FASB and IASB Agree to Possibly Agreeing

Standards boards want to unify accounting rules by 2005; harmonization could take longer. Plus: Another CFO pleads guilty to fraud, and commotion down at the supermarket. Also: Red-letter date: EDS wins big BPO award from P&G.


On Wednesday, members of the Financial Accounting Standards Board and the International Accounting Standards Board met in FASB’s Connecticut office. What was the upshot of the get-together? Apparently the two standards-setting groups agreed to try to agree.

No joke. The heads of both boards have asked their staffs to select the better accounting standard in each of 15 areas, according to published reports.

The boards will then make a formal decision on how to proceed following public comment.

The end game: to harmonize accounting standards by 2005. That happens to be the deadline for all publicly traded companies in the European Union to adopt international accounting standards.

“What has happened here is quite historic,” Sir David Tweedie, chairman of the IASB, reportedly said. “This is a public commitment that we will try to get rid of those differences. What we are trying to do is move as quickly as we can to get a compatible set of standards.”

But Tweedie and Robert Herz, his FASB counterpart, told reporters they are realistic enough to expect intensive political and corporate opposition when it comes time to deciding which standard to adopt.

“If we propose certain things in order to achieve convergence and they affect particular companies or industries I expect there will be opposition,” Herz told FT.com.

While the boards said they will seek convergence in such areas as how companies make restatements when accounting standards change and the classification of short- and long-term liabilities, they did not talk about the hotly debated issue of expensing stock options.

The IASB is expected to come up with its own proposal on that subject within the next few weeks. FASB has already chosen to invite public comment on any differences between the IASB draft and existing U.S. rules. “We have a duty to look at it and come up with a good answer that is the same or similar to what they have put in,” Herz told the Web site of the Financial Times.

The reality, though, is that a meaningful convergence of accounting standards won’t occur unless both sides agree to compromise. “Everybody has to recognize that both have to be willing to change,” Herz told Dow Jones. “This is about change for everybody.”

FASB will meet on October 2 to discuss the issue of convergence. The IASB approved the convergence project back in July.

FASB to Decide on Stock Options

Meanwhile, FASB indicated it would decide within a year whether U.S. companies will need to expense stock options. The standards board is seeking comments on the hot topic from investors and businesses during the next month.

Keep in mind that FASB tried to require companies to treat options as expenses back in 1995. U.S. companies successfully lobbied Congress to force FASB to dilute the rule, however.

“It’s an issue that’s very much on the minds of our constituents, investors, people on Main Street, and Congress as well,” Herz told Bloomberg Wednesday during FASB’s joint meeting with the IASB.

Currently, companies must disclose options expenses in the footnotes of their annual reports if they don’t expense the grants.

The IASB has said it will require European companies to deduct employee stock options from earnings by the end of the year.

As CFO.com reported, a panel of The Conference Board on Tuesday called on FASB to require companies to expense stock options.

D&T Warned, A&P Dismissed

Some commotion down at the supermarket.

The Great Atlantic & Pacific Tea Co. acknowledged in a public filing that it fired independent auditor Deloitte & Touche one day after the accountancy had warned the company about questionable internal controls relating to the timing of the recognition of certain vendor allowances. A&P dismissed D&T as its independent auditor on September 10, hiring PricewaterhouseCoopers instead.

What’s more, it appears that D&T had actually informed the chairman of A&P’s audit committee about the “reportable condition” as early as August 21.

A reportable condition is defined under generally accepted auditing standards as “matters coming to an auditor’s attention that represent significant deficiencies in the design or operation of internal control that could adversely affect the entity’s ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements.”

A&P stressed in the filing that during the two most recent fiscal years, and the subsequent interim period through the date of D&T’s dismissal, there were no disagreements between the company and D&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. If there had been such a disagreement, and it was not resolved to D&T’s satisfaction, the auditor would have been forced to make reference to the subject matter of the disagreement in connection with its reports.

Management at A&P said it previously disclosed that it conducted a review related in part to certain irregularities relating to the timing of recognition of vendor allowances. The review examined the internal controls for vendor allowance accounting.

“The company’s restatement of its audited financial statements for fiscal 1999 and fiscal 2000, and supplementary unaudited financial information for the first, second and third quarters of fiscal 2001…resulted in part from that review,” A&P indicated in Wednesday’s filing. “The company has authorized D&T to respond fully to inquiries of PwC concerning such reportable condition.”

Penn Traffic Rings Up Restatement

More news from the supermarket.

Yesterday management at Penn Traffic Co. acknowledged that the company had restated financial results for more than three years due to an accounting fraud committed by an employee.

On August 8, the supermarket operator said it would restate financial results after discovering that an employee of its Penny Curtiss bakery manufacturing subsidiary made false accounting entries that primarily involved the overstatement of inventory. The employee was fired.

On Wednesday, Penn Traffic said the total cumulative after-tax effect of the misstatements was $7.3 million. The restatement also reduced operating income for the 21-week period ended June 26, 1999, by $1.1 million.

The effect on earnings before interest, taxes, depreciation, and amortization, or EBITDA, during the same period was $11 million.

“Although we are very concerned about what happened, we have not felt any significant impact from this financial restatement,” said Joseph Fisher, president and chief executive.

Former Auto Parts CFO to Plead Guilty

Another former chief financial officer is headed for prison.

According to wire service reports, Peter Bromberg, the former top finance executive at Motorcar Parts & Accessories Inc. (MPA), will plead guilty to charges that he lied to investors. Bromberg’s book-cooking forced the company to restate earnings for 1997 and 1998.

Bromberg, 38, of Wellington, Florida, admitted committing financial fraud by falsifying Motorcar’s books and records. He served as the company’s CFO from 1994 until he resigned in May 1999.

Bromberg reportedly faces a maximum sentence of 20 years in prison and a possible $1 million fine.

His arraignment on two felony counts of making false statements to investors is scheduled for September 30.

Motorcar Parts, a maker of replacement alternators and starters for imported and domestic cars and light trucks, reportedly inflated its earnings by nearly $3.4 million, or 60 percent, in 1997. With Bromberg’s apparent assistance, the company artificially bumped up earnings by about 50 percent in 1998.

The Securities and Exchange Commission also has filed criminal and civil charges against Bromberg and Motorcar Parts for deceiving investors and lying to auditors.

SEC Names Former Andersen Partner

It appears that not all Arthur Andersen alums are having trouble getting work. Yesterday Scott A. Taub, a former partner at Andersen, was named deputy chief accountant for the SEC.

Taub (no relation) will share with Jackson M. Day responsibilities for the day-to-day operations of the office, including resolution of accounting and auditing practice issues, rule-making projects, and oversight of private sector standard-setting efforts and regulation of auditors, the commission said.

Taub will begin work at the commission September 23.

“Given his experience as a partner at an accounting firm and his former knowledge of the workings in this office when he was professional accounting fellow, I believe Scott will provide invaluable service to the commission and to investors,” said SEC chief accountant Robert K. Herdman.

Taub was most recently a partner with Andersen’s Professional Standards Group in Chicago. Seven of his years at Andersen were spent in its Detroit office, where he served as a manager in the audit practice.

He served as a professional accounting fellow with the Office of the Chief Accountant from June 1999 through June 2001. Taub, 34, graduated in 1990 from the University of Michigan in Ann Arbor. He is a member of the American Institute of Certified Public Accountants.

EDS to Announce $8 Billion Outsourcing Deal

Electronic Data Systems Corp. on Thursday will announce that it will buy the business-technology operations of Procter & Gamble Co. and manage them as part of a 10-year, $8 billion contract, according to Reuters, citing sources close to the deal.

Under the terms of the deal, P&G will sell the technology operations that are used to run the company’s global business processes, such as staff payroll, accounts payable, and pensions, said Reuters. Then P&G will farm out the management of those operations to the successful buyer.

This is what’s known as business process outsourcing, the fastest-growing segment of outsourcing. Under more traditional outsourcing arrangements, a services company takes over the computer and server operations of a business and runs them remotely on its behalf.

(Editor’s note: For more on the latest trends in business process outsourcing, see “Where’s the Big Deal?” In November, CFO.com will run a special report on business process outsourcing.)

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