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I read "The SEC Rules" (August) with interest. You mapped the battle for influence between contending parties (the SEC, FASB, the PCAOB, the IASB, the "Big Four," the AICPA, Congress, the President) and the importance of individual personalities and politics during this period of flux (with the SEC and chairman Christopher Cox very much the center of focus).
As a preface to reviewing various hot spots of contention, you declared "the battle has shifted" away from the issue of stock options. I am surprised at that assessment. To the contrary, the treatment of options is a matter of central importance right now, and the various parties are jockeying for advantage to assure their views prevail.
Recently, the Financial Accounting Standards Board publicly endorsed its Liability and Equity Project Committee's staff recommendations. Those recommendations include expensing employee/management options based on estimated value at time of grant (as is now the practice) and then marking to market options until expiration or exercise.
After submission of a final report and a series of closed-door meetings at FASB, you would logically expect the Liability and Equity Project report to resurface in September or October as an official FASB opinion. However, I can assure you that there is considerable concern among both outside observers and involved parties that pressure will sink (or fail to sink) the options-expense recommendation before it sees the light of day. Should the recommendation manage to surface, the IASB integration process is making itself most visible as a delaying factor: FASB will issue a "preliminary view" rather than a finding, and the review process will be allowed a fairly lengthy period for comment (probably through March 2008).
When reflecting upon options, if you see still waters, look beneath the surface: you may find the corpse of the committee's recommendation, a grisly reminder of the ferocity of the divergent camps. If the thing manages to surface, expect a battle every bit as contentious as in 1993. In either case, the options-expense issue remains as tumultuous as ever, and the outcome of FASB's Liability and Equity Project recommendations on expensing options seems likely to serve as a pretty fair acid test of who wants what (and wins) in today's world of setting accounting standards.
Michael A. Gumport
Founding Partner
MG Holdings/SIP
Via E-mail
Far from Settled
Your July article on the fifth anniversary of the Sarbanes-Oxley Act ("Five Years and Accounting," which inaugurated a three-part series that concludes in this issue) was right to note that many issues "remain far from settled."
It is time to raise serious questions. The concerns of Sarbanes and Oxley were legitimate. Some changes were needed. However, questions persist and are reflected in the continuing discontent, as you so well illustrate. (I find myself saying that if the PCAOB were a building, it would have collapsed by this time!) The architecture of the implementation is yet to be optimally designed. It is not clear that the implementation promotes "accountability on many levels."
Is the PCAOB needed, or is it a redundant body for regulation and rule-making related to financial reporting and for oversight of public accounting? Should the auditing standard-setting be transferred back to the Accounting Standards Board, which is involved in serious, good-faith participation in global efforts to establish a single set of auditing standards? Should the oversight function be moved to the SEC? Indeed, a small staff of auditors who would have full access to the inspection reports of public accounting firms auditing publicly owned entities could provide a valuable analysis and research service in monitoring weaknesses in standards, problems, with implementation, and so on. This group of auditors would be at the SEC, too.
Mary Ellen Oliverio
Professor of Accounting
Pace University
Via E-mail
Still Hitting the Ceiling
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