Today's accounting standards: how can anyone keep up?

As I write this, the first "season" of Sarbanes-Oxley Section 404 reports for accelerated filers with December year-ends has just ended. The early reviews of the disclosures of material weaknesses (which were reported by about 6 percent of filers) have estimated that about 30 percent of the material weaknesses relate to personnel issues. This includes poor segregation of duties, as well as a lack of sufficient personnel with appropriate qualifications.

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At first blush, this appears to me to be a staggering statistic. However, as I contemplate the proliferation of extraordinarily complex financial accounting standards over the past few years, this should not be surprising. Who can possibly have appropriate qualifications to comprehend and implement standards such as FAS 133 and FIN 46?

Prior to Sarbanes-Oxley, companies had to rely on the expertise of a handful of technical accounting gurus at their audit firm's national office to help understand the implementation issues associated with these new standards. Now, if a company does not have a technical expert on staff to understand every intricacy of pension accounting (FAS 106), income tax accounting (FAS 109), derivatives (FAS 133) and FIN 46 (variable-interest entities), they have a material weakness. Not to mention having the capability on staff to recite the 180 different pieces of literature associated with revenue recognition.

AICPA Studies Differential Accounting

At the same time that the Section 404 reports were being issued by public companies, the American Institute of Certified Public Accountants (AICPA)'s task force on private companies issued the results of its study on differential accounting standards. The institute surveyed 3,709 users, auditors and preparers, asking about the relevance and usefulness of 12 particular areas of financial reporting, including pension accounting and stock compensation. Not surprisingly, the study determined that much of this was not useful. As a result, the AICPA came to the conclusion that current U.S. GAAP (generally accepted accounting principles) is not necessarily useful for private companies.

FEI's Committee on Corporate Reporting (CCR), which consists of public company controllers, recently issued a letter to the International Accounting Standards Board (IASB) in response to its consultation paper, Review of the Constitution, Proposals for Change. The committee notes that the IAS Committee foundation constitution describes one of the principle objectives as being "... to develop, in the public interest, a single set of high-quality, understandable and enforceable global accounting standards that require high-quality, transparent and comparable financial information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions."

Outside Assistance Often Needed

The CCR letter goes on to note that "... recent standard-setting activity has not always produced standards that are understandable. To the contrary, the complexity and technical demands of standards have increased considerably in recent years. Over the last 10 years, the demands on technical competence have steadily increased to the point where many otherwise-capable accountants are not confident that they can apply the requirements of new standards without outside assistance from subject-matter experts.

"This is happening at a time when, in the U.S. reporting environment, there is a heightened sensitivity and attention to accounting and financial reporting, with the widely held expectation that enactment of the Sarbanes-Oxley Act of 2002 will ensure that accountants and their auditors get the right answers 100 percent of the time."

It is clear that all companies are increasingly having difficulty keeping up with the complexity and technical demands of accounting standards. Therefore, it should have come as no surprise that about 30 percent of material weaknesses disclosed indicate that current staff don't have the capability to keep up!