FASB: A new era of liberation and perhaps even reformation

The article FASB: Subjugation, liberation, reformation, consternation and incorporation by Paul Miller and Paul Bahnson is a look at not only the history of the Financial Accounting Standards Board, but also where the authors think it should go.

They feel that FASB subjugated itself by penning an agreement in 2002 to make existing standards fully compatible with the International Financial Reporting Standards (IFRS).  Over the last 10 years, both boards have felt the strain of trying to meet the original agreement.

According to Miller and Bahnson, the FASB has now been liberated because it's become obvious that the SEC can not set the IASB as the standard-setting body under the Sarbanes-Oxley Act.  This also frees them to do what they need to do without worry because their funding is assured and they are backed by the SEC, “the baddest big brother of them all”.

Now, in their opinion, is the time for reformation.  It is time for FASB to bring GAAP into the 21^st century by updating financial reporting standards and making them more relevant.

They believe the following should be FASB’s to-do list:

·         Reporting Frequency – Dates back to the 1930’s for the stock exchange and the 1960’s for all other companies.  In today’s fast-paced world, why are we still running on 1930’s time?

·         Inventory – Managerial decision-making for LIFO or FIFO dates back to 1946.  Time to fix the weak stance on the matter.

·         Depreciation – Systematic Depreciation dates back to the 1830’s.  No more dodging the question ‘How do we assess market value?’

·         Leases – Accounting for leases hasn’t change since the 1970’s, and it’s time to create a new standard that doesn’t allow for bogus leases to create false financial information.

·         Stockholder Equity – Should be limited to common stock only.  Prefered stock, employee stock options and other derivatives should be listed as liabilities.

·         Pensions – Pension obligations are debt.  Pension funds are investments.  They should be listed separately on the balance sheet.

·         Cash Flows – We’ve been using the indirect method of reporting operational cash flows since 1987.  Isn’t it time to start using what users wanted in the first place?

·         Income Taxes – Is GAAP income tax reporting even useful?  Perhaps it’s time to try the flowthrough method.

·         Investments – Repeat after me: Fair Value.

As for consternation, Miller and Bahnson believe that making these necessary changes will create consternation for managers and auditors alike, but that shouldn’t stop FASB. 

To be truthful, I chose this article because of the name.  However, it will be interesting to see where FASB goes now that they have stepped away from the IASB and have decided they will not be incorporating IFRS.

Auditor Rotation Takes a Front Seat

In the article, Hot Topic, Cool Talk (Mostly), the author, Michael Cohn, discusses a recent public inquiry by the Public Company Accounting Oversight Board (PCAOB) into audit firm rotation.  The obvious cause for the discussion is the memorable audit failures in recent history, WorldCom and Enron.

Has the auditing industry lost focus in the name of acquiring long-term contracts?  Can they keep perspective with clients they have had for a century?  Or do these long-term clients create an industry blind-spot?

The PCAOB asked the auditing community its impressions of a regular schedule for audit firm rotation, drilling to what many consider the heart of the matter, long-term clients.  In response the auditing industry felt that audit firm rotation would be a costly, unnecessary and possibly an impossible task given the concentration of audit firms.

The corporate community felt similarly, quoting as much as 20% increases to costs if they were forced to move from auditing firm to auditing firm.  Highly specialized industries, such as utilities, also lamented the possible loss of “auditor knowledge”.

The U.S. Chamber of Commerce also weighed in on the issue, accusing the PCAOB of “mission creep” and requested the board withdraw its concept release for auditor rotation.  The Chamber feels the board is moving beyond its mission of audit regulation and into regulating corporations.

Not everyone were nay-sayers, however. John Biggs, former CEO of TIAA-CREF, said the insurance provider rotates its audit firms every few years and that industry projections of 20% cost increases are more likely closer to 2%.

As one of the marginally informed, but fully aware of the costly implications of auditor complacency, I’m all for auditor rotation.  I personally feel it would help to keep everyone honest and focused.  However, I haven’t forgotten the lesson I learned while researching international financial standards.  This article barely scratches the surface of auditor rotation, and it would be negligent of me to base my opinion of the topic solely on the ideas expressed therein and the bad press of Enron and WorldCom.

I do intend to keep myself abreast of this topic as the weeks and months progress towards legislation, and along with myself, you, my dedicated reader.

Reference:

"Hot topic, cool talk (mostly); Strong opinions rise to surface at PCAOB discussion on auditor rotation." Accounting Today 26.5 (2012): 1. Academic OneFile. Web. 7 May 2012.

Modern Auditors: Have you got what it takes?

Throughout the years auditing has changed.  According to one of the interviewees in the article The New Breed of Auditor by Bill Carlino, auditing was far simpler thirty years ago than it is today.  In that era of auditing, "you found out what an asset cost and figured out how to get the income statement properly matched with revenue.”  They also used historical cost instead of fair value. 

So what does the current auditor require to do his job?    Not the worksheets and checklist of yesteryear.  Modern auditors need to be familiar with the International Financial Reporting Standard.  In today’s global market even smaller companies participate in foreign markets.  They are also expected to use technology to enhance their auditing with paperless auditing software. 

But what Mr. Carlino seemed to find in his article is beyond the technology and stricter regulations; there are new ideologies as well.  Today’s auditors' greatest tools are critical thinking and the ability to communicate.  They need to be able to think independently and think fluidly on their feet.  They need to understand data analytics.  They also need specialization of knowledge by industry.

Obviously the field of auditing is not for the weak of heart.  It is a field that is now under public, governmental and agency scrutiny.  Progressing into the future, it is easy to see that regulations are going to continue to get stricter and the auditor’s role will become more and more difficult as it has become more and more important.  At one point I had considered doing auditing, but this one little article makes it sound a bit more difficult than I’d originally thought.  Hopefully an auditing class will help me decide if it is something I should try outside academia.

References:

"The new breed of auditors; A&A used to mean checklists and workpapers, but not anymore." Accounting Today 26.5 (2012): 20. Academic OneFile. Web. 7 May 2012.