Yesterday, Compliance Week ran an article by Tammy Whitehouse based on an interview with retired Public Company Accounting Oversight Board member Kayla Gillan. (You can access the whole article at Compliance Week for free with a quick registration.) The SEC's recent internationalization tear has left many observers concerned about the SEC's priorities; see for instance, Tom Selling's piece today in his Accounting Onion. Last year, the SEC was all over the rewrite of Auditing Standard 2, because of the uproar over the internal control provisions. It might be interesting to hear what someone close to the process had to say about that particular sausage-making:

“Some people at the SEC wanted the auditors to really only look at the process that companies go through to assess [internal controls] and not actually look at the controls themselves,” she said. “That would have been in my mind not only a much narrower scope of review but potentially even a misleading opinion to investors. At one point they wanted auditors to only look at the denied controls and not whether or not they were actually operating effectively. At one point they wanted to really significantly reduce the amount of information the auditors were required to give to the audit committee on controls that were less than material weaknesses.”

In any of those three paths - look only at internal control process, look only at certain controls, or reduce information to the audit committee - you have to wonder: how does an idea like that improve confidence of the audit committee or investors that the financial statements have been pulled together properly?

The SEC was heavily involved with the development of Auditing Standard 5, the replacement for AS2. In the end, the PCAOB prevailed; while it's more flexible than AS2, the new standard keeps in place much of the original's workings. What's interesting in the interview is the amount of SEC "proactiveness" in the process; it sounds almost as if the PCAOB was at risk of being run over by the Commission. Makes you wonder about the SEC's current internationalization efforts and therelationship between the SEC and the FASB.

On Friday, the SEC released its "Financial Explorer" to the public. It's an interface tool that will let investors manipulate XBRL-published financial statements so they can produce charts quickly. You can access the Financial Explorer tool directly at this link.

I spent a little time with it; interesting displays, fairly quick response time. (For what it does, which is still pretty limited.) Is it going to be extremely useful? Not in its current state, which I recognize is simply "early." It's more than a toy, but way less than a tool. The visualizations of the data are nice, but there has to be more meat to it. The site explains that the Explorer tool is designed for the retail investor (aka John Q. Public). But does that mean all that retail investors want is quick pictures of some data, and some visual representations of changes in metrics? If that's all that the system is going to serve up, there might be a whole generation of "retail" investors that never learns about the good stuff in the footnotes or the MD&A.

The site indicates that more data is on its way to presentation, and in theory, there should be all kinds of XBRL readers available in the after-market that will make data manipulation more custom-tailored. The present state of the art does make one consider, however: what role will the Management's Discussion & Analysis play in the XBRL world? That disclosure is one of the most investor-beneficial requirements that the SEC has ever instituted - and it doesn't seem to lend itself well to "data-tagging" and table-structuring. Let's hope the SEC focuses some its imagination on the MD&A as hurtles itself into the XBRL future. Context counts as well as numbers, and that's long been what the MD&A provides investors. How does one tag that?

In the wake of the surprise laid on the market by AIG on Monday, there’s one casualty: Statement 157. And it was just an innocent bystander.

Plenty of commentary has been spewed on the unfairness of fair value reporting, with blame for perceived inequities being laid on Statement 157. Some pundits are saying that this is an example of what's wrong with statement 157 - that it's forcing companies to come up with ridiculous values that are disconnected from long-term reality. Some express concern that trying to report illiquid assets at their fair value is too subjective and arbitrary. Some argue for keeping illiquid securities reported at their cost on the balance sheet.

Back up. First of all: AIG has not adopted Statement 157 yet. Period. Those estimates of losses aren't due to some forced, new fair value reporting; they're the result of good ol' impairment recognition.

It's a basic tenet of financial reporting: when an asset isn't worth what it cost, it's written down to what it's worth. Illiquid assets like factories and buildings, when they're not being used productively, are not carried at their historical cost: their carrying value is written down to an estimate of what they're worth. Would investors prefer that they remain stated at full cost on balance sheets, even if they producing any results for shareholders? Of course not. But there isn't always a market for them - so, by the logic of those who carp about valuing illiquid securities being "fair valued," those losses should be held in suspended animation until there's a sale of the assets. In a "real" market.

Statement 157 aside: what makes valuation issues like this one unsettling is that investors know that it's a "black box" being used to value things that aren't bathed in sunlight. Who knows how a "super senior credit default swap" should be valued? How can investors be comfortable with reported values when there's "model-switching" is going on? (AIGFP's initial model didn't include the value of "structural mitigants" or the benefit of a "spread differential;" Model 2.0 included them in November; the December values won't include the benefit of the spread differential, which helped to the tune of $3.6 billion. And AIG promises to continue to develop valuation methodologies for the year end figures, so there could be yet another version of their Binomial Expansion Technique black box arriving in time for the year end figures. Not a confidence builder for investors.)

Nevertheless - would investors be better served if managers didn't have to step up and disclose values - and how they got there? Are investors better served by "trust me" statements? I don't think so. Estimates of writedowns due to impairments have always been around. Statement 157 doesn't force anyone to use a "black box" to value anything that they haven't had to value or assess for impairments before. What Statement 157 really does is provide a framework for understanding how much investors have to stomach when it comes to black-box valuations. That fair value hierarchy (Levels 1, 2 and 3, often labeled by critics in full snark as "the three levels of hell") paints a picture of the reliability of the reported fair values. It does not expand the use of Level 3 disclosures - they've been around forever. Investors just didn't know it. How does knowing where the valuation risks exist become a bad thing for investors?

It's funny: fair value reporting under Statement 157 is getting criticized widely while asset values are being written down. Wouldn't the risks be greater if asset values were being revised upwards?

As the world trudges - make that "sprints" - towards a system of international financial reporting, one becomes curious as to how all that international standard setting is going to be financed.

Here in the United States, the FASB had long funded itself by passing around the hat: it relied on contributions from corporations, auditing firms and to a much lesser degree, investors. That funding strategy didn't do much for the appearance of FASB's independence from its constituents. With the Sarbanes-Oxley Act, the FASB's funding came straight from the SEC, eliminating its dependence on well-heeled constituents. As long as the SEC acts in the interests of investors - the intended beneficiaries of financial reporting, by the way - investors would have to feel more comfortable with the SOX set-up than the previous funding mechanism. 

The IASB, torch-bearer for the international reporting movement, still has a funding model that looks a lot like what the FASB had in place, pre-SOX. Last Monday, the IASB released an update on its funding plan for 2008.

The IASB considers its funding plan to be "broad-based, compelling, open-ended and country-specific"; it needs £16 million for 2008 and it believes it has £12.5 million secured. The funding comes from 19 different countries, based on the proportions of a country's GDP to the whole pot. That funding from each individual country is not necessarily coming from investors: it's expected to come from voluntary contributions by preparer companies within the countries, and sometimes from a country's stock exchanges or  accounting standard-setter.

The US is expected to contribute a little over £2 million from 32 companies. They must be expecting to be using IFRS soon; seems a little strange to see contributions from US companies when they can't report under that system yet. At the same time, many multinationals domiciled here have to use IFRS in their foreign subsidiaries, so it's not entirely strange.

Nowhere in the plan is there an indication of funding from investor groups. Perhaps the most interesting thing is that there is also funding from the US Fed of £200,000 - and a lot from the Big 4 international accounting firms. Combined with next-tier accounting firms, they'll contribute about £4.3 million in 2008 - about 27% of the expected budget, and 34% of the funds raised to date. It sure looks like the old FASB model of funding - and a sure-fire recipe for agitation by countries whose constituents might not like standards the IASB develops. And if you think the IASB standards are "principles-based" right now, with this much auditor involvement in IASB operations, there's the opportunity for international standards to become more minutiae-oriented down the road when auditing firms would like to have something in black-and-white for dealing with stubborn clients. Hopefully, the IASB has longer-range plans for funding independence.

The Sarbanes-Oxley Act requires that all filers be reviewed at least every three years. Over the last couple years, the SEC's Division of Corporation Finance studied the filings of more than 100 foreign private issuers. Those studies resulted in comment letters on the filings, and they're available in fairly raw form at the SEC's website. They were just waiting for someone to come along and stratify them so that some conclusions could be drawn about a) the state of foreign private issuer filings, relative to GAAP or IFRS application and b) how the SEC handled the reviews.

Fortunately, someone did come along: Deloitte. They've put together a report that's available for the right price (free) which puts together some interesting observations. From their summary:

"In the comment letters we reviewed, we noted several overall themes:

• Focus was more on the primary IFRS financial statements than on the U.S. GAAP reconciliation.

• Presentation and disclosure were significant areas of focus across industries.

• Recognition and measurement comments varied by industry.

• There was a particular interest in “converged” standards.

• Comments were geared toward understanding the judgments made and assumptions used in applying IFRSs."

That first observation is interesting - and it meshes well with the SEC's mention (in the proposing release for the IFRS/GAAP reconciliation elimination) that its first practical experience with IFRS came with its review of the FPI filings. And the fact that the focuse was more on primary IFRS financials than on the GAAP reconciliation hints at where the SEC's mind has been for the last couple of years.

On average, there were 19 comments for each filer.

The report also mentions that "certain" comments were issued on a forward-looking basis - meaning, comments were made to the effect that "something wasn't disclosed completely, but you can do it right next year." The report also mentions that a few comments required restatement.  It makes sense that the SEC wouldn't drill companies too hard - as enthusiastic as they've been about  encouraging the spread of IFRS, it wouldn't be too  wise to make it look like adoption would require restatements or a lot of head-butting with the SEC staff. Look at the corporate angst over something as  elemental as  internal controls. IFRS proponents don't want to experience that kind of wrath.

Call that a principles-based title. It gets the point across, but doesn't it make you just a little bit uneasy about the content of what you're about to read?

Well, that's perfectly normal for you to be uneasy perhaps, if you've been reading these posts for a while. But my point is that there's almost a mindless infatuation with "principles-based standards" going on in the big auditing firms. The simplification promised by moving to international accounting standards and all their "principled-ness" is coming down to the level expressed in that title.

Evidence: the Global Public Policy Symposium held in New York on Tuesday. At that conference, the Big 4 + 2, unveiled a joint presentation on "Principles-Based Accounting Standards." There's not a lot of really new thinking in it, but what's striking is the unanimity of the CEOs of those firms: they're all thinking in lockstep on the subject, all heartily endorsing IFRS. 

IFRS is a noble goal, as well as convergence of US standards with IFRS. But before blindly blaming every capital market problem on "rules-based" accounting standards, wouldn't it be a good idea to consider that IFRS is still pretty young at heart sys