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PLI Hosts Audit Committee Workshop

At the Practising Law Institute's recent audit committee workshop, Carol Stacey, the departing chief accountant in the SEC's Division of Corporation Finance, recommended looking at FASB's quarterly reports. The reports provide highlights and projects planned for the rest of the year. FASB has a number of major projects on its plate, she said, including accounting for leases, revenue recognition and financial statement presentation.

Stacey advised that the SEC will be looking at the disclosure in response to recent FASB statements on fair value, pensions and accounting for income tax uncertainties. She noted that FIN 48, Accounting for Income Tax Uncertainties, applies to all tax positions, not just those considered aggressive. She referred interested parties to a speech by Jenifer Minke-Girard last December which outlines the staff's views. Stacey predicted that there will be a lot of comments in this area.

Meredith Cross, with Wilmer Cutler Pickering Hale and Dorr LLP, discussed what she sees as the most important development on the disclosure side, which is the new executive compensation and affiliated transaction rules. She said she has seen more attention paid to proxy statements this year than in her past 25 years in the business. Audit committee responses to the new disclosure rules are all over the map, she reported, but most committees asked for a briefing and a description of the company's plan to comply.

Cross said most audit committees did not "get into the weeds" on the executive compensation disclosure requirements, given that it falls within the purview of the compensation committee. Some companies have delegated the related persons transaction rules to the governance committee. Audit committees already have too much to do, she said. The options backdating problems made clear that there was underwhelming board oversight of executive compensation, Cross added. She said the lesson learned is that the audit committee needs to understand compensation and accounting practices.

M. Michael Cook, retired from Deloitte & Touche LLP, noted that when he appeared at the conference last year, he said it was time to reset the perspective of the audit committee to focus on improving financial reporting. Now it's a year later, and the talk is still about section 404, he said, and for the fifth year. Basic financial reporting is declining in value, in his view, because it lacks business performance information.

Cook said that audit committees should spend time on earnings releases rather than Forms 10-Q, because that's where the information that matters is. The audit committee should care about earnings releases because they do not receive the same "defense" and are not subject to the same controls, he explained. There is lots of information in the financial statements that does not mean anything to users, he said.

Cook said it is time for regulators to step back, take a look at what is going out to investors and what is not captured within the current system. It is time to redefine the financial reporting package, in his view.

Jacquelyn Lumb