A member of the International Accounting Standards Board, James Leisenring, told attendees at the Standard & Poor’s Accounting Hot Topics conference in New York on December 10, 2009, about possible abuses and accounting arbitrage that may result from IASB’s recently issued standard for recognizing and measuring financial instruments. In his remarks, he acknowledged that political pressures had forced the board to publish the standard. In his remarks, Leisenring presented serious reservations about company adoptions of the new standard, IFRS 9, which is the first of a three-part effort to replace the IAS 39 standard on financial instruments. (For an EU perspective, refer to the article by Peter Williams.)
1. Who are the political powers that Leisenring contends were pressuring the IASB? Do you think this happens with FASB processes? Explain.
2. Look at the article by Carver (in particular, the sixth & seventh paragraphs). Leisenring is critical of the â€œlook-throughâ€ method of accounting for products like collateralized debt obligations. What are collateralized debt obligations and tranches?
3. Where do collateralized debt obligations appear on the financial statements under U.S. GAAP?
Carver, Laurie (2010). â€œAbuse of Revised IFRS Standards â€œInevitableâ€ â€“ IASBâ€™s Leisenring,â€ Risk.net. (Retrievable online at http://www.risk.net/life-and-pensions/news/1567708/abuse-revised-ifrs-standards-inevitable-iasb-s-leisenring)
Cohn, M. (2009). â€œIASBâ€™s Leisenring: Pay No Attention to IFRS 9,â€ WebCPA (Retrievable online at http://www.webcpa.com/news/IASB-Leisenring-Pay-No-Attention-IFRS-9-52702-1.html)
Williams, Peter. (2009). â€œAccounting: IFRS 9 and What It Means For Year-End Reporting,â€ Computeractive (Retrievable online at http://www.computeractive.co.uk/financial-director/comment/2255297/shock-value)
The Sarbanes-Oxley Act of 2002 increased audit committeesâ€™ responsibilities and authority, and raised the bar on the independence of members. As a result, the SEC and the stock exchanges also proposed new regulations and rules to strengthen audit committees. A recent report by the KPMG Audit Committee Institute presents New Yearâ€™s guidance for audit committees and their upcoming 2010 agendas.
1. One of the points presented in the article is that audit committees need to monitor managementâ€™s assumptions underlying critical accounting estimates. Pension funding is included as one of these priorities. What are some of the estimates that impact pension funding?
2. In the articleâ€™s focus on financial communication, audit committees are urged to understand the companyâ€™s policy on the use of Twitter and other social media networks to reach investors. How could these networks impact earnings guidance?
3. In particular, the report urges audit committees to engage early on in reviewing 2010 proxy disclosures. What are contained within proxy disclosures?
WebCPA Staff. (2010). “KPMG Lists Top 10 Priorities for Audit Committees,” WebCPA (Retrievable online at http://www.webcpa.com/news/KPMG-Lists-Top-10-Priorities-Audit-Committees-52937-1.html)
More companies are cutting eliminating the acceptance of check payments from their business plans. According to Karen Aho, Whole Foods Markets, Fresh & Easy, and Banana Republic (a brand of Gap, Inc.) are just a few of the companies that refuse checks as payment from customers. According to the Federal Reserve, paying by check has declined by 6.4% since 2003. Financial services consultant, like James Neckopulos, believe that checks will be a thing of the past in 10 years.
- The article talks about how â€œpaper costs money.â€ What are these costs associated with taking checks and where would they be accounted for on the financial statements?
- Are there any costs associated with accepting credit card payments from customers? If so, how are these recorded in journal entries?
- While some companies cite faster check-out lanes as an advantage of no-check policies, what are the financial advantages of accepting only cash, credit cards, or debit cards? What are some of the disadvantages in terms of customer relations?
- Are payments by check reported separately on financial statements? If not, then where?
Aho, K. (2009). Still Use Checks? Join the Dinosaurs. MSN.Money (Retrievable online at
On December 9, 2009, Wal-Mart disclosed that it had settled a long-running wage and hour dispute in Massachusetts for $40 million. According to the Boston Globe, this was the largest wage and hour settlement in the state of Massachusetts. Interestingly, it was just a year ago at the end of 2008 that Wal-Mart reported that it had paid $640 million to settle similar wage and hour violations in 63 federal and state lawsuits.
- For SEC and investor purposes, what documents does Wal-Mart release that presents information about the violations?
- What are some of the possible wage and hour violations that a company could commit?
- How do you think that settlements are recorded in the companyâ€™s accounting records?
- The article also mentions disclosure of a Philadelphia lawsuit, where a judge ordered Wal-Mart to pay $188 million for a wage and hour violation. Since the case is currently under appeal, should the company accrue the litigation judgment? Explain your answer.
Leder, Michelle. (2009). Wal-Mart Settles Wage and Hour Claims for $40 Million. Footnoted.org (Retrievable online at http://www.footnoted.org/buried-treasure/wal-mart-settles-wage-and-hour-claims-for-40-million/)
Every year, Michelle Leder at www.footnoted.org, takes a look at the worst footnote disclosures that companies try to bury in their routine SEC filings. As her website states, the financial footnotes are important for all users, including professional money managers and analysts, accountants, and individual investors. According to her article, there are a lot of candidates for this distinction, so it is hard to whittle it down to just five.
- Take a look at Michelleâ€™s entrants in the BNET.com article. Then, after 12/31/09, go to her website (www.footnoted.org) to see who won reader-nominated honor of having the worst disclosure. Do you agree? Why or why not?
- What is a retention payment?
- How should the retention payment for Martha Stewart be recorded in journal entry (or entries) form?
- What is a gross-up?
- How should a gross-up for Ross Perot Jr. be recorded in journal entry form by the company granting this concession? (For a hint, see http://www.footnoted.org/buried-treasure/perot-gets-a-gross-up/)
Ritholtz, B. (2009). 2009â€™s Worst Disclosures Buried in Footnotes, BNET.com, December 21 (Retrievable online at http://www.ritholtz.com/blog/2009/12/2009s-worst-footnote-filings-with-the-sec/)
Leder, Michelle. (2009). Voting now open for worst footnote of 2009! Footnoted.org (Retrievable online at http://www.footnoted.org/)
During the week of December 7, 2009, Japan’s Financial Services Agency (FSA) announced that it is moving to the formal adoption of International Accounting Standard (IAS) reporting by 2015. Up until now, the FSA has allowed Japanese companies to file consolidated statements using U.S. GAAP, but in 2015 this may end. The agency will make a final determination about whether to make IAS reporting mandatory in 2012.
- Based on this article, what are the major differences between U.S. or Japanese GAAP and IAS?
- Approximately what percentage of current firms on the Tokyo Stock Exchange may be affected by this decision for the future?
- What are the four major reasons cited by Japanese companies that are considering early adoption of IAS?
Whitten, D. (2009). Shifting the Goalposts: Japan to Adopt New Accounting Rules. iStockAnalyst (Retrievable online at http://www.istockanalyst.com).
In September 2009, Merck & Co. Inc. announced that they will be the largest drug company to publish details of payments to doctors. The prescription drug industry has met with growing criticism about its lack of disclosure regarding payments that may influence drug prescribing. As the second-largest U.S. drug company, the company vowed to begin publishing regular details in the fourth quarter of 2009.
- Based on the dollar amounts listed in the article, why arenâ€™t these listing currently part of GAAP accounting disclosures to the financial statements?
- What financial statement(s) would contain these payments?
- How do you think these payments are classified (i.e., what account title)?
Jack, A. (2009). Merck to Publish GP Payments. FT.com (Retrievable online at http://www.ft.com/cms/s/0/3f2d7e48-a8a3-11de-9242-00144feabdc0.html?ftcamp=rss&nclick_check=1)
Home Solutions of America, Inc., a hurricane restoration company, is charged by the SEC with recording millions of dollars in bogus revenues and issuing misinformation to fraudulently inflate its stock price. The scheme was compounded by transactions that occurred between Home Solutions and Fireline Restoration Inc., its largest subsidiary. All of this alleged activity happened after Hurricane Katrina and other weather-related disasters.
- Explain the expense-deferral scheme that Home Solutions used to commit fraud and why it violates GAAP.
- Explain the related-party violations that are alleged.
- From 2004 to 2007, this multi-million dollar fraud continued at the direction of various Home Solutions and Fireline executives. How does the magnitude and timeline of this fraud compare with the average fraud mentioned in the Association for Certified Fraud Examiners Report to the Nation? (Hint: Go to www.acfe.com)
- Speculate on what factors and/or lack of controls allowed for the perpetration of this fraud.
WebCPA Staff. (2009). Hurricane Company Charged in Katrina Accounting Fraud. WebCPA (Retrievable online at http://www.webcpa.com/news/Hurricane-Company-Charged-Katrina-Accounting-Fraud-52563-1.html)
The SEC revised its disclosure guidelines for executive pay in late 2006. Since that time the regulator has been sending out letters to violator companies with insufficient disclosures, but has seen little compliance. Now the commission indicates that reviews will be tighter and thereâ€™s no room for a â€œMister Nice Guyâ€ approach. In fact, its deputy director, Shelley Parratt, threatened (in a recent speech) that companies who wait until receiving staff letters faulting material noncompliance with disclosure guidelines will face the arduous task of amending filings.
- According to the article, what is it that the companies are not providing the SEC in these disclosures?
- According to the article, what are some of the other kinds of disclosures that the SEC is thinking about for the coming year?
- Explain the relationship between the proxy statement and the CD&A, including the type of information contained within each.
Johnson, S. (2009). â€œNo More Lenience on Pay Disclosure: SEC,â€ CFO (Retrievable online at: http://www.cfo.com/article.cfm/14454811/c_2984410/?f=archives)
According to a new study from the research firm, Audit Analytics, smaller companies that have not had auditors review their internal-control reports are more likely to have restatements than larger companies, despite their claims of effective controls. This is bad news for those small publicly traded companies who have argued that they should be exempt from this auditor-attestation requirement of the Sarbanes-Oxley Act.
- Is a restatement the same as an error change resulting from a change in accounting principle?
- Which Section of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting?
- While the largest of U.S. publicly traded companies are in their fifth year of complying with auditor assessments of internal controls, what is the deadline for these smaller â€œnonacceleratedâ€ filers?
- What size are these firms (those that were given extra time to design, implement, and document controls prior to auditor attestation of their effectiveness)?
Johnson, S. (2009). â€œDoes Sarbox Reduce Restatements?â€ CFO (Retrievable online at http://www.cfo.com/article.cfm/14459533)