Compliance Blog

FASB Chief Not Pleased About Proposed IFRS Changes

2009-06-04T10:43:00.007-04:00

Financial Accounting Standards Board (FASB) Chief David Herz, has expressed displeasure about the proposed changes to IAS 39 Financial Instruments. A big concern to US standard setters is that US accounting standards are not subject to political pressure. Herz believes that recent proposed changes to IAS 39 are yielding to political pressures to make bank financial states appear more positive.

An article published by Reuters discusses these points.

Excerpts are here:

"The U.S. body said it won't be shoehorned into change.
"We desire to get to a common good answer with the IASB and we will make best efforts to do so, but some of the directions we are currently headed in are not to the liking of our board," FASB chairman, Bob Herz, told a meeting of the Financial Crisis Advisory Group."

Does not look good for a new version of IAS 39 for this year. Maybe cooler heads will prevail on this topic. We will see how it shakes out.

But let's face it, many people wonder why the IASB cares so much about what the US thinks on IFRS when the current US administration has shown no interest in the IFRS Roadmap. They seem to have enforcement on their minds not convergence on accounting standards. The current administration has shown more of a leaning toward protectionism in its latest budgets and policies. So it would not be surprising to see little interest in trying to become more involved in world standards instead of a US centric view.

US companies would find IFRS less costly to utilize on an ongoing basis and less oriented towards rules and more principles based.

If your company is moving to IFRS and needs a cost effective solution, and wants to do it in a sensible and cost effective way, contact http://www.ifrspartner.com/ for more information on IFRS Partner® for companies beginning their conversion efforts. To find out more about events demonstrating these solutions, see http://ifrspartner.com/pages/events.htm

SOX 404 Delays Caused Increased Fraud in Smaller Public Companies

2009-02-06T12:04:00.005-05:00

My experience as a Certified Internal Auditor and working with clients on SOX 404 and the Canadian equivalent NI 52-109 over the past six years, has made me a firm believer that fraud exists in most companies. It is just a matter of how big the fraud, how pervasive and whether it will be detected. A study that was released just today from the firm Lord & Benoit supports this conclusion.

An excerpt is here:

"Lord & Benoit, a Sarbanes-Oxley (SOX) research and consulting firm, just released The Tipping Point: Collision of Relaxed Regulation, Small Business and the Economy, a White Paper snapshot of the current economic, ethical and political environment for small business SOX compliance in the new Obama Administration. The Tipping Point provides a sobering post-mortem case study of a small, high technology public company that, according to a well-informed financial insider, "could have been saved if it had been complying with Section 404." The company, which received millions of dollars in investor capital during years of SOX deadline extensions, filed for bankruptcy and left a painful trail of financial destruction among investors, employees and suppliers."

The other interesting point the article makes is that fraud tends to increase in times of economic decline, for a lot of reasons. The new SEC Chair Susan Shapiro is a believer in the increased regulations of public companies and intends to push through SOX 404b this year. Makes sense since the original regulations were enacted in 2002. With all of the delays, many companies have not been taking the regulations seriously.

When I hear ( and I do frequently ) that these types of regulations are garbage and just busy work, this makes me think that the people uttering these remarks do not take the regulations and their implementation seriously. The regulations in fact try to have the issuers take responsibility for ethics as well as financial controls. So if ethics are "crap" then we are all in trouble.

In this prescriptive world of regulations, the business leaders need to take back the high ground and re-institute an ethical culture and stop the habit of complaining about regulations that are supposed to assist in high ethics and transparency. These business leaders need to truly embrace high ethical standards. This current cynical world of "nothing matters unless you get caught" is eroding our markets and the faith of many in business leaders. This lack of faith has a direct impact on faith in stock markets and share prices.

So let's get back to basics in business, honesty and integrity and it might be surprising how fraud will decrease and faith increases as does the share price.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada at http://www.issuescentral.com/. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Reuters. For IFRS Transition products, see http://www.ifrspartner.com/ from Issues Central.

Thanks Christopher Cox for your Service and Vision on IFRS

2009-01-22T10:17:00.013-05:00

It is always amazing when talented people take really tough political government positions, knowing that one day they may have to step down amid controversy. The Chairman of the SEC is one of those positions that may be the most thankless job in government (except possibly being President of the USA). Chairman William Donaldson (SEC Chair prior to Christopher Cox) was pushed out for being too aggressive in chasing Wall Street villains.

I had the pleasure of meeting Chairman Donaldson at an open SEC meeting in Washington during his tenure. He was warm, intelligent and passionate about the job. He did a great job. Too bad they pushed him out. Despite his initial ties to Wall Street he was relentless in his work in trying to route out corruption. I was heartened to see that he was on the advisory team to the Obama administration during the transition.

But despite being a Donaldson fan, I think that former Chairman Cox got a raw deal. Should they have followed up on the many tips the Commission allegedly received over the years about Madoff, Yes. But it is not like Cox spent the last 3 1/2 years doing nothing. They worked to root out fraud and had an impressive enforcement record in addition to working with smaller public companies to assist them in complying with SOX. Their guidance documents on the subject were excellent and well thought out.

The truth about fraud is that everyone who has ever audited and missed something knows that the hardest part about detecting fraud is if there is collusion. Clearly there were so many partners in Madoff's alleged crimes that he may have had to use several yachts to hold them all. Obviously, the old boy was pretty smart not to have been caught for so long.

There will always be criminals who are connected smart sociopaths in our midst. I do not care how much regulation you put into place, there will always be smart crooks who perpetrate fraud. It is not to say that it should be tolerated, it should not. But to think that regulation and regulators can catch every fraud is pure fantasy.

I say thanks to Christopher Cox for your record and taking action to move the US to IFRS because those are actions that no one will understand the importance until later. So good job and best of luck Mr. Cox. Some of us appreciate your hard work and vision for the future of American competitiveness.

If your company is moving to IFRS and needs a cost effective solution, and wants to do it in a sensible and cost effective way, contact http://www.ifrspartner.com/ for more information on IFRS Partner(tm) for companies beginning their conversion efforts. To find out more about events demonstrating these solutions, see http://www.ifrspartner.com/events.htm

More Discussion About Moving the US to IFRS

2009-01-08T09:42:00.010-05:00

It might seem like just one more monumental task to undertake during times of such great economic change, but think about this for a moment:

1. The US is projected to run at least a $1.2 trillion deficit for fiscal period 2009 by current estimates.

2. President-Elect Barack Obama is working congress to sell his economic stimulus plan to try to kick start the economy. This is projected to cost at least $1 trillion.

The US has certainly been the world financial leader since post World War II. But deficit spending on two wars, an economic stimulus in 2007, the 2008 economic stimulus TARP and more to come, the US is the world's largest debtor nation.

While one could make the argument that prosperity and consumer spending in the US has caused most boats to rise, the debacles on Wall Street and overspending by consumers has also caused a similar but negative reaction for the rest of the world.

The US finds itself in an awkward and unfamiliar position of a large sea change in power. Being a behemoth, causing a lot of financial wreckage around the world and a large debtor, puts the US in a position of much less power and flexibility. The US economy has been the envy of the world but that is changing. The latest cracks in ethics and large scale corruption have changed everything. It is not clear who will come out a winner from all this, but US reputation has certainly been tarnished. You cannot blame George Bush for this one, you can blame old fashioned greed for this one.

So things are changing for the US, and while it will always most likely be a world business powerhouse, it cannot afford to continue to be isolated in so many ways any more. One of these avenues is certainly accounting standards. If your emperor (Wall Street and business has been seen to have no clothes, many things begin to be examined. 112 countries have now moved or are moving to some form of the International Financial Reporting Standards (IFRS).

This is key to improving international business for all. The US must now understand that it needs to be a more equal partner to the rest of the world in many ways and accounting standards are a great way to start. The additional reason why this move is so critical is that US GAAP is the most complete accounting standard in the world and for many years the Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board (IASB) to converge the two standards. So much accommodation to US GAAP has happened.

Is this a huge undertaking? Yes of course, but in the US' fragile economic state and with the new reality regarding its relationships to the world, it would be a good time for President Elect Obama to demonstrate some of that change he has been selling. Let's stop talking and start changing. The US may find itself being dictated to by other nations on many fronts with the expected loss of power that this latest crisis brings to the US.

Let's take the bold step in the US and converge with other nations on accounting standards as evidence that the US is a partner in the world and sees this and let's see some positive changes for all involved.

If your company is moving to IFRS and needs a cost effective solution, and wants to do it in a sensible and cost effective way, contact http://www.ifrspartner.com/ for more information on IFRS Partner® for companies beginning their conversion efforts. To find out more about events demonstrating these solutions, see http://www.ifrspartner.com/events.htm

Roll Back Sarbanes-Oxley: Huh?

2008-11-15T12:36:00.010-05:00

I am a big fan of Newt Gingrich, former US Speaker of the House. I watch him frequently on Fox News. He is extremely intelligent and well reasoned. That is on most things. But Newt and I part company on Sarbanes-Oxley. Mr. Gingrich is now lobbying to roll back Sarbanes-Oxley. I am not sure if this is a paid engagement, but one wonders.

Mr. Gingrich stated on Fox News November 15, 2008 that he believed that rolling back Sarbanes-Oxley would help businesses grow. First of all, that is such a general statement, let's analyze that:

1. Only public companies face Sarbanes-Oxley and only companies over $75Million in market capitalization have had to undergo 404 (b) external auditor atttestation. While these companies are approximately 90% of market cap, they represent about 5% of the total listings. So the larger volume of companies do not even face Sarbanes-Oxley because they are private and smaller companies have only done 404 (a) which is management's evaluation of internal controls.

2. I have personally worked with hundreds of companies in developing documentation for Sarbanes-Oxley and Canada's version NI 52-109 and it is clear that companies need to do this type of work. Most companies have flaws in their internal financial reporting processes that lead to fraud and errors. In many companies, this is not a theory, this is reality.

3. Just because there is a possibility that management can override controls and Sarbanes-Oxley cannot prevent this is not a reason to repeal it. Companies had not been managing internal controls and the fact that restatements went way up after Sarbanes-Oxley is an indication that there were problems.

4. Arguing against internal controls is the equivalent of arguing against honesty and integrity. In these times of an obvious lack of integrity on the part of many large companies, we really do not need to relax regulations that encourage strong internal controls.

Referencing a blog entry on this: The answer is, we need to keep Sarbanes-Oxley in place. When we can assure that all public companies will operate with total integrity, we can roll back Sarbanes-Oxley.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada at http://www.issuescentral.com. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Reuters. For IFRS Transition products, see http://www.ifrspartner.com from Issues Central.

Wall Street Financial Crisis: Executive Compensation was a Driving Force

2008-09-24T10:58:00.008-04:00

When we look at the blame game that is coming on fast in Washington and around the world for the Wall Street meltdown, many believe it is the deregulation that is the cause. Certainly this warrants a review. But it certainly seems that the US has a bevy of regulations even WITH deregulation. So it is not so much deregulation that is the villain but maybe a more important reason: Executive Compensation schemes that incented excessive risk taking.

In the business world, most people are driven by money let's face it. Executives often have the most gain if they are able to show big earnings and share appreciation. So with much at stake, and even regulations in place not working, it is no wonder that there was world wide collaboration to sell high risk securities that no one really understood the total value or ramifications.

It seems that these days the securities and program trading calculations are so complex, that there are probably five mathematicians somewhere that dreamed them up and they understand their calculations, but when you combine it with a swap and a division and resale and factor in a meltdown, who really understands the ramifications of the securities.

So while regulators should have been watching more closely, it seems that the real villains are the Board of Directors who approved the executive compensation schemes that encouraged this type of greed and risk taking and the executives themselves who did not employ care and proper consideration in their activities.

It comes down to right and wrong and you cannot legislate that. You either have it or you do not. But certainly all these executives signed Code of Ethics as did Board of Directors. But no one seems to really believe what they are signing. We have lost the moral high ground in the business world when there are no rules and standards and when people will argue that if it is legal it can be done.

This is not just a Wall Street problem but a world wide epidemic in the financial sectors around the world.

Whatever happened to good old fashioned ethics, corporate responsibility and a morality? Without that, we can fix the current crisis, but there will always be another one around the corner because there will be another loop hole that creative financial engineers can find. Some moral judgment and high standards would be a refreshing change in the financial sectors. Let's start there before we begin more regulation.

IFRS will impact Internal Controls in a Company

2008-08-07T14:51:00.004-04:00

In working with companies in Canada as they begin their journey toward IFRS in 2011, it is apparent that a large shift in the way accounting is performed and the way financial statements are presented will require revisions to internal controls as well.

This is due to the change toward an even more principles based accounting methodology - IFRS and because accounting policies must all be reviewed and many must be revised slightly or completely. This definitely depends on the industry and complexity of a company.

But like an internal controls review, the careful analysis and review of a company's accounting policies can yield benefits.

For example, many policies may have been suitable at some point of a company's development but may be out of date. So change can be good.
Further, IFRS allows companies to make some changes to their balance sheets that can be beneficial for presentation of future financial statements. For example on Property Plant and Equipment, companies have the option to either use a cost basis or a revaluation method. Depending on the industry, revaluation could make sense and "clean up" the balance sheet.

The other reason internal controls will require changes is the completely different outlook that IFRS utilizes compared to Canadian or US GAAP, in that capitalization looks very strongly on whether the asset will produce future cash flows. Additionally, IFRS has more of a balance sheet orientation than income statement. This will force changes in management reporting and in internal controls.

An excerpt from a recent article on this topic is here:

"...One could certainly argue that the controls check the processes that create the financial data that end up being reported. They will still do that. The resulting data will merely be repurposed for IFRS.

But not so fast says D.J. Gannon, Partner at Deloitte & Touche, who maintains, "A shift to a judgment-based framework, such as IFRS, requires that not only the accounting policies, but also the internal processes and controls be adjusted."
An example: lease accounting. "Under U.S. GAAP, there are a number of rules governing how leases should be classified," Gannon says. "Company controls are designed to ensure compliance with those rules. IFRS takes a more holistic approach to classifying leases looking to the substance of the agreement. Therefore, a company's control structure may need to be fine-tuned to focus on applying principles consistently to reflect the economic substance of the transactions with more extensive disclosure."

So it will be an interesting journey - the road to IFRS and then revision to internal controls. There are pluses and minuses to IFRS but convergence of accounting standards in global markets only makes sense as the world increases integration through more global trade.

What do IFRS and "Wealth Transfer" Have in Common?

2008-07-11T10:26:00.008-04:00

The current deadline for companies traded on Canadian public exchanges to begin disclosing their plans for conversion from Canadian GAAP to IFRS is 2008 for December 31 filers. This is a substantial change. Approximately 28 other countries have accomplished this change and lived to talk about it - EU member countries, South Africa, Australia to name a few.

But similar to the SOX 404 feeding frenzy by certain large accounting firms, there has been an attempt to scare Canadian public companies into a large "wealth transfer" from public company coffers to once again those of the large accounting firms.

While yes there is substantial work involved and it is not to be taken lightly, accountants in public companies are intelligent enough to accomplish this task without spending millions with the large firms. They learned GAAP so they can learn IFRS.

Additionally, there is no getting away from learning IFRS because it will be the new standard companies will be using. So do not outsource the chance to get involved and learn the ins and outs and manage your own conversion project.

A common complaint we hear in our work with public companies is that the large firms are just now training their own people so it is the same song second verse folks. SOX 404 all over again. The firms are using pressure to negotiate massive contracts with clients and then train their people on the job. They set out a work plan that guarantees the most tedious approach with the most amount of work possible.

Do not be fooled into thinking your internal team cannot handle this challenge. Yes it is work. Yes you must take it seriously. But is not so massive or difficult that you need to outsource the task, knowledge and train accounting firm personnel rather than your own. This is the new standard, better to take it on and own it early to make the best decisions. No one knows your company's requirements better than your team does.

Chief Executives Want Shareholders Have Greater Access to Information

2008-06-20T10:09:00.005-04:00

In a Grant-Thornton poll, chief executives indicated two key areas that shareholders would be pleased with:

The CFO and CEO positions in the company should be held by different individuals to assure independence.

Chief executives want shareholders to have great transparency concerning compensation information.

This is an interesting trend post Sarbanes-Oxley. Maybe it turns out that good governance IS good. There is no point in trying to make executive compensation opaque to investors. This just increases unnecessary shareholder activism and assures that investors think the worst.

If you are one of those 3600 Canadian companies who have to comply with NI 51-102F6, then you will be very interested in the new Executive Compensation Disclosure product that we have developed and that is being distributed in Canada by Carswell, a Thomson Reuters business. The product is Compliance PARTNER - Executive Compensation Disclosure edition. You can learn more about the product by going to their Compliance PARTNER website for the Thomson Reuters news release or go directly to www.compliancepartner.ca for more information.

Executive Compensation Disclosure - Canadian Update for Fiscal Year 2008

2008-06-13T16:25:00.009-04:00

The Canadian Securities Adminstrators (CSA) are in the process of finalizing the expanded requirements for executive compensation disclosure associated with Form 51-102F6 Statement of Executive Compensation. The implementation date should begin with those issuers, excluding investment funds, with fiscal years on or after December 31, 2008.

This means there is lots more disclosure work ahead for about 3600 issuers on the TSX and TSX Venture exchanges.

Companies are going to need to improve their processes, systems and practices to meet the new requirements. Many shareholders feel that it couldn't come at a better time. A news release today highlights the challenges associated with transparency and processes. Click here to read more. Ouch!

If you are one of those 3600 companies then you will be very interested in the new Executive Compensation Disclosure product that we have developed and that is being distributed in Canada by Carswell, a Thomson Reuters business. The product is known as Compliance PARTNER - Executive Compensation Disclosure edition. You can learn more about the product by going to their Compliance PARTNER website at http://www.compliancepartner.ca/ .

Executive Pay: In the News

2008-04-03T09:47:00.009-04:00

With so much concern about the global economy right now, executive pay is a hot topic. What seems to be out of sync, is the high levels of executive pay when earnings or share prices of companies are collapsing. Investors wonder whose interests are being looked after.

2007 was the first year that US companies begin filing new Executive Compensation Disclosure and Related Person Disclosure information in the form a new section to the annual reports called Compensation, Discussion and Analysis (CD&A). The SEC has expressed displeasure at the filings and has requested improved reporting.

Canada has proposed similar legislation for 2008 for Canadian public companies which will put a bright light on this topic "up north".

An article from HR Executive Resource Online " Doubting Executive Pay" released yesterday sheds light on this topic and the investor and employee discord surrounding it. Here is an excerpt:

"Directors and investors say exorbitant executive compensation causes resentment and harms corporate America's image, but the SEC's disclosure rules are not the answer. One expert says the problem stems from short-term thinking, rather than greed. By Kristen B. Frasch
With the nation's attention focusing ever more intently on CEO salaries -- most recently in the form of congressional hearings before the House Committee on Oversight and Government Reform -- two different surveys suggest boards of directors and shareholders remain at odds over just how broken the system is and what they can and should be doing to fix it.
In one study, by Heidrick & Struggles and the University of Southern California's Marshall School of Business, about one in three directors of U.S.-based public companies said CEO pay is "too high in most cases."

The 2007 Corporate Board Survey of 210 respondents also found widespread unhappiness among directors over the latest disclosure rules about executive compensation mandated by the U.S. Securities and Exchange Commission.

Most directors (about 90 percent) said they doubt the rules -- designed to give investors and corporate watchdogs better, timelier information about pay and other compensation for top executives -- are meeting investors' needs.
"Executive compensation and how that information is disclosed have been controversial for some time," says Ed Lawler, distinguished professor of business at USC Marshall and founder and director of the university's Center for Effective Organizations.

"But what this survey unmistakably shows is that the issues are a growing concern, even among the people most responsible for dealing with them: the board members of public companies," he says.

Board members' dissatisfaction in the study centers on the type of information reported in the new SEC-mandated proxy statements.
Only one in 10 said they believed the information did a good job of explaining how compensation decisions are made and fewer than three of 10 agreed the statements provide valuable information about the amount a CEO actually makes.

"A major advantage [of the new rules] is to see the top five salaries, but even these are often obscured with descriptions of things [boards] can't fully understand," Lawler says.
A problem contributing to hard-to-decipher information and continual salary increases, according to respondents, is the role compensation consulting firms play in the creation of new incentive-compensation programs.

"It is interesting that even though it is boards that determine the level of executive compensation, they still point to the important role consulting firms play," says Ted Dysart, managing partner for the Americas with Heidrick & Struggles' global board of directors practice.
In a separate study by Watson Wyatt Worldwide, corporate directors and institutional investors disagree over whether the U.S. executive-pay model is changing for the better, but both groups say the current model has hurt corporate America's image.

The study, 2008 Report on Directors' and Investors' Views on Executive Pay and Corporate Governance, which surveyed 163 directors and 72 investment and pension-fund managers, found 63 percent of directors think the pay system is improving, compared to just 36 percent of investors.

It also found 65 percent of directors believe the current pay model has helped to improve company performance while only 39 percent of investors feel that way.
"While directors believe the system generally works, institutional investors ... feel the model's flaws run deeper and require more substantial changes," says Ira Kay, global director of compensation consulting at Washington-based Watson Wyatt. "Clearly, more work needs to be done."

Most of the respondents (75 percent), however, believe the model has tarnished the nation's image, has led to resentment among the rank-and-file and has resulted in excessive executive pay..."

Clearly this disclosure meets with objections from those who have to report and administer it. But no one can argue that investors should be prevented from transparent information from the companies they invest in. Is the legislation perfect? Probably not, but you have to start somewhere. And starting with some disclosures about an important topic is important.

If your company has to comply with Executive Compensation Disclosure regulations, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information.

You Know It Has Been a Bad Day When...

2008-03-24T13:45:00.002-04:00

Both the Securities and Exchange Commission (SEC) and the Ontario Securities Commission (OSC) have filed charges against Biovail for fraudulent accounting and a host of other items.

It took five years for that little "I missed my revenue forecast because my truck crashed on the way to the warehouse" story to finally cause some really big investigations and charges. I have to admit when I heard that story many years ago, I could not figure out how that had affected revenue but who knew?

It sounds like Eugene Melnyk and fellow Execs are going to have to come up with some pretty good answers for what the two agencies are alleging as fraud and undisclosed errors. Some serious charges of intentionally misleading investors.

Who knows, maybe Eugene will join the hallowed halls of prison in Florida with the likes of Conrad Black. According to an article today in the Globe and Mail, Conrad is quoted in the article, "I am doing fine," Mr. Black said in an e-mail to the Canadian Press from his Florida prison. "This is a safe and civilized place and I don't anticipate any difficulty."

Patriot Act Compliance Causes Google a Headache

2008-03-24T12:54:00.004-04:00

According to a Globe and Mail article today , the Patriot Act may cause many organizations to wonder about using Google's free office productivity software. The issue is that the organization's data is stored on Google's servers. Therefore, they are potentially subject to search and review by US government law enforcement services. This could occur without the knowledge of the end user. This is due to the expanded powers granted to the US government after 9/11 in the law known as the Patriot Act.

The concern becomes that any company who houses another company's data, hosting services for example, may be subject to requests from the US federal government to view confidential data. The organization housing the data may not be able to deny the requests.

An excerpt from the article is here:
"The privacy issue goes far beyond academia. In Toronto, at SickKids Foundation, which has the largest endowment of any Canadian hospital, employees have been keen to use Google tools. But the foundation's IT department blocked access for two reasons.

"Wherever possible, we keep our donor and patient records in Canada, as trying to enforce privacy laws in other jurisdictions is complex and expensive," said Chris Woodill, director of IT and new media at SickKids Foundation. Second, free hosted software offers limited support and no formal legal contract, limiting an organization's ability to demand additional privacy or security measures, he said.

Google says it has a strong track record in regard to protecting customers' data. The firm cites a court case it fought in 2006 against attempts by the U.S. Justice Department to subpoena customer search records. "We will continue to be strong advocates on behalf of protecting our users' data," said Peter Fleischer, Google's global privacy counsel.
But the Mountain View, Calif.-based company will not discuss how often government agencies demand access to its customers' information or whether content on its new Web-based collaborative tools has been the subject of any reviews under the Patriot Act."

Even if data is not housed in the US, if a hosting company for example, does business in the US, there could be such a request made to the hosting company, citing national security. It does bring interesting questions into play about allowing any outside organization to house and safeguard your data.

XBRL in use by SEC eases Financial Research

2008-02-17T17:20:00.003-05:00

The SEC is making great strides in taking the vast amount of financial data stored and filed on its website by beginning the conversion and usage of XBRL (eXtensible Business Reporting Language). This is great news for investors who need to compare and evaluate this data in an easy and understandable way. The XBRL in use by the SEC called Financial Explorer.

An excerpt from a recent article is here:

"XBRL is fast becoming the universal language for the exchange of business information and it is the future of financial reporting," said Cox. "With Financial Explorer or another XBRL viewer, investors will be able to quickly make sense of financial statements. In the near future, potentially millions of people will be able to analyze and compare financial statements and make better-informed investment decisions. That's a big benefit to ordinary investors."
The SEC already offered investors two other online viewers: the Executive Compensation viewer and the Interactive Financial Report viewer. The Executive Compensation can compare what 500 of the largest U.S. companies are paying their top executives, while the Interactive Financial Report viewer helps investors gather, analyze, and compare key financial disclosures filed voluntarily by public companies using XBRL. (To date, there have been 307 such filings from 74 companies, the agency said.) "

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

FBI Gets into the Game to Uncover Fraud in Subprime Mortgage Fiasco

2008-01-30T11:02:00.000-05:00

You know it has been a bad day when the third government entity is now investigating the subprime mortgage disaster. First it was the SEC, then the Attorney General's office of New York and now the FBI's Economic Crimes unit.

Fraud and insider trading allegations abound. One thing is for sure, some new regulations will come of this one.

Investment Banks and the banks around the world do not look too swift right now. First it was subprime mortgages with no rails and regs and now it is the French bank Societe Generale with the complete failure of controls and key performance indicators.

All I want to know is where were all these regulators before all this happened. There certainly was evidence before the whole thing blew up.

An excerpt from Business Week online: "Fall Guys?
It's not just public company executives who may need to worry about their sales. If, for example, a hedge fund manager pulled his own money out of a fund when he became aware of valuation problems, but left customers in, that, too, could be a problem. "That's not exactly insider trading, but it could involve fraud in connection with the sale of a security," says the investigator.
While there's no way of knowing yet what the probes will turn up, or whether any actions will rise to the level at which criminal intent can be established, Frenkel points out that the involvement of the FBI is not good news for executives at firms where wrongdoing is suspected.
"As we saw in the corporate fraud cases, companies have an incentive to resolve these investigations; that may include the sacrifice of corporate personnel," he says. "People often forget in the early stages of an investigation, their interests and those of a company can diverge. Companies can settle. They don't go to jail, people do."

Audit Standard #6 from PCAOB: Evaluating Consistency of Financial Statements

2008-01-30T10:53:00.000-05:00

The PCAOB has released Audit Standard #6 for review. If adopted by the SEC, it will become effective within 60 days - end of March 2008.

An excerpt is here: " The Board also removed the hierarchy of generally accepted accounting principles (GAAP) from its interim auditing standards. The GAAP hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in preparing financial statements. The Board believes that the GAAP hierarchy is more appropriately located in the accounting standards. Because the FASB intends to incorporate the hierarchy in the accounting standards, it no longer will be needed in the auditing standards. The Board has coordinated with the FASB and understands that the FASB intends to coincide the effective date of its GAAP hierarchy standard with that of the PCAOB."

As the world moves more toward one standard, these incremental moves make one accounting standard more possible. This will change the face of internal controls and their references as accounting standards change.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

Smaller Non-Public Companies Have Higher Internal Control Standards than Smaller Public Companies

2008-01-15T15:12:00.000-05:00

With all of the non-stop complaining about SOX 404, smaller public companies have received five years of delays on Section 404.

All during this time, the AICPA (American Institute of Public Accountants) was working on accounting standards regarding internal controls for NON-PUBLIC companies. These standards, SAS 107-112 require auditors to review internal controls over financial reporting for NON-PUBLIC companies. The affects companies with fiscal periods ending on or after December 15, 2006.

With the current deadline for public companies under 404(b) fiscal years on or after December 15, 2008 (possibly delayed to 2009), the public company standards are now lower than private companies. Interesting since internal controls are basic good business.

It is now difficult to make the case that smaller public companies cannot comply with ICFR standards when their private brethren will comply this year and be audited with a top down risk based approach.

Sound familiar? More detail on the unintended consequences of these delays can be reviewed in Lord Benoit's recent study.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

One More Time: One Year Delay Proposed for Small Companies for SOX 404(b): Auditor Attestation

2007-12-12T14:42:00.000-05:00

Well, they done it again. The SEC is proposing one more delay for small companies for the auditor attestation portion of SOX 404. That is 404(b). So this gives companies a breather to let the larger brethren to get Audit Standard #5 road tested.

But this means, look out when the Auditor Attestation occurs in 2009. The auditors will be there with full confidence. Time to get those risk control documents in order and test those controls and remediate as necessary.

Here is the detail so far from Market Watch:

"CAMBRIDGE, Mass., Dec 12, 2007 /PRNewswire via COMTEX/ -- The Committee on Capital Markets Regulation applauds SEC Chairman Cox's testimony proposing the delay of an additional year before requiring that small companies get external audits under Sarbanes Oxley Section 404(b), in order to complete what amounts to a cost-benefits analysis of that requirement. As we noted in our Interim Report of November 2006 and in our testimony in June 2007 before the U.S. House Committee on Small Business, Section 404 costs, averaging $4.4 million in the first year, have disproportionate impact on small companies.

Let's wait to see whether these costs are substantially reduced by the SEC's and PCAOB's recent Section 404 reforms before applying them to small companies. Unreasonable 404 costs will either prevent small private companies from going public, or drive them abroad to do so. Indeed, our December 4th report on The Competitive Position of the U.S. Public Equity Market found that through the first three quarters of 2007, a remarkable 9.2% of U.S. companies did their IPOs only abroad. "

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

Is White Collar Crime Really Less Evil than Violent Crime?

2007-12-03T13:27:00.000-05:00

Conrad Black has started his public rantings again against this time the US legal system. In an article in today's Globe and Mail, he claims he is innocent. He has not yet been sentenced but he is speaking out. But hey that is Conrad. He cannot stop talking even when it might cut his jail time.

Conrad played by his own rules, not the ones he was supposed to. Just because he thinks that some of the charges were dropped, does not mean they were not true, the prosecutors may just have had to pick their battles to win the war.

But to me the most interesting item in this article relates not to Conrad Black, who frankly raided the corporate cookie jar and got caught.

A Mr. Frenkel from the British Press is quoted in this article: "There's no question that the conviction of [ex-Enron CEO] Jeffrey Skilling warranted jail, but when drug dealers and murderers are serving fewer than the 24 years he will be serving, there is certainly an inequity."

I beg to differ. Has anyone ever bothered to go back and count the lives that were lost due to suicide from these fraudulent investments? Those who ended it all because they lost their life savings. They believed the fraudulent promises of these white collar criminals such as Jeffrey Skillings, Conrad Black, etc..

How many people did not go to college because savings were lost? How many people ended up homeless because they lost their money? Why are these consequences not counted among the "lives wrecked or lost? It is easier when there is a murder or drugs sold to say these criminals are evil, but that is only because the wreckage is either tracked by government statistics or covered by the media.

The personal economic devastation caused by these criminals, and they are criminals, is real and they should be punished just like other criminals.

There is a good reason to have good governance. It is not just fluff. The truth matters. Investors should be able to trust what officers of companies publish in their financial records and news releases. There has to be accountability.

Those former corporate titans like Jeffrey Skillings and Conrad Black always thought they were the smartest ones in the room. But at least for awhile, their rooms are far away from the public and their ability to commit crimes is diminished.

CSA Staff Notice 52-319 Could Be More Transparent

2007-11-30T16:18:00.000-05:00

On November 23, 2007 the Canadian Securities Administrators issued Staff Notice 52-319: STATUS OF PROPOSED REPEAL AND REPLACEMENT OF MULTILATERAL INSTRUMENT 52-109 CERTIFICATION OF DISCLOSURE IN ISSUERS' ANNUAL AND INTERIM FILINGS.

The main intent of the notice as evidenced by the majority of the subject matter was to indicate that the regulators had decided that Venture Issuers could file a basic certificate rather than the Form 52-109F1 form that TSX issuers must file. Further, the Venture issuers could file this certificate for this year if in fact their fiscal year ends after November 23, 2007 - basically either November 30 or December 31.

While some may think this is good news, it is a bit disconcerting when this type of notice comes out almost at the end of fiscal years. So many Venture issuers have done extensive work on their 52-109 documentation and some have made such disclosures in their MD&A.

This provides a very late notice with certificates with terms such as:

"reasonable diligence" and
"The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate"

No doubt these certifications require a level of documentation of controls in place in order to be able to make these certifications. But how different are the requirements?

The other point in this late breaking news is that for awhile Venture Issuers were closer to same status as TSX issuers, with the same disclosures. No doubt the benefits were there for lowering the perceived investment risk. This is an important factor when considering how difficult it is to get analyst coverage and their higher cost of capital, thus lowering their overall liquidity.

The area that has really caused a lot of discussion and many different interpretations is some other wording in the notice:

"The comment period expired on June 28, 2007. We received 53 comment letters. After extensive review and consideration of the comments received, we have decided to make significant revisions to certain aspects of the proposal. As a result, we will publish an amended version of the Proposed Materials for comment and we will not implement the Proposed Materials in final form on June 30, 2008. When we publish an amended version of the Proposed Materials for comment, we will include information relating to the expected effective date."

With 13 regulators, there have been so many rumours flying all around Canada on what this means. The concern with this type of wording is that is vague and leads everyone to reach their own conclusions. A concern for regulators who have an interest in making sure that issuers move forward with the requirements.

But issuers, on the other hand, need to be careful not to read into this announcement what they "wish to hear". The public information in the CSA staff notice is just saying the final comments will not be in final form on June 30, 2008 NOT that issuers are off the hook for proper ICFR and disclosure controls and the certifications of design/implement and effectiveness.

PCAOB Issues Report on Small Firm Inspections and Deficiencies

2007-11-27T09:25:00.000-05:00

The PCAOB issued its report on Small Firm Inspections on October 22, 2007. The Center for Audit Quality plans to hold a webcast on Thursday, Nov. 29, from 1:30 to 3:30 p.m. Eastern time that will allow public company auditing firms to hear from the PCAOB about the most common deficiencies they found, and ask questions.

The report details some areas where smaller audit firms were found to be deficient in their audit practices of public companies for Sarbanes-Oxley Section 404. They were specifically in the areas of:

Revenue Recognition - more specifically that firms often did not go into enough detail surrounding the contracts and industry specific practices to understand whether the revenue was in fact correct. Further, they relied on substantive testing of Accounts Receivable and Inventory too often to justify the revenue. Thresholds for further investigation were often not set leading to suspect conclusions about revenue recognition.

Related Party Transactions - Lack of understanding of the existence and implications of related party transactions as well as potential improper levels of disclosures of their existence. Further, such transactions can have implications for other indebtedness or other such arrangements that may not be recorded properly on company accounting records.

Equity Transactions - Since newer companies have more difficulty raising money, they often do not properly record and account for the equity transactions according to GAAP. Audit firms in many situations failed to determine whether firms had properly complied with SFAS No. 123 - Accounting for Stock based compensation. Numerous deficiencies were found in the firms' testing of fair value of such compensation.

Business Combinations and Impairment of Assets - Where auditors have failed to identify the the accounting acquirer; these transactions were not always properly researched.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

Welcome Back to US Markets

2007-11-17T10:00:00.000-05:00

We wrote in this blog November 12, 2007 about Chinese banks listing on US exchanges as a new trend. Now this week, Israeli companies are coming back to US markets.

This is probably due to a few factors:
US Markets are still by far the largest in the world: $18 trillion versus $3.4 trillion for the UK. So size matters.

Additionally, many countries are now putting in SOX-Like or SOX-Lite regulations: Canada, Japan, South Africa to name a few, so the SOX stigma has become the new standard - transparency is good.

The other factor is no doubt the powerful Wall Street marketing machine which apparently is now present in Israel. It is a wonder what sweet siren songs the Wall Streeters are singing into the ears of Israeli public companies.

For the complete article on this topic, click here. An excerpt on this topic can be found here:

"According to James Posnett, MD of European products at Eurolist and Alternext, interviewed by the Jerusalem Post, the trend will change in 2008. While Israeli companies has only eyes for the NASDAQ for more than a decade, their interest stareted dwindling down in 2005 with the the costly Sarbanes-Oxley listing regulations. In 2005, 20 Israeli start-ups went public on the European markets rather than in the U.S., and mainly on London’s Alternative Investment Market (AIM).
In 2006, the number went down to 16 in Europe vs. 8 on Wall Street, and the trend is set to change back in 2008 in the advantage of the US. The presence of several US investment banks in Israel favors a growing interest and experience of the US markets."

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

US Markets Provide Access to Chinese Banks

2007-11-12T18:11:00.001-05:00

Interesting report from http://www.chasecooper.com/. They put out an article yesterday on a trend in Chinese banking. An excerpt is here:

"China Merchants Bank (CMB), to open a branch in New York, the first Chinese bank to gain such approval in 15 years. This is expected to be a first step to CMB listing on a US exchange."

They go on to say:

"It is expected that CMB will be joined by Industrial and Commercial Bank of China (ICBC), China’s largest bank and, by many measures, the world’s largest, bank who applied for a US licence to open a NY branch earlier this year. Approval has been given by the NY State Banking Department but ICBC still wait the final approval from the Fed.

No Chinese banks have listed in the US since the onset of the Sarbanes-Oxley Act but this now looks set to change."

This looks good for an SEC who made de-listing easier in January 2007. Interesting turn of events with all of China's power in the financial reserves these days. Good to see US markets accessed by powerful foreign companies.

Openness of US markets is some of the best in the world. This is a testament to this and the market power of the US.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

IFRS Gaining Momentum in North America

2007-11-01T09:16:00.000-04:00

With the SEC's efforts to keep and attract new foreign listings, the interest in not only allowing foreign filers to use International Financial Reporting Standards (IFRS) to file their financial statements.

October 9, 2007 Christopher Cox, Chairman of the SEC, spoke to the 2007 US-EU Corporate Governance Conference at SEC headquarters.

Excerpts from the speech are here:

"Today, when investors look across the Atlantic, it is possible to see bonds between our markets that are stronger than ever before in history. The combined NYSE and Euronext comprise a transatlantic company that operates six different exchanges catering to many different types of issuers. The International Accounting Standards Board and the U.S. Financial Accounting Standards Board have for years been working on a convergence project to eliminate needless regulatory friction between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles. And that has made possible the SEC's announcement that we are taking the next steps on our Roadmap to eliminate the reconciliation requirement in the United States, and that we are even considering allowing U.S. issuers to use IFRS."

He goes on to say:
"The European Union itself is a vivid demonstration of why differences in markets can sometimes justify differences in regulation. In the United Kingdom and the Netherlands, for example, ownership of most public companies is widely diffused. There are few, if any, shareholders that own a controlling block of a public company's shares. In Germany, many public companies have controlling shareholders. Traditionally, those have been large banks. In Italy, the controlling shareholders are often entrepreneurial families. Even in markets that seem similar, we often see differences that profoundly affect how our markets work.

For example, like the United States, the United Kingdom has many companies owned by large numbers of shareholders, none of whom owns enough to constitute control. But unlike the United States, the UK market historically has not had a very large retail component. Over the past few decades, the investors that predominate are not retail investors but large financial institutions, all located within a few blocks of each other in the City of London."

Regarding IFRS in particular, Cox notes:

" Let's consider a concrete example: the move that's afoot throughout Europe and around the world for a truly global set of high quality accounting standards. The vision behind International Financial Reporting Standards is that a single worldwide set of standards will permit investors around the world to benefit from a high level of comparability and a consistently high level of quality in financial reporting. It would eliminate the need for investors and analysts to try to understand financial statements that are prepared using the different accounting standards of many jurisdictions.

It would eliminate one of the significant barriers to raising capital outside one's borders. And it would provide a globally enforceable check on corporate governance practices, including executive compensation — where lately the SEC has done so much work.
IFRS promises to integrate our markets.

But that promise is jeopardized if IFRS isn't applied faithfully and consistently across jurisdictions. Regulators must beware the impulse to develop nationally-tailored versions of IFRS, and we must cooperate with one another in implementing a set of standards that is faithfully and consistently applied."

It will be interesting to see how much convergence there will be among the current IFRS "flavors" around the world. Public companies want convergence of accounting standards, but what standard is the right one. And if IFRS is the standard to converge with: then what IFRS? UK, Germany, Poland, South Africa, etc.

This will be an interesting journey to say the least. Canada is working toward IFRS conversion by 2011. US registrants will most likely have choices much sooner than that. These are huge changes for public companies, investors and the very educational institutions which must provide graduates for this upcoming challenge. It is a worthy goal but much more formidable than many realize.

According to an article by FEI Canada, today: The following issues are ones where IFRS will cause huge upheaval:
"Key differences exist in:

insurance contracts,
financial instruments,
full cost versus successful efforts,
de-recognition of financial assets and liabilities,
consolidation - variable interest entities and special purpose entities,
stock-based compensation,
impairment of non-financial assets,
employee future benefits, and
income taxes."

This will be an interesting ride. Hold on to your seats.

Canadian Public Companies Need to Focus on Internal Controls

2007-10-31T13:57:00.000-04:00

While many Canadian companies are working hard on their NI 52-109 projects, there are many who have not put the consistent effort into providing investors that they have reasonable assurance over their Internal Control over Financial Reporting. This is especially disconcerting since the legislation has been proposed and/or in place for many years now.

Of special concern is the Venture Exchange where the resources to comply with this complex legislation are just not available. Many of these companies are in natural resources: mining and natural gas. This represents approximately 1600 companies or (of the approximately 3800 public companies) 42% of companies listed on Canadian exchanges.

Next year is an extremely crucial year in the progress of the requirements of this legislation. It is the year where public companies must certify the effectiveness of their internal control over financial reporting. In other words, they must certify that their controls "work as advertised".

Many companies have struggled with the first phase of this legislation: "Design and Implement Internal Controls over Financial Reporting". It will be interesting to see what happens when the really tough stage begins.

A recent article discusses some of these challenges:

Excerpts from the complete article from the National Post:

"Canadian corporate disclosure about internal controls is also inconsistent and regulation here "severely lags" behind the United States, despite a slew of new rules designed to improve reporting, say the authors of the study...

Only 46% of TSX-listed companies surveyed said their internal controls were effective. Among Venture Exchange companies, the figure plummets to 13%. Internal controls are the checks and measures companies have in place to prevent fraud and to make sure the financial information they generate is accurate."

There is much work to be done. Investors will be closely watching the results.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.