Industry Itself Joins Government in Policing Members

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ACCOUNTING AFTER ANDERSEN

Industry Itself Joins Government in Policing Members

By CONOR DOUGHERTY

Staff Reporter

As government and industry regulators draft new rules and regulations for the accounting profession, the business itself already has moved to tighten some of its practices.

Trouble is, accounting will always be subjective.

“The real problem isn’t the rules, it’s having the integrity to observe those rules,” said Dwight Call, a professor of accounting at California State University, Northridge. “The big problem in the accounting profession is what we allowed to happen in the accounting profession. We weren’t conforming or being true to our own rules.”

Recent passage of the Sarbanes-Oxley Act, which addresses practices ranging from corporate governance to how loans to executives must be treated, is the first in what is expected to be a raft of new oversight initiatives.

Among them: a measure aiming to tighten reporting requirements for off-balance sheet assets is being reviewed by the Financial Accounting Standards Board and likely will be incorporated into Generally Accepted Accounting Principles within months.

Other issues, including whether to book stock options as expenses, remain contentious, though some have started expensing them in advance of expected regulation.

Some accountants believe voluntary actions, rather than new mandates, will have the greatest effect in curbing questionable behavior.

Eric Sussman, associate professor at UCLA’s Anderson School points to special purpose entities, or off balance sheet transactions, as an example of market-driven adjustments.

These entities were largely responsible for the fall of Enron Corp., and have become synonymous with corporate deception.

“If I’m on Wall Street right now, off balance sheet are words no CFO wants to hear,” said Sussman.

Still, the FASB is drafting a new rule that would consolidate certain special purpose entities onto a company’s balance sheet.

The rules can be as complicated as the transactions themselves, but the goal is to improve financial reporting.

For instance, it long has been standard practice to consolidate “special purpose entities” in which the parent company has a majority interest. This rule has been sidestepped in the past, most often by getting a third party to put up capital for the SPE (as little as three percent in some cases), effectively allowing companies to take subsidiaries off their balance sheet.

Under GAAP, this practice was permitted so long as the third party retained a majority of the voting power in the subsidiary.

Though new rules are still being drafted, they likely will require the third party to make a larger capital contribution to the partnership and generally make it harder for companies to move subsidiaries and debt off the books.

“It would put more stuff on the balance sheet that isn’t there now,” said Sussman.

One of the most debated issues has been the use of stock options, and whether companies should be required to expense them. On Capitol Hill, tech firms have lobbied hard to keep options off their expense reports, arguing that since it is difficult to determine an option’s true value there is no point in expensing them at all.

But more than 100 publicly traded companies, including local firm Dole Food Co. and Public Storage Inc., have begun expensing options, according to data compiled by Dow Jones Newswires.

Under a proposal being considered by the FASB, companies could choose one of three ways to expense stock options.

The one likely to have the greatest impact on earnings per share calls for companies to restate all statements back to 1995, incorporating the effect of a stock option expense.

The other two allow companies to expense stock options granted since the beginning of the year in which the company decided to begin expensing. One plan calls for the grandfathering of options from previous years; in the other companies would expense all unvested options.

Marc Abrams, a partner and head of the public company practice at Singer Lewak Greenbaum & Goldstein in Los Angeles, thinks options will soon be counted as an expense. “Since a lot of companies have adopted it already, there is a lot of pressure on presentation,” he said. “(FASB) wants to get everybody on the same playing field.”

Some believe Sarbanes-Oxley will have the most profound affect on accounting.

One of the major points is the responsibility the act puts on a company’s audit committee. Under the new law audit committees are now responsible for hiring the outside auditor, and the auditors will now report to the committee instead of management.

New Regulations

Sarbanes-Oxley Act

– Each member of an audit committee must be an independent member of the board.

– Audit committee is now responsible for hiring a company’s independent auditor and for overseeing the auditor.

– Members of the audit committee may not be paid for anything other than serving on the board.

Special Purpose Entities

The Financial Accounting Standards Board is reviewing a proposal that would tighten the reporting requirements for special purpose entities or off-balance sheet transactions.

– Companies will likely be required to make a larger capital contribution to special partnerships set up off the books.

– The primary beneficiary of a special partnership would be required to include the assets, liabilities and results of the subsidiaries’ financial results in its financial statements.

– Existing SPE’s not meeting new criteria would not be grandfathered.

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