Compliance Week Day 2 – More Than Enough To Keep Me Busy

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Forgive the delay in posting this second day summary.  I’ve also got a three more interviews to write up and another I’m hoping to still get to round out my profile.  I’m also writing an exclusive story covering some of the highlights for those in the UK for Accountancy Magazine.  Watch for it next month in their 120th year anniversary issue.

There was no lack of content or new friends.  I will reiterate what I have already said prior and what was said on other blogs like Compliance Building, Securities Docket, IT Compliance, and Matt Kelly’s Compliance Week spot – There’s nothing like meeting people in person to create a new and stronger bond of cooperation and sharing.  And that is exactly how I feel about Doug, Bruce, Alex, and Matt. I see great collaboration in the future, all for your benefit.

I stayed in DC over the weekend – a combination of changed plans, fear of bad weather delays on Friday, laziness, and a desire to get some quiet non-business writing done.  While we were at Compliance Week last week, one of the most important trials in the accounting industry finally got underway – Banco Espirito Santo vs. BDO International.  My first dispatch, with exclusive clips, was posted over the weekend, with more to come as I review complete trial footage after each day of court.  All this takes is time.  And sometimes a lot of money. I appreciate your support and your patience.

The morning keynote on June 4th was SEC Chairman Cox, I mean Pitt.  Yes, when I asked Harvey a question later, he accused me, in front of everyone, of calling him Cox, not PItt.  Many made jokes.

Former SEC Chairman, Kalorama Partners CEO, and Compliance Week Columnist Harvey Pitt’s speech was entitled, “Ethical Cultures in a Down Economy.” This was his fourth consecutive appearance at Compliance Week’s annual conference, only one more than me. He attempted to describe how companies can (and must) instill a culture of integrity, ethics and compliance in a deteriorating economic climate. There were a few good sound bites:

“Business leaders have to stop being my mom. Just because no one tells you you have cancer, doesn’t mean you don’t.” 

Regarding Madoff scandal he says regulators never came out and admitted, “Something bad happened. We screwed up. We failed.”

“Audit firms, regulators still execute SOX with a “check-the-box” mentality focused on avoiding liability. The concept of Sarbanes-Oxley was good, but unfortunately has been ineffective in practice.”

“Real incentive for acting ethically is self-interest.” Huh? Harvey, how about heaven vs. hell?

And then I asked my question:

Mr. Pitt and I had a nice chat after the presentation. He knows that I know he’s no Cox.  Go here if you want to get a peek into his closed door session held later.

I didn’t attend the FASB Update on critical accounting developments for public companies by FASB Technical Director Russ Golden. I wanted to go see my fellow Maryland Association of CPAS Expo panelist talk about IFRS.  But I hear Golden was very good.  Go here for a summary. 

The presentation, “Making the IFRS Transition” was moderated by former FEI CEO and Compliance Week Columnist Colleen Cunningham and included Eli Lilly Chief Accounting Officer Arnold Hanish and Microsoft Senior Director of Financial Accounting and Reporting Bob Laux. Both gave detailed updates on the status of their initiatives.  In general, both firms have completed the planning and assessment stage and they emphasized that spending enough time on these two steps is essential.  Given the delay in the timetable, both re-emphasized the importance of the assessment phase – figuring out what your differences will be now and making the necessary plans, both technical and financial, to absorb the impact.

Colleen is a great moderator and asks the questions I want answered.  She asked the panelists what type of involvement their external auditors have in the IFRS conversion planning process:

I’m having a little trouble with the idea that companies are asking their external auditors for “advice” on IFRS issues during the analysis and assessment stage.  What I heard was clearly a “pre-clearance” kind of approach that doesn’t seem to me to be in synch with the spirit of the independence rules.  Companies are supposed to be staffed up with sufficient accounting expertise or willing to buy it from the appropriate independent service provider such that their auditor is not later opining on their own advice. Not having sufficient accounting technical expertise can turn into a material weakness in internal controls in their Sarbanes-Oxley assessment.

I think this needs to be be kicked around more by regulators so it doesn’t end up another self-fulfilling prophecy – auditors won’t say no or criticize because they’re the ones who gave the “go-ahead” in the first place.  We’ve seen too many situations like this in the past and I’m tired of it.  All that being said, Mr. Laux and Mr. Hanish appeared extremely knowledgeable and were detailed in their comments and responses to questions.  But you have to wonder how far up the line that kind of appreciation for the detail goes.  They both said that their Audit Committee would not be making accounting policy decisions or getting too involved other than being informed of decisions made. Seems perhaps a little too detached from decisions that may, in some companies, have a very, very big impact.

Another presentation I couldn’t attend but everyone seemed to be anxious to hear was the one by  Steven Dreyer on the new S&P Assessments of corporate governance.  I’ve written about the ratings agencies and their conflicts and issues are well know.  In fact, there seems to be quite a schizophrenic attitude towards them as evidenced by this article about Moody’s stock doing well even though the franchise is under fire every day for its conflicts.  I guess oligopolies win as long as they are preserved, no matter how much they may be perceived to be strictly self-serving.

From Doug Cornelius’ summary of Dreyer’s session:

All S&P cares about is the ability of the company to repay its debt. Corporate social responsibility is nice, but does not affect credit. S&P does not lower a credit rating on an airline because of a plane crash. They care about cash flow. They do care if a risk is a risk to cash flow. S&P is not a missionary for ERM.

So why are they adding ERM to credit ratings to non-financial institutions?

  • Enhance Analytical Process & Focus
  • Create More Forward-Looking Ratings
  • Better Insights and Communication on Management
  • Differentiate Better

Baker & McKenzie partner and former U.S. Deputy Attorney General Paul McNulty keynoted later in the day in a speech entitled, “A Tale of Two Sectors: The Challenges of Corporate Compliance When Enforcement Increases and the Economy Declines.”  Not much to say about this.  My tweet says it all. Others who were more interested wrote more

“Structuring Internal Investigations: From the Inside to the Outside,” presented by Cooley Godward Kronish partners Neal Stephens and William Freeman was on my list of “must attends”.  I will be brief now because I also interviewed them after the presentation and will be writing that up as a separate post.  Messrs. Freeman and Stephens are still on a major high as a result of their successful defense of McAfee former general counsel Kent Roberts in a stock-option backdating case. (Roberts was acquitted last month.)  Their presentation interspersed practical advice for handling super high-profile investigations with anecdotes and personal asides from the McAfee case.  I told them when I asked for the interview:  I like winners.  That makes three legal superstars on the west coast for Cooley Godward. 

Deputy Attorney General David W. Ogden was a member of the Obama transition team and has previously served as President Clinton’s Assistant Attorney General, Civil Division. He keynoted the formal closing of the conference.  A good summary is here.


10 replies
  1. Edith Orenstein
    Edith Orenstein says:

    Thank you for very informative highlights from top thought leaders at CW conference – your coverage of the conference live from the Mayflower Hotel via Twitter and your blog the past few years is always highly anticipated.

    I have one comment with respect to your reference above to the ‘pre-clearance’ process, which you note was raised during the Transitioning to IFRS panel moderated by former FEI President & CEO Colleen Cunningham, featuring Arnold Hanish of Eli Lilly, Bob Laux of Microsoft, and Gregg Nelson of IBM.

    You state: ” I’m having a little trouble with the idea that companies are asking their external auditors for ‘advice’ on IFRS issues during the analysis and assessment stage. What I heard was clearly a ‘pre-clearance’ kind of approach that doesn’t seem to me to be in synch with the spirit of the independence rules.”

    Although I was not at the conference, I would point out that if the term ‘pre-clearance’ was used, or if the description provided by the panelists sounded a lot like ‘pre-clearance,’ I believe that would be consistent (at least by broad analogy) with the SEC’s recommended ‘pre-clearance’ process which expressly encourages registrants to consult with their auditors before approaching the SEC for further guidance on a complex issue or new type of transaction. See, e.g.:
    – SEC’s “Guidance for Consulting with the SEC’s Office of Chief Accountant” , particularly the instructions under the subsection “Content of Correspondence” which, among other things, asks the registrant to state: “The conclusion of the company’s auditor with respect to the accounting, auditing or independence issue and whether the submission and the proposed resolution of the issue have been discussed with the auditor’s national office or other technical resource, and if so, when this discussion occurred.”
    – Speech by former SEC Chief Accountant Robert K. Herdman, “Advancing Investors’ Interests,” at the Dec, 2001 AICPA National Conference on Current SEC Developments, , particularly the subsections “Working Together to Get It Right,” “The Pre-Clearance Process is Not Utopia,” and “Registrants’ and Auditors’ Responsibilities.”
    – Speech by former SEC Director of Division of Corporation Finance John White, “Don’t Throw Out the Baby With the Bath Water,” at the Nov. 21, 2008 ABA Section of Business Law Fall Meeting, in which he said: “It seems like an obvious concept, but still one worth noting — whenever we can give advice and suggestions on disclosure in advance, and to everyone at once, we are more transparent and it is easier for companies to know what to expect. In addition, it streamlines the comment process, leverages staff resources, and gets more information to investors more quickly (an entire reporting cycle earlier).” Footnote 9 to that sentence references the pre-clearance process, citing to Recommendation 2.5 in the Final Report of the Advisory Committee on Improvements in Financial Reporting (CIFiR).
    – Recommendation V.S.4 in the Final Report of the Advisory Committee on Smaller Public Companies (printed page numbers 119-120; pdf pgs 129-130), urging the SEC and PCAOB to: “Monitor the state of interactions between auditors and their clients in evaluating internal controls over financial reporting and take further action to improve the situation if warranted,” cited in footnote 248 a large volume of testimony received by the commitee about a ‘chilling’ of communications and advice between auditors and clients post-Sarbox (presumably resulting from the auditors’ interpretation of auditor independence rules and related statements issued by the SEC or PCAOB), – with the concern that the decrease in communication could lead to a decrease in the quality and reliability of financial reporting.

    [NOTE: I believe the SEC and/or PCAOB issued clarifications after 2006 either within rulemaking, speeches, or staff FAQs/Q&As, to provide more comfort to auditors to return to a healthy level of engaging in consultation and advice with their clients, although I cannot locate cites at this time.]

    To wrap up, a ‘pre-clearance’ process with one’s audit firm would seem to make sense in looking at IFRS transition issues; in fact in the extreme, one may view consulting with other audit firms on IFRS issues as akin to ‘opinion shopping.’ However, there may be some specific rules of the SEC or PCAOB on this point I have not considered, and I respect that there are various views about the interaction between consultation and independence; as companies contemplate a potential wholesale adoption of IFRS, the question will continue to be debated.

  2. EX-DT
    EX-DT says:

    I’m interested in your thoughts on this point:
    “I’m having a little trouble with the idea that companies are asking their external auditors for “advice” on IFRS issues during the analysis and assessment stage. What I heard was clearly a “pre-clearance” kind of approach that doesn’t seem to me to be in synch with the spirit of the independence rules.”

    While I agree that the independence rules need to be carefully maintained, what options are there for companies in potentially subjective / tricky areas? Surely it is better for them to consult with their auditors to get to the right answer earlier, than to wait until the end and have the auditors say “no, we don’t like that”.

    I guess there are potentially lots of tricky areas – it may be easier for something like an IFRS treatment question, but for certain areas i.e. control remediation, companies may take months or longer to implement projects to address SDs or MWs, so they really need to have the auditors up to speed and bought in to some degree as they go along. Otherwise there is a risk they could spend substantial time / effort and still not have the auditors comfortable at the end.

    Any thoughts?

  3. fm
    fm says:

    @Edith Orenstein and @Ex-DT

    Thanks Edith for the details on the letter of the laws that apply here with regard to the pre-clearance policy…

    I think the operative phrase in my expression of concern is ” doesn’t seem to me to be in synch with the spirit of the independence rules…” The key word in that phrase is “spirit.” I am aware that clarification was made regarding consulting with auditors in order to “thaw the chill” that had developed immediately post-SOx. The past few years have seen much of the post-Enron re-regulation go through a de-regulatory phase. But perhaps we should look to who was behind this chill thawing between auditors and their clients that I think was well considered at the time and more than necessary – Christopher Cox.

    The auditors were just fine with the chill because they were picking up the fallout on the back end-with SOx consulting work for each other’s audit clients. But now that clients are pushing back and tightening their belts, they are feeling the internal profit pressure and seek to re-expand their roles and influence over audit clients. You can see this in the subtle drumbeat via on-the-payroll academics that’s started on the issue of providing internal audit services to external audit clients, for example.

    My point is that their are now plenty of INDEPENDENT, well qualified advisors for companies in the area of GAAP, IFRS, and SEC reporting. Frankly, the Big 4 generally can’t competently advise their US based clients on IFRS unless they import foreign professionals. Would be just as well for companies to hire FRA, FTI, Huron, or Resources Global’s Colleen Cunnigham and/or hire and beef up their own staff with training from independent providers or the Big 4. Remember when we saw otherwise “blue-chip” companies like GE and GM get dinged with material weaknesses for inadequate, incompetent accounting technical expertise? It’s ridiculous that multibillion dollar conglomerates won’t invest in having people who understand the accounting they’re doing in order to create the earnings they are reporting.

    It may be that the current environment allows this kind of fraternization between the auditors and clients on technical accounting issues and for these same auditors then to opine on these accounting treatments as if they were independent. And I’m sure the auditors are enjoying having a lock again on their clients on a few things like IFRS and XBRL, thanks to Cox’s previous strong mandates. They must be fearful of Shapiro continuing to de-prioritize both mandates. These are the only things that are putting any new money in their coffers. But it doesn’t mean it’s right to revert on these independence ideals. Whether on this, or on the internal audit issue, or on going easy on having business alliances with audit clients as I described re: PwC and Satyam, it’s not good for shareholders and other stakeholders

  4. EX-DT
    EX-DT says:

    FM – again, I agree with you that independence (both in appearance and fact) is key, however IMHO there is another question here. As we know, the focus is on the material accuracy of the financial statements. At the end of the day, the competency of accounting staff, effectiveness of ICFR etc are ultimately aimed at that target. So, I wonder, what is truly the issue (taken at face value) with a company and their auditors agreeing an appropriate treatment?

    I do agree that entities need to have the skills in house and should not rely solely on their auditors for determining the treatment, but assuming a company proposes a treatment to the auditors, who find it acceptable, I’m interested in your concerns on “pre-clearance” in this context. Are you suggesting that it’s better for a company to wait until the auditors have finished testing to determine they have an issue? This would obviously increase tension between auditor and client, but I’m not sure how this would be beneficial.

    Apologies if I’m missing your point but I’m interested to hear your thoughts. Also, I am not in a technical accounting role and no longer within the Big 4, so maybe I’m seeing things more simply than they really are…..

  5. fm
    fm says:


    The concept of an independent audit opinion relies on the auditor being independent, objective. If they are asked and give advice on accountinng treatment while decision, activities is in process, they are stepping into shoes of management. They are no longer independent when they later assess the integrity of the financial statements and management decisons regarding treatment of transactions and representations for public disclosures.

    That is the biggest no-no. The external auditor gives an opinion on the accuracy, completeness, integrity, of financial statement as management presents them. Done. Final. Yes, this can be tense. And I’m not saying that if the company hires one Big 4 firm for advice and another one is their auditor that you might not have a pi**ing match. And then again, the Big 4 sticks together, so if one says something is reasonable and appropriate , they are loathe to call each other out because that firm might do the am thing too them when the roles are reversed somewhere else.

    Bottom line is that the changes in SOx in this area were intended to prevent companies from relying so heavily on the auditors for advice and to tell them what to do that they essentially abdicated responsibility for their own accounting, thereby muddying the waters when things went wrong.

    That;s why the opinion on internal controls (which is now integrated with the financial statement opinion) is management’s opinion. The auditors opinion is on whether management had sufficient controls in place to develop a valid opinion themselves. It’s a subtle line but a critical one.

  6. Anonymous Auditor
    Anonymous Auditor says:

    This is a tough issue. I believe the problem is that it comes down to attitude, which is very hard to regulate. Two examples:

    1) During the era, the controller of one of my audit clients would regularly call me to ask if he could recognize revenue under whatever bizarre contract structure his marketing guys were proposing. I would say no. He would put his hand over the phone and yell at the marketing guys, “I told you we couldn’t do it.” I don’t think most people would suggest that type of consultation was wrong. Granted, this wasn’t an SEC client, but I don’t think it’s reasonable to expect even an SEC registrant to have access to the same depth of accounting expertise in areas of emerging guidance as a 100,000 person public accounting firm. I also don’t think it’s reasonable to expect the client to account for the transactions however they think best without consultation, then have a “gotcha” moment at year-end — I’m not sure how that serves anyone well.

    2) Based on what I’ve read about Enron (and it’s only what’s publicly available), it appears that they discussed with their auditors how to structure transactions in order to get the accounting treatment they wanted, which was generally removing liabilities from the books and/or recognizing revenue on the basis of a sale that lacked economic substance. I think most people believe what was done was wrong.

    How do you codify the difference between #1 and #2? You can say that in #1, I wasn’t suggesting transaction structures. But I could easily have explained to the client that revenue couldn’t be recorded until the earnings process was complete, and explained what SAB 101 (not yet 104) meant by completing the earnings process, and I still don’t think that would have been wrong. Was there a difference in attitude between #1 and #2? I certainly think so. But fundamentally, both discussions amounted to “If I do X, do I get Y accounting treatment?” I don’t know how to legislate / regulate the difference between them.

  7. ex-DT
    ex-DT says:

    @6 – totally agree with your post. The thing that got me thinking about this thread initially was exactly the same as the point you made here:

    “I also don’t think it’s reasonable to expect the client to account for the transactions however they think best without consultation, then have a “gotcha” moment at year-end” – can you imagine the discussions with the board – “what do you mean you only found this out now…” – not a great situation.

    Unfortunately I also agree that I have no idea how you can easily address this…… 😕

    Anyone else got any inspiration? 🙂

  8. Anonymous
    Anonymous says:

    1) wouldn’t it be appropriate for internal audit/advisory to help with what you term “pre-clearance” or helping to transition to IFRS?

    2) The check-the-box mentality seems to really hold back external audit from quality work. But, is that the way the regulations have set it up to work?

    3) How can we get auditors to get over the word materiality. If they continue to dismiss many things as immaterial that in aggregate add up to something material, or miss the criminal act because it (as a stand alone act) was immaterial?

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