FASB Considering New Approach to Accounting

Standards board mulling switch to principles-based accounting; move would bring U.S. in line with Europe. Also: SEC may charge Martha with fraud, ex-Manugistics finance exec gets two years in prison, and more pension fund shortfalls.


Somebody build an ark.

In what can only be described as a dramatic about-face, the Financial Accounting Standards Board (FASB) said it will discuss whether to take a principles-based approach to accounting. Some members of the board believe such a move might improve the quality and transparency of financial reporting and affect development of future standards.

This approach relies more on broadly applied principles and less on specific, detailed rules.

FASB is seeking public comment on the proposal by January 3, 2003, and will hold a public roundtable discussion on the topic on December 16.

Linda A. MacDonald, FASB project manager, explained that some constituents have expressed concern that detailed accounting standards are more difficult to use and costly to implement. Still others believe that detailed rules allow for structuring transactions that meet the literal requirements of the rules — but ignore the intent and spirit of the standards.

FASB and standards-setters at Europe’s International Accounting Standards Board (IASB) have long differed over which of the two approaches is superior. The IASB has promulgated a principals-based system, and to date, Europe has been relatively free of the corporate scandals that have roiled the U.S. markets.

As CFO.com reported last month, FASB and the IASB met on Sept. 18 to discuss harmonizing accounting standards by 2005. At the meeting, the two sides agreed to look at 15 different accounting treatments, and to settle on one approach in each of those 15 areas. At the time, Sir David Tweedie, chairman of the IASB, reportedly said: “What has happened here is quite historic. This is a public commitment that we will try to get rid of those differences.”

Yesterday, Robert Herz, FASB chairman, insisted that the American board is committed solely to improving U.S. financial accounting standards “Many believe that moving to broader, more principles-based accounting standards such as those used in other parts of the world would facilitate better reporting in the United States,” Herz noted.

Not all finance managers cleave to that opinion, however. As Herz himself noted: “[Some] are concerned that a principles-based approach could reduce the comparability of financial information and leave too much room for judgment by companies and auditors.”

FASB said it needs more information before it undertakes initiatives to adopt the approach. Indeed, the setting-board concedes that adoption of a principles-based approach would require changes in the mind-set of all participants in the U.S. financial accounting and reporting process.

While a switch to principles-based accounting would be a real switch for FASB, the board has little choice but to consider such a move. The recently enacted Sarbanes-Oxley Act requires the SEC to investigate the feasibility of implementing a more principles-based approach to accounting in the U.S. FASB said it worked closely with the Commission in preparing this new proposal.

A number of accounting-watchers were less than enthusiastic about the news from FASB.

“It runs the risk that different firms will start accounting for the same type of transaction in different ways,” Ed Ketz, an associate professor of accounting at Pennsylvania State University, told the Associated Press.

An IASB-type system would also potentially provide wide latitude for auditors to make their own interpretations of specific rules and practices.

Lynn Turner, an accounting professor at Colorado State University and the SEC’s former chief accountant, told the wire service: “I don’t think it’s an either-or answer. The bottom line is anyone who thinks a broad-based principle fixes the problem, they’re dreaming.”

(Editor’s note: Is governance in Europe better than governance in the U.S? Should American companies adopt some of the governance practices championed by European regulators and executives? Read “Transatlantic Answers,” a CFO.com exclusive.)

Ex-Manugistics Executive Sentenced

Another finance executive is going to jail.

Barry L. Saffer, a former director of financial planning and analysis with Manugistics Group, Inc. was sentenced to 24 months in jail for illegal insider trading.

On July 2, Saffer pleaded guilty to 10 counts of securities fraud.

The SEC said Saffer used his position at Manugistics to obtain nonpublic information and traded in advance of company news announcements on a number of occasions. The illegal trades were made over a three-year period from Jan. 1999 through March 2002.

The Commission also filed a related civil action against Saffer alleging that he violated the antifraud provisions of the federal securities laws by engaging in illegal insider trading.

The SEC is seeking an injunction, disgorgement and a penalty.

Is Martha Next?

Speaking of illegal insider trading: it looks like Martha Stewart could be the next high-profile executive to be charged with using non-public information to trade shares of stock.

According to Reuters, the SEC plans to recommend filing securities fraud charges against Stewart over her sale of about 4,000 shares of ImClone Systems Inc. stock.

Reportedly, Stewart was served a Wells notice by the SEC. The notice gives Stewart 30 days to respond to charges.

Any charges against the home-and-garden doyen must be approved by the entire SEC in Washington, the report said.

If she is convicted, Stewart would face a large fine. The SEC would also likely bar her from acting as an officer or director of a publicly traded company. That means Stewart would be forced to resign as chairman and chief executive of Martha Stewart Living Omnimedia Inc.

Stewart is currently being probed by the Justice Department about her Imclone sales. The department is also said to be investigating whether Stewart lied to a Congressional committee about the transactions.

Last week ImClone CEO Samuel Waksal, a friend of Stewart, pleaded guilty to a number of insider trading charges.

CFO Resigns Over Alleged Conflict

Vesta Insurance Group, Inc. said Monday Chief Financial Officer, W. Perry Cronin resigned, effective immediately.

Hopson B. Nance, vice president and controller, has been named Interim Chief Financial Officer. Nance, who had formerly worked at PricewaterhouseCoopers, joined Vesta in July 2000.

“These relationships do not impact the accuracy of our financial statements and we intend to certify our financial statements for the third quarter,” said Norman W. Gayle III, President and CEO.

He added the company is looking to name a permanent CFO by the end of the year.

Global Crossing Restates Results

Global Crossing said it will restate its financials for 2000 and the nine months ended September 2001, which will result in a reduction in revenues by $19 million.

The restatement, in effect, will reverse revenues the company had recognized for swaps of telecommunications capacity and service contracts.

The SEC told Global Crossing that its previous accounting for these exchanges did not comply with Generally Accepted Accounting Principles.

The company said the details of the restatements will be subject to the review of a new independent accountant. Global Crossing’s board of directors expects to appoint the new auditor shortly.

Global Crossing’s accounting firm for the periods subject to the restatement was — yup — Arthur Andersen.

The company indicated that cash flow would not be affected by the revised accounting treatment.

Global Crossing noted that the enforcement division of the SEC is continuing its investigation into various matters relating to the transactions that are being restated.

More Pension Shortfalls

At least three large, high-profile companies announced huge pension shortfalls on Monday.

Alcoa Inc. said it expects an increase in its pension liability of $700 million to $1 billion, mostly due to the decline in equity markets and interest rates, according to Reuters.

“Assumption changes for major plans are expected to impact after-tax earnings by approximately $50 million annually,” the company management said, according to the wire service. “There is no material change in funding expected in 2003.”

Alcoa is reportedly lowering its expected rate of return on its pension assets from 9.5 percent, but did not provide a new figure.

Also on Monday, 3M Co. said it would take a $1 billion charge in the fourth quarter due to a pension funding shortfall.

And United States Steel Corp. reported it may have to take a $750 million charge against equity later this year to account for possible shortfalls in its union employee pension plan.

Last week Credit Suisse First Boston said that 325 companies in the S&P 500 would have pension shortfalls by the end of the year.

Short Takes

  • A few major companies either announced large layoffs or hinted about plans to do so. Texas Instruments Inc. said it would fire 500 workers while United Airlines announced 1,250 job cuts with more to come.

Ford Motor Co., on the other hand, simply said it is looking to make an additional $1 billion in cuts from overhead next year due to the lousy economy.

  • New York Stock Exchange Chairman and Chief Executive Richard Grasso said that corporate offenders must be prosecuted to help rebuild investor confidence.

Speaking at the Directors’ Education Institute at Duke University, he reportedly said the recent prosecutions were critical to demonstrate to investors that fairness and transparency were paramount in American equity markets.

“That’s the contract that was broken, and that’s the contract that is going to be fixed,” Grasso reportedly said. “The system isn’t broken. There were some in the system whose moral compass was broken.”

  • Boeing won a critical ruling in a dispute with its largest union. An arbitrator ruled the aerospace giant didn’t violate its 1999 contract with the union when it subcontracted work out at the same time it was laying off workers.

The union had argued the layoffs were violations of its 1999 contract, which stipulated there would be no layoffs directly resulting from giving work to subcontractors and suppliers except for “strategic work placement,” and other undefined situations, according to Dow Jones.

In its 2002 contract, Boeing defined strategic work placement as giving work to foreign suppliers for forming or creating alliances that help Boeing gain access to a key market or otherwise make a sale, the wire service explained.

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