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SEC Financial Reporting Issues


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  • 1. SEC Financial Reporting Issues NARUC Subcommittee on Accounting and Finance Jackson Hole, Wyoming October 8, 2007
  • 2. John W. Albert Senior Associate Chief Accountant Office of the Chief Accountant
    • The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or speeches by any of its employees. The views express are those of the speaker and do not necessarily reflect the views of the Commission or of the speaker’s colleagues on the staff of the Commission.
  • 3. SEC Financial Reporting Issues
    • Internal Control Reporting
    • Audit Committees and Auditor Independence
    • Financial Reporting Complexity
    • International Activities
    • Stock Option Grant Backdating
    • XBRL Project
  • 4. Internal Control Reporting
    • Directed by Section 404 of Sarbanes-Oxley
    • Management Assessment of Effectiveness of Company’s System of Internal Controls over Financial Reporting as of Year End
    • Standards for Auditor Evaluation and Report on Internal Controls
    • 2005 and 2006 SEC Roundtables
    • Recommendations of SEC Advisory Committee on Smaller Public Companies
    • COSO Guidance for Small Companies
  • 5. Internal Control Reporting
    • Reporting Results – Year three filers
    • Extended Compliance Dates
    • SEC Interpretive Guidance to Management
    • Reduction of Auditors’ Reporting Responsibilities
    • PCAOB Revised Auditing Standards
      • Revised AS 2
      • Considering and Using Work of Others
  • 6. Internal Control Reporting
    • Key Attributes of SEC Guidance
      • Principles-based
      • Does not replace framework requirements
      • Focus on areas of highest risk of material misstatement to financial statements
      • Management flexibility to tailor evaluation process to specific facts and circumstances
      • Provides guidance on supporting the assessment
      • Provides framework for evaluating deficiencies
  • 7. Audit Committees Auditor Independence
    • Audit committee responsibility for oversight of the company’s independent auditors
    • SEC rules designed to ensure that auditors are independent of their audit clients
    • SEC publication highlights certain SEC rules and other pronouncements relevant to audit committee oversight responsibilities regarding independence
    • Topics covered include
      • Review of general independence standards
      • Guidance on communications between the audit committee and independent auditor
      • Guidance concerning changes in independent auditors
      • Guidance on consulting with SEC staff is accessible at
  • 8. Complexity in Financial Reporting
    • SEC Advisory Committee on Improvements in Financial Reporting (CIFiR)
    • Committee is chaired by Robert Pozen, Chairman of MFS Investments, and includes representatives of various constituents in the financial reporting community
    • Committee’s mission is to (1) study complexity in financial reporting and (2) make financial reporting more understandable to investors
    • Potential causes of complexity
      • Desire for certainty in interpretations
      • Carving out exceptions to principles
  • 9. Complexity in Financial Reporting
    • Areas to be studied
      • Current approach to setting accounting and reporting standards
      • Current approach to regulating compliance with accounting and reporting standards
      • Current system for delivering information to investors and accessing that information
      • Other environmental factors that drive unnecessary complexity and reduce transparency to investors
      • Balance between costs of and benefits from existing accounting and reporting standards and potential impact of increased use of international standards
  • 10. International Activities
    • FASB/IASB Commitment to developing high quality global standards for use in cross border securities offerings
    • Convergence efforts linked with U.S./foreign GAAP reconciliation requirements
    • Roadmap to convergence
    • Rules to allow first time IFRS adopters to present only two years of statements
    • SEC staff reviews of IFRS filings
    • March 2007 SEC Roundtable
  • 11. International Activities
    • Follow up to Roundtable
      • Rule proposal to eliminate the requirement for foreign private issuers filing statements using IFRS to also file a reconciliation of those statements to U.S. GAAP
      • Concept release published to solicit public comment on allowing U.S. issuers to file financial statements using IFRS
      • Comments on the rule proposal are due by September 24; comment deadline on the concept release is November 13
  • 12. Stock Option Grant Backdating
    • Chairman Cox’s Sept 2006 Senate testimony on options backdating
    • Not merely sloppy bookkeeping
    • SEC enforcement actions involving options backdating schemes
    • “ In-the-money” options disguised as being “at-the-money”
      • Measurement issues
      • Books & records issues
      • Internal control adequacy issues
      • Disclosure problems
      • Corporate governance issues
  • 13. Stock Option Grant Backdating
    • Chief Accountant’s Sept 2006 letter expressing SEC staff views regarding accounting for stock options
    • Accessible from SEC Web site at
    • Corporation Finance’s Dec 2006 letter regarding restated financial statements for errors in stock option grant accounting
    • Accessible from SEC Web site at
  • 14. XBRL Project
    • eXtensible Business Reporting Language being evaluated by the SEC and others as a format for reporting financial information
    • Potential benefits
      • Direct, real time access to data by users
      • Interactive, personalized analysis
      • Lower cost of more complete data
      • Efficient collection, preparation, analysis, and release of information by preparers
      • Direct communication channel with investors and other stakeholders
  • 15. XBRL Project
    • Ongoing voluntary program for registrants to participate in test group using XBRL
    • Inducement for voluntary participation is expedited review of filings
    • XBRL-enabled interactive Financial Report Reviewer available on SEC Web site
    • Development of certain industry-specific reporting taxonomies
    • Contract with XBRL US, Inc. toward the development of full suite of U.S. GAAP taxonomies
    • Sept 25 Announcement of completed data tagging for entire system of U.S. GAAP