Tag: pcaob

E & Y Calls for More Regulation (More Cost)

In a speech at the Commonwealth Club in San Francisco recently, EY CEO James Turley called for more regulation of audit firms.  His premise that audit quality has improved as a result of SOX and the PCAOB while ‘possibly’ accurate (and I’m not conceding that) is irrelevant.  Foremost I don’t believe that quality has improved for quality firms.   I can’t speak for EY.  Perhaps they are better for it.  The SEC and the  PCAOB for all intents and purposes  initially  adopted the accounting and internal control standards that were already promulgated by the profession.  Adding another layer of regulation sufficed only in adding additional cost to public companies.  And now Mr. Turley wants to expand that further.  Why?

Since my introduction to the profession in the 1970’s when we were attacked by Michigan Democratic Congressman John Dingell, we have fought for self regulation.  Obviously the SEC Practice Section of the AICPA (the forerunner to the Center for Audit Quality CAQ) failed miserably and here we are.  Based on his leadership, it appears the CAQ is on the same course.   One of the defining characteristics of any  profession is self regulation.  So we apparently have failed as a profession if you are to subscribe to Mr. Turley’s pleading or does he have another motive?

Economists define this propensity of larger firms ‘getting cozy’ with regulators in order to drive up costs and limit competition from smaller firms as ‘regulatory capture’.  Banks, drug companies, airlines – accounting firms?  Bigger isn’t better, but it certainly seems to be more expensive.

From my days as a young corporate bank officer for a mid-sized California bank in the early 1970’s, I recall having regulatory audits by Federal regulators, the State of California examiners, and the Federal Depositors Insurance Corporation (FDIC).  We also had our own internal audit department as did every other bank.  And as every other bank has had since then.  Total regulation.  It’s obviously worked well Mr. Turley.  In my professional lifetime a list of the most heavily regulated industries would include banks, airlines, railroads,  banks, banks, banks.   More regulation.  Yeah!  That’s the answer.

More recently we have two great examples of failures by  federal regulation in Madoff and Stanford.  I challenge you to name one economy with more regulation than we have had in the US that has been more successful.  Ever.  I can list dozens that failed with more regulation.

I disagree vehemently with Jim Turley.  Additional regulation if warranted should come from inside the profession – specifically the CAQ which Mr. Turley happens to be the sitting Chair of.  Do the job you signed on for with the CAQ Mr Turley.   That he wants to abdicate that responsibility is incredibly disturbing.  That he proposes to add additonal layers of cost – cost that he and his firm will derive revenue  directly from- is unconscionable.

SFAS 157 – How 'Fair is Fair' Value?

No matter if you believe that “fair value” drives unnecessary market instability or that it provides enhanced transparency of financial information, the question remains unchanged.

No matter if you believe that “fair value” drives unnecessary market instability or that it provides enhanced transparency of financial information, the question remains unchanged. What is a supportable fair market value that reflects an orderly transaction between two or more willing market participants?

The SEC’s recently issued “Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting” concludes, amongst other things, that “..additional measures should be taken to improve the application and practice related to existing fair value requirements – particularly as they relate to both Level 2 and Level 3 estimates”. In the report, the SEC’s Committee on Improvements to Financial Reporting (CIFiR) further recommended the SEC issue a statement of policy articulating how it evaluates the reasonableness of accounting judgments and include factors that it considers when making this evaluation, as well as that the PCAOB should also adopt a similar approach with respect to auditing judgments.

In light of these conclusions, and unlikely forthcoming judgment “guidance” for valuing financial instruments with primarily Level 2 and 3 inputs, it is important to gather all pertinent information and variables potentially used in building a valuation model. There are several keys to doing this including:

  • Monitor your investments and those similar throughout the reporting period, not just at the reporting date.
  • Stay in touch with general economic indicators.
  • Consider your true plans of instrument liquidation and whether the Company has the ability to wait out the market.
  • Get your non-accounting finance and analyst types involved as they are generally more comfortable with assumptions and judgment than most accounting types.
  • Provide your assumption documentation to your auditor as soon as possible – it is generally not difficult to audit the fair value model itself, however, getting reasonable documentation related to assumptions is where the time is spent, particularly when there is a difference in opinion as to what constitutes reasonable.
  • Try to keep it simple concise and as straightforward as possible. Tying certain assumptions to the lining up of the planets will likely not pass your auditor’s smell test.

By the way, the SEC’s Report concluded that the fair value accounting standards did not cause the bank failures of 2008.