April 27, 2007

SEC Announces Next Steps Towards International Financial Reporting Standards

On Tuesday, the SEC announced the “next steps” it will take along its path towards the “IFRS Roadmap.” The next steps include a concept release that will pose questions about whether US based companies should be permitted a choice between filing in IFRS or US GAAP – as well as a rule proposal to give non-US companies that choice. Both are expected this summer – with comments due in the fall – as the SEC towards its goal to eliminate reconcilation by 2009.

In addition, the SEC recently announced a protocol for implementing the Work Plan between the SEC and the Committee of European Securities Regulators to share information on application of IFRS by issuers listed in the UK and the US. Things here are moving along towards some an end game that is a huge development…

US Senate: Attempt to Railroad Section 404 Reform Fails

On Wednesday, the US Senate voted, 62-35, to table an amendment of the COMPETE Act offered by Sens. DeMint (R-SC) and Martinez (R-FL) that would have impacted Section 404 of Sarbanes-Oxley. The Compete Act – S. 761 – is a bill addressing math and science education and US competitiveness in that area. The DeMint amendment would have made Section 404 compliance optional for companies with: market cap of less than $700 million, or revenue of less than $125 million, or fewer than 1500 shareholders. If this threshold ever became law, it would exempt 70% of the public companies out there from internal controls reporting.

As a counter to the DeMint amendment, Sens. Dodd (D-CT), Shelby (R-AL)
and Reed (D-RI) offered a “Sense of the Senate,” which is a symbolic Senate statement expressing support for efforts already under way by the SEC and PCAOB to fine-tune Section 404. This symbolic statement received a vote of 97-0 in support.

SEC Commissioner Atkins Rants on Excessive Regulation

Earlier this week, SEC Commissioner Paul Atkins delivered this speech entitled “Is Excessive Regulation and Litigation Eroding U.S. Financial Competitiveness?” Not atypical for those that have closely followed Commissioner Atkins over the years.

Here is an excerpt from Jack Ciesielski’s “AAO Weblog” pertaining to the Commissioner’s attack on the Staff’s interpretive process:

“Commissioner Atkins argues that Staff Accounting Bulletins (SABs) are subject to review under the Administrative Procedure Act – something that would dramatically impede the SEC’s ability to widely disseminate their positions on application of accounting problems they’ve observed in practice. SABs are the result of observations by SEC reviewers and the Office of the Chief Accountant; sometimes they deal with new standards (see SAB 107); sometimes they deal with problems observed in practice over many years (see SAB 108). They are always the result of observed reporting issues, and they are issued in order to keep all registrants on the same page, accounting-wise. They’re not loved by companies, because they can force them to change things. Putting them into an Administrative Procedure Act would slow down their issuance even further. Atkins’ take:

‘I have no opposition to our staff’s attempting to explain or apply an SEC rule or accounting standard to a current situation. Staff guidance can provide very helpful advice to all participants in the capital markets. Such guidance can be issued faster and is particularly appropriate to situations with a unique set of facts and circumstances.

But sometimes staff pronouncements can fundamentally change existing market practices. For example, Staff Accounting Bulletin No. 101 (SAB 101) addressed in depth various aspects of revenue recognition. The final guidance required registrants to reflect the adoption of SAB 101 as a change in accounting principle, similar to the adoption of a new FASB standard. With all of the attributes of rulemaking from the perspective of affecting the marketplace, it is difficult to argue that such pronouncements are not rules and should not be subject to the requirements of the Administrative Procedure Act.’

SAB 101 was nothing new: it was a compendium of revenue recognition issues pulled from existing accounting literature, and a description of the SEC’s take on various misapplications of them. Not all companies had to “change accounting principles” to comply with it, and those that did, probably weren’t employing the proper principles in the first place. Sounds like another front is being opened in the battle to tamp down fair reporting to shareholders.”

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