FEI.

ISSUES/ADVOCACY

CFRI 2000

The Current Financial Reporting Issues (CFRI) Conference, held Nov. 6-7 in New York, with over 500 attending, was kicked off with the announcement of FEI's name change and new logo -- fitting changes at a meeting that echoed with news and comments about international accounting standards and attempts to harmonize global financial reporting. Some highlights of the two-day event follow.

In a short and informal opening keynote speech, Frank Zarb, chairman of the National Association of Securities Dealers (NASD) and chairman and CEO of Nasdaq, infused a sense of history into an overview of the financial markets and the changes sweeping over them. Zarb, a former official in several Republican administrations and CEO of Smith Barney, recalled when he started on Wall Street -- in the days before fixed commissions -- trading amounted to "rich guys selling stock and bonds to other rich guys." Now, markets have been democratized, are global and around-the-clock.

Information technology has transformed the trading of securities in enormous ways, Zarb said, with Nasdaq at the forefront of those changes. Time and again, Zarb reiterated two realities: markets move quickly and are hungry for information. "The market will get what it wants, when it wants it and without you," he told the FET audience. Even today, he said, Nasdaq and other leading exchanges could be disintermediated by new entities that give investors better information,

Integrity of information is critical, Zarb said. "Tomorrow's markets will link global pools of liquidity with integrity." He argued that international regulators need to work harder at harmonizing standards and enforcement and noted that little is done outside the U.S. on issues like insider trading. "Integrity is integrity -- you know it when you see it," Zarb said.

* In the conference's first general session on the financial implications of new business trends, Thomas Pizzutti, director of strategic finance at Internet incubator CMGI, argued that investors are now demanding that Internet companies speed up their life cycles -- that they demonstrate more quickly that they can have cash flows, can be valued and can indeed be profitable. Pizzutti added that goodwill issues are "enormous" for Internet companies, noting that goodwill is frequently amortized over very short periods, often as little as three years.

* Mary Pat McCarthy, vice chair for information, communications and entertainment at KPMG, said that from the auditing perspective, there has been more change in the past year than any of the past 23 she has been in the accounting arena. Audit clients want more for less, she noted, adding that auditors must turn increasingly to technology to deliver more customized services -- even, perhaps, "real-time" audits.

In fact, McCarthy sees auditors increasingly becoming technologists, using tools like data mining, artificial intelligence and predictive modeling. Audits will become business process-oriented, she believes, which will help clients manage risk and leverage knowledge. Industry specialization, too, will become more important, with the days of auditors jumping from industry to industry disappearing.

* Edmund L. Jenkins, chairman of the FASB, contended that today's economy is "fundamentally different" from that of a generation ago, and that traditional reporting "doesn't capture the value drivers." Today, there is an emphasis on value creation, as opposed to value realization, a more backward-looking measure. Intangibles are more important than ever, he said, and new accounting standards may be needed to reflect them. Cash flow reporting will continue to grow in prominence, Jenkins said, adding that the FASB is beginning to think about broad-based performance reporting. Today's delivery system for financial reporting is outdated, he argued, and a more accessible electronic format is needed.

* A second general session, an update on various accounting projects, was kicked off with a comprehensive overview of current FASB projects by Timothy S. Lucas, chairman of the Emerging Issues Task Force and director of research and technical activities for the FASB. Lucas summarized FASB actions since 1997, reassuring the audience that nothing on the technical agenda is new since then.

On the business combinations/ pooling of interests issue, Lucas reiterated that the FASB began re-deliberations last March and is continuing to explore related goodwill issues, as well as a non-amortization approach that would include an asset impairment test. Currently, he said, the board has targeted a release date of March 31, 2001 for the new rule -- and at any rate, it would become effective in the first half of the year.

In what he called "coming attractions" -- issues that the FASB may take on -- Lucas discussed areas such as recognition of liabilities and revenues, intangible assets and the New Economy, and performance reporting. International standardization of accounting issues is "a wild card," he said, and could affect the FASB at any time.

* Mark Sever, chairman of the Accounting Standards Executive Committee (AcSEC) for the AICPA and a partner with Ernst & Young, noted that the committee is currently reviewing projects involving real estate, lending and insurance, and a financial institutions guide. He added that guidance on cost capitalization relating to "PPE" -- property, plant and equipment -- is being expanded at the request of the SEC. A key and controversial component of that, he said, is component depreciation, the concept that different components of PPE depreciate at different rates.

* In a spirited luncheon talk, Thomas Stewart, a member of the Board of Editors at Fortune magazine, argued that intellectual capital and knowledge work are simply not being adequately measured and stated in today's financial statements. Stewart, who has developed an expertise in the intellectual capital area, challenged the audience to do a better job of reflecting such intangibles. "The stuff you're providing is not providing the markets with the information they want," he said in a direct challenge to the audience of financial executives.

Market capitalization and book value correlations continue to diverge, he noted, with technology companies with lower book values shooting to the top of the market cap rankings. Knowledge has become a defining difference, and as it is reflected in a company's content and asset base, the capital markets reward that company with greater value. But Stewart doesn't believe that the SEC and FASB should throw everything out. "There are some important babies in that bathwater," he said.

Jeffrey Marshall

Day Two

* In the second-day general session, a panel addressed the issue of international accounting standards in an increasingly global economy. A particularly hot topic was the set of 30 core international accounting standards (IAS) developed last May by the International Accounting Standards Committee (IASC) and designed to help alleviate current problems in comparability and disclosure among the domestic GAAP of countries around the world. The European Commission has recently proposed adopting the IAS for use in all European companies by 2005.

While the SEC currently requires foreign companies using IAS to reconcile to U.S. GAAP, the SEC will move to accept the IAS for foreign filings in the U.S. by modifying the reconciliation requirements, predicts Mary B. Tokar, a KPMG partner, former senior associate chief accountant at the SEC and chair of the International Organization of Securities Commissions' (IOSCO) Working Party on Multinational Disclosures and Accounting. "I don't think that the Commission would have gone this far with both the IASC and the IOSCO resolution if it concluded that further progress wasn't possible," she said.

* FASB Chairman Jenkins, speaking about the ongoing role of the FASB in developing the LAS, urged the business community to be actively involved in the process. Failure to do so, he said, could result in companies losing "the ability you now have with the FASB to fully participate in the establishment of financial reporting standards that will directly affect your own reporting and your access to capital markets." Jenkins also observed that the IASC restructuring that took place last year "provides a foundation that we lacked at the IASC until now for the development of global financial reporting standards in an independent and objective manner with a full and open due process."

* Trevor Harris, director of equity research at Morgan Stanley Dean Witter, implied that a substantial amount of capital is being raised in the U.S. by foreign companies on the basis of financial information that does not meet the standards imposed by the SEC or U.S. GAAP, giving foreign entrants an unfair advantage in raising funds in the U.S. Specifically, he pointed to companies trading under so-called Level 1 American Depositary Receipts (ADRs), which do not have to comply with U.S. GAAP or provide full SEC disclosure.

Harris argued that widespread adoption of the IAS abroad should begin to alleviate this problem, in that they harmonize financial reporting and allay U.S. investment community concerns.

* In another second-day general session, three of the SEC's senior accounting staff outlined the major accounting and disclosure issues that the Commission plans to focus on during the next year. The development and implementation of international accounting standards remain a hot issue to the European Commission (EC), IOSCO and the IASC. On the other hand, domestic concerns likely to dominate the SEC's agenda over the next year include those related to auditor independence, fair disclosure, FASB Statement No. 133, accounting for pooling of interests and combinations, fraud and IPOs.

On the international front, a ruling on the acceptance of the IAS for use on U.S. securities exchanges is expected early in the new year, although a general consensus has yet to emerge on the substance of that ruling. Robert Bayless, chief accountant of the SEC's Division of Corporation Finance, said that suggestions have ranged from immediate acceptance of the IAS to no consideration of acceptance "without full reconciliation to U.S. GAAP."

The panel noted that the auditor independence ruling is a top issue, having generated more than 3,000 comment letters. Bayless said the letters, and alternate rules proposed by PricewaterhouseCoopers, are being carefully considered. [Editor's note: the SEC approved a modified final rule on Nov. 15, 2000.]

Referring specifically to FASB Statement No. 133, Bayless cautioned the audience to make sure that all their derivatives were documented up front. "To the extent that it is not done at the beginning of the period that the derivative is outstanding for, it's not going to be treated as a hedge," he said.

--Ramona Dzinkowski

FEL PARTNERS

Newest Strategic Partner: KPMG

KPMG LLP has become the newest FEI Strategic Partner, bringing the total number to 12. The global accounting and consulting firm joins others in the Big Five that work with FEI, providing members with access to new information, technology products and services that help them manage their objectives more efficiently.

"KPMG plans and participates in many great events (chapter meetings, conferences, teleconferences, etc.), and we really appreciate all the work we have already done together," says FEI Chief Executive Philip Livingston. "Senior Partner/Professional Practice Mike Conway and I regularly meet to share the views of FEI and KPMG on emerging policy and accounting standard issues. Mike's support, and that of Karen Schimf and Lisa Lowman, has been terrific."

PEOPLE

Several new people have joined the FEI staff, and one employee has been promoted. They include:

* Yesha Callahan has joined as membership associate and will be working in membership operations with principal responsibility for the AMS directory.

* Brenda Newkirk has been promoted to manager, Strategic Partners program. She has been working with the program since November 1998, having joined FEI in December 1996 as an administrative assistant in career services.

* Patrick Postiglione has joined as a data entry specialist and will be working in membership operations.

* Mario Rico has joined the marketing communications department as manager, membership marketing, with responsibility for all new member recruiting efforts.

* Tracy Santella has joined the Conference Department and will assist in conference and event management, reporting to Director of Conferences Bill McGrath.

* Max Zhang (pronounced Chong) has joined as senior programmer responsible for much of the custom programming currently being outsourced.