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December 10, 2008

Corp Fin Releases Updated Accounting Manual

Yesterday, the Staff of Corp Fin’s Office of Chief Accountant posted an updated version of the Accounting Disclosure Rules and Practices Manual, now renamed the Financial Reporting Manual. The Manual was last updated in 2000, so this has been a monumental effort on the part of the Staff. Even though the Manual is posted on the SEC’s website, it still bears that legend “For Division of Corporation Finance Staff Use Only” and includes a disclaimer about its informal nature as guidance.

Those who follow the Q&A Forum know that I have cited to the Manual often, because it has always been a great resource for understanding Staff positions on filing and financial statement matters. It might be a good idea to keep your old copy of the Staff Manual, because the new manual does not cover all of the same topics as the old one.

What is Your Auditor Thinking About This Year?

The current economic environment will not only influence disclosure decisions for your upcoming 10-K (as we discussed in the September-October 2008 issue of The Corporate Counsel), it will also influence auditors and how they look at companies during 2008 financial statement audits. If you want to get into the mind of your auditor for the upcoming audit season, check out the PCAOB’s recent Staff Audit Practice Alert on Audit Considerations In the Current Economic Environment. The Alert does a nice job of highlighting the most significant accounting and auditing issues that companies are now facing in light of the recession and the credit crisis, including:

- Overall audit considerations
- Auditing fair value measurements
- Auditing accounting estimates
- Auditing the adequacy of disclosures
- Auditor’s consideration of a company’s ability to continue as a going concern
- Additional audit considerations for selected reporting areas

The Audit Practice Alert points out that in planning and performing the audit, auditors need to be particularly sensitive to fraud risk considerations, which may include increased pressure to meet targets or other expectations of third parties, and even the extent to which the personal financial situations of members of management or the board are threatened by their companies’ performance. This may be an area that will receive more focus this year as compared to recent audits in periods of an economic upswing.

Auditors may also be paying more attention to disclosures this year, particularly the discussion in MD&A of liquidity, capital resources, results of operations, off-balance sheet arrangements and contractual obligations. The Staff Practice Alert notes that auditors need to read this and other information in the report and consider whether the information, or the manner of its presentation, is materially consistent with information, or the manner of presentation of information, appearing in the financial statements.

Inspection Retrospective

While on the topic of the PCAOB, it is hard to believe that the Board has been around so long that it is already putting out its “greatest hits.” Last week, the PCAOB published its Report on the PCAOB’s 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms. This report summarizes the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years (i.e., the biggest firms).

The press release announcing the report notes:

“The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management’s estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.

The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements.”

Last month, the PCAOB proposed its 2009 budget, seeking a modest increase in spending with a budget of $157.6 million, compared to a budget of $144.6 million for 2008.

- Dave Lynn