The House recently approved a measure aimed at creating jobs and easing the regulatory burden on smaller businesses.   A major component of this bill exempts small and mid size businesses initiating public offerings from some key provisions of Sarbanes Oxley.  As drafted, prospective issuers with less than $1 billion in revenue and $700 million in publicly traded stock would no longer be subject to external audits of their internal controls (among other things).   As I have noted in prior blogs, there has been tension between the conflicting goals of protecting investors and shielding business from excessive regulation.  While the above measure still needs to pass the Senate and be signed by the President, it is a strong indication that the latter goal is gaining traction. I do believe this is a good trend but also urge caution in moving too far. There continue to be major “blows” in financial reporting, such as those recently announced by Diamond Foods.  Moreover, outright fraud can be perpetrated by public companies.  The recent story of Puda Coal (a Chinese company which gained access to the US securities markets via a “reverse merger”) is an excellent case in point.  In this saga, the executives of this company effectively stripped the company of all operating assets, leaving shareholders with a shell company. 

As a prison boss famously said to Paul Newman's character in Cool Hand Luke, "What we got here is... failure to communicate." Well, the PCAOB did not consider AU 380, it's standard on auditors' communications with audit committees, to be a failure of Cool Hand Luke proportions - but they have decided some improvements were in order. In late December 2011 the PCAOB reproposed AU 380 based on response to comments received through a comment letter process and a public roundtable. The reproposed standard is intended to improve current requirements regarding auditor communications by linking these to the related performance requirements in other auditing standards; it does not otherwise impose new performance requirements other than communications. The new proposed standard and related amendments are anticipated to be effective, subject to SEC approval, for audits of fiscal years beginning on or after December 15, 2012. Comments on this reproposal are due by February 29. Click here for access to the reproposed standard and supplemental materials.

A BDO USA survey has indicated that investment bankers are increasing their due diligence related to Chinese based offerings due to Chinese accounting scandals in recent years. Expanded efforts have been reported when reviewing internal controls over financial reporting and corporate governance structure. The survey also found that nearly half of those investment bankers surveyed predict a decrease in the number of Chinese based offerings in 2012 on U.S. exchanges. To read the full article and survey results on accountingtoday.com, follow the link listed below.   http://www.accountingtoday.com/news/Chinese-Accounting-Scandals-Dampen-IPO-Market-61428-1.html

In a letter to the SEC dated November 15, 2011, the Financial Accounting Foundation (FAF) announced that it supports the incorporation of IFRS into U.S. GAAP “as the appropriate path forward for the continued development of high-quality, investor-focused, international financial reporting standards.” FAF is the independent, private-sector organization with responsibility for the oversight, administration, and finances of the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB and their Advisory Councils. FAF expressed its support for an incorporation approach that “advances improvements to U.S. GAAP and furthers the comparability and consistency of high-quality, investor-focused financial reporting standards throughout the globe.” Toward that end, it has recommended a number of modifications to the SEC’s proposed approach to IFRS incorporation. The proposed FAF approach is based on the premise that, over time, international standards will become the foundation of U.S. GAAP. Significantly, FAF believes that its proposed approach complements the SEC’s primary responsibility of facilitating investor protection in the U.S. capital markets, and that it reinforces the SEC’s goal of setting standards that provide necessary financial information to investors in our capital markets.

In a plus for corporate governance advocates and a rare positive emerging from the current economic climate, the financial crisis appears to have driven home the need for boards to manage risk more effectively. This conclusion is based on the findings of a survey of board members of public companies with revenues ranging to $750M that was released this month by our alliance partner BDO. As the responsibility of boards has grown in recent years due to regulatory requirements, board risk management activities have been focused heavily on compliance. Now, facing increased risks as a result of the financial crisis, it appears that boards are more willing to take a proactive role in risk management. In the survey, when asked what topics they would like to spend more time on, a majority (55%) of board members at public companies cite risk management, more than any other area. Moreover, an even greater percentage (61%) believe their liability risk as a director has increased during the past few years. Interestingly, the study shows that the CEO position is considered by board members to be the most helpful position for assessing and managing risk (44%), with the CFO following at 33%. 

Audit committees provide a variety of benefits to nonprofits. An audit committee can implement an enhanced internal control structure, deter fraud, improve financial practices, advance financial reporting, and help nonprofits meet their accountability goals. [More]

Financial Accounting Standards Board (FASB) has identified several factors that indicate major differences in the financial reporting needs of public companies versus private companies or governmental entities. This is an initial assessment that comes from comments over two years from dozens of interested stakeholders gathered by the Board. From these differences, FASB will be able to establish a “differential framework” that will be used in determining if different financial standards will be created to apply to private companies. The framework will be used by the Board to decide when and how to modify specific U.S. GAAP accounting standards for private company use. “This work is an important step forward in the FASB’s effort to develop a set of criteria for evaluating when accounting or disclosure standards should be different for private companies,” said FASB Chairman Leslie F. Seidman. “This process demon­strates our commitment to better serving the needs of without sacrificing the quality and fundamental level of comparabil­ity that are the touchstones of the U.S. accounting system and U.S. capital markets.” The significant differences include: the types of users, access to management, investment strategies, ownership structures, accounting resources and education. What’s next? FASB will continue to solicit input from those using, preparing and auditing financial statements of public companies. In addition, the board will expose a draft of the proposed differential framework for industry feedback.

eXtensible Business Reporting Language (XBRL) has been adopted as the new technology standard to web-enable the financial reporting process. XBRL is intended to provide benefits to both the auditing profession and to shareholders and other users of corporate financial data. Instead of treating financial information as a block of text, XBRL employs a computer-readable tag to identify specific items of data. This process enables access to and exchange of corporate financial and business data in an “intelligent” manner, with the goal of enhancing corporate governance by making the information more meaningful and transparent. SEC-reporting companies are in a phase-in period of the interactive data requirements, with the ongoing introduction of detailed tagging of notes to the financial statements and the phase-out of the limited liability provisions.  The Division of Risk, Strategy, and Financial Innovation recently completed a review of XBRL documents submitted during the first two months of 2011 and has published its observations on those filings.  The SEC is encouraging companies to take these observations into account as they prepare future filings. Overall, the SEC believes that filers “continue to devote significant effort to consider their responsibilities under this program, comply with the new rules and provide high-quality submissions.”

Effective June 15th, the SEC will initiate the third phase of the Commission’s XBRL implementation program. The implementation should be viewed as a means of creating better transparency for investors, allowing them to access financial information in an analyzable format. [More]