5 The Scandals of … Enron WorldCom Tyco Arthur Anderson KPMG HealthSouth CorporationDrove investors to loss confidence in our regulators and the reliability of publically reported financial information so our government sent a strong message to the marketplace with this act.
6 Sarbanes-Oxley Act - Summary The Sarbanes-Oxley Act of 2002 (named for its sponsors Senator Paul Sarbanes and Representative Michael G. Oxley) is a law that was passed in response to the previously mentioned financial scandals. The law established new, stricter standards for all US publicly traded companies. It does not apply to privately companies. The Act is administered by the Securities and Exchange Commission (SEC), which deals with compliance, rules and requirements. The Act also created a new agency, the Public Company Accounting Oversight Board, or PCAOB, which is in charge of overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.
7 Key Sections Summary Key Sections Section 201 Outlines Prohibited Auditor Activities.Section 302 Describes The CEO's And CFO's New Responsibilities Regarding Corporate Reports.Section 404 Addresses The Management Assessment Of Internal Controls.Section 409 Outlines Real Time Disclosure.Section 802 Describes Criminal Penalties For Altering Documents.Section 806 Describes Whistleblower Protection.Section 807 Describes Criminal Penalties For Fraud.
9 Section 404 of the Sarbanes-Oxley Act SEC MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS. (a) RULES REQUIRED- The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall--(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and(2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.(b) INTERNAL CONTROL EVALUATION AND REPORTING- With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.
10 Sarbanes-Oxley Section 404 IT Controls Top Deficiencies Common deficiencies found in first year of audits:Unidentified or unresolved segregation of duties issuesProgrammer/developer access to production business transactionsLarge number of users with access to “Super” or “Power” User transactions in production
11 Was It Worth It?Per the SEC, the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.Actual implementation costs in 2004 were 35 times higher than SEC estimate ($3.185 M)In 2002, only 3 Congressmen opposed SOXNow a lot of businessmen & politicians oppose the financial burden it puts on smaller companiesSOX led to the creation of the Public Company Accounting Oversight Board (PCAOB), which was established to oversee public companies' auditors and protect the public's interest by ensuring informative, fair, and independent audit reports.The PCAOB is actively investigating small business issues (70+% of public companies are considered small).The SEC and PCAOB are constantly revising their guidance to address some of the concerns Small company i.e. compliance dead lines have been extended.
12 SOX & The FutureSection 404 certification is an annual event. Compliance is an ongoing requirement which will require resources (people / $$$)Auditors are now more objective because they cannot provide non audit servicesAudit partners (not auditor) are rotated every five yearsExternal Reporting is expanded for investorsThe SEC and PCAOB are constantly revising their guidance to address some of the ongoing concerns which drives continuous changeCEO & CFO are likely to be more proactive in their financial disclosure due to potential liabilitySEC has more power – i.e. blackball officers & directors
13 SOX & The Future cont… The Sarbanes-Oxley Act has many critics: Opponents state the Act is an over-burdensome piece of regulation, one that has imposed costly and unneeded obligations on issuers. It has driven U.S. companies to exit the public markets and “go private,” and it has deterred non-U.S. companies from raising capital and listing in the United States.Supporters of Sarbanes-Oxley counter that these arguments are extreme. Yes the benefits of Sarbanes-Oxley are hard to quantify. Little discussion about the costs of not implementing such compliance measures, such as the losses due to fraud, and the loss of investor confidence. The costs of an entity's dysfunction, such as what happened with Enron and a number of other companies, were enormous. Trillions of dollars were lost in market capitalization, and this was a real crisis with respect to investor confidence. The feelings are that is has increased public confidence in the markets and arguably lessened accounting fraud and numbers “manipulation.”However, there is agreement among all parties that the act needs some adjustment particularly with respect to the burdens it imposes on smaller companies.
16 Everyone Is Writing About It Opening Comment - The financial arena is ever changing with IFRS growing in its use/requirement across the world & eventually the US. CFO Magazine of May 2008 has the CFO of Eaton and article title of “Good Bye” GAAP. US FASB codification is starting to simplify its structure. The January Illinois CPA Society magazine Insight is highlighting IFRS concept coming to America. The February issue of AICPA Journal of Accountancy talks about what it takes to move to the next step of this project
17 IFRS vs. GAAPIFRS – International Financial Reporting Standards by IASB (International Accounting Standards Board) GAAP – Generally Accepted Accounting Principals by FASB (Financial Accounting Standards Board)
18 But Why Be Concerned about IFRS? How can global investors, regulatory agencies, etc compare financial information/statements on a global basis if it is based on different rules, etc. It is like comparing …TO
19 IFRS Compared to GAAP = Apples vs. Oranges Both are in the fruit family but a different variety - having major differences: color, skin, taste, purpose & texture
20 But if everyone is using IFRS (a Worldwide Standard) for their Financial Reporting… Than it is like comparing Apples (Macintosh) vs. Apples (Granny Smith) Both in the fruit family and in the same variety - having minor differences: color, taste & texture – Easier comparison
21 IFRS vs. GAAPIFRS – International Financial Reporting Standards by IASB (International Accounting Standards Board) IFRSs are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. Vs GAAP – Generally Accepted Accounting Principals by FASB (Financial Accounting Standards Board) GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements
22 Why Is Everyone Talking About IFRS? The SEC Is Mandating It?Your Competitors Are Doing ItYour CPA Thinks It Is A Great Idea
24 The SEC Is Mandating ItInternational Corporations preparers no longer must reconcile to US GAAPWill it replace US GAAP?The SEC has announced a timeline (2014) for potential adoption2005 – EU Accepts itUS listed companies have the option to use IFRS2009 – New SEC Chairman – “Now my agenda”SEC will access results2014: This would be the earliest year that the SEC would require U.S. large accelerated filers to convert their financials to IFRS.2015: Earliest year the SEC would require U.S. accelerated filers to convert to IFRS.2016: Earliest year the SEC would require U.S. non-accelerated filers, including smaller U.S. public companies to convert to IFRS.
26 Your Competitors are Doing It Today more than 113 countries permit or require IFRSBy 2012 every major capital market will have adopted IFRS except the US (last to the dance)We are a globally driven environment who will need to have a common standard in place
28 Your Competitors are Doing It cont… 20112014?201220112012201020122009
29 Your CPA Thinks it is a Great Idea AICPA – Appendix A Rule 2003In 1973 FASB was set as the sole standard setterIASB (International Accounting Standards Board) is designated as an acceptable principles creation organizationContinuous Convergence between IASB & FASB for a common “standard”There are more than 15,000 SEC registered companies in the USA
30 History – Timeline of IASB 1973: Foundation of the International Accounting Standards Committee (IASC) in London as the result of an agreement between accountancy bodies in nine countries1998: Completion of 39 ‘core’ international accounting standards (IASs). The number of IASC members passes one hundred2001: The IASB assumes the standard-setting responsibilities from IASC and is overseen by the IASC Foundation (established in 2001)2002: The EU Parliament confirms the endorsement process by which IFRSs will become the sole set of standards for EU listed companies2005: Adoption of IFRSs for listed companies in the EU2006: The US FASB and the IASB publish a Memorandum of Understanding detailing a roadmap to convergence2007: US SEC publishes a proposal to eliminate reconciliation requirement for foreign private issuers using IFRSs
34 Convergence Process Between IASB & FASB On Going EffortFinal IFRSStandard?
35 Convergence Process Between IASB & FASB Agenda AlignmentFull Joint ProjectsModified Joint ProjectsShort term:Projects of Narrower areas of differenceLong term:Projects of “Big Ticket”Not just convergence for the sakes of convergence, but also improvement
36 Convergence Process Between IASB & FASB Short TermFair Value Option (FASB) completedSegment Reporting (IASB) completedJoint Ventures (IASB) final standard in 2009…Long TermFinancial Statement Presentation (Joint) DP (Discussion Paper) issued in Q42008Leases (Joint) Discussion Paper issued in Q12009Liabilities & Equity ED (Exposure Draft) in 2009
38 Convergence Process Between IASB & FASB “ Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP. The goal is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved. Because of these ongoing convergence projects, the extent of the specific differences between IFRS and U.S. GAAP is shrinking.”However ….
39 Convergence Process Between IASB & FASB There Are Still Major Differences:IFRS does not permit Last In First Out (LIFO) as an inventory costing method.IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.IFRS has a different probability threshold and measurement objective for contingencies.IFRS does not permit curing debt covenant violations after year-end.IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction.Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail.
40 High Level Differences Areas: Financial Statement PresentationConsolidations, Joint Ventures, and Equity Method InvesteesBusiness CombinationsInventoryIntangible AssetsLong-Lived AssetsImpairment of AssetsLeasesFinancial InstrumentsForeign Currency MattersIncome TaxesProvisions & ContingenciesRevenue RecognitionShare Based PaymentsEmployee Benefits other than Share-based PaymentsSegment ReportingEarnings Per ShareInterim Financial Reporting
41 High Level Differences cont… Financial Statement Presentation:The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS and is prepared at the date of transition, which is the beginning of the earliest period for which full comparative information is presented in accordance with IFRS. For example, preparing IFRS financial statements for the three years ending December 31, 2011, would have a transition date of January 1, That would also be the date of the opening IFRS balance sheet.IAS-1 requires that the opening IFRS balance sheet:Include all of the assets and liabilities that IFRS requires;Exclude any assets and liabilities that IFRS does not permitClassify all assets, liabilities and equity in accordance with IFRS; andMeasure all items in accordance with IFRS.
42 High Level Differences cont… Inventory:IAS-2 - the objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. I t also provides guidance on the cost formulas that are used to assign costs to inventories.For example inventory using LIFO is prohibited under IFRS. Techniques for the measurement of the cost of inventories, such as the standard cost method, may be used for convenience if the results approximate to cost. Companies on LIFO for US GAAP would have to support multiple inventory costing methods resulting in changes, not only to the General Ledger but also as well to the inventory management, project tracking, and procurement systems to support multiple cost basis capabilities.
43 High Level Differences cont… Fixed Assets:The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognized in relation to them.Fixed Assets requires componentization of fixed assets and permits revaluation to fair valueRequires new depreciable lives, asset categories, etc., as well as modification to front- end systems (real estate, property management) to track costs at lower levels of detail
46 Key Challenges Principles vs. Rules – Mindset Change Hidden Differences – More Than ExpectedIntegration Into Education/BudgetPolicy Issues i.e. LIFO AccountingEducationInvestors, Employees (current & future), etc.And …?
47 Transition for US Corporations from GAAP to IFRS Financial Statements:Based on the current proposed roadmap published by the SEC, companies would need to be able to produce financials under both US GAAP and IFRS for a minimum of three (3) yearsFor some companies, the time period may be longer due to stand alone US GAAP reporting requirements for statutory reporting, debt covenant reporting to banks, etc.
48 Transition for US Corporations from GAAP to IFRS – Costs? Expenses to determine the effects of adopting IFRSSystems/ IT changesMulti GAAP Capability / IFRS ComplaintPotentially higher cost of accounting staff –Restatement of 2 prior yearsInternal ExperienceOutside consultants & auditors who understand IFRSPossible cost of switching to an audit firm with proper experience in IFRS reporting
49 Transition for US Corporations from GAAP to IFRS Information Technology Considerations:IFRS is accounting driven but it will drive major changes to IT systems as well as business processes and personnelCurrent experience indicates that IT costs are generally over 50 percent of the cost of IFRS conversionOrganizations benefit when they identify and integrate the efforts of the IT team early in the IFRS conversion processDepending on the system complexities associated with the conversion to IFRS, experience from other global conversion efforts indicates that the IT system conversion component of an overall IFRS conversion can take months or longer.IT efforts will comprise a mix of short and long term projects within the organization s overall IFRS projectThe IFRS conversion effort provides opportunities for achieving synergies with other IT projects and strategic initiatives, such as an ERP implementation or major upgrade
50 SEC - Cost Estimate“ We estimated that the cost of IFRS transition under Proposal A would be 0.125% of revenue for the U.S. issuers that would be eligible to use IFRS accounting, and would be approximately 0.13% of revenue under Proposal B to reflect the additional U.S. GAAP reconciliation disclosure We used a higher percentage of revenue to take into account our different filing obligations in the U.S., which require, among other things, issuers to include three years of audited financial statements, and our requirement related to internal controls over financial reporting.” SEC QuoteSo a $1B organization estimate = $1,300,000.But you must remember that not too long ago the SEC made an estimate for a mandated enterprise-wide project that ended up costing companies millions of dollars in auditing fees. That project — the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.
51 Addressing IFRS Challenges with QAD Solutions For Global Manufacturing Companies, the typical areas concerned will center on choices to be made in the areas of:First-time adoption (IFRS 1) ReportingSegment Reporting (IAS 14, recently superseded by IFRS 8)Inventory Valuation (IAS 2)Fixed Assets Valuation (IAS 16)Revenue Recognition (IAS 18)Foreign Exchange rates (IAS 21)
52 Addressing IFRS Challenges with QAD Solutions Where some ERP vendors can only handle the multi-GAAP and reporting requirements by using separate consolidation or BI solutions, w e have embedded these capabilities in the core product suite. Some examples include:Combination of Local GAAP and IFRS, also supporting the first time adoptionQAD Enterprise Applications allow combining reporting both on Local GAAP as well as on IFRS standards through the application ‘adjustment layers’ (EE). This approach allows for separately recording and tracking of the differences between the GAAPs. Segment reportingIFRS 8 applies when a company has parts of the business operating in different business segments. QAD EE support multiple analytical segments (e.g. subaccount and SAF’s) that can be used to support segment reporting. In some cases there might be a need to reallocate general costs and revenues to the appropriate segments. QAD EE introduces an allocation module for this, streamlining the automation of this processInventory ValuationIAS 2 concerns inventory valuation and recommends costing inventory by either specific identification, FIFO or weighted average. The standard cost inventory method may be used, provided that results after incorporation of variance reconcile back to one of the above. QAD Enterprise Applications supports both standard and average costing.
53 Addressing IFRS Challenges with QAD Solutions Fixed AssetsQAD Enterprise Applications provide for the different ways to treat the lifecycle of a Fixed Asset from acquisition, revaluation through dismissal. QAD Enterprise Applications supports putting in place multiple depreciation books for an asset, allowing complying with both Local GAAP and IFRS valuation requirements.Foreign Exchange RatesQAD Enterprise Applications provide powerful tools for multi-currency activities, translating foreign currencies to functional currency at the moment of transaction and supporting the recognition of realized and unrealized exchange gains and losses at the moment of reporting.OthersThe above list is far from complete. QAD Enterprise Applications have many built-in provisions for internal controls that make reconciliation and reporting easier. QAD Enterprise Edition introduces an even more extensive set of these internal controls and extra functions.
54 QAD Solution – 2009 EEQAD Enterprise Edition introduces new capabilities to further streamline IFRS complianceAccounting Layers
55 QAD Solution – 2009 EEQAD Enterprise Edition introduces new capabilities to further streamline IFRS complianceSupplementary Analysis Fields (SAF)
56 QAD Solution – 2009 EEQAD Enterprise Edition introduces new capabilities to further streamline IFRS compliancePeriodic CostingPeriodic revaluation of item costs based on all inventory/shop floor transactions occurred during that period supporting following calculation methods:Weighted Average (WAVG)FIFOLIFOGeneration of GL Transactions for all related transactions based on new calculated item costComplete versus standard costing plus adjustmentsInventory Valuation based on WAVG, FIFO LIFO calculated item unit costsAbsorption of Indirect costsAbsorption of expenses (Freight, Insurance, …)
57 QAD Solution – 2009 EEQAD Enterprise Edition introduces new capabilities to further streamline IFRS complianceAllocations