November 19, 2007

Broad Auditing Overhaul to be Considered By Treasury’s Committee

This “Auditing Profession Discussion Outline” from the Treasury Department’s Advisory Committee on the Auditing Profession (co-chaired by Arthur Levitt and Donald Nicolaisen) is an eye-opening list of topics that the Committee expects to take up, obtain comment and issue a report on next summer. Among other broad topics, the Committee will consider: how to improve the quality of audits; whether auditors should be provided caps on their legal liability; whether auditors should be able to organize in structures that would seek private or public capital; governance and transparency of the firms; independence rules; how to attract more students into accounting as opposed to seeing them go into other professions; the dwindling supply of college professors; and how to improve the competitiveness among the small and large firms. The Committee seeks input for its outline, with comments due by November 30th.

Meanwhile, the SEC’s Advisory Committee on Improvements to Financial Reporting continues to plug along, holding its latest meeting a few weeks ago. The SEC has posted a host of reports from various subcommittees (scroll down to November 2nd meeting). There are some pretty interesting ideas being kicked around – particularly those in this report on restatements.

Restatements: Timing and Disclosure Issues

Speaking of restatements, a recent study from the Huron Consulting Group found:

– average filing time between initial filing of a Form 8-K and restated financial statements was 7 weeks (and the median was 3 weeks)

– One out of every 6 restatements analyzed was filed within one day of a Form 8-K being filed (while one-third of the restatements were filed within two weeks of the initial Form 8-K filing)

– 20% of the companies reviewed took more than 4 months to complete the process (typically missing at least one timely filing of a Form 10-K or Form 10-Q)

– 4 out of 5 restatements are filed within 4 months of the initial filing of the Form 8-K announcing the existence of a material error

– Most prevalent accounting issues were: Equity and Debt; Capitalization and Expense of Assets; Reserves/Accruals/Contingencies; Revenue Recognition; and Taxes

– Neither company size nor industry appeared to be significant factors in the length of the restatement process

– 19% of Form 8-K filings announcing the existence of a material error reported fewer accounting issues than were ultimately included in the restated financial statements.

In our “Restatements” Practice Area, we have posted a copy of the Huron Consulting Group study – as well as a recent PCAOB working paper regarding changes in market responses to restatements.

SEC’s Concept Release: Disclosure of Business Activities in Terrorist Countries

On Friday, the SEC issued a concept release regarding how the public should access disclosures about material business activities in the five countries on the State Department’s list of State Sponsors of Terrorism. This is a follow-up to the SEC’s discontinued practice of listing companies that disclosed certain matters relating to the countries (the concept release explains the filters that the Staff had used before – long story).

Given the topic, we might see more comments than one would think – even though this potential rulemaking only impacts how the SEC would list information filed through Edgar and not require companies to do anything differently than they already do. Personally, I think the reputational stakes are too high if a mistake is made by the SEC and a company is inadvertantly placed on this type of a list. Let the media and others do Edgar searches to create their own list…

– Broc Romanek