December 21, 2006

A Few Corp Fin Items Before the Holidays

Yesterday, the SEC posted these items on its website:

– the proposing release regarding the 404 management report on internal controls

– a speech on “Materiality of Errors” by Todd Hardiman, a Corp Fin Associate Chief Accountant (along with this Corp Fin PowerPoint) delivered at last week’s AICPA National Conference

– an updated version of the “Current Accounting and Disclosure Issues” Outline prepared by Corp Fin’s Office of Chief Accountant

– a luncheon speech from Commissioner Annette Nazareth, given before the ABA’s Committee on Federal Regulation of Securities a few weeks ago

PCAOB Inspections: PwC’s Turn in the Barrel

The AAO Weblog does a good job describing PricewaterhouseCooper’s new PCAOB inspection report that was issued last week. Here is an excerpt from Jack Ciesielski’s blog:

“It found that the firm’s quality control was lacking in some audits: revenue and receivables at one audit client were inadequately tested, for one example. When the auditors repaired their audit, they increased the confirmations of accounts receivable by a factor of ten. On other engagements, the firm had failed to test impairment charges, various aspects of inventory and fair values of investments. PwC acknowledged the deficient audits and remedied them.

One could look at the report – and the one issued on Deloitte & Touche last week as well – and get the idea that the Big Four are out of control. And certainly, it’s bound to be spun that way in the press.

No apologies here for their mistakes – they don’t even sound like they’re failures involving extremely vexing issues. But it’s not an unfair question to ask all involved: what do you expect a regulator like the PCAOB to do? How can you expect them to inspect the Big Four each year and NOT find something? After all, their existence has to be justified as well – and if there are tens of thousands of audit engagements occurring each year, they’re not all going to be pristine. One would believe there’s plenty of meat for the PCAOB to chew if it wants to find it.

The fact that there’s a PCAOB inspection lurking in the bowels of each Big Four firm each year probably raises the quality of each employee’s work over what it would be in the absence of an inspection machine. But just because the PCAOB doesn’t bring one member of the Big Four to its knees each year doesn’t mean it’s not doing its job, either. Hopefully, if one of the Big Four goes off the rails into a swamp of total audit sleaze, the PCAOB mechanism is there to get them back onto the rails. Because it hasn’t happened yet, investors should be glad.”

Options Backdating Study: “Lucky” Directors Reap Benefits Too

Check out Harvard Law School’s new “Corporate Governance Blog” – and not to just read about the latest option backing study that has been in the media this week, co-authored by Professors Lucian Bebchuk, Yaniv Grinsten and Urs Peyer. The new study – entitled “Lucky Directors” – focuses on 800 seemingly backdated options at 460 companies involving 1400 independent directors. The key findings of the study are that, out of all director grants during 1996-2005, 9% fell on days with a stock price equal to a monthly low – and 3.8% of these grants were “super-lucky,” taking place at the lowest stock price of a quarter.

Maybe this is why IBM announced it will eliminate option grants to directors yesterday? I tend to doubt it as aligning shareholders’ interests with directors’ interests still makes sense…

Personal note: The holiday miracle at work: “Rocky Balboa” gets two thumbs up! I’m not kidding, the critics are liking this movie – a pretty good indicator about how bad movies were this year overall. Happy Festivus to you and yours!