (along with a couple of guys named Sarbanes and Oxley) fundamentally changed the ways in which CPAs and corporate finance types do business.

Skilling is currently serving a 24-year, 4-month prison sentence for, among other things, conspiracy, insider trading and making false statements to auditors. But he has appealed his conviction, and in October the U.S. Supreme Court agreed to hear his appeal.

According to National Public Radio's Wade Goodwyn, Skilling's appeal centers on two central arguments -- that a judge should have granted Skilling's request that the site of his trial be changed, and that the prosecution's assertion that Skilling deprived Enron employees and investors of his "honest services" is, in the words of Time, a "bogus charge."

What does that "honest services" argument mean? Beats the heck out of me. Goodwyn does a much better job of explaining it that I ever could, so listen to his NPR report in its entirety.

The Supreme Court is expected to hear the case in early 2010.

The mere fact that the Supreme Court is hearing the case means there's a pretty good chance that Skilling will walk. I'm quoting here from The Houston Chronicle:

"The Supreme Court gets about 10,000 requests a year and typically picks fewer than 80 cases to hear, usually ones raising legal issues that might prompt the high court to overturn lower courts' rulings. It generally reverses 65 percent to 75 percent of the cases it hears, and that's what it did in the prior two Enron-related cases it heard."

So Enron sinks like a rock, takes with it the life savings of countless employees and investors, then forces lawmakers to rewrite accounting regulations, and Skilling is on the verge of going home. Is anyone besides me angry about all of this?

What do you think: Should Skilling's conviction be overturned?

Learn more about Sarbanes-Oxley-related issues at these MACPA programs:

• Feb. 10: Integrating the New Risk Assessment and Yellow Book Standards into the Audit Process
• April 27: Internal Controls Design, Evaluation and Communication for Not-for-Profits

New math: Risk management + strategy = strength

The corporate battlefield is littered with little risk bombs these days, isn't it? New regulation, data protection, network security, economic recovery ... it's a mine field out there, and every step brings considerable risk.

If you plan your route and know what to look for, though, mitigating that risk gets considerably easier.

That seems to be the message from the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. In a new report titled "Strengthening Enterprise Risk Management for Strategic Advantage," the panel says aligning risk management with strategy will strengthen an organization considerably.

“Management is often being asked to provide their boards with more information regarding key risk exposures,” said COSO Chairman David Landsittel. “The challenge facing management is designing and implementing an enterprise-wide approach to risk management that is both strategic and value-adding so that the board and senior management have a rich understanding of the organization’s top risk exposures."

The report focuses on four areas in which a company's senior management and board members can work together to mitigate risk:

• Discussing risk management philosophy and risk appetite.
• Understanding risk management practices.
• Reviewing portfolio risks in relation to risk appetite.
• Learning of the most significant risks and how to respond.

Align risk management with strategy? Doesn't exactly sound like rocket science, does it? Then again, an awful lot of companies have been taking part in an awful lot of risky behavior these days. Maybe the COSO paper is the perfect reminder at the perfect time.

Read the paper in its entirety, then check out these additional resources:

• Keep taking those risks ... but carefully
• Risk management: Do what's right and you won't go wrong
• MACPA virtual seminar, Nov. 18: Enterprise Risk Management in Personal Wealth Management
• MACPA virtual seminar, Dec. 2: Enterprise Risk Management in Innovation and Learning Initiatives
• MACPA virtual seminar, Dec. 16: Enterprise Risk Management in the Health Care Sector

Transparency, accountability, efficiency: Time for a revolution

"A little revolution now and then is a good thing." -- Thomas Jefferson 

Our profession has a rare opportunity to start a revolution that can help regain trust in our financial markets and government and unleash the power of the people. The seeds of that revolution can be seen in two unlikely places for CPAs -- Wired Magazine and The Huffington Post.

The revolution is about radical transparency, lower costs of government and business compliance, smart regulators, and an army of citizen regulators watching over the free markets and our governments (federal, state and local). The tools of that revolution are two of our favorite subjects here at CPA Success -- XBRL and the Enhanced Business Reporting Consortium, both started by the AICPA,

Dan Roth offers us a great starting place in his "Wired Manifesto":

Next, we can follow David Stephenson's advice and create smart regulation (is that an oxymoron?) using these same tools.

In his post, Recovery.gov: The First Step Toward Smart Regulation, W. David Stephenson sums it up like this: "If eventually adopted not just by Recovery.gov but agencies in general, such an approach could dramatically reduce companies' and local governments' reporting burdens; improve regulatory oversight by giving agencies simultaneous, real-time access to the same data; and, as a bonus, help improve organizations' efficiency."

This is not rocket science. It is already working and using a proven technology and methodology! I know because I had the opportunity to meet Harm Jan van Burg (thanks to my XBRL mentors, Eric E. Cohen and Mike Willis at PwC) from the Ministry of Finance in the Netherlands, who has created the model of this new form of "smart regulation."

Harm Jan led the Dutch Taxonomy Project, in which he helped save the Dutch government millions of euros and reduce the costs of compliance by businesses by $322 million annually. (For a country roughly three times the state of Maryland, that is not bad.) Australia estimates reduced costs of government burden of $800 million, New Zealand's estimate $55 million to $75 million. All of these are annual savings that recur year after year -- an annuity that benefits both government and the people.

There are examples at the FDIC, and even two states (Nevada and Oregon) have implemented XBRL into Standardized Business Reporting projects to create transparency, accountability, and efficiency.

(Pictured: Eric E. Cohen, Harm Jan van Burg, and yours truly at the Rutgers World Continuous Reporting/Assurance Conference, October 2008)

Diane Mueller, vice chair of XBRL International, talks about the opportunity in her post Free the Data: eGov and Open Standards, in a plea to President Obama's newly appointed CIO, Vivek Kundra, to use XBRL in his efforts to democratize federal government information. She writes:

"When President Obama appointed his new federal CIO, Vivek Kundra, last week, Kundra announced ambitious plans to "democratize" federal government data by making it accessible in open formats and in data feeds. His plan calls for the creation of a single point of access to all public federal information. The idea is to enable the data to be accessed by developers whose applications will open up federal data to the sunlight of millions of citizens by encouraging them to scrutinize how the Recovery Act’s dollars will be spent."

Vivek, if you are out there, please listen to Diane and the rest of us: What you are describing is XBRL.

Dennis Howlett over at the Accman blog says it well in his post recapping the latest developments in XBRL: "Whether Huffington Post can be regarded as a credible source for reporting on IT is another matter, but the fact the topic is entering the U.S. mainstream consciousness should be a wake up call to us all."

"The time to act is now," writes Dan Roth. "An exhaustive study by the Transparency Policy Project at Harvard University's John F. Kennedy School of Government — analyzing disclosure rules for everything from restaurant cleanliness to SUV rollover risk — found that there's a very brief window after any calamity for government to institute changes. (Wait too long and the special interests start regaining their confidence and pushing back.) In the financial world, the old order is still trying to find its new shape. So the window is, briefly, cracked. Caveat vendor."

But revolutions are not easy. Howlett offers this warning: "XBRL creates new opportunities but making the best of them requires new thinking. So far, the profession has shown itself to be occasionally opportunistic but not radical in the way it assists clients." I think it is time we get a little radical.

I encourage you to read the full article, "Road Map For Financial Recovery: Radical Transparency Now!" by Wired Magazine senior writer Daniel Roth and W. David Stephenson's post "Recovery.gov:The FIrst Step Toward Smart Regulation."

What do you think? Is it time for a revolution?

If so, I hope you will join us on June 16 at our Maryland Business and Accounting Expo, where we will continue this conversation with thought leaders from XBRL and EBRC. Who knows? Maybe it can be the start of the revolution.

Resources:

• XBRL and Public Sector Reporting Study, by the AGA
• Enhanced Business Reporting: It's Time has Come, featuring a podcast with EBRC founding member Bob Laux, CPA, of Microsoft and his presentation in Second Life (Bob will be speaking at the Expo)
• Lessons from the XBRL frontlines, a post featuring Maryland CPA Ken Kelly and his work at McCormick on XBRL (Ken will also be at the Expo)
• Virtual workshop examines reality of XBRL, featuring a presentation by Eric E. Cohen and Mike WIllis of PwC, who also will be at the Expo)

Is your CFO certified?

Bob Tarola has a point. 

Last week, I attended the AICPA Regional Council meeting with our Maryland delegation. Maryland is well represented with two AICPA board members (Carter Heim and Lisa Cines) and one at-large council member (Robert Tarola, pictured in the middle), plus our designated and elected representatives (Lou Satchell; Ed Rommel, pictured at left; Tami Bensky; Al DeLeon, pictured at right; and Kimberly Ellison-Taylor).

At that meeting, I had a chance to catch up with our volunteer leaders and we had a good discussion about a topic that is extremely relevant in light of the recent financial scandals and auditing issues. The question is: Why is the emphasis on corporate and accounting scandals always focused almost solely on the auditors? What about the preparers?

The point is that you cannot "audit in" the quality of financial reporting. There should be a renewed emphasis on the competency and qualifications of financial preparers -- CFOs, CAOs, controllers, etc. -- in addition to the focus on auditors. The people who are the first line of defense in understanding and reporting on the financial and economic affairs of the business have as much or more obligation to the public interest than the auditors that check on them ... or do they?

The SEC's new sign-offs required by Sarbanes-Oxley and the requirement that a financial expert serve on public company boards are a good first step, according to Tarola, but do they cover accounting expertise? And what about the public interest?

That was the subject of our conversation while in New York. It is also covered in Bob's whitepaper, CPAs Can Be the Backbone of the Financial Reporting System. Bob makes the point that having demonstrated accounting expertise and the responsibility to protect the public interest that accompanies a CPA license may be an idea that can add one more layer of protection in the financial reporting process. He should know; he has been on both sides of the financial reporting process, as an auditor and as a preparer. Bob is the retired CFO of W.R. Grace and former audit partner at PricewaterhouseCoopers.

I agree with Bob and want to emphasize two key points that having a CPA license adds:

1. It is based on a uniform national CPA exam that tests practical competencies in accounting and auditing.
2. It is a license issued by states with an additional obligation to protect the public interest. That is very different from other credentials that do not include the additonal responsibility of a state granting you the rights, privileges and obligations that go with licensure.

Wouldn't it be nice if either the chief accounting officer or the chief financial officer certifying financial statements to the SEC was a licensed CPA? This would add one more element of oversight and responsibility to the public interest to the financial reporting process. It also is not the first time this idea has surfaced.

Funny how I was re-reading the MACPA's 2002 Accounting Reform Task Force (of which Bob was a member) whitepaper as I was prepping for a presentation I am giving on corporate and accounting scandals to accounting students at Salisbury University later this week. In it, I found the same recommendations. Our blue ribbon task force had these as two of our major suggestions for restoring public trust in financial reporting :

1. Have the principal accounting officer and principal auditor in corporations be currently licensed CPAs where possible.
2. Include an outside CPA on the audit committee to provide financial accounting and auditing expertise.

Even Financial Executives International included this concept in its recommendations during the Enron-WorldCom scandals of 2002. In its paper titled, Improving Financial Management, Financial Reporting and Corporate Governance, the FEI made a recommendation that "the principal accounting officer should be a licensed public accountant or possess equivalent knowledge and experience, and should be current and knowledgeable in the understanding of GAAP and the SEC’s rules and regulations governing the preparation and audit of financial statements."

It reminds me of our ad, "Your doctor is certified. Your lawyer is certified. Shouldn't your accountant (CFO or CAO) be certified?"

• Read Bob Tarola's whitepaper and tell me what you think.
• See CPAs commit to protecting the public interest at the official swearing-in ceremony in Maryland.
• See Bob's interview during our CPA road show in which he talks about a career as a CPA.
• Read the MACPA's accounting reform white paper.

Audit warns of problems with IRS internal controls

File this under "Things That Make You Go Hmmmm."

More than six years ago, the federal government created the Sarbanes-Oxley Act and insisted that America's business executives vouch for the quality of their companies' internal controls.

Now comes word that at least one government agency could use some serious help in that area.

The Government Accountability Office has released a report that's critical of the financial oversight within the Internal Revenue Service. According to the GAO, the IRS did not "maintain effective internal control over financial reporting or compliance with laws and regulations, and thus did not provide reasonable assurance that losses, misstatements, and non-compliance with laws and regulations material in relation to the financial statements would be prevented or detected on a timely basis."

And there's more:

"IRS management faces serious challenges from its continued use of obsolete financial management systems that do not conform to the requirements of (the Federal Financial Management Improvement Act of 1996)," the report reads. "These challenges adversely affect IRS’s ability to fulfill its responsibilities as the nation’s tax collector because it is unable to routinely obtain comprehensive, timely, accurate, and useful information for day-to-day decision making.

"As IRS continues to progress toward ever more automated financial management processes," the report continues, "the presence of material weaknesses in controls over these systems, especially in the area of information security, could have serious implications for our future ability to determine whether IRS’s financial statements are fairly stated."

In all fairness, the GAO praised the IRS for making progress in tackling its financial management and internal control issues in recent years, and IRS Commissioner Douglas Shulman told CFO.com that the agency is "dedicated to promoting the highest standards of financial management."

But the problems persist and must be addressed, the report states.

Seriously, if government regulators are going to hold corporate America's feet to the fire, is it too much to ask that they practice what they preach?

Read the report in its entirety, then tell us your reaction.

Risk assessment: Old problem, new guidance

Assessing risk is as hard as ever, but help may be on the way.

A report from PricewaterhouseCoopers finds, among other things, that two-thirds of corporate board members surveyed believe today's boards don't have the tools and transparency necessary to properly assess risk.

The survey was completed at PwC's Financial Services Audit Committee Forum, where "the leading topic of discussion ... was the current market environment and what can be done to avoid future market turbulence," the firm reports. "More than 95 percent of the board members asked said they believe greater clarity is required as it relates to what is and what is not reported on an organization's balance sheet, and 77 percent said existing valuation tools are not robust enough."

Sounds like a call to arms for enhanced business reporting. Find out more about EBR here and decide for yourself.

Meanwhile, the Public Company Accounting Oversight Board is seeking public comment on seven newly proposed auditing standards that should help auditors better assess and respond to risk. The proposed standards center on the following areas:

• Audit risk in an audit of financial statements
• Audit planning and supervision
• Identifying and assessing risks of material misstatement
• The auditor's responses to the risks of material misstatement
• Evaluating audit results
• Consideration of materiality in planning and performing an audit
• Audit evidence

"The proposed standards," states the PCAOB, "would establish requirements and provide direction on audit procedures performed throughout the audit, from the initial planning stages through the evaluation of the audit results in forming the opinions in the auditor's report."

Read more about the proposed standards here, then tell us: Will they help? Could improved risk assessment help prevent future market volatility?

Enhanced business reporting: Its time has come

As Wall Street continues its wild roller coaster ride, we’re hearing one word more than any other coming out of the mouths of regulators and legislators -- “transparency.”

That's hardly a surprise. The need for transparent business information is greater than ever; some are saying a lack of transparency may be one of the root causes of this financial crisis.

Lesser known is the fact that a tool has been under development for years now that promotes transparency in financial reports and makes it easier for investors to make decisions about where to put their money.

That tool is enhanced business reporting, or EBR. An enhanced business report would include much more than just the bottom-line numbers. It would include key performance indicators like employee turnover and information about, for example, patent portfolios or research and development. It could change Wall Street’s focus on short-term earnings projections and offer insight into how companies are creating value over the long haul. Experts say the results could include greater investor loyalty and lower stock-price volatility -- and who couldn’t use a little more of that these days?

It’s been a while since we’ve heard much from the world of EBR, so I thought I’d check in with Bob Laux to find out what’s been going on. Laux is director of financial accounting and reporting for Microsoft and a member of the Enhanced Business Reporting Consortium. He’s been at the forefront of EBR from almost the very beginning, so let’s listen in as he gives us an update on the state of enhanced business reporting today in this MACPA podcast.

• Subscribe to our free weekly podcasts here, or open your copy of iTunes and search for "CPA Spotlight."

Would enhanced business reporting have helped thwart the financial crisis? Let us know what you think, then check out our other EBR resources.

Related CPE in Second Life
Laux will present "Increasing Transparency: Enhanced Business Reporting" at noon on Oct. 23. The free session, which will take a closer look at the benefits EBR offers to companies and investors alike, will be held virtually on CPA Island, the MACPA’s headquarters in the virtual world of Second Life. Get details and register here.

FIN 48 deadline extended for private companies

The Financial Accounting Standards Board isn't done tinkering with FIN 48 yet.

First came FASB's decision to exempt private companies from the disclosure requirements found in paragraphs 21(a) and 21(b) of the interpretation, a.k.a. "Accounting for Uncertainty in Income Taxes."

Now comes word that FASB will defer compliance with FIN 48 for all non-public entities until fiscal years beginning after Dec. 15, 2008. The deferral had previously been limited to pass-through entities alone.

"In the end, FASB decided that in light of a sagging economy —- that has currently bogged down many corporate finance departments —- and the lack of clear definitions and proper training, it would defer the application of FIN 48 for all private companies," writes CFO.com's Marie Leone.

It's the latest evidence that legislators and regulators listen when their publics speak. The MACPA has been among those taking the lead in seeking FIN 48 reforms on behalf of private companies, and it's great to know that reasoned arguments don't fall on deaf ears. Kudos, FASB.

Decision to go private examined in Second Life session

We often hear about companies and their dreams of going public, of snagging that big IPO and setting Wall Street on fire.

Less often publicized but equally important are the bids of some public companies to go private. What drives that decision? What are the most important factors to consider?

That was the centerpiece of the MACPA's latest "mixed-reality" CPE session in Second Life, a panel discussion titled "Going Private: Insight from a Management and Investor Perspective." Held live as part of a meeting of the San Francisco chapter of the Financial Executives Networking Group and attended by virtual attendees on CPA Island in Second Life, the event focused on the process, risks and rewards of going private.

And make no mistake: There are lots of reasons these days to consider going private. Costs of complying with the Sarbanes-Oxley Act and other regulations, so-called "soft costs" like the significant time spent on earnings calls and speaking to shareholders, and governance headaches often cause executives with public companies enough pain to make them rethink their position.

"The world has changed dramatically," said Ben Bisconti, managing director of Accel KKR Partners, a private equity firm. "The benefits of being public are more often in question, especially for smaller businesses."

Find out more about the session and download materials here.

More virtual CPE on deck
Equally imortant, though, was the format of the session. This was the third "mixed-reality" session the MACPA has held in Second Life, and with each session we come closer to proving that this is a convenient and accepted way of receiving continuing education.

And that leads us to our next Second Life session, "Increasing Transparency: Enhanced Business Reporting." Scheduled for noon on Oct. 23, the session will take a closer look at the benefits Enhanced Business Reporting offers to companies and investors alike. The featured speaker will be Bob Laux, director of financial accounting and reporting for Microsoft. You can get details and register here.

GAAP is dead ... long live GAAP?

The SEC says U.S. issuers could be using international financial reporting standards by 2014, but the convergence of IFRS with U.S. generally accepted accounting principles could be completed years earlier than that.

The Financial Accounting Standards Board and the International Accounting Standards Board have released a report in which they outline their goal of completing their convergence projects by 2011.

"I believe that delivering on that goal will bring significant improvement to both U.S. GAAP and IFRSs in areas that are important to investors," said FASB Chair Robert Herz. "We also will decide by the end of the year whether to modify the short-term convergence program to enable a sharpened focus on the major improvement efforts. This reflects our continued commitment to work together to develop a single set of high-quality international accounting standards."

But don't write off GAAP just yet. In "Vive le GAAP," CFO.com's Sarah Johnson says the U.S. accounting principles aren't going anywhere ... at least for the time being.

"The term 'generally accepted accounting principles' and the metrics and ratios it generates are embedded in many places outside of SEC regulations, including state rules, tax policies, and companies' own contracts with their employees and lenders," Johnson writes. She then quotes Amy Greer, a partner in Reed Smith LLP's securities and litigation enforcement group, as saying that "the largest of U.S. companies, which may be able to use IFRS for their SEC filings as early as next year, will still have to reconcile their financial results with GAAP as other areas of the U.S. financial reporting system play catch-up to the regulator."

Is GAAP history? Let us know what you think, then check out these other IFRS resources:

• MACPA IFRS resource center
• AICPA IFRS resources
• IFRS impact hits IT, education and beyond (from CPA Success)
• More insight into the SEC's IFRS roadmap (from CPA Success)
• IFRS: Implications for CPAs (an MACPA podcast)
• Everywhere you turn, it's IFRS (from CPA Success)
• IFRS: 'Let's get it done' (from CPA Success)
• More resources surface as IFRS gains traction (from CPA Success)
• Are You Ready for IFRS? Moving Beyond the Basics (an MACPA program)
• International vs. U.S. Accounting: What in the World is the Difference? (an MACPA program)