The big news last Friday: the Public Company Accounting Oversight Board doesn't look like it's in imminent danger of extinction. Remember that lawsuit charging that its creation was unconstitutional, filed back in early 2006? It was filed by a Las Vegas accounting firm with an axe to grind: they were being investgated by the PCAOB while being investigated themseleves.

For a while, it looked like it might actually lead to the demise of the PCAOB. A three-judge panel heard oral arguments in the case, and one of them was clearly sympathetic to the plaintiff.

Looks like it won't happen: not without an appeal, anyway. According to the Wall Street Journal, the plaintiffs plan to take it all the way to the Supreme Court, so it there's more ahead on this saga. SEC Chairman Cox weighed in favorably on the outcome in this press release.

Last week, the Governmental Accountability Office released a study of corporate income taxes paid for the years 1998 - 2005. Findings: for most of that period - roughly two-thirds of the time - firms did not report a US tax liability.

There was slightly more of a tendency for foreign-owned firms (50% or more of voting stock owned by a foreign entity) to report zero liability that for US-owned firms. In both cases (foreign-owned versus US-owned), firms paying no taxes tended to be smaller firms. (Firms were considered large firms if they had assets greater than $250 million and $50 million of revenues.)

Don't jump to conclusions about tax chicanery. There's one important attribute of the findings that the GAO listed in the first paragraph of the report:

"Most large FCDCs (foreign-controlled domestic corporations) and USCCs (US-controlled corporations) that reported no tax liability in 2005 also reported that they had no current-year income. A smaller proportion of these corporations had losses from prior years and tax credits that eliminated any tax liability."

So, while it carries a populist tune in an election year, some of that tax non-payment might be totally legitimate: income is a necessary condition for an income tax, right? And the crazy-quilt patchwork of a tax code lets firms turn losses into assets to be applied to taxes later, and credits shelter the income of favorite son industries. So that "two out of three IS bad" label might not really stick.

What it might mean though, is that the corporate tax code is badly in need of repair. That subject is nicely teed up in "A World of Wealth: How Capitalism Turns Profits Into Progress," which I enjoyed on my vacation last week. It's the work of Thomas Donlan, Barron's editorial page editor, and it's a terse primer on economics, capitalism and capitalistic solutions to modern problems. (Briefly: prices help do the job of solving most problems, and they do it best when they're left alone.) One issue Donlan raises: why have a corporate income tax at all? In the end, it isn't the company paying the tax; according to the GAO, there isn't even the appearance of most firms paying a corporate income tax in recent history. Where taxes are paid, however, the normal corporate behavior is to build the tax into the prices of the goods and services sold to consumers. Why continue the charade? Take the taxes off the corporations and everyone benefits - except maybe corporate tax shelter promoters, tax accountants and tax lawyers.

Donlan riffs on a variety of issues, from oil prices to greenhouse gases to immigration and taxes, with a zeal for capitalism that's clearly evident in his entertaining and breezy style. Quick, read it before the summer goes - and at the latest, before you vote in November.

Last August, the SEC formed an advisory committee to improve financial reporting. It became known in accounting circles as the "complexity committee" (though "anti-complexity committee" would make more sense) or CIFR (acronym for "Committee on Improvements to Financial Reporting). It was established with a one-year life span; making good on that timetable, the committee issued its final report on Friday. Some of their recommendations:

♦ A short executive summary at the beginning of a company’s annual report on Form 10-K with material updates in quarterly reports on Form 10-Q.

Why? "Many individual investors may find a company’s periodic reports overly complex and detailed. A summary would describe concisely the most important themes or other significant matters with which management is primarily concerned."

Sounds suspiciously like the attempts about fifteen years ago to introduce "abbreviated financial statements" into mainstream on the grounds that full-strength financials were too difficult to use for individuals. This creates the possibility to eliminate more information down the road in the name of "simplification."

♦ The Committee supports the SEC’s long-term efforts to introduce XBRL, and its gradual phase-in.

♦ They encourage the private sector to "develop key performance indicators (KPIs), on an activity and industry basis, that would capture important aspects of a company’s activities that may not be fully reflected in its financial statements or may be nonfinancial measures."

The idea behind KPI's is that these are the indicators or data points that managers use to run the business. Why, then, don't these already appear in the Management's Discussion & Analysis? That report is supposed to let investors see the business through the eyes of management.

♦ They recommend increased investor representation on the FASB and the Financial Accounting Foundation.

That is, assuming they'll be around long enough to matter, given the SEC's drive to make IFRS the law of the land.

♦ They recommend "increasing the field work for proposed standards and formalizing post-adoption reviews of new standards, as well as periodic assessments of existing standards."

This could lead to further standard-setting paralysis. It's not like standards have been thrown at companies that require factory recalls. When there is a delay or partial transition of a standard, it's usually because the affected firms have lobbied hard to slow things down. Setting up a mechanism like this would only give them more tools to impede progress.

♦ They support "creation of a Financial Reporting Forum (FRF), on which key public and private parties would be represented. The FRF would meet regularly to discuss the current pressures on the financial reporting system and how constituents are meeting these challenges."

Isn't this awfully similar to the Financial Accounting Standards Advisory Council? Would it really add more than an additional layer of bureaucracy?

♦ The committee recommends "a move away from industry-specific guidance in authoritative literature – unless justified by strong conceptual arguments. A better approach would be to focus on the nature of the business activity itself."

♦ The committee also recommends the SEC and PCAOB adopt policy statements on how they evaluate the reasonableness of a judgment.

Time will tell how many of these recommendations will become reality. You can bet there will be a lot of activity on them between now and the end of the year, when this iteration of the SEC finishes up.

On Wednesday, the FASB will take another look at the effective date to be inserted into the exposure draft of the forthcoming amendments to Statement 140 and Interpretation 46R. These amendments, covered before in the May Accounting Observer and in subsequent posts, will make full consolidation of the vehicles used in securitizations much more likely. In other words, after these amendments go into effect, firms might still securitize loans - but the loans will still exist on their balance sheets and a liability shown for the amount of the "pass-through" security created in the securitization. The traditional "sale treatment," where the assets are derecognized and the pass-through liability instrument isn't shown on the securitizer's balance sheet, would likely be a much rarer find.

The likelihood of these amendments being in place by year-end is getting pretty slim. It's now the end of July, and there's no exposure draft; indeed, the topic on Wednesday is directly related to the tardiness in completing a draft. There needs to be at least a 45-day comment period for the proposal, if not a longer 60-day comment period. If the draft was complete two months ago, there would not be debate now about the effective date.

The effective date, considered this far, works like this: new securitizations would have to be evaluated under the new rules, potentially putting the full-strength transaction on the balance sheet of the sponsor, for transactions occurring in the first fiscal year and interim periods beginning after November 15, 2008. A bank with a calendar year end making a securitization in the first week of January would then have to evaluate such a transaction under the revised rules: a bulkier balance sheet would probably result, when the first balance sheet is reported on March 31, 2009. For existing securitizations at the 11/15/08 effective date, the same principles would be applied - but there would be a full year grace period. Those old securitizations might not pop onto the bank's balance sheet until March 31, 2010. (Assuming that they would have to be consolidated.)

As reported before, banks don't like this (like Citigroup); trade groups don't like this (like the American Securitization Forum). Now there are others getting into the act, pressuring the FASB to delay. Last week, Ranking Member of the House Committee on Financial Services Spencer Bachus wrote to FASB Chairman Bob Herz and SEC Chairman Christopher Cox, asking them to - what else? - slow down the process on amending Statement 140 and Interpretation 46R for an additional year:

"Changes to securitization accounting could have a dramatic impact on the economy, the capital markets and consumers seeking credit. With capital and liquidity at a premium, the effect of these changes could be to prolong market dislocation."

Those concerns are rather patronizing of investors, in several ways. There's a presumption that investors are better off right now with crummy information about risks and leverage being taken on by firms when they engage in securitizations. Don't fix the accounting right away, because the market has been dislocated. So - keeping investors in the dark longer would be better? Or does that mean that a certain level of securitizations have to be floated to get the lenders back in the game, over the course of the next year? Then it will be okay to fix the accounting? Of course. Fix the accounting after investors in securitization-sponsoring firms have been kept in the dark about the level of risk and liability being undertaken by the firms in which they've invested. That's a sure-fire confidence-builder, a really good way to engender trust in the markets.

Extensions of deadlines beget more extensions of deadlines. If the delay doesn't work and the markets are still in deep trouble, the delay will be extended again at the request of some other Senator or Congressman. And if there is a recovery, the banks and their ilk will not welcome changes that make them look more leveraged; they'll cite the success of a recovery without the revised rules and resist them. The more time that elapses before a standard becomes effective, the greater the opportunity for its foes to find a way to delay the standard once again.

It would be better for the FASB to stick with their existing plan for the two-tiered appr ...

Revenue recognition has always been one of the more deceptively complex accounting issues. You think that there's a sale when there's delivery of a product or fulfillment of a service - but things like a right of return, or customer creditworthiness, or multiple deliverables promised, to name few, serve to muck up the recognition picture. (Among other things, like false invoices, premature shipping of goods, lowball estimates of doubtful accounts reserves - to name a few.)

CFO.com reports on the FASB's decision last week to issue a discussion document in the fall that would unify the plethora of accounting standards now existing regarding revenue recognition. It's more of a "thought piece" with a four-to-six month comment period; a full exposure draft will arrive in fall of 2009, with a final standard to be issued by mid-2011.Ambitious, yet possible.

Can't wait for the discussion document to show up? You can get a handle on what it will cover by taking a look at the handout from the last Board meeting. Link here for your fix.

The auditing profession has been lusting for caps on their legal responsibility for failed audits for some time now. The failure of Arthur Andersen has played nicely into their hands in this regard, allowing them to invoke the doomsday scenario of "what would life be like if there were only three major auditing firms?" Therefore, they need protection from lawsuits that could make this a reality. 

The funny thing is - the audit is under the control of the auditor. They could "audit better," if they chose to do so. And they could walk away from audits that they cannot audit better. Better that they have limits to their legal responsbility? Hmm... seems like they'd have even less incentive to do an audit better. I smell a moral hazard in the offing.

 There's an idea floated by Professor Lawrence Cunningham of the George Washington Law School that's worth considering, and he blogs about it in his post at the Concurring Opinions blog. Skip the caps: instead, have the auditing firms issue catastrophe bonds as a backstop for liability above the limits of their insurance policies.

 "The firms would issue bonds in debt markets to provide a backstop against the big judgment. Paying a high interest rate to reflect risk, the bonds would be repaid at maturity if no big claims arose but principal would be released to cover massive judgments if they did. This would protect share owners against losses from incorrect accounting without bankrupting an audit firm."

 It's a fascinating notion, one that might be worth some effort on the part of the auditing firms to consider. One puzzle: if a market could be found/created for these bonds, why wouldn't insurance firms just underwrite the risks in that particular market?

 Will auditing firms give it serious consideration? They should, but they're probably far too wedded to their lobbying efforts to minimize liability to pay much attention to it.

Saturday's New York Times featured a front-page piece by reporter Stephen Labaton on the forthcoming timetable to be set by the SEC for American companies to use IFRS - and mutual recognition of the enforcement agencies regulating foreign brokers, enabling foreign brokers to sell directly to Americans. 

"The S.E.C. also plans to announce details of a pilot program that would enable foreign brokers to deal directly with American investors, while continuing to be largely regulated by the foreign country. The first country in the program will be Australia, although officials hope to eventually include other countries."

On top of that:

"In a third move, the Public Company Accounting Oversight Board, which works under the supervision of the S.E.C., is preparing a rule that would allow it to defer to foreign regulators for inspections of some of the 800 foreign auditors of overseas companies that sell stock in the United States."

It's a good article for people just wondering how many things can be going on at one time. It also raises the question of whether all this activity is for the good of the investor - or just politics as usual as an administration comes to a close. And maybe the best quote in Labaton's far-ranging article is this one:

"James D. Cox, a securities law expert at Duke Law School who returned this week from teaching corporate law in Eur