July 31, 2006

PCAOB Issues Guidance for Auditors on Option Backdating Issues

On Friday, the PCAOB issued an alert regarding stock options grants entitled “Matters Relating to Timing and Accounting for Options Grants.” In the alert, the PCAOB advises auditors that backdating practices may have implications for audits and internal control reviews – and discusses factors that may be relevant to assess related risks.

Essentially, the PCAOB says that auditors should inquire about option grant timing at their clients to make sure that there are no misdating issues. Auditors are supposed to make these inquiries routinely as part of their year-end audit as well as whenever a prior audit is included in a registration statement. Not really a big surprise given that many auditors already have adjusted their procedures within the past few months to cover themselves going forward.

As the WSJ noted in this Saturday article, this guidance could unleash a wave of restatements. The article also notes that the PCAOB identified “springloading” as a potential problem – counter to SEC Commissioner Atkins’ recent speech on the topic.

As an aside, note that this is Audit Practice Alert #1 from the PCAOB – a new type of guidance for them (intended to “highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws”). The PCAOB still has a long way to go to catch up with the SEC and its dozens of guidance avenues…

Director Liability and Responsibilities: After Disney

We have posted a copy of our transcript for the webcast: “Director Liability and Responsibilities: After Disney.”

A Funny Thing Happened On The Way To Convergence

From the “AAO Weblog“: “The driver of the convergence bus decided to put it into neutral for a while. The International Accounting Standards Board released a bombshell yesterday that’s gone pretty much unnoticed in the US press. (Though the Financial Times picked it up.) The IASB is declaring a moratorium on the effective date of any new International Financial Reporting Standards (IFRS) or major modifications of existing standards until after January 1, 2009.

The only other mention I could find in the world press was this from the Irish Examiner, who said the “Institute of Chartered Accountants in Ireland (ICAI) has welcomed the announcement by the International Accounting Standards Board (IASB) that it will suspend the introduction of new accounting standards until 2009.” That’s not what the IASB said: they said there’d be no new standards effective until 2009. They didn’t say they wouldn’t issue new standards until 2009. Keep your hopes in check, guys.

The idea behind the moratorium: give folks in the European Unionsome time to catch their breath. The transition to IFRS has been difficult in many countries, and this will give them a chance to evaluate their situations in less of a panic mode. Furthermore, the IASB will slow down some of its work with the FASB on a joint conceptual framework project.

And some of the comments of Sir David Tweedie in the Financial Times article, indicate the delay might also calm down some constituents “inflamed” by a February announcement of the IASB and the FASB to speed up “writing joint standards in 11 areas by 2008 and to examine existing standards in 10 other areas.”

It’s not a bad idea, and in fact it synchronizes well with the SEC’s own convergence plans. (Recall that there’s currently a requirement for a foreign company to reconcile the accounting used in its financial statements to US GAAP-based accounting. By 2009, the SEC wants to eliminate that requirement if IASB standards are used by a foreign company – provided the Commission is satisfied with the IASB standards in place by that time.)

The danger is that, rather than use the time to get on board with the IASB standards, companies will use the time to try and exploit politics to further avoid the standards or roll them back. And delays might become a serial habit, with or without political interference. Keep tuned. (For the next few years.)”