Financial Reporting: Focus on the IASB. (Conferences).

FEI's annual Current Financial Reporting Issues conference kicked off Monday, Nov. 12, at New York's Waldorf-Astoria Hotel with a keynote address by former Federal Reserve Board Chairman Paul Volcker. Now head of the International Accounting Standards Committee, he confessed to being something of a neophyte in the accounting world, and said he's "impressed by the difficulty of the issues" involved in trying to devise a single set of global accounting standards. "The world of auditing and accounting appears to be in crisis," driven in part by issues such as intangibles, the complexity of derivatives and trading and financial engineering, he added.

Volcker conceded that it will be difficult to achieve consensus on the 14-member International Accounting Standards Board (IASB), appointed by the IASC. Countries are at different stages of development, and it's unclear where the final authority for the standards would rest, especially if political entities get involved. He added that disagreement could arise over two competing philosophies -- the U.S. approach of setting standards in detail and the "European idea" of setting out clear standards but leaving detail to practice and emerging issues.

Volcker took a relatively hard line on the controversial issue of options accounting, saying it's a difficult subject that won't be settled quickly. While there may be different expectations about the urgency of the issue, he said, it can't dominate the board's agenda.

A panel session featured Thomas Jones, the IASB vice chairman; Edmund Jenkins, chairman of the Financial Accounting Standards Board (FASB); and John Morrissey, deputy chief accountant at the U.S. Securities and Exchange Commission.

Jones, the former Citicorp finance chief, said that for international standards to work, there has to be a "three-legged stool" with standards, audit and enforcement. He supports the European model of creating less-detailed standards, then "going after those who deviate" from them.

Jones called options accounting a volatile issue whose outcome isn't clear. Europeans are already writing standards on options, he said, and urged the U.S. not to create "a frenzy" or become inflexible. "This is a board that won't take to being bullied," he said of the IASB, and cautioned advocates of the U.S. system not to withdraw support of the IASB over this issue.

Jenkins emphasized the FASB's "unequivocal support" for the idea of high-quality global standards, noting that the groundwork has been laid for some time and that now's the time for "heavy lifting." The FASB is already working with eight national standards-setters, he said, but "won't shortcut any processes in the search for convergence."

Jenkins argued that principle-based standards can be "problematic," and that financial engineering is often the result of attempts to avoid detailed standards.

Timothy Lucas, the FASB's director of research and technical activities, provided an update on the recent statements and projects being pursued by the FASB and the Emerging Issues Task Force (EITF). FAS 141 through 144, the major statements issued this year, are relatively significant, Lucas said. The biggest changes, the decisions in Business Combinations to eliminate the pooling-of-interests method of accounting for mergers and to test goodwill for impairment, were major improvements, he argued. Pooling, he said, was "non-accounting," tended to create wrong-headed incentives and involved complex criteria. Moreover, he said, the previous treatment for goodwill impairment was not operational, and goodwill amortization was not meaningful.

Projects in the FASB pipeline include: a "purchase method" project, the first in concert with the IASB; and a "new basis/fresh start" effort, which will likely be led by the IASB.

The FASB also plans a project on reporting financial performance, though Lucas said he saw little relationship between the project and the controversy over pro forma statements.

Day 2

The session "Update on SEC Developments" was moderated by Roger W. Trupin, vice president and controller, Citigroup.

Robert Herdman, the newly appointed chief accountant in the SEC's Office of the Chief Accountant, discussed some current priorities. "Everything we do at the SEC is geared towards protecting the interests of investors," he said. He said that improving the U.S. financial reporting system -- already the best in the world -- is a top priority of Chairman Harvey Pitt's. The basic framework of the system that came into being some 70 years ago is pretty much unchanged, except for adding MD&A, he explained. "It can use a good dose of simplifying." Herdman believes strongly in leveraging technology as "a good enabler to disseminate information and knowledge."

Herdman listed some financial reporting and accounting "hot button" issues: events of Sept. 11; MD&A for disclosures; recession-related disclosures about uncertainties; FAS 141 and 142 implementation issues; and revenue recognition (overstatements). He said he's pleased that the IASB added revenue recognition to its agenda, and would like the FASB to do the same.

Charles D. Niemeier, chief accountant in the SEC's Division of Enforcement, said his department has been very busy, with 260 financial fraud investigations underway. The division is receiving more information than ever before, often stemming from disgruntled employees. The "big story," he said, is the size of the companies under scrutiny: there are more Fortune 500 companies than five years ago. It's also significant that Big 5 accounting firms are auditors for three-quarters of the companies being investigated.

Fraud investigations are underway in non-U.S. operations and are delving into issues related to companies' quarterly reports - not just annual reports. He expressed a general concern with the quality of audits.

"No company is immune from financial fraud," said Niemeier, and "good people get caught. It can happen to anyone and any company." Companies get in trouble for a variety of reasons, including: top-side adjustments for which there is insufficient support, extreme pressure to make targets without adequate controls, doing acquisitions to make revenue projections, and more.

To avoid trouble, Niemeier advised, "Don't start -- one thing leads to another. When in doubt, disclose and communicate -- early and often." Basically, he said, "Investors want to know operating results of a company -- is it trending up or down?" He also said that audit committees can be helpful, and that the management letter provides protection -- it's a document to memorialize what was said and done.