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An Inside Peek At The PCAOB (and SEC)

Feb 27

Written by: Jack Ciesielski
2/27/2008 8:17 AM

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.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.