ACCOUNTING AND AUDITING OVERSIGHT: 

PENDING PROPOSALS AND EMERGING 

ISSUES CONFRONTING REGULATORS, 

STANDARD SETTERS, AND THE ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 28, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–112 

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ACCOUNTING AND AUDITING OVERSIGHT: PENDING PROPOSALS AND EMERGING ISSUES 

CONFRONTING REGULATORS, STANDARD SETTERS, AND THE ECONOMY 

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ACCOUNTING AND AUDITING OVERSIGHT: 

PENDING PROPOSALS AND EMERGING 

ISSUES CONFRONTING REGULATORS, 

STANDARD SETTERS, AND THE ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 28, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–112 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 28, 2012 ................................................................................................. 1 

Appendix: 

March 28, 2012 ................................................................................................. 59 

WITNESSES 

WEDNESDAY, MARCH 28, 2012 

Attmore, Robert H., Chairman, Governmental Accounting Standards Board 

(GASB) .................................................................................................................. 13 

Carcello, Joseph V., Ph.D., CPA, CMA, CIA, Ernst & Young and Business 

Alumni Professor; and Director of Research—Corporate Governance Center, 

The University of Tennessee, Knoxville ............................................................. 40 

Doty, James R., Chairman, Public Company Accounting Oversight Board 

(PCAOB) ................................................................................................................ 10 

Kabureck, Gary R., Vice President and Chief Accounting Officer, Xerox Corporation, on behalf of Financial Executives International (FEI) ..................... 41 

Kroeker, James L., Chief Accountant, U.S. Securities and Exchange Commission (SEC) ............................................................................................................. 8 

Melancon, Barry C., CPA, President and Chief Executive Officer, American 

Institute of Certified Public Accountants (AICPA) ........................................... 43 

Quaadman, Tom, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 45 

Seidman, Leslie F., Chairman, Financial Accounting Standards Board 

(FASB) ................................................................................................................... 12 

APPENDIX 

Prepared statements: 

Attmore, Robert H. ........................................................................................... 60 

Carcello, Joseph V. ........................................................................................... 79 

Doty, James R. .................................................................................................. 87 

Kabureck, Gary R. ............................................................................................ 110 

Kroeker, James L. ............................................................................................ 132 

Melancon, Barry C. ........................................................................................... 144 

Quaadman, Tom ............................................................................................... 158 

Seidman, Leslie F. ............................................................................................ 169 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy; and Capuano, Hon. Michael: 

Written responses to questions submitted to Leslie F. Seidman ................. 253 

Fitzpatrick, Hon. Michael: 

Written statement of the Investment Company Institute (ICI) and the 

Independent Directors Council (IDC) .......................................................... 260 

Written statement of the Mutual Fund Directors Forum (MFDF) .............. 267 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 275 

Sherman, Hon. Brad: 

‘‘Blue-Ribbon Panel on Standard Setting for Private Companies, Report 

to the Board of Trustees of the Financial Accounting Foundation,’’ 

dated January 2011 ...................................................................................... 277 

(1) 

ACCOUNTING AND AUDITING OVERSIGHT: 

PENDING PROPOSALS AND EMERGING 

ISSUES CONFRONTING REGULATORS, 

STANDARD SETTERS, AND THE ECONOMY 

Wednesday, March 28, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Biggert, Hensarling, Neugebauer, Campbell, McCotter, Pearce, 

Posey, Fitzpatrick, Grimm, Dold; Waters, Sherman, Miller of North 

Carolina, Maloney, Perlmutter, and Donnelly. 

Ex officio present: Representative Bachus. 

Also present: Representatives Renacci and Capuano. 

Chairman GARRETT. Good morning. Today’s hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises is called to order. This morning’s hearing is on accounting 

and auditing oversight. 

We will begin with opening statements. And I will recognize myself for about 3 minutes. 

We are here today to examine the accounting and auditing profession. And the hearing is aptly titled, ‘‘Accounting and Auditing 

Oversight: Pending Proposals and Emerging Issues Confronting 

Regulators, Standard Setters, and the Economy.’’ 

Accurate and reliable financial reporting to investors is obviously 

a key cornerstone to our Nation’s capital markets. It is essential 

that investors have the appropriate information needed to make 

well-informed decisions on just where to invest their capital, as our 

Nation continues to recover from the recent financial crisis. 

So we must work hard to restore the vitality to our markets and 

to foster an environment where American public companies can do 

what they do best, which is create jobs. 

There are three broad areas that I want to explore in greater detail today with our great panelists here. 

First, I would like to hear from the SEC where we stand with 

international convergence of accounting standards. 

I know this is a top priority for many in the business community. 

I also realize that there is some disagreement between the large 

2 

and the small companies, as well as from different industries as to 

what the preferable outcome of convergence will be. 

I am interested in discussing the steps that the Chairman and 

staff are taking to overcome these various obstacles, and how we 

can ensure that harmonization of these standards creates an atmosphere here in the United States where companies and investors 

have the best information possible. 

Second, I look forward to learning more about the current process that FASB and GASB go through to develop their standards. 

And I agree that the integrity and the independence of the standard-setting process is basically essential, and that Congress should 

not legislate accounting standards. 

I have seen some positive statements from the market participants about the improvement in the standard-setting process. And 

I appreciate that FASB and GASB balance that delicate line of listening to the business community’s concerns, while also ensuring 

that there is an independent process in place. 

Finally, I would like to discuss some of the PCAOB’s current proposals and how and why these proposals came to pass. 

I do think it is important to remind the PCAOB that it is not 

a policy-making entity. Congress and this committee are the policymakers here. The PCAOB’s job basically is to regulate and oversee 

the auditing profession. 

So I am concerned about some of the recent activist-type proposals put forth by the PCAOB. And I agree with the Chamber of 

Commerce, where I was just speaking this morning as a matter of 

fact, and others, that believe that they may be engaged in—as 

someone called it—mission creep—crossing the threshold of audit 

regulation into an attempt to regulate corporate governance. 

Specifically, the recent concept release on mandatory audit firm 

rotation is concerning. 

What is the specific problem they are trying to solve here with 

that? What data are they examining? What kind of specific cost/ 

benefit analysis is being done? What solutions will this lead to? 

Too many times with many of our regulators, the policy outcome 

is predetermined before the work—that is hard usually to do—is 

determined and what the best solution should be. 

So I would like to commend the gentleman from Pennsylvania, 

Mr. Fitzpatrick, for his legislation that would prevent the PCAOB 

from moving forward right now on its policies. 

This hearing will serve as a legislative hearing for that proposal. 

And it is my hope that the subcommittee will consider this bill at 

the next possible markup. 

So in conclusion, while I believe that those three areas, especially 

the concerns around the PCAOB, are the most pressing issues, I realize that there are many other issues that require further discussion. And I look forward to a constructive hearing this morning. 

With that, I now yield 3 minutes to the gentlelady from California, and good morning. 

Ms. WATERS. Good morning, and thank you, Mr. Chairman, for 

holding this hearing. 

Investors in my district, including workers with investment and 

pension funds, have a strong interest in enhancing auditor independence. After all, it is the auditors who are supposed to reassure 

3 

investors that they can trust the financial reports of the companies 

they have entrusted with their lifesavings. 

How we can achieve more auditor independence is obviously a 

subject for our debate. And I appreciate that the Public Company 

Accounting Oversight Board has put out its concept release on 

auditor rotation, and held public meetings last week to get this 

conversation started. 

While I certainly think that we must explore ways to enhance 

auditor independence, I am interested in understanding the issue 

of mandatory auditor rotation more fully, whether it would work, 

or whether there might be better alternatives than mandatory rotation. 

For example, should shareholders perhaps be allowed a proxy 

vote to determine if they would like to have mandatory audit rotation? Are there are measures that might increase professional 

skepticism more than rotation would? 

However, even if stakeholders come to the conclusion that mandatory rotation is a good idea, I don’t think anyone believes that 

it could come close to resolving all of the outstanding barriers to 

auditor independence. So I am eager to explore any other ideas 

brought forward by our witnesses today. 

Finally, I would also like to note that I have been focused on ensuring that auditors are adequately and independent, and skeptical 

under the OCC and Federal Reserve’s market servicing consent 

order process. 

Under that process, banking regulators required servicers to hire 

auditors to investigate their foreclosure practices over the past few 

years, and to provide remediation to affected borrowers. 

We found that auditors often have other lucrative engagements 

with the servicers they have been hired to investigate; perhaps creating a disincentive to find wrongdoing when it comes to looking 

at their foreclosure practices. 

So along with Senator Menendez and some of my colleagues from 

the House, I have asked the GAO to look into this issue. 

There are also other issues I hope we can get to today, including 

the role of audit committees, whether to make PCAOB disciplinary 

proceedings public, and certain accounting issues. 

I look forward to hearing the testimony of our witnesses today. 

Thank you. And I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

The gentlelady yields back. 

The chairman of the full Financial Services Committee, Chairman Bachus, is recognized for 2 minutes. 

Chairman BACHUS. Thank you, Mr. Chairman, for convening this 

hearing. 

I think it is important to have oversight of the SEC Office of 

Chief Accounting, the Public Company Accounting Oversight 

Board, and the Financial Accounting Standards Board. 

There are several critical issues facing the accounting and auditing professions, their regulators, and their standard setters including the convergence of global accounting standards, mandatory 

audit firm rotation, and audit quality. 

While we all agree that sound accounting and auditing play a 

critical role in the U.S. capital markets, regulatory overreach and 

4 

overly aggressive standard setting may disrupt the economy and 

limit job creation. 

Regulatory overreach at least appears to be alive at the PCAOB. 

For example, the Board ignored what I consider flexibility provided 

in the Dodd-Frank Act to scale its oversight of auditors of brokerdealers, and instead imposed a one-size-fits-all exam program for 

all of these auditing firms. 

Moreover, there are some at the PCAOB who feel that public 

companies should be required to rotate their audit firm. I have serious concerns about such a proposal because mandatory audit firm 

rotation would both increase the cost of auditing and decrease 

audit quality. And for that reason, I am not sure it is sound policy. 

And no hearing on the accounting industry would be complete 

without a discussion of Sarbanes-Oxley, which will have its 10th 

anniversary in 4 months. As we approach that landmark, it is incumbent upon this committee to determine if Sarbanes-Oxley has 

been completely successful, and specifically, if Section 404(b) has 

been worth the cost. 

Being from Birmingham where HealthSouth is located, obviously 

I know the value of good auditing. And I think Sarbanes-Oxley has 

probably resulted in avoiding a lot more HealthSouths and Enrons. 

But particularly for small firms, the cost can be significant. 

I thank the witnesses for your testimony. 

And I thank you, Chairman Garrett, for holding this hearing. 

I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

The gentleman yields back. 

Thank you, Mr. Chairman. 

The gentlelady from New York is recognized for 2 minutes. 

Mrs. MALONEY. Thank you. 

And thank you, Mr. Chairman, and welcome to all the witnesses. 

Oversight of the accounting industry is an important function of 

this committee. And I am so pleased that we have all of the accounting standard setters here with us this morning. 

If we have an accurate and fair accounting system, then we have 

safety and soundness in our financial institutions. We have an 

oversight of how to be more effective in our government programs. 

And there are so many ways that an accurate accounting industry 

can contribute to the strength of our country. 

We have also seen how if there are slack standards, we can end 

up with total economic disaster such as Enron and Tyco and others 

that led to the passage of Sarbanes-Oxley. And as we approach the 

10th anniversary, I look forward to hearing your comments on how 

Sarbanes-Oxley is working or not working. 

With the 404(b) exemption, we made permanent in Dodd-Frank an exemption for public companies under $75 million, because of 

the cost, because many are start-ups, because of the need to have 

the right balance to allow them to grow without costly red tape. 

I would like to hear whether you feel we got the right balance for exempting companies under $75 million, and that have not been 

required to comply with 404(b). I am also interested in hearing 

more about proposals to make disciplinary proceedings public. 

I understand the concern that the PCAOB has about firms dragging disciplinary proceedings. But I also want to hear whether 

5 

there is any concern that by making these proceedings public, we 

are necessarily harming the reputation of a firm before any official 

action is taken. 

Personally, I don’t think we should do so unless there is an official action. 

I am also concerned about the cost and quality of audits. That 

is always a top concern, and one that I hear concerns, and about 

this thing about rotating of the oversight with the accounting 

firms. 

I wonder whether there are other ways to boost auditor firm 

independence without putting an arbitrary requirement in there 

that might disrupt the relationship between the firm and the company it is auditing, and also the cost and quality effects that it has 

with the mandatory firm rotation. 

So you have a big responsibility. If our audits are correct, then 

our economy and our private and public institutions are fair and 

honest and open, and hopefully thriving. 

Congratulations on the work you do. And I look forward to your 

testimony. 

Chairman GARRETT. The gentlelady yields back. 

Mr. Fitzpatrick for 1 minute. 

Mr. FITZPATRICK. Thank you, Mr. Chairman, for convening this 

important oversight hearing. 

Our economy is in the midst of the slowest economic recovery 

since World War II. And what the American people need is for the 

economy to grow and for the private sector to create jobs. 

What the people do not need is their own government getting in 

the way of that economic recovery or the private sector job creation. 

For the last 15 months, this chamber and this committee has examined areas where regulations are stifling job growth and holding 

back our recovery. This hearing is consistent with that effort. And 

I thank the chairman for holding it. 

According to the Small Business Administration, regulations cost our economy $1.8 trillion annually. It is a very heavy burden on 

companies that we are looking to for job growth. 

So when the Public Company Accounting Oversight Board issues 

a concept release for mandatory audit firm rotation, that elicits a 

negative response from almost 95 percent of the respondents in 

American companies from Krispy Kreme to Xerox to Coca-Cola. 

And they are unanimous in their opposition. I think that more 

than justifies a very, very careful examination. 

We cannot afford to hamper job creation, and to lock up capital 

at this very fragile time. 

So as we prepare to hear testimony today, I am curious to know 

what sort of cost/benefit analysis has been done or will be done. 

And ultimately, I want to hear how this new regulation is going 

to help the economy and create jobs. 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

Mr. Perlmutter is recognized for 1 minute. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

And just sort of in response to my friend, Mr. Fitzpatrick, in the 

summer of 2008, the stock market was at about 12,500. By the end 

of the Bush Administration, 6 months later, it was at 6,500, a loss 

6 

of 6,000 points. It is $1.3 billion per point, about $7.6 trillion, 

$25,000 for every man, woman, and child in America. And we were 

losing about 800,000 jobs a month. 

We are now gaining about 200,000 jobs a month. We have doubled the stock market to about 13,000. We have had 23 months of 

job growth, and a doubling of the stock market. 

And so allowing Wall Street or any financial markets to run pretty wild without regulation, without some responsibility through the 

accounting sector—and I am not throwing any disparagement towards you—but it is important to have reasonable regulation in 

place, because the cost of the loss that we suffered in the fall of 

2008 was monumental. And we can’t have something like that 

again. 

Now I agree with Mr. Fitzpatrick in terms of, let us be reasonable. Let us make sure that we are not doing things that are just 

obstacles only for obstacle purpose, but have a real direction and 

a real effort in helping investors. 

But we must have good accounting in this country so that investors and others feel protection, and a certainty and reliability of the 

system. 

With that, I yield back. 

Chairman GARRETT. The gentleman yields back. 

I appreciate the reference to the Bush Administration. 

Mr. PERLMUTTER. I thought you would like that. 

Chairman GARRETT. Thank you. 

Mr. Grimm is now recognized for 1 minute. 

Mr. GRIMM. Mr. Chairman, thank you for holding this hearing, 

and I thank all of the witnesses for coming today to testify. 

I think there are a lot of things that have contributed to the financial meltdown. And I certainly think that government intervention and the government’s role cannot be left out of it when you 

are factoring in all the different things in the analysis. 

But I certainly realize that job creation has to be at the top of 

the list. And whether the stock market is going up and down, I 

think there is a myriad of reasons why the stock market has doubled. 

I don’t think necessarily the accounting standards or what we 

are going to talk about in this hearing today is the reason. But I 

do know that stability, certainty, and the rule of law has always 

been an innate advantage for the United States. 

And I think that preserving that, and making sure that everyone 

around the world who is going to invest understands our rules, and 

knows what they are going to be, not only today but tomorrow, will 

certainly help create jobs. 

So I am looking forward to hearing your testimony today. 

And with that, I yield back. 

Thank you. 

Chairman GARRETT. And the gentleman yields back. 

Mr. Dold is recognized for 1 minute. 

Mr. DOLD. Thank you, Mr. Chairman. 

Historically, our capital markets have been the most transparent 

and the most efficient capital markets in the world. 

7 

And our accounting and auditing profession, along with the supporting balance regulatory framework, I believe, is an important 

reason for the historical success of our capital markets. 

However, an increasingly interrelated global financial system 

and constantly changing economic circumstances puts significant 

pressure on our regulators and the Congress to make sure that the 

existing regulatory framework still makes sense, and that any necessary improvements are identified and implemented promptly. 

After studying the proposals and considering the written testimony, and other expert resources, I am most concerned about two 

proposals that I believe have been rejected for good reason each 

time Congress considered them in the past: the mandatory audit 

firm rotation proposal; and the proposal to immediately make all 

Public Company Accounting Oversight Board allegations public 

without any due process and without any findings. 

While I am always open to hearing counter arguments, these two 

proposals seem to me like solutions that are searching for nonexistent problems, while creating a serious risk of inflicting severe, 

unnecessary, and actual harm on investors and other end-users. 

In any event, all of these proposals raise important questions. 

And I look forward to hearing from my colleagues and from our 

witnesses today. 

Thank you so much for being here. 

Mr. Chairman, I yield back. 

Chairman GARRETT. The gentleman yields back. 

Do we have any other opening statements? Yes? 

Mr. Royce is recognized for 1 minute. 

Mr. ROYCE. The market is up, Mr. Chairman. But we still have 

fewer people in the labor force, fewer people out there working in 

jobs than we did 3 years ago. 

And with the 10th anniversary of Sarbanes-Oxley coming up, I 

think the question for us—we all know what the end goal is. We 

are going to get the highest quality audits for public companies. 

That is the ambition. 

The question is, how you do that in a reasonable way in terms 

of affordability, in terms of what is practical. What we happen to 

see is that we have something of an anchor on the creation of new 

corporate firms coming into the market. 

We have fewer IPOs. We do have a consequence here. It is incumbent upon us to look at this tradeoff, and ask ourselves if we 

are taking actions that make it harder for this economy to get back 

on its feet. 

Have we made it harder for new firms to create economic activity 

that employs Americans? Because at the end of the day, we have 

to ask ourselves how it is humanely possible to have figures that 

show so many people out of work, so much smaller participation in 

the American labor force after only 3 years. 

What creates a circumstance where we have such a slow recovery? 

And is part of it the overreach? The regulatory overreach is part 

of it. The regulatory cost is part of it, the impractical rules that we 

have put on our economic system. 

Can we do something to get that balance so that the economy recovers more quickly? 

8 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. The gentleman yields back. 

And I think you are our final speaker, Mr. Renacci, for 1 minute. 

Mr. RENACCI. Thank you, Mr. Chairman. 

I want to thank you and the subcommittee for allowing me to sit 

in on this hearing this morning. 

I realize most Members usually don’t flock to hearings on accounting standards. But as a CPA, I believe the standards are the 

essential foundation for a sound and stable economy. 

The reliability of a financial statement would allow businesses to 

access capital, markets to attract investors, and create jobs. 

As lawmakers draft laws and propose regulations, we must remember that without uniform, consistent, and independent accounting standards, the accuracy of financial statements will deteriorate, making it more difficult for investors to invest, and companies to raise capital. 

I want to thank the witnesses for being here today, and I look 

forward to hearing your testimony. 

I am especially interested in hearing about FASB’s latest efforts 

to coordinate international accounting standards, the progress of 

implementing the Dodd-Frank accounting provisions, and the 

PCAOB’s proposal to mandate audit firm rotation. 

Thank you again, Mr. Chairman, for allowing me to be here this 

morning. And I yield back. 

Chairman GARRETT. And thank you. The gentleman yields back. 

Thank you for being with us here today, and for all those people 

who are not flocking here, they obviously just do not know what 

they are missing, because today we have the SEC, the PCAOB, the 

FASB, and the GASB here, all here to testify on the first panel. 

So I welcome you gentlemen, and gentlelady. 

As all of you who have been here before know, we will recognize 

each of you for 5 minutes, and your complete written statements 

will be made a part of the record. 

And so with that, Mr. Kroeker, good morning, and you are recognized for 5 minutes. 

STATEMENT OF JAMES L. KROEKER, CHIEF ACCOUNTANT, U.S. 

SECURITIES AND EXCHANGE COMMISSION (SEC) 

Mr. KROEKER. Good morning and thank you, Chairman Garrett, 

Ranking Member Waters, and members of the subcommittee. 

I am Jim Kroeker, Chief Accountant of the Securities and Exchange Commission, and I serve as the principal advisor to the 

Commission on accounting and auditing matters. 

I thank you for the opportunity to appear before you today, to 

testify on behalf of the Commission regarding current issues related to the accounting and auditing profession. 

The reliability of financial reporting is critical to the confidence 

of the investing public. The objective of financial reporting is to 

provide information that is useful to providers of capital in their 

decision-making process. 

This information must be neutral, reliable, and portray economic 

results in an accurate and faithful manner. 

I am pleased to be on today’s panel with individuals who have 

important roles in promoting high quality financial reporting. 

9 

I would like to summarize for the subcommittee some of what I 

view to be the principal current issues on this subject, beginning 

with accounting developments. 

In February of 2010, the Commission issued a statement in support of efforts of the Financial Accounting Standards Board and the 

International Accounting Standards Board to converge U.S. GAAP 

with International Financial Reporting Standards, or IFRS. 

This statement also directed the staff of the SEC to execute a 

work plan to evaluate issues relevant to a potential Commission 

consideration of incorporating IFRS for U.S. issuers. 

With respect to convergence, the two Boards have continued to 

work diligently to complete their priority projects. Despite several 

successes, many challenges remain. 

In addition, in response to concerns about the pace of standard 

setting, the Boards have extended several times the timetable for 

completion of these projects. 

With respect to the work plan, the staff has expended substantial 

efforts towards its execution. To inform the Commission and the 

public of our progress, the staff has issued several progress reports 

and other papers. 

At this point, we have completed what I believe to be the field 

work related to the work plan, and we anticipate publishing a final 

report in the upcoming months that will summarize our findings 

and observations in each of the areas of the work plan. 

Moving on from international accounting standards, in recent 

years we have seen how important it is that financial regulation 

and accounting and auditing standards keep up with changes in 

the business environment. 

In response, we have launched the Financial Reporting Series, 

an ongoing series of roundtables designed to examine emerging 

issues in financial reporting. 

The inaugural roundtable was held in November of last year and 

discussed measurement uncertainty and its role in financial reporting. 

Turning to auditing issues, this coming July will mark the 10th 

anniversary of the Sarbanes-Oxley Act. Despite the Act’s many 

beneficial reforms, the PCAOB’s inspection program continues to 

identify audit deficiencies of varying nature and severity, which 

may increase the risk of material misstatement in financial reports. 

In response, the PCAOB is engaged in several efforts to enhance 

audit quality. It has undertaken efforts to identify and analyze further the underlying root causes of these audit deficiencies. 

It has issued a concept release on auditor independence and objectivity, an important component of audit quality, that considers 

audit firm rotation, and it has issued a concept release on whether 

there should be changes to the information that auditors provide 

in their audit reports to investors. 

Other jurisdictions, including the European Union, are currently 

considering these and other auditing reforms. 

The PCAOB is working on a number of projects to update existing audit and quality control standards to reflect the lessons that 

it has learned from nearly a decade of audit firm inspections. 

10 

This type of project may have a direct positive impact on audit 

quality. My staff will continue to work closely with the PCAOB as 

it moves forward with these projects. 

Finally, I would like to highlight two auditing areas related to 

the Dodd-Frank Act. 

First, last summer the Commission proposed amendments to the 

financial reporting requirements for broker-dealers. And the 

PCAOB proposed new auditing and attestation standards that 

would apply to the audits of broker-dealers. 

Both sets of proposals are still under consideration. 

Second, the staff performed a study with respect to Section 

404(b) requirements for issuers with market capitalization between 

$75 million and $250 million. This study was delivered to Congress 

last April. 

To conclude, there is a substantial amount of activity in the accounting and auditing area. We will continue to work closely with 

the FASB and the PCAOB on these matters, guided by the Commission’s mission of protecting investors; maintaining fair, orderly, 

and efficient markets; and facilitating capital formation. 

Thank you. And I would be pleased to address any questions. 

[The prepared statement of Mr. Kroeker can be found on page 

132 of the appendix.] 

Chairman GARRETT. Thank you, and the gentleman yields back. 

Mr. Doty from PCAOB, welcome to the panel, and good morning. 

You are recognized for 5 minutes. 

STATEMENT OF JAMES R. DOTY, CHAIRMAN, PUBLIC 

COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB) 

Mr. DOTY. Thank you. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, I am pleased to appear before you today. The 

PCAOB is focused on taking appropriate steps to improve audit 

quality and enhance protection of the investing public. 

By law, all of the PCAOB’s responsibilities are discharged under 

the oversight of the Securities and Exchange Commission. 

Chairman Mary Schapiro, the Commissioners, and Chief Accountant Jim Kroeker have taken a deep interest in the PCAOB’s 

work, and I am grateful for their support. 

The Sarbanes-Oxley Act of 2002 requires the PCAOB to conduct 

a continuing program of inspections of registered accounting firms. 

Our global network firm program covers the largest U.S. firms 

and approximately 190 of their foreign affiliates. In 2011, the 

PCAOB issued 344 inspection reports which included global firms, 

foreign affiliates, and smaller firms subject to PCAOB inspection. 

During an inspection, PCAOB inspectors evaluate the design and 

effectiveness of a firm’s quality control system, as well as the quality of the firm’s work in the proportions of the audit selected for 

inspection. 

The PCAOB has also continued its work to implement the DoddFrank Act which gave the PCAOB authority for inspection, standard setting, and enforcement for the audits of brokers and dealers 

registered with the SEC. 

To this end, we have established a pilot inspection program for 

auditors of SEC-registered broker-dealers. This program will assess 

11 

compliance with existing auditing standards, all of which were set 

by the profession prior to the Dodd-Frank Act. 

The pilot program is intended to help the Board determine the 

scope and elements of a permanent inspection program, including 

whether to exempt any public accounting firms such as the auditors of introducing brokers from inspection. 

No firm’s specific reports will result. But that should provide us 

valuable information needed to move forward with an intelligent 

permanent program. 

We have also commenced a series of meetings with smaller firms 

that audit smaller broker-dealers, which we call forums on auditing 

smaller broker-dealers. These forums allow smaller firms to learn 

about the PCAOB’s work and to provide their own insights and 

suggestions. 

In addition to inspection authority, the Board has the authority 

to impose sanctions on registered firms and associated persons who 

have violated applicable laws and standards. 

Under the laws that exist today, however, the PCAOB’s disciplinary proceedings are nonpublic. This is not good for investors, not 

good for the auditing profession, and not good for the public at 

large. 

I commend Congressman Westmoreland and Ranking Member 

Frank for bringing forward bipartisan legislation, H.R. 3503, to 

bring transparency to the PCAOB’s disciplinary proceedings. 

Turning to standards, the Sarbanes-Oxley Act also charges the 

Board with establishing audited and related professional practice 

standards. The Board has recently proposed new standards relating to communications with audit committees and related parties 

in transparency. 

The Board has also recently issued two concept releases soliciting 

public comment on the auditors reporting model, and auditor independence, objectivity, and professional skepticism. The concept release on independence, objectivity, and professional skepticism included questions about the pros and cons of mandatory firm term 

limits. 

These concept releases did not propose new auditing standards. 

Rather, they sought the public’s views on particular matters so 

that the Board can better evaluate the need for future standard 

setting. 

Just last week, the PCAOB held a 2-day public meeting on auditor independence, objectivity, and professional skepticism, at which 

47 prominent leaders of the business world and academia offered 

their views. 

This dialogue on auditor independence, objectivity, and professional skepticism was prompted by, among other things, concerns 

developed over the last 9 years of the PCAOB inspections of public 

company audits. 

Concerns about auditors’ skepticism have also been expressed by 

regulators in other countries. If this process results in the PCAOB 

proposing any rules—I emphasize ‘‘if’’—and whether those would 

involve any form of audit rotation, term limits, or not, any such 

standards, any such proposed standards would be subject to further 

public comment and SEC approval. 

12 

I am certainly not wedded to any particular outcome. But I do 

believe that the PCAOB must continue to explore issues of such 

fundamental importance for the audit. 

In conclusion, I appreciate the subcommittee’s interest in this 

work. And I look forward to any questions you may have. 

Thank you. 

[The prepared statement of Mr. Doty can be found on page 87 of 

the appendix.] 

Chairman GARRETT. And I thank you. 

Ms. Seidman, you are now recognized for 5 minutes. 

STATEMENT OF LESLIE F. SEIDMAN, CHAIRMAN, FINANCIAL 

ACCOUNTING STANDARDS BOARD (FASB) 

Ms. SEIDMAN. Good morning. Chairman Garrett, Ranking Member Waters, and members of the subcommittee, my name is Leslie 

Seidman, and I am the Chairman of the Financial Accounting 

Standards Board, also known as the FASB. 

The FASB is an independent private sector organization which 

operates under the oversight of the Financial Accounting Foundation and the Securities and Exchange Commission. 

Since 1973, the FASB has established standards of financial accounting and reporting for nongovernmental entities, including 

both public and private businesses, and not-for-profit organizations. 

Those standards are recognized as authoritative generally accepted accounting principles, or GAAP, by the SEC for public companies, and by the American Institute of Certified Public Accountants 

for other nongovernmental entities. 

GAAP is essential to the efficient functioning of capital markets. 

Investors, creditors, donors, and other users of financial reports 

rely heavily on relevant, comparable, and unbiased financial information. 

Accounting standards are not intended to drive behavior in any 

particular way. Rather, they seek to present financial information 

so that financial statement users can make informed decisions 

about how best to deploy their capital. 

An independent standard-setting process is the best means of ensuring high quality accounting standards, since it relies on the collective judgment and input of all interested parties through a thorough, open, and deliberative process. 

We meet regularly with several advisory councils who advise us 

about emerging financial reporting issues, the practical implications of our proposals, and opportunities for improvement. 

We also meet regularly with the staffs of the SEC, the PCAOB, 

and banking regulators as well as policymakers and their staff. 

We recently added a project to reconsider the accounting for and 

disclosures about repurchase agreements, as a result of recent feedback obtained through these processes. 

Broad consultation helps to identify unintended consequences, 

and to assess whether the benefits to users of improved information from our proposed changes outweigh the costs of the changes 

to preparers and to users. 

The FASB recently completed several standard-setting projects to 

improve the transparency and overall usefulness of information 

provided in financial reports and to reduce complexity. 

13 

These projects include: new disclosures about a company’s commitments to multi-employer pension plans; a simplified approach 

for determining whether a company’s goodwill is impaired; and 

guidance to help creditors account for and disclose troubled debt restructuring. 

The FASB also has a number of ongoing projects including its 

projects to improve and converge U.S. GAAP and International Financial Reporting Standards. We have already made substantial 

improvements on converged accounting standards in a number of 

areas, and are making progress on four remaining priority projects: 

revenue recognition; leasing; financial instruments; and insurance. 

In all of these projects, we are making a significant effort to understand the perspectives of all of our stakeholders through public 

meetings, field visits, workshops, and the exposure of our proposals 

for public comment. 

We have made a number of changes in response to the suggestions and concerns that have been expressed through these various 

means. For example, on our financial instruments project, we have 

modified our original proposal relating to loan accounting and impairment. And we are proposing new disclosures about liquidity 

risk that were suggested by investors. 

In addition to our standard-setting activities, the FASB has recently made numerous process changes to improve our ability to 

understand and act upon private company concerns. We now have 

Board members with significant experience with private companies 

and staff dedicated to addressing private companies issues. 

We have broadened our outreach activities to seek out and listen 

to private company practitioners, such as at dedicated roundtables. 

In short, the FASB has taken these steps to understand private 

company perspectives in every standard that we set. The FASB is 

taking similar steps to enhance its consideration of the accounting 

and reporting needs of not-for-profit organizations. 

Thank you for the opportunity to provide a brief overview of the 

FASB, and its priorities for this year. 

My written testimony provides extensive information about our 

projects and activities. 

I would be pleased to answer your questions. 

[The prepared statement of Ms. Seidman can be found on page 

169 of the appendix.] 

Chairman GARRETT. Thank you for your testimony. 

And finally, Mr. Attmore, you are recognized for 5 minutes. 

STATEMENT OF ROBERT H. ATTMORE, CHAIRMAN, 

GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) 

Mr. ATTMORE. Thank you. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, thank you for this opportunity to participate in 

today’s hearing. 

My name is Robert Attmore. I am the Chairman of the Governmental Accounting Standards Board and have served in that capacity since 2004. 

Before joining the GASB, I was a deputy controller for the State 

of New York, and served as the New York State auditor. 

14 

Because this is the first time in the 27-year history of GASB that 

we have been invited to appear before Congress, I would like to 

briefly provide some background on our organization. 

Sovereign state governments have the authority to establish accounting and financial reporting standards for themselves and 

their local jurisdictions. Before the GASB was created, State and 

local governments’ accounting and financial reporting standards 

were established for over 50 years by the National Council on Governmental Accounting (NCGA). 

In the wake of a financial crisis in the 1970s, State governments 

recognized the need for change. In order to adequately meet the 

needs of financial report users in the municipal bond market, State 

representatives determined they needed an independent national 

standard-setting body for State and local governments comparable 

to the Financial Accounting Standards Board. 

State organizations working with the Financial Accounting Foundation (FAF), the American Institute of Certified Public Accountants, local government organizations, and the Government Accountability Office reached an agreement in 1984 to create the 

GASB, which began operations that year. 

Today, all State governments follow financial reporting standards 

issued by the GASB. 

The GASB was set up as an independent, private sector organization that establishes accounting and financial reporting standards for State and local governments in the United States. GASB 

was directed to adopt the existing NCGA standards, and then given 

the mission to establish and improve standards for State and local 

government accounting and financial reporting. 

The mission is accomplished through a comprehensive and independent process that encourages broad participation, objectively 

considers all stakeholder views, and is subject to oversight by the 

FAF board of trustees. 

Our proceedings are public and transparent. GASB’s rules of procedure require that we circulate draft recommendations for public 

comment. We also hold numerous roundtable discussions and public hearings to solicit constituent views. 

The GASB’s work is accomplished with the seven-member board. 

As the chairman, I am the only full-time member of the board. The 

other GASB members serve on a part-time basis. 

All board members have significant expertise in the issues facing 

State and local governments obtained through their prior work experience. The board is assisted by a 21-member staff. 

In the past, the GASB was funded in a piecemeal, inadequate 

manner by voluntary contributions from States, local governments, 

the financial community, and sales of FAF publications. The DoddFrank Act established for the first time an independent stable 

source of funding for the GASB for which we say, thank you. 

Over the years, GASB has issued 66 standards on a wide range 

of issues. Let me just mention two important projects on the 

GASB’s current technical agenda. 

The first is our pension accounting and financial reporting 

project. After extensive study, we have proposed several changes in 

the treatment of pensions, including new approaches to recognize 

pension expense. 

15 

We also propose bringing the net pension liability onto the face 

of an employer government’s balance sheet. Our goal is to issue 

new standards for pensions in June of this year. 

The second GASB project addresses economic condition reporting. 

This deals with financial projections for State and local governments. 

GASB recently solicited public comments on a proposal that 

would call for State and local governments to provide projections 

of cash inflows, cash outflows, and total financial obligations for at 

least a 5-year period going forward. 

We will be considering all the responses received for those proposals over the next several months. 

Finally, the GASB could not achieve its mission without the 

strong support and oversight of the FAF board of trustees. This 

oversight assists us in maintaining our independence, and provides 

additional credibility to the robust public due process that the 

GASB follows when setting standards. 

Thank you again, Mr. Chairman, for the opportunity to appear 

before the subcommittee. And I would be pleased to answer any 

questions. 

[The prepared statement of Mr. Attmore can be found on page 

60 of the appendix.] 

Chairman GARRETT. Thank you, and welcome to the panel for the 

first time in 27 years. 

Mr. ATTMORE. Thank you. 

Chairman GARRETT. I will now recognize myself to begin the 

questioning. 

And thanks to the panel. 

We will start with Mr. Doty. 

You may be familiar with the fact that I sponsored some legislation, it is before the committee, that would require the SEC and 

the PCAOB to do a cost/benefit analysis, and to identify the problem before the whole rule process begins. And I am sure you are 

familiar with that. 

So looking at that issue in general, and then drilling down a little bit to the area that I referenced in my opening comments, and 

that you, I see, referenced in your discussion as well, the mandatory audit firm rotation. 

Can you drill down a little bit and go beyond what you talked 

about as far as the panel that you discussed, with regard to any 

analysis that has been done on this, whether it is an economic 

analysis already, and if not already, what your plans are going forward? 

What specific type of economic analysis has been or will be done? 

What sort of data would you be looking to collect? What has been 

or will be done? What sort of people will be doing that, economists 

or otherwise? How many have or will be done? 

Can you just get into some detail on that particular area? 

Mr. DOTY. Yes, sir. 

Chairman GARRETT. Great, thanks, sir. 

Mr. DOTY. Yes, sir. 

First, we are at the concept stage. The concept release raised the 

issue of auditor independence because of the concern about the inherent conflict in the auditor’s fee. This all comes out of a wideVerDate Nov 24 2008 17:25 Jan 25, 2013 Jkt 075084 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\75084.TXT TERRI
16 

ranging international focus on whether the audit profession has an 

inherent conflict. 

As you know, Congress originally, in considering this subject, did 

in fact institute audit partner rotation; they deferred the question 

of a firm rotation. The GAO took a look at it, and said we should 

wait a few years, and then look at it again. 

We have in fact raised the concept release and asked people to 

consider what would be involved here, because it is a fact that nations around the world are rushing to adopt mandatory rotation in 

some cases in 5 and 6 years. 

So we thought it was important to ventilate this subject. 

Without talking about it, you are talking about auditor independence and the conflict of the fee in a—and ignoring the elephant in 

the room. 

At any time, at any point that we get to a proposal for a standard, we will have considered in-depth the scaling, the proportionality, the purpose of the standard, whether the standard can be expected to engender the conflict—the conduct in an auditor that we 

expect, whether there are unintended consequences in the conduct 

of the auditor, scaling, proportionality. 

And then, we think a post-implementation review is a part of any 

kind of analysis of the practicality and the cost of and the utility 

of a standard. And we do that. 

We have done it. And if you look at our outstanding proposal on 

communications with audit committees on related parties, I think 

you will see that. 

In this particular context, I think it is clear that we always have 

problems in the financial regulatory area, as the GAO notes. And 

many times, you cannot monetize or quantify either the costs or 

the benefits. 

We will, I can assure the committee, be thinking as we move forward in this area of independence, with any standards that we are 

thinking of bringing in the independence area to address these 

issues of conflict— 

Chairman GARRETT. Yes. 

Mr. DOTY. —skepticism, independence, objectivity— 

Chairman GARRETT. Right. 

Mr. DOTY. —we will be thinking about the utility, the— 

Chairman GARRETT. So— 

Mr. DOTY. —and the cost/benefit of it. 

Chairman GARRETT. Okay, so on that last point. I guess that is 

where—I get the point on scaling, proportionality, and the consequences. 

In that analysis, once you—first of all, do you have a timeline as 

to when that will begin? When you do that, will you be bringing 

in an economist to be making that examination? And how many 

economists would be making that analysis? 

So start there: when; who; and how many? 

Mr. DOTY. Mr. Chairman, I can’t tell you that we will be bringing 

a standard on mandatory audit firm rotation. At this point, we are 

a long way from any kind of decision on whether firm rotation 

should be proposed as a standard. 

17 

We are holding discussions on auditor independence and inviting 

a wide range of ideas on whether there is something we should be 

doing about independence— 

Chairman GARRETT. And just—I only have about 3 seconds, and 

I try to abide by it pretty closely. 

Other than the general concensus or general thought that this is 

an issue that should be looked at, was there any specific data that 

you had received from anyone to say, here is data that can show 

us that this is a problem area as opposed to anecdotal, this is just 

another topic area that we should be looking at? 

Mr. DOTY. It is a very fair question. If you go back in our comments, the Board had—the Board’s inspectors in inspecting over 

the years, have found questions of skepticism, issues of whether 

auditor skepticism was present, whether professional independence 

was being compromised. 

This is an area that crops up, recurs. It recurs in our findings 

over the years. It is not an isolated issue. It is not simply something that was raised without the basis in the— 

Chairman GARRETT. And I will close it on this. 

I think your comment was that we are not wedded to this outcome, so there is no preconceived notion as to—from where you 

personally sit or anybody else as far as the outcome here? 

Mr. DOTY. Yes. In fact, Mr. Chairman, in the meetings of last 

week, I think one of the hallmarks of those meetings was that we 

heard a number of thoughtful comments on what could be done to 

enhance skepticism, to enhance the professionalism of auditors, but 

also to enhance the effectiveness of audit committees. 

There is great interest among audit committees in working toward a more effective analysis of the audit function, and a more 

effective evaluation of the audit service they are getting. 

That could come out of this very easily as a result. 

Chairman GARRETT. I thank you, Mr. Doty. 

I yield back and the gentlelady from California is recognized for 

5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to start with Mr. Kroeker. 

J.C. Flowers & Company, a private equity firm and a major MF 

Global shareholder, recruited Jon Corzine for the CEO job at MF 

Global. 

Moreover, until MF Global’s failure, Mr. Corzine was an 

unsalaried operating partner at J.C. Flowers. David Schamis, a 

partner at J.C. Flowers, sat on the MF Global board, was deemed 

an independent director by the firm and was able to sit on the 

firm’s risk and audit committee. 

So I am looking at all of these connections—many contend that 

the risk and audit committee at MF Global did not sufficiently 

push back against Corzine’s risk in sovereign debt trade. 

While I am not trying to get into the specifics of this case, does 

MF Global teach us anything about how we can increase audit 

committee independence? 

Yes, Mr. Kroeker? 

Mr. DOTY. Ranking Member Waters— 

Mr. KROEKER. Yes, again without commenting on any of the specifics, and I think consistent with Chairman Doty’s response of 

18 

what we heard in their 2 days of hearings yesterday on audit committee effectiveness is that there are areas where audit committees 

are probably—best practices with respect to audit oversight. 

Part of that is understanding the nature of PCAOB inspections, 

how risk—financial reporting risk, how that relates to operational 

or business risk. PCAOB has a standard under consideration for finalization on auditors’ communication with audit committees that 

helps provide that linkage between financial reporting risk and the 

audit committee’s oversight role. 

Ms. WATERS. Oh, and I am not so sure whether or not you—related to my concerns about the overlapping directorate here as it 

relates to those that I named that sat on both MF Global’s and the 

relationship that Mr. Corzine had with J.C. Flowers, these connections I am concerned about. 

What do you recommend? 

Mr. KROEKER. Yes, and under existing requirements, again without commenting specifically on any individual registrant, the requirements to have an independent audit committee, I think, have 

strengthened that audit committee oversight role. 

So I think, taking those requirements very seriously, that the 

audit committee members need to fulfill that independent role of 

the overseer of the audit process. 

Ms. WATERS. Let me go to you, Mr. Doty. 

Audit committees currently do not have access to PCAOB inspection reports which assess whether auditors approach their work 

with the required independence, objectivity, and professional skepticism. 

Would this information be useful to audit committees? 

Does the PCAOB need legislation in order to share inspection reports with audit committees? 

Mr. DOTY. Ranking Member Waters, that is a good question. 

Auditors, the auditor can of course waive or make this information available to an audit committee. 

We cannot, under the statue. We cannot do it. 

The auditor can choose to do it. But one of the remarkable things 

we heard over the last 2 days of meetings last week was an acute 

interest in audit committee members, mature and thoughtful people who sit on many audit committees and who want to see more 

of the detail that lies behind our published part one inspection reports. 

So we believe that there is enhanced interest among audit committee members in understanding what our reports mean and what 

kind of detail is behind them. And we believe that there will be increasing interest on the part of audit committee members as an attribute of their being an effective monitor and evaluator of audit 

quality. 

Ms. WATERS. So again, you think you need legislation? 

Mr. DOTY. You would need legislation to authorize the Board to 

deliver it upon request of an audit committee member. 

There was interest in audit committee members in meeting with 

the Board and having an exchange on that basis. And I think you 

would need legislation before we could reveal what is in the nonpublic portion of the report. 

Ms. WATERS. Thank you. 

19 

Back to Mr. Kroeker, while I still have a few seconds. 

Recently, the United Brotherhood of Carpenters Pension Fund 

and the Sheet Metal Workers Pension Fund have submitted a series of proposals to public companies recommending a shareholder 

advisory vote asking the companies to establish a policy of mandatory auditor rotation every 7 years. 

To date, the SEC staff has issued no action letters to each of the 

companies stating it would not recommend enforcement action to 

the SEC if the companies omitted, the unions audit rotation proposal from its proxy materials. 

Can you discuss the rationale for the SEC staff’s decision on this 

issue? 

Mr. KROEKER. Yes, and principally that is an issue that is handled by our Division of Corporation Finance and attorneys who look 

at the existing requirements for such proposals. 

So I would be happy as well to get additional information. 

But under the existing staff no-action guidance, there is an assessment made as to whether or not the request is a matter of— 

just to put it simply, in the ordinary course of business. And this 

has been a no-action process that works for many different types 

of proposals. 

I am aware that proposals were brought forward with respect to 

auditor rotation and the staff’s guidance was sought as to action, 

and the staff’s conclusion was that no action would be recommended because it would be viewed as in the ordinary course of 

business activities. 

Ms. WATERS. My time has been exhausted. I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

Mr. Bachus is recognized. 

Chairman BACHUS. Thank you. 

Mr. Doty, in my opening statement I mentioned the audit firm 

rotation. And your statement, I think, basically is that we are only 

at the start of considering this. And we have made no decisions. 

There seems to be at least a misinformed public who believes 

that you are well on your way to doing that. And I don’t know why 

that is. 

But, Mr. Garrett asked you if you had done a cost/benefit study. 

And I think you answered, well we are just at the start of the process. 

But will that be a part of the process? 

Mr. DOTY. Good question, Chairman Bachus. 

It would be putting the cart before the horse. 

Chairman BACHUS. Okay. 

Mr. DOTY. To start evaluating costs and benefits of some form of 

rotation before you had any sense of whether you were going to go 

there or what it would be, the initial inquiry here is what should 

be done to enhance not only the perception of auditor independence 

which suffered in the financial crisis, but also the fact of auditor 

independence. 

We are very aware of the pressures auditors are under. 

Chairman BACHUS. Right. 

Mr. DOTY. I personally, and I know members of the Board with 

me want the private auditing profession to survive. We want to see 

20 

a private auditing profession and not have audit become a public 

governmental function. 

There is pressure on that at this point. And it derives, as I said 

before, from the questions of whether there are sufficient safeguards of objectivity, skepticism— 

Chairman BACHUS. Right. 

Mr. DOTY. —independence. One of the things you have to look at 

is the fact that in some cases companies have had the same auditor 

for a century— 

Chairman BACHUS. I mentioned HealthSouth in my opening 

statement. And obviously, we all know accounting firms were 

under pressure, auditors if they wanted to keep the business, how 

closely did they look? I think skepticism is the right word. 

And I think Madoff isn’t about a public company. That auditor 

said that he just took everything at face value. And obviously, that 

had disastrous consequences. 

Will you at least keep a dialogue open with us as you move along 

this, and give us your thought process and what you are finding, 

and keep us abreast of— 

Mr. DOTY. We welcome the dialogue. And we want to be sure 

that we keep you informed of where these concepts and these proposals are moving. 

And I would certainly tell you that the concepts on the changes 

in the reform, the audit reporting model, are moving toward a proposal. That enjoys a lot of support and input from the audit profession, from the users, from all sorts of sources of opinion. 

We will be keeping you informed of that. 

I would also simply volunteer the fact that we have no doubt 

that audit quality has improved since Sarbanes-Oxley. 

Chairman BACHUS. Right. 

Mr. DOTY. There is no question about that. Audit committees are 

the fulcrum of it. Audit committees are doing better. 

Chairman BACHUS. I think I see evidence of that in The Wall 

Street Journal every day where people are questioning things. 

And these are obviously issues that are tough to solve. That is 

why they are still issues. 

Let me ask the SEC—you have a role in this. 

Will you do a cost/benefit or an economic analysis of the effect? 

And I know it is hard to weight sometimes what is the cost of not 

having skepticism or an auditor question something. But it is hard 

to analyze what those costs are sometimes. 

Mr. KROEKER. Those will be the—as Chairman Doty says, they 

are not anywhere close to that point. But those will be certainly if 

there was a proposal advanced, what would be the— 

Chairman BACHUS. Of course if you made a proposal, we are 

going to go to that. And you hadn’t done a cost/benefit analysis. 

Mr. KROEKER. No, we will be looking in advance of that and 

working— 

Chairman BACHUS. Okay. 

Mr. KROEKER. —with the— 

Chairman BACHUS. Let me switch gears for just a minute. I only 

have about 30 seconds. 

21 

Madoff, obviously it wasn’t a public company. It was a private 

auditor. It was a two-man shop. They were regulated by the State. 

The broker-dealer was regulated by FINRA. 

But the investment advisor was the SEC. Does the Board maybe 

feel like you ought to, that auditors of investment advisors should 

be more scrutinized to avoid a Madoff, which Dodd-Frank didn’t address. 

Mr. DOTY. We have not been—we don’t inspect— 

Chairman BACHUS. Oh, I know— 

Mr. DOTY. —privately held—private— 

Chairman BACHUS. Oh, I know. 

Mr. DOTY. —hedge funds and their investment advisors that are 

neither SEC-registered brokers nor issuers. 

Chairman BACHUS. Right. 

Mr. DOTY. In the pilot program in the attempt to get to an intelligent rule, a standard that suits what Congress clearly wanted us 

to do, we will be looking at examinations and reviews. Reviews of 

the representations that broker-dealers make about their entitlement to the exemption, and the examination of the compliance with 

what they say in that. 

We are hopeful that at the end of this process, we will be able 

to put in place a standard which will give the Congress and the 

public assurance that we have taken steps to prevent or detect the 

kind of fraud that Madoff perpetrated. 

None of these are obviously foolproof, but we want to be conscious of the proportionality that Chairman Garrett referred to and 

I know you are interested in. 

Chairman BACHUS. Sure. Thank you very much. I appreciate 

that. 

Chairman GARRETT. Thank you, Mr. Chairman. 

The gentleman from California is recognized. 

Mr. SHERMAN. Ms. Seidman I want to commend you on this report to the blue ribbon panel on standard setting for private companies. 

Without objection, I would like to make it a part of the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. SHERMAN. And I know that that there is some discussion in 

your shop of delay in writing another report—looks pretty good. 

Mr. Doty, you have talked—I believe it was you who talked about 

smaller broker-dealers. And we saw this with Madoff where the accounting firm was obviously too small to have done the audit, if 

they chose to do an audit of Madoff, even if they had devoted 100 

percent of all their efforts to that one client. 

Standards for independents generally say that an accounting 

firm shouldn’t have more than 5 or 10 or 15 percent of its revenue 

coming from one client. 

Because even if you have just enough staff to service that one big 

client, if that one big client is half your business, then you are not 

so much independent as an appendix or an appendage. 

What steps are you taking to make sure in dealing with these 

smaller auditing firms around the country, that they are big 

enough so that they can do the audit of the relevant broker-dealer 

and still have 90 percent of their resources available to handle 

other clients? In other words, that they are big enough not only 

22 

enough to do the job, but big enough to have other sources of revenue and be independent of the client. 

Mr. DOTY. Congressman, you put your finger on an issue not 

simply for the auditors of broker-dealers, but for many of what we 

call the triennial firm, audit firms, the smaller audit firms. 

Mr. SHERMAN. Please speak into the microphone. 

Mr. DOTY. And we have inspected eight. We have selected eight 

of the broker-dealer auditors exclusively—auditors exclusively of 

broker-dealers that we inspected or we looked at with a mutual 

consent in 2011. 

We will do two more this year, three more this year, probably— 

Mr. SHERMAN. Mr. Doty, do you have standards or could—is it 

entirely legal for an accounting firm to get 30 percent of its revenue from a company and attest to their—excuse me—opine on 

their financial statement? 

Mr. DOTY. It could be one of the indicia of independence and of 

capacity— 

Mr. SHERMAN. So you have no—in a profession best known for 

focusing on numbers, you don’t have a numerical standard? 

Mr. DOTY. We think we would be precipitous to have established 

some kind of hard threshold at this point. But I would— 

Mr. SHERMAN. So would 50 percent be enough, 60 percent, 80 

percent? 

Mr. DOTY. I think we would— 

Mr. SHERMAN. Do you even know— 

Mr. DOTY. —looking at firms— 

Mr. SHERMAN. —when the broker-dealer files a statement with 

you, do you even know what percentage of the CPA firm’s revenues 

come from that one client? 

Mr. DOTY. Yes we do. We do look at that. 

We look at— 

Mr. SHERMAN. Is it on your form or do you look at it only in the 

1 percent of the cases where you gather additional information? 

Mr. DOTY. We—in all of our inspections of an audit— 

Mr. SHERMAN. In all of your inspections, so 99 percent of these 

you don’t inspect. 

Mr. DOTY. But in every inspection that we do— 

Mr. SHERMAN. Okay, why don’t you ask for that information on 

every filing— 

Chairman BACHUS. Mr. Chairman? 

Chairman GARRETT. Yes. 

Chairman BACHUS. I don’t know that the witness is having an 

opportunity to respond to the— 

Mr. SHERMAN. I will give you a chance to respond, Mr. Doty. 

Why don’t you ask that question for every filing? 

Mr. DOTY. We get it—we do not ask for a general survey of firms 

to give us, in advance, an entire breakdown of their client revenue 

contribution. I believe I am right about that. 

I will confirm that for you. 

Mr. SHERMAN. Mr. Doty, if I can rephrase the question. Why 

don’t you simply ask the firms when they submit the statement to 

indicate that that one client is less than 10 percent of 15 percent 

of their revenue, all the time, not just with the one tenth of 1 percent where you are able to conduct an investigation? 

23 

Mr. DOTY. It is certainly an idea that we should consider. 

Mr. SHERMAN. Okay. And— 

Mr. DOTY. —I don’t— 

Mr. SHERMAN. —the light is about to turn red. 

I will say to Ms. Seidman, you have called upon me many times 

to defend the FASB’s role in writing accounting standards, and the 

independence that the FASB has obtained. 

And yet every time I have talked to the FASB about accounting 

for research, I get no theoretical support for a position. I am told, 

wait another decade. We will finally work something out with the 

Europeans. And in the meantime, there are tens of billions of dollars of research that isn’t being done because we have accounting 

standards with no basis. 

And I will ask you to respond for the record, unless the chairman 

wants to give me more time. 

Chairman GARRETT. We will let that go to the record. 

Mr. SHERMAN. Thank you. 

Chairman GARRETT. And with that, I will go to Mr. Schweikert 

for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

This is one I want to try to get my head around on what accounting—what economic modeling, what else goes into it. 

And some of this is sort of family folklore reaching way back 

when accounting recognition rules changed on installment sales. 

And some of that is, I think, the first time that was done was like 

35 years ago, and then had multiple—and each time that happened, in the real estate industry people, particularly those who extended credit and had cascades of evaluations. 

My understanding, Ms. Seidman, is that rules are in promulgation or being looked at in regards to how to recognize leaseholds. 

I would like to first understand, where is the rule going? What economic modeling has been done? 

Is there differentiation made between credit tenant, long-term 

tenants, tenants who will—how are you modeling that? 

And what potential do you see happening, as to how we book and 

value real estate across the country? 

Ms. SEIDMAN. Thank you, Congressman. 

First, let me just explain the project you are referring to is our 

joint project on lease accounting that we are conducting with the 

International Accounting Standards Board. 

The primary purpose of the project was to respond to persistent 

concerns that we heard from investors and also regulators that material obligations of leases were not being reported on the balance 

sheets of lessees. 

That is the primary purpose of the project. 

We engaged in that because investors were trying to make adjustments themselves, to put those amounts on the balance sheets. 

So we are trying to take some cost out of the system and provide 

more useful information to investors. 

With respect to where we stand in the process of it, we are currently working through the comments that we received on the first 

exposure draft which generally supported the proposal that longerterm leases would be recognized on the balance sheet. 

24 

There were concerns raised about complexity. And there are concerns that have been raised about the income statement treatment 

of that basic approach. So we are currently working through that. 

We proposed some changes to the lessors accounting which is directly related to the question that you asked. We have been working through those issues, as well. 

At this point, we have landed on a proportionate sale model for 

everything except real estate. We are planning to scope real estate 

out of the standard, and instead rely on a different standard that 

we are developing for investment properties. 

Mr. SCHWEIKERT. Okay. Any sense where that is going? 

And my reason is—I instantly can start to think of ways this 

gets gamed. If I am showing a concern saying, okay, here is a long 

term lease. We want to recognize that from the tenancy. 

Now do you start doing 5 years with some type of rolling options? 

At a way, so now, as the real estate owner, does it change the 

valuation of how you capitalize your real estate? 

My fear is we are heading towards a mechanic—where the accounting standard may end up creating a certain level of game 

playing here, where most of us who have done evaluations and 

looked at REITs and those things, at least we sort of understand 

the mechanics right now. 

Ms. SEIDMAN. Right. 

Mr. SCHWEIKERT. Is my concern unfounded? 

Ms. SEIDMAN. We would certainly try to make sure that there is 

no opportunity for arbitrage between the accounting standards or 

game playing as you said. 

Mr. SCHWEIKERT. Some of it would just be the way you structured a lease. And therefore, if you did it for a certain amount of 

term with then a certain creatively written option, it would be recognized differently, wouldn’t it? 

Ms. SEIDMAN. Yes, the proposal would include provisions to enable people to form judgments about how to incorporate options in 

the estimation of the lease term, and then ultimately how the 

transaction is recorded. 

Both of these standards are still under development. We have already agreed that we will send the leasing proposal out for comments again. So there will be an opportunity to provide further 

comments on it. 

And we are just starting the process of looking at the comments 

we received on the investment property proposal, which is the one 

primarily related to real estate. And we got lots of substantive comments on it. 

It is going to take us some time to work through them. 

Mr. SCHWEIKERT. Aren’t these pretty well disclosed also in the 

footnotes, though? 

Ms. SEIDMAN. There are certain requirements to disclose minimum lease payments in the— 

Mr. SCHWEIKERT. And duration, isn’t that also in there? 

Ms. SEIDMAN. The lease term, yes. 

Mr. SCHWEIKERT. Okay. 

Ms. SEIDMAN. But it is minimum lease payments rather than expected lease payments. 

25 

So what we are trying to do is have everybody perform similar 

calculations to take some of the work out of the hands of the investors. 

Mr. SCHWEIKERT. Okay. 

Mr. Chairman, thank you. 

My only concern is that sort of law of unintended consequences 

that if we reach way back in time, we saw the devastation happen 

when we changed the installment sale rules. 

Ms. SEIDMAN. Right. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Ms. SEIDMAN. May I just add that we do plan to conduct significant outreach with stakeholders to try to avoid any unintended 

consequences. 

Chairman GARRETT. Thank you. 

Mr. Miller is recognized for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

There has already been some discussion of concerns about a lack 

of independence for conflicts of interest by auditors. That is the 

reasoning behind the proposed requirement of retaining auditors. 

But that seems to be a recurring concern. 

It was a concern in Enron and those other scandals during that 

period. And the biggest auditing firms, the big four accounting 

firms, still have consulting firms that are affiliated that are as 

large, and as possible, as the accounting firm. 

I know that there are some not some limitations on how much 

overlap there can be between the—consulting firms and the auditing firms. 

But right now, the OCC and the Fed are both doing reviews of 

foreclosure practices by the bigger servicers that are all affiliates 

of the biggest banks. And both essentially have allowed the servicing firms to pick their own reviewers. 

It appears from the engagement letters that had they made public that most of the reviews are being done by the consulting firms 

that are affiliated with auditing firms. And it certainly has raised 

some questions about conflict of interest. 

Most notably for JPMorgan Chase, their affiliates that did servicing, they picked Deloitte. And a big part of their review will be 

mortgages that came to JPMorgan from Bear Stearns, which they 

acquired, and from Washington Mutual, which JPMorgan Chase 

acquired. 

Deloitte was the auditor for Bear. And they are in fact a defendant in investor litigation for what went on at Bear and mortgage 

securitization. They are a defendant with Washington Mutual, also 

for the mortgages originated by Washington Mutual. 

It seems like there is an ample disincentive for the auditing firm 

to find large problems with the mortgages originated by JPMorgan 

Chase, or now liabilities assumed by JPMorgan Chase, when they 

bought Bear and when they bought Washington Mutual. 

There was an article in the American Banker earlier this month 

by Francine McKenna raising those questions. She has concerns 

about conflict, or certainly the appearance of conflict, or the lack 

of distance. 

I have those concerns as well. 

Do you all have those concerns? 

26 

And should this have happened? How should the rules be 

changed, if you think so? 

Yes, sir? 

Mr. DOTY. Congressman, first of all, you have highlighted the 

scope and complexity of the independence question. 

Independence and skepticism are a state of mind. And part of the 

exercise that we are engaged in is to try to understand as much 

as we can about that. 

I would have to say that with respect to the issue you put your 

finger on, it is an issue of another regulator’s area of expertise and 

jurisdiction. 

It is not part of our jurisdiction. It is part of the jurisdiction of 

the Federal banking regulators. 

And I think in the McKenna article you are referring to, the appropriate official of the Office of the Comptroller of the Currency 

speaks to it, and speaks to the issue. 

But I really would have nothing to add or nothing to comment 

on there. It is not my responsibility or the Board’s responsibility to 

confront that issue in this particular case. 

Mr. MILLER OF NORTH CAROLINA. I understand. I have heard 

that it is not my job response many times. 

But it seems like it should be your job if an affiliate of an accounting firm is undertaking an investigation that may look at the 

work of the accounting firm with which they are affiliated. 

Why is that not something that some of you will look at? 

Would any of you look at that? 

Mr. DOTY. We would in inspecting an engagement of any accounting firm. We would be concerned about business relationships 

with the affiliates of the accounting firm and the registrant or the 

issuer. 

And we do look at, as I was saying to Congressman Sherman, the 

relative contribution of non-audit fees to the revenue of the firm 

when we do our annual inspection of the 10 largest firms. 

Mr. MILLER OF NORTH CAROLINA. Anybody else? Mr. Kroeker, 

you have your hand on your button. Was it just a nervous twitch? 

Mr. KROEKER. No, no, no. 

As it relates to the independence of the financial statement auditor, which is really the jurisdiction that we have for registered public companies, we would certainly be taking a look at that issue. 

It is a tenet of the independence rules that you can’t audit your 

own work, and a tenet of the independence rules follows that you 

can’t be independent if you have less than an objective sense of 

mind—that is, you are incented to come to a particular outcome. 

So as it related to the financial statement audit, that would be 

squarely within our responsibility. 

As it relates to any work that is done under a consent decree for 

the OCC or others, I don’t believe it would fall within our jurisdiction. 

Chairman GARRETT. The gentleman yields back. 

Thanks for the answer. 

The gentleman from Texas is recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Doty, I may be confused about an earlier part of your testimony or actually an answer that you gave to Chairman Bachus. I 

27 

believe you said in response to a question of his that it is premature for a cost/benefit analysis. 

Is that what I heard you say? 

Mr. DOTY. You did. 

Mr. HENSARLING. Okay, so implicitly that means you intend to 

conduct a cost/benefit analysis; the timing is simply wrong. 

Is this what you are trying to say? 

Mr. DOTY. Not to put too fine a point on it, but one would normally not conduct a cost/benefit analysis or indeed any kind of 

analysis of the kind you are talking about on a concept release. 

It is when you get to the—if you got to the point of a proposal, 

and as I have said, we don’t have a proposal outstanding— 

Mr. HENSARLING. If I could, Mr. Doty, let me ask you this with 

respect to the concept release. 

There is some reason you put it out. So I assume you assessed 

that there is a benefit to be derived by putting the concept release 

out. 

You have identified some problem. You have proffered a solution. 

So implicitly, aren’t you telling us it is not premature to consider 

benefits, but it is premature to consider cost? 

Mr. DOTY. The concept release, it is a fair question. 

The concept release took note of the fact that there are other jurisdictions which are adopting term limits mandatory for all of the 

audits in their jurisdiction. 

The Netherlands is one. India is moving in that direction. These 

are, in some cases, 5- and 6-year term limits. The E.U. is considering these proposals. 

The concept release said we would be interested in the views of 

commenters on any of these proposals, but also what about terms 

of more than 10 years. 

What about extended terms? 

What about segments of the issuer market other than all? 

I think that the concept release is very clear that we did not intend to suggest that we had reached some conclusion that all— 

Mr. HENSARLING. Yes. 

Mr. DOTY. —2,500— 

Mr. HENSARLING. But let me speak of one conclusion. The GAO 

study, when they last looked at this, it appears they employed a 

cost/benefit analysis. 

I am reading from their report: ‘‘GAO believes that mandatory 

audit firm rotation may not be the most efficient way to strengthen 

auditor independence and improve audit quality considering the 

additional financial cost and loss of institutional knowledge of the 

public company’s previous auditor of record.’’ 

So it appears they used a cost/benefit analysis. Again, I am still 

a little curious as to what has changed since the GAO study that 

has caused this concept release to be put out? 

What additional evidence is there? 

It just seems like they may be putting that cart before the horse 

here. I am trying to— 

Mr. DOTY. These are very fair questions. 

The lapse of time—the GAO report was in 2004. It did direct us 

to take another look at it down the line. 

28 

The GAO report was tentative. It did not say that it would not. 

It offered the cautionary concern about cost. But it estimated—it 

was reporting an estimate it had received from others of a 20 percent jump that would cost 20 percent more. 

Congressman, I think we have received a good deal of testimony, 

opinion, evidence that that number would be exaggerated, that in 

fact, firms change their auditors. They change their auditors all the 

time. And they don’t experience a 20 percent jump in audit costs. 

Audit costs have risen, but they haven’t jumped through the period post-Arthur Andersen when firms have changed their auditors. 

Mr. HENSARLING. Mr. Doty, I see my time is starting to wind 

down. I do want to get in a couple of other points. 

I clearly have not had an opportunity to review all the responses 

to your concept release. I have been informed though that it is 

overwhelmingly negative. And in fact a majority of the investor 

community, who have sent you comments on record, are opposed to 

it. 

Do you disagree with that characterization? 

Mr. DOTY. First, it is helpful to us to know of 900 comment letters, there is very strong opposition to any kind of one-size-fits-all 

standard. And that is what the comment letters say, that they oppose a one-size-fits-all rule which is exactly what is being proposed 

in a number of foreign jurisdictions. 

So that is a useful data point. It is a very important data point— 

Mr. HENSARLING. If I could, as my seconds wind down, I know 

you don’t have to be wedded to it, but are the majority of the comments from the investor community ostensibly those who would 

benefit from this mandatory auditor rotation? Have they opined 

negatively or positively? 

Mr. DOTY. There is a large and representative segment of the 

CFO preparer community that is opposed to it. They are opposed 

to it— 

Mr. HENSARLING. Thank you. 

Chairman GARRETT. Thank you. Thank you. 

The gentlelady from New York is now recognized. 

Mrs. MALONEY. Thank you. Thank you for your testimony. 

We are increasingly in a global economy and our firms are part 

of a global economy now. And I would like to hear some statements 

on how we are really merging the GAAP accounting principles with 

the International Financial Reporting Standards. 

It seems like we should be trying to work together. It certainly 

would make it more efficient for our companies to interact in the 

global markets. 

I would like to ask one specific question that really impacts the 

district that I represent. And that is, the G20 has urged FASB and 

the ISAB to converge GAAP and international standards. And as 

part of this convergent process, the FASB added a project to its 

agenda on accounting for the investment property. 

As I understand it, FASB’s investment property entities proposals relies on the type of entity that would determine whether 

investment property would be reported at fair value. 

As I understand it, this proposal is inconsistent with the international standard that simply defines investment property as fair 

value and to report the property at its fair value. 

29 

And my question on this particular one is also to a larger sense 

why aren’t we converging both and getting them to one standard? 

Why have two separate standards? Why can’t we get together with 

GAAP and the international community? 

But this is one specific example which then could probably explain the broader challenges of trying to mesh the two accounting 

standards that would make a more seamless and efficient international accounting standard for Americans’ global businesses. 

Ms. SEIDMAN. Congresswoman, I think that question is properly 

directed at me. 

We indeed have a project on our agenda to consider putting in 

place a standard on investment properties. The reason we put it on 

the agenda was two-fold: first, it helps clarify what the scope of the 

leasing standard will be, because we are talking about leases of investment properties, for the most part; and second, to try and converge, if possible, with international accounting standards. 

We certainly looked at the international standard as our starting 

point. The reason that we did not move forward with it was because it allowed an option for companies to decide whether to carry 

their investment properties at fair value or at cost. 

And in very recent years, we have been urged by the SEC as part 

of their committee on improving financial reporting, and investors 

at large, to not allow choices in GAAP. 

So we took the basics in the international standard and instead 

decided to try and develop a requirement for when certain types of 

investment properties should be carried at fair value. 

Mrs. MALONEY. And where does it stand now? 

Ms. SEIDMAN. We issued a proposal for public comment and the 

comment period just ended. We are in the process of conducting 

roundtables with stakeholders on it. 

I will share with you that the IASB has indicated a willingness 

to consider the feedback that we have received on our proposal 

with a goal of eventually converging. 

But this is a case of leapfrogging where we have entered into this 

narrow scope project for some very specific reasons with a broader 

goal of convergence ultimately. 

Mrs. MALONEY. And how is convergence working in general 

across all accounting standards? Are you trying to make that one 

effort now or where does it stand? 

That is one specific example, but generally in the whole accounting process, where does it stand? 

Ms. SEIDMAN. Yes. We have been working on a number of 

projects that were agreed upon between the FASB, the SEC, and 

others which were representing the most significant opportunities 

for improvement and financial reporting, as well as the opportunities— 

Mrs. MALONEY. It sounds like you are making good progress. 

I would like to say that I think your profession is incredibly important, because if the private sector doesn’t trust the financials, 

then they are not going to invest. 

Public companies now pay firms to audit them. And as has been 

discussed in this committee many times at a basic level, this presents a conflict of interest and a potential barrier to auditor independence. 

30 

Are there any proposals either domestically or internationally to 

change this model of auditor compensation? And if so, what is it? 

My time has expired anyway. 

Mr. DOTY. There are proposals that surfaced overseas, Congresswoman, that suggest that insurance funds should be created. 

There are proposals that government funds should be established—that an independent government agency would employ, 

would select the auditor, negotiate, and determine the compensation. 

I would have to say that I think that again rushes a process that 

is terribly important. 

Audit committees have assumed since 2002 an increasingly independent and important role in selecting the auditor, negotiating 

the audit fee, and coming to terms with the scope of the audit. All 

of that has improved the audit. 

And our outstanding proposal on communications with audit 

committees takes account of that. So we are not focusing a lot of 

attention on these alternative payor systems. 

We were much more interested in knowing whether there was 

something in the concept release short of that kind of alternative 

payor alternative appointment process that would benefit independence. 

Chairman GARRETT. I thank the gentleman. 

And the gentlelady yields back. 

Mr. Fitzpatrick is recognized for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr. Doty, why did you decide to extend the comment period for 

entities to give testimony or write letters in connection with this 

rule? 

Mr. DOTY. Good question. The 2 days of meetings we had last— 

the 2 days of public meetings and hearings included distinguished 

people such as Paul Volcker, John Bogle, and Don Nicolaisen. Their 

commentary is written. It is all on our Web site. 

We felt it would be a good thing to allow other people to react 

to that and to get their comments in. The more information, the 

more comments we have, the better informed we are. 

And a number of the comments—a number of the proposals or 

the—a number of the suggestions that came out of that meeting 

that we should consider were actually not suggestions that were 

encapsulated in the concept release. They were new. 

So they deserve some consideration and comment. 

Mr. FITZPATRICK. As I said in my opening statement, we are in 

a fragile economic recovery right now. We are looking to the private sector, including public companies, to get the private sector 

economy moving again, to get people back to work. 

And so I think we need to be very careful as we impose new burdens, new regulations, and requirements upon them. And we listen 

very carefully to them, because everything that we do here in this 

town seems to dry up their capital that we are asking them to free 

up to get people back to work. 

I have started printing out some of the comments. And I think 

I am about halfway through. This is half of them. 

And following up on Mr. Hensarling’s question, it seems like the 

overwhelming majority—and I have seen a number recently, maybe 

31 

as many as 95 percent of the comments that the Board is receiving 

on this concept are not just negative but overwhelmingly negative. 

I pulled out a couple of them from my State of Pennsylvania. 

United States Steel has indicated the mandatory audit firm rotation will result in increased costs and inefficiencies and reduce 

audit quality with little if any added benefits. 

A company called Koppers Holdings Incorporated, has said that 

mandatory audit firm rotation would cause higher costs and inefficiencies. A company will be required to invest substantial time, effort, and money each time it must select an educated new audit 

firm. 

And finally, a little closer to my part of the State, 

AmerisourceBergen indicated, ‘‘We strongly oppose mandatory 

audit firm rotation for three primary reasons: number one, we believe that audit costs will increase significantly because new audit 

firm personnel will be required to invest time and educate themselves about the company, its operations, and business practices; 

number two, we don’t believe there is evidence that audit firm rotation will work to improve audit quality—I thought this was interesting—; and number three, mandatory audit firm rotation will 

also indirectly increase the cost of our tax compliance. 

‘‘We use the same accounting firm for both audit and tax services 

work as permitted by and in accordance with the rules of the SEC 

to ensure that both audit and tax services are well coordinated and 

provided in an efficient manner. 

‘‘We believe that if we are required to use a new accounting firm 

for audit services, we would also need to use that firm for tax services.’’ 

And so, the great majority of companies are saying hold on, that 

the benefits are minimal, and the cost is potentially very significant. 

I remember reading in one of these comments—I can’t find it 

right now, that it might have been the GAO predicted that the increase in costs would be 20 percent. 

I remember—was there a GAO study out there? 

Mr. DOTY. That is what—the GAO study did recite that if that 

had been the estimate that some had. 

I would tell you that there are people who would dispute the accuracy of that now— 

Mr. FITZPATRICK. Do you dispute the accuracy— 

Mr. DOTY. —7 or 8 years later— 

Mr. FITZPATRICK. —of that? 

Mr. DOTY. Sir? 

Mr. FITZPATRICK. Have you disputed the accuracy of the 20 percent number? 

Mr. DOTY. As I say, I have no basis for saying it is right or wrong 

now. But I— 

Mr. FITZPATRICK. What do you believe—do you have an opinion? 

Mr. DOTY. I have—we have been told by people who are in fact 

on audit committees and have engaged in the rotation of auditors 

for very substantial companies, that in fact audit rotation lowers 

the cost of the audit, reduces the fees that are charged, and lowers 

the cost to the company. 

32 

So there is conflicting testimony among people who are engaged 

in this process. 

Mr. FITZPATRICK. And that is why, Mr. Doty—we really believe 

it is incredibly important to have it a good cost/benefit analysis 

done at the very beginning. 

And so my question to you is, are you committed to doing a cost/ 

benefit analysis? If so, when? Who is going to do it? And how is 

it going to be done? 

Mr. DOTY. First, Congressman, the question arises because of the 

2008 financial crisis in which people said auditors lost independence. They lost objectivity. 

We do not have a proposal out for any kind of firm rotation. We 

are not committed to any particular approach to independence and 

objectivity. We are going to hear all of these comments. 

And I assure you— 

Mr. FITZPATRICK. But will you do a cost/benefit analysis before 

you begin pushing that concept? 

Mr. DOTY. Before we came in with a proposal on mandatory firm 

rotation, we would be doing a very careful analysis of costs, unanticipated consequences, and benefits. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Chairman GARRETT. I thank you. 

The gentleman yields back. 

Mr. Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman, and I thank the committee for its indulgence and its courtesies. 

I would like to shift a little bit from the panel to talk about an 

issue. I am the ranking member on the Oversight Subcommittee of 

the full Financial Services Committee, and we have been working 

for the last several months trying to figure out what happened with 

MF Global. I have no doubt that most of you have been, as well. 

And in that time, for those of you—I am sure you all know. But we have $1 billion missing. That $1 billion belonged to investors, 

some big, many small, a lot of people hurt. And we are trying to 

figure out what happened. 

I haven’t reached any conclusions yet. The committee hasn’t 

reached any conclusions. 

But it is coming down to, in my opinion, three real possibilities 

here, or maybe some combination of these possibilities. One is possible criminal activity, which crimes happen everywhere. That is 

life. But the other one is also possibly the lack of true segregation 

and so-called segregated accounts, different issue, not an issue for 

you guys. 

But the third item is potentially the language of FASB statement 

number 140, which attempts to define when a sale is a sale and 

how to treat a sale. 

Now most Americans, I think you would find, they know what 

a sale is. If you sell it, you don’t own it anymore. Someone else 

owns it. 

The fact that we have to define a sale in a specific statement obviously answers the question that well, it is not always that way. 

And I am not looking to lay blame here. But I need to be sure 

at this point—and as we speak, to my knowledge is at least six different agencies, both government and nongovernmental agencies, 

33 

giving serious review to this, including the SEC being one of the 

lead agencies, the CFTC, and others. 

But I guess I need to know just for the record. Mr. Kroeker, I 

just want to be clear. I assume you are familiar with the SEC’s review of the MF Global situation at the moment? 

Mr. KROEKER. Yes. 

Mr. CAPUANO. Okay. 

And Mr. Doty, I am just curious, is the PCAOB involved with reviewing any of the rules or any of the appliance of those rules that 

might have been related to MF Global? 

Mr. DOTY. Congressman, we shouldn’t be commenting to you 

publicly on— 

Mr. CAPUANO. I am not asking about the specific issue. But rules 

are rules that apply to others. And the reason there are rules is 

not for a specific investigation. I am not asking for a comment on 

that. 

I am asking about any issue that you would read in the newspaper in theory would either result or not result in a self-review 

of what role might my group have had in this. 

And did we do anything wrong? Or did we do anything wrong? 

And not to say wrong, sometimes maybe we have to clarify something. That is all I am asking. 

Is the PCAOB engaged in self-review, internal review, as to 

whether there can be any activities that you might be able to take 

to address whatever may have happened there? 

Mr. DOTY. Yes, sir, we are constantly reviewing the existing 

audit standards with a view to determining whether there are 

areas where the audit standards can be improved— 

Mr. CAPUANO. That is—and— 

Mr. DOTY. —and how we do that— 

Mr. CAPUANO. —and you have done it or you are currently doing 

it as it relates to potential issues that have been raised in the public domain, I might add, relative to MF Global? 

Mr. DOTY. I wouldn’t want to suggest that we have a view on 

what existing audit standards require for any currently problematic audits that are out—I think that would— 

Mr. CAPUANO. That is— 

Mr. DOTY. —be a mistake. But we are always looking at—we 

read the papers. We listen to what you all do here. 

We are always concerned about whether our standards, whether 

we are looking ahead and thinking where our standards should be 

to guide auditors and to produce better audits to avoid— 

Mr. CAPUANO. Yes. 

Ms. Seidman, your agency? 

Ms. SEIDMAN. Whenever a major financial reporting issue 

emerges, we take steps to try and evaluate whether there is an 

issue with the standard itself or whether there is a compliance 

issue with it. 

Once we became aware of this situation, we did undertake steps 

to try and get to the bottom of that. Our outreach indicated that 

there was consistent interpretation of the guidance. But through 

our outreach, we also learned that market practices seem to have 

changed since the original standard was written in 1996. 

34 

And the nature of the change seems to be related to the types 

of securities that are involved in these arrangements. At the time 

the standard was written, it seemed to involve Treasury’s and government agency’s securities with very little credit risk. 

Whereas now, we understand that a much broader range of securities— 

Mr. CAPUANO. That is fair enough— 

Ms. SEIDMAN. —are being used. 

Mr. CAPUANO. Mr. Attmore, is your agency involved with any of 

these? 

I am not sure that you would have a role in this. 

Mr. ATTMORE. We do not have a role. 

Mr. CAPUANO. I didn’t think so. 

The reason I ask is again, I only suspect, I am not looking for 

anybody to say, this is what we are doing on this case. That is inappropriate for this kind of a forum. 

But I will tell you that you have a rule here that has already 

been amended, 140 is an amendment of 125, which was an amendment of a previous number. And I don’t remember the previous 

number. 

So it is clearly a rule that requires an ongoing review. 

And I just need to be satisfied at the moment—maybe at a future 

time, I would like to know more—that at least all the agencies— 

and by the way, when you are doing all this, are you talking to 

each other? Because it is really not going to do any good for FASB 

to come up with a new rule if PCAOB and practitioners can’t understand that one either. 

You really have to be talking to each other. And I guess I would 

like to know, are you communicating with each other on this type 

of thing as to where you might want to go and what might be an 

appropriate way, so that you have one clear, unequivocal rule that 

every practitioner will be able to utilize in the same fashion? 

Chairman GARRETT. And we will ask that they get back to you 

on that in writing, as the gentleman’s time has— 

Mr. CAPUANO. Fair enough. 

Thank you very much, Mr. Chairman. 

Chairman GARRETT. Thank you. 

The gentleman from California is recognized. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

At Ford Motor Company back in the day, they used to call you 

a name based on what part of the company you came from. 

If you came from accounting or finance, you were a ‘‘bean 

counter,’’ right? And if you were from engineering and manufacturing, you were a ‘‘slide ruler.’’ And if you came from sales and 

marketing, you were a ‘‘bozo.’’ 

I used to think ‘‘bean counter’’ was a pejorative until I heard 

them call a whole bunch of people ‘‘bozos,’’ and then I was kind of 

happy about that. 

As one of the three certified ‘‘bean counters’’ on the committee 

this morning, good morning. 

I want to ask about something that Mr. Kroeker mentioned. And 

I think Ms. Seidman addressed tangentially a little bit. 

But IFRS—and we are all talking about IFRS, and that IFRS is 

coming, and that we have to move in that direction. 

35 

And we have been—I was trained as an accountant back in the 

1970s when principles-based accounting was a lot of what they 

taught you. And we have been moving away from that into rulesbased accounting. 

Ms. Seidman, you talked about a lot of the FASB things and how 

complex they are. The one on stock options being the most unbelievably byzantine complex thing I have ever seen in my life. And 

it is all a part of this rules-based accounting. 

But if we go to IFRS, we are going to go back toward more principles-based. 

My question is this: can we do that in this industry without having some tort reform or some aspect of—how can we do that with 

our legal system as it currently exists? Can we or can we not? 

Anybody who wishes to answer that, I will be pleased to hear. 

Yes, Mr. Kroeker? 

Mr. KROEKER. I would be happy to answer that. My personal 

view is I think we can. 

The SEC staff delivered to Congress a report on principles-based 

accounting standards coming out of Enron and other financial reporting scandals, some of which were really tied to what some have 

referred to as rules-based standards—that is, somebody was on one 

side of a 3 percent test. 

And really the sense of that study was we need to move toward 

what we refer to as an objectives-based set of standards, broad objectives but sufficient application guidance, but not the detailed 

prescription that we have today. 

And I think being on the good side of a judgment is a lot better 

than the wrong side of a bright line rule. 

Mr. CAMPBELL. Okay. 

But from a litigation standpoint, if there is a rule, even if the 

rule is a bad rule, that is not the fault of the person who followed 

the rule. 

But if you are principles-based, which I personally much, much, 

much, much, much prefer, that means there is judgment involved. 

And judgment can always be second-guessed. 

And so doesn’t that create liability issues that are—that under 

a rules-based system—now I agree with you. 

A principles-based system will give us a better outcome, give us 

better accounting. It will give us better financial statements, in my 

view and my estimation. 

But the question is what—when people can second-guess things 

under our current—can we do that simultaneously and still have 

the accounting firm stay in business? 

It seems like Ms. Seidman is jumping at the— 

Ms. SEIDMAN. I think you are asking an excellent question. It is 

something that we live every single day working with our international counterparts where there is much more tolerance for the 

application of judgment. 

And I will say much less severe consequences for someone questioning your judgment. 

And so in our daily work with the International Accounting 

Standards Board, we have a tension every day abut the U.S. stakeholders wanting a certain amount of specificity in the guidance, so 

that they have a sense that they are going to hit it down the fairVerDate Nov 24 2008 17:25 Jan 25, 2013 Jkt 075084 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\75084.TXT TERRI
36 

way with good intentions; whereas internationally, they are much 

more comfortable having a broad principle expressed and not a lot 

of guidance. 

To me, what we have been trying to do is provide enough application guidance so that there is an acceptable level of diversity, but 

at some point it becomes unacceptable. And we need to step in and 

provide some guidance. 

So through our field work, we try and test how consistently do 

we think companies are going to be able to apply the standard 

without getting into excessive detail. 

Mr. CAMPBELL. So how are we going to do—how are we going to 

move to— 

Ms. SEIDMAN. Yes— 

Mr. CAMPBELL. —more principles-based without—how do we deal 

with the other issue, with the litigation or the liability issue. 

Ms. SEIDMAN. I do agree with you that it is a systemic issue. 

But I will share with you that we hear from our investors as 

well, that they like to have a certain amount of consistency in the 

information being reported which lends itself to having some application guidance. 

Mr. CAMPBELL. Mr. Kroeker? 

Mr. KROEKER. I don’t know which from a litigation standpoint is 

a better posture to be in, but we have so many rules in certain 

standards, that I understand the profession has a hard time in derivatives accounting when you get to the—highest to the lowest of 

actually understanding each rule. 

So I am not convinced that we wouldn’t be better off to have a 

principle where everyone understands the principle, and then 

makes those informed judgments. 

Mr. CAMPBELL. Okay. I have more to ask but my time has expired. 

Thank you, Mr. Chairman. 

Chairman GARRETT. Indeed. 

Mr. Perlmutter is recognized. 

Mr. PERLMUTTER. I think I will start—you mentioned independence and objectivity as being sort of key to what an accountant and 

an auditor is trying to determine. 

Are these good books or are these bad books? Are these numbers 

real or are they phony? 

So just sort of going back to Mr. Fitzpatrick’s line of questions, 

in 2008, where so many people lost so much, have you found that 

there wasn’t objectivity, there wasn’t independence exercised by accounting firms that come under your supervision? 

Mr. DOTY. I don’t think the failures in audit, whatever they may 

have been, have been fully explored, documented, and pinned 

down. 

I would have to say that if you are asking do we have a clear 

electronic connection between some failure of independence and objectivity, and an obvious audit flow that led to the collapse of a 

major financial institution, I would say no, Congressman, we don’t 

have that. 

We don’t have that. 

What we do have, as I have said before, is a pattern that goes 

back beyond the—2008 in which inspectors do find failures of skepVerDate Nov 24 2008 17:25 Jan 25, 2013 Jkt 075084 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\75084.TXT TERRI
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ticism and failure to perform necessary procedures, and perform a 

good audit under circumstances that suggest that they may be less 

than objective or less than independent. 

Mr. PERLMUTTER. Well— 

Mr. DOTY. So it is much more difficult— 

Mr. PERLMUTTER. I see where Mr. Fitzpatrick is coming from. 

And you and I have had a chance to talk about this. 

You don’t want to have a cozy relationship between somebody, 

whether it is the regulator and the regulated company, or the auditor and the company. But auditors and accountants also need to 

know how the business is put together. 

You are sort of—on the one hand, if you are always switching out 

auditors, they always have to learn about the company. And that 

doesn’t make a lot of sense to me. 

But there is this need for independence and not coziness, if you 

will. And so, I appreciate Mr. Fitzpatrick’s questions, the cost/benefit analysis. I don’t know if you—the cost you use is $25,000 per person in 

this country which was potentially lost between the summer of 

2008 and the spring of 2009, or what the right cost/benefit analysis 

might be. 

I will—just as I was sitting up here, maybe you rotate partners 

within the company if you are worried about having a new set of 

eyes. Obviously, you have thought about all of these things. 

And so, I appreciate your concern. This rotation of auditing 

firms, I think, is probably too much, just from my point of view. 

But I understand the value; you are trying to make sure there 

is independence and objectivity. 

Now, the question about this principles-based versus sort of statutory or rules-based, when—let me step back and ask a more specific question. 

With Madoff, using some kind of an accountant to hold the monies of the customers, does anybody disagree that if a broker-dealer 

or an investment advisor is holding somebody’s funds, they ought 

to have a CPA or some kind of an independent accounting firm 

checking on the books of the investment advisor or the broker-dealer? 

Mr. KROEKER. I agree they should. 

Mr. DOTY. I concur. 

Mr. PERLMUTTER. Because we want to make sure there is independence there as well. And— 

Mr. DOTY. And independence was a problem of course in the 

Madoff case. It was an affiliated auditor. 

Mr. PERLMUTTER. Okay. 

I was thinking that whenever you all come and speak to us, it 

is a pretty dry subject. But then you start really digging into the 

weeds which is your responsibility when you look at the books and 

records of your businesses and the people. 

If you don’t take a good look, we can end up with lots of trouble. 

So I just—you have been taking a little bit of heat from us up 

here. But we appreciate your service. And we obviously support the 

accounting industry in making sure that their customers, who they 

are reviewing, have good books so that the investors are protected. 

So thank you, I yield back. 

38 

Mr. FITZPATRICK [presiding]. The Chair recognizes Mr. Renacci 

from Ohio for 5 minutes. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Again, I want to thank all the witnesses for being here. 

Mr. Attmore, Section 978 of Dodd-Frank established a permanent source of funding for the Government Accounting Standards 

Board by authorizing the SEC to require the financial industry’s 

regulatory authority, FINRA, to collect these fees from its members. 

If GASB had not received this Dodd-Frank funding source, would 

the future of GASB be comprised? 

I figured I would bring you into the questioning. 

[At this point in the hearing, there were some technical difficulties in the hearing room.] 

Mr. ATTMORE. [audio malfunction.] 

Mr. RENACCI. So you are saying Section 978 has been successful 

for you? 

Mr. ATTMORE. [audio malfunction.] 

Mr. RENACCI. Okay. 

Mr. Kroeker in a written statement, you mentioned several SEC 

staff papers written in relation to the IFRS and its incorporation 

to U.S. GAAP. 

One of these papers mentioned that diversity and application of 

IFRS presented challenges to the comparability of financial statements across countries. 

How do you—how does the FASB and the ISAB plan to overcome 

these challenges in incorporating the IFRS into U.S. GAAP? 

Mr. KROEKER. Part of the work that we are doing is really to inform the Commission as to whether to make a decision to incorporate. And so understanding the level of diversity in IFRS is important to that decision. 

So no decision has been made as of yet. 

But there are suggestions as we moved along that would say if 

there is an unacceptable level of diversity under IFRS, it really illustrates the need for a continuing strong role domestically for the 

Financial Accounting Standards Board (FASB), to assist both with 

identification of diversity, but then providing application guidance 

if needed if an incorporation decision was made, and sufficient 

guidance wasn’t being provided internationally. 

Mr. RENACCI. How will the convergence of international financial 

standards benefit the U.S. economy? 

Mr. KROEKER. I think—first and foremost, it could benefit investors in making allocation decisions of their capital consistently 

across companies and across jurisdictions. 

From a company’s standpoint, that has a benefit to them because 

their competitors would then have consistent reporting that they 

do. For multinational corporations in the United States, we have 

heard from many of those that it would assist in a standard set of 

bookkeeping for them around the world. 

But we have also heard plenty of challenges for those who aren’t 

competing internationally for capital. 

Mr. RENACCI. So do you think it will make capital markets more 

attractive to foreign issuers? 

39 

Mr. KROEKER. I haven’t reached a conclusion on that yet. 

Mr. RENACCI. Okay. 

Ms. Seidman, what are your thoughts on if the FASB and the 

IASB also agree to one set of accounting standards? What happens 

if companies decide that they do not want to use IFRS? 

And which accounting standards will they use? 

Ms. SEIDMAN. The approach we have been taking so far is to 

work jointly on projects with the IASB that we would have concluded needed improvement in the United States anyway. 

So in other words, the approach we are taking is to make improvements to U.S. GAAP that are consistent with the improvements that are being made by the International Accounting Standards Board. 

So they are following U.S. GAAP. It just happens to be consistent 

with IFRS. 

I think the big question is, how much further do we want to take 

this? 

In other words, there are many, many pieces of U.S. GAAP that 

are not consistent with IFRS. And so, are we going to continue to 

do this or not? 

That is really the crux of the matter that the SEC is looking at, 

and with very much of a cost/benefit perspective in mind. 

Mr. RENACCI. So I know I am running out of time here. 

But do you think U.S. GAAP will remain a valid set of accounting pronouncements? 

Ms. SEIDMAN. Yes. We completely accept our responsibility to 

make sure that the standards that we set will continue to fulfill 

our mission, which is to make sure that investors have credible, 

complete, and transparent information regardless of what we are 

ultimately going to call it. 

Mr. RENACCI. All right, thank you. 

I yield back. 

Mr. FITZPATRICK. At this point, I am going to ask unanimous consent to make three written statements a part of the record: one 

from the Mutual Fund Directors Forum dated March 28th; one 

from the Investment Company Institute dated March 28th; and one 

from the Property Casualty Insurers Association of America dated 

March 27th. 

Without objection, they are a part of the record. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

So with that, this panel is dismissed with our appreciation for 

your time. 

And we will ask that the second panel take their positions at the 

hearing table. 

The second panel of this subcommittee hearing includes: Mr. Joseph Carcello, professor, department of accounting and information 

management at the University of Tennessee; Mr. Gary Karbureck, 

vice president and chief accounting officer at Xerox Corporation, on 

behalf of the Financial Executives International; Mr. Barry 

Melancon, president and chief executive officer of the American InVerDate Nov 24 2008 17:25 Jan 25, 2013 Jkt 075084 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\75084.TXT TERRI
40 

stitute of CPAs; and Mr. Tom Quaadman, vice president, Center for 

Capital Markets Competitiveness at the United States Chamber of 

Commerce. 

Your written statements, gentlemen, will be made a part of the 

record, and you will each be recognized for 5 minutes for an oral 

summary of your testimony, beginning with Mr. Joseph Carcello. 

Sir? 

STATEMENT OF JOSEPH V. CARCELLO, PH.D., CPA, CMA, CIA, 

ERNST & YOUNG AND BUSINESS ALUMNI PROFESSOR; AND 

DIRECTOR OF RESEARCH—CORPORATE GOVERNANCE CENTER, THE UNIVERSITY OF TENNESSEE, KNOXVILLE 

Mr. CARCELLO. Congressman Fitzpatrick, Ranking Member Waters, and members of the subcommittee, thank you for giving me 

the opportunity to speak with you today about accounting and auditing oversight. 

I have served as a professor at the University of Tennessee for 

approximately 20 years where I teach accounting, auditing, and 

corporate governance. 

My remarks are also informed by my service on the PCAOB’s investor advisory and standing advisory groups, both of which are 

outside advisory groups to the Board. 

I will focus my remarks today on auditing oversight, particularly 

on three issues of concern to investors: internal control over financial reporting; public versus private nature of PCAOB enforcement 

proceedings; and audit firm rotation. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act exempts public companies with a market capitalization of less 

than $75 million from Section 404(b) of the Sarbanes-Oxley Act. In 

addition, the Dodd-Frank Act requires the SEC to study whether 

to extend the exemption from compliance with Section 404(b) to 

issuers with a market capitalization below $250 million. 

I believe that expanding the number of public companies that are 

exempt from auditor reporting on internal control would ill-serve 

investors in the capital markets. 

Over the last 5 years, a large body of empirical research has 

emerged that establishes the importance of effective internal controls and the benefits of auditor reporting on internal control. 

The most compelling evidence on the value of auditor reporting 

on internal controls comes from a study by Bedard and Graham 

2011. Bedard and Graham examine issuers with revenues of $1 billion or less. 

They find that one, auditors, rather than management, detect approximately 75 percent of the unremediated internal control deficiencies. As Bedard and Graham point out, ‘‘Importantly, this low 

level of client detection occurs when clients are aware that auditors 

will soon follow with their own tests.’’ 

Two, when managers detect the internal control deficiency, they 

tend to classify the deficiency as less severe, but auditors frequently override those classifications. 

Three, a significant percentage of the internal control deficiencies 

in the control environment component and related to the revenue 

account are detected by auditor control testing. This is germane because fraud is often associated with control environment weakVerDate Nov 24 2008 17:25 Jan 25, 2013 Jkt 075084 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\75084.TXT TERRI
41 

nesses and revenue is the account most typically misstated when 

fraud occurs. 

Let me move on to public versus private nature of PCAOB enforcement proceedings. 

I understand that Representative Lynn Westmoreland has introduced H.R. 3503, which would amend SOX to make PCAOB disciplinary proceedings public. I favor such legislation. 

The most compelling argument for making PCAOB disciplinary 

proceedings public is that the nature of these proceedings is private 

if brought by the PCAOB, but public if brought by the SEC, even 

though the PCAOB is closely supervised by the SEC. 

As former PCAOB Acting Chairman Dan Goelzer stated in his 

August 24, 2010, letter to Congressmen Frank and Bachus, ‘‘If the 

SEC were to bring the same case as the PCAOB, alleging the same 

violations, against the same auditor, the SEC’s charges would be 

disclosed at the time the Commission instituted its proceeding. Any 

administrative trial would be open to the public.’’ 

Finally, on audit firm rotation, the PCAOB has outstanding a 

concept release on auditor independence and audit firm rotation. I 

understand that Representative Fitzpatrick is considering draft 

legislation that would prohibit the PCAOB from mandating audit 

firm rotation. 

It is important to understand that the Board’s release on this 

topic emanates from a concern that auditors currently exhibit an 

inadequate level of professional skepticism. 

Without professional skepticism, audits are of little value. 

I believe that there is sufficient evidence to legitimately question 

whether auditors are sufficiently skeptical. 

The PCAOB’s inspection process has found that at least one of 

the largest accounting firms uses the following language in a recent 

proposal to a prospective client: ‘‘Your auditor should be a partner 

in supporting and helping the company achieve its goals.’’ 

In addition, the PCAOB’s inspection process continues to identify 

a sizable number of audit deficiencies. And these deficiencies are 

often related to inadequate profession skepticism. 

Given that the PCAOB’s mission is to protect the interest of investors and further the public interest in the preparation of informative and independent audit reports, exploring this issue is not 

only appropriate, not only is it within the clear mission of the 

Board as articulated by Congress, it is arguably the very mission 

of the Board and the reason the Board exists. 

Thank you. 

[The prepared statement of Professor Carcello can be found on 

page 79 of the appendix.] 

Mr. FITZPATRICK. Thank you. 

Mr. Kabureck from Xerox? 

STATEMENT OF GARY R. KABURECK, VICE PRESIDENT AND 

CHIEF ACCOUNTING OFFICER, XEROX CORPORATION, ON 

BEHALF OF FINANCIAL EXECUTIVES INTERNATIONAL (FEI) 

Mr. KABURECK. Thank you, Congressman Fitzpatrick, Ranking 

Member Waters, and members of the subcommittee for inviting me 

here today. 

42 

I am Gary Kabureck, chief accounting officer of Xerox Corporation. And today, I am representing the Financial Executives International (FEI), a leading international organization of senior financial executives. 

I would like to discuss three items today of interest to our members: the PCAOB project exploring the merits of mandatory audit 

rotation; complexity in accounting standards; and, time permitting, 

to provide some perspectives in the concept of principles-based accounting. 

Beginning with the subject of mandatory auditor rotation, the 

FEI has always supported the critical need for auditor independence and impartiality. There is no guarantee or evidence that mandatory rotation will increase auditor independence. However, it is 

clear that mandatory rotation will be costly and operationally disruptive. 

There are many reasons financial statement preparers oppose a 

requirement to periodically rotate the company’s auditors. My comments today will focus on practical operational implications and 

costs. 

For the largest multinational corporations, realistically only the 

big four firms have the resources to effectively perform the audit. 

I am on both sides of the table replacing auditors, and I can attest the process for selecting a new auditor in transitioning a new 

auditor will be lengthy and extremely costly for both the company 

and the new auditor. 

It requires a significant amount of incremental time of company 

personnel at all levels to break in new auditors. And it is usually 

at least 3 years before the audit effort achieves the steady 

workflow state. 

Company time and money are finite. Every hour and dollar spent 

on changing auditors is not available for the uses in the business 

or for return to investors. 

Additionally, many multinationals have non-audit relationships, 

for example, consulting with one or more of the big four firms, 

which would need to be curtailed if such firm was to be the new 

auditor. 

This leads to additional business disruption, to replace the firm 

in its non-audit capacity. Alternatively, companies may decide to 

never retain the big four firms to provide non-audit services, as one 

day that firm may need to become the new auditor. 

Beyond the audit, this notion has consequences for the entire 

consulting industry. 

The big four firms are not necessarily fungible as they vary in 

industry concentrations and expertise, geographic presence, and 

international reach, which potentially further limits the pool of selection of new auditors. 

Many capital markets and merger and acquisition transactions 

extend over several periods. And under mandatory auditor rotation, 

there will be instances when one auditor is present at the beginning of the transaction and a different auditor is present at the 

end. 

I can assure you this creates its own set of unique issues. 

In summary, mandatory rotation is a draconian step and it is 

critical to keep in mind the actual project goals, which is to find 

43 

ways in which auditor independence, skepticism, and objectivity 

can be enhanced. 

My second subject, complexity in accounting standards, is a significant issue for preparers of financial statements and their auditors. 

Of course, some complexity is unavoidable and appropriate, but 

some can and should be avoided. 

Unnecessarily complex accounting and disclosure requirements 

result in significant operating costs to financial statement preparers. It increases the risks of errors, mature weaknesses in these 

statements. 

The FEI recommends that to the extent possible, new accounting 

standards should result in financial statements that reflect the 

company’s business model. 

We also believe the cost of implementation and compliance 

should receive greater prominence in the FASB’s decision process. 

The FEI does wish to recognize Chairman Seidman’s efforts during the last 2 years she has chaired the FASB. In an effort to test 

the operational viability of potential new standards, the FASB has 

been conducting greater than ever outreach both in frequency and 

in visibility to its various constituencies. 

Obviously, we encourage this path in the future. 

One of the potential solutions, or at least partial solutions to 

complexity is my last subject: the call for great focus on principlesbased accounting standards. 

The FEI has long been a strong proponent of principles-based accounting and encourages the accounting standards setters to promulgate new standards with more emphasis on principles and less 

on detailed rules. 

We have noticed the recent change by the FASB in this direction. 

But do note that old habits, for example the drafting of very detailed roles, are hard to break. And there remain many accounting 

standards on the books that include extensively detailed rules. 

However, the effective principles-based accounting standards will 

require the acceptance of good faith application of judgment by all 

constituencies in the accounting, regulatory, audit, and user communities, and recognition that there may be slightly less comparability between companies in the future as local judgments may 

be different. 

Thank you for your time today. And will be pleased to answer 

any questions. 

[The prepared statement of Mr. Kabureck can be found on page 

110 of the appendix.] 

Mr. FITZPATRICK. Thank you, Mr. Kabureck. 

Next, Mr. Melancon from the American Institute of CPAs. 

STATEMENT OF BARRY C. MELANCON, CPA, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) 

Mr. MELANCON. Thank you, and good afternoon, Congressman 

Fitzpatrick, Ranking Member Waters, and members of the subcommittee. Thank you for having me today. 

44 

My name is Barry Melancon. I am a CPA, and president and 

CEO of the American Institute of Certified Public Accountants 

(AICPA). 

I am pleased to be here to testify before you today about the profession’s commitment to the public interests, its role in the global 

economy and capital markets, and the important services CPAs 

provide to U.S. businesses of all sizes. 

The AICPA was established 125 years ago by the accounting profession to serve the public interests by fostering independence, objectivity, confidence, and the highest possible level of professionalism and ethical behavior. 

To further that mission, we have identified five strategic initiatives geared toward the continuing improvement of our profession. 

The first strategic initiative is attracting and retaining the best 

and the brightest people into the profession. The CPA profession 

recognizes that its principal asset is human capital. And the 

AICPA is making significant investments in ensuring that a vibrant and highly qualified number of professionals are attracted to 

the profession, and see the profession as a rewarding career. 

The second initiative is ensuring the ongoing competency of the 

best and brightest in their respective roles. Many bodies are critical 

to the assurance—to assure the accuracy, transparency, and quality of financial reporting, including the AICPA, corporations, 

boards of directors, independent audit committees, CPA firms, and 

the regulatory community. The AICPA works to provide the ethical 

framework, training, and guidance that the CPAs as management 

and as auditors need to get it right. 

Third, the AICPA promotes independent relevant financial reporting, auditing, and ethical standards. Standards of practice developed free of any special interests influences, but with input from 

all relevant stakeholders, are critical to the production of information that is meaningful to investors and other users of that information. The AICPA supports the ongoing independence of FASB 

and its activities to develop financial reporting standards for public 

companies. 

More broadly, we support the development of one set of high 

quality global financial reporting standards. And we believe that 

international financial reporting standards, or IFRS, are best positioned to ultimately be that set of standards. 

The fourth strategic initiative is developing and implementing innovative solutions to the increasingly complex issues and business 

environment that CPAs navigate skillfully. Accounting and auditing solutions need to keep pace with business activities in order to 

maximize the ability of the profession to perform at the highest levels and to keep abreast of complex global business transactions. 

Nonfinancial information is becoming an increasingly integral 

tool to assess current and future business performance. Fraud detection and prevention will remain critical factors for both the financial statement preparer and auditor. Internal controls over financial and non-financial reporting are becoming much more important as well. And of course, technology solutions are critical. 

The fifth strategic initiative is supporting robust but balanced 

regulation. The AICPA believes in a strong and balanced regulatory structure that protects the public but does not detract or 

45 

negatively impact quality reporting and auditing, and does not restrict the effective and efficient flow of capital. 

The PCAOB is engaged in a number of projects which we support, including its concept release on auditors reporting model. 

There are two other projects about which we have some concerns. 

Last August, the PCAOB issued a concept release on audit firm 

rotation. Sarbanes-Oxley delegated responsibility for overseeing the 

hiring and firing of external auditors to independent audit committees. We believe in the audit committee’s authority and support 

strengthening its role, not undermining it. 

If the PCAOB’s release becomes a rule, it would present a clear 

example of unbalanced regulation by imposing significant strains 

on public companies and the audit profession, with little evidence 

that Sarbanes-Oxley is not working. 

Last October, the PCAOB issued a proposed rule on improving 

the transparency of the audit which would require identification of 

the audit partner and certain other participants in the audit report. We have questioned whether the identification of this specific 

engagement partner in that report would improve audit quality 

and auditor accountability, and we have suggested an alternative 

that provides a more balanced approach. We appreciate the 

PCAOB’s willingness to consider our suggestions. 

I also want to note two recent rulemakings that we believe overlook the appropriate balance between regulation that protests the 

public, and regulation that overly burdens businesses and their 

auditors. 

The first relates to audits of introducing broker-dealers and the 

inclusion in the PCAOB’s interim inspection program. And the second relates to audits of pooled investment vehicles, which results 

in effectively excluding certain CPA firms from providing audit 

services. 

We believe that regulations and the resources to implement those 

regulations should focus on where there is the greatest risk to the 

investing public. 

Let me conclude my remarks by emphasizing that CPAs in all 

areas of the accounting profession, along with the AICPA, join you 

as we seek to advance a common mission of promoting the highest 

quality accounting and auditing services that are valuable to the 

public interest, and to the global capital market. 

Thank you for the opportunity to present this testimony. And I 

would be pleased to answer your questions. 

[The prepared statement of Mr. Melancon can be found on page 

144 of the appendix.] 

Mr. FITZPATRICK. Thank you. 

The final witness is Mr. Quaadman from the U.S. Chamber of 

Commerce. 

STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER 

FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER 

OF COMMERCE 

Mr. QUAADMAN. Thank you, Representative Fitzpatrick and 

Ranking Member Waters. 

46 

I am Tom Quaadman with the U.S. Chamber of Commerce. And 

I think this hearing is appropriate the day after Congress passed 

the Jobs Act. The Jobs Act obviously was to spur IPOs. 

But we also feel at the Chamber, that there is a significant outflow of public companies from the public marketplace itself, which 

is something that Congress should address. And we think this 

hearing is an important first step to do that. 

Businesses need to have strong, clear, concise financial reports 

that accurately reflect economic activity. 

Strong financial reports allow businesses to go out into the marketplace and raise capital. They allow them to identify counterparties for transactions, as well as determining what the needs and capabilities of the company are. 

Standard setting is at the very head of that financial reporting 

process. Standard setting needs to be balanced and needs to have 

integrity. And the products that come out of the standard-setting 

process itself need to be done through thoughtful deliberation— 

masquerades as financial reporting will in fact drive investors and 

businesses out of the public marketplace. 

FASB, we believe years ago, had a problem with the standardsetting process that was unbalanced, was not receiving the appropriate input. That fair value accounting was actually a symptom of 

that problem. 

However, under the leadership of Jack Brennan with the Financial Accounting Foundation, and with Leslie Seidman of FASB, we 

think they have developed strong lines of communication that have 

allowed for the convergence projects to move forward in a very 

thoughtful way. 

The PCAOB, in our view, does have a very, very important role 

in the financial reporting process. However, currently we believe 

that they are misguided in their priorities and that they are actually engaged in mission creep. 

Sarbanes-Oxley was very clear in delineating lines of demarcation that corporate governance would reside either with State corporate law or with the SEC. The PCAOB was given jurisdiction 

over the regulation of auditing itself. 

In a series of concept releases and proposals that the PCAOB is 

currently looking at, they are crossing the threshold into corporate 

governance. Those include: the concept release on auditor independence which has rotation; audit committee communications; revisions to the audited financial statements; and apparently coming 

soon, the need for auditors to review and pass judgment on executive compensation. 

The reason why rotation is such an important issue—and I think 

why there has been such important discussion on it today, this as 

proxy access in its own way, has been around for decades. 

Yet there has been universal opposition to rotation. 

Congress, in debating Sarbanes-Oxley, specifically declined to include rotation. The GAO in looking at the issue twice decided that 

rotation was not appropriate and that it would increase costs. 

The majority of investors who have commented on the concept release have opposed rotation. All the businesses that have commented on the concept release have opposed rotation. And there 

are academic studies that oppose it as well. 

47 

But in the justifications we have heard about the need to consider rotation, the PCAOB has failed to provide any inspection evidence as to why this should be considered. 

Furthermore, the concept release and the statements, including 

this morning by Chairman Doty, have said that audit quality 

standards today are better than they were 10 years ago. 

So the question is, what is the need? The more fundamental 

question is, why is it the role of the government to tell a business 

what vendors they should or should not use. 

We think not. We think that the draft bill that you have put forward, Mr. Fitzpatrick, actually delineates the lines that SarbanesOxley stated. 

We have a 12-point plan, outlined in our testimony, that has a 

number of provisions we think would improve reporting, including 

Chairman Garrett’s SEC accountability bill, that would have FASB 

and the PCAOB have to abide by the Administrative Procedures 

Act as well as any advisory groups through FACA. 

They will in fact allow—force the arbiters of transparency to be 

transparent. We think that the PCAOB should have a business advisory group. 

And finally, Congressman Miller had an amendment in the Financial Regulator Reform bill to create a financial reporting forum 

that would have allowed the regulators—FASB, the PCAOB, investors, and businesses—to get together on a periodic basis to identify 

problems in financial reporting as well as to prioritize appropriate 

projects. 

We think that these are all issues that Congress should look at. 

And I look forward to taking any questions. 

[The prepared statement of Mr. Quaadman can be found on page 

158 of the appendix.] 

Mr. FITZPATRICK. Thank you. Thank you, Mr. Quaadman. 

I want to follow up on your testimony in connection with what 

you referred to as ‘‘mission creep’’ within the Board. 

As we all know now, the PCAOB has this concept release mandate auditing firm rotation. Yet, I believe they also acknowledge 

that audit quality has increased post Sarbanes-Oxley. So it has gotten better. 

In addition, this concept release also states that there is no data 

from PCAOB’s inspections that were shown to demonstrate the 

need for firm rotation, and also that the GAO studies have estimated that rotation—GAO says that it will cost 20 percent. 

Some say more. 

Why do you believe that the PCAOB is continuing to expend resources on this concept release at this point? 

Mr. QUAADMAN. Part of the justification we have heard is that 

this is being considered internationally and there has been discussion about that today. 

A couple of points on that. One is the Netherlands is about the 

size of New Jersey. 

The E.U.—and there has been discussion about auditor rotation 

or changes to the audit model, they say we need to move forward 

on this because the United States is considering this. 

And if you actually look at China, in China they are talking 

about rotation. But they are talking about it in a way that you 

48 

would actually force Chinese companies after a period of time to rotate out of global firms into Chinese-only firms. And that might be 

a problem because it could actually be protectionist in measure. 

What is also troubling, I think, as well was that Chairman Doty 

has stated to the press that ‘‘This is an issue we will be working 

on a year from now.’’ 

If you look at the state of audit standards today, most audit 

standards today predate Sarbanes-Oxley. 

So why is the PCAOB engaged in this process using these resources where there is no justification for moving forward or for the 

consideration when there are other more important issues that 

they should be working on? 

Mr. FITZPATRICK. What are some of those issues in your— 

Mr. QUAADMAN. As I said, reviewing audit standards is one. 

The SEC 5 years ago, in 2008, before the financial crisis, had an 

advisory committee that actually issued a number of different proposals on how to reduce financial restatements, including the use 

of materiality for investors. 

That has sat on the shelf. And I think it is a question Congress 

should ask the chairman: why aren’t they moving forward on the 

ability to reduce restatements? 

Mr. FITZPATRICK. Mr. Kabureck what are some of the operational 

challenges that companies would face if mandated to rotate their 

firms such as being proposed? 

Mr. KABURECK. I can think of several in the time I have. Let me 

talk in the context. 

Most multinational companies probably would have independence issues with three of the big four firms. 

In my company, we would. We have outsourced internal audit. 

Another firm does work that will be constituted tax law. Still another does joint go-to-market services for us. 

So if you had to—as a big four—we would need a big four firm. 

If we had to go to one of the other big four, is—they would—the 

independence issue that they would have would have to be remedied. 

So for example, take an internal audit. We would have to bring 

it back in-house, which would encompass finding new people who 

are willing and qualified to do auditing. Or you would have to move 

it to still another firm. You lose the institutional knowledge that 

that outsourced internal auditor has. 

And then you don’t want to have a break in internal audit while 

you are transitioning from the old firm until you have the new arrangement. That would not be a good thing either. 

So I could go on and on. But basically, this example is that the 

services that these vendors are providing would have to stop. There 

are at least nine enumerated prohibited services that exist today. 

And the major corporations use the other big three firms that 

sent their auditor for them regularly. 

Mr. FITZPATRICK. So you are suggesting that if your corporation 

were required to switch auditing firms that you may be limited to 

only one to go too? 

Mr. KABURECK. You would—at the moment, there would be independence issues with all three. Some task would have to stop by 

one or the others. 

49 

And you could—I used the internal audit as an example because 

it—but the law—but the big four firm that does some international 

tax work for us that would be more—can—would—here would be 

considered practicing tax law, that would have to stop. And they 

are doing a very good job if it over there. 

So you are going to have to replace your tax attorney abroad. 

And so it is a—something else changes besides just the auditor. 

Mr. FITZPATRICK. Mr. Melancon, you had talked briefly about the 

importance of these firms being able, and the companies being able, 

to attract quality auditors. 

Given what Mr. Kabureck just indicated, you are now limited to 

perhaps one company to transfer to. What does that do to the sort 

of migration of auditors between company and auditors and different auditing firms? 

Mr. MELANCON. The human capital issue is real. 

One of the things in all this discussion about auditor rotation 

that wasn’t brought up today, that I think is very important, it 

goes to your point, Congressman, is that Sarbanes-Oxley actually 

in—passed—part of its law required the lead partner and the concurring partner to rotate every 5 years, which was addressing the 

issue of that different look. 

But at the same time, not going to the point that Gary mentioned which was related to the audit firm rotation itself. 

And we tend to sort of bypass that. But even that provision requires huge human capital aspects within a firm because of the difficulties of those particular issues. 

If you go to a much greater extent, there will be disruption, serious disruption within the firms as well as within the corporations 

as he just mentioned. 

Mr. FITZPATRICK. Mr. Kabureck, this question of audit committees within public companies, my understanding of those audit— 

the committees are independent. They have a job to do. Their job 

is to understand the importance of the audit. How it occurs. How 

many individuals are there day-to-day within the company? 

And that is an appropriate role in a public company for that 

audit committee. 

What essentially is being proposed is that the Federal Government through one of its agencies’ Boards is now going to sort of 

reach into—not just mandate audit firm rotation, but essentially 

usurp the proper role of an audit committee within a public company. 

Can you expand on that? 

Mr. KABURECK. Certainly. As I understand it, the PCAOB proposal, if it was to become the requirement, to mandatory rotate 

audit firms, it absolutely is usurping a Board governance, more 

specifically audit committee governance responsibility. 

Going towards local solutions to local issues would seem to me, 

and I think to my colleagues in FEI, is that companies, boards of 

directors, more specifically their audit committees, their best position is to understand when is the right time, if ever, to reconsider 

changing auditors and to challenge the auditors, even just to rebid 

it just to get fees down. 

50 

But it would seem to me that every company situation is different. Every audit situation is different. So the FEI believes that 

is best left to companies and their boards of directors. 

Mr. FITZPATRICK. I now recognize the ranking member, Ms. Waters, for 5 minutes. 

Ms. WATERS. Thank you very much. 

I would like to thank all of our witnesses for being here today. 

I have to say that I am a little bit concerned about the tremendous opposition to the rotation concept. 

We have just gone through a subprime meltdown that basically 

almost destroyed our economy. And we have found that there were 

many individuals, agencies, organizations that played a role in the 

demise almost of our housing market, which negatively impacted 

our entire economy. 

And yet this very, very strong opposition to rotation just seems 

as if there is not a lot of understanding about auditing, rating 

agencies, etc., etc. 

I want to go back to our first witness here, and ask about—under 

Sarbanes-Oxley’s Sections 302 and 906, CEOs and CFOs must sign 

certification attesting to the internal controls of the corporation 

they are recording every year in. 

If as a CEO, or if a CEO or CFO attests that those certifications 

are accurate, and if they are not, they could face civil and criminal 

penalties. Have these certifications been effective in improving the 

quality of financial reporting? 

Could you help me with this, Mr. Carcello? 

Mr. CARCELLO. Yes, as you point out, Representative Waters, 

under Sections 302 and 906, the CEO and the CFO have to certify 

as to the accuracy of the financial statements. 

There has been both anecdotal and empirical research. We have 

talked earlier today about costs and benefits. 

I would refer this committee to numerous studies that have documented the benefits associated with that certification. So it does 

seem to have helped. 

I believe, although we haven’t talked extensively about this 

today, one of the reasons that the PCAOB has proposed a requirement for the audit partner to be identified in the audit report is 

if those certifications have provided benefits on the part of preparers, public identification of the audit partner may provide comparable benefits on the audit side of the house. 

Mr. Kabureck, do you agree? 

Mr. KABURECK. With respect to the 302 and 906 certifications, I 

think they have increased the quality of and the liability of financial reporting. 

I am also a signing officer for quarterly and annual filings. 

The CEO and CFO rely upon internal processes, which I lead, to 

give them comfort and assurance that the statements that we are 

releasing comply with GAAP and the relevant laws and so on. 

So I think 302 and 906 certifications have been an improvement 

from the pre-Sarbanes-Oxley practices. 

Ms. WATERS. What you are saying suggests that audit partners 

should be required to sign off on the audit reports they issue as 

proposed by PCAOB, and as is the case in the E.U, Australia, 

Korea, and other countries? 

51 

Mr. KABURECK. No, if the question is directed to me, and I don’t 

know if FEI has a position on it. I personally support the audit 

partners name being disclosed and associated with the audit, either 

by signature or by in the text in the 10-K. 

Ms. WATERS. Let me turn to the U.S. Chamber of Commerce. 

I have been reading some news reports that basically talk about 

a clash between you and—as they refer to it, our top watchdog. You 

have been very, very vocal. As a matter of fact, you have demanded 

that Mr. Doty back up from this idea of rotation. 

Why are you so adamant that rotation is the wrong way to go, 

and that the concept should not even be considered? 

Mr. QUAADMAN. Sure. Thank you for the question. 

As you know, we can’t control what reporters write. But we 

strongly believe in the internal controls in Sarbanes-Oxley. We 

strongly believe in independent audit committees. And actually, rotation has been considered over decades and been rejected. 

Our concern is that rotation is going to neuter independent audit 

committees. And in fact, that there are other things that the 

PCAOB could be working on. 

Ms. WATERS. You mentioned cost. And I think cost was mentioned several times. 

What do you mean? And what is the difference? 

And how much increase in cost do you anticipate that rotation 

would cost? 

Mr. QUAADMAN. I think there are costs that—in a couple of ways. 

First off, in any rulemaking that a Federal agency does, they 

have to engage in a cost/benefit analysis. In fact, the President’s 

Executive Order last year on regulatory reform enhanced what 

should be the economic analysis scrutiny that agencies should engage in. 

We think that both FASB and PCAOB should do that. Because 

one, you have to identify problems, and two, you have to try and 

look at alternative solutions, and what the costs and benefits to 

those may be. 

FASB and PCAOB do not provide a public cost/benefit analysis 

as does the SEC. 

I think the proxy access decision from last year was very instructive in that. And furthermore, what the court also talked about 

there is that if a regulator has a predetermined outcome in mind 

when they begin a process, that is something that the court is 

going to strike down. 

So if you have an agency such as the PCAOB, despite the fact 

that 92 percent of the comment letters oppose the concept release 

saying we are going to be working on this issue a year from now, 

we really have to wonder if they have crossed the line of having 

a preconceived outcome in mind. 

Ms. WATERS. I am way past my time. And I thank you very 

much, Mr. Chairman. 

By the way, proxy access was my addition to Dodd-Frank. 

Mr. QUAADMAN. I am very much aware of that. 

Mr. FITZPATRICK. I recognize Mr. Campbell for 5 minutes. 

Mr. CAMPBELL. Thank you. Thank you, Mr. Chairman. 

I know there is lots of talk about firm rotation. And I have feelings on that too. 

52 

But I am going to go back to the line of questioning that I had 

earlier, with the earlier panel. And I don’t know if you were all 

here. 

I want to try and elicit perhaps a little more specific responses 

from you all, who I think maybe have a little more flexibility to do 

so. 

Let me tell you what I think. And you tell me if you think I am 

full of garbage or you agree with some of it or not, or whatever. 

But what I think is that IFRS is a good thing. From a harmonization standpoint, we need to go in that direction. 

I think principles-based accounting is a good thing. And that we 

ought to move in that direction. 

But under our current litigation system, if we do that, we won’t 

have a big four accounting firms. We may not have a big one accounting firm, because it is too easy in a principles-based system 

to second-guess a judgment call that turns out to be wrong at the 

time perhaps it was made. 

And that we need some now—people shouldn’t go without punishment for making bad—for making mistakes. 

But that we need some kind of system that allows us to use— 

make more judgment calls, have harmonization with world accounting principles, have a much better system of accounting statement. But not basically be setting up the situation where we have 

a big one which is not going to enable us to meet Sarbanes-Oxley, 

or Dodd-Frank, or any of the other requirements that have been 

passed by this Congress over the past decade. 

Somebody talk to me. 

Mr. Melancon? 

Mr. MELANCON. Thank you, Congressman. 

I think that first off, your line of reasoning is very sound. We 

would agree with you that the IFRS is the ultimate end game here. 

And that getting to a global set of standards that are used around 

the world from accounting is a good thing for investors worldwide, 

and U.S. investors who are investing in foreign companies as well. 

The premise of your discussion is really about principles-based 

versus rules-based. And we see in America, obviously in many instances outside of the—accounting, issues of significant rules because of the environments that you are in today. 

And what we have said is that to move to IFRS, it requires the 

entire system to move. It requires for instance where you use professional judgment, there has to be reasonable protection that this 

thought of 20–20 hindsight or second-guessing reflects the professionalism that people bring to that particular standpoint. 

I think it applies to companies. I think it applies to auditors. And 

I think it applies to audit committees and everyone else in that 

particular process. 

It is very important that when people use and deploy reasonable, 

rational, professional approaches, and come to a reasonable answer, that the system does not allow that to be second-guessed 

with the emergence of facts 2, 3, 5, 8, or 10 years later that would 

say, you did wrong in that particular circumstance 

Because it is only natural then if that is the case, the people in 

that system will say, then give me rules to comply with. And I 

think that is what has driven where we are today. 

53 

Mr. CAMPBELL. Dr. Carcello, I think you were the next most anxious. 

And then we will get to you— 

Mr. CARCELLO. Thank you, Congressman. 

In terms of a principles-based system, and your argument for 

that, reasonable people can disagree. But let us take your premise 

as a given. 

In order to get better accounting, the role of auditors will become 

even more important, because management will be given more 

judgment. 

But others here seem to oppose efforts to improve auditor independence and skepticism, whether rotation is the answer or not, 

that is a different question. 

But there is a legitimate concern, as expressed by virtually everyone who testified last week, if you go read the statements, as 

it relates to auditor independence and skepticism. In my opinion, 

those positions are not consistent. 

In terms of litigation reform, I would point out for the benefit of 

the Members here, let us not forget that in 1995, this Congress 

passed a Private Securities Litigation Reform Act. Let us not forget 

that in— 

Mr. CAMPBELL. Authored by my predecessor, Christopher Cox. 

Mr. CARCELLO. Yes. That is right. 

In 1998, this Congress passed the Securities Litigation Uniform 

Standards Act to prevent an end run around Federal jurisdiction 

by going to the States. 

And let us not also forget that in the last 15 years, there has 

been a series of Supreme Court decisions that have substantially 

weakened the ability of third parties to sue outside parties, starting with the Central Bank of Denver, the Stoneridge, to Morrison 

to Janus. 

Mr. CAMPBELL. Okay. I want to make sure that Mr. Quaadman 

has a chance. 

Mr. QUAADMAN. No, Mr. Campbell, I think you have really sort 

of highlighted what the third rail is with IFRS. 

We support IFRS. We support a global system. We have raised 

the same issues with the SEC about the stresses of the litigation 

system here in the United States. 

I think that is quite frankly one of the reasons why the SEC, and 

Jim Kroeker in particular, are taking the time that they are to try 

and get there because they also recognize the same issue. 

I also want to agree with you as well that a principles-based system is the right way to go. 

And just one small example with the convergence projects, where 

we have had a very sharp difference of opinion, is actually on lease 

accounting. And one of the areas where we have a very sharp difference of opinion is this notion that you have to frontload all the 

expenses, which doesn’t seem to make sense. 

Yet, that has a direct impact on the bottom line for companies. 

So we think that a principles-based system will allow for adjustments that won’t have such harmful consequences. 

Mr. CAMPBELL. Okay, thank you. And my time is up. 

54 

I will just say on that that I—a lot of these rules-based systems, 

I have looked at—and not taking anything away from the FASB. 

They are doing what they have to do under the circumstances. 

But I can put together scenarios under which the outcome is 

completely wrong. And everybody understands it is completely 

wrong, because you can’t make a rules-based system that covers all 

potential scenarios. 

But yet that is what we are doing. And it is—and I—many of 

these pronouncements I have to agree, I look at them and go, this 

is just wrong. 

They—certain things you—if it looks like a duck, quacks like a 

duck, and acts like a duck, it is a duck. And if it doesn’t, it is not. 

And at some point we need to go back to that system. 

I appreciate your indulgence, Mr. Chairman. 

Mr. FITZPATRICK. I recognize Mr. Sherman for 5 minutes. 

Mr. SHERMAN. Thank you. 

Mr. Melancon, the Public Company Accounting Oversight Board 

has urged us to amend Sarbanes-Oxley to make PCAOB disciplinary proceedings public unless the Board orders otherwise. 

Currently, those proceedings are not public until and unless the 

PCAOB decides to refer the case to the SEC for criminal prosecution. 

What do you think of the Public Company Accounting Oversight 

Board’s proposal to amend Sarbanes-Oxley? 

Mr. MELANCON. Congressman, being a CPA, you know all CPAs 

would be in favor of making sure the highest quality is there. And 

certainly dealing with people who have performed inadequately is 

a part of that process. 

However, Sarbanes-Oxley built a system that addresses actually 

the two aspects that are most important here: the ability to address bad actors; but also the ability for the professional’s reputation to be protected through a reasonable process in which their 

professional judgment—to Congressman Campbell’s previous question—can be aired out in that particular process. 

And that is the reason for that first layer of confidentiality with 

the PCAOB. The PCAOB is not a government agency. And as a result, it has certain exemptions from other activities that other government agencies must abide by, which includes Sunshine and Administrative Procedures Act and the like. 

And so what the system actually provides is that you have a 

mechanism with the PCAOB in which you have, yes, a confidential 

process for a while. 

And an ability at any time, not just at the end of the process, 

but at any time that the PCAOB if they believe there is an egregious situation, where the public is at risk, or if someone, quite 

frankly, is gaming the system, that they can make an immediate 

referral to the SEC, which of course then affords that investigation 

all of the transparency that is being called for. 

And so what we actually have in the construct of what is there 

today is a system that tries to balance, as my testimony talks 

about, balance regulation, both of those imperative in the process. 

Mr. SHERMAN. So you think this committee got it right on this 

issue when we passed the original version of Sarbanes-Oxley. 

55 

I would like to move to another issue and that is the PCAOB 

issued its concept release on auditor independence and audit firm 

rotation. They received, I believe, 600 comments, and 96 percent of 

them opposed that rotation. 

Tell me what it would mean to the cost of the audit and the quality of the audit if we went to mandatory rotation. 

Mr. MELANCON. A lot of people have been talking about cost 

today. And it is—and I am sure Gary would agree with this. 

There is not only the external cost changing an audit firm which 

includes familiarity with the business, which is a big component of 

these very complex global organizations. But also the internal cost 

to the business itself in dealing with a different set of individuals 

in that capacity. 

There is also a cost overall to the system. There would be a process that would be going on where different firms would be constantly being reviewed by—or considered by different public companies, some 15,000 or so of those. 

That in itself consumes activity. 

The premise of this discussion is about professionalism, and independence, and skepticism. And my friend, Dr. Carcello, at the end 

said, people here don’t seem to be very concerned about that. 

We are absolutely concerned about that. 

But the question becomes, as rotation addressed those particular 

concerns—I travel all over this country. I can tell you, auditors 

today are under more scrutiny and more pressure and more aspects 

to do it right, both internally from their firms, from the regulatory 

process, from independent audit committees, and the like. 

And so there is a high degree of skepticism. And Chairman Doty, 

in fact, testified that audit processes are better today. 

Now, we all agree we should be working on things to improve. 

But we don’t really believe that this is the way to go. 

We believe improving audit committees, getting them more 

equipped to ask the right questions of auditors about independence 

and skepticism. All of those things will add to improvements in the 

process without sort of taking a very direct approach like mandatory rotation. 

And I want to make one final point. 

I think it is very critical to understand that there are other 

places around the world. And Chairman Doty referenced that, that 

are talking about this. 

But we are the deepest, most significant capital market in the 

world. And it would be very unfortunate if our discussion about 

that topic, even if it doesn’t lead to a rule, would imply to others 

that that is a direction outside the United States that they should 

go, which would have the same type of detrimental effect on the 

profession. 

Because these are global—for the most part, global companies, 

global audits that are going on, and it is teams around the world 

that are involved in these particular processes. 

Mr. SHERMAN. And finally, I would point out that one part of the 

oversight of the profession is if the firm screws up, they are going 

to get sued, and not for just a few million dollars. 

I yield back. 

Mr. FITZPATRICK. I recognize Mr. Perlmutter for 5 minutes. 

56 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

And it is interesting that in the Congressmen you have facing 

you, you have two lawyers and two accountants. So that is who enjoys this kind of conversation, I guess. 

Mr. SHERMAN. Actually, I am both. 

Mr. PERLMUTTER. Oh and then—yes. So he has two stripes on his 

epaulet. 

But no, I appreciate the testimony. I thank you for—and Noah 

who works with my office, Noah Marine, and you Mr. Melancon 

educated me on what is in Sarbanes-Oxley, that there is a refreshing or a new set of eyes every so often. 

And for me, that is sufficient. 

At the end of the day, I have to believe either accountants are 

professionals, or they are not. They either know what they are 

doing or they are bums. 

The business needs from the officers to the investors to the bankers to the lenders to the counterparties, as you suggested, rely on 

good information, good financial information. 

And if we did a rotation, a mandated rotation with these giant 

companies, for them to get up to speed, it just hasn’t made sense 

to me in the conversation. Especially now, knowing that under Sarbanes-Oxley there is a requirement within the firm to bring in a 

new set of eyes, just to make sure that it isn’t too cozy. 

So I appreciate that. There has been a metamorphous I would 

say to my friend, Mr. Campbell, over time. 

Back in the 1970s, there was a business judgment rule. But 

there were mistakes made. And there—the common law and the 

law equity came into play. 

And ultimately, there were losses. There were judgments. And 

we kept getting more and more specific with—either with statues 

or rules to provide safe harbors. 

Now if we are going to go back to principles-based, it is not going 

to—what his idea of a bad judgment might be—I might say was a 

really bad judgment. 

So, we are in this pickle between having the safe harbor for those 

that are trying to interpret financial records versus wait a second, 

the business has the right to make a judgment in this respect. 

So I did have a specific question rather than just a conversation 

about this. 

Mr. Melancon, you talked about now having to deal with non-financial information. 

What did you mean? 

Mr. MELANCON. Congressman, I think the world of business reporting, I will call it and not just financial reporting is rapidly 

evolving. 

And this Congress has certainly had debate on Section 404(b) 

and the internal controls. 

I think that if we were here 10 years from now talking about 

what is it that the information that investors have, that business 

decisionmakers are having as it relates to companies, it is going to 

be much more expansive, much more real time, much more complex than it is today. 

And what controls are about is about building processes around 

that whole information flow. 

57 

If you think about better decision-making and protections, which 

is what obviously this whole process is about from a systems standpoint, clearly businesses are reporting on broader sets of information. 

There are pilots going on around the world for instance. And 

there is something called the International Integrated Reporting 

Council which all of the large networks are working on, in which 

companies are looking at a broader information footprint, not just 

the financial statements, financial statements plus, so information 

about how sustainable the business process is; in other words, their 

supply chains, and the ability for the company to survive as a going 

concern as an example. 

The key indicators that are important for management and the 

Boards to be measured on by investors as to what is really driving 

value in the organization. 

And those types of things require an information system that 

people who see the outputs of those can rely on that information. 

Mr. PERLMUTTER. But let me— 

Mr. MELANCON. And so, that is the broader footprint. 

Mr. PERLMUTTER. My time is about up. 

So let us say on the supply chain, does an auditor these days, 

or somebody and maybe, Professor, you could answer, do you guys 

have to opine on whether the supply chain is shaky or not shaky 

or if there is a tsunami in Japan, it is going to—Toyota here in the 

United States is going to have trouble. You don’t have to go that 

far, I hope. 

Mr. MELANCON. No, not today. But the fact of the matter is, 

again, that when we look at information that is used for the decision-making set, there is evolution to those broader footprints 

today. 

And as I said, there are pilots that are going on around the 

world. Not so much in the United States, that is exactly related to 

that particular concept of a broader set. Not to the maybe a myopic 

point that you might be thinking, but the broader strategic and 

critical performance indicators that are necessary for us to understand how a business is operating. 

Mr. PERLMUTTER. Thank you. 

Thanks, Mr. Chairman. 

Mr. FITZPATRICK. The gentleman yields back. 

With that, the questions are concluded. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

So with that, I want to express our appreciation to the members 

of the panel for your service here today. 

And this hearing is adjourned. 

[Whereupon, at 1:00 p.m., the hearing was adjourned.] 

(59) 

A P P E N D I X 

March 28, 2012 

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Testimony of 

Robert H. Attmore, Chairman 

Governmental Accounting Standards Board 

Before the 

U.S. House of Representatives Financial Services Subcommittee On 

Capital Markets and Government Sponsored Enterprises 

Accounting and Auditing Oversight: Pending Proposals and Emerging Issues 

Confronting Regulators, Standard Setters and the Economy 

March 28, 2012 
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Chainnan Garrett, Ranking Minority Member Waters, and Members of the Subcommittee, thank 

you for this opportunity to participate in today's hearing. My name is Robert Attrnore. I am the 

Chainnan ofthe Governmental Accounting Standards Board (GASB) and have served in that 

capacity since 2004. Before joining the GASB, I was a Deputy Comptroller for the State of New 

York and served as the N.Y. State Auditor. Before joining the State in 1979, I worked for 

Deloitte, a major public accounting finn. 

Because this the first time in the 27-year history of the GASB that we have appeared before 

Congress, I would like to briefly provide some background on our organization. The GASB was 

set up as an independent private-sector organization that establishes accounting and financial 

reporting standards for state and local governments in the United States. The GASB operates 

under the auspices of the Financial Accounting Foundation (FAF) which has oversight authority 

for both the GASB and the Financial Accounting Standards Board (FASB). 

Individual sovereign state governments have the authority to establish accounting and financial 

reporting standards for themselves and their local jurisdictions. Before the GASB was created, 

state and local government accounting and financial reporting standards were established for 

over 50 years by the National Council on Governmental Accounting (NCGA) and its 

predecessors. In the wake of a financial crisis in the 1970s, state governments recognized a need 

for change. In order to adequately meet the nccds of financial report users in the municipal bond 

market, state representatives detennined they needed an independent, national, standards-setting 

body for state and local governments comparable to the F ASB. State organizations, working 

with the F AF, the American Institute of Certified Public Accountants, local government 

organizations, and the Government Accountability Office, reached an agreement in 1984 to 

create the GASB, which began operations that year. Today, all statc governments follow GASB 

standards. 

The GASB is recognized by state and local governments, resource providers, the accounting industry, and 

the capital markets as the official source of generally accepted accounting principles (GAAP) for state 

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and local governments. Tribal governments in the United States and United States territories also 

have chosen to follow the GASB pronouncements. While recognized as an authoritative 

standard setter, the GASB does not have enforcement authority. Compliance with GASB's 

standards, however, is enforced through the laws of many individual states and through the audit 

process, when auditors render opinions on the fairness of financial statement presentations in 

conformity with GAAP. 

GASB's Mission and Guiding Principles 

The mission of the GASB is to establish and improve standards of state and local governmental 

accounting and financial reporting that will: 

• Result in useful information for users of financial reports, and 

• Guide and educate the public, including issuers, auditors, and users of those financial 

reports. 

The mission is accomplished through a comprehensive and independent process that encourages 

broad participation, objectively considers all stakeholder views, and is subject to oversight by the 

FAF's Board of Trustees. 

GASB publications note that external financial reporting assists in fulfilling government's duty to 

be publicly accountable and that such reporting is used to assess accountability and to make 

economic, social, and political decisions. Those publications also identifY the primary users of 

state and local government financial reports as those: 

• To whom government is primarily accountable-its citizens 

• Who directly represent the citizens-legislative and oversight bodies 

• Who finance government or who participate in the financing process-taxpayers, other 

governments, investors, creditors, underwriters, and analysts. 

Sometimes government administrators also are users of financial reports; whether they are 

considered primary users depends on whether they have ready access to internal financial 

information. 

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To accomplish its mission, the GASB acts to: 

Issue high-quality standards that improve the usefulness of financial reports based on the 

needs of financial report users and on the underlying concepts set out in the GASB's 

conceptual framework 

• Keep standards current to reflect changes in the governmental environment 

• Provide guidance on implementation of standards 

• Consider significant areas of accounting and financial reporting that can be improved 

through the standards-setting process 

• Improve the common understanding ofthc nature and purposes of information contained in 

financial reports. 

The GASB develops and uses concepts to guide its work of establishing standards. Those 

concepts provide a frame of reference, or conceptual framework, for resolving accounting and 

financial reporting issues. 

The GASB's work on both standards and other communications, including concepts, is based on 

research conducted by the GASB's technical staff and others. The GASB actively solicits and 

considers the views of its various stakeholders on all accounting and financial reporting issues. 

The GASB's activities are open to public participation and observation under the "due process" 

procedures mandated by its Rules of Procedure. 

In establishing standards and concepts, the GASB exercises its judgment after research, public 

due process, and careful deliberation. It is guided by these principles: 

• To be objective and neutral in its decision making and to ensure, as much as possible, that 

the information resulting from its standards is a faithful representation of the effects of state 

and local government activities. Objective and neutral mean freedom from bias, precluding 

the GASB from placing any particular interest above the interests of the many who rely on 

the information contained in financial reports. 

To weigh carefully the views of its stakeholders in developing standards and concepts so 

that they will: 

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a. Meet the decision-making needs of the users of government financial reports, and 

b. Gain general acceptance among state and local government preparers and auditors of 

financial reports. 

To establish standards only when the expected benefits to be derived exceed the perceived 

costs. The GASB strives to determine that proposed standards (including disclosure 

requirements) fill a significant need and that the costs they impose, compared with possible 

alternatives, are justified when compared to the overall public benefit. 

To consider the applicability of its standards to the separately issued general purpose 

financial statements of governmentally owned special entities. The GASB is aware of the 

unique and distinguishing characteristics ofthe government environment, which may 

require different standards from those used by similar private-sector entities. However, it 

specifically evaluatcs similarities of special entities and of their activities and transactions 

in both the public and private sectors, and the need, in certain instances, for comparability 

with the private sector. 

To bring about needed changes in ways that balance the desire to minimize disruption of 

accounting and financial reporting processes with the need for information in financial 

reports to communicate effectively to users. The GASB establishes reasonable effective 

dates and transition provisions when new standards are introduced. 

To review the effects of past decisions and interpret, amend, or replace standards when 

appropriate. 

The GASB also works to educate the public, including financial statement preparers, auditors, 

and users, about its standards and the information those standards require governments to present 

in their financial reports. In order to encourage broad public participation in the standardssetting process, GASB standards and other communications are issued only after completion of 

extensive and rigorous public due process. 

Board Members and Staff 

The GASB standards and other communications are established by a seven-member Board 

whose members are selected by the Trustees of the FAF. The Chairman serves on a full-time 

basis with the remaining six members devoting approximately one-third of their time to GASB 

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activities. The Board holds face-to-face public meetings every six weeks. Those meetings 

generally are held over a three day period. Due to the part-time nature of the Board, the face-toface meetings are supplemented by half-day public teleconference meetings that are generally the 

third week after the face-to-face meeting. 

In addition to me, the current Board membership is as follows: 

William W. Fish (term expires 2016) joined the GASB on February 1,2012. 

Michael H. Granof (term expires 2015) began serving as a member ofthe GASB on July 1, 

2010. 

David E. Sundstrom (term expires 2014) began serving as a member of the GASB on July 1, 

2009. 

Jan I. Sylvis (term expires 2017) began serving as a member of the GASB on July 1,2007. 

Marcia L. Taylor (term expires 2015) joined the GASB on July 1, 2005. 

James M. Williams (term expires 2012) joined the GASB on July 1,2002. 

The Board members are supported by 17 technical and 4 administrative staff. The technical staff 

is drawn from the preparer, audit, and user communities from around the United States. As 

discussed below, the staff conducts basic research, and prepares papers and proposals that set 

forth issues to be deliberated by the Board members in public meetings. 

Why Different Standards for State and Local Governments? 

Accounting and financial reporting standards designed for the government environment are 

essential because governments are fundamentally different from for-profit businesses in several 

important ways. Their purpose is different, in that governments provide public services rather 

than seek to generate wealth for business owners, and the way they are financed is very different. 

For example, businesses receive revenues from a vohmtary exchange of perceived equal values 

between a willing buyer and seller; whereas, governments obtain resources primarily from the 

required payment of taxes, and the specific taxes paid by an individual taxpayer often bear little 

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direct relationship to the value of services received by that taxpayer. Furthermore, the 

information needs of the variety of users of government financial statements are different from 

the needs of the users of nongovernmental financial statements. For example, governmental 

accounting and financial reporting standards aim to address the need for information to help 

stakeholders asscss how public resources are acquired and used, whether current resources were 

sufficient to meet current service costs or whether some costs were shifted to future taxpayers, 

and whether the government's financial position and its ability to provide services improved or 

deteriorated from the previous year. 

GASB Due Process 

The GASB's due process activities are described in its published Rules of Procedure. The 

GASB's stringent due process activities are designed to encourage broad public participation in 

the standards setting process. These activities promote timely, thorough, and open study of 

financial accounting and reporting issues by the preparers, auditors, and users of financial 

reports. For many of the issues it addresses, the GASB: 

• Appoints an advisory task force of outside experts 

• Studies existing literature on the subject (including pronouncements previously issued by 

the Federal Accounting Standards Advisory Board (FASAB), F ASB, and the 

International Public Sector Accounting Standards Board and conducts or commissions 

additional research if necessary 

• Publishes a discussion document for public comment setting forth the issues or concerns 

being addressed and possible solutions 

• Broadly distributes an Exposure Draft of a proposed standard for public comment 

• Conducts public hearings and user forums on its due process doctUllents. 

Significant steps in the process are announced publicly. The GASB's meetings are open for 

public observation and a public record is maintained. The GASB also is advised by the 

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Governmental Accounting Standards Advisory Council (GASAC), a 30-member group 

appointed by the FAF Trustees that represents a wide range of the GASB's stakeholders. 

Transcripts of public hearings, letters of comment and position papers, research reports and other 

relevant materials on projects leading to issuance of pronouncements become part of the Board's 

public record and are available for inspection. To encourage public comment, discussion 

documents and Exposure Drafts are made available for download on the Internet. Single printed 

copies also are available without charge during the comment period to all who request them. 

Final pronouncements arc distributed when published through GASB subscription plans or may 

be purchased separately. 

GASB Funding 

The Sarbanes-Oxley Act of2002 provided an independent, stable source of funding for 

the F ASB. An adequately funded independent private-sector standard setter also is essential for 

the state and local government environment and the municipal securities market. Although states 

essentially delegated their authority for prescribing accounting and financial reporting standards 

for state and local governments to the GASB (under the oversight of the FAF) in 1984, the 

GASB has been funded in a piecemeal, inadequate manner by voluntary contributions from 

states, local governments, the financial community, and through sales ofFAF publications since 

its inception. 

The recent financial and economic crisis has demonstrated the urgency to ensure full 

disclosure and transparency in the municipal securities market. The municipal securities market 

is a key component of our nation's capital markets. The Federal Reserve Board has estimated 

the size of the municipal securities market at $3.7 trillion with over 50,000 issuers as of 

September 30, 2011. GASB has an essential role in this market by issuing high-quality, 

independently established governmental accounting standards that provide a foundation for 

financial reporting that investors can rely on to make informed investment decisions. 

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75084.009

The municipal securities market is largely a retail market. According to a June 20]] 

Federal Reserve Board statistical relea~e, approximately 51 % of the $3.7 trillion municipal 

securities market is held by individual investors and an additional 22% is held by mutual funds. 

As such, these securities are not only critical to financing infrastructure and other government 

needs, they are important to American investors seeking safe state and local government 

investments. 

On July 21,2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(WSRA) became law. §978(a) ofthe WSRA empowers the U.S. Securities and Exchange 

Commission (Commission) to require a national securities association to establish a reasonable 

annual accounting support fee adequate to fund the annual budget of the GASB to ensure highquality state and local governmental accounting and financial reporting standards. As a result, 

the Commission directed the Financial Industry Regulatory Authority, Inc. (FINRA) to establish 

a reasonable accounting support fee and related rules and procedures to provide a sustainable 

funding mechanism to support the efforts ofthe GASB. On February 23,2012, the Commission 

issued an order granting approval ofFINRA's proposed rule change establishing a GASB 

Accounting Support fee. 

Securing an independent funding source for the GASB is a tremendous milestone in the 

Board's history and represents the far-reaching recognition by the municipal capital markets of 

the importance of transparent financial information and the important role that GASB plays in 

fostering high-quality financial accounting and reporting. I am grateful to Congress for 

recognizing the need for this secure and independent funding source for the GASB. 

Current GASB Activities 

Accounting and financial reporting is in a state of continual improvement. At anyone time, the 

GASB has four to six major projects on its current technical agenda and two to four more limited 

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scope projects that focus on practice issues. In addition, there are usually four to six projects 

where initial research is being conducted by the staff. During the past year, the GASB has 

focused its efforts on four major projects: 

• Postemployment Benefits-pension accounting and financial reporting and reporting of 

other postemployment benefits, including retiree healthcare 

• Economic condition reporting: financial projections 

Financial guarantees 

• Government combinations 

The following is a summary of activities to date associated with these four projects and major 

issues identified by the GASB in each of those projects. 

Postemployment Benefits Project 

Pension Accounting and Financial Reporting 

The Board currently is considering improvements t6 existing standards of accounting and 

financial reporting for pension benefits by state and local governmental employers and by the 

trustees, administrators, or sponsors of pension plans. One objective of this project is to improve 

the transparency of financial reporting, in regard to the financial effects of employers' 

commitments and actions related to pension benefits. This objective would include improving 

the information provided to help financial report users assess the degree to which interperiod 

equity has been achieved. Another objective of this project is to improve the usefulness of 

information for decisions or judgments of relevance to the various users of the general-purpose 

external financial reports of governmental employers and pension plans. 

This project follows a research project initiated by the Board in January 2006 to gather 

information regarding how effective the standards established for pension accounting and 

financial reporting-Statement No. 25, Financial Reportingfor Defined Benefit Pension Plans 

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and Nofe Disclosures for Defined Contribution Plans, and Statement No. 27, Accounting for 

Pensions by State and Local Governmental Employers-have been in providing decision-useful 

information. The research project was conducted, in part, as a result of the Board's commitment 

to periodically reexamine its standards. The research project provided an opportunity to review 

how state and local governments and pension plans applied the requirements of Statements 25 

and 27 and how financial reporting reflected the transactions and events affecting pensions from 

the issuance of those standards in 1996. In 2008, the Board concluded that, based on the results 

of this research, additional improvements should be considered. The Board has drawn upon the 

work of various standards setters for the pension project, including the F ASB and F ASAB. 

Since the project was added to the current technical agenda, the Board has issued the following 

due process documents to solicit constituent feedback: 

Invitation to Comment, Pension Accounting and Financial Reporting-which was issued in 

March 2009 

• Preliminary Views, Pension Accounting and Financial Reporting by Employers-which was 

issued in June 2010 

• Exposure Drafts, Accounting and Financial Reportingfor Pensions and Financial Reporting 

for Pension Plans-which were issue in June 2011 

The Board held multiple public hearings for each of the documents as part of its extensive due 

process. In addition, the Board conducted a field test with financial statement preparers in late 20 II 

to assist the Board in identifying the costs associated with the pension proposals and potential 

implementation issues. The Board also held three financial statement user forums in October 2011 to 

further identifY and understand the perspectives of financial statement users regarding the anticipated 

benefits from the pension proposals. 

The Board is currently in the process of again deliberating its tentative decisions based on the 

feedback to the proposals that were included in the employer Exposurc Draft. The GASB 

proposed that generally a goverrunent (the employer) that provides pension benefits to its 

employees is responsible for the net pension liability and would report it in its financial 

statements. 

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A total pension liability is measured based on actuarially-calculated methods using assumptions 

that are consistent with the American Acadcmy of Actuaries' Actuarial Standards of Practice, 

unless otherwise specificd by the GASB. The total pension liability less amounts held in a 

qualifying pension trust, which generally are measured at fair value, equals the net pension 

liability. The measurement of the total pension liability is based on projecting futurc bcncfits 

payments, discounting those benefits to a present value, and attributing thc prcscnt value of thc 

projected benefits to appropriate service periods (past, present, and future). 

Based on the career-long employer/employee relationship that is being measured, the GASB has 

proposed to continue the current practice of incorporating expectations of future employmentrelated events and cost-of-living increases into the projections of benefit payments. 

As long as plan assets related to current employees, retirees, and their beneficiaries are projected 

to be sufficient to make the projected benefit payments for those individuals, governments would 

discount projected benefit payments using a long-term cxpected rate of return on plan 

investments. For some governments, however, there will be a point at which the plan assets are 

no longer projected to be available to be invested long term and, therefore, would not be 

sufficient for paying benefits to current employees, retirees, and their beneficiaries. The GASB 

believes that from point forward, the projected bcnefit payments take on attributes that are 

similar to other forms of debt. In this circumstance, governments would incorporate into the 

calculation of the discount ratc a tax-exempt, high-quality municipal bond index rate to reflect 

that future benefit payments are not expected to be made from earnings on long-term 

investments. 

The GASB also has proposed that all governments use a single actuarial cost method for 

attributing the present value of projected benefits to past, present, and future periods that is 

known as entry age, and to apply that method as a level pcrcentagc of payroll. 

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The effects of changes in the net pension liability resulting from service cost, interest cost, 

benefit changes, and projected earnings on plan investments should be recognized in pension 

expense in the period of the change. Changes in the net pension liability due to differences 

between expected and actual experience with regard to economic or demographic factors, and the 

effects of changes of assumptions about future economic and demographic factors for all 

employees and retirees, should be recognized in pension expense over the average expected 

remaining service lives of all employees and retirees using a systematic and rational, closedperiod method. Differences between projected and actual plan investment earnings should be 

recognized in pension expense over a closed five-year period, in a systematic and rational 

manner. 

The Board is expected to complete its deliberations on the proposed pension standards in the 

summer. New pension Statements would then be issued assuming that no significant changes are 

made to the prior proposals (which would result in the reexposure of new proposals). 

Other Postemployment Benefits 

In addition to the pension accounting and financial reporting project, the Board also has a 

companion project that addresses other postemployment benefits (OPEB), including retiree 

healthcare benefits. Since the issuance of the OPEB recognition standards in 2004, state and 

local governments, for the first time, have been required to disclose the extent of their retiree 

healthcare obligations in the notes to their financial statements. This new project will reexamine 

the measurement and recognition provisions related to those OPEB obligations. Deliberations on 

this project are scheduled to restart in July 2012. 

Economic Condition Reporting: Financial Projections 

The objective of this project is to consider what guidance, if any, should be provided for 

additional information about a government's economic condition. The project examines the 

usefulness of indicators of economic condition and its related components. This project also 

includes consideration of the information financial statcment users identified as necessary to 

assess the risks associated with a government's intergovernmental financial dependencies. 

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The GASB's research indicates that users of financial reports are interested in understanding a 

governmental entity's past economic condition-and thus how the governmental entity arrived at 

its current status-with an eye toward assessing a governmental entity'sfuture financial viability 

or fiscal sustainability. In other words, based on existing infonnation, users seek to assess a 

governmental entity's ongoing ability to raise revenue, to deliver services, to issue debt, and to 

meet its obligations and commitments as they become due-the capacity to sustain or improve 

its financial status. Fiscal sustainability is the forward-looking aspect of economic condition. 

The GASB has tentatively defined fiscal sustainability as a government's ability and willingness 

to generate inflows of resources necessary to honor current service commitments and to meet 

financial obligations as they come due, without transferring financial obligations to future 

periods that do not result in commensurate benefits. 

The current technical agenda project was begun in 2010 and in October 2011, the Board issued 

its Preliminary Views, Economic Condition Reporting: Financial Projections. The Preliminary 

Views presents the Board's current tentative views on what it believes are the most fundamental 

issues associated with the reporting of financial projections and related narrative discussions that 

will assist users in assessing a governmental entity's economic condition. The Board's intent is 

to obtain comments from constituents before developing more detailed proposals for potential 

new standards. 

The Board's preliminary view is that projections of the following infonnation for each ofthe 

next five years are necessary to assist users in assessing a governmental entity's fiscal 

sustainability: 

Cash inflows and cash outflows, with explanations of the known causes of fluctuations in 

cash inflows or cash outflows 

Financial obligations, including bonds, pensions, other postemployment benefits, and 

long-tenn contracts, with explanations of the known causes of fluctuations 

• Annual debt service payments (principal and interest) 

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A narrative discussion of a government's major dependencies on other governments to provide 

its services also would be included. 

Similar to guidance that is currently effective for the fcderal government based on standards 

established by the F ASAB, financial projections would be (1) based on current policy, (2) 

informed by historical information, and (3) adjusted for known events and conditions that affect 

the projection periods. Assumptions employed in making projections would be (1) consistent 

with each other and with the information used as the basis for the assumptions and (2) 

comprehensive by considering significant trends, events, and conditions. Disclosure of key 

assumptions would be required. 

It is important to note that projections based on current policy do not represent a forecast or a 

prediction of the most likely outcome. Financial projections may be based upon assumptions 

regarding changes in social, economic, and demographic events and conditions that are 

inherently subject to uncertainties. Therefore, a cautionary notice would precede the displayed 

financial projections and related narrative discussions advising readers that actual results may 

vary from the financial projections reported. 

The Board plans to hold public hearings on these preliminary views in late March and April 

before again beginning deliberations based on constituent feedback later this spring. 

Financial Guarantees 

The objective ofthe financial guarantees project is to establish additional guidance regarding the 

recognition and disclosure of financial guarantees made and received by state and local 

governments. 

The GASB staffs research indicates that financial guarantees are primarily associated with 

commitments related to debt issued by other governmental units, not-for-profits, and in certain 

cases for-profit organizations. The guarantees, however, may take other forms, including 

statutory commitments. The current economic environment has resulted in a level of financial 

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stress that has touched most organizations, resulting in financial guarantees that have been made 

or received in the past that are now coming to light. Currently, generic and specilic accounting 

and financial reporting guidance for these transactions derives from multiple sources, to the 

extent it exists. There is no single, comprehensive source of guidance for these guarantee 

transactions. Due to the heightened importance of these guarantees and the potential for them to 

result in claims, the Board believes that it is important to establish clear recognition and 

disclosure requirements. 

Since the project was added to the current technical agenda in April 2011 the Board has reached 

several tentative conclusions that it plans to expose for public comment later this year. These 

tentative conclusions include proposals related to measurement and recognition standards. 

For guarantees extended for which qualitative factors indicate that it is more likely than not an 

indemnification payment will be made, the amount ofthe liability should be measured using a 

cost accumulation approach. An Exposure Draft is scheduled to be issued in June 2012 for 

public comment. 

Government Combinations and Disposals of Government Operations 

The primary objective of the current government combinations project is to consider the 

financial reporting requirements for government combinations that are accomplished through 

annexation, consolidation, acquisition, shared service arrangements, or by other means. This 

project includes the analysis of government combinations that have taken place in both the 

general governmental area (for example, city/county consolidations and consolidated school 

districts) and the business-type activities area (for example, healthcare organizations). In 

addition, the project addresses certain devolution (spin-off) issues; for example, accounting for a 

library district that was formerly a department in a primary government. 

Until now, governments have accounted for mergers, acquisitions, and other combinations by 

analogizing to accounting and financial reporting guidance intended for the business 

environment, generally APB Opinion No. 16, Business Combinations. This proposed Statement 

would provide accounting and financial reporting guidance for combinations that would be 

specifically relevant to the governmental environment. This proposed Statement also would 

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improve the decision usefulness of fmancial reporting by requiring that relevant disclosures be 

made by governments about combination arrangements in which they engage and for disposals 

of government operations. 

The project was added to the current technical agenda in December 2010. Since that date, the 

Board has reached tentative conclusions that were exposed for public comment earlier this 

month. These tentative conclusions include: 

• Government combinations are identified by whether governments and other entities or 

their operations are transferred to (a merger or transfer of government operations) or 

purchased (an acquisition) by a government and the services associated with an entity or 

operation will continue after a government combination has occurred. 

• Carrying values would be used to measure the assets and liabilities in a government 

merger or transfer of government operations. Measurements of assets acquired and 

liabilities assumed in an acquisition generally are to be based upon their acquisition 

values. 

Other Projects 

In addition to these four major projects that were addressed herein, the Board has other projects 

on its current technical agenda and projects on its research agenda. A list of all GASB projects, 

along with a projected due process timetable is presented in Attachment A. Additional 

information on all GASB projects can be found at the GASB's website, www.gasb.org. 

Conclusion 

In conclusion, the GASB has made significant progress over the past 27 years, but there is still 

much left to do. With continued oversight by the FAF, a robust public due process that 

encourages and values broad participation from all GASB constituents, and dedicated Board 

members and staff, the GASB is up to the challenges that lie ahead. 

Thank you again Mr. Chairman for the opportunity to appear before the Subcommittee. 

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75084.018

Attachment A 

GASB Current Technical Agenda: Overview (As of 3/15/12) 

Project Issued To Be Issued 

ITCIPV ED DPD/PV ED Final 

Major Projects: 

Conceptual Framework- 6111 4Q12 2Q13 

Recognition and 

Measurement 

Approaches 

Economic Condition 11111 4Q12 3Q13 

Reporting: Financial 

Projections 

Fair Value Measurement lQ13 4Q13 

and Application 

Financial Guarantees 2Q12 1Q13 

Government Combinations 3/12 4Q12 

Postemployment Benefit 

Accounting and Financial 

ReportingOther Postemployment 3Q13 2Q14 

Benefit Accounting 

and Financial Reporting 

Pension Accounting and 3/09 6/11 2Q12 

Financial Reporting 6110 

17 
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75084.019

GASB Current Technical Agenda: Overview (As of 3/15/12) 

Project 

Practice Issues: 

Comprehensive 

Implementation 

GuideAnnual Update 

Mid-Year Supplement 

User Guides-Update 

ED-Exposure Draft 

Issued 

ITCIPV 

Final-Statement, unless otherwise noted 

lTC-Invitation to Comment 

Research Projects 

Electronic Financial Reporting 

Fiduciary Responsibility 

GAAP Hierarchy 

Leases 

ED 

18 

To Be Issued 

ITC/PV ED Final 

3Q12 

lQ13 

2Q12 

PV -Preliminary Views 

RED-Revised Exposure Draft 

RFR -Request for Response 

TB-Technical Bulletin 
79 


75084.020

Statement of Joseph V. Carcello, Ph.D., CPA, CMA, CIA 

Ernst & Young and Business Alumni Professor 

Director of Research - Corporate Governance Center 

University of Tennessee, Knoxville 

Testimony before the Capital Markets and Government Sponsored Enterprises 

Subcommittee of the House Financial Services Committee on "Accounting and Auditing 

Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard 

Setters, and the Economy" 

Chairman Garrett, Ranking Member Waters, and other members of the Subcommittee, thank you 

for giving me the opportunity to speak with you today about accounting and auditing oversight. 

I have served as a professor at the University of Tennessee for approximately 20 years, where I 

teach accounting, auditing, and corporate governance. In addition to my teaching and research, 

my remarks are informed by my service on the PCAOB's Investor Advisory and Standing 

Advisory Groups, both of which are outside advisory groups to the Board. Moreover, I have 

performed two coauthored studies for COSO that examine fraudulent financial reporting in the 

United States between 1987 and 2007. 

I will focus my remarks today on auditing oversight, and will focus on six issues of concern to 

investors. 

Internal Control over Financial Reporting 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) exempts 

public companies with a market capitalization ofless than $75 million from Section 404(b) of 

the Sarbanes-Oxley Act (SOX). Section 404(b) requires the issuer's external auditor to audit and 

issue an opinion on the effectiveness of the issuer's internal controls over financial reporting. In 

addition, the Dodd-Frank Act requires the SEC to study whether to extend the exemption from 

compliance with Section 404(b) to issuers with a market capitalization below $250 million. 

I believe that expanding the number of public companies that are exempt from auditor reporting 

on internal control would ill-serve investors and the capital markets. Over the last five years, a 

large body of empirical research has emerged that establishes the importance of effective internal 

controls and the benefits of auditor reporting on internal control (see Schneider, Gramling, 

Hermanson, and Ye (2009) for a review of this literature). Ashbaugh-Skaife, Collins, Kinney, 

and Lafond (2008) find that issuers reporting material internal control deficiencies have lower 

quality accruals (accrual quality is a frequently-used metric used to evaluate the quality of 

financial reporting). In addition, issuers who remediate (fix) these internal control deficiencies 

experience an increase in accrual quality, whereas issuers who do not remediate the control 

deficiencies do not experience an improvement in accrual quality. Second, auditors' internal 

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control opinions have real cffects in the managerial labor market. Li, Sun, and Ettredge (20 I 0) 

find a positive relation between the auditor concluding that an issuer's internal controls arc 

ineffective and turnover of the eFO. More importantly, when the auditor concludes that internal 

controls are ineffective, these issuers arc more likely to hire a replacement CFO with better 

qualifications and, for these firn1s, internal control is likely to improve in the future. 

The most compelling evidence on the value of auditor reporting on internal control comes from a 

study by Bedard and Graham (20 J 1). Bedard and Graham examine issuers with revenues of $1 

billion or less. They find: 

• Auditors, rather than management, detect approximately 75% of the unremediated 

internal control deficiencies. As Bedard and Graham point out, "Importantly, this low 

Icvcl of client detection occurs when clients are aware that auditors will soon follow with 

thcir own tests." 

• When managers detect the internal control deficiency, they tend to classify the deficiency 

as less severe, but auditors frequently override those classifications. 

• A significant percentage of the internal control deficiencies in the control environment 

component and related to the revenue account are detected by auditor control testing. 

This is germane bccause fraud is often associated with control environment weaknesses 

and revenue is the account most typically misstated when fraud occurs (Beasley, 

Carcello, and Hermanson 1999; Beasley, Carcello, Hermanson, and Neal 2010). 

Finally, any decision to exempt smaller public companies from auditor internal control testing 

under Section 404(b) ignores the ample evidence that internal control problems are often most 

serious in smaller public companies. Doyle, Ge, and McVay (2007) find that issuers with more 

serious (entity-wide) control problems are generally smaller and younger. Audit Analytics 

(Whitehouse 2011) reports that larger public companies, which are subject to auditor reporting 

on internal control, experienced a 5.1 % decline in restatements for non-GAAP reporting from 

2009 to 20 I 0, whereas those public companies not subject to auditor reporting on internal control 

experienced a 13.8% increase in restatements during the comparable time period. Finally, those 

companies charged with financial statement fraud by the SEC tend to be relatively small 

(Beasley, Carcello, and Hermanson 1999; Beasley, Carcello, Hermanson, and Neal 2010). As 

Bedard and Graham (2011) conclude, " ... the recent exemption of Section 404(b) for smaller 

U.S. public companies could result in failure to fully realize potential improvements in financial 

reporting quality in that sector of the market." Given the weight of the empirical evidence on the 

efficacy of auditor involvement in testing and reporting on internal control, exempting more 

issuers from such auditor involvement seems adverse to the interests of investors and the capital 

markets. 

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75084.022

Public vs. Private Nature of PCAOB Enforcement Proceedings 

I understand that Representative Lynn Westmoreland (R-GA) has introduced H.R. 3503 that 

would amend SOX to make PCAOB disciplinary proceedings public. I favor such legislation. as 

I believe that the existing non-public nature of PCAOB disciplinary proceedings does not serve 

investors or thc capital markets. Under current law, PCA013 disciplinary proceedings against 

auditors and audit firms are non-public until the proceedings are scttled or adjudicated. This 

structure provides an incentive for firms, particularly large firms, to litigate PCAOB enforcemcnt 

actions because during the litigation process, including any subsequent appeal to the SEC, the 

existence and nature of the PCAOB enforcement action remains undisclosed to invcstors, 

companies, audit committees, and other capital market participants. More perniciously, during 

this entire time, the accountant or firm that is the subject of the PCAOB enforcement action is 

permitted to continue issuing audit reports on public companies, regardless of the seriousness of 

the charges being litigated. 

It is important to understand that even ifPCAOB disciplinary proceedings are made public, 

substantial protections remain for parties that may be subject to these proceedings. The Board 

only commences disciplinary proccedings after an extensive nonpublic (my emphasis) 

investigation, involving document production and on-the-record testimony. Moreover, the 

evidence gathered by the Board's Division of Enforcement and Investigations is presented to the 

Board, and it is the five Board members who must vote to commence a disciplinary proceeding. 

Given that two of these five Board members are CPAs, two are securities attorneys who have 

spent much of their career representing companies and auditors, and one is a former 

Congressional staff member, accountants who may face disciplinary proceedings would clearly 

appear to be facing a "jury of their peers." 

The most compelling argument for making PCAOB disciplinary proceedings public is that the 

nature ofthese proceedings is private if brought by the PCAOB but public if brought by the SEC, 

even though the PCAOB is closely supervised by the SEC. As former PCAOB (acting) 

Chairman Dan Goelzer stated in his August 24,2010 letter to Congressmen Frank and Bachus: 

Ifthe SEC were to bring the same case as the PCAOB, alleging the same violations, 

against the same auditor, the SEC's charges would be disclosed at the time the 

Commission instituted its proceeding. Any administrative trial would be open to the 

public. Ifthere were an appeal to the Commission and an oral argument, the public 

could attend. The ability - or inability ofthe Commission's staff to prove its charges 

would be a matter of public record. 

Audit Firm Rotation 

The PCAOB has outstanding a Concept Release on auditor independence and audit firm rotation 

(PCAOB 201Ia). I understand that Representative Michael Fitzpatrick is considering draft 

legislation that would prohibit the PCAOB from mandating audit firm rotation. The PCAOB has 

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not proposed audit firm rotation. Nonetheless, this is obviously a controversial PCAOB Concept 

Release, as evidenced by the fact that the Board has received more than 600 comment lettcrs on 

the Release. 

Before discussing the rclative merits of mandatory firm rotation, it is important to understand 

that the Board's release on this topic emanates from a concern that auditors currently exhibit an 

inadequate level of profcssional skepticism. Without professional skepticism, audits arc of little 

value. I believe that there is sufficient evidence to legitimatcly question whether auditors are 

sufficiently skeptical. First, in a study of how issuers choose audit firms, Fiolleau, Hoang, 

Jamal, and Sunder (2009) find: (I) there is significant management control in the selection of the 

external auditor (also see Cohen, Krishnamoorthy, and Wright (2010) for similar evidence), (2) 

auditors are required to provide references from scnior officers of current and past clients, and 

repeatedly demonstrate responsiveness and commitment to the prospectivc client's management, 

and (3) there is extensive pricc competition, where one audit firm offered a bid materially bclow 

the previous year's audit fee. Based on this research, audit committees appear somnolent and 

captured by management. Management scems to want compliant and cheap auditors, and to 

know how to get them. Investors are an afterthought. And the behavior of auditors was the most 

discouraging of all - so eager to obtain new clients that thc auditor talks about the client during 

the proposal process using the client's own code words among other potentially problematic 

behaviors. Second, the PCAOB's inspection process has found that at least one of the largest 

accounting firms used the following language in a recent proposal to a prospective client: "Your 

auditor should be a partner in supporting and helping [the issuer] achieve its goals ... " (PCAOB 

201Ia). I chair the audit committee for a mid-size governmental entity, and we rccently solicited 

proposals for our external audit. A national CPA firm that bid on the engagement used similar 

language about partnering with the goverrunental entity. Third, the PCAOB's inspection process 

continues to identifY a sizable number of audit deficiencies, and these deficiencies are often 

related to inadequate professional skepticism (Ferguson 2012). In my view, any serious observer 

of the accounting profession needs to be concerned about the current level of professional 

skepticism exhibited by auditors. 

Given that the PCAOB's mission is "to protect the interests of investors and further the public 

interest in the preparation of informative, accurate and independent audit reports", exploring this 

issue is not only appropriate not only is it within the clear mission ofthe Board as articulated 

by Congress -- it is arguably the very mission of the Board and the reason the Board exists. 

Notwithstanding the importance of improving professional skepticism, I think it is an unresolved 

question as to whether mandatory audit firm rotation would improve skepticism and, if so, the 

optimal structure for implementing a mandatory rotation regime. The academic literature is 

mixed on the benefits of mandatory rotation. Bazerman (2012) favors fixed contract terms for 

audit engagements. Moore (2012) and Kaplan (2012) both support audit firm rotation. In an 

experimental study, Arel, Brody, and Pany (2006) find that auditors in a rotation regime make 

more independent judgments than auditors in a regime where tenure is not limited. In an 

4 
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75084.024

archival study, Harris and Whisenant (2012) study the effects of implementing mandatory 

rotation in three foreign countries (Italy, South Korea, and Brazil). They generally find 

improved audit quality after the introduction of mandatory auditor rotation, but audit quality 

appears lower in the last year of the previous auditor's tenure and the first year of the successor 

auditor's tenure. Conversely, Ghosh (2012) points out that audit quality is correlated with audit 

finn industry expertise, and that audit finns will have less incentive to specialize by industry if 

limits on auditor tenure arc introduced. Moreover, Ghosh concludes, based on a review of the 

literature, that the majority of extant studies find that long auditor tenure is not problematic. In 

addition, Jenkins (2012) also is concerned that mandated auditor rotation might result in 

decreased use of industry-specialist auditors, which he believes will result in a decline in audit 

quality. 

The relative merits of audit finn rotation are complex and deserve careful study. The PCAOB 

appears to be proceeding slowly and cautiously in examining this topic - i.e., the Board has only 

released a concept document (essentially a discussion document), the Board just completed two 

full days of hearings on this topic and appears committed to having more hearings, and no Board 

member appears to have prejudged the final outcome. A prudent course is to let the PCAOB 

continue to examine the issue of auditor independence and professional skepticism, including 

potential solutions, under the active supervision of the SEC, without interjecting Congressional 

action into the proccss. 

Previous attempts by Congress to micro-manage standard setting in accounting and auditing have 

generally been failures (e.g., Congress' interjecting itself into the discussion of stock option 

accounting). For example, the proposed bill introduced by Representative Fitzpatrick, although 

less than one page in length, is potentially flawed. The proposed bill would prohibit the PCAOB 

from requiring public companies to use specific auditors. PCAOB Auditing Standard No. S 

(ASS) already requires an issuer to use the same auditor to audit the financial statements and 

internal control over financial reporting. This requirement in ASS could be interpreted as the 

Board requiring an issuer to use a specific auditor. Eliminating this ASS requirement would 

likely make audits more expensive and less effective. 

In the interest of brevity, I will only briefly touch on the last three issues. 

Nature ofthe Audit Report 

The PCAOB has outstanding a Concept Release on potential changes to the auditor's report 

(PCAOB 2011 b). The current audit report is a standard three-paragraph report that is essentially 

identical for the overwhelming majority of all public companies. As a result, notwithstanding 

the significant fees associated with external audits, many investors view the information content 

ofthe standard audit report as lacking (Blake et al. 2011). The PCAOB's Concept Release 

discusses four alternatives: (1) supplementing the audit report with more infonnation about the 

audit and the issuer's financial statements, (2) requiring an expanded use of emphasis-of-matter 

5 
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paragraphs, (3) requiring auditor reporting on information outside the financial statements, and 

(4) clarifying certain language in the auditor's report. 

I believe, as do two-thirds of the PCAOB's Investor Advisory Group (lAG), that the standard 

audit report is currently deficient as a communication vehicle, and that the audit report needs to 

be supplemented with more information about the audit and the issuer's financial statements. 

Based on a survey of institutional investors conducted by a sub-group of the lAG, we believe 

that the additional information needed by investors includes: (1) the auditor's assessment of the 

estimates and judgments made by management in preparing the financial statements and how the 

auditor arrived at that assessment, (2) disclosure of areas of high financial statement and audit 

risk and how the auditor addressed these risk areas in planning and conducting the audit, (3) 

discussion of unusual transactions, restatements, and other significant changes in the financial 

statements, and (4) discussion of the quality, not just the acceptability, ofthe issuer's accounting 

policies and practices. 

Audit Partner Identification 

The PCAOB has outstanding a Proposed Rule (PCAOB 2011c) that would, among other 

changes, require the identification of the name of the audit partner in the audit report. 

Notwithstanding that engagement partners are required to sign the audit report throughout the 

European Union, Australia, Korea, and many other countries, the PCAOB's more modest 

proposal to simply identify the engagement partner by name is largely opposed by the public 

accounting profession (although there is some corporate support for this proposal). I agree with 

the Board that identifying the engagement partner would enhance accountability and 

transparency. In addition, research that I have conducted finds that audit quality improved in the 

United Kingdom after partners were required to sign the audit report (Carcello and Li 2012). 

Related Parties and Significant Unusual Transactions 

The PCAOB has recently released a Proposed Rule (PCAOB 2012) on related parties and 

significant unusual transactions. Given that related party transactions and significant unusual 

transactions are often associated with fraudulent financial reporting (Beasley, Carcello, and 

Hermanson 1999; Beasley, Carcello, Hermanson, and Neal 2010), I support this proposed 

PCAOB rule. Moreover, the PCAOB's Proposed Rule would require auditors to read and 

understand compensation practices of the issuer's senior management. Given that compensationrelated incentives are often tied to fraudulent financial reporting (e.g., Feng, Ge, Luo, and 

Shevlin 2011), requiring the auditor to have a better understanding ofthe financial incentives 

that management may have to misstate the financial statements is prudent. 

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75084.026

REFERENCES 

Arel, B., R. Brody, and K. Pany. 2006. Findings on the effects of audit firm rotation on the audit 

process under varying strengths of corporate governance. Advances in Accounting 22: 1-27. 

Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney, Jr., and R. LaFond. 2008. The effect of SOX 

internal control deficiencies and their remediation on accrual quality. The Accounting Review 83 

(I) (January): 217-250. 

Bazennan, M. H. 2012. Statement of Professor Max Bazerman at PCAOB Public Meeting on 

Auditor Independence and Audit Firm Rotation. March 21-22. 

Beasley, M. S., J. V. Carcello, and D. R. Hermanson. 1999. Fraudulent Financial Reporting 

1987-1997: An Analysis ofU.S. Public Companies. COSO: New York, NY. 

Bcasley, M. S., 1. V. Carcello, D. R. Hermanson, and T. L. Neal. 2010. Fraudulent Financial 

Reporting 1998-2007: An Analysis of u.s Public Companies. COSO: New York, NY. 

Bedard, J. C., and L. Graham. 2011. Detection and severity classifications ofSarbanes-Oxley 

Section 404 internal control deficiencics. The Accounting Review 86 (3) (May): 825-855. 

Blake, K., J. V. Carccllo, N. J. Harrison, M. 1. Head, B. Roper, A. Simpson, T. Sondhi, R. M. 

Tarola, L. E. Turner, M. Williams, and A. Yerger. 2011. Response ofa sub-group of the PCAOB's 

Investor Advisory Group to the PCAOB's Concept Release Concerning Reports on Audited 

Financial Statcments and Related Amendments to PCAOB Standards. Current Issues in Auditing 5 

(2) (December): C21-C50. 

Carcello, J. V., and C. Li. 2012. Costs and benefits of requiring an engagement partner signature: 

Recent experience in the United Kingdom. Working papcr, University of Tennessee and University 

of Pittsburgh. 

Cohen, J., G. Krishnamoorthy, and A. M. Wright. 2010. Corporate governance and the audit 

process in the post Sarbanes-Oxley era: Do auditors perceive substantive changes? 

Contemporary Accounting Research 27 (3) (Fall): 751-786. 

Doyle, J., W. Ge, and S. McVay. 2007. Determinants ofweaknesscs in internal control over 

financial reporting. Journal of Accounting & Economics 44 (1-2) (September): 193-223. 

Feng, M., W. Ge, S. Luo, and T. Shevlin. 2011. Why do CFOs become involved in material 

accounting manipulations? Journal of Accounting and Economics. 51 (112) (February): 21-36. 

Ferguson, L. 2012. Statement on Public Meeting on Auditor Independence and Audit Firm 

Rotation. March 21. 

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Fiolleau, K., K. Hoang, K. Jamal, and S. Sunder. 2009. Engaging auditors: Field investigation of 

a courtship. Working paper, University of Alberta and Yale University. 

Ghosh, A. 2012. Statement of Professor Al Ghosh at PCAOB Public Meeting on Auditor 

Independence and Audit Firm Rotation. March 21-22. 

Goelzer, D. L. 2010. Letter to the Honorable Barney Frank and the Honorable Spencer Bachus. 

Transparency of PCAOB Disciplinary Hearings and Related Proceedings. August 24. 

Harris, K., and S. Whisenant. 2012. Mandatory auditor rotation: An international investigation. 

Working paper, University of Houston. 

Jenkins, G. 2012. Statement of Professor Greg Jenkins at PCAOB Public Meeting on Auditor 

Independence and Audit Firm Rotation. March 21-22. 

Kaplan, R. L. 2012. Statement of Professor Richard Kaplan at PCAOB Public Meeting on 

Auditor Independence and Audit Firm Rotation. March 21-22. 

Li, C., L. Sun, and M. Ettredge. 2010. Financial executive qualifications, financial executive 

turnover, and adverse SOX 404 opinions. Journal of Accounting & Economics 50 (l) (May): 93-

110. 

Moore, D. 2012. Statement of Professor Don Moore at PCAOB Public Meeting on Auditor 

Independence and Audit Firm Rotation. March 21-22. 

PCAOB. 2011a. Concept Release on Auditor Independence and Audit Firm Rotation. Release 

No. 2011-006. August 16. 

PCAOB. 2011 b. Concept Release on Possible Revisions to PCAOB Standards Related to 

Reports on Audited Financial Statements. Release No. 2011-003. June 21. 

PCAOB. 2011c. Improving the Transparency of Audits: Proposed Amendments to PCAOB 

Auditing Standards and Form 2. Release No. 2011-007. October 11. 

PCAOB. 2012. Proposed Auditing Standard - Related Parties, Proposed Amendments to Certain 

PCAOB Auditing Standards Regarding Significant Unusual Transactions and Other Proposed 

Amendments to PCAOB Auditing Standards. Release No. 2012-001. February 28. 

Schneider, A., A. Gramling, D. R. Hermanson, and Z. Yeo 2009. A review of academic literature 

on internal control reporting under SOX. Journal of Accounting Literature: 1-46. 

Whitehouse, T. 2011. Restatements by small companies could revive SOX 404 debate. 

Compliance Week (May 24). See http://www.complianceweek.comlrestatements-by-smallcompanies-could-revive-sox -404-debate/article/203211/. 

8 
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75084.028

PCAOB 

Public Company Accounting Qve.,;ght I!oo!d 

Statement of James R. Doty 

Chairman 

1666 K Street NW, 8th Floor 

Washington, DC 20006 

Telephone: (202) 207-9100 

Facsimile: (202) 862-8430 

www.pcaobus.org 

Public Company Accounting Oversight Board 

at a Hearing on 

Accounting and Auditing Oversight: Pending Proposals and Emerging 

Issues Confronting Regulators, Standard Setters and the Economy 

Before the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets 

and Government Sponsored Enterprises 

2128 Rayburn House Office Building 

March 28, 2012 
88 


75084.029

PCAOB 

Statement of James R. Doty 

Chairman 

Public Company Accounting Oversight Board 

Chairman Garrett, Ranking Member Waters, and Members of the Subcommittee: 

Thank you for the opportunity to appear before you today on behalf of the Public 

Company Accounting Oversight Board ("PCAOB" or "Board") to testify on the work of 

the PCAOS. 

I appreciate the SUbcommittee's continued interest in high quality audits for 

public companies and SEC-registered broker-dealers. Further, on behalf of the 

PCAOB, I commend the Committee's members, Representative Westmoreland and 

Ranking Member Frank, for bringing forward bipartisan legislation, H.R. 3503, to bring 

transparency to the PCAOB's disciplinary proceedings. Transparency would enhance 

the PCAOB's effectiveness - as well as public confidence in the PCAOB's oversight 

and in the auditing profession's credibility as a relevant participant in the capital markets 

- by permitting the Board to disclose its disciplinary proceedings, and I encourage the 

Congress to pass it. 

I. Introduction 

Public securities markets provide a reliable funding mechanism for American -

and, increasingly, foreign - businesses. More than half of American households invest 

their savings in securities to provide for retirement, education, and other goals. Our 

economy is resilient, even in the face of the recent financial crisis, in part because 

millions of savers continue to be willing to invest in business enterprises to fuel growth, 

growth that results in more workers, more savings and more investment. This cycle 

promotes economic wealth, but it relies on the system of accurate financial disclosures 

by public companies to the investors who entrust capital to them. 

As Chairman of the PCAOB, I believe that the PCAOB, and the accounting firms 

that we oversee, playa critical role in enabling markets to provide investors with reliable 

information upon which to make their own investment decisions. The financial audit is 

the linchpin for investor confidence in that information, and a reliable audit is one led by 

an auditor that is independent, objective, and skeptical, and applies the diligence 

needed to meet PCAOB standards. 

If investors lose confidence in financial reporting, they will demand prohibitively 

high retums as a condition of investing or they may withdraw from the capital markets 

altogether. The result would be to make it more difficult and expensive to finance the 

businesses on which our economy depends. Moreover, inaccurate financial reporting 

can mask poor business strategies or fraud that, if left uncorrected, may result in the 

misallocation of capital, business failures, and job losses. 
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75084.030

peAOB 

Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 2 

The PCAOB is focused on taking appropriate steps in its inspection and 

enforcement programs in order to improve audit quality and enhance protection of the 

investing public. The PCAOB is also using information gained in inspections and 

investigations, along with information received from investors, audit committee 

members, auditors and others, to improve auditing and related professional practice 

standards. 

The PCAOB is a non-profit, independent institution designed to bring expertise 

and a variety of perspectives to the task of setting appropriate standards and 

overseeing the practice of auditing public companies and SEC-registered brokerdealers. This independence is critical for the Board to fulfill its Congressionally 

mandated mission of protecting the interests of investors. By law, all of the PCAOB's 

responsibilities are discharged under the oversight of the U.S. Securities and Exchange 

Commission ("SEC"). Chairman Mary Schapiro, the Commissioners, and Chief 

Accountant Jim Kroeker have taken a deep interest in the PCAOB's work, and I am 

grateful for their support and for the strong working relationship they have fostered 

between our organizations. 

II. Current PCAOB Activities and Priorities 

A. Inspections 

The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") requires the 

PCAOB to conduct a continuing program of inspections of registered accounting firms. 

There are currently 2,398 accounting firms registered with the Board. The Board's 

statutory inspection authority relates to audits of issuers, brokers, and dealers. The 

Board does not inspect firms that perform no such work, although many such firms have 

chosen to register. 

During an inspection, the PCAOB assesses the firm's compliance with applicable 

laws, rules and professional standards. As part of an inspection, PCAOB inspectors 

evaluate the design and effectiveness of a firm's quality control system as well as the 

quality of the firm's work in the portions of audits selected for inspection. 

Registered firms that issue audit reports for more than 100 issuers are required 

to be inspected by the PCAOB annually. In 2011, the PCAOB inspected 10 such firms. 

As part of these inspections, PCAOB inspectors examined portions of more than 340 

audits performed by these firms. 

Registered firms that issue audit reports for 100 or fewer issuers are, in general, 

inspected at least once every three years. At any time, the PCAOB may also inspect 

any other registered firm that plays a role in the audit of an issuer, and the PCAOB has 

a practice of inspecting some firms in that category each year. The PCAOB inspected 
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March 28, 2012 

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203 firms in these categories in 2011, including 42 non-U.S. firms located in 15 

jurisdictions. In the course of those inspections, PCAOB staff examined portions of 

more than 485 audits. 

1. Inspections of Public Company Audits. 

PCAOB inspections of public company audits are handled in one of two 

programs. First, we have a global network firm program. Second, we have a program 

covering the other registered firms located in the U.S. as well as non-U.S. firms not 

covered in the global network firm program. 

Our global network firm program covers inspections of the largest U.S. firms and 

approximately 190 of their foreign affiliates, which participate in the audits of issuers that 

file financial statements with the SEC. 

Each registered firm in a global network of firms is a separate legal entity that is 

subject to the same frequency of inspections as any other registered firm. Substantial 

portions of the audits of many of the largest U.S. companies are performed by affiliated 

network firms, including firms we cannot inspect due to resistance by local authorities. 

The selection of issuer audits for review is influenced by a number of factors. 

The selection can be based on the risk that an issuer's financial statements could be 

materially misstated; characteristics of the particular issuer or its industry; the audit 

issues likely to be encountered; considerations about the firm, a particular practice 

office or an individual partner; prior inspection results; or other factors. 

The PCAOB prepares a report on each inspection and makes portions of that 

report publicly available, subject to statutory restrictions on public disclosure. The 

Board issued 344 inspection reports in 2011. 

If an inspection report includes criticisms of or identifies potential defects in a 

firm's system of quality control, those criticisms are initially kept nonpublic, as required 

by the Act. The firm has 12 months from the issuance of the inspection report to 

address the criticisms to the Board's satisfaction. If it does so, the criticisms remain 

nonpublic. If it does not do so, then, subject to the firm's right to seek SEC review of the 

Board's determination, the Board publicly discloses those criticisms. 

As a matter of law, the full reports on inspections are nonpublic although certain 

parts of the reports are public. Inspectors have identified a concerning number of 

deficiencies in successive inspection cycles for the largest firms, and at times on those 

firms' largest engagements. While our 2011 inspection cycle is not yet complete, our 

inspectors' preliminary results show that the number of deficiencies identified continues 

to be high relative to earlier years. ' 
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March 28, 2012 

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The PCAOB's second inspection program focuses on the smaller registered firms 

(Le., firms that audit 100 or fewer issuers) that are not members of a network covered in 

our global program. Currently approximately 600 such domestic firms and 75 nonaffiliated, foreign firms are subject to triennial inspection. 

In 2010, the PCAOB established an Office of Outreach and Small Business 

Liaison, to focus on outreach to auditors of the small business community. This office 

serves as a point of contact for anyone with questions about the PCAOB's activities. It 

also assists in identifying areas where information related to the PCAOB's work may not 

be well understood. 

In addition, for several years, the PCAOB has conducted a series of meetings 

with auditors from smaller, unaffiliated firms that lack the resources of the large, 

networked firms but nevertheless can bring significant expertise to bear for investors in 

the vast array of small public companies. These meetings, called the Forum on 

Auditing in the Small Business Environment, are day-long events designed to allow 

auditors in smaller firms to learn about the PCAOB's work, to provide their own insights 

and suggestions, and to ask questions about PCAOB activities, including inspections 

and new auditing standards and guidance. 

The format of these forums promotes an open dialogue among PCAOB 

representatives and forum participants. In 2011, 762 people attended small business 

forums held in seven cities. The PCAOB plans to hold seven more such forums in 

2012. 

2. Pilot Program for Inspections of Broker-Dealer Audits. 

In 2011, the PCAOB continued its work to implement the provisions of the DoddFrank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which gave 

the PCAOB authority for inspection, standard setting and enforcement for the audits of 

brokers and dealers registered with the SEC. 

On June 14, 2011, the Board adopted a temporary rule that provides for an 

interim inspection program for firms that perform audits of the financial statements of 

brokers and dealers. 

The interim inspection program allows the Board to assess registered public 

accounting firms' compliance with current laws, rules, and standards in performing 

audits of the financial statements of brokers and dealers. As part of this program, 

information will be gathered to help guide the Board's decisions about the scope and 

elements of a permanent inspection program, including whether to differentiate between 

classes of brokers and dealers; whether different inspection schedules would be 

appropriate with respect to firms that only audit certain types of brokers and dealers; 
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March 28, 2012 

Page 5 

and whether to exempt any public accounting firms from inspections related to their 

audits of broker and dealers. 

The SEC approved the temporary rule on August 18, 2011. By year-end, the 

PCAOB had inspected eight firms and examined portions of 19 audits of brokers and 

dealers. 

The PCAOB does not expect to issue firm-specific inspection reports as part of 

the interim inspection program. Instead, to keep the public informed, the Board will 

annually publish a report describing the progress of the interim program. The first such 

annual progress report is expected to be issued in August 2012. 

After gaining valuable insight through the interim inspection program and 

analysis of broker-dealer characteristics, I anticipate that the Board will then carefully 

consider whether there should be exemptions from the permanent program, including 

for auditors of brokers that do not receive or hold customer funds. 

Further, in an effort to provide information to and seek the views of auditors of 

brokers and dealers, the PCAOB in 2011 inaugurated the Forum on Auditing Smaller 

Broker-Dealers, drawing 321 attendees in Jersey City, NJ, and Huntington Beach, CA. 

The PCAOB plans four additional such forums in 2012 in Chicago; Houston; Jersey 

City; and San Diego. 

B. peAOB Access to Non-U.S. Registered Firms 

Public companies, whether located in the U.S. or abroad, access U.S. capital 

markets by complying with certain U.S. legal requirements, including the requirement to 

periodically file audited financial statements with the Securities and Exchange 

Commission. 

Under the Sarbanes-Oxley Act, the auditor of financial statements - whether a 

U.S. auditor or a non-U.S. auditor - must be registered with the PCAOB, and the 

PCAOB must regularly inspect the firm to assess its compliance with U.S. laws, rules 

and professional standards in connection with those audits. As of Dec. 31, 2011, 908 

non-U.S. accounting firms were registered with the PCAOB. 

The PCAOB has conducted inspections in 37 non-U.S. jurisdictions since nonU.S. inspections began in 2005. In 2011, the PCAOB reached cooperative agreements 

with auditor oversight authorities in the United Kingdom, Canada, Switzerland, Norway, 

Japan, Taiwan, Israel, Dubai and the Netherlands. 

These cooperative agreements generally provide a basis for cooperation in the 

oversight, including inspections and investigations, of firms subject to the jurisdiction of 
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March 28, 2012 

Page 6 

both parties to the agreement. Many of the PCAOB's cooperative agreements also 

permit the PCAOB to exchange confidential information with its non-U.S. counterparts, 

under authority granted to the PCAOB by the Dodd-Frank Act. 

The PCAOB in 2011 remained unable to conduct inspections of registered firms 

in certain European Union member states and China, due to asserted restrictions under 

local law or objections based on national sovereignty. Due to the position taken by the 

authorities in China, the PCAOB also was prevented from conducting inspections of 

registered firms in Hong Kong to the extent that their audit clients had operations in 

China. Discussions with local oversight authorities in Europe and China continue. 

While we work on negotiating access, the PCAOB has issued staff audit practice 

alerts and other reports to keep auditors and the public apprised of audit risks presented 

in non-U.S. audits. Specifically, the PCAOB has issued two staff audit practice alerts 

relating to (i) appropriate use of non-U.S. auditors and related risks that should be 

addressed,1 and (ii) audit risks identified in emerging markets. 2 In addition, in March 

2011, the PCAOB issued a research note on trends and risks related to reverse merger 

transactions involving companies from the China region 3 

C. Enforcement 

The Board has broad authority to impose sanctions on registered firms and 

associated persons that have violated applicable laws and standards. Disciplinary 

cases that have become public recently have focused on audit failures related to both 

U.S. and non-U.S. companies traded in U.S. markets; failures to follow standards on 

quality control and auditing; and auditors' failures to comply with the Board's processes 

and rules. 

For example, in 2011 the PCAOB announced a settlement with five India-based 

affiliates of PricewaterhouseCoopers, for their audits of Sat yam Computer Services. 

PCAOB Staff Audit Practice Alert No.6, Auditor Considerations Regarding Using 

the Work of Other Auditors and Engaging Assistants from Outside the Firm (July 12, 

2010). 

PCAOB Staff Audit Practice Alert No.8, Audit Risks in Cerlain Emerging Markets 

(Oct. 3,2011). 

PCAOB, Activity Summary and Audit Implications for Reverse Mergers Involving 

Companies from the China Region: January 1, 2007 through March 31, 2010 

(March 14, 2011), available at http://pcaobus.org/News/Releases/Pages/03152011 

Research Note. aspx. 
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March 28, 2012 

Page 7 

This followed the extraordinary public statement of Sat yam's then-Chairman that the 

company had reported inflated profits over several years and was showing on its 

balance sheet more than $1 billion in non-existent cash and bank balances. The SEC, 

in an order in its proceeding against the auditors, noted that the fraud was 

accomplished through the company's use of fictitious invoices, bank statements, and 

bank confirmations. The Sat yam audit was a high profile example of auditors failing to 

exercise professional skepticism. 4 Their deficient audit procedures contributed directly 

to their failure to uncover the Sat yam fraud. 5 

Also, just last month, the Board issued another settled disciplinary order against 

one of the largest registered accounting firms. In this order, the Board censured Ernst & 

Young LLP ("E& Y"), imposed a $2 rnillion civil money penalty against the firrn, and 

sanctioned four of its current and forrner partners for violating PCAOB rules and 

standards. 6 

This order related to three E&Y audits of Medicis Pharrnaceutical Corporation 

and a consultation sternming from an internal E& Y audit quality review of one of the 

audits. Specifically, the company's initial basis for establishing its sales returns reserve 

conflicted both with U.S. generally accepted accounting principles ("GAAP"), and with 

the firrn's internal accounting guidance that addressed revenue recognition for sales 

with rights of return. Rather than appropriately addressing this material departure from 

GAAP, E&Y and its personnel wrongly decided in an internal consultation that another 

flawed rationale supported the cornpany's existing accounting. The company ultimately 

corrected its accounting for its sales returns reserve and filed restated financial 

staternents with the SEC as a result. 

In another recent settled rnatter, the Board revoked a firm's registration, and 

barred two of its partners, for violations of quality control and auditing standards, 

4 Under PCAOB standards, "professional skepticism" is an attitude that includes a 

questioning mind and a critical assessment of audit evidence. See AU 230.07. 

In addition to censuring the firrns, the Board (i) levied a $1.5 million fine, (ii) barred 

the firms from taking on any new SEC issuer work for 6 months, and (iii) ordered thern 

to retain an independent monitor to oversee development of quality control 

improvements ordered by the Board. The SEC brought a simultaneous proceeding 

against the firms under Rule 102(e), including a $6 rnillion penalty. 

See In the Matter of Ernst & Young LLP, Jeffrey S. Anderson, CPA, Ronald Butler, 

Jr., CPA, Thomas A. Christie, CPA, and Robert H. Thibault, CPA (Feb. 8, 2012). 
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March 28, 2012 

Page 8 

including in audits of two China-based reverse merger companies, and for failing to 

cooperate in the investigation and in an inspection. 7 

There is also a significant body of cases that focus on firms' failure to cooperate 

with the PCAOB's inspection or enforcement programs. For example, in two other 

settlements last year, the Board barred two audit personnel at a large firm, including the 

engagement partner on the relevant audit, for improperly creating, backdating, and 

adding documents to audit work papers shortly before a PCAOB inspection. 8 

The PCAOB closely coordinates its enforcement efforts with the SEC, including 

on China audit firm matters. In certain instances, the PCAOB investigates the auditor's 

conduct and the SEC focuses its investigation on the public company, its management, 

and other parties. 

III. New Audit Standard-Setting Initiatives 

The Sarbanes-Oxley Act charges the Board with establishing auditing and 

related professional practice standards for audits of public companies and SECregistered broker-dealers, and the Board has followed a transparent and fair process for 

doing so. The Board uses information that it leams in its inspections and from other 

sources to evaluate the need for changes in auditing standards. In developing new 

standards, the PCAOB casts a wide net to seek advice from various interested people 

and groups on ways to improve audits. 

The Board's actions are informed by meetings and dialogue with investors, 

auditors, representatives of public companies and members of the academic 

community, among other ways through its Standing Advisory Group. Further, the Board 

holds roundtable discussions and other public meetings to deepen its dialogue with 

commenters and other interested parties. The Board also works closely with the SEC 

on the development of standards and monitors the work of accounting standard setters, 

such as the Financial Accounting Standards Board, for developments that may affect 

auditing. 

PCAOB standards are rules of the Board. To adopt or change them, the Board 

uses a notice-and-comment process similar to the process used by federal agencies 

and other standard setters, under which the Board proposes standards for public 

comment before adopting new or amended standards in a public meeting. All Board 

standards must be approved by the SEC before they can become effective. 

See In the Matter of Chisholm, Bierwolf, Nilson & Morrill, LLC, Todd D. Chisholm, 

CPA, and Troy F. Nilson, CPA (Apr. 8, 2011). 

8 See Peter C. O'Toole (Aug. 1,2011); Darrin G. Estella (Aug. 1,2011). 
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Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 9 

In the past year, the Board has engaged in a number of projects related to 

auditing and related professional practice standards: 

The Board proposed a new auditing standard ,Related Parties, and 

amendments to certain PCAOB standards regarding significant unusual 

transactions, intended to enhance auditing procedures in areas,that have, at 

times, been used to engage in fraudulent financial reporting, 

• The Board also proposed amendments intended to improve the 

transparency of public company audits by requiring the disclosure of the 

engagement partner's name in the audit report and the disclosure of other 

independent public accounting firms and other persons that took part in the 

audit. 

The Board reproposed a new auditing standard, Communications with Audit 

Committees, and related amendments that are intended to enhance the 

relevance and quality of the communications between the auditor and the 

audit committee. 

• The Board proposed auditing and attestation standards that would apply to 

the audits of SEC-registered brokers and dealers and to the supplemental 

information accompanying audited financial statements. 

Finally, the PCAOB issued two Staff Audit Practice Alerts in 2011 - one 

intended, as discussed above, to increase auditors' awareness of risks when 

performing audits of companies with operations in emerging markets, and 

the other to assist auditors in identifying matters related to the economic 

environment that might affect the risk of material misstatement in financial 

statements. 

These projects, as well as the Board's planned future standard-setting projects, are 

described in Appendices 1 and 2, respectively. 

In addition, the Board has recently issued two concept releases, soliciting public 

comment on possible changes to PCAOB standards affecting two major areas of audit 

practice: (i) the auditor's reporting model, and (ii) auditor independence, objectivity and 

professional skepticism, including mandatory term limits, or rotation, for auditors of 

companies traded in U.S. markets. These concept releases did not propose new 

auditing standards. Rather, they sought the public's views on particular matters so that 

the Board can better evaluate the need for future standard-setting. To this end, the 

PCAOB held a roundtable on the auditor's reporting model in September 2011. 
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March 28, 2012 

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Further, the PCAOB recently held a public meeting on auditor independence, 

objectivity and professional skepticismB Forty-seven panelists appeared at the two-day 

public meeting, offering varied perspectives as investors, senior executives and audit 

committee chairs of major corporations, chief executive officers of audit firms, 

academicians and other interested parties. The PCAOB plans to hold additional such 

meetings around the country, in an effort to obtain public comment from a wide and 

diverse set of interested parties on this important topic. 

IV. Pending Legislative Proposals 

A. Providing Public Transparency to peAOB Disciplinary Proceedings 

The Subcommittee's invitation letter invited comment on H.R. 3503, introduced 

by Congressman Westmoreland and co-sponsored by Committee Ranking Member 

Frank to make the PCAOB's disciplinary proceedings public. 

Under the Sarbanes-Oxley Act as it exists today, the PCAOB's disciplinary 

proceedings are nonpublic, unless the Board finds there is good cause for a hearing to 

be public and each party consents to public hearings. 1o The auditors and audit firms 

charged with violating applicable laws, rules or standards have little incentive to consent 

to opening the case against them to public view, and in fact, none have ever done so. 

PCAOB disciplinary proceedings remain nonpublic even after a hearing has been 

completed and adverse findings made by a disinterested hearing officer, if the auditors 

and firms do not consent to make the proceedings public and opt to appeal. In addition, 

unlike the authority the Securities Exchange Act of 1934 provides the SEC in its 

administrative proceedings, the PCAOB has no authority, while litigation is pending, to 

issue temporary cease-and-desist orders in appropriate cases, to prevent threatened 

violations or harm to investors or the public interest. 

Continued litigation postpones - often for several years - the day on which the 

public leams that the PCAOB has charged the auditor or firm, the nature of those 

charges, and the content of adverse findings. This secrecy has a variety of unfortunate 

consequences. 

First, the public is denied access to important information regarding PCAOB 

cases. During the course of the proceeding, investors, audit committees, and other 

The agenda and a webcast of the meeting are available at 

http://pcaobus.org/News/E vents/Pages/032120 12 PublicMeeting. aspx. 

10 See Sarbanes-Oxley Act, Section 105(c)(2). 
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Page 11 

interested parties are kept in the dark about a respondent's alleged misconduct - no 

matter how serious. Even after the Board has found sufficient cause to initiate formal 

proceedings and a disinterested hearing officer has found that the alleged violations 

occurred, the matter may still remain unknown to the public at least until the case is 

appealed to the Commission. As a result, investors are unaware that companies in 

which they may have invested are being audited by accountants who have been 

charged, even sanctioned, by the Board. For example, during the nonpublic 

proceedings regarding Gately & Associates, the firm issued 29 additional audit reports 

on public company financial statements between the commencement of the Board's 

proceeding and when the Board was able to make its charges public, which was not 

until the Commission affirmed the Board's decision to expel the firm from public 

companyauditing. 11 

Second, respondents have an incentive to litigate Board cases, regardless of 

whether they believe they will ultimately prevail. Contesting the allegations allows 

respondents to continue with their public company audit practice without any disclosure 

to clients or investors of the Board's charges for as long as the litigation is ongoing. In 

the Gately & Associates matter, over two years elapsed between the filing of the 

Board's case and the Board's publication of the sanctions. During that time, the firm 

continued its public company audit practice. 

Third, the public cannot properly evaluate the Board's enforcement program. 

During the course of a PCAOB disciplinary proceeding no investor, no other auditor, no 

audit committee, no member of the media is entitled to know what conduct the Board 

considers to merit discipline, whom the Board has charged, and what issues are being 

litigated. As a result, the public is uninformed about the level of activity in the Board's 

enforcement program and how the Board uses its enforcement resources. 

If the SEC were to bring the same case as the PCAOB, alleging the same 

violations, against the same auditor, the SEC's charges would be disclosed at the time 

the Commission instituted its proceeding. Any administrative trial would be open to the 

public. If there were an appeal to the Commission and an oral argument, the public 

could attend. The ability - or inability - of the SEC's staff to prove its charges would be 

a matter of public record. 

The SEC determined more than twenty years ago that its disciplinary 

proceedings against accountants and auditors should be public. In the 1980s, the SEC 

faced the same problem as now confronts the Board. SEC disciplinary hearings 

11 See In the Matter of the Application of Gately & Associates, LLC and James P. 

Gately, SEC Release No. 34-62656 (August 5, 2010). The number of opinions issued 

was obtained from Audit Analytics. 
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Statement of PCAOS Chairman James R Doty 

March 28, 2012 

Page 12 

involving accountants and auditors were private until 1988, when the Commission 

amended its rules to make the hearings presumptively pUblic. 12 The reasons cited by 

the SEC for the change included: 

• Virtually all other administrative proceedings brought by the SEC (including 

those against brokers, dealers, investment advisers, and public companies) 

and all SEC injunctive actions are public, 

• Private proceedings create incentives for delays, 

The public and audit professionals are interested in timely disclosure of the 

standards used to commence disciplinary proceedings (the public and other 

auditors have a legitimate interest in learning, on a timely basis, the facts and 

circumstances that have led to the institution of proceedings), and 

Public proceedings are more favored in the law than closed-door 

proceedings. 

These same reasons support the need for public PCAOS disciplinary 

proceedings. The Soard, however, unlike the SEC, lacks the authority to make its 

proceedings public through a change to its rules. This state of affairs is not good for 

investors, for the auditing profession, or for the public at large. Investors would be best 

served by similar transparency in PCAOS disciplinary proceedings. 

B. March 21 Discussion Draft 

The Subcommittee's invitation letter also invited comment on a discussion draft 

of potential legislation that would amend Section 103 of the Sarbanes-Oxley Act to 

prohibit the PCAOS from requiring public companies to use specific auditors or require 

the use of different auditors on a rotating basis. 

The Soard, of course, has not proposed mandatory audit firm rotation. Rather, 

as described above, the PCAOS is engaged in a deep and wide-ranging public dialogue 

about ways to enhance the independence, objectivity and professional skepticism of 

public company auditors. The Soard initiated this discussion by issuing a concept 

release, which asked not only whether others agree or disagree that the Soard should 

focus on this issue, but also sought specific ideas for improving independence, 

objectivity, and skepticism, including the possibility of rotation. This dialogue was 

prompted, among other things, by concerns developed over the last nine years of the 

PCAOS's inspections of public company audits. It was also prompted by the 

12 SEC Release No. 34-25893 (July 7,1988); 53 FR 26427 (July 13,1988). 
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March 28, 2012 

Page 13 

Government Accountability Office's statutorily required 2003 report on mandatory audit 

firm rotation, which noted the significant implementation issues that would be 

associated with mandatory audit firm rotation and concluded that the PCAOB and the 

SEC would need more time and experience to evaluate whether term limits are 

necessary to preserve auditor independence. 13 

With the benefit of nearly a decade of inspections, the Board has begun that 

evaluation. As the Board's concept release states -

Since its creation, the Board has conducted hundreds of inspections of 

registered public accounting firms each year. These inspections provide 

the Board with a unique insight into the state of the audit profession and 

the conduct of public company audits. Based on this insight, the Board 

believes that the reforms in the Act have made a significant, positive 

difference in the quality of public company auditing. Yet, as described 

below, the Board continues to find instances in which it appears that 

auditors did not approach some aspect of the audit with the required 

independence, objectivity and professional skepticism. 14 

The PCAOB is not alone in its concern over the number of deficiencies found in 

inspections and the larger questions that arise from these findings. Similar concerns 

have been expressed by regulators in Canada, Germany, the UK, the Netherlands, 

Australia and elsewhere. 15 As the Canadian Public Accountability Board recently 

13 See U.S. General Accounting Office, Required Study on the Potential Effects of 

Mandatory Audit Firm Rotation (2003), at 5. 

14 See PCAOB Release No. 2011-006, Concept Release on Auditor Independence 

and Audit Firm Rotation (Aug. 16, 2011). Pursuant to the Sarbanes-Oxley Act, the 

details of the PCAOB's inspections are subject to a broad confidentiality restriction such 

that they may not even be shared with Congress. Sarbanes-Oxley Act, Section 

105(b)(5). Last Congress, the House Financial Services Committee unanimously 

approved an amendment offered by then-Representative Adam Putnam (R-FL) to 

amend the Act and allow the Board to do so, but that provision has not been enacted. 

15 See Audit Oversight Commission, Report on the Results of the Inspections 

according to § 62b WPO for the Years 2007-2010, at 3 (Apr. 6, 2011) (Germany): 

In general the inspection findings ... show that there is still room for 

improvement in terms of the audit quality, according to the AOC. 

This particularly applies in view of the auditor's indispensable professional 

scepticism towards statements made by the audit client. In this respect 
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March 28, 2012 

Page 14 

reported in a summary of worldwide inspection findings, "[i]nsufficient Professional 

Skepticism ... is undoubtedly the most common finding - that auditors are too often 

accepting or attempting to validate management evidence and representations without 

sufficient challenge and independent corroboration.,,16 Based on such concerns, the 

European Commission also is considering reforms to enhance auditor independence. 

In light of these findings and related developments, the PCAOB has solicited 

ideas and begun a vigorous, substantive and constructive debate on the best ways to 

achieve greater auditor independence, objectivity and professional skepticism. Part of 

this debate has involved bringing interested and experienced parties together for indepth discussions. As previously mentioned, the PCAOB just last week held a two-day 

the inspections showed indications in some cases that the audits had not 

been conducted with the necessary professional scepticism, especially in 

the audit fields which were exposed to increased risks in the context of 

the financial market and economic crisis and consequently required 

particular professional scepticism on the part of the auditor. 

See also U.K. Professional Oversight Board, Audit Inspection Unit 2009/10 Annual 

Reporl, at 4 (July 21, 2010) (stating that "[fjirms sometimes approach the audit of highly 

judgmental balances by seeking to obtain evidence that corroborates rather than 

challenges the judgments made by their clients" and that "[a]uditors should exercise 

greater professional scepticism particularly when reviewing management's judgments 

relating to fair values and the impairment of goodwill and other intangibles and future 

cash flows relevant to the consideration of going concern"); Netherlands Authority for 

the Financial Markets, Reporl on General Findings Regarding Audit Quality and Quality 

Control Monitoring, at 13-14 (Sept. 1, 2010); Australian Securities & Investment 

Commission, Audit Inspection Program Public Reporl for 2009-2010, at 13-14 (June 29, 

2011); Canadian Public Accountability Board, Enhancing Audit Quality: Reporl on the 

2010 Inspections of the Quality of Audits Conducted by Public Accounting Firms, at 3 

(April 2011); Federal Audit Oversight Authority, Activity Reporl 2010, at 23 (Feb. 14, 

2011) (Switzerland). 

In addition, the Canadian Public Accountability Board just last month issued a Special 

Report on Auditing in Foreign Jurisdictions, in which the CPAB "found a lack of 

professional skepticism when auditors were confronted with evidence that should have 

raised red flags regarding potential fraud risk." Canadian Public Accountability Board, 

Auditing in Foreign Jurisdictions: CPAB Special Reporl, at 1 (Feb. 2012). 

16 See Canadian Public Accountability Board, Auditing in the Oecade Ahead: 

Challenge and Change, Audit Quality Symposium Pre-Reading Materials, at 36 (2011). 
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March 28, 2012 

Page 15 

public meeting at which the PCAOB heard from forty-seven participants. We plan to 

hold additional meetings around the country over the course of the next year or so. 

During this dialogue, I have been struck and encouraged by auditors' heightened 

self-awareness that the world is changing and that a new look at measures to maintain 

the relevance and reliability of audits is warranted. Most accounting firms appear to 

appreciate that the profession is evolving and that additional enhancements to auditor 

independence, objectivity and professional skepticism are needed. 

As an independent standard setter, the PCAOB has brought people with a variety 

of viewpoints together to explore this critical issue in greater depth. If this process 

results in the PCAOB proposing any rules - whether they involve term limits or not 

they will be subject to further public comment and SEC approval. 

For these reasons, I encourage the Subcommittee to respect the decision made 

by Congress to entrust these judgments to the independent standard-setting process of 

the body charged with examining public company audits and, based on that 

examination, considering what improvements are needed in those audits to protect 

investors and further the public interest. 

In conclusion, I appreciate the Subcommittee's interest in the work of the PCAOB 

and I look forward to working with you in the future. I would be happy to answer any 

questions. 
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PCAOB 

APPENDIX 1 - RECENT STANDARD-SETTING ACTIVITIES 

Proposed Standards and Amendments 

Audits of SEC-Registered Brokers and Dealers 

The Dodd-Frank Act gave the PCAOB the authority to oversee auditors of 

SEC-registered brokers and dealers, including authority to set standards and 

rules for audits of brokers and dealers. 

The SEC decides what parts of the financial reports filed by registered 

brokers and dealers should be audited by PCAOB-registered accounting firms 

and the standards that should be used in conducting those audits. In June 2011, 

the SEC proposed to amend its rules to require that certain audit and attest 

reports be prepared by PCAOB-registered auditors using standards established 

by the PCAOB. On July 12, 2011, the Board proposed attestation standards for 

auditors tailored to the SEC proposed rule amendments. The Board also 

proposed a standard for audits of supplemental information accompanying 

audited financial statements that would apply to audits of brokers and dealers 

and audits of issuers. The deadline for comments on the proposed PCAOB 

standards was Sept. 12, 2011. Further action on the Board's proposals is 

dependent on the SEC's adoption of the proposed amendments to its rules. 

Audit Transparency 

The audit report is typically an investor's primary source of information 

about the audit. Usually a single page, the report provides general information 

about how every audit must be conducted, states that the audit complied with 

applicable standards, gives the firm's opinion on the company's financial 

statements or internal control over financial reporting, and includes the signature 

of the firm that issued it. While the report provides useful information-the 

opinion, primarily-it tells the reader little about the key participants in the audit. 

On Oct. 11, 2011, the Board proposed amendments to its standards that 

would improve the transparency of public company audits by requiring that audit 

reports disclose the name of the engagement partner as well as the names of 

other independent public accounting firms and other persons that took part in the 

audit. The amendments would also require registered public accounting firms to 

disclose the name of the engagement partner for each audit listed on the firms' 

annual reports filed with the PCAOB. The deadline for comments on the 

proposed amendments was Jan. g, 2012. 
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peAOS 

Appendices to Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 2 

Communications with Audit Committees 

On Dec. 20, 2011, the Board reproposed a new auditing standard, 

Communications with Audit Committees, and related amendments. The standard 

is intended to benefit investors by establishing requirements that enhance the 

relevance and quality of the communications between the auditor and the audit 

committee. 

The Board originally proposed the auditing standard in March 2010. 

Interest in the proposed standard prompted the Board to reopen the comment 

period and host a roundtable discussion with representatives of audit 

committees, investors, auditors, issuers and others. 

The reproposed standard incorporates comments and suggestions 

received; reflects information that is aligned with the Board's new risk 

assessment standards that took effect in 2011; and adds a requirement to 

communicate information about significant unusual transactions. The reproposal 

also provides commenters with an opportunity to comment on the standard in 

relation to the audits of brokers and dealers. The deadline for comments was 

Feb. 29, 2012. 

Auditing Related Pariy Transactions 

Related party transactions often involve difficult measurement and 

recognition issues that not only can lead to errors in financial statements but 

also, in some cases, have created opportunities for fraudulent financial reporting 

and the misappropriation of assets. Studies have shown that such transactions 

have played a recurring role in financial failures, from those that led to the 

Sarbanes-Oxley Act to those recently alleged in certain emerging market 

companies. Significant transactions that are outside a company's normal course 

of business present similar issues. On February 28, 2012, therefore, the Board 

proposed a new standard, Related Pariies, as well as amendments to certain 

PCAOB auditing standards to assist auditors in detecting and addressing the 

audit risks associated with related parties and other unusual transactions. The 

comment period expires May 15, 2012. 
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PCAOB 

Appendices to Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 3 

Concept Releases 

Auditors Reporting Model 

Auditors, as a result of performing required audit procedures, often have 

significant information regarding a company's financial statements and the audit 

of such financial statements. Although that information is not reported in the 

standard auditor's report to the financial statements users, the information might 

be useful to investors and other financial statement users. 

On June 21, 2011, the Board issued a concept release to seek public 

comment on potential changes to the auditor's reporting model based on 

concems of investors and other financial statement users. 

The concept release raised for consideration several altematives for the 

auditor's reporting model that could increase its transparency and relevance to 

financial statement users. The altematives include a supplement to the auditor's 

report in which the auditor would be required to provide additional information 

about the audit and the auditor's view of the company's financial statements (an 

"Auditor's Discussion and Analysis"); required and expanded use of emphasis 

paragraphs in the auditor's report; auditor reporting on other information outside 

the financial statements; and clarification of certain language in the auditor's 

report. The concept release noted that the identified altematives are not mutually 

exclusive and that other alternatives may exist. 

The concept release was preceded by several discussions with the 

PCAOB's Standing Advisory Group and Investor Advisory Group, in addition to 

extensive outreach by PCAOB staff in 2010 and early 2011. The staff presented 

the findings from that outreach to the Board at an open meeting March 22, 2011, 

and the Board approved the concept release June 21, 2011. The Board solicited 

further comment at a roundtable on Sept. 15, 2011, with participants representing 

investors, other users and preparers of financial statements, audit committee 

members, academics and auditors. The deadline for comments on the concept 

release was Sept. 30, 2011. 

Auditor Independence and Audit Firm Rotation 

An audit has value to financial statement users because it is performed by 

a competent third party who is viewed as having no interest in the financial 

success of its audit client. Investors should be able to take comfort in the fact that 
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PCAOB 

Appendices to Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 4 

independent professionals have performed required procedures and have a 

reasonable basis for the audit opinion. 

Questions persist, however, about whether more can and should be done 

to enhance auditor independence, objectivity and professional skepticism. As a 

result of PCAOB inspections, the experience of other audit regulators and 

concems expressed by investors, the Board issued a concept release Aug. 16, 

2011, seeking public comment on a variety of possible approaches to improving 

auditor independence, objectivity and professional skepticism. 

One possible approach is mandatory audit firm rotation, which would limit 

the number of consecutive years a registered public accounting firm could serve 

as the auditor of a public company. 

The release sought comments on, among other things, whether a rotation 

requirement would risk significant cost and disruption and how mandatory 

rotation would serve the Board's goals of protecting investors and enhancing 

audit quality. The Board also sought comment on whether other measures could 

meaningfully enhance auditor independence. 

The deadline for comments was Dec. 14, 2011. The Board also held the 

first of several public meetings to obtain further comment last week, on March 21 

and 22. The Board reopened the comment period in connection with the public 

meeting, until April 22, 2012. 

Staff Audit Practice Alerts 

The PCAOB publishes Staff Audit Practice Alerts to highlight new, 

emerging or otherwise noteworthy circumstances that may affect how auditors 

conduct audits under the existing requirements of PCAOB standards and 

relevant laws. The PCAOB issued two alerts in 2011 in response to events in 

emerging markets and in the global economic environment that exposed possible 

threats to the reliability of some companies' financial statements and heightened 

the need for vigilance on the part of auditors. 

Audit Risks in Certain Emerging Markets 

On Oct. 3, 2011, the PCAOB issued Staff Audit Practice Alert No.8, Audit 

Risks in Certain Emerging Markets, to increase auditors' awareness of risks 

when performing audits of companies with operations in emerging markets. 
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PCAOB 

Appendices to Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

PageS 

The alert was prompted by disclosures of possible improprieties in 

financial reporting by companies based in certain large emerging markets in Asia 

and observations from the Board's oversight activities. The practice alert focuses 

on risks of misstatement due to fraud that auditors might encounter in audits of 

companies with operations in emerging markets-risks that also may be present 

in companies in developed markets. 

Conditions and situations indicating heightened fraud risk include 

discrepancies between a company's financial records and audit evidence 

obtained from third parties; auditors' difficulties in confirming cash and receivable 

balances; and the recognition of revenue from contracts or customers whose 

existence cannot be corroborated. 

Risk in the Current Economic Environment 

On Dec. 6, 2011, the PCAOB issued Staff Audit Practice Alert No.9, 

Assessing and Responding to Risk in the Current Economic Environment, to 

assist auditors in identifying matters related to the economic environment that 

might affect the risk of material misstatement in financial statements and, 

therefore, require additional audit attention. 

The alert updated Staff Audit Practice Alert No.3, issued in December 

2008, in light of global economic conditions and new risk assessment standards 

that took effect for audits in 2011 The alert directs auditors' attention to 

considering the impact of economic conditions on the audit; auditing fair value 

measurements and estimates; considering a company's ability to continue as a 

going concem; and auditing financial statement disclosures. 
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PCAOB 

APPENDIX 2 - FUTURE STANDARD SETTING PLANS 

Among the auditing issues on the Board's standard-setting agenda are 

those dealing with: 

Specialists. The Board is considering possible revisions to the standard on the 

auditors' use of specialists to strengthen requirements related to certain aspects 

of specialists' work, such as the auditor's evaluation of the work of a specialist. 

Pari of the audit performed by other auditors. In many public company audits, the 

accounting firm issuing the audit report does not perform 100 percent of the audit 

procedures. This may be especially common in, but not limited to, audits of 

companies with operations in more than one country. In these situations, audit 

procedures on or audits of the company's foreign operations are performed by 

other accounting firms or other participants in the audit not employed by the 

auditor. The Board is considering possible revisions to its standards to 

strengthen requirements regarding the work performed by the various auditors 

participating in the audit. 

Assignment and documentation of firm supervisory responsibilities (failure to 

supervise). The Sarbanes-Oxley Act authorizes the PCAOB to impose sanctions 

on registered public accounting firms and their supervisory personnel for failing to 

reasonably supervise associated persons. To assist its oversight, the Board is 

considering possible rulemaking or standard setting that would require firms to 

make and document clear assignments of the supervisory responsibilities that 

should already be part of any audit practice. The Board sought comment on 

rulemaking concepts related to supervision in a release issued Aug. 5, 2010. 

Fair value measurements. The Board is evaluating potential revisions to the 

PCAOB standards on fair value measurements and other accounting estimates. 

To assist in its evaluation, the Board formed the Pricing Sources Task Force in 

March 2011. This group of investors, financial statement preparers, auditors and 

representatives of pricing services and brokers met three times in 2011 to 

discuss the valuation of financial instruments that are not actively traded and the 

use of third-party pricing sources to value such instruments. 

Going concern. The Board is considering possible revisions to the auditing 

standard on the auditor's evaluation of a company's ability to continue as a going 

concern. Among other things, the Board is considering how to enhance the 

auditor's evaluation process and the usefulness of the auditor's communication to 

investors regarding going concern uncertainty. 
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PCAOB 

Appendices to Statement of PCAOB Chairman James R. Doty 

March 28, 2012 

Page 2 

Confirmation. The Board is considering possible revIsions to the proposed 

standard, Confirmation, that would update and expand the requirements related 

to the auditor's use of confirmations. Confirmations are the direct 

communications between an auditor and a third party about a particular item 

affecting a company's financial statements. The standard was proposed July 13, 

2010. 

Quality control. The Board is in the process of evaluating potential revisions to its 

quality control standards, including the SEC Practice Section standards. 

Codification of PCAOB standards. The Board is considering a potential 

framework of organization and codification of its auditing standards. 

Subsequent events. The Board is also considering possible revisions to the 

auditing standards related to events or transactions that occur subsequent to the 

balance-sheet date. 
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75084.051

Prepared Testimony to the Subcommittee on Capital Markets and Government 

Sponsored Enterprises 

By Gary R. Kabureck 

Vice President and Chief Accounting Officer, Xerox Corporation 

On Behalf of Financial Executives International 

March 28, 2012 

I would like to begin by thanking Chairman Garrett, Ranking Member Waters and 

the members of the Subcommittee on Capital Markets and Government 

Sponsored Enterprises for inviting me today to discuss a number of current 

issues and matters affecting the state of the U.S. accounting and auditing 

professions. Today I am representing Financial Executives International (FEI)-

a leading international organization of senior financial executives. I am the 

chairman of the FEI's subcommittee on relations with the Financial Accounting 

Standards Board (FASB). For the last 11 years I have been Chief Accounting 

Officer of Xerox Corporation, a $23 billion multinational corporation which 

operates in over 160 countries. The perspectives I will share with you today will 

be from the perspective of a financial statement preparer. 

The accounting and auditing professions are large, dynamic and crucial to the 

smooth and efficient functioning of our economy and its capital markets. Like 

any large profession the list of current issues under consideration for change is 

long - as it should be - reflecting: the professions' continuous efforts for 

improvement; emerging issues and current needs of financial statement users; 

and reflection on the continuing applicability and on-going value of past 

decisions. 

There are three subjects I would like to discuss with you today - they are: 

• Mandatory Rotation of Auditing Firms 

• Complexity in Accounting Standards 

• Principles Based Accounting Standards 

Mandatory Rotation of Auditing Firms 

Key messages: 

• The FEI recognizes and has always supported the critical need for auditor 

independence and impartiality however there is no guarantee that 

mandatory rotation of auditing firms will increase auditor independence 

and thus result in higher quality audits which is the primary goal. However 

it is clear that mandatory rotation will be costly and operationally 

disruptive. 

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• There are many reasons the financial statement preparer community 

opposes any requirement to periodically rotate a company's external 

auditors. This presentation focuses on practical operational implications 

and costs. 

• For the larger multinational corporations (MNCs) realistically only the Big 4 

firms have the global resources to effectively perform the audit. 

• The process for selecting a new auditor and transitioning in a new auditor 

will be extremely costly for both the company and the new auditor. 

Company time and money are finite - every hour and dollar spent on 

changing auditors is not available for other uses in the business or return 

to investors. 

• Many MNCs have non audit relationships (i.e. consulting, valuation, 

internal auditing, etc.) with one or more of the Big 4 firms which would 

often need to be curtailed if such firm was to be selected as the new 

auditor. This leads to additional business disruption to replace that firm in 

its non audit capacity. Alternatively, companies may decide to never 

retain a Big 4 firm to perform non-audit services as one day that firm may 

become the new external auditor. 

• As big as they are the Big 4 firms are not necessarily fungible. They vary 

in industry concentrations and expertise, geographic presence and 

international reach which may limit the potential for selection as a new 

auditor. 

• Many complex capital markets and M&A transactions may extend over 

several periods with one auditor present at the beginning and another 

present at the end. This creates it own set of costs and complications. 

Discussion: The preparer community has been closely following this issue and 

is virtually unanimously opposed to any regulations which would require the 

mandatory rotation of a company's independent auditors. This Committee has or 

may hear the detailed pro and con arguments in favor or opposed to auditor 

rotation. 

My objective today is to describe what some of the disruptive effects on a 

company's operations would be if periodic auditor rotation became a 

requirement. As I will discuss the financial, operational and cost implications are 

significant. 

• For large mUltinational corporations (MNCs) realistically only the Big 4 

firms have the capacity to perform a quality global audit in accordance 

with the standards of the PCAOB. This means there are only three 

potential alternatives when a MNC needs to change auditors. Contrast 

that to say the number of large banks or law firms who may be available 

for a given service. 

• In some instances it is possible that there would not even be 3 of the Big 4 

available. Each of these firms have varying industry expertise and 

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geographic presences and there are degrees of industry concentration 

within them. Thus the practical number of choices for new auditor 

selection may be less than 3. 

• The Big 4 firms have enormous global capabilities and their non-audit 

practices place them among the largest consulting firms in the world. 

They each bring to the table a vast array of non-audit financial and other 

consulting services which most MNCs use in some capacity. The 

business issue is that many of these services (nine are enumerated in 

regulation) are prohibited from being performed by a company's audit firm 

- generally as an impairment to independence. 

• For example implementing computer processing systems is a competency 

each of the Big 4 have. Systems projects often occur over several years. 

When an audit rotation interval comes up the Big 4 firm involved in the 

systems project would likely be ineligible to become the next auditor. 

What does a company do as there are no good choices: 

o Do not hire the Big 4 firm to do the system project in the first place 

even if it is otherwise highly qualified and cost effective? 

o During the middle of the systems project replace the Big 4 firm with 

another vendor and hope the vendor transition is seamless? 

o Limit the new auditor selection to only 2 of the Big 4? 

• Another business disruptive example involves a company's internal audit 

function. Many MNCs - including my own - have outsourced internal 

auditing to a Big 4 firm other than their auditor. Internal audit outsourcing 

is a large line of business for many audit firms however it is a prohibited 

service for the external auditor to perform for his audit client. As with 

systems vendors, a company is only left with poor choices: 

o Select the firm with the internal audit contract to be the new 

external auditor, terminate their internal audit relationship and 

change the internal audit outsourcer to another major accounting 

firm; 

o Bring the internal audit function in house but in doing so a company 

would have to establish a new department and then identify and 

train qualified internal finance staff to do the function; 

o Leave the internal audit function where it is outsourced and limit 

new auditor selection to only 2 of the Big 4. 

• There are many other examples that could be cited however it is very 

likely that most MNC's retain at least a few of the Big 4 firms to perform 

professional services that would be prohibited to be done by the external 

audit firm. 

• Capital markets transactions and major acquisitions are complicated, big 

dollar business critical transactions with significant amounts of capital and 

risk often present. Often these transactions will span several quarters 

from launch to closing including over a fiscal year end. What happens if 

during the course of a lengthy transaction the required audit rotation 

interval occurs - i.e. one Big 4 firm is present at the beginning but another 

signs off at closing? This is a hugely important issue and concern. In 

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these circumstances extensive and complicated coordination between the 

predecessor and successor auditors is required. Both audit firms would 

have to concur on all significant accounting and auditing matters and a 

protocol to share audit findings would need to be developed. There would 

result in otherwise unnecessary costs (i.e. different firms signing comfort 

letters to underwriters, consents and expertization in registration 

statements, subsequent events reviews, different auditors signing off on 

different years in the financial filings, etc.). Capital markets and M&A 

transactions are frequently costly and complex and a required auditor 

change during the life of one would be an unwelcome and costly event. 

• For large companies the process for new auditor selection is lengthy and 

expensive. For a MNC it may be necessary for the prospective auditor to 

visit several locations and commit to extensive due diligence in order to 

assess a company's internal controls, nature of records, operational 

matters affecting the audit etc. in order to prepare a meaningful proposal 

to become the new auditor. For a company's management it may have to 

repeat this process with several firms. Once the bids are in, extensive 

senior management time is necessary to evaluate them, conduct 

interviews and presentations. During this process the company's audit 

committee would need to become engaged, conduct their own interviews, 

evaluate management's assessments, etc. before finally selecting the new 

auditor. Much of this work would occur while the out going auditor is 

present and wrapping up his final year on the engagement. 

The institutional knowledge the predecessor auditor has is lost when that 

firm leaves the engagement as it is not transferable to the new auditor. 

Thus, once the new auditor is selected management must commit 

extensive support time to assist the new firm in learning all the financial 

details about the client. It is easy for first year audit time to exceed by 

50% or more the steady state effort and it may take several years to get to 

the steady state. 

In summary, requirements to mandate the periodic rotation of auditing firms will 

have significant operation consequences and cost increases to the companies 

they audit. The above examples are among the more significant implications 

however there are many more that can be enumerated. 

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Complexity in Accounting Standards 

Key messages: 

• Complexity in accounting standards, including the related disclosure 

requirements, is a significant issue for the preparers of financial 

statements. 

• Some complexity is unavoidable and appropriate but some can and 

should be avoided. 

• Unnecessarily complex accounting standards results in significant 

operating costs to preparers. 

• To the extent possible, new accounting standards should result in financial 

statements which reflect a company's business model. 

• Cost of implementation and ongoing compliance should receive greater 

prominence in the FASB's decision process for new standards. 

• The FASB currently conducts extensive outreach when developing new 

accounting standards and the FEI strongly encourages such be continued 

in perpetuity. The FEI wishes to recognize Chairman Seidman's efforts 

during the almost two years she has chaired the FASB. In an effort to test 

the operational viability of potential new standards the FASB has been 

conducting greater than ever outreach - both in frequency and visibility -

to its various constituencies including the preparer community. 

Discussion: The complexity of many accounting standards is a matter of 

significant importance and concern to the preparers of financial statements, the 

senior management of their companies and to the audit community. 

Unnecessarily complex accounting standards almost certainly result in increased 

operational and audit costs for financial statement preparers and increase the 

potential for financial statement errors. The FEI has long been a proponent of 

improvements to financial accounting to address investor needs and works very 

closely with the FASB in a continuous dialogue regarding the development of 

new accounting standards and in the ongoing evaluation of existing standards. 

To be sure, some complexity is inevitable and the complex nature of some 

transactions can only be properly addressed by complex accounting standards. 

There are many root causes behind the complexity in accounting standards 

including (but not limited to): 

• Culturally the US tends to be a rules based society so it is logical that 

accounting standards also contain a large rules based element. 

• The FASB and its predecessor standards setters have historically been 

guided by an overarching goal of achieving consistency and comparability 

in the recognition, measurement and presentation of transactions between 

different companies. Thus a tendency towards detailed rules and a 'one 

size fits all' approach in the promulgation of new standards. 

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• Building on the preceding point, in an effort to achieve consistency new 

accounting standards released over the last few decades have tended to 

be very detailed in trying to provide guidance for many lower level 

implementation issues and variants found in practice. 

• The cost of compliance with new accounting standards has frequently not 

been a significant factor in the establishment of new standards. In this 

context 'cost' means the internal operating costs to develop new 

procedures and information systems and the ongoing costs of compliance 

including internal staff time and external audit fees. 

While the FASB's mission is to enhance the decision usefulness of accounting 

information for investors and other users of financial statements, the FEI strongly 

recommends that new standards should also be developed with due 

consideration of the preparer community's operational capability in a costeffective manner. Stated differently, improvements to accounting standards and 

cost effective, less complex new requirements need not be mutually exclusive. 

FEI recommends to the extent reasonably possible new accounting principles: 

• Be developed considering the business models of the affected companies; 

• Recognize that companies are different from each other - even than those 

in the same industry - such that it is reasonable to assume that similar 

transactions may be accounted and presented differently but still produce 

decision useful financial statements; 

• Recognize that there will be occasions when there is more than one 

equally reasonable and decision useful alternative accounting treatment 

for a given type of transaction or event; 

• Increase the weighting that cost of implementation and compliance 

receives in the FASB's decision process; 

• Allow for reasonable flexibility in the transition rules for the initial adoption 

of new accounting principles; 

• Minimize unnecessary complexity even at the expense of permitting some 

variations in practice - see next section below on Principles Based 

Accounting Standards. 

Principles Based Accounting Standards 

Key Messages: 

• The FEI has long been a strong proponent of principles based accounting 

and encourages the accounting standards setters to promUlgate new 

standards with more emphasis on principles and less on detailed rules 

and implementation guidance. 

• The FEI has noticed a recent change by the FASB in this direction but 

notes that old habits (i.e. drafting very detailed guidance) are often hard to 

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break and there remain many accounting standards on the books that 

include extensively detailed rules. 

• Unnecessary complexity and higher compliance costs tend to be byproducts of rules based accounting standards. 

• Principles based accounting standards will require (1) the acceptance of 

good faith application of judgment by all constituencies in the accounting, 

reporting and auditing communities and (2) recognition that there may be 

slightly less comparability between companies in the future as local 

judgments may be different. 

Discussion: FEI has been a strong proponent for principles based accounting 

for many years. The question often comes up what's the difference between 

rules based accounting and principles based accounting? The simple answer 

involves the level of detail provided by standards setters such as the FASB and 

IASB. Rules based accounting standards always begin with basic principles but 

then expand from there. Rules based standards frequently attempt to provide 

guidance for as many transaction variants and combinations and permutations as 

have been identified by the staff as existing in practice. The high level objectives 

for detailed rules are generally laudable - consistency in practice, 

implementation guidance, detailed standards to audit against, etc. Although 

most interested parties in the accounting and auditing communities regularly 

profess to be supporters of principles based accounting the reality is that after 

several decades of primarily rules based new standards it is difficult to quickly 

change philosophical direction. FEI has noticed the winds of change appear to 

be gathering and strongly encourages the direction. However old habits are 

always a challenge and there are many, many standards on the books with 

heavy detailed rules content. 

Some of the drawbacks of rules based accounting principles include: 

• Complexity is definitely increased as the final accounting standards are 

much longer and frequently it is not always clear which individual rule 

applies in a given situation because: 

• All possible variations in practice cannot be covered by detailed rules 

• Detailed rule making tends to invite exceptions. 

• Precise and detailed rules offer the opportunity for transaction structuring 

around and between individual rules. 

• The ability to apply judgment is often limited. 

• Costs of implementation and ongoing compliance will frequently be higher 

because it may be more difficult to apply detailed rules than higher level 

principles. 

• Detailed rules and resulting complexity increase the chance of error and 

restatement. 

• It generally takes longer for standard setters to finalize new accounting 

standards if for no other reason than the mere length of the final document 

and level of details provided. 

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• Detailed rules based standards often detract from the basic, high level 

goals of the new accounting standard. 

While FEI recognizes that some level of detailed rules are inevitable and 

appropriate, we strongly recommend that the future direction of accounting 

standards setting stay primarify focused on promulgating principles and resist, to 

the extent possible, the historical urge for extensive rules. Effective deployment 

of a principles based accounting system may require certain changes in practice 

such as: 

• Acceptance by all constituents that good faith judgment will playa greater 

role in the future recognition, measurement and auditing of transactions 

• Acceptance by all constituents that in a principles based system there will 

be some variations in practice - frequently in timing as opposed to overall 

end results - but the reduction in complexity and lower compliance costs 

will be offsetting benefits. 

• There may be slightly less comparability of financial statements between 

companies because local judgments may be different. 

• A standard or framework for how to apply and assess judgment may need 

to be developed by accounting, auditing or regulatory bodies. 

In summary, there are many benefits to principles based accounting standards 

but they do come with the potential for slightly less consistency in practice and 

the need for a greater role in good faith judgments by all involved parties. 

I would be pleased to take questions from the members of the Subcomittee and 

would be available at a later date to discuss in greater detail any of the matters 

reviewed today. 

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• I 

December 14, 

Office of the Secretary 

Public Accounting Oversight Board 

1666 K 

Washington. D.C. 20006-2803 

Re: PCAOB Hulemaking Docket Matter NO.3? 

Dear Board: 

The Committee on Corporate Peporting 

amxeiciailes the to share its 

of Financial Executives International P'EI") 

on the Public Oversight 

Release No. 2011-006, "Concept on 

Indieoenijer1ce and Audit Firm Rotation" ("Ute Pelease"). FEI is a leading intemational 

nm,~ni7~iHnn of senior financial executives. CCR is a technical committee FEI, which 

and responds to research studies) statements, 

legislation, proposals and other documents issued by and inh'rn~ti"n;,1 

and This document the views of CCR and not np.cp<"~rilv 

vIews 

the Board's efforts to evaluate ways to enhance auditor independence, 

nrcitA<'S;Cinai and improve overall audit 

believe there is a lack of empirical to support the 

m'lnciatf,rv audit firm rotation will improve auditor independence, 

sKI'p"e"rm, and that there are other ways to enhance these 

areas. opposition is based upon the potential negative impacts to audit quality. 

especially around the time of a rotation. the anticipated increase in overall audit costs that 

Will result from such a requirement and in connection with 

successor auditors a rotation. recommend any changes to enhance 

and professional skepticism should potentially be part of a 

that the role of the audit committee in the 

incieoen,delltauditor. We are also concerned that mandatory aud,t firm rotation lead to 

operational chailenges due to the limited number of audit firms with the industry 

experience and international presence required to perform audits for rnu!ti-nationa! 

issuers. Lastly, we are concerned that audit firm rotation be a drastic 

hundreds of registrants to concerns that appear to be arising in 

audit !nspections. 

RiSKS to Audit Quality 

An audit firm accumulates knowledge its audit client over an extended period of time. We 

believe there is a distinct and important difference between the minimum level of 

knowledge of a and its control environment to obtain in 

order to conduct an in accordance with the standards of the and (ii) the level 

and depth of such knowledge that is built and accumulated over time. Extensive expenence 
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with a company drives an appreciation for historical transactions and trends as well as an 

understanding of an issuer's control environment. An audit firm develops a deep 

understanding of an issuer's accounting policies, procedures, processes and information 

systems through experience over time. As this knowledge base grows, the audit firm is far 

better able to challenge management's judgments and assumptions that underlie significant 

accounting estimates and other complex accounting and disclosure determinations. 

An audit firm must climb a steep learning curve in the early years of an audit relationship 

with a new client, especially on large multi-national company audits where the audit work 

may be performed by several audit firm offices and/or member firms. It could easily take 

several years before an audit firm has developed a deep level of knowledge of the company. 

During these early years of the audit relationship, we are concerned that an auditor's lack of 

in-depth knowledge of the company and its history may adversely affect audit quality. The 

potential risks relate to new auditor's difficulty challenging management's assumptions and 

judgments due to the auditors' limited knowledge of the company, its history and industry. 

Although detection risk is inherent within the auditing model, a more mature relationship 

between the external audit firm and the company significantly mitigates the risk. The audit 

firm's specific experience with the company provides a greater foundation from which the 

auditor can assess the company's conclusions and to formulate their own professional 

judgments. Additionally, some academic studies suggest that auditors with longer tenure 

demonstrate increased audit quality, including the 2002 study by Geiger and Raghunandan 

(Geiger, Marshall A. and Raghunandan, Kannan, Auditor Tenure and Audit Reporting 

Failures, Auditing: A Journal of Practice & Theory, Vol. 21, No.1, March 2002). Geiger and 

Raghunandan's analysis found that there was an adverse correlation between the 

propensity of audit failures and audit firm tenure, resulting in significantly more audit failures 

during the early stages of the audit relationship. 

Specifically related to the notion that in some instances audit firms with a long-standing 

tenure could lack objectivity and professional skepticism, we believe the current five year 

rotation period imposed on the lead and concurring review audit partners adequately 

addresses these concerns. In our members' experiences, the engagement partners typically 

possess a broad understanding of the general business, industry specific and unique risks 

facing the company, and are the audit team members who maintain the closest relationships 

with the executive management of the company. However, our members see the greatest 

levels of in-depth knowledge of the company's policies, procedures and information systems 

reside with the experienced staff audit team members (e.g., managers, senior associates) as 

they perform the majority of the detailed audit procedures. We believe that the current 

mandatory rotation of the engagement partners coupled with the established company 

knowledge retained throughout the remainder of the audit engagement team allows for both 

a fresh perspective and depth of knowledge that is necessary to perform a high quality audit. 

In fact, we believe that longer audit tenure and mandatory partner rotations exemplify the 

combination of experience and independence necessary to achieve the desired level of 

objectivity and professional skepticism. Furthermore, there is no clear evidence that longer 

audit firm tenure adversely impacts an auditor's independent mindset and objectivity. 

Increased Costs 

We also believe that any mandatory audit firm rotation will likely result in increased audit 

costs. These increased costs will be both direct financial costs and indirect costs associated 

with lost time and productivity. The 2003 GAO study estimated an increase of 17% in audit 

fees as a result of a mandatory audit firm rotation requirement (Government Accountability 

Office, 2003, Required study on the potential effects of mandatory audit firm rotation). Our 

members' experience suggests audit firms currently absorb (i.e., do not bill to the client) 

much of the first-time non-recurring costs associated with a new audit engagement. We are 
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concerned that a mandatory firm rotation will change the marketplace dynamic such that 

more of these costs are billed to the audit client. We do not believe that it is in the best 

interest of the investors to burden them with these increased expenses without specific 

understanding of direct benefits from these costs. 

We expect that companies will be significantly impacted by the lost productivity amongst 

various levels of a company's organization as a result of a mandatory audit firm rotation. 

Certain of our members have recently undertaken a voluntary change in audit firms and 

have directly experienced significant lost productivity as a result of the time necessary to 

educate the new audit firm's personnel on the company's background, control environment, 

accounting practices and information systems. 

There also will be significant costs involved in changing the audit firm at various subsidiaries 

around the world where statutory audits are required. In most cases, our members seek to 

use the same audit firm that audits their consolidated financial statements to also perform 

any required statutory audit work in foreign subsidiaries. This is done for a variety of 

reasons, including managing the overall coordination and effectiveness of such 

arrangements as well as overall cost considerations. For many companies, this would mean 

not just a change in the auditor at the parent company level, but also the auditor at all such 

subsidiaries. We believe this introduces substantial additional ccsts into the audit process 

without a proven benefit to investors or the public interest. 

Operational Challenges 

We are also concemed that significant operational challenges will arise under a mandatory 

audit firm rotation requirement due to companies' limited options when selecting a successor 

audit firm. These limitations may arise due to concerns with certain geographic 

requirements, sufficient industry expertise and potential independence considerations. 

Practicalfy speaking, most of our members would need one of the Big 4 audit firms to 

perform the audit due to the overall size and complexity of the engagement. Further, the 

potential audit firms would need to have a deep understanding of and experience with their 

industry and have an international presence appropriate to meet the needs of the 

consolidated audit and various statutory audits. These complexities result in significant 

limitations to the population of potential audit firms who possess the size, international 

presence and overall expertise to meet the demands of our members' audit requirements. 

With an already limited audit firm pool from which to choose due to size and industry 

expertise of the audit firm, we are also concerned with the impact that independence would 

have on mandatory audit firm rotation in regards to identifying a potential successor audit 

firm. Currently, most of our members use one of the Big 4 audit firms to perfonm the audit, 

while also utilizing one or more of the remaining Big 4 firms to perform non-audit services 

the auditor is prohibited from performing (i.e., valuation services or internal audit 

outsourcing). In these circumstances, our members' audit committee's could find themselves 

with very few, if any, options that would not also involve changing a non-audit service 

provider. If audit firm rotation were required, many of our members would undoubtedly find 

themselves in a situation where they would have to rotate a Big 4 firm out of the non-audit 

services space in order to establish their independence and thus eligibility to perform the 

audit. This rotation must be completed well before the time of mandatory rotation, which 

would further constrain and complicate the selection process of the new audit firm as well as 

cause a significant disruption to management's processes as some of these services could 

take a significant period of time themselves to transition and likely result in increased costs. 
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The pervasiveness of these limitations would be a significant hurdle that all large, 

international issuers would be forced to address. The compounded nature of these 

limitations realistically reduces the number of audit firms who could adequately perform the 

audit, while causing an unnecessary disruption to rnanagernent's processes. 

Audit Committee Corporate Governance 

We are concerned that mandatory audit firm rotation will preclude audit committees from 

effectively fulfilling one of their chief governance responsibilities. Currently, audit committees 

select the audit firm that they believe best meets the company's and investors needs. 

Further, audit committees have the right to implement a change in audit firms at any time 

and have exercised this right when they considered it appropriate to do so. We believe that 

the audit committee is in the best position to determine who will perform the audit and when 

it is appropriate to make a change in audit firms and that mandatory audit firm rotation 

significantly impedes the exercise of this discretion. For example, an audit committee may 

be forced to make a decision which is not in the best interests of investors by having to 

change audit firms in the middle of a complex business development transaction, registration 

statement or spin-off which could delay the transaction and put investors at greater risk. 

Other Actions to Consider 

With respect to the Board's initiatives regarding the enhancement of audit quality, we believe 

that there are other potential solutions that could achieve the desired goals without 

mandating an audit firm rotation model. These include the expanded distribution of 

inspection comments to the issuer's audit committee and more timely distribution of formal 

PCAOB inspection results. 

The audit committee's oversight role directly includes the responsibility to oversee the 

overall quality of the audit and audit firm including assessing independence, objectivity and 

professional skepticism. To further improve this aspect of audit committee governance, a 

natural first step would be to enhance the information available to the audit committee for 

use in their assessment of the audit firm. While we recognize there may be limitations under 

the laws and regulations that exist today, one alternative solution is for the PCAOB to revise 

the auditor's required communications with the audit committee to include its firm's 

inspection results, including, where applicable, any audit engagement-specific results. We 

believe audit committees are generally effective in their oversight of the audit firms and 

believe that this additional knowledge, specifically related to the effectiveness of their audit 

firm and team, would allow audit committees to more proactively address any potential audit 

quality concerns. Ultimately, it is in our best interest and the interest of investors to promote 

full and effective communication between audit committees and audit firms, and this 

information would be useful in the audit committee's ongoing assessment of the audit firm's 

effectiveness. We also recommend that the PCAOB consider enhancements to the auditor's 

required communications to the audit committee that address additional matters specifically 

related to the audit firm's objectivity and professional skepticism exercised throughout the 

audit. 

While the PCAOB has made progress in issuing their inspection reports more rapidly 

following the completion of inspection fieldwork, we encourage the PCAOB to continue to 

refine its reporting process so that inspection reports could be issued sooner after 

completion of fieldwork. For example, a recent inspection report for an annually inspected 

firm was issued in November 2011 following completion of fieldwork in November 2010, 

under which the covered audits were presumably for fiscal 2009 year-ends. We believe that 

a more timely delivery of the Board's inspection results to auditors and the investing public 
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following completion of fieldwork could provide important information to audit committees 

and further enhance ongoing efforts to increase audit quality_ 

In summary, we do not support a mandatory audit firm rotation requirement and believe the 

PCAOB should continue its research into other potential initiatives to improve auditor 

independence, objectivity and professional skepticism and, ultimately, audit quality, 

******** 

We appreciate the Board's consideration of these matters and welcome the opportunity to 

discuss any and all related matters, If you have any questions, please contact Lorraine 

Malonza at (973) 765-1047 or Imalonza@financialexecutives,org, 

Sincerely, 

Loretta V, Cangialosi 

Chair, Committee on Corporate Reporting 

Financial Executives International 

cc: Martin F, Baumann, Chief Auditor and Director of Professional Standards 
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January 30,2012 

Mr. J. Gordon Seymour 

Secretary, Public Company Accounting Oversight Board 

1666 K Street, NW 

Washington, DC. 20006-2803 

xerox i') 

Gary R. Kabureck 

Vice President: Chief 

Accounting Omcer 

Xerox Corporation 

45 Glover Avenue 

NOr'l'valk, CT 06856 

6ary.Kabureck@xerox.com 

tel 203.849.2630 

PCAOB Rule Making Docket Matter No. 037 - Concept Release on Auditor 

Independence and Audit Firm Rotation 

Dear Sirs: 

In my capacity as a member of the Standing Advisory Group (SAG) and as the 

Chief Accounting Officer of Xerox Corporation I am pleased to have the 

opportunity to provide my comments and suggestions on the PCAOB's recent 

Concept Release "Auditor Independence and Audit Firm Rotation" (Release No. 

2011-006). Xerox Corporation is a mUltinational organization with operations in 

160 countries and annual revenues of approximately $23 billion. Our audit fees, 

exclusive of non-recurring items and non audit services, have approximated $20 

million in recent years. We fully support the PCAOB's stated objectives for this 

Concept Release of strengthening auditor independence, objectivity and 

skepticism. These principles have long formed the basis of modem auditing and 

financial reporting and are critical to ensuring the integrity of an independent 

audit. However we at Xerox strongly disagree with any final rule making which 

will require the mandatory rotation of a company's auditors. We believe such a 

requirement will not result in improved auditor independence, objectivity or 

skepticism and there are numerous cost-beneficial ways, far short of auditor 

rotation, that can enhance achievement of these objectives. The PCAOB's own 

research and the research of others does not make a compelling case in support 

of mandatory auditor rotation. Further we note the Concept Release itself 

acknowledges that there are important company and investor benefits to long 

term audit relationships. Lastly, mandatory auditor rotation usurps a 

responsibility of a company's audit committee and will result in unnecessary 

costs and business disruptions. This letter will conclude with several 

suggestions on other means to potentially enhance auditor independence, 

objectivity and skepticism 

My detailed comments and recommendations follow: 
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Recent Enhancements to Auditing Standards Make Mandatory Auditor Rotation 

Unnecessary 

The Sarbanes-Oxley Act has already resulted in significant enhancements to 

auditor independence and overall audit quality. The creation of the PCAOB with 

its audit firm registration process, deep inspection program and effective 

enforcement activities by itself represents a significant improvement from 

previous practice. As impressive as the PCAOB's activities and 

accomplishments have been to date, it is worth noting your organization is 

relatively young and the full positive impact of PCAOB activities is most likely still 

emerging. 

Early in the PCAOB's existence the managerial reporting and extemal auditing 

on the effectiveness of intemal controls over financial reporting (ICFR) became a 

reality for most corporations beginning in 2004. The positive impacts of ICFR 

are unmistakable. As reported in the Audit Analytics December 2011 report 

"Auditor Tenure, Financial Officer Tumover and Financial Reporting Trends" 

during the 6 years ended in 2010 material weaknesses in the Russell 1000 

companies steadily dropped from 8.2% of companies in 2005 to 0.8% in 2010. 

Likewise for the same study group, in 2005131 of the Russell 1000 companies 

reported restatements however that number had declined to 31 by 2010. 

Similar results are observed when the Russell 2000 companies results are 

included. The conclusion is that for 12,000 audits over the research period 

restatements and material weaknesses have steadily improved which must 

indicate that overall financial statement reliability has been improving. 

In 2010 the PCAOB issued several new auditing standards on assessing 

engagement audit risk and, in 2009, a major standard expanding the role of the 

engagement quality reviewer (the 'EOR' or as more commonly known the 

concurring partner). Additionally, at this time there exists several important 

standards development projects which, when finalized, will undoubtedly increase 

auditor independence, objectivity and overall audit quality. These projects 

include the auditor's reporting model and auditor communications with audit 

committees among others. 

One of the often expressed concems about auditor independence (or lack 

thereof) is (was) the temptation for audit firms to actively solicit non audit 

services from audit clients such that the auditor may have become so financially 

dependent on non-audit fees, so much so that that audit independence, 

objectivity and skepticism were compromised. This important concem was also 

addressed by the PCAOB and SEC several years ago when nine (9) prohibited 

services by a company's auditor were enumerated. These significant 

restrictions on allowable non audit services has gone a long ways towards 

addressing the ability of auditing firms to become financially dependent on nonaudit fees from audit clients. Proxy statement disclosures of fees paid to 

auditors is extensively studied and widely reported on. It is very apparent that 

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over the last decade non audit services provided to audit clients has been 

severely curtailed. In addition, many companies have adopted governance 

policies limiting non audit services to de-minim us amounts. 

Lastly. we believe the current five year rotation requirement for the lead audit 

partner and the EQR effectively results in a 'fresh look' at the audit client every 

few years. In addition, for larger accounts the major audit firms have a practice 

of having a second headquarters audit partner assigned adding another check 

and balance on the lead audit partner. In comparison to earlier rules, after 

rotating off it is much more difficult for the lead audit partner to re-engage in the 

near term with his or her former audit client. The net result is that today a 

process is in place to continually ensure partner level transitions which can and 

does increase overall auditor objectivity and skeptiCism. 

In light of all these impressive accomplishments - the benefits of some are just 

emerging· I recommend the Board refrain from the drastic step of mandatory 

auditor rotation until substantial evidence is available that conclusively 

establishes the aforementioned are materially ineffective. 

Mandatory Auditor Rotation will Increase Risks to Audit Quality 

While the stated objectives of this Concept Release are to enhance auditor 

objectivity, independence and skepticism these objectives represent tactical 

goals in support of the Board's overarching objective which is to improve overall 

audit quality. We believe that mandatory rotation of auditing firms will most likely 

result in lower not higher - overall audit quality. 

Institutional knowledge is a valuable asset - one that is not capable of being 

sold or transferred from one entity to another. It is obtained the old fashioned 

way - by the sustained hard work of many professionals over a long period of 

time. One of the primary reasons a company, or more importantly its audit 

committee, values long term audit relationships is this institutional knowledge as 

it enables the auditor to bring the proper resources to the audit at the right place 

and time. Learning CUNes are steep and costly. The Concept Release itself 

notes that most audit failures occur early in a new auditor's tenure. There is a 

big difference between a new auditor having the minimum knowledge of a 

company and its control environment required to conduct an audit in accordance 

with the standards of the PCAOB and an effective audit which is planned and 

executed by an incumbent auditor with full knowledge of the company, its 

financial processes, culture, business objectives, etc. 

With respect to transitioning institutional knowledge, there is an enormous 

difference between a lead partner or engagement team within a firm transitioning 

audit knowledge to another audit partner in the firm versus the information that is 

required to be communicate between predecessor and successor audits under 
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current standards. It seems very logical that within a firm there will be an orderly 

and effective transition policy and protocol versus what may expected between 

different audit firms. We believe the current practices of mandatory partner 

rotation, EOR reviews and National Office reviews and consultations are 

sufficient to preserve auditor independence, objectivity and skepticism. If, 

despite many objections to the contrary, the Board decides to require mandatory 

auditor rotation, as a prerequisite the Board will need to vet new standards with 

respect to required communications and transitional support between 

predecessor and successor auditors. 

Audit services for multinational corporations can rarely be meet other than a Big 

4 firm. It is important to note that the Big 4 are not fungible. They each have 

varying strengths (and weaknesses) in terms of geographic reach, industry 

expertise, local presence, etc. It is possible in a given industry that only 2 of the 

Big 4 have the relevant firm wide expertise. In this scenario the situation would 

effectively result in a duopoly and industry participants would merely rotate back 

and forth between 2 firms. Does this accomplish much? 

One last point on audit quality and risk, while most observers seem to agree the 

risk of audit failure is highest in the early years of a new auditor's tenure, I 

submit there is an equal risk of audit failure late in the aUditor's tenure as well 

because the existing audit firm can naturally be expected to move its best 

people assigned to the audit to other clients of the firm. 

Appointment and Removal of Auditors is Properly an Audit Committee 

Responsibility 

Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public 

company is responsible for managing the relationship with the company's 

independent auditor including appointment, compensation, retention and 

oversight. Mandating auditor rotation would circumvent this extemal director 

govemance responsibility and compromise the audit committee's ability to 

effectively engage, oversee and terminate an audit firm. For U.S. public 

companies, all audit committee members must be independent directors who 

are knowledgeable about a company's business, intemal controls, financial 

policies and extemal reporting requirements. Because of this unique role, we 

believe a company's audit committee is best positioned to determine the 

circumstances under which an incumbent audit firm should be replaced. It is 

important that an effective working relationship exists between a company's 

audit firm and the audit committee; the requirement for periodic rotation is 

inconsistent with this objective. Audit committees do have the right to terminate 

an audit relationship at any time deemed appropriate and, as is public record, it 

is not infrequent that this right is exercised. When an audit termination occurs, 

SEC has Form 8-K disclosure requirements requiring both the company and the 

terminated firm to report on the circumstances of the dismissal. 

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Assuming the PCAOB persists, despite the strong objections of many 

commentators, to require mandatory auditor rotation there will inevitably be 

many instances where a change in auditors compelled by regulation would not 

be in the interest of the company or its investors and such a change would not 

be otherwise contemplated. For example, a very complex M&A transaction, a 

major business re-organization or transformation, a material capital markets 

action, etc. may span several quarters and be in process over a fiscal year end 

when there is a change in the external audit firm before the event in question is 

finalized. This will create significant challenges for, and between, management, 

the predecessor auditor and the successor auditor and require complicated and 

otherwise unnecessary coordination of activities. The list of potential 

complications is long but includes the obtaining of consents, subsequent events 

reviews by the predecessor auditor, carrying forward prior year audit reports on 

earlier year but still live financial statements, concurrence between the two 

auditing firms on all material matters of accounting and auditing significance, etc. 

We strongly encourage the Board to field test and evaluate the real world 

implications of requiring the rotation of audit firms at sub optimal times and the 

difficult position audit committee members will find themselves in these 

circumstances .. 

Mandatory Auditor Rotation will Permanently Increase Costs and Result in 

Unnecessary Business Disruption without Commensurate Benefits 

Virtually all comment letters have noted the significant increase in audit costs 

that mandatory auditor rotation will cause. We agree with those observation and 

would like to offer some additional perspectives which have not been as 

frequently raised in the comment letters to date: 

Monetary amounts aside, the PCAOB needs to address the question, and 

concern, as to exactly how the audit firms will source the increased workload? 

have been on both sides of changing auditors both as an auditor and as a 

preparer. Many commenters have observed that it is at least four (4) years into 

a new audit engagement before the audit effort settles into its ongoing level. 

Consider this plausible scenario: In year 1 of a new audit there is a 50% 

increase in assigned hours over the steady state; in year two - 30% and year 3 -

10% before year 4 achieves normal go forward level of efforts. Extrapolating 

this using the European Union proposal of a 6 year rotation plan, there is a 15% 

permanent increase in audit hours so presumably on average each auditing firm 

will need 15% more staff. Extrapolating using a 10 year rotation plan results in 

9% permanent increase in staffing requirements. With respect to the demand 

for accounting skills, every analysis I have seen indicates that the demand for 

accounting talent will grow by -5% or more for the foreseeable future. So, the 

obvious question in need of an answer is 'where will all these future accountants 

come from?, 

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There will be significant burdens and hidden costs with respect to the rotational 

selection process itself - on management, the audit committee and the audit 

firms. The process for changing auditors, similar to the process for changing 

other major vendors, would commonly use an RFP process. Due diligence 

materials would need to be prepared; interviews with prospective auditors would 

need to occur; the audit firms would need to consider their bids and identify the 

engagement partner and senior audit team. For a multinational corporation the 

size of Xerox this process would be lengthy - the mere task of visiting numerous 

global locations and obtaining an understanding of accounting processes and 

internal control effectiveness would be immense and expensive. Senior 

management and the audit committee would need to divert significant time to 

reviewing and assessing competing bids and final interviews. After the new firm 

was selected, there would then need to be a major coordinating effort between 

the predecessor and successor firms. The company's internal accounting and 

other finance organizations would see an exponential increase in staff time to 

adopt to a new auditing firm and to familiarize the new auditors with the 

company. All of this unnecessarily drives up operating costs and diverts 

important managerial and outside director time for no commensurate benefit. 

For virtually all major corporations, realistically only the Big 4 firms can perform 

the audit. Xerox, like most major companies, routinely utilizes the consulting 

and other non-audit services capabilities of the remaining Big 4 firms. Many of 

these services would constitute prohibited services if performed by our extemal 

auditors. Further, even if not an expressly prohibited service, many companies 

from time to time will use these same firms to perform other non-audit and 

consulting services which current governance practices would tend not to award 

to a company's audit firm. The Big 4 firms have immense global presence and 

vast business support capabilities. Mandatory audit rotation would be a 

disservice to investors because one of the practical implications is that the at 

least some non-audit service capabilities of the other Big 4 firms would no longer 

be available to companies. 

Multinational companies globally operate through subsidiaries most of which will 

have statutory audit requirements. It is not uncommon for corporations the size 

of Xerox to have hundreds of statutory audit reports each year. For purposes of 

the US GAAP and GAAS audit only a handful would typically be significant with 

the remainder being primarily local compliance efforts. Many companies have a 

policy of requiring all statutory audits to be performed by the parent company's 

auditor. In order to minimize business disruption, companies would have to 

choose - leave the local incumbent statutory auditors in place when the parent 

company rotates the incumbent Big 4 auditor or transition dozens to hundreds of 

local audits to the new Big 4 firm which may not otherwise be necessary to 

enable the US GAAP and GAAS audit. As the peADB deliberates the notion of 

mandatory auditor rotation the implications on statutory audits should not be 

underestimated. 

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Evidence in Support of Mandatory Auditor Rotation is Neither Sufficient nor 

Compelling 

The Concept Release accurately notes that the issue about mandatory auditor 

rotation has been around for a long time and I agree it is time to conclusively 

address the subject and (presumably) conclude the costs and risks far outweigh 

the benefits. Many comment letters have noted the conclusion of the 2003 GAO 

Report, commissioned as part of the Sarbanes-Oxley Act, to study and report on 

the potential effects of requiring mandatory audit firm rotation. The conclusion, 

as you are aware, states that "mandatory audit firm rotation may not be the most 

efficient way to enhance auditor independence and audit quality." 

It does not appear staff or other independent research to date has established a 

definitive correlation between audit failures and the length of the audit 

relationship. It is important to observe that the Soard defines audit failures as 

situations where documented audit evidence is either insufficient, or 

categorically does not, provide the proper support the audit report. Financial 

statement users on the other hand would likely define audit failures in terms of 

restatements which, as discussed on page 2 of this letter, are infrequent and 

declining. It is critical for this project to reconcile these two very different 

theories. 

I recommend that staff research on the incident rates of audit failures be 

conducted to categorize the nature of audit failures by: auditor competence and 

training, lack of industry expertise; occurring in the early years of a new audit 

relationship; audit firm size no longer adequate for a growing client; and lastly 

by lack of auditor independence, objectivity or skepticism. Lastly, this research 

should not be limited to audits supervised by the PCAOS - it is only in the last 

year that the PCAOS (as part of the Dodd Frank Act) achieved control over the 

audits of broker-dealers and as we all know too well some of the most 

spectacular audit failures in recent years (e.g. Madoff Securities) involved audits 

not subject to the PCAOS's procedures. 

Potential Strategies for Enhancing Auditor Independence, Objectivity and 

Skepticism 

The considerable Soard and staff effort which would be required to attempt 

finalizing a rule requiring mandatory auditor rotation would be far better used in 

developing new auditing standards and other policy positions consistent with the 

Concept Release's primary objective of enhancing auditor independence, 

objectivity and skepticism. I believe considerable progress can be made 

towards the objective in a much more cost-beneficial and practical manner than 

the draconian step of requiring mandatory auditor rotation. I have listed below a 

number of suggestions for your consideration: 

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~ 

• The PCAOB should refine its inspection process such that its firm 

inspection reports are issued more timely. For example, in November of 

2011 an inspection report of a major firm was issued for field work 

completed in November 2010 for the calendar year 2009 audits. Using 

this example, by the time the year end 2011 audits are completed, fully 

40% of the engagement partners from the 2009 audits will have rotated 

off the engagement diminishing the effectiveness of the inspection 

findings. A more timely delivery of inspection results to the investing 

public would be beneficial. 

• PCAOB inspection reports for the specific engagements reviewed should 

be made available to the audit committees of the companies audited. 

Many comment letters have recommended this. Transparency is always 

key to effectiveness as the 'light of day' (or the potential therefore) tends 

to bring out the best in people - in this case an audit engagement partner 

would clearly not want it to be communicated to his or her client that the 

PCAOB had concerns with how the engagement was conducted. We 

want to second the comment letters from many audit committee members 

who have also recommended these reports be made available because 

an inspection report would be invaluable to the audit committee's 

oversight of the audit function. 

• Several professional groups I am associated with have discussed the 

merits of revising audit committee membership requirements to include a 

'financial accounting' or' financial auditing' expert - which is a different 

skill set from to day's required 'financial expert'. This letter is not 

advocating this becomes a requirement but merely that the subject is 

worthy of PCAOB and SEC staff research. 

• At several SAG meetings we have discussed 'audit quality indicators' -

what they are, how they would be measured and how they would be 

used. To my knowledge no consequential further actions have to date 

occurred. I recommend this become a formal staff project and when 

finalized they become a part of the PCAOB inspection procedures and, to 

the extent any inspection report is engagement specific, it be shared with 

the related audit committee. 

• Finalize the current major PCAOB projects on revising the auditor's 

reporting model and required communications with audit committees and 

allow sufficient time for these standards to be in force and then measure 

their effectiveness. While many commenters, including as you will recall 

myself, disagreed with many of the more expansive requirements of these 

proposals I anticipate that both projects will be completed with at least 

some modification from current requirements. These should be allowed 

reasonable time to work in practice and their effectiveness evaluated. 

• Finalize the requirement to publicly disclose the name of the lead 

engagement partner - either by a personal signature on the audit report 

or by other disclosure means. This issue has been discussed many times 

at SAG and other PCAOB forums and is a common practice outside the 

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Summary 

United States. Publicly personalizing the engagement partner's name 

with the audit report and related annual report can only serve to increase 

the engagement partner's focus on the quality of the audit. 

We strongly disagree with any notion of requiring mandatory audit firm rotation no 

matter what the rotational interval may be. Such a requirement holds a very real 

possibility for an overall decrease in audit quality and will result in a permanent 

increase in cost and business complexity that is not justified by the evidence at 

hand. As discussed, the numerous PCAOB and SEC pronouncements and 

regulations of recent years are having a positive effect on extemal reporting casting 

further doubt on the need to mandate auditor rotation. We remain very supportive 

of the Board's efforts to continue enhancing auditor independence, objectivity and 

skepticism by less draconian, more cost effective means and, as we have in the 

past, are prepared to provide the Board whatever assistance we can. 

Thank you for the opportunity to provide these comments for your consideration on 

this important project. Please do not hesitate to contact me if you have any 

questions or comments about the contents of this letter. 

Yours very truly, 

Gary R. Kabureck 

c: M. Baumann, Chief Auditor and Director of Professional Standards, PCAOB 

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Testimony Concerning Accounting and Auditing Oversight: Pending Proposals and 

Emerging Issues Confronting Regulators, Standard Setters, and the Economy 

by 

James L. Kroeker 

Chief Accountant 

U.S. Securities and Exchange Commission 

Before the Subcommittee on Capital Markets 

and Government Sponsored Enterprises 

of the House Committee on Financial Services 

March 28,2012 

Chainnan Garrett, Ranking Member Waters, and Members of the Subcommittee: 

I am Jim Kroeker, Chief Accountant of the Securities and Exchange Commission. I serve 

as the principal advisor to the Commission on accounting and auditing matters. I thank you for 

the opportunity to appear before you today to testify on behalf of the Commission regarding 

current issues related to the accounting and auditing profession 

Importance of Reliable Financial Reporting 

The reliability of financial reporting is critical to the confidence of the investing public. 

The objective of financial reporting is to provide infonnation useful to providers of capital in 

their decision-making processes. Infonnation provided to participants in our capital markets 

must be neutral, reliable, and portray economic results in an accurate and faithful manner. Just 

as important, participants must have confidence that this is in fact the case. 

The U.S. system of financial reporting has long been considered a major asset of our 

capital markets. The prominence and reputation of the U.S. capital markets are directly linked to 

our system's ongoing commitment to high-quality, accurate financial reporting. This 
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commitment provides investors with confidence, helping to minimize the cost of capital from 

uncertainty or suspicion as to an issuer's economic fundamentals and prospects. 

As the agency empowered by the federal securities laws to be the investor's advocate, the 

Commission has the authority and responsibility to prescribe the methods to be followed in the 

preparation of issuer accounts and the form and content of financial statements filed with the 

Commission. The federal securities laws also mandate an independent audit of public company 

financial statements according to specified standards by qualified professionals in order to 

provide assurance as to the faithfulness and integrity of the information presented. 

Two entities under the Commission's oversight have key roles in the financial reporting 

process. The first is the Financial Accounting Standards Board, or F ASB, whose accounting and 

financial reporting standards the Commission has recognized as "generally accepted" for 

purposes of the federal securities laws. The second is the Public Company Accounting 

Oversight Board, or PCAOB, which is responsible for overseeing the audit of public companies 

that are subject to the securities laws. I am pleased to be on today's panel with Leslie Seidman, 

the Chair of the F ASB, and Jim Doty, the Chair of the PCAOB. I also am pleased to be on this 

panel with Robert Attmore, Chainnan of the Government Accounting Standards Board, or 

GASB. 

Today, a confluence of factors-from the financial crisis to the decade-long effort to 

converge U.S. GAAP with International Financial Reporting Standards, or IFRS-has produced 

a significant volume of activity in the accounting and auditing areas. My office-the Office of 

the Chief Accountant, or OCA-works closely with the FASB and the PCAOB on these matters. 

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I would like to summarize for the subcommittee some of what I view to be the principal current 

issues. 

Current Accounting Developments 

The SEC continucs to focus significant attention on two aspects of accounting. The first 

is thc Commission's consideration of whether, and ifso how, to incorporate IFRS into the 

financial reporting system for U.S. issuers. The second, and criticalIy related to the first, is the 

ongoing efforts of the FASB and the International Accounting Standards Board, or lASB, in their 

efforts to converge U.S. GAAP and IFRS. 

Global Accounting Standards 

The Commission has previously stated its conceptual support for a single set of highquality, globally-accepted accounting standards. This position advances the dual goals of 

improving financial reporting within the United States and reducing country-by-country disparity 

in financial reporting, which in tum facilitates cross-border capital formation and helps provide 

investors with the comparable and material information they need to make informed decisions 

about investment opportunities. Of course, having a single set of high-quality standards is not in 

itself enough to achieve these benefits. Investors must also have confidencc in the standardsetting body and that the standards will be consistently applied and robustly enforced both within 

and across jurisdictions. And we recognize that there are many factors and challenges that need 

to be considered in pursuit ofthis objective. 

The Commission has engaged in significant efforts to determinc how to advance the goal 

of a single set of high-quality globally-accepted accounting standards, including through 

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considering whether to incorporate IFRS into the U.S. financial reporting system. In February 

2010, the Commission issued a statement in support of the FASB's and IASB's ongoing 

convergence efforts, and also directed the Staff to execute a Work Plan to evaluate issues 

relevant to a potential Commission consideration of incorporating IFRS for U.S. issuers. 

The Work Plan includes the following areas for staff study: 

• The sufficiency ofthe development and application oflFRS for the U.S. domestic 

reporting system, including enforceability and auditability of the standards, as well as 

comparability of IFRS reporting across jurisdictions; 

The independence of international accounting standard-setting for the benefit of 

investors; 

• Investor understanding and education regarding IFRS; 

• The U.S. regulatory environment that would be affected by a change in accounting 

standards; 

The impact on issuers, both large and small, including changes to accounting systems, 

changes to contractual arrangements, corporate governance considerations, and 

litigation contingencies; and 

• Human capital readiness. 

The Staff at this point has completed what I would consider the "field work" related to 

the Work Plan. In executing the Work Plan, we have sought input from U.S. investors, issuers, 

regulators, auditors, and other constituents; evaluated financial statements of foreign companies 

that assert compliance with IFRS; and researched the experiences of other jurisdictions that have 

incorporated IFRS into their financial reporting systems. 

To inform the Commission and the public of our progress, the Staffhas issued several 

reports and papers. The first report, published in October 20 I 0, was a comprehensive status 

update on the Staff's Work Plan performance and planned next steps. This report also followed 

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two public requests for comment, one specifically related to issues that may impact investors, 

such as their knowledge of and preparedness for IFRS, and one specifically related to issues that 

may impact public companies, such as compliance with contractual arrangements and regulatory 

rcquirements. 

In the second paper, published in May 20 II, the Staff sought public input on a possible 

method of incorporation of IFRS. This possible method previously had not been described in as 

much detail as other potential approaches. It contemplated establishing an endorsement protocol 

whereby the FASB would incorporate existing IFRSs into U.S. GAAP over an extended 

transition period, while also incorporating any new or newly-amended IFRSs into U.S. GAAP. 

The paper also describcd and sought feedback on potential benefits and risks that may be 

associated with such an approach. The staff received over 100 thoughtful and productive 

comment letters in response to this paper. 

The third and fourth staff papers were released in November 20 II, and both relate to the 

Staffs work in considering the sufficiency of development and consistency of application of 

IFRS. The first of these papers provided a summary ofthe status ofthe FASB-IASB 

convergence projects and an analysis ofthe Staffs comparison of the written text of U.S. GAAP 

to that of IFRS. In comparing the two sets of standards, the paper noted many similarities in the 

overarching principles, but also noted examples of differences, including many differences in the 

detailed text. The second of these November papers analyzed recent annual financial statements 

of approximately 180 companies (including both SEC registrants and companies that are not 

SEC registrants) that assert that their financial statements are prepared in accordance with IFRS. 

This paper notes two general themes: first, across topical areas, the transparency and clarity of 

the financial statements reviewed could be enhanced through improved disclosures; and second, 

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diversity in the application of IFRS presented challenges to the comparability of financial 

statements across countries and industries. 

We anticipate publishing a final staff report in the upcoming months that will summarize 

our findings and observations for each of the areas ofthe Work Plan. 

Convergence 

Another critical component in evaluating whether to incorporate IFRS into the U.S. 

financial reporting system is the outcome of the FASB-IASB joint convergence projects. The 

Commission in its 2010 statement expressed support for the Boards' efforts and noted the 

importance of completing such convergence projects according to the Boards' then-current work 

plan as part ofthe Commission's consideration of incorporating IFRS. The convergence efforts 

also demonstrate that the United States is committed to considering changes to our accounting 

standards in conjunction with the IASB in areas where both Boards have acknowledged that both 

sets of standards are in need of improvement. 

The FASB and the IASB have worked together since 2002 to improve and converge U.S. 

GAAP and IFRS. In 2006, the F ASB and IASB developed a joint project plan (commonly 

referred to as the Memorandum of Understanding) that identified those standards perceived to be 

most in need of improvement. The Boards set out to develop new comprehensive standards to 

address those topical areas. By June 2010, the Boards had achieved some successes, but many 

challenges remained, and stakeholders were expressing concerns that the rapid pace of standard 

setting made it difficult for them to provide meaningful, high-quality comments on draft 

standards. Thc Boards therefore reprioritized their agenda and modified their joint standard6 
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setting timetable. The Boards made further adjustments in November 2010 and April 2011, 

again in response to stakeholder concerns. 

Despite rigorous efforts by the Boards, including monthly joint meetings, the timetable 

for completing the priority projects has been gradually extended, from June 2011, to the end of 

2011, and now into 2012 to allow for sufficient time to complele deliberations on certain projects 

and to allow for re-exposure of draft standards for public comment on other projects. 

The Board's current priority convergence projects include the accounting requirements in 

three areas: financial instruments, revenue recognition, and leases. 

Financial Reporting Series 

In recent years, we have seen repeatedly how important it is that financial regulations and 

accounting and auditing standards keep up with changes in the business environment. To assist 

in the early identification of risks related to, as well as areas for potential improvements in, the 

reliability and usefulness of financial information provided to investors, OCA launched the 

Financial Reporting Series on November 8, 2011. 

The Series is intended to be an ongoing series of roundtables designed to provide a 

thorough and balanced examination of emerging issues in financial reporting. The roundtables 

will include a cross-section of capital markets participants, including investors, preparers, 

auditors, and others, to discuss their individual views. The F ASB and the PCAOB also will 

participate as observers. 

The topic of the inaugural roundtable was measurement uncertainty in financial reporting. 

Measurement uncertainty exists when values are computed based on judgments about unknown 

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future events. The conccpt of measurement uncertainty touches on many issues important to 

investors, preparers, and auditors alike. 

Current Auditing Developments 

Let me now tum to auditor and PCAOB oversight. In 2011, the Commission appointed 

three new board members to the PCAOB, including Chairman Doty. Last month, the 

Commission appointed a fourth new board member, Jeanette Franzel, to replace the last founding 

PCAOB board member, Dan Goelzer, whose second term had ended. 

Audit Quality 

This coming July will mark the tenth anniversary of the Sarbanes-Oxley Act of 2002. 

With the financial crisis looming large in our memories, we also must not forget the crisis of 

confidence in the audit profession caused by the accounting scandals of just over a decade ago. 

The Act created the PCAOB, strengthened the role of audit committees, and focused 

management and auditors on the importance of internal controls. Now there are important issues 

being debated about what the auditor should audit, how the auditor should communicate its 

results to investors, and whether the auditor is sufficiently independent and objective. 

In this environment, both we and the PCAOB are continuing to devote substantial 

attention to these issues. The PCAOB's inspection program continues to identifY audit 

deficiencies of varying nature and severity. While the presence of an audit deficiency does not 

necessarily mean that the related financial reporting contains material undetected errors, it may 

increase the risk of material misstatement in that reporting. The PCAOB has undertaken efforts 

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to identify and analyze further the underlying causes of audit deficiencies in developing its 

inspection reports. 

PCAOB Standard-Setting Projects 

Another important component of audit quality is auditor independence and objectivity, 

and there are considerations being debated both here and abroad in this area. In August 20 II, 

the PCAOB issued a concept release soliciting comment on new standards for auditor 

independence and audit firm rotation. 

Mandatory firm rotation has been explored in the past. For example, the subject of firm 

rotation was debated in the development ofthc Sarbanes-Oxley Act. The eventual Act required 

audit partner rotation and requested a study of possible firm rotation by the U.S. Government 

Accountability Office. In its report, the GAO expressed the belief that mandatory audit firm 

rotation may not be the most efficient way to enhance auditor independence and audit quality 

considering the additional financial costs and the loss of institutional knowledge of a public 

company's previous auditor ofrecord. The GAO also stated that several years' experience with 

implementation of the Sarbanes-Oxley Act's reforms would be necessary in order to adequately 

evaluate whether further enhancements or revisions, including mandatory audit firm rotation, 

may be needed. 

The PCAOB's comment period on the concept release closed in December of last year. 

Many important issues that require careful consideration were raised in the more than 600 

comment letters received by the Board. The PCAOB also last week held two days of public 

meetings on the concept release. My staffwill work with the PCAOB as it continues its 

deliberation on auditor independence, objectivity, and professional skepticism. 

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Other jurisdictions are currently considering mandatory finn rotation along with other 

auditing reforms. The European Commission, for example, has released a proposal for audit 

market reform that includes mandatory finn rotation and encouragement of joint audits. In 

addition to reinforcing auditor independence and professional skepticism, the stated objectives of 

the proposal include promoting competition among audit providers. 

Another project the PCAOB has undertaken is the consideration of the usefulness or 

relevance of the audit report to investors. In this vein, the PCAOB is actively considering 

whether there should be changes to the information the auditor provides in thc audit report to 

investors. This is another topic that is also being considered in other jurisdictions as well as our 

own. Questions being explored include: (I) what, ifany, additional information about the audit 

or the related financial reporting should be included in the audit report; (2) should the scope of 

the audit be expanded; and (3) should there be additional disclosure regarding participants in the 

audit, such as the engagement partner and other audit firms that have perfonned work in the 

audit? The PCAOB issued a concept release and a proposal last year on these ideas, and my staff 

will continue to work with the PCAOB as it moves forward with these projects. 

In the meantime, the PCAOB is undertaking a significant amount of very important work 

to update existing audit and quality control standards to reflcct the lessons it has learned from 

nearly a decade of audit firm inspections. Many of the PCAOB's standards are still "interim" 

standards that the Board adopted in 2003. There is increasing focus on the need for significant 

progress on updating the interim standards that directly address audit performance, which may 

have a direct positive impact on audit quality. The PCAOB's standard-setting agenda includes a 

number of active projects related to some of the interim audit performance standards, including 

auditing fair value measurements, the use of specialists by auditors, the use of the work of other 

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audit firms, and firm quality control standards. In addition, last month the PCAOB issued for 

public comment a proposed auditing standard on related party transactions. Finally, the PCAOB 

recently received a number of comments on its re-exposed standard related to auditor 

communications with audit committees, which it intends to finalize later this year and submit to 

the Commission for approval. 

Dodd-Frank Considerations 

I'd like to address briefly two other areas related to auditing, both related to the DoddFrank Wall Street Refornl and Consumer Protection Act. These arc the expanded PCAOB 

authority over audits of brokers and dealers, and the audit requirement over an issuer's internal 

control over financial reporting. 

First, the Dodd-Frank Act granted the PCAOB explicit oversight auiliority over audits of 

brokers and dealers registered with ilie Commission. Last June, the Commission proposed 

amendments to the financial reporting requirements for brokers and dealers. Among other 

things, the proposed amendments are intended to facilitate the ability of the PCAOB to 

implement its oversight of auditors of broker-dealers, and to eliminate potentially redundant 

requirements for certain broker-dealers affiliated with, or dually registered as, investment 

advisors. Last July, the PCAOB proposed new auditing and attestation standards that would 

apply to the audits of broker-dealers. Boili sets of proposals are still under consideration. 

Second, Section 989G of the Dodd-Frank Act amended Section 404 of the SarbanesOxley Act to provide that smaller companies (specifically those that are not "accelerated filers" 

or "large accelerated filers" under Commission rules) are exempt from the requirement in 

Section 404(b) that an independent auditor attest to, and report on, the issuer's assessment of its 

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internal control over financial reporting. The Dodd-Frank Act also mandated a study with 

respect to Section 404(b) requirements for issuers with a market capitalization between $75 and 

$250 million. That study was delivered to Congress in April 20 II. It recommended maintaining 

the existing investor protections of Section 404(b) for this category of issuers and encouraging 

activities that have the potential to improve further both the effectiveness and the efficiency of 

the evaluation of internal controls. One ofthese activities is the plan by the Committee of 

Sponsoring Organizations, or COSO, to review and update its internal control framework, which 

is the most common framework used by management and the auditor alike in performing 

assessments of internal control over financial reporting. COSO exposed a draft of its updated 

framework for public comment; the comment period closes on March 31. 

Conclusion 

In sum, there is a substantial amount of activity in the accounting and auditing space. We 

will continue to work closely with the F ASB and the PCAOB on these matters, guided by the 

Commission's mission of protecting investors, maintaining fair, orderly, and efficient markets, 

and facilitating capital formation. Thank you, and I would be pleased to address any questions. 

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WRITTEN TESTIMONY OF BARRY C. MELANCON, CPA 

ON BEHALF OF THE 

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNT ANTS 

BEFORE THE 

SUBCOMMITTEE ON CAPITAL MARKETS 

AND GOVERNMENT SPONSORED ENTERPRISES 

HOUSE FINANCIAL SERVICES COMMITTEE 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON ACCOUNTING AND AUDiTING OVERSIGHT: 

PENDING PROPOSALS AND EMERGING ISSUES CONFRONTING 

REGULATORS, STANDARDS SETTERS AND THE ECONOMY 

March 28, 2012 
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AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

TESTIMONY OF 

BARRY C. MELANCON, PRESIDENT AND CEO 

BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS 

AND GOVERNMENT SPONSORED ENTERPRISES 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON ACCOUNTING AND AUDITING OVERSIGHT: 

PENDING PROPOSALS AND EMERGING ISSUES CONFRONTING 

REGULATORS, STANDARDS SETTERS AND THE ECONOMY 

Good morning Chairman Garrett, Ranking Member Waters and members of the 

Subcommittee. My name is Barry Melancon and I am a CPA and president and 

CEO of the American Institute of Certified Public Accountants ("AICPA"). I am 

pleased to be able to testify before you today about "Accounting and Auditing 

Oversight: Pending Proposals and Emerging Issues Confronting Regulators, 

Standards Setters and the Economy." I will address the CPA profession's 

commitment to the public interest, as well as the important services CPAs 

provide to U.S. businesses of all sizes and to investors and the profession's role 

in the global economy and global capital markets. 

This year, the AICPA celebrates its 125th anniversary. The AICPA was 

established by the accounting profession to serve the public interest by fostering 

independence, objectivity and competence, the highest possible level of 

professionalism and ethical behavior. Our mission is to provide our members 

with leadership, information and resources to enable them to provide valuable 

services in the highest professional manner to benefit the public, employers, 

investors and clients. 

The world was very different in 1887 when the AICPA began than it is today. 

Businesses were simpler entities that focused on local markets and customers. 

Financial instruments were limited to hard currency and paper checks. And the 

Securities and Exchange Commission ("SEC") would not be established for 

another 47 years. 

It's not an exaggeration to say that virtually everything CPAs do and how they do 

it has changed since then; the capital markets and business activity around the 
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globe have become more complex. What has not changed, however, is the 

commitment the AICPA and the profession made in 1887 to ensure the highest 

levels of quality and professionalism, unimpeachable ethics, objectivity and a 

healthy degree of skepticism, and financial reporting and auditing that meets the 

investment community's need for transparency and expert analysis. 

The AICPA is the world's largest association representing the accounting 

profession, with nearly 377,000 members. AICPA members represent many 

areas of practice, including business and industry, public practice, government, 

education and consulting. CPAs work in accounting firms that range from sole 

proprietors in small towns supporting Main Street businesses, to large firms with 

thousands of employees supporting multinational entities with operations 

worldwide. CPAs are business owners, CEOs and CFOs and serve in other key 

decision-making roles in companies, from the Fortune 100 to small businesses, 

throughout America. 

The AICPA sets ethical standards for the profession and U.S. auditing standards 

for audits of private companies, non-profit organizations and federal, state and 

local governments. It develops and grades the Uniform CPA Examination and 

offers specialty credentials for CPAs who concentrate on personal financial 

planning; fraud and forensics; business valuation; and information technology. 

The AICPA works to ensure that CPAs have the skills, tools and information 

necessary to address the complicated accounting, tax and auditing questions 

they face every day. Our members are required to exercise sound professional 

judgment as they practice, regardless of whether the beneficiary will be investors, 

lenders, employers, employees, taxpayers or an unknown third party. 

Of critical importance to the AICPA is that the profession fulfills its commitment to 

lead as our business community, its financial reporting needs and the needs of 

investors and other users of business information continue to evolve in a rapidly 

changing environment. 

To that end, we've identified five strategic initiatives where we devote significant 

resources toward the advancement of the profession. We believe it is critical to 

create an environment that attracts the best and brightest from each generation to 

join and remain in the profession, to assure the quality of the services performed and 

to promote innovation for the future. 

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The first strategic initiative is attracting and retaining the best and the brightest 

people into the profession. 

The CPA profession recognizes its principal asset is human capital and the AICPA is 

making significant investments in creating a vibrant and highly qualified supply. Our 

research tells us that the baby boomer generation will be retiring at an alarmingly 

high rate, over 10,000 every day for the next 19 years, and that professions will be 

competing with each other to attract the best and the brightest. Our goal is to create 

an environment where the millennial generation is attracted to and continues to 

see the accounting profession as a rewarding profession where individuals can 

collectively make a difference in their communities, businesses and the economy. 

The AICPA engages students through our Start Here, Go Places website, which is 

focused on high school and community college students. The site allows students to 

explore broad possibilities from small business start-ups to Fortune 100 companies. 

We know that enrollment at community colleges is reaching an unprecedented level, 

but resources available to accomplish a transfer to a four-year institution continue to 

be challenged. To serve these needs, the AICPA, in partnership with other 

associations and state CPA societies, has taken critical steps to help students and 

educators at two-year colleges enhance the pathway to four-year schools. 

To continue providing university accounting students and CPA candidates with a 

clear road map to navigate the educational and licensure process and become 

successful CPAs, the AICPA launched its community-based website, 

ThisWayToCPA.com. Since the website's launch, more than 27,800 have joined 

this community, which features CPA role model profiles, recent CPA candidate exam 

diaries and state licensure requirements. 

ThisWayToCPA.com hosts scholarship applications and the Legacy Scholars 

Program. About 80 percent of the 2011 - 2012 class of AICPA Legacy Scholars 

represents students from ethnically diverse backgrounds. During the fall semester, 

Legacy Scholars' community service and outreach efforts reached over 4,600 

individuals. 

Because we believe there is an impending shortage of accounting PhD faculty, which 

are a necessary and integral part of the accounting profession supply chain, the 

AICPA established the Accounting Doctoral Scholars Program. With financial 

commitments exceeding $17 million, the program's goal is to increase the current 

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doctoral pool by 120 PhDs by 2016. This program should also increase the 

availability and quality of accounting programs across the country. 

The AICPA has established the Fellowship for Minority Doctoral Students to 

ensure that PhDs from minority populations are provided the resources to participate 

as we work toward creating a more ethnically diverse profession. Recognizing the 

need for ethnically diverse role models, the AICPA is enhancing its focus on diversity 

under the newly established AICPA National Commission on Diversity. 

Aligning with the recommendations of the Advisory Committee on the Accounting 

Profession for the US Treasury Department, the AICPA works to address the 

future of accounting education through the efforts of the Pathways Commission. The 

Commission's goal is to provide ongoing strategies to enrich accounting education 

processes. The AICPA stands ready to support and implement the forthcoming 

recommendations. 

The second initiative is ensuring the ongoing competency of the best and the 

brightest in their respective roles. 

What may be most familiar to the Subcommittee is the fact that the AICPA develops 

and maintains the Uniform CPA Examination ("Examination"), which establishes the 

entry point for CPAs into the profession and is designed to assure a competency 

baseline for the best and the brightest. Examination content development is a major 

AICPA effort, involving sixty full-time AICPA staff and hundreds of CPA volunteers 

who spend literally thousands of hours every year on the development of new 

examination questions. A constant flow of new questions is necessary to maintain 

the currency, vitality, and credibility of the CPA Examination - which remains a 

critical entry point for professionals who serve the public in a wide swath of roles, 

from the CFO to the auditor to the tax preparer. 

CPAs serve in many key decision-making roles, including those who work in 

business and industry. For example, over 42 percent of our members practice as 

management accountants-those CPAs on the front line every day making decisions 

about their businesses. Management is responsible for the preparation of financial 

information and therefore a CPA in business or industry is the gatekeeper who is 

responsible for the preparation of high quality financial statements. It is critical that 

CPAs have the skills and tools to "get it right." This includes a steady moral 

compass, a healthy eye for skepticism, the knowledge to apply professional 

judgment, and the technical accounting resources to apply his or her craft, including 

enhanced understanding of financial reporting standards. The AICPA's role is to 

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provide the ethical framework, training and guidance so that the preparer is best 

positioned to "get it right." We do this through the development and issuance of 

training materials (e.g., conferences, continuing education) and publications (e.g., 

industry accounting guides, checklists, comparison tools). 

The auditor provides an opinion on financial statements that are the responsibility of 

management to prepare. Auditing involves complex procedures designed to provide 

the auditor with sufficient evidence so that the auditor has reasonable assurance, 

which is a high but not absolute level of assurance, that his or her opinion is correct. 

CPA firms and the AICPA commit significant resources to training and educating 

auditors in order to "get it right." Examples of our areas of focus are training and 

guidance materials in auditing standards and audit methodology, the development of 

skills necessary for fraud detection and how to apply professional skepticism and 

judgment and education in unique industries and areas of specialization, such as 

auditing fair value calculations or testing information technology controls. 

One of the keys to quality is the structure that firms have in place to internally support 

and monitor their audit engagement teams. For example, the major accounting firms 

and the AICPA provide practitioners with access to specialists in accounting and 

auditing on a daily basis. These consultations help promote accounting and audit 

effectiveness as well as consistency in the application of standards. Internal review, 

monitoring and inspection of audit engagements are also key components of 

assuring that the firm has complied with all appropriate professional standards. 

Further, external quality monitoring via peer review and Public Company Accounting 

Oversight Board ("PCAOB") inspection provide the final layer of oversight, designed 

to provide investors with confidence that the auditor has the skills, education and 

procedures in place to assure that the audit meets the appropriate professional 

standards and can be relied upon. 

As part of the AICPA's commitment to audit quality, we have established audit quality 

centers, so that we can provide CPAs with focused tools and resources to meet the 

ongoing challenges of a vibrant and changing environment. Our Governmental and 

Employee Benefit Plan Audit Quality Centers focus on enhancing the performance 

of the CPA firms that audit the many thousands of entities that receive federal 

assistance, including governments, not-for-profits and certain for-profits and that 

participate in over 80,000 employee benefit plans, such as 401(k), pension and 

health and welfare plans subject to the Employee Retirement Income Security Act. 

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In addition, five years ago the public company auditing profession established the 

Center for Audit Quality--an independent organization affiliated with the AICPA, 

whose sole mission is to improve the quality of and confidence in public company 

audits--which has been a leader in the profession, dedicated to enhancing investor 

confidence and public trust in the global capital markets. 

Third, the AICPA promotes independent, relevant financial reporting, auditing, and 

ethical standards. 

Standards of practice, developed free of any special interest influences but with input 

from all relevant stakeholders, are critical to the production of information that is 

meaningful to investors and other users of business information. 

Accordingly, the AICPA supports the ongoing independence of the Financial 

Accounting Standards Board ("FASB") in its activities to develop financial 

reporting standards for public companies. More broadly, we support the 

development of one set of high quality global financial reporting standards, and 

we believe that International Financial Reporting Standards-<Jr IFRS--are best 

positioned to be that set of standards. The accounting profession strongly 

encourages the SEC to make a decision soon on next steps with respect to IFRS 

incorporation into U.S. GAAP. 

The AICPA was an early supporter of international convergence of accounting 

standards and has fully supported the incorporation of IFRS into the U.S. 

financial reporting framework. There is no choice: uniform international 

standards are critical. Multinational companies are chartered in different 

countries and the AICPA is convinced that investors will benefit if issuers around 

the world prepare financial statements using a common set of high quality, 

globally accepted and consistently applied and enforced financial reporting 

standards. 

Along these lines, we would also suggest the PCADB consider utilizing 

International Standards on Auditing--ISA--as a basis for U.S. public company 

auditing standards. 

Finally, the AICPA's mission includes promoting the highest possible ethical 

standards. It sanctions members who do not follow the standards that we have 

set and that we believe are essential to the proper professional performance of a 

CPA. 

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The fourth strategic initiative is developing and implementing innovative solutions 

to the increasingly complex issues and business environment that CPAs navigate 

skillfully for their clients and employers. 

Accounting and auditing solutions need to keep pace with business activities in 

order to maximize the ability of the profession to provide value-added services. 

Standards for financial reporting are critical to the equation and non-financial 

information is becoming an increasingly integral tool to assess current and future 

business performance. Measurement of natural resource use and replenishment 

is a good example of the kind of issue the profession is confronting. 

How these important measures are reported and whether there should be 

independent reporting and assurance on those measures is an emerging 

discussion topic within the business community. 

Internal control has always been an integral part of reliable financial reporting, 

and Sarbanes-Oxley focused renewed attention on its importance. We believe 

that robust internal control over financial reporting is critical to every organization, 

regardless of size. Further, testing financial reporting control effectiveness and 

reporting on controls to some extent should be required in every audit. The 

AICPA continues to believe that there should be no additional exemption for 

existing issuers from section 404(b) of Sarbanes-Oxley. 

Use of technology is a given and it is one of the critical tools companies utilize to 

manage their businesses. We believe it is important for users of business data to 

have meaningful and usable information to help them make investing decisions. 

While not demanded yet, we believe that users will seek a common format on the 

source data that ultimately results from financial statements and we are on the 

frontlines to support the advancement of such a format. 

E~tensible .§.usiness Reporting .banguage ("XBRL") is an electronic data format 

standard that is already opening doors by allowing users of financial information 

to drill down into financial statements and other business reports. XBRL is a 

royalty-free, international information format designed specifically for these 

purposes, which allows users to automatically consume and analyze the data. 

We strongly believe the broader application of the XBRL data standard across 

reporting streams would create tremendous efficiency gains and enable more 

sophisticated and timely analysis. The creation of new tools to leverage these 

data standards will magnify this potential exponentially. 

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Looking to the future, the AICPA and the profession are working to integrate key 

non-financial data with financial reporting measures to provide one integrated 

meaningful report. We started this work nearly 10 years ago with the creation of 

the Enhanced Business Reporting Consortium and are now collaborating with 

the World Intellectual Capital Initiative and the International Integrated 

Reporting Council to advance this initiative. 

We are also looking at the best ways to develop assurance of this data via 

activities related to data standards, information integrity and system reliability 

which addresses the privacy, security and confidentiality of information in 

addition to other criteria. 

Finally, we recognize that preventing and detecting fraud remains a significant 

challenge for all members of the "financial reporting supply chain"-company 

management, boards of directors, audit committees, internal auditors and 

external auditors. While company management has primary responsibility when 

it comes to preventing and detecting fraud and the financial statement audit is 

designed to provide reasonable assurance that material fraud will be detected, all 

members of the supply chain should work together to leverage their 

complementary and interconnected duties. Of great importance in mitigating the 

conditions leading to fraud is the tone at the top, skepticism and strong 

communication. A critical part of the profession's work, headed by the Center for 

Audit Quality, is the formation of an Anti-Fraud Collaborative Partnership with 

a number of other financial associations. The partnership is engaged in a 

number of projects aimed at improving our collective ability to deter and detect 

financial reporting fraud. 

The fifth strategic initiative is supporting robust but balanced regulation. 

Robust, balanced regulation is the final component of the strategic equation. 

The profession is subject to several layers of regulation. State boards license 

and regulate CPAs at the state level. Several agencies regulate CPAs at the 

federal level depending on the area of practice, including the SEC and the 

PCAOB. 

The AICPA believes in a strong and balanced regulator for the public company 

audit profession and supports robust regulation of the profession in a manner 

that protects the public, but does not detract from, nor negatively impact, quality 

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reporting and auditing and does not restrict the effective and efficient flow of 

capital. 

There are several current issues that should be noted in a discussion of robust 

and balanced regulation: 

1. A strong and balanced regulator for the public company audit profession. The 

AICPA and the profession communicate regularly with the SEC, PCAOB, FASB 

and Governmental Accounting Standards Board ("GASB") to provide useful and 

relevant information about the profession and to make sure that the profession's 

views are considered as part of these organizations' deliberations. Through our 

members' expertise and the information and data we have compiled, we formally 

comment on proposals and informally consult with these entities, to help them 

fully understand the implications of what they are considering and ultimately 

develop meaningful and balanced regulation and standards. 

During its entire history, the AICPA has consistently worked closely with 

Members of Congress, regulators, the accounting standards-setting bodies and 

ad hoc federal task forces and committees, to assure balanced regulation of the 

profession. 

2. PCAOB Rulemaking. The PCAOB is currently engaged in a number of 

projects and is to be commended for the manner in which it is approaching them. 

For example, before issuing the concept release on possible changes to the 

auditor's reporting model, the PCAOB held open forums as well as private 

meetings with a wide variety of stakeholders, including auditors, audit committee 

members and investors, to help shape the ideas presented in the concept 

release. This is a good example of how a strong and balanced regulator acts to 

promote the public interest. 

3. PCAOB Concept Release on Firm Rotation. In August 2011, the PCAOB 

issued Release No. 2011-006--Concept Release on Auditor Independence and 

Audit Firm Rotation-focusing on various recommendations, including the 

periodic, mandatory rotation of an audit firm, to improve auditor independence, 

objectivity and skepticism. Sarbanes-Oxley delegated responsibility for 

overseeing the financial reporting process, including the hiring and firing of the 

external auditor, to independent audit committees. Audit committees, which take 

this responsibility seriously and have the requisite skills, fiduciary knowledge and 

experience, are the appropriate and balanced approach to the auditor's ongoing 

engagement and retention. We believe in the audit committee's authority and 

support efforts to strengthen the role of the audit committee, not undermine it. 

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Interestingly, the PCAOB's release acknowledges that there is little evidence 

linking audit firm tenure to audit failures or a lack of independence, objectivity 

and professional skepticism by the auditors. The release also recognizes that 

mandatory audit firm rotation would represent a significant change in practice 

and would increase costs and cause disruptions for companies and external 

auditors. 

Of the roughly 600 comment letters received by the PCAOB, 94 percent were 

against mandatory audit firm rotation, including that of the Government 

Accountability Office ("GAO"), which stated the PCAOB "does not provide 

compelling evidence that the root cause of the audit quality issues [it has found] 

is related to a breakdown in auditor independence." GAO also stated, "Even if 

the PCAOB could clearly establish that a lack of independence or objectivity is 

causing audit quality problems, it is unclear that such a problem would be 

prevented or mitigated by a mandatory audit firm rotation requirement." 

Finally, it's important to note that more than 200 letters were sent to the PCAOB 

by audit committees during the original comment period, and not one supported 

rotation. 

Given the significant costs and disruption, the lack of evidence linking 

engagement tenure to audit quality, and, most importantly, the risk that 

mandatory rotation is actually a detriment to audit quality, we oppose mandatory 

firm rotation. We do however support the review underway to further enhance 

both the role of the auditor and of the audit committee in ways that enhance the 

quality of information provided to investors. We believe this is a much more 

beneficial and fruitful area on which to focus. 

Should the PCAOB's Concept Release become a proposal which is adopted, it 

would represent a very clear example of unbalanced regulation. It would impose 

significant strains on the audit profession and the public company business 

community with no evidence that the Sarbanes-Oxley formula, which assigned 

authority to hire and fire the auditor to the independent audit committee, is not 

working in a way that protects the public interest. 

4. Transparency of PCAOB Enforcement Proceedings. The PCAOB also has 

urged Congress to amend Sarbanes-Oxley and make its enforcement 

proceedings public. To that end, the "PCAOB Enforcement Transparency Act of 

2011," which has been introduced in both the House and the Senate, would 

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make PCAOB hearings and all related notices, orders, and motions, open and 

available to the public unless otherwise ordered by the Board. 

PCAOB enforcement proceedings currently are confidential under SarbanesOxley, because Congress understood that auditors belong to a profession in 

which a good reputation is essential and publication of unproven charges may 

end an individual auditor's career or audit firm's existence. Congress created a 

special confidentiality regime for PCAOB enforcement proceedings because of 

that concern and because the PCAOB is not part of the government and thus is 

not subject to the procedural due process requirements imposed on government 

agencies pursuant to the Administrative Procedures Act. 

Most assuredly, the AICPA and the accounting profession want to eliminate bad 

actors from the profession. The stain from one affects all. But there needs to be 

an appropriate balance of the rights of the accused and due process for 

someone unjustly accused. 

Transparency of PCAOB disciplinary matters is appropriately addressed under 

current law, by the PCAOB's authority to refer matters to the SEC when it 

determines that public disclosure is necessary to protect the public interest. 

The SEC has the authority to make its investigations public. In other words, the 

PCAOB has existing statutory authority to address these public policy concerns; 

thus we believe that amending Sarbanes-Oxley is unnecessary. 

5. Transparency of Audit Partners. In October, 2011, the PCAOB issued a 

proposed rule--u/mproving the Transparency of Audits: Proposed Amendments 

to PCAOB Auditing Standards and Form 2" that would require identification of the 

audit partner and certain other independent firms and participants along with the 

percentage of hours worked in the audit report. 

We have appropriately questioned the PCAOB on whether the identification of 

the engagement partner in the audit report will improve audit quality and auditor 

accountability and have expressed concerns about increased liability to, and 

safety of, the individual audit partner. We suggested an alternative that identifies 

the audit partner in firms' annual reports to the PCAOB (Form 2) rather than the 

audit report in SEC Form 10-K. 

The profession also supports providing additional information to investors to 

enhance the understanding of the auditor's role and responsibilities and the audit 

process, including certain information regarding the use of other firms in the 

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audit. We have suggested 1) a higher threshold for disclosure, such as 10 

percent or 20 percent participation which aligns with existing FASB, SEC and 

PCAOB guidance and 2) using ranges to indicate participation as opposed to 

requiring disclosure of precise participation percentages. 

We hope the PCAOB will consider this more balanced, but still robust approach. 

I also want to note two recent regulatory rulemakings where we believe the 

PCAOB and the SEC have adopted rules that overlook the appropriate balance 

between regulation that protects the public and regulation that overly burdens 

businesses and their auditors. 

The first relates to audits of non-public, not-clearing, non-custodial (known as 

"introducing") broker dealers and the second relates to audits of pooled 

investment vehicles ("PIV"). 

Congress explicitly gave the PCAOB in the Dodd-Frank Act the authority to 

determine which nonpublic broker-dealer auditors should be part of an expanded 

regulatory structure that includes PCAOB auditor oversight and inspection. 

Rather than tailoring its approach to those broker-dealers that pose the greatest 

risk, the PCAOB has adopted an interim rule requiring that all auditors of 

nonpublic broker-dealers be registered and inspected. 

We believe that regulations-and the resources to implement those regulations--

should focus on where there is greatest risk to the investing public and that 

auditors of non-pUblic introducing broker-dealers do not pose that risk and, 

therefore, should not be subject to PCAOB oversight and inspection. 

The second issue involves amendments to the SEC's custody rule. In its custody 

rule, the SEC determined that all PIVs must be audited by independent public 

accountants "subject to regular inspection by" the PCAOB. However, some CPA 

firms that previously have specialized in PIV work do not audit public companies 

and, therefore, cannot be subject to PCAOB inspection. This regulation denies 

those CPA firms the ability to continue to audit their PIV clients, which are not 

publicly-traded companies. We do not believe it appropriate for the SEC to 

effectively ban an otherwise qualified firm from conducting this work through its 

rules. 

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Another area of continuing discussion in the policy arena is the requirement for 

auditors to attest to a public company's internal controls over financial reporting 

under section 404(b) of Sarbanes-Oxley. 

The Dodd-Frank Act made the exemption from this auditor attestation 

requirement permanent for public issuers with market capitalizations of less than 

$75 million. In recent months, there have been multiple proposals to raise this 

exemption for larger companies and/or to provide an on-ramp for new public 

companies. While we oppose exemptions to Sarbanes-Oxley section 404(b) for 

existing issuers, we appreciate Congress' effort to promote capital creation for 

small businesses through the more focused approach of the IPO on-ramp 

legislation. 

As I mentioned earlier, effective internal controls are an integral part of an entity's 

financial reporting system. The U.S. Government Accountability Office has 

recognized this concept and requires auditors of entities subject to an audit under 

Generally Accepted Government Auditing Standards to issue a report identifying 

weaknesses in internal control over financial reporting that were noted during the 

financial statement audit. 

Let me complete my remarks by reiterating the CPA profession's foundation of 

commitment to the public interest, our history of objectivity, independence and 

integrity and as well as the important services CPAs provide to U.S. businesses 

of all sizes and to investors and the profession's role in the global economy and 

global capital markets. 

The U.S. retains the most sound and credible financial reporting in the world and 

I am here to assure you that CPAs in all areas of the accounting profession, 

along with the American Institute of CPAs, join you as we seek to advance a 

common mission of promoting the highest quality accounting and auditing 

services that are valuable to the public interest and to the global capital markets. 

Thank you for the opportunity to testify today. 

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ON: "Accounting and Auditing Pending Proposals and Emerging 

Issues n~.l';LH"UH~, Standard Setters and the 

TO: The Subcommittee on 

Enterprises 

DATE: 2012 

Markets and Government Sponsored 
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The US. Chamber of Commerce is the world's largest business federation, 

representing the interests of more than 3 million businesses of all sizes, sectors, and 

regions, as well as state and local chambers and industry associations. 

More than 96 percent of the Chamber's members are small businesses with 

100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, 

virtually all of the nation's largest companies are also active members. We are 

particularly cognizant of the problems of smaller businesses, as well as issues facing 

the business community at large. 

Besides representing a cross-section of the American business community in 

terms of number of employees, the Chamber represents a wide management spectrum 

by type of business and location. Each major classification of American business --

manufacturing, retailing, services, construction, wholesaling, and finance - is 

represented. Also, the Chamber has substantial membership in aliSO states. 

The Chamber's international reach is substantial as well. It believes that global 

interdependence provides an opportunity, not a threat. In addition to the 

US. Chamber of Commerce's 115 American Chambers of Commerce abroad, an 

increasing number of members are engaged in the export and import of both goods 

and services and have ongoing investment activities. The Chamber favors 

strengthened international competitiveness and opposes artificial US. and foreign 

barriers to international business. 

Positions on national issues are developed by a cross-section of Chamber 

members serving on committees, subcommittees, and task forces. More than 1,000 

business people participate in this process. 

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Chairman Garrett, Ranking Member \'Vaters and members of the Capital 

Markets and Government Sponsored Enterprises subcommittee. My name is Tom 

Quaadman, vice president for the Center for Capital Markets Competitiveness at the 

U.S. Chamber of Commerce. The Chamber is the world's largest business federation, 

representing the interests of more than three million businesses and organizations of 

every size, sector and region. I appreciate the opportunity to testify before the 

Subcommittee today 011 behalf of the businesses that the Chamber represents, which 

are investors themselves in our economy. 

We are here to discuss the current issues facing the accounting profession and 

accounting and auditing standard setting. 

Effective financial reporting and internal controls are an important priority for 

the U.S. Chamber of Commerce and one of the reasons why the Chamber established 

the Center for Capital Markets Competitiveness in 2007. In order for businesses to 

grow over the long-term they need to be able to access capital in financial markets 

domestically and abroad. The conveyance of reliable and relevant financial 

information to investors is an important part of that capital formation process. 

Similarly, businesses are investors and active market participants themselves. 

Companies must mitigate risk through derivatives transactions and raise cash to 

ensure continuity of operations and accommodate growth. As active participants in 

the debt and equity markets, companies, like other investors, must have access to 

reliable and relevant financial data that facilitates efficient analysis and decisionmaking. 

Therefore, the work of the Financial Accounting Standards Board ("F ASB"), 

Public Company Accounting Oversight Board ("PCAOB"), and the Securities and 

Exchange Commission ("SEC") to ensure usable, reliable, and relevant financial 

reporting are critical to our free enterprise economy. 

If the United States is to create the 20 million jobs that it needs to revive the 

economy over the next decade, financial reporting must play its crucial role of 

accurately, reliably and efficiendy reflecting relevant economic activity. Some 

advances have been made in improving accounting and auditing standards. But 

unfortunately, over the last two decades, we have also seen ill conceived initiatives. 

Some of these were not just bad policy. They were efforts to redirect accounting and 

auditing standards to advance agendas rather than providing investors and businesses 

with useful information. 

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Dialogue between regulators, the accounting and auditing professionals who 

prepare financial data and the investors who use and rely upon it-including 

American business-is critical to keeping changes and refinements to auditing and 

accounting standards on track toward serving their vital purpose. The Fair Value 

accounting crisis was brought about, in part, by a lack of communication between 

FASB and the business community. A lack of dialogue deprived FASB of useful 

information and critical facts. Consequently, this led to flawed standards that 

prevented financial reports from realistically measuring economic activity. 

In this context, the Fair Value accounting crisis was merely a symptom of a 

larger communications problem-one for which we think FASB has taken efforts to 

correct through regular and meaningful dialogue with stakeholders. However, we are 

concerned that the PCAOB is currently facing a similar communications challenge. 

To elaborate, we have worked with Financial Accounting Foundation 

Chauman Jack Brennan and FASB Chairman Leslie Seidman to facilitate continuous 

on-going communications regarding standards development and other issues of 

importance to accounting. I believe that these communications have been helpful and 

fruitful during this critical phase of the I' ASB convergence projects with the 

International Accounting Standards Board ("lASB"). The objective is not to create 

standards that pick winners or losers in our free enterprise system, but rather to insure 

that the standards are reflective of real world activities and provide investors and 

other users of financial reports with the relevant, reliable and useful data needed to 

make informed decisions and compete on a level playing field. 

Arc all of our concerns addressed in these communications? Of course not. 

Are there bumps in the road? Yes. For instance, we believe that a reversal by FASB 

and IASB of current lease accounting standards could dramatically spike costs for 

companies and weaken a leasing market worth trillions of dollars. Yet, we continue to 

work with I' ASB to solve the problem. By giving stakeholders their voice in the 

process, FASB has developed a level of trust that insures a collaborative partnership 

to share relevant facts to inform the development of standards. This benefits 

everyone and ensures that the evolution of accounting and auditing standards remains 

focused on its specific role in our system of free enterprise. 

The dramatic improvement in communications with the Financial Accounting 

Foundation and FASB has made the convergence projects less contentious than they 

could have been and facilitated world class standards that can help advance capital 

formation globally. This benefits businesses, investors, and our economy. The 

increased communication efforts and process to solicit input, facts, and feedback can 

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setve as a model for the PCAOB in improving its processes and the deployment of 

the resources at its disposal-the majority of which come from public companies. 

This is important because the PCAOB appears to have embarked on an agenda 

that is leading far afield from its specific, but important, mandate to regulate auditors. 

For example, the concept releases on mandatory audit finn rotation and auditor 

discussion and analysis have the Chamber concerned that the PCAOB is engaged in 

mission creep. It is leaving the realm of audit regulation and crossing the threshold of 

regulating corporate governance, a subject area that has been left to state corporate 

law and the Securities Exchange Commission. Moreover, the PCAOB should clarify 

that their recent proposal for auditors to understand executive compensation is for 

risk assessment rather than trying to regulate corporate governance. 

Let's take a look at the history of mandatory audit finn rotation debate: 

• Congress, in debating Sarbanes-Oxley, explicitly declined to enact 

provisions requiring mandatory finn rotation; 

• The General Accounting Office has twice reviewed and rejected the 

need for mandatory finn rotation; 

• .A.cademic studies have demonstrated that mandatory f1t1n rotation may 

hann companies through higher costs and increased incidence of 

undetected fraud; 

• The PCAOB has failed to provide infonnation through the inspections 

process demonstrating a need for mandatory finn rotation; 

• Over 90% of commenter's to the concept release have opposed the 

concept of mandatory finn rotation; and 

• The majority of investors commenting on the concept release also 

opposed mandatory finn rotation. 

The PCAOB's failure to demonstrate any need for mandatory f1t1n rotationmuch less a rationale that outweighs the cogent and consistent concerns raised about 

it by investors, businesses and government entities that have rejected the concept 

leads us to question why valuable resources, time, and monies are being spent on this 

project. They can be better deployed for many other worthwhile endeavors. Indeed, 

statements that this issue ,viiI be worked on a year from now open the PCAOB to 

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potential criticism that a predetermined objective exists even if there is no record to 

support it. A similar zeal to reach a result in the absence of supporting facts or 

analysis caused the D.C. Circuit Court of Appeals to vacate the SEC's proxy access 

rule. 

Such a result is neither good for the PCAOB nor for financial reporting as a 

whole. 

Last month we wrote to d1e PCAOB and SEC with concerns that the PCAOB 

does not have enough dialogue with the business community, and we have proposed 

the creation of a Business Advisory Group to work with the PCAOB from the outset 

along the lines of the dialogue that now exists with the F AF and FASB. Such 

dialogue can prevent concept releases being opposed by 92% of the comments 

submitted and allow a more constructive focus on workable standards tied to the 

PCAOB's mission. A wide range of input and discussion can only enhance the ability 

of the PCAOB to prioritize issues 'W'ithin its purview and address them in a thoughtful 

and balanced manner. 

Other innovations, which we will discuss in greater detail, such as the use of a 

cost benefit analysis can also assist the PCAOB and stakeholders in detemlining the 

importance of issues and the efficacy of proposed solutions in relation to the costs 

and burdens they impose. 

To summarize, for the past twenty years we have seen financial reporting move 

from one crisis to the next. Numerous studies have been conducted with solutions 

seldom implemented. Standards have been written, not to reflect economic activity, 

but in search of a holy grail of purity that is simply unobtainable and sometimes 

counterproductive to good and lawful economic activity. During this time we have 

seen: 

1. A steady decline in the listing of public companies in the United States; and 

2. American companies eschewing the traditional form of public company 

financing and consciously avoiding the American capital markets to raise capital 

through private markets. 

Despite these indications of serious problems, financial reporting policies in the 

United States are still the best in the world. But our competitive advantage as the 

preferred destination for capital formation is eroding. We cannot wait to address the 

issues and correct the problems if we want to ensure our capital markets remain 

efficient and attractive for years to come. 

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The following are among the reforms that need to be taken to retain our 

primacy: 

• Financial Reporting Forum: A PRF should be formed and made up of the 

SEC, FASB, PCAOB, financial regulators, investors (broadly defined), and 

businesses and its mission should be to identifY and propose solutions to 

problems before they reach the crisis stage. This will also provide a mechanism 

to allow for appropriate coordination amongst regulators and input from 

investors and businesses. Congressman Gary Miller had an amendment to 

create an PRF that became a part of the House passed financial ret,>ulatory 

reform bill. The Miller amendment was stripped out by the Dodd-Frank 

Conference Committee. 

• Materiality for Investors: The SEC, P ASB, and PCAOB should develop 

standards of materiality for investors, as well as the scope of outreach to the 

investor community. This will provide perspective on various accounting and 

auditing issues such as the need for restatements on the one end, while framing 

the picture for input on the front end of standard setting. 

• PCAOB, FASB, and Regulator Coordination: A formal, ongoing, and 

transparent dialogue should be created to consider the auditability of 

accounting standards. This would allow for the auditing of accounting 

standards to work in conjunction with standard development. It would also 

provide for the identification and resolution of issues that arise in practice. A 

similar process should be created to ensure that regulators have an 

understanding of standards and that different entities are not working at cross 

purposes. The era of "not my problem" needs to end. 

• Administrative Procedures Act and Federal Advisory Committee Act: 

Recognition should be made that both FASB and PCAOB can have an 

enormous impact on the economy. Accordingly, FASB and PCAOB should 

abide by the same rules of procedure as required by the Administrative 

Procedures Act. In its standard setting activities, it should be required to 

consider the effects of its proposals "on efficiency, competition and capital 

formation" as the SEC is required to do and provide meaningful cost-benefit 

analysis so that it is mindful of the downstream effects of its proposals. 

Additionally, any advisory groups I!ASB and PCAOB form should be balanced 

in representation, open in process and follow the mandates for transparency 

and open deliberation reflected in the FACA. 

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• Formal Pre and Post Implementation Review by FASB: Standards should 

be field tested and put through a rigorous process to identify unintended 

consequences both before and after implementation. This process should 

include the following: 

1. Establishing a nine month period, following the finalization of the 

convergence projects, for F ASB and lASB to work with all financial 

reporting stakeholders to identify transition issues and issue an 

implementation plan; 

2. Establishing an Implementation Issuer Advisory Group made up of 

large cap, mid cap, and small cap public companies and appropriate 

private company representation to advise FASB and IASB on the 

transition issues and implementation plan; 

3. Holding a series of roundtables, in conjunction with the appropriate 

regulators, for all stakeholders to have a voice in identifying issues and 

developing an implementation plan; 

4. Committing to procedural transparency through adherence to the 

Administrative Procedures Act and the cost-benefit analysis required for 

significant rulemakings, as well as disclosure policies established by U.S. 

financial regulators in the wake of the Dodd-Frank Act rulemaking; 

5. Consulting with appropriate financial regulators; and 

6. Developing a formal implementation and post-implementation process 

as proposed by CIFiR. 

• PCAOB Business Roundtables and Formation of Business Advisory 

Group: In the coming weeks the Chamber and other trade associations will 

call upon the PCAOB to hold a roundtable and form a business advisory group 

to understand the role of companies as investors and their views on enhancing 

audit quality and other issues under the PCAOB's purview. Such a group 

should be transparent and follow the standards of F ACA. 

• PCAOB Audit Advisory Group: To provide for current, relevant expertise in 

the standard setting process and facilitate the identification and resolution of 

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issues that arise in practice, the PCAOB should form an audit advisory group 

composed of public company auclitors. 

• Cost Benefit Analysis: In developing accounting and auditing standards, 

F ASB and PCAOB must conduct a cost benefit analysis for investors and 

businesses before moving forward with a proposal. Standards should also 

show a justification for market efficiency and capital formation. 

• Less Reliance on Prescriptive Rule Making: Hand-in-hand with the 

appropriate use of judgment is avoiding a system that is overly prescriptive in 

the formulation and application of standards and rules. The danger of an ever 

increasing number of rules and regulations by which audit firms are required to 

operate and auditors are required to apply has a danger of limiting the 

perspective of audit firms and auditors by displacing the application of 

principles and the exercise of judgment. This has the potential to create a 

system that has a one size fits all approach and check the box mentality that is 

at odds with the ever evolving dynamics of change inherent in our economy 

• Global Standards: The SEC, FASB, and PCAOB should work towards the 

convergence of accounting and auditing standards to create a global system that 

will benefit investors from around the world. This convergence must create 

quality standards and should not adhere to a strict timeline to achieve that goal. 

Additionally, the SEC, and the Administration should continue efforts to 

achieve the international recognition of inspections. 

• Liability: It should be recognized that large, medium, and small audit firms 

are needed, just as our economy needs large, medium, and small financial 

institutions. However, the unique aspects of the industry and the potential for 

catastrophic failure because of liability require a serious effort at liability 

reform, as has been accomplished in other jurisdictions or for other industries 

here in the United States. 

• Ban Mandatory Audit Firm Rotation and keep the PCAOB focused on 

its mission: This is not a matter of auditing regulation. This is a matter of 

corporate governance outside of the PCAOB's realm. Congress should stop 

this effort in its track and refocus the PCA.oB on its core mission. 

The Chamber believes that these reforms would have dramatic benefits and 

provide a resiliency that was lacking during the financial crisis. All stakeholders would 

have the ability to provide input to FASB and PCAOB in an open and transparent 

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manner. Standards would be improved and accounting and auditing would be on the 

same page. The same would be true of the regulators who, with the standard setters, 

would have a better feel for the overlap and interplay of seemingly disparate yet 

interconnected disciplines. 

Finally, let me discuss the Chamber's positions on H.R. 3503 (the 

"Westmoreland Bill") and the draft bill banning mandatory finn rotation ("the 

Fitzpatrick Bill"). We have serious concerns regarding the Westmoreland bill on 

public disciplinary proceedings. First, the current system is one commonly used for 

regulatory proceedings-it is the same system that the Federal Elections Commission 

uses for alleged campaign finance violations. Second, these proceedings affect the 

auditor and the company. Inappropriate disclosures regarding disciplinary 

proceedings will impact the equity value of a company, harming shareholder value for 

investors and a business's capital base. We believe in strong even-handed 

enforcement and would like to have further discussions with Congress to achieve this 

goaL 

The Chamber supports independent standard setting, however we believe that 

recent proposals on mandatory finn rotation, audit committee communications and 

proposals on an auditor discussion and analysis and executive compensation clearly 

are outside the bounds of audit regulation and entering corporate governance as 

discussed before. The Fitzpatrick bill reaffinns the line of demarcation, as established 

in Sarbanes-Oxley, that the PCAOB's jurisdiction is limited to that of an audit 

regulator, while corporate governance and executive compensation reside with the 

SEC or state corporate law. 

*** 

Auditors would be empowered to use their best judgment to impose integrity 

and accountability into the system. Global standards and cross-border cooperation 

will increase the ability of investors to understand a global marketplace, and for 

regulators to better provide for safety and soundness. 

If we want to have transparent financial disclosures, the regulators and standard 

setters need to be transparent themselves. They need to focus on disclosures that are 

relevant and rational, and useful to investors, including business. The Chamber urges 

you to: 

• Mandate more rational and efficient procedures at the standard setting bodies 

with a particular emphasis on improving their transparency and accountability; 

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• Keep these entities focused on their narrow, but important roles. Do not 

permit them to become overlapping and redundant bureaucracies that 

perpetuate a bloated administrative state that stifles the creative energies of its 

citizenry with excessive red tape; 

• Empowering the stakeholders of these entities by ensuring they can engage in 

meaningful dialogue and get reasoned analysis to support new accounting and 

auditing standards; 

• Address the ominous and growing liability issues that threaten the depth of our 

auditing and accounting professions. 

All of these reforms are critical next steps to aligning financial reporting policy 

with America's economic prosperity in the 21" century economy. 

As you move forward to make these reforms, recognize that the purpose of the 

financial reporting system is not to eliminate all risk from economic endeavors. Risk 

is inherent in our free enterprise system. It is a necessary element for innovation and 

the growth opportunities our economy needs to thrive. While we can try to 

strengthen the system, we must recognize that rational and enforceable financial 

reporting policies are designed to help stakeholders evaluate risks through the many 

different perspectives they may have of it. Such a system properly conceived as a 

means to an end and not as an end in itself will help spur long-term economic growth 

and job creation, and the Chamber is willing to work with any and all parties to make 

that a reality. 

I will be happy to take any questions that you may have. 

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Testimony of 

leslie F. Seidman, Chairman 

Financial Accounting Standards Board 

before the 

U.S. House of Representatives Financial Services Subcommittee 

on Capital Markets and Government Sponsored Enterprises 

Accounting and Auditing Oversight: Pending Proposals and Emerging Issues 

Confronting Regulators, Standard Setters and the Economy 

March 28, 2012 
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Introduction 

Chairman Garrett, Ranking Minority Member Waters, and Members of the Subcommittee: 

My name is Leslie Seidman and I am the Chairman of the Financial Accounting Standards Board 

(FASB or Board). I would like to thank you for this opportunity to participate in today's 

important hearing. 

As the Subcommittee examines current issues facing accountants and auditors, I thought it would 

be helpful to outline for you the manner in which accounting standards are developed. In doing 

so, I would like to begin by providing a brief overview of the FASB and its parent organization, 

the Financial Accounting Foundation (FAF). I also want to explain the FASB's robust due 

process and how we remain accountable to our stakeholders. As you requested, I have 

summarized some recent guidance promulgated by the F ASB as well as several of our pending 

projects, including our disclosure framework project and our convergence projects with the 

International Accounting Standards Board (lASB). Finally, I would like to highlight some of the 

changes that we have made to our process to better understand and respond to the issues of 

private companies and not-for-profit organizations. 

TheFASB 

The F ASB is an independent private-sector organization that operates under the oversight of the 

FAF. For nearly 40 years, the FASB has established standards of financial accounting and 

reporting for nongovernmental entities, including both businesses (public and private) and notfor-profit organizations. Those standards are recognized as authoritative, generally accepted 

accounting principles (GAAP) by the U.S. Securities and Exchange Commission (SEC or 

Commission) for public companies and by the American Institute of Certified Public 

Accountants (AICPA) for other nongovernmental entities. 

U.S. GAAP is essential to the efficient functioning of the U.S. economy because investors, 

creditors, donors, and other users of financial reports rely heavily on credible, transparent, 

comparable, and unbiased financial information. In today's dynamic financial markets, the need 

for integrity, transparency, and objectivity in financial reporting is increasingly critical to ensure 

the strength of U.S. capital markets and provide investors with accurate and timely infonnation. 

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In 2002, Congress enacted the Sarbanes-Oxley Act, which included provisions protecting the 

integrity of the F ASB' s accounting standard-setting process. The legislation provided the F ASB 

with an independent, stable source of funding. The legislation mandated an ongoing source of 

funding for the FASB from annual accounting support fees collected from issuers of securities, 

as those issuers are defined in the Sarbanes-Oxley Act. 

It is important to note that although the F ASB has the responsibility to set accounting standards, 

it does not have authority to enforce them. Officers and directors of a company are responsible 

for preparing fmancial reports in accordance with accounting standards. Auditors provide an 

opinion as to whether those officers and directors appropriately applied accounting standards. 

The Public Company Accounting Oversight Board (PCAOB) is charged with ensuring that 

auditors of public companies have performed an audit in accordance with generally accepted 

auditing standards, which include an auditor's analysis of whether a public company has 

complied with appropriate accounting standards. The SEC has the ultimate authority to analyze 

whether public companies have complied with accounting standards. 

The Mission of the F ASB 

The F ASB' s mission is to establish and improve standards of financial accounting and reporting 

that foster financial reporting by nongovernmental entities that provides decision-useful 

information to investors and other users of financial reports. That mission is accomplished 

through a comprehensive and independent process that encourages broad participation, 

objectively considers all stakeholder views, and is subject to oversight by the FAF's Board of 

Trustees. 

We recognize the critical role that reliable financial reporting plays in supporting the efficient 

functioning of the capital markets. Robust financial reporting increases investor confidence, 

which in turn leads to better capital allocation decisions and economic growth. Accounting 

standards are not intended to drive behavior in a particular way; rather, they seek to present 

financial information so that financial statement users can make informed decisions about how to 

best deploy their capital. 

Today, as the U.S. economy continues to recover from the financial crisis and recession, the 

FASB remains committed to ensuring that our nation's financial accounting and reporting 

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standards provide investors with the information they need to confidently invest in the U.S. 

markets. 

To accomplish its mission, the FASB acts to do the following: 

1. Improve the usefulness of financial reporting by focusing on the primary characteristics 

of relevance and reliability and on the qualities of comparability and consistency 

2. Keep standards current to reflect changes in methods of doing business and changes in 

the economic environment 

3. Consider promptly any significant areas of deficiency in financial reporting that might be 

addressed through the standard-setting process 

4. Improve the common understanding of the nature and purposes ofinfonnation contained 

in fmancial reports. 

As it works to develop accounting standards for financial reporting, the F ASB is committed to 

following an open, orderly process that considers the interests of the many who rely on financial 

infonnation. Because we understand that the actions of the F ASB affect so many stakeholders, 

we are steadfastly committed to ensuring that the decision-making process is independent, fair, 

and objective. 

The Standard-Setting Process 

An independent standard-setting process is paramount to producing bigh-quality accounting 

standards, since it relies on the collective judgment of experts, and it is informed by the input of 

all interested parties through a thorough, open, and deliberative process. The F ASB sets 

accounting standards through processes that are open, accord due process to all interested parties, 

and allow for extensive input from all stakeholders. Such extensive due process is required by 

our Rules of Procedure, set by the Board within the parameters of the F AF' s bylaws. Our 

process is similar to the Administrative Procedure Act process used by federal agencies for 

rulemakings but provides far more opportunities for interaction with all interested parties. In 

fact, in recent years, we have significantly expanded our ability to engage with stakeholders in a 

variety of ways. 

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The FASB's extensive due process involves public meetings, public roundtables, field visits or 

field tests, liaison meetings and presentations to interested parties, and the exposure of our 

proposed standards for public comment. The F ASB videocasts its Board meetings and education 

sessions on its website to make it easier for stakeholders to observe our decision-making 

process. The F ASB also creates podcasts and webcasts to provide short, targeted summaries of 

our proposals and new standards so that people can quickly assess whether they have an interest 

and want to weigh in. We also have been proactively reaching out to meet with stakeholders, 

including a wide range of investors and reporting entities, to discuss our proposals to help us to 

assess whether the proposals will lead to better information as well as to assess the related costs. 

Those interactive meetings allow the F ASB and its staff to ask questions to better understand 

why a person holds a particular view, which can accelerate the identification of issues and 

possible solutions. 

The F ASB proactively meets with stakeholders, including a wide range of investors, auditors, 

and reporting entities, to identify implementation issues with existing standards. Those meetings 

with stakeholders help us to assess whether U.S. GAAP is providing useful information and also 

to assess the related costs. 

The F ASB conducts outreach on a frequent and regular basis with its numerous advisory groups. 

The primary role of advisory group members is to share their views and experience with the 

Board on matters related to practice and implementation of new standards, projects on the 

Board's agenda, possible new agenda items, and strategic and other matters. 

In addition to the FASB's advisory groups, the Emerging Issues Task Force (EITF or Task 

Force) assists the FASB in improving fmancial reporting through the timely identification, 

discussion, and resolution of financial accounting issues relating to U.S. GAAP. The EITF also 

was designed to promulgate implementation guidance for accounting standards to reduce 

diversity in accounting practice on a timely basis. The EITF assists the F ASB in addressing 

implementation, application, or other emerging issues that can be analyzed within existing U.S. 

GAAP. Task Force members are drawn from a cross section of the FASB's stakeholders, 

including auditors, preparers, and users of financial statements. The chief accountant or the 

deputy chief accountant of the SEC attends Task Force meetings regularly as an observer with 

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the privilege of the floor. The structure of the EITF is designed to include persons in a position 

to be aware of emerging issues before they become widespread and before divergent practices 

become entrenched. 

The FASB also meets regularly with the staff of the SEC and the PCAOB. Additionally, since 

banking regulators have a keen interest in U.S. GAAP financial statements as a starting point in 

assessing the safety and soundness of financial institutions, we meet with them on a quarterly 

basis and otherwise, as appropriate. We also understand Congress's great interest and regularly 

brief Members and their staffs on accounting developments. 

In short, the F ASB actively seeks input from all of its stakeholders on proposals and processes 

and we are listening to them. Wide consultation provides the opportunity for all stakeholder 

voices to be heard and considered, the identification of unintended consequences, and, 

ultimately, broad acceptance of the standards that are adopted. The Board's wide consultation 

also helps it to assess whether the benefits to users of imprOVed information from proposed 

changes outweigh the costs of the changes to preparers and others. 

The FASB Chairman's Reports for all four quarters of2011, which enumerate the FASB's 

technical activities, its education and communication activities, and its various forms of outreach 

with stakeholders, are provided as Attachment 1. 

Oversigbt of FASB 

The FASB's accountability derives from oversight at two levels. First, the Board is overseen by 

the independent Board of Trustees of the FAF. Organized in 1972, the FAF is an independent, 

private-sector, not-for-profit organization. The FAF exercises its authority by having 

responsibility for oversight, administration, and finances of the FASB and its sister organization 

the Governmental Accounting Standards Board (GASB). The F AF also has responsibility for the 

following: 

1. Selecting the members of the FASB, the GASB, and their respective Advisory Councils 

2. Overseeing the FASB's and the GASB's Advisory Councils (including their 

administration and finances) 

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3. Overseeing the effectiveness of the FASB's and the GASB's standard-setting processes 

and holding the Boards accountable for those processes 

4. Protecting the independence and integrity of the standard-setting process 

5. Educating stakeholders about those standards. 

Second, the FASB also is subject to oversight by the SEC with respect to standard setting for 

public companies. The SEC has the statutory authority to establish fmancial accounting and 

reporting standards for publicly held enterprises. For nearly 40 years, the SEC has looked to the 

private sector to set accounting standards. In 2003, the SEC issued a Policy Statement, 

Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter, which 

reaffirms its longstanding relationship with the F ASB. 

Additional information about the F ASB and the F AF can be found in the 20 I 0 Annual Report of 

the F AF, which is available on the FAF website. 

F ASB Activities 

One of the significant challenges facing our fmancial reporting system is the need to improve the 

transparency and overall usefulness of reported financial information to investors and other users 

of fmancial reports and reduce complexity. The F ASB is addressing this challenge in a number 

of ways. First, the F ASB has completed several projects to improve information provided in 

financial reports. Second, the FASB continues its work to improve accounting requirements in 

several areas, including its convergence projects to improve U.S. GAAP and International 

Financial Reporting Standards (IFRS) and narrow the differences between the two. Third, the 

F ASB has made numerous process changes to improve its ability to understand and act upon 

private company concerns and the not-for-profit sector. Fourth, the FASB is working on a 

disclosure framework project intended to increase the utility of information disclosed in the 

fmancial statements. Lastly, the F ASB continues to enhance the FASB Accounting Standards 

Codijication@ (Codification), which is the source of authoritative U.S. GAAP recognized by the 

F ASB to be applied by nongovernmental entities, and the XBRL (eXtensible Business Reporting 

Language) U.S. GAAP financial reporting taxonomy. 

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Recently Completed Standard-Setting Activities 

The FASB recently completed a number of amendments to U.S. GAAP through the issuance of 

Accounting Standards Updates (Updates) to improve accounting and disclosure requirements. 

Some of the changes affect how companies recognize and present certain transactions in their 

financial statements and other changes enhance footnote disclosures. 

1. Participation in multiemployer plans to be disclosed. Previous accounting guidance 

required a company to disclose only its historical contributions made to multiemployer 

pension plans. The F ASB introduced new disclosure requirements to increase awareness 

of a company's commitments and risks involved with participating in multiemployer 

pension plans. l The new disclosures improve transparency into how a company's future 

cash flows might be affected by its participation in a multiemployer pension plan. 

2. Qualitative assessment allowed for goodwill impairment test. Goodwill impairment 

testing affects a large number of companies. Previous accounting guidance required 

companies to calculate the fair value of a business as part of a two-step goodwill 

impairment test. The FASB simplified the impairment test by introducing an initial 

qualitative assessment.2 Under that simplified approach, a company is not required to 

calculate the fair value of the business unless that company determines that it is more 

likely than not that the fair value of the business is less than its carrying amount. 

3. Presentation of other comprehensive income (OCI) is enhanced.3 All companies that 

report iterns of OCI will be affected by this change. OCI items may no longer be 

presented in the statement of stockholders' equity. Instead, OCI will be presented after 

net income in either a single statement of comprehensive income or in two separate but 

consecutive statements. 

1 FASB Accounting Standards Update No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans 

(Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan. 

2 FASB Accounting Standards Update No. 2011-{)8, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill 

for Impairment. 

3 FASB Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of 

Comprehensive Income. 

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4. Amendments made to fair valne measurement requirements. The amendments result 

in common fair value definitions and disclosure requirements in U.S. GAAP and IFRS.4 

Among other things, the amendments clarify that a reporting entity should disclose 

quantitative information about inputs used in certain fair value measurements. 

5. Offsetting of derivatives, financial assets, and financialliabilities.5 To facilitate 

comparison between companies that use U.S. GAAP versus companies that use IFRS, the 

F ASB and the International Accounting Standards Board (IASB) issued common 

disclosures about derivative contracts and other fmancial instruments. The new 

disclosures will require (a) both gross and net information about instruments and 

transactions eligible for offset in the balance sheet and (b) information about instruments 

and transactions subject to master netting arrangements or similar arrangements. 

6. Additional guidance abont troubled debt restructnrings. Given the recent economic 

downturn, the volume of debt restructured by creditors has increased. The FASB issued 

additional guidance to help creditors to determine whether debt restructurings constitute 

troubled debt restructurings, which are subject to impairment guidance and supplemental 

disclosure requirements.6 

7. Insurance companies----(!hange in the accounting for deferred acquisition costs. 

Certain costs incurred by insurance entities qualify as deferred acquisition costs and can 

be capitalized in the acquisition of new and renewal insurance contracts rather than 

expensed when incurred. Under the amendments, fewer costs qualify as deferred 

acquisition costs; costs associated with the successful acquisition of a contract are now 

the only acquisition costs eligible for deferral. 7 

8. Change in how effective control is determined for repnrchase agreements. Under 

previous guidance, a company had to consider the extent of collateral maintained in its 

assessment of whether a repurchase agreement should be accounted for as a sale or 

4 fASB Accounting Standards Update No. 2011..(J4, Fair Value Measurement (Topic 820): Amendments to Achieve 

Common fair Value Measurement and Disclosure Requirements in U.S. GMP and IFRSs. 

5 fASB Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets 

and Liabilities. 

6 FASB Accounting Standards Update No. 2011..(J2, Receivables (Topic 310): A Creditor'S Determination a/Whether 

a Restructuring Is a Troubled Debt Restructuring. 

7 fASB Accounting Standards Update No. 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs 

Associated with Acquiring or Renewing Insurance Contracts. 

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secured borrowing. The F ASB concluded that the criterion pertaining to an exchange of 

collateral should not be a detennining mctor when evaluating the accounting for a 

repurchase agreement. As a result, some repurchase transactions will be reported as 

secured borrowings rather than as sales.8 That change will affect leverage and expense 

ratios. 

A list of recent Updates issued by the FASB is provided as Attachment 2. 

Ongoing Standard-Setting Activities 

The F ASB has a number of ongoing projects to improve accounting and disclosure requirements 

in several areas, including its projects to improve U.S. GAAP and IFRS and narrow the 

differences between the two. 

The current Technical Plan for all of the FASB projects underway Goint and standalone) is 

provided as Attachment 3. 

Convergence Activities with the IASB 

The F ASB has long supported the goal of developing high-quality, comparable global 

accounting standards based on the 2002 Norwalk Agreement and the 2006 Memorandum of 

Understanding (MOU) (as updated in 2008). 

The MOU reflects the decision by the FASB and the IASB, with concurrence of the SEC and the 

European Commission, that their resources should focus on developing converged and improVed 

standards in those areas in U.S. GAAP and IFRS that were most in need of improvement. To 

that end, the F ASB and the IASB have substantially converged accounting standards in a number 

of areas including business combinations, noncontrolling interests, fair value measurements, 

borrowing costs, segment reporting, stock compensation, and nonmonetary exchanges. 

However, significant differences remain, and the F ASB and the IASB are working together and 

making progress on the four remaining priority projects (revenue recognition, leasing, financial 

B FASB Accounting Standards Update No. 201HJ3, Transfers and Servicing (Topic 8601: Reconsideration of Effective 

Control for Repurchase Agreements. 

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instrumcnts, and insurance). In areas in which we have not yet reached converged solutions, we 

are rcviewing the differences to see if further convergence can be achieved. 

While the FASB is committed to working at a dcliberate pacc to develop improved, converged, 

and sustainablc standards, it is equally committed to making sure that the standards result in 

improvcd financial information for investors and that companies and auditors undcrstand the new 

requirements and can implemcnt them in an ordcrly manncr. Thosc proposed standards go to the 

core ofa company's opcrating metrics, and the FASB is committcd to ensuring that stakcholders 

have ample opportunities to comment on proposcd changes and identify possiblc implcmentation 

issucs bcfore the standards are finalized. The four priority convergence projects arc dcscribed 

below. 

Revenue Recognition 

In November 2011, the FASB and the IASB issucd a revised Exposure Draft? of a 

comprehcnsive principle and application guidance for when and how to recognize revenue. The 

revised Exposure Draft reaffirms the principle for revenue recognition from the first Exposure 

Draft (issued June 2010) but, based on the feedback we received, we made changes that were 

aimed at reducing complexity and adding clarity to the basic concepts. The Boards decided to 

reexpose the revised proposal for public comment as a quality control measure because revenue 

is such an important indicator of performance for virtually every company around the world. 

The F ASB has taken a number of steps to inform stakeholders about the revised proposal. The 

F ASB website contains a webcast explaining the major provisions, a wcbcast answering 

frequently asked questions, and a reference tool comparing current requirements with the 

proposed requirements and highlighting the industries that would be affected. 

Since the issuance of the revised Exposure Draft, the F ASB also has been conducting extensive 

outreach meetings with stakeholders around the globe to help them understand the proposal and 

the changes that we intend to help them formulate their views. We have a number of roundtables 

planned in locations around the world to discuss feedback on the proposed changes. We also 

9 Proposed FASB Accounting Standards Update, Revenue Recognition (Topic 605): Revenue from Controds with 

Customers, and IASB Exposure Draft, Revenuefrom Contracts with Customers. 

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have a simple electronic feedback form on the website, which is ideal for targeted feedback on a 

narrow point or an overall statement in which you agree with the proposal or in which your 

previous concerns have been addressed. 

The Boards expect to begin joint redeliberations in the second quarter, with a goal of completing 

those discussions by the end of the year. However, that timing depends on the nature of the 

feedback we receive and how long it takes to work it through. Based on the current plan, we 

expect to issue a converged new standard in the first quarter of2013. 

Leasing 

The Boards were urged to consider changes to existing accounting standards on leasing for a few 

reasons including (I) the feedback from investors that significant lease obligations were not 

being reported on the balance sheet, (2) the complexity of the existing guidance, and (3) to 

converge the guidance in U.S. GAAP and IFRS. In August 2010, the Boards issued an Exposure 

DraftlO proposing that the rights and obligations relating to leases be reported on a company's 

balance sheet. For the last several months, the FASB and the IASB have been jointly 

considering the feedback we received on that original Exposure Draft. Based on that feedback, 

the Boards have already decided to make (a) nwnerous changes to the original proposal, which 

largely address issues relating to complexity, and (b) clarifications of the scope of the proposed 

standard. The Boards have reaffirmed their decision that the rights and obligations relating to 

leases belong on the balance sheet, which has been widely supported by investors. 

However, the Boards have continued to receive feedback indicating concerns with the income 

statement effects resulting from the proposed right-of-use model. Many stakeholders, including 

preparers and some investors, do not view certain types ofleases as being similar to a purchase 

and financing of part of an asset. Both Boards are trying to work through those concerns. The 

Boards have asked the staff to conduct outreach to evaluate the decision usefulness and 

operationality of two alternative approaches before they decide how to proceed. Leasing is a 

very pervasive transaction, and we want to make sure that we have carefully considered the 

concerns that have been raised before we move forward with another Exposure Draft. 

10 Proposed FASS Accounting Standards Update, Leases (ropic840), and lASS Exposure Draft, Leases. 

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On the lessor side, the Boards also have revisited the conclusions in the first Exposure Draft to 

address the concerns that had been raised. We decided to apply a proportionate sale model for 

all leases except leases of investment property, which would be excluded from the scope. 

However, given the potential changes being considered for lessees, the Boards asked the staff to 

explore whether there should be symmetrical accounting for lessors, which could have 

implications for the Board's previous decisions for lessors. The staff will gather input on those 

issues, and we expect to continue our discussions with the IASB in May 2012. 

This additional analysis will extend the timetable on leasing by a few months. If the Boards 

reach a decision in May 2012, then we would expect to conclude our discussions in the second 

quarter, with a revised Exposure Draft in the third quarter of2012. During the comment period, 

the Boards plan to conduct additional outreach with investors and a wide range of companies that 

lease property and equipment. The purpose of the outreach is to help people understand the 

revised proposal, gain an understanding of the expected costs of implementation, and to gather 

additional input from investors and other users of financial statements about whether the 

resulting information is useful in their decision making. At this point, we would anticipate a 

fmal standard in mid 2013. 

AccD/lllting fOT Financial Instruments 

The financial instruments project aims to provide a more timely and fulsome description of a 

company's involvement in financial instruments. The project addresses how to (1) classify and 

measure fmancial instruments, (2) account for impairments (loan loss provisioning), and (3) 

improve reporting of hedging activities. The Boards' overall objective is to simplify, improve, 

and converge the accounting for financial instruments. Differing timetables and priorities led the 

F ASB and the IASB to develop separate proposals. The IASB issued final guidance on 

classification and measurement (lFRS 9, Financial Instruments) as well as separate proposals on 

impairment and hedging, while the F ASB issued a comprehensive Exposure Dmft in May 

2010. 11 

11 Proposed FASB Accounting Standards Update, Accounting for Financia/lnstruments and Revisions to the 

Accounting [or Derivative Instrument and Hedging Activities-Financial Instruments (Tapic 825) and Derivatives 

and Hedging (Tapic 815). 

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Classification and measurement of financial instruments 

The May 2010 F ASB Exposure Draft on financial instnunents proposed a much greater use of 

fair value measurement for financial instruments than exists under current accounting guidance 

or under IFRS 9. The feedback that the FASB received on that proposal indicated that the vast 

majority of investors, reporting entities, and other stakeholders did not think that fair value was 

the most appropriate measurement attribute for some financial instnunents in the balance sheet. 

They suggested various ways to enhance the information through a more robust impairment 

approach and expanded disclosures, particularly for loans. Based on that feedback, in its 

deliberations to date, the F ASB has tentatively decided that at least some assets should qualifY 

for cost accounting based on the characteristics of the instnunent and the entity's business 

strategy in holding them. 

In November 2011, the IASB decided to consider making limited modifications to IFRS 9. 'That 

decision gives the Boards an opportunity to try to narrow the differences with the tentative 

classification and measurement model that the F ASB has been developing. The Boards began 

joint discussions at their February 2012 meeting, and plan to continue those joint discussions 

over the next few months. 

Impairment of financial instruments 

The F ASB and the IASB initially proposed different impairment models, but are now developing 

a joint approach to credit impairment based on variations of their previous proposals. This joint 

approach is based on expected losses and is more forward looking than the current incurred loss 

approach. Under this joint approach, companies would recognize losses as a loan deteriorates 

based on supportable information (for example, past events, current conditions, and reasonable 

and supportable forecasts) that is consistent with externally available information and considered 

relevant in measuring the credit impairment allowance. (Under current U.S. GAAP, an 

impairment loss is not recognized until it is probable.) 

The joint staff team continues to perform extensive outreach to determine whether the approach 

is operational. The current plan is to complete joint deliberations on impairment in the second 

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quarter of2012 and issue a converged Exposure Draft in the second half of 2012. Based on that 

timetable, we would expect to fmalize the new impainnent requirements in the fIrst half of 20 13. 

Hedging 

The FASB plans to consider whether to expand its evaluation of hedge accounting issues 

following the joint discussions of classification and measurement issues. 

Risk disclosures about financial instruments 

In response to significant investor feedback on the FASB's May 2010 Exposure Draft on 

fmancial instruments, the F ASB has developed new disclosure requirements about liquidity and 

interest rate risk. The F ASB plans to expose those proposed disclosure requirements in the 

second quarter of 20 12. 

Repurchase Agreements 

Current accounting guidance and current transaction structures result in most repurchase 

agreements being accounted for as secured borrowing transactions with only certain types of 

transactions being accounted for as sale transactions. Those are repurchase agreements 

involving the return of a security that is different from the security originally transferred and 

repo-to-maturity transactions. 

Concerns about the accounting for repa-to-maturity transactions had not been raised in the past, 

even when the FASB previously considered certain aspects of the accounting for repurchase 

agreements, as recently as 2010. However, in late December 20 II, the FASB was made aware 

of concerns about the accounting for repo-to-maturity transactions. In January 2012, the staff in 

the SEC's Office of the Chief Accountant and the staff at the FASB began evaluating those 

concerns. The FASB staff commenced outreach activities with various stakeholders to better 

understand current practices related to repo-to-maturity agreements. Our outreach indicates that 

market practices have changed over the years since this accounting guidance was established (in 

1996). For example, while historically, repurchase agreements involved mostly U.S. Treasury 

and agency securities, the range of debt instruments has broadened to include other types of debt 

securities, which may be less creditworthy and consequently affect how those transactions 

operate and how investors consider the risks associated with them. 

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Accordingly, on March 21, 2012, the FASB added a project to its agenda to reconsider the 

accounting and disclosure guidance for repurchase agreements and similar transactions. In 

keeping with our due process procedures, we will hold a series of public meetings to deliberate 

the issues raised and expose a proposed standard for public comment. Subject to nature of our 

deliberations and the feedback we receive, we expect that a final standard could be issued in 

2012. 

Insurance 

The FASB and the IASB have been working together to develop a converged global standard on 

accounting for insurance contracts. In general, the Boards are developing a model that would 

reflect current estimates of the amount necessary to fulfill an insurance obligation. However, we 

have not reached consistent conclusions about several elements of the model. There is a strong 

desire for a global standard on insurance, and the Boards are undertaking an effort to gain a 

deeper understanding of the decisions taken by each Board to identify potential opportunities to 

resolve differences. Once we have worked through some of those issues, we will evaluate the 

prospects for further convergence and decide how to proceed. 

The F ASB and the IASB are at different points in the process on the insurance contracts project. 

The FASB is deVeloping its first Exposure Draft, whereas the IASB has already issued an 

Exposure Draft, Insurance Contracts. We currently estimate that we will conclude our major 

technical discussions in the second quarter of 20 12, with a F ASB Exposure Draft in the second 

half of2012. The IASB will determine whether to reexpose the changes they made during 

redeliberations. 

Further Convergence of InternaJionai Standards 

Many stakeholders, including leaders of the 0-20 nations and the SEC, have called for the F ASB 

and the IASB to continue efforts to converge accounting standards in key areas. On May 26, 

2011, the SEC Staff issued a paper titled, Exploring a Possible Method of Incorporation under 

the SEC's Work Plan for the Consideration of Incorporating International Financial Reporting 

Standards into the Financial Reporting Systemfor U.S. Issuers. The SEC Staff Paper described 

an approach to incorporation colloquially referred to as "Condorsement". The FAF Board of 

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Trustees and the FASB Board members carefully considered the proposed approach and the 

comments made by U.S. stakeholders to the SEC about the approach. In November 2011, the 

Chairman of the FAF, on behalf of the Board of Trustees, submitted a letter to the SEC 

supporting an incorporation approach with some recommended modifications and clarifications 

intended to address the concerns that were raised by many who offered comments to the SEC 

Staff. 12 

Private Company Accounting 

Privately held companies remain very important to the F ASB in achieving its mission. The 

F ASB recently has made numerous process changes to improve its ability to understand and act 

upon private company concerns. For example, the F ASB did the following: 

I. Welcomed the FAP's appointment ofa Board member with a private company preparer 

background and another Board member with significant experience investing in and 

auditing private companies 

2. Assigned private company liaisons to each project team to better provide input on how 

proposed changes to U.S. GAAP would affect private companies 

3. Held roundtables comprised only of private company stakeholders to discuss proposed 

changes to U.S. GAAP 

4. Increased participation in conferences targeting private company stakeholders 

5. Developed an electronic feedback form to enable stakeholders to more easily respond to 

proposed changes to U.S. GAAP 

6. Increased the use of web casts and podcasts about proposed changes to U.S. GAAP to 

increase awareness of our activities and encourage participation. 

In addition, the F ASB has increased its face-to-face interactions with its nonpublic advisory 

groups, the Small Business Advisory Council (SBAC) and the Private Company Financial 

Reporting Committee (pCFRC). The SBAC focuses on increasing the opportunities for small 

business community members (both public and private) to share their ideas, knowledge, and 

"Brennan, John J., Letter to Elizabeth M. Murphy, Secretary, Securities and Exchange CommiSSion, November 15, 

2011. http://www.sec.gov/comments/4-600/4600-158.odf. 

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experience with the FASB, as well as with the other group members. The PCFRC represents 

privately held business entities and focuses on how standard setting affects day-to-day technical 

activities and procedures from a costlbenefit perspective. 

The F ASB has taken these steps to make private company concerns an integral part of every 

standard-setting deliberation it undertakes. The process changes noted above have led to recent 

changes in accounting standards on goodwill impainnent13 and disclosures about multiemployer 

pension plans. 14 In addition, we have two projects underway that focus on private companies. 

The first is to ensure that we have a common understanding of when differences are appropriate 

for private companies versus public companies in U.S. GAAP. We have heard a wide range of 

views-at one end, the perspective that "significant changes are required" and at the other end, 

the view that ''there should be no differences in recognition and measurement." 

To try to build consensus on this core issue, the FASB staff has been developing a decisionmaking framework that will describe a number of the distinguishing characteristics of private 

companies and then suggest how those characteristics might affect the various types of 

accounting and disclosure issues that we typically address. The staff has been working with a 

resource group of private company professionals to vet these ideas, and our plan is to issue a 

draft framework in the second quarter for public comment. 

A related issue is the definition of a private company. The F ASB recently added a project to 

clarify the definition for a few reasons. First, it will help establish which entities have specific 

attributes that would potentially warrant a difference in reporting. Second, we plan to address a 

number of practice issues that have emerged over the years, including some recent changes in 

legislation about filing requirements for various types of entities. And third, there are a number 

of existing definitions of a nonpublic entity in U.S. GAAP, and we see an opportunity to reduce 

complexity in that area. 

In addition to the FASB's efforts, the FAF Board of Trustees has taken a number of steps to 

address private company concerns. Most recently, the trustees developed a plan to establish a 

" Update 2011-08. 

14 Update 2011-09. 

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l'rivate Company Standards Improvement Council (PCSIC).15 The public comment period for 

the trustees' proposed plan ended on January 14,2012. The trustees conducted four roundtables 

and other forms of outreach across the country this year and will make a final decision after 

reviewing and considering public input. 

Not-/or-Profit Accounting 

The FASB has a long-standing commitment to the not-for-profit sector as part of its standardsetting process for U.S. GAAP. Over the years, the FASB has addressed the accounting and 

reporting needs ofthe sector, both for transactions that are unique to the sector (for examplc, 

contributions received) and for transactions that it has in common with public and private 

business enterprises (for example, employee postretirement benefit obligations). The FASB has 

staff dedicated to advising the Board and other staff members on issues pertinent to the not-forprofit sector and communicating with members of the sector. To reinforce and broaden such 

consultation and communication, the FASB created a Not-for-Profit Advisory Committee (NAC) 

in 2009. The NAC serves as a standing resource for the FASB in obtaining input from the notfor-profit sector on existing guidance, current and proposed technical agenda projects, and longer 

term issues affecting those organizations. 

With the help of the NAC, the FASB will reexamine existing standards to improve the way 

donor restrictions are considered in the presentation of net assets and to provide more relevant 

information about a nonprofit's liquidity, financial performance, and cash flows. The F ASB 

plans to start discussing those issues in the second quarter of 20 12. F ASB staff also will be 

conducting research about best practices followed by nonprofits to "tell their story" about their 

financial health and the overall effectiveness of their organizations. The EITF also is currently 

working to address two accounting issues unique to the not-for-profit sector. 

Disclosure Framework 

Stakeholders have expressed concerns about disclosure overload or, often, disclosure 

ineffectiveness. In response to those concerns, the FASB has added a disclosure framework 

15 Finanoal Accounting Foundation, Plan to Establish the Private Company Standards Improvement Council, 

October 4, 2011. See Attachment 4. 

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project to its agenda We have been working to develop a framework to identify what 

information is most informative to users of fmancial statements. The framework would guide 

the Board in future decisions about disclosure requirements, but it also would provide a guide for 

companies on how to exercise discretion, to make the information presented most relevant at any 

point in time. 

The second objective is to seek ways to better integrate information provided in financial 

statements, Management Discussion & Analysis (MD&A), and other parts of a reporting entity's 

financial reporting package. The intention is to promote meaningful communication and avoid 

repetition wherever possible. The desired results are an increase in the utility ofthe information 

disclosed and a net reduction in volume. 

The F ASB is working cooperatively with a few European standard-setting bodies and with the 

assistance of a U.S.-based resource group. We currently expect to issue a discussion document 

for public commentary in mid 2012. We plan to review existing disclosure requirements as well, 

but will consider the feedback on the proposed framework fIrSt. 

FASB Accounting Standards Codijlcation® 

In 2009, the F ASB officially launched the Codification as the source of authoritative 

nongovernmental U.S. GAAP. This was a milestone event for the FASB and the U.S. financial 

reporting system, ushering in a new era of modern accounting research to accounting and 

financial reporting professionals, as well as to analysts and investors. The Codification's launch 

culminated a multiyear effort to make the U.S. GAAP literature more accessible and user 

friendly. Instead of U.S. GAAP standards scattered among many pronouncements issued by 

various standard setters over the years, the Codification provides constituents with one topically 

organized, easily accessible online research system. 

With the launch of the Codification, the F ASB is no longer adding numbered Statements, 

Interpretations, FASB Staff Positions, and the like to U.S. GAAP but, rather, is issuing Updates 

that contain amendments to the relevant sections of the Codification. 

The new system significantly reduces the amount of time and effort required to research 

accounting issues, mitigates the risk of noncompliance with standards through improved 

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usability of the literature, provides accurate information with real-time updates as new standards 

are released, and assists the F ASB with the research efforts and literature amendments required 

during the standard-setting process. 

To monitor the effectiveness of the Codification, the Codification system allows users to submit 

content feedback. In addition, the FASB meets with stakeholders to discuss concerns about the 

Codification and recently solicited feedback via a user survey. The F ASB staff reviews feedback 

on the Codification in an ongoing manner and the Board periodically issues technical corrections 

to update the Codification to address feedback received. 

u.s. GMP Financial Reporting Taxonomy 

The U.S. GAAP Financial Reporting Taxonomy is a list of computer-readable tags in XBRL that 

allows companies to label precisely the thousands of pieces of financial data that are included in 

typical long-form fmancial statements and related footnote disclosures. (XBRL is a standard for 

tagging business and fmancial reports to increase the transparency and accessibility of business 

information by using a uniform format.) The tags allow computers to automatically search for 

and assemble data so those data can be readily accessed and analyzed by investors, analysts, 

journalists, and the SEC staff. The FASB's development of the taxonomy is investor-focused 

and its use has increased substantially over the past few years. As a result, the F ASB is 

continually striving to understand how the information is used by investors and other users and 

has initiated some mechanisms such as the FASB Taxonomy Advisory Group (made up of 

analysts, data aggregators, accounting firms, service providers, and preparers) to advise it on 

these matters. The F ASB also launched an online review and comment system to make it easier 

for stakeholders to submit comments on the U.S. GAAP Financial Reporting Taxonomy. 

Conclusion 

Thank you for the opportunity to provide a brief overview of the FASB and its many pending 

projects and initiatives. I would be pleased to answer any questions. 

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Attachments: 

1. The FASB Chairman's Reports for 2011 

2. List of ASUs issued by the FASB since Januaryl, 2011 

3. Current Technical Plan for all of the FASB projects underway Goint and standalone 

4. Financial Accounting Foundation, Plan to Establish the Private Company Standards 

Improvement Council, October 4, 2011. 

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REPORT OF THE FASB CHAIRMAN 

TO THE FINANCIAL ACCOUNTING FOUNDA nON 

January 1,2011 through March 31, 2011 

ITEM 1: TECHNICAL ACTIVITIES 

BOARD AND STAFF ACTIVITIES 

a. Final Document Issued: 

1. Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of 

the Effective Date of Disclosures about Troubled Debt Restructurings in Update 

No. 2010-20 (issued January 19,2011). 

b. Exposure Documents Issued: 

1. Proposed Accounting Standards Update, Balance Sheet (Topic 210): Offsetting 

(issued January 28, 2011). Comment deadline: April 28, 2011. 

2. Supplementary Document, Accountingfor Financial Instruments and Revisions to 

the Accounting for Derivative Instruments and Hedging Activities-Impairment 

(issued January 31, 2011~ Comment deadline: April I, 201l. 

3. Discussion Paper, Invitation to Comment-Selected Issues about Hedge 

Accounting (including IASB Exposure Draft, Hedge Accounting) (issued February 

9,2011). Comment deadline: April 25, 2011. 

c. From time to time, the FASB issues Accounting Standards Updates to amend the 

nonauthoritative portions of the FASB Accounting Standards Codification® (such as 

the nonauthoritative SEC content). No such Updates were issued this quarter. 

d. No new projects were added to the Technical Agenda. 

e. An agenda request to add a project to the Technical Agenda on the definition of a 

nonpublic entity was considered but declined. 

f. No projects were removed from the Technical Agenda. 

g. Outreach Activities-Public Roundtable Meetings. The F ASB held the following 

public roundtable meetings: 

1. Four public roundtable meetings were held to discuss the Exposure Draft on 

Leases. One of those roundtable meetings, held in Chicago, was composed solely 

of nonpublic company participants. 

h. Outreach Activities-Meetings ofFASB Standing Advisory Groups: 

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1. Financial Accounting Standards Advisory Council (F ASAC) meeting. Seven 

Board members and several F ASB staff members met with F ASAC in March to 

discuss the Board's projects on Accounting for Financial Instruments, Revenue 

Recognition, and Leases. Participants also discussed their views about issues that 

the F ASB should consider in setting its future agenda, once it completes the 

current priority projects. 

2. Investors Technical Advisory Committee (IT AC) meeting. Five Board members 

and several F ASB staff members met with ITA C in an open meeting in January to 

discuss the Board's projects on Leases and Accounting for Financial Instruments 

and the Discussion Paper on Effective Dates and Transition Methods. 

Participants also discussed the need for a potential future F ASB project on the 

Accounting for Pensions. 

3. Not-for-Profit Advisory Committee (NAC) meeting. Two Board members and 

several staff members met with NAC members in an open meeting to discuss the 

definition of public and private entities, the reporting model for not-for-profit 

organizations, the Board's projects on Revenue Recognition and Leases, and other 

matters of interest. 

i. Outreach Activities-Other Consultations with Stakeholders: 

I. National Association of College and University Business Officers (NACUBO). 

Five Board members and several staff members met in an open meeting with 

representatives ofthe NACUBO's Accounting Principles Council in January. 

Participants discussed what readers of higher education financial statement want 

to know, focusing on both public and nonpublic entities. Participants also 

discussed the Board's projects on Accounting for Financial Instnunents, Revenue 

Recognition, and Leases, as well as feedback on the classification requirements 

for net asset by not-for-profit organizations. 

2. Chartered Financial Analysts Institute (CF A). Five Board members and several 

staff members met in an open meeting with representatives of the CFA's 

Corporate Disclosure Policy Committee in February. Participants discussed 

individual and cross-cutting issues on the priority projects. Participants also 

discussed the Board's projects on Disclosure Framework, Effective Dates and 

Transition Methods, Financial Statement Presentation, Loss Contingencies, and 

Investment Properties. 

3. Three F ASB members met privately with representatives from the Campaign for 

Quality Construction (CQC) and the Mechanical Contractors Association of 

America (MCAA) to discuss the ongoing project on Disclosures about an 

Employer's Participation in a Multiemployer Plan. 

4. Two F ASB members met privately with representatives from the National 

Council of Real Estate Investment Fiduciaries (NCREIF) to discuss the ongoing 

project on Investment Properties. 

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j. Other significant project-specific outreach activities: 

1. Offsetting financial assets and fmancialliabilities-representatives of the FASB 

participated in over 25 calls and other meetings with various groups of investors, 

preparers, and auditors. 

2. Revenue recognition-the project team continued their targeted outreach program 

to obtain feedback throughout the redeliberations process. The staff met with 

various companies and industry organizations including representatives from the 

entertainment and media, aerospace and defense, engineering and construction, 

technology, software, pharmaceutical and biotechnology, and financial services 

industries. 

3. Financial statement presentation-representatives of the FASB meet privately 

with the Investment Company Institute working group. 

4. Goodwill impairment-representatives of the FASB participated in calls with a 

number of preparers, users, and auditor groups. 

COLLABORATION WIlli TIIE INTERNATIONAL ACCOUNTING STANDARDS 

BOARD 

a. The FASB and the IASB held multi-day joint Board meetings in January, February, 

and March using their video-conferencing capabilities and a three-day face-to-face 

joint Board meeting in London in February and Norwalk in March. 

b. F ASB staff participated in IASB Board meetings to discuss technical issues on the 

Boards' various joint projects. 

c. F ASB members participated in joint Board advisor meetings on Revenue 

Recognition, and Insurance. 

d. The F ASB and the IASB held joint education sessions on Revenue Recognition, 

Leases, and Insurance. 

e. Two F ASB Board members and staff participated in a public meeting of the Leases 

Working Group (Norwalk). 

f. An F ASB Board member and staff participated in a public meeting of the Leases 

Working Group (London). 

g. F ASB staff participated with IASB staff in conducting outreach on the projects on 

Impairment and Offsetting Financial Assets and Financial Liabilities. 

h. The F ASB and IASB directors met periodically to discuss technical and 

administrative matters. 

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OTHER INTERNATIONAL ACTIVITIES 

a. Two F ASB Board members, the technical director, and several staff members met 

with representatives of the Accounting Standards Board of Japan to discuss progress 

on their shared goal of convergence. The Boards also discussed the projects on 

Accounting for Financial Instruments, Revenue Recognition, Leases, and the issues 

surrounding the interest rate on the measurement of liabilities. 

b. The F ASB sponsored the National Standard Setters two-day meeting and dinner in 

New York. The FASB chairman, an FASB Board member, and the FASB technical 

director participated in the meeting. 

c. The F ASB chairman, the F AF chairman, and the F AF CEO met with representatives 

of the European Commission, EFRAG, the U.S. Treasury, and the U.S. Ambassador 

to the E.U. to discuss progress on the convergence projects and other matters of 

mutual interest. 

XBRL ACTIVITIES 

The FAF is responsible for the ongoing maintenance of the taxonomy applicable to 

public issuers registered with the SEC. The F AF has delegated those maintenance 

responsibilities to the F ASB. 

a. On January 18,2011, we posted the 2011 U.S. GAAP Financial Reporting Taxonomy 

(UGT) to the FASB website. The SEC officially adopted the 2011 UGT on February 

28, 2011, making it available for use by public issuers registered with the SEC. 

EDUCATIONAL WEB CASTS AND PODCASTS DELIVERED 

1. 2011 Chairman's Outlook for the FASB (January webcast) 

2. XBRL 2011 Taxonomy Overview (February webcast) 

3. The FASB's Supplementary Document on Impairment (January podcast) 

SPEECHES DELIVERED 

The following is a list of speeches delivered during the 1

st quarter of2011: 

• AAA Financial Accounting & Reporting Section-Midyear Meeting 

CF A Institute-Cayman CF A Society 

• CFA Institute 

Corporate Directors Forum 

• CT Society ofCPAs (CSCPA) Not-for-Profit Committee Meeting 

• Deloitte Trueblood Seminar 

• FEI Central Florida Chapter 

• FEI Tampa Chapter 

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• FEI Philadelphia Chapter 

• FEI Committee on Corporate Reporting 

• Financial Services Roundtable 

• Florida State University College of Business 

• Investor Roadshow (CLSA sponsored) 

• LTA Committee Conference 

• National Association of Regulatory Utility Commissioners 

• National Society of Accountants for Cooperatives Roundtable 

• NCFC Legal, Tax & Accounting Conference & NSAC Conference 

• New York State Society of CP As (NYSSCP A) Higher Education Conference 

• NYSSCPA Annual Not-for-Profit Conference 

• Northwestern Law School's 38th Annual Securities Regulation Institute 

Pathways Commission 

• Public Company Accounting Oversight Board (PCAOB) Annual Inspections 

Training 

Standard & Poor's Accounting Conference 

• United States Chamber of Commerce, Center for Competitiveness 

• University of Wisconsin, Arthur Andersen Center School of Business. 

PROFESSIONAL DEVELOPMENT -FASB STAFF AND BOARD 

a. The following professional development sessions were presented to the Board and 

staff: 

1. Bank Regulatory Capital, presented by Steven P. Merriett, Assistant Director and 

Chief Accountant-Supervision for the Federal Reserve Board's Division of 

Banking Supervision and Regulation, and R. Ryan Richards, Senior Supervisory 

Financial Analyst for the Federal Reserve Board's Division of Banking 

Supervision and Regulation. 

2. XBRL in 2011, presented by Louis Matherne, FASB Chief of Taxonomy 

Development; Christine Tan, F ASB XBRL Project Manager; Adrian Hong, F ASB 

XBRL Technical Research Assistant; and David Shaw, FASB XBRL Technical 

Research Assistant. 

3. Conducting Interviews for Research, presented by Dean Mead, GASB Research 

Manager. 

4. Effective Writing, presented by Mary Huydic, F ASB Editor. 

ITEM 2: ADMINISTRATIVE MATTERS AND STRATEGIC ACTIVITIES 

a. All Board members attended the January F AF Trustees meeting. 

b. In March, the F ASB launched live video-webcasting of its education sessions. 

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ITEM 3: WASHINGTON ACTIVITIES 

a. Members of Congress, their staffs, and the Administration were informed about the 

activities of the F ASB through various meetings and other forums, including: 

I. The FASB chairman and F ASB staff and FAF staff provided the Treasury 

Assistant Secretary for International Markets & Development with a 

conference call update on convergence, offsetting, and hedging. 

2. An F ASB Board member and F AF staff met with the PBGC Director and 

senior staff to brief them on the FASB's Multi-Employer Plan Disclosure 

Exposure Draft. 

3. An FASB Board member and FAF staff met with Senate HELP Committee 

and Senate Finance Committee staff to brief them on the FASB's MultiEmployer Plan Disclosure Exposure Draft. In addition, F ASB and F AF staff 

conducted a conference call with Senate staff members of the HELP 

Committee to answer questions on the proposed disclosure requirements in the 

Multi-Employer Exposure Draft. 

ITEM 4: ADDITIONAL COMMUNICATIONS ACTIVITIES 

a. The F ASB issued the following press releases/media advisories: 

I. 1-10-11: Susan M. Cosper Named Technical Director of the Financial 

Accounting Standards Board 

2. 1-14-11: Financial Accounting Foundation Appoints Daryl E. Buck and R. Harold 

Schroeder to the Financial Accounting Standards Board 

3. 1-14-11: MEDIA ADVISORY: FASB to Host January 25 Webcast, 2011 

Chairman's Outlook on the FASB with Leslie F. Seidman 

4. 1-19-11: MEDIA ADVISORY: Registration Is Now Open for January 25 

Webcast, 2011 Chairman's Outlook on the FASB with Leslie F. Seidman 

5. 1-28-11: IASB and FASB Propose to Align Balance Sheet Netting 

Requirements--D(fferences in IFRS and US GAAP Offsetting Requirements to Be 

Eliminated 

6. 1-31-11: IASB and FASB Propose Common Solution for Impairment 

Accounting-Boards Jointly Address Fundamental Aspect of Financial 

Instruments Accounting 

7. 2-9-11: F ASB Discussion Paper Seeks Input on Issues about Hedge Accounting 

8. 2-11-11: Representatives of the Accounting Standards Board of Japan and the 

Financial Accounting Standards Board Meet to Discuss Global Convergence 

9. 2-14-11: FASB to Host February 24 Webcast,XBRL 2011 Taxonomy Overview 

10. 2-17-11: The Financial Accounting Foundation Reappoints Thomas J. Linsmeier 

to a Second Term on the F ASB 

I 1.2-22-1 I: MEDIA ADVISORY: Register Now for February 24 Webcast, XBRL 

2011 Taxonomy Overview 

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12.3-1-11: MEDIA ADVISORY: 2011 US GAAP Financial Reporting Taxonomy 

Adopted and Supported by SEC Effective February 28, 2011 

13.3-7-11: Financial Accounting Foundation Announces Live Video Webcasting of 

F ASB Education Sessions 

14.3-17-11: Financial Accounting Standards Board Announces Joint FASBIIASB 

Public Roundtable Meetings on Proposed Standard on Offsetting 

b. The F ASB issued "FASB in Focus" documents during the month of January for the 

Exposure Draft on Offsetting of Financial Assets and Liabilities and the 

Supplementary Document on Impainnent of Financial Assets. 

c. In January, Leslie Seidman was interviewed by Ellen Heffes of Financial Executives 

Magazine for an in-depth profile of the new F ASB chainnan. 

d. On March 3, Leslie Seidman participated in an interview conducted by Matt 

Lamoreaux for the Journal of Accountancy. The interview covered a broad array of 

topics regarding the new chainnan's priorities for the F ASB in 2011 and beyond. 

e. The following student groups visited the F ASB for tours: 

a. Creighton University-January 5, 20 students 

b. University of New Hampshire--March 10, 30 students 

c. Texas A&M Fellows-March 16, 13 students 

d. Champlain College--March 30, 15 students 

ITEM 5: GASH LIAISON ACTIVITIES 

a GASB meeting minutes were sent to the FASB directors. 

b. The GASB RTA director and the FASB P&S director held monthly meetings and met 

quarterly with the F ASB and GASB chainnen. 

c. The GASB staff distributed a draft of the preliminary views document, Recognition of 

Elements of Financial Statements and Measurement Approaches, to the F ASB for 

review. 

d. The F ASB staff distributed the following drafts for GASB' s review: 

• Accounting Standards Update, Receivables (Topic 310): Deferral of the Effective 

Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 

• Accounting Standards Update, Fair Value Measurement (Topic 820): 

Amendments to Achieve Common Fair Value Measurement and Disclosure 

ReqUirement in US. GAAP and IFRS 

• Accounting Standards Update, Comprehensive Income (Topic 220): Presentation 

of Comprehensive Income 

• Accounting Standards Update, Receivables (Topic 310): Clarifications to 

Accountingfor Troubled Debt Restructurings by Creditors 

• Proposed Accounting Standards Update, Balance Sheet (Topic 210): Offsetting 

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• Proposed Accounting Standards Update, Intangibles-Goodwill and Other (I'opic 

350): Testing Goodwillfor Impairment. 

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REPORT OF THE F ASB CHAIRMAN 

TO THE FINANCIAL ACCOUNTING FOUNDATION 

April 1, 2011 through June 30, 2011 

ITEM 1: TECHNICAL ACTIVITIES 

BOARD AND STAFF ACTIVITIES 

a. Final Docmnents Issued: 

1. Accounting Standards Update No. 2011-02, Receivables (Topic 310): A 

Creditor's Determination of Whether a Restructuring Is a Troubled Debt 

Restructuring (issued AprilS, 2011) 

2. Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): 

Reconsideration of Effective Control for Repurchase Agreements (issued April 29, 

2011) 

3. Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 

820): Amendments to Achieve Common Fair Value Measurement and Disclosure 

Requirements in U.S. GAAP and IFRSs (issued May 12,2011) 

4. Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): 

Presentation of Comprehensive Income (issued June 15,2011). 

h. Exposure Docmnent Issued: 

1. Proposed Accounting Standards Update, Intangibles-Goodwill and Other (Topic 

350): Testing Goodwillfor Impairment (issued April 22, 2011). Comment 

deadline: June 6, 2011. 

c. From time to time, the F ASB issues Accounting Standards Updates to amend the 

nonauthoritative portions of the F ASB Accounting Standards Codification®(such as 

the nonauthoritative SEC content). No such Updates were issued this quarter. 

d. No new projects were added to the technical agenda. 

e. No projects were removed from the technical agenda. 

f. The F ASB and the IASB decided to reexpose their revised proposals for a common 

revenue recognition standard. 

g. The F ASB chairman, a Board member, and the F ASB technical director met with 

representatives from the Clearing House to provide a technical update on current 

priority projects. 

h. The F ASB technical director had periodic calls with the PCAOB and SEC in planning 

the financial reporting series. 

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1. Outreach Activities-Meetings of F ASB Standing Advisory Groups: 

1. Financial Accounting Standards Advisory Council (F ASAC). Seven Board 

members and several F ASB staff members met with F ASAC in a June public 

meeting to discuss critical aspects of standard-setting success in four areas: highquality fInancial reporting standards, outreach to stakeholders during the standardsetting process, transition to forthcoming fInal accounting standards, and 

education about and implementation of forthcoming fInal accounting standards. 

Participants also discussed their views about cross-cutting issues related to 

accounting for acquisition costs and complexity in fInancial reporting. 

2. Investors Technical Advisory Committee (ITAC). Three Board members and 

several FASB staff members met with ITAC in an April closed meeting to discuss 

the projects on accounting for fInancial instruments, balance sheet---offsetting, 

leases, and revenue recognition. Participants also discussed potential risk 

disclosures related to an entity's involvement in fInancial instruments and 

provided feedback about the information provided through the enhanced credit 

quality disclosure requirements that went into effect at the end of 20 10. 

3. Small Business Advisory Committee (SBAC). Seven Board members and several 

staff members met with SBA C members in a May public meeting to discuss 

private company fInancial reporting, goodwill impairment assessments, education 

about forthcoming fInal standards, and key decisions in the projects on revenue 

recognition, leases, and accounting for fInancial instruments. 

4. Private Company Financial Reporting Committee (pCFRC). Six Board members 

and several staff members met with PCFRC members in a May public meeting to 

discuss projects on goodwill impairment, leases, accounting for fmancial 

instruments, hedge accounting, revenue recognition, investment properties, and 

the Board's consideration of effective dates and transition methods. 

5. Each of the Not-for-ProfIt Advisory Committee (NAC) subgroups (Reporting 

Financial Performance, Telling the Story, and Liquidity and Financial Health) 

held a series of closed meetings to begin the development of proposals for 

discussion at the September 2011 meeting of the full NAC. Representatives of 

all three subgroups met in June to update each other on their progress and 

direction. Several FASB staff members participated in those closed subgroup 

meetings. 

j. Outreach Activities-Other Consultations with Stakeholders: 

1. Financial Executives International Committee on Corporate Reporting (CCR). 

Seven Board members, the FASB technical director, the F AF chairman, the FAF 

president and CEO, and an FASB staff member met with CCR in June to discuss 

the Committee's views on the SEC staffpaper on IFRS, the status of the FASBIASB Memorandum of Understanding, the FAF's post implementation review, and 

the FASB's projects on disclosure framework, accounting for fInancial 

instruments, leases, and revenue recognition. 

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2. ABA Accounting Committee. Two Board members met in a closed meeting with 

representatives of the ABA's Accounting Committee in May. 

3. Leaseurope and the US Equipment Leasing and Finance Association (ELF A). One 

Board member discussed lessor accounting in a May conference call with 

Leaseurope and ELF A members. 

4. The FASB chairman, the FAF chairman, and the FAF president and CEO met 

privately with ABA President Frank Keating to discuss matters of mutual interest. 

k. Other significant project-specific outreach activities: 

1. Insurance Contracts-Representatives of the FASB met in closed meetings with 

over 60 users via small group roundtables or individual calls. 

2. Insurance contracts-A Board member and staff participated in a closed half-day 

Property/Casualty Insurance roundtable meeting sponsored by Deloitte & Touche 

and attended by approximately 15 property/casualty insurers. 

3. Insurance contracts-Three Board members participated in a closed FASBsponsored workshop meeting with preparers (insurers, investment bankers, etc.) 

and audit firms regarding the accounting for various types of guarantees. 

4. Financial Guarantees Workshop-Three Board members and the FASB technical 

director participated in a closed workshop meeting with representatives from 

various companies to discuss the accounting for financial guarantees. 

COLLABORATION WITH THE INTERNATIONAL ACCOUNTING STANDARDS 

BOARD 

a. The F ASB and the IASB and staff held multi-day joint Board meetings using their 

video-conferencing capabilities and a three-day face-to-face joint Board meeting in 

London. 

b. Four F ASB Board members and the F ASB technical director attended an open 

meeting of the Leases Working Group in London. 

c. Three FASB Board members and the FASB technical director attended an open 

meeting of the Insurance Working Group in London. 

d. The F ASB and the IASB held public roundtable meetings on balance sheetoffsetting in London, Singapore, and Norwalk. 

e. The F ASB and the IASB held joint education sessions on revenue recognition and 

leases. 

f. The F ASB and IASB directors met periodically to discuss technical and 

administrative matters. 

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OTHER INTERNATIONAL ACTIVITIES 

a. The F ASB chairman and another F ASB Board member met with the European 

Financial Reporting Advisory Group (EFRAG) to discuss potential collaboration of 

their respective projects to develop a Disclosure Framework. Two F ASB staff 

members attended the May 2011 EFRAG Technical Experts Group meeting in 

Brussels, Belgium, with the objective of collaborating with EFRAG to issue a 

discussion paper on a Disclosure Framework in the fall of 2011. 

XBRL ACTIVITIES 

The FAF is responsible for the ongoing development and maintenance of the taxonomy. 

applicable to public issuers registered with the SEC. The F AF has delegated these 

responsibilities to the F ASB. 

a. On June 14, 2011, the F ASB launched a new Taxonomy Online Review and 

Comment System. This new system provides greater transparency for users of 

eXtensible Business Reporting Language (XBRL) and makes it easier for 

stakeholders to submit comments on the U.S. GAAP Financial Reporting Taxonomy. 

The Taxonomy Online Review and Comment System allows Taxonomy users to 

review and provide direct input on the Development Taxonomy being updated and 

maintained by the F ASB XBRL team. 

ITEM 2: EDUCATION AND COMMUNICATIONS 

EDUCATIONAL WEBCASTS AND PODCASTS DELIVERED 

a. The first two webcasts with CPE credit were held in June: 

1. IN FOCUS Webcast: FASB Update for Nonpublic Entities-June 17,2011 

2. IN FOCUS Webcast: How to Use the XBRL 2011 US GAAP Financial 

Reporting Taxonomy-June 22, 2011. 

b. The FAF Post-Implementation Review Process-May 20, 2011. The FASB chairman 

participated in a live F AF webcast explaining its post-implementation review process. 

c. April 2011 podcast-The F ASB chairman discussed the April 20 11 Progress Report 

on F ASBIIASB MOU projects. 

d. Apri120!1 podcast-An interview with the FASB chairman and the IASB chairman 

regarding the timeline for completing the convergence program. 

e. April 20 11 podcast-An F ASB Board member and staff discussed testing goodwill 

for impairment proposals. 

f. May 2011 podcast-An F ASB Board member discussed F ASB Accounting 

Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments 

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to Achieve Common Fair Value Measurement and Disclosure Requirements in u.s. 

GAAP and IFRSs. 

g. June 2011 podcast-An F ASB Board member discussed the just-issued final 

Accounting Standards Update on the presentation of comprehensive income. 

SPEECHES DELIVERED 

F ASB Board members or staff delivered speeches during the 2nd quarter 2011 at the 

following conferences and events: 

• American Council of Life Insurers 

• AICP A National Conference on Employee Benefit Plans 

• AICPA'sNFP Expert Panel 

• AICPA Webcast - MOU Update: A U.S. Perspective 

• Appraisal Institute Investment Property Accounting Standards 

• Baruch College 10th Annual Financial Reporting Conference 

• CFO Magazine Core Concerns Conference 

• CEASAICARE Conference 

• Chartis Global Finance Leadership Conference 

• College of William & Mary, Mason School of Business, Excellence of Financial 

Reporting Conference 

• Compliance Week Annual Conference 

• Deloitte & Touche 2011 Professional Practice Directors Meeting 

• Deloitte !FRS 

• FICP A Accounting & Auditing Conference 

• J. H. Cohn LLP - CFO Breakfast Roundtable Accounting Update 

• Massachusetts Society of CP As 42nd Annual Accounting & Auditing Conference 

• Moody's Insurance Executives' Conference 

• Morgan Stanley Insurance Conference -Accounting Controversies: 

Understanding the Divergent Views 

• National Rural Utilities Cooperative Finance Corporation (NRUCFC or CFC) 

Workshop: Cooperative Accounting 

• National Society of Accountants for Cooperatives 

• NIRI Annual Conference 

• Northern Lights Regional Council of the Institute of Management Accountants 

Annual Seminar 

• OSCPA Not-for-Profit Conference 

• PCIAA - PCI Global Financial Issues Seminar 

• Practising Law Institute (PU) Audit Committee Workshop 2011 

• Property Casualty Insurers Association of America 

RC Knox Symposium at University of Hartford 

• SEC Financial Reporting Institute Conference (USC) 

SEC Institute's 26th Midyear SEC Reporting Conference 

• Southern Connecticut State University Accounting Society Annual Banquet 

• Standard & Poor's 2ih Annual Insurance Conference 

• University of Tulsa, Collins College of Business 

• University of Washington Eighth Annual Financial Reporting Conference 

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• XBRL International Conference, Brussels 

ITEM 3: ADMINISTRATIVE, PROCEDURAL, AND STRATEGIC ACTIVITIES 

a Administrative Matters: 

1. In June, the FASB launched a series oflive educational webcasts that will provide 

CPE credit to qualifYing participants. 

2. All Board members attended the May FAF Trustees meeting. 

3. The FASB launched the Nonpublic Entities portal on its website, designed to 

enable stakeholders to more easily find information on the FASB's activities. 

b. Procedural Matters: 

1. In connection with the goodwill impairment project, the F ASB piloted a new 

electronic constituent feedback form that is intended to make it faster and easier 

for stakeholders to provide comments about proposals. 

c. Professional Development-F ASB Staff and Board 

The following professional development sessions were presented to the Board and 

staff: 

1. Analyzing Financial Statements of Insurance Companies presented by Doron 

Nissim, Ernst & Young Professor of Accounting & Finance, Columbia School of 

Business. This session described accounting issues in the insurance industry that 

users find particularly relevant. 

2. Lunch and Learn: Seven Steps to Financial Fitness presented by Gillian 

Anderson, director of the Fairfield County Chapter of the Foundation for Personal 

Financial Education. 

3. Successful Leaders in Today's Business Environment (the first of the F AF 

Leadership Series) presented by Jack Brennan, chairman of the Financial 

Accounting Foundation. The objective of this session was to provide the F AF' 

FASB, and GASB staff with a better understanding of what makes a good leader 

and how those traits can be used to find success outside the workplace. 

4. Excel Workshop presented by Tracy Farr, FASB postgraduate technical assistant. 

This session covered how to reconfigure data, how to manipulate data, and 

advanced methods of using or combining formulas to analyze data At the end of 

the session, participants were able to work more efficiently and effectively in 

Excel. 

5. The Conceptual Framework Project: An Overview presented by Jim Leisenring, 

F ASB senior advisor. In this session, Mr. Leisenring discussed the history of the 

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Conceptual Framework, including the issues it was intended to address and the 

reasons why early Board members thought establishing a framework was 

important. 

d. Professional staff attended the following external conferences: 

1. The 10th Annual Financial Reporting Conference at the Robert Zicklin Center 

for Corporate Integrity, Baruch College, NY 

2. SEC Institute Mid-Year Reporting Forum. 

ITEM 4: WASmNGTON ACTIVITIES 

a. An F ASB Board member, the F ASB technical director, and F AF staff met with the 

U.S. Department of Labor Assistant Secretary of Employee Benefits Security 

Administration (EBSA) and the EBSA Chief Accountant to provide an update on the 

F ASB multi-employer proposal. 

b. Members of Congress, their staffs, and the Administration were informed about the 

activities of the F ASB through various meetings and other forums, including: 

L FASB and FAF staff presented updates on convergence and the leases project to 

the FE! Committee on Government Business. 

2. The FAFIFASB/GASB hosted the annual FAF Trustee reception and dinner in 

Washington, DC in May that was attended by several Members of Congress and 

senior Administration officials. The keynote speaker for the dinner was SEC 

Chairman Shapiro. 

3. The F ASB chairman, F ASB Board members, the F ASB technical director, and 

F AF staff met in closed meetings with the Federal Reserve Board Chairman and 

Governors, members of the Senate Banking Committee and House Financial 

Services Committee, and Members of Congress (House and Senate) to update 

them on FASB initiatives, especially convergence. 

4. An F ASB Board member, the FASB technical director, and certain F AF staff met 

with the Labor Assistant Secretary for EBSA and CFO for EBSA to update them 

on the multi-employer disclosure project. 

5. The FASB chairman appeared before the Senate Banking Committee, 

Subcommittee on Securities, Insurance & Investment to testify on the role of the 

accounting profession in preventing another financial crisis. 

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6. An F ASB Board member, the F ASB technical director, and certain F AF staff met 

with Congressman Sherman's Legislative Assistant to discuss present and past 

accounting requirements for research and development costs. 

7. An FASB Board member, the FASB technical director, and FAF staff met with the 

U.S. Chamber of Commerce Leases Coalition to brief the coalition on status of the 

leases project. 

8. The F ASB chairman, the F ASB technical director, the F AF president and CEO, 

and certain F AF staff met with Congressman Jim Himes to provide a briefmg on 

key accounting projects and to answer questions on the status of convergence. 

9. An FASB Board member and certain FAF staff met with the Chief CounselPension Policy Director, Senate Committee on Health, Education, Labor & 

Pensions (HELP) to provide an update on the multi-employer disclosure project 

and to answer any questions about disclosure of withdrawal liabilities. 

10. An F ASB Board member and certain F AF staff met with the Deputy Assistant 

Secretary for International Monetary & Financial Policy, Department of Treasury 

to provide an update on F ASB/IASB convergence projects including the schedule 

for completion. 

11. An F ASB Board member and certain F AF staff met with the Senate Banking 

Committee Majority Senior Counsel to provide an update on convergence projects 

and the multi-employer disclosure project. 

12. The FASB staff developed and delivered in June an in-depth White Paper 

addressing the relevance of current accounting requirements for research and 

development costs for Congressman Brad Sherman of the House Financial 

Services Committee. 

13. The F ASB chairman, two F ASB Board members, the F ASB technical director, and 

an F AF staff member participated in quarterly meetings with staff members of the 

SEC's Office of the Chief Accountant and the Public Company Accounting 

Oversight Board. 

14. The F ASB chairman, an F ASB Board member, the F ASB technical director, and 

an FAF staff member attended the quarterly meeting with the bank regulators. 

ITEM 5: ADDITIONAL COMMUNICATIONS ACTIVITIES 

a The F ASB issued the following press releases/media advisories: 

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1. 4-5-11: F ASB Issues Accounting Standards Update to Improve Financial 

Reporting about Troubled Debt Restructurings 

2. 4-21-11: IASB and F ASB Report Substantial Progress toward Completion of 

Convergence Program 

3. 4-22-11: F ASB Issues Proposed Accounting Standards Update on Testing for 

Goodwill Impairment 

4. 4-29-11: FASB Issues Accounting Standards Update to Improve Financial 

Reporting of Repurchase Agreements 

5. 5-12-11: Financial Accounting Foundation to Discuss Next Steps in PostImplementation Review Process in May 20 Webcast 

6. 5-12-11: F ASB and IASB Issue Common Fair Value Measurement and 

Disclosure Requirements 

7. 6-1-11: Financial Accounting Standards Board Launches IN FOCUS: WEBCAST 

Educational Webcast Series with CPE Credit 

8. 6-2-11: Media Advisory-Registration Is Now Open for June 17 Webcast, IN 

FOCUS: FASB Update/or Nonpublic Entities 

9. 2-14-11: Media Advisory-Registration Is Now Open for June 22 Webcast, IN 

FOCUS: How to Use the XBRL 2011 US GAAP Financial Reporting Taxonomy 

10. 6-14-11: Financial Accounting Standards Board Launches New Taxonomy Online 

Review and Comment System 

11. 6-15-11: IASB and F ASB to Re-Expose Revenue Recognition Proposals 

12.6-16-11: FASB Issues Accounting Standards Update to Improve Presentation of 

Comprehensive Income. 

b. The FASB issued "FASB in Focus" documents for the following: 

• April2011-Exposure Draft on Offsetting of Financial Assets and Liabilities 

and the Supplementary Document on Impairment of Financial Assets 

• ApriI2011-Receivables: A Creditor's Determination of Whether a 

Restructuring Is a Troubled Debt Restructuring 

• April 201 I-Transfers and Servicing: Reconsideration of Effective Control 

for Repurchase Agreements 

• May 201 I-Fair Value Measurement: Amendments to Achieve Common Fair 

Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs 

• June 20 II-Presentation of Comprehensive Income. 

c. Interviews: 

• March 2011-Matt Lamoreaux of Journal of Accountancy interviewed the 

F ASB chairman. 

• June 2011-The FASB chairman was interviewed by Adam Jones of the 

Financial Times. 

• June 2011-The FASB chairman discussed convergence with Michael 

Rapoport of the Wall Street Journal. 

• June 20 II-Project manager Danielle Zeyher was interviewed by Barron's on 

the leases project. 

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d. New F ASB members participated in media training in April. 

ITEM 6: GASB LIAISON ACTIVITIES 

a. GASB meeting minutes were sent to the F ASB directors. 

b. The GASB RTA director and the F ASB P&S director held monthly meetings and met 

quarterly with the FASB and GASB chairmen. 

c. The GASB staff distributed the following drafts to the F ASB for review: 

• Statement No. 63, Financial Reporting of Deferred Outflows of Resources, 

Deferred Iriflows of Resources, and Net Position 

• Statement No. 64, Derivative Instruments: Application of Hedge Accounting 

Termination Provisions 

• Exposure Draft, Accounting and Financial Reportingfor Pension Benefits by 

Employers and by Nonemployer Contributing Entities 

• Exposure Draft, Financial Reporting of Deferred Outflows of Resources, 

Deferred Inflows of Resources, and Net Position 

• Preliminary Views, Recognition of Elements of Financial Statements and 

Measurement Approaches. 

d. The FASB staff distributed the following drafts for GASB's review: 

• Accounting Standards Update, Transfers and Servicing (Topic 860): 

Reconsideration of Effective Control for Repurchase Agreements 

• Accounting Standards Update, Comprehensive Income (Topic 220): Presentation 

of Comprehensive Income 

• Proposed Accounting Standards Update, Intangibles-Goodwill and Other (Topic 

350): Testing Goodwillfor Impairment. 

Proposed Accounting Standards Update, Consolidation (Topic 810): 

Agent/Principal Analysis 

• White Paper on Private Company Financial Reporting: Differential User Needs 

and Cost-Benefit Considerations. 

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REPORT OF THE FASB CHAIRMAN 

TO THE FINANCIAL ACCOUNTING FOUNDA nON 

July 1,2011 through September 30,2011 

ITEM 1: TECHNICAL ACTIVITIES 

BOARD AND STAFF ACTNITIES 

a. Final Documents Issued: 

1. Accounting Standards Update No. 2011-06, Other Expenses (I'opic 720): Fees 

Paid to the Federal Government by Health Insurers (a consensus of the FASB 

Emerging Issues Task Force) (issued July 21,2011) 

2. Accounting Standards Update No. 2011-07, Health Care Entities (I'opic 954): 

Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, 

and the Allowance for Doubtfol Accounts for Certain Health Care Entities (a 

consensus of the FASB Emerging Issues Task Force) (issued July 25,2011) 

3. Accounting Standards Update No. 2011-08, [ntangibles-~oodwill and Other 

(I'opic 350): Testing Goodwillfor Impairment (issued September 15,2011) 

4. Accounting Standards Update No. 2011-09, Compensation----Retirement 

Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an 

Employer's Participation in a Multiemployer Plan (issued September 21,2011). 

b. Exposure Document Issued: 

1. Proposed Accounting Standards Update, Property, Plant, and Equipment (I'opic 

360): Derecognition of in Substance Real Estate---a Scope Clarification (a 

consensus of the Emerging Issues Task Force) (issued July 20, 2011). Comment 

deadline: October 3,2011. 

c. From time-to-time, the F ASB issues Accounting Standards Updates to amend the 

nonauthoritative portions of the F ASB Accounting Standards Codification® (such as 

the nonauthoritative SEC content). No such Updates were issued this quarter. 

d. New projects added to the agenda: 

1. EITF Issue No. II-A, "Parent's Accounting for the Cumulative Translation 

Adjustment upon the Sale or Transfer of a Group of Assets within a Foreign 

Subsidiary That Meets the Definition ofa Business" (August 2011) 

2. A project on impairment of indefinite-lived intangible assets, to consider whether 

to include a qualitative screen, similar to the recent Accounting Standards Update 

on goodwill impairment. 

3. A research project to develop a framework for identifying and assessing the need 

for differential standards for private entities (July 2011). 

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e. New projects considered but not added to the agenda: 

I. A proposal that the Board defer the effective date of Accounting Standards 

Update 2010-26 on accounting for costs associated with acquiring or renewing 

insurance contracts. 

2. A proposal that the Board provide guidance on the accounting for subsequent outlicensing of assets used in in-process research and develop projects acquired in a 

business combination. 

3. A proposal to reconsider the various different definitions of non public entity as 

used in the F ASB Accounting Standards Codification. The proposal will be 

considered in the FASB's research project to develop a framework for identifying 

and assessing the need for differential reporting standards for private entities. 

4. A proposal to provide guidance on the accounting for joint and several obligations 

within the standalone financial statements of a subsidiary under common control. 

The F ASB chairman decided to conduct further research through the formation of 

a working group before deciding whether to add the potential issue to the EITF 

agenda. 

5. A proposal to provide guidance on the capitalization of interest related to bonds 

guaranteed by the federal government. 

f. No projects were removed from the technical agenda. 

g. The F ASB and the IASB decided to reexpose their revised proposals for a common 

leases standard after their redeliberations of the original. 

h. Outreach Activities-Meetings ofFASB Standing Advisory Groups: 

1. Investors Technical Advisory Committee (ITAC) 

i. July 2011 meeting: Six Board members and several FASB staff members met 

and discussed with ITAC members the Board's projects on the accounting for 

fmancial instnunents, leases, and multiemployer pension plans. Participants 

also discussed the SEC workplan on IFRS and provided feedback about the 

IASB's recent revisions to its pension accounting standard. 

11. September 2011 meeting: In two separate closed sessions, several Board 

members (less than a voting majority) and several FASB staff members 

discussed with ITAC members the projects on accounting for financial 

instruments, insurance, revenue recognition, leases, and disclosure 

framework. Committee members also discussed their views about the 

potential incorporation ofIFRS in the U.S. and the SEC workplan on IFRS. 

2. Not-for-Profit Advisory Committee (NAC) meeting. Board members and several 

F ASB staff members met with NAC members in a September public meeting to 

discuss ways to improve the financial reporting model for not-for-profit 

organizations. The NAC recommended several potential reporting improvements 

for agenda consideration by the F ASB chairman, and educational efforts that 

could be carried out by the F ASB staff, the NAC, or other organizations. The 

agenda requests will be considered by the chairman in the fourth quarter. NAC 

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participants also discussed recent developments in the not-for-profit sector that 

could have accounting implications; updates on the FASB's projects on leases, 

revenue recognition, and disclosure framework; and the applicability of the 

differential factors between public and private companies. 

3. Private Company Financial Reporting Committee (PCFRC) 

i. July 2011 meeting: A Board member and several FASB staff members 

participated in the public meeting held in Minneapolis. The PCFRC discussed 

the Board's projects on consolidation: policies and procedures, consolidation: 

investment companies, investment properties, disclosures about an employer's 

participation in a multiemployer plan, accounting for financial instruments, 

revenue recognition, leases, disclosure framework, differential standardsetting framework for private companies, and goodwill impairment testing. 

Committee members also discussed the SEC staff Work Plan for the 

Consideration of Incorporating International Financial Reporting Standards 

into the Financial Reporting System for U.S. Issuers, recent activities of the 

IFRS for SMEs Implementation Group, and the FAF's post-implementation 

review process on the accounting for uncertainty in income taxes. Committee 

members also suggested improvements to the format and content of an 

Accounting Standards Update. 

ii. September 2011 meeting: A Board member and several FASB staff 

participated in the public meeting held in Las Vegas. The meeting agenda 

included discussion of the SEC's so-called condorsement approach to 

incorporated IFRS into the U.S. financial reporting system and updates on 

various FASB projects (revenue recognition, accounting for fmancial 

instruments, insurance contracts, investment companies, investment 

properties, leases, and disclosure framework). Committee members also 

discussed the F AF' s private entity initiative and issues related to certain 

existing U.S. GAAP standards including accounting for variable interest 

entities, interest rate swaps, and level-three fair value measurements. 

4. Private Company Resource Group (PCRG). In connection with staffresearch on a 

decision-making framework for private company standard setting, several F ASB 

staff members discussed issues related to transition methods with the PCRG. 

That August teleconference meeting also included discussions about effective 

date considerations for the revenue recognition project. 

i. Outreach Activities-Other Meetings with Industry or Other Representative Groups; 

1. National Investor Relations Institute (NIRI). Two Board members and several 

FASB staff members met privately with NIRI in August. 

2. Institute of Management Accountants (IMA): Six Board members met with the 

IMA's Financial Reporting Committee in a September public meeting. IMA 

representatives shared their general perspectives on the potential incorporation of 

IFRS in the U.S., the interpretive process for converged standards, and standard3 

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setting for nonpublic entities. They also discussed the Board's projects on 

accounting for financial instruments, revenue recognition, and leases. 

3. AICPA Private Companies Pmctice Section Technical Issues Committee (TIC): 

Board members and several F ASB staff members participated in a public meeting 

with TIC in September and discussed private company fmancial reporting issues, 

transition methods for private entities, and various ongoing F ASB projects 

(investment properties, leases, revenue recognition, disclosure framework, and 

disclosures about risks and uncertainties and the liquidation basis of accounting.) 

j. Other significant project-specific outreach activities: 

1. Accounting for fmancial instruments project: F ASB staff conducted targeted 

outreach relating to the financial instruments project with a number of preparers 

and users of nonpublic entity fmancial statements. 

2. Impainnent of indefinite-lived intangible assets: As part of its pre-agenda 

research activities, the F ASB staff held a private workshop in August 20 II to 

discuss current standards with staff representatives of the SEC and PCAOB and 

preparer representatives of both public companies and private entities. 

3. Insurance contmcts: The project was discussed in about a dozen conference calls 

with financial statements users and in various meetings with industry 

representative groups. 

4. Leases: The F ASB staff discussed proposed accounting, presentation, and 

disclosure requirements with users of retail entity financial statements, 

participated in meetings and conferences with various industry representative 

groups, and conducted targeted outreach meetings with auditing finns. An F ASB 

Board member and F AF staff met with the Executive Committee of the FEI 

Committee on Government Business to provide a briefing on the status of the 

leases project. Representatives of the FASB staff and the FAF staff met on two 

occasions with the U.S. Chamber of Commerce Leases Coalition. 

5. Revenue recognition: F ASB staff discussed the project with various user groups, 

gave project update speeches at several conferences, and conducted targeted 

outreach activities with private company representatives. 

COLLABORATION WITH THE INTERNATIONAL ACCOUNTING STANDARDS 

BOARD 

a. The F ASB and the lASB held several multi-day joint video-conference Board 

meetings and three face-to-face joint Board meetings (London). 

b. An FASB Board member attended a meeting on impainnent in London. 

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c. The FASB and the IASB held small-group video-conference meetings on insurance, 

leases, and impairment 

d. Representatives of the F ASB and the IASB met privately with several stakeholder 

groups to obtain feedback on accounting for impairment. 

e. The F ASB and the IASB directors met periodically to discuss technical and 

administrative matters. 

OTHER INTERNATIONAL ACTIVITIES 

a. The F ASB chairman and a Board member met with representati ves of the Accounting 

Regulatory Department of the Ministry of Finance in Beijing. 

b. The F ASB chairman and a Board member met with the Accounting Standards Board 

of Japan and representatives of Japan's Financial Services Agency in Tokyo. 

c. The F ASB chairman, a Board member, and the technical director participated in the 

National Standard Setters meeting in Vienna, Austria. 

d. The F ASB chairman, a Board member, and the technical director participated in the 

World Standard Setters meeting in London. 

e. Two FASB staff members participated in the September 2011 European Financial 

Reporting Advisory Group (EFRAG) Disclosure Framework Advisory Panel meeting 

in Paris. 

f. The F ASB research director met with the chairman and senior staff members of the 

ANE (French Standard Setter) in Paris to discuss research efforts and other matters. 

g. The F ASB chairman participated as an observer in the July 2011 SEC Roundtable on 

International Financial Reporting Standards. 

XBRL ACTIVITIES 

The FAF is responsible for the ongoing development and maintenance ofthe U.S. GAAP 

Financial Reporting Taxonomy applicable to public issuers registered with the SEC. The 

F AF has delegated these responsibilities to the FASB. 

a. On September 1, 2011, the FASB released the proposed 2012 Taxonomy for public 

review and comment. This proposed release includes changes from the 2011 

Taxonomy for ASUs finalized since the last release, accommodation of common 

practices identified in SEC registrant XBRL Exhibits, and other adjustments to 

enhance usability. The deadline to submit written comments is October 31, 2011. 

This release is on time and in accordance with SEC expectation. The next milestone 

date is December 15,2011, for delivery of the "candidate" release 2012 Taxonomy 

for final SEC review and acceptance. 

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ITEM 2: COMMUNICATIONS 

SPEECHES DELIVERED 

F ASB Board members or staff delivered speeches at the following conferences and 

events: 

• ACPEN Accounting and Auditing Update Broadcast 

• AICP A National Conference on Banks & Savings Institutions 

• AICPAINAATS 

• American Accounting Association Government & NFP Conference 

• American Accounting Association Annual Meeting Panel on the Blue Ribbon 

Panel 

• American Accounting Association Conference 

• American Gas Association Accounting Principles Committee 

• American Petroleum Institute Accounting Subcommittee 

• California Society of CPAs CPE session and nonpublics discussion 

• Center for Corporate Reporting & Governance at California State University 

Tenth Annual SEC Financial Reporting Conference 

• DeloittelDewey & LeBoeuflStandard & Poor's 3

rd Annual Reactions North 

America Conference Risk and Capital Management Issues in 2011 

• ELF A Lease and Finance Accountants Conference 

• EY and University of Texas at Arlington 

• Hudson Global Resources XBRL Filings Panel Discussion 

• llIinois CPA Society 17th Annual Midwest Financial Reporting Symposium 

• Kentucky Society of CP As Annual Not-for-Profit Conference 

• NAREIT Senior Financial Officer/Investment Relations Officer 

• National Association of Independent Sureties 

• National Association of Regulatory Utility Commissioners Conference 

• National Association of Surety Bond Producers Update Call 

• National Rural Electric Cooperative Association Annual Accounting, Finance 

& Tax Conference 

• SEC Institute's Annual SEC Reporting and F ASB Forum for Small Public 

Companies 

Surety Association of American F ASB update call 

• University of Texas McCombs School of Business Distinguished Speaker 

Lyceum 

ITEM 3: ADMINISTRATIVE, PROCEDURAL, AND STRATEGIC ACTIVITIES 

a. Administrative Matters: 

1. All Board members attended the August F AF Trustees meeting. 

b. Professional Development-F ASB Board and Staff 

1. The following professional development sessions were presented to the Board and 

staff: 

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a. Successful Leaders in Today's Business Environment (The second of the FAF 

Leadership Series), James H. Quigley, fonner chief executive officer for Deloitte 

Touche Tohmatsu and fonner member of the FAF Board of Trustees shared his 

insights on what makes a good leader; how good leaders inspire, motivate, and 

coach others to work together for a common objective; and what he believes are 

the challenges and obstacles to good leadership. 

b. Dr. Sam L. Savage, Author of The Flaw of Averages: Why We Underestimate 

Risk in the Face of Uncertainty (Wiley 2009), Chainnan and Chief Scientist of 

Vector Economics, and Consulting Professor in Management Science and 

Engineering at Stanford University, shared his views on the flaw of the practice of 

forecasting business conditions with single "average" outcomes. 

c. Lunch and Learn: Marking Financial Decisions in Challenging Times, Anne 

Wilkins, CRPC®, CFP®, Chapter Coordinator of the Fairfield County Chapter of 

the Foundation for Personal Financial Education, presented a thorough review of 

the retirement planning process and the obstacles that can keep us from reaching 

our goals. 

d. Video Presentation of Inside Job, produced, written, and directed by Charles 

Ferguson, and Discussion about the Financial Crisis of 2008, Christopher 

Roberge, F ASB Project Manager. This session included a viewing of the 

documentary Inside Job, which is the first film to expose the shocking truth 

behind the economic crisis of 2008, followed by a discussion about the film, the 

lessons learned from the crisis, and related accounting issues. 

c. Professional staff attended the following external conferences: 

1. AICPA NAAATs Annual Conference 

2. AlCP A Not for Profit Conference Industry Conference. 

ITEM 4: GOVERNMENT AND REGULATORY LIAISON ACTIVITIES 

a. Members of Congress, their staffs, and the Administration were infonned about the 

activities of the FASB through various meetings and other forums, including: 

1. A briefmg of Senate Committee Banking Staff by an F ASB Board member, 

F ASB technical director, and F AF staff about F ASB activities. 

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2. A briefing of Senate Permanent Subcommittee members on the accounting for 

income taxes on foreign earnings by an F ASB Board member, F ASB technical 

director, and F AF staff. 

3. A briefing on convergence and emerging issues was provided to the Senior 

Minority Counsel for the House Financial Services Committee by an F ASB Board 

member, F ASB technical director, and F AF staff. 

4. Quarterly briefmg of bank regulators provided by the FASB chairman, F ASB 

Board members, F ASB technical director, and F AF staff. 

ITEM 5: OTHER COMMUNICATIONS ACTIVITIES 

a. The F ASB announced the following significant events through press releases, media 

advisories, or tweets: 

1. The F ASB and the IASB decision to re-expose their leasing proposals 

2. The issuance of final standards covering; 

o Enhanced disclosures by employers about their participation in 

multiemployer pension plans 

o Simplified requirements for testing goodwill for impairment. 

3. The announcement of public roundtable meetings with users, preparers, and 

auditors offinancial statements about their concerns about private entity reporting 

standards. 

4. The availability of the U.S. GAAP Financial Reporting Taxonomy for Public 

Review and Comment 

5. The decision to hold an educational webcast entitled IN FOCUS: Summary of 

Changes for the Proposed 2012 Taxonomy and Using XBRL Tables. 

b. The F ASB issued "FASB in Focus" documents for the following: 

1. Private Companies: The Path to a Differential Standard-Setting Framework (July 

11,2011) 

2. FASB Completes Redeliberations on Multiemployer Pension Plan Disclosure 

Project (Subtopic 715-80) (July 28, 2011) 

3. FASB Simplifies Guidance for Testing Goodwill for Impairment (August 12, 

2011) 

4. F ASB Completes Project on Multiemployer Pension Plan Disclosures (Subtopic 

715-80) (September 21,2011) 

c. Podcasts; 

• In July we posted a podcast in which the FASB chairman discussed the FASB's 

work on a differential framework for private company standard setting. 

d. Media Outreach: 

• During the quarter ended September 30,2011, members of the FASB or its staff 

participated in numerous interviews with media. 

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• The FASB chainnan and staff met with representatives from Accounting Today & 

Compliance week to discuss private-company and international issues. 

ITEM 6: GASB LIAISON ACTMTIES 

a. GASB meeting minutes were sent to the F ASB directors. 

b. The GASB RTA director and the F ASB P&S director held monthly meetings and met 

quarterly with the F ASB and GASB chainnen. 

c. The GASB staff distributed the following draft to the F ASB for review: 

• Exposure Draft, Reporting Balances Previously Recognized as Assets and 

Liabilities. 

d. The F ASB staff distributed the following drafts for GASB' s review: 

• Accounting Standards Update, Other Expenses (Topic 720): Fees Paid to the 

Federal Government by Health Insurers-a consensus of the FASB Emerging 

Issues Task Force 

• Accounting Standards Update, Health Care Entities (Topic 954): Presentation 

and Disclosure of Certain Net Patient Service Revenue, Provisionsfor Bad Debts, 

and the Allowance for Doubtful Accounts-a consensus of the FASB Emerging 

Issues Task Force 

• Accounting Standards Update, Intangibles~oodwill and Other (Topic 350): 

Testing Goodwill for Impairment 

• Accounting Standards Update, Compensation-Retirement BenefitsMultiemployer Plans (Subtopic 715-80): Disclosure about an Employer's 

Participation in a Multiemployer Plan 

• Proposed Accounting Standards Update, Property, Plant, and Equipment (Topic 

360): Accountingfor Derecognition of in Substance Real Estate-a Scope 

Clari/ication-a consensus of the FASB Emerging Issues Task Force 

• Proposed Accounting Standards Update, Technical Corrections 

• Proposed Accounting Standards Update, Revenue Recognition (Topic 605): 

Revenue from Contracts with Customers 

• Proposed Accounting Standards Update, Real Estate-Investment Property 

Entities (Topic 973): Accounting and Reporting by Investment Property Entities 

• Proposed Accounting Standards Update, Financial Services (Topic 946): 

Investment Companies 

• Proposed Accounting Standards Update, Consolidations (Topic 810): Agent 

versus Principal Analysis. 

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REPORT OF THE FASB CHAIRMAN 

TO THE FINANCIAL ACCOUNTING FOUNDATION 

October 1, 2011 through December 31, 2011 

ITEM 1: TECHNICAL ACTIVITIES 

BOARD AND STAFF ACTIVITIES 

a. Final Documents Issued: 

1. Accounting Standards Update No. 2011-10, Property, Plant, and Equipment 

(Topic 360): Derecognition ofin Substance Real Estate-a Scope Clarification (a 

consensus of the FASB Emerging Issues Task Force) (issued December 14, 

2011) 

2. Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): 

Disclosures about Offsetting Assets and Liabilities (issued December 16,2011) 

3. Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220): 

Deferral o/the Effective Date for Amendments to the Presentation of 

Reclassifications of Items Out of Accumulated Other Comprehensive Income in 

Accounting Standards Update No. 2011-05 (issued December 23,2011). 

b. Exposure Documents Issued: 

1. Proposed Accounting Standards Update, Technical Corrections (issued October 

14,2011). Comment deadline: December 13,2011. 

2. Proposed Accounting Standards Update, Real Estate-Investment Property 

Entities (Topic 973) (issued October 21, 201l). Revised comment deadline: 

February 15,2012. 

3. Proposed Accounting Standards Update, Financial Services-Investment 

Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure 

Requirements (issued October 21, 201l). Revised comment deadline: February 

15,2012. 

4. Proposed Accounting Standards Update, Consolidation (Topic 810): Principal 

versus Agent Analysis (issued November 3, 2011). Revised comment deadline: 

. February 15,2012. 

5. Proposed Accounting Standards Update, Comprehensive Income (Topic 220): 

Deferral o/the Effictive Date/or Amendments to the Presentation of 

Reclassifications of Items Out of Accumulated Other Comprehensive Income in 

Accounting Standards Update No. 2011-05 (issued November 8, 2011). Comment 

deadline: November 23, 2011. 

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6. Proposed Accounting Standards Update (Revised)-Revenue Recognition (I'opic 

605): Revenue from Contracts with Customers (issued November 14,2011). 

Comment deadline: March 13,2012. 

7. Proposed Accounting Standards Update, Consolidation (I'opic 810): Parent's 

Accountingfor the Cumulative Translation Adjustment upon the Sale or Transjer 

of a Group of Assets That Is a Nonprofit Activity or a Business within a 

Consolidated Foreign Entity (a consensus of the FASB Emerging Issues Task 

Force) (issued December 8, 2011). Comment deadline February 6, 2012. 

c. From time-to-time, the F ASB issues Accounting Standards Updates to amend the 

nonauthoritative portions of the F ASB Accounting Standards Codification® (such as 

the nonauthoritative SEC content). No such Updates were issued this quarter. 

d. New projects added to the agenda: 

1. Presentation of Other Comprehensive Income (October 2011). The objective of 

this standards-setting project is to reconsider how entities are required to present 

items reclassified out of accumulated comprehensive income, in response to 

stakeholder concerns about the operability of new requirements published in 

Accounting Standards Update 2011-12. 

2. Not-for-Profit Financial Reporting: Financial Statements (November 2011). The 

objective of this standards-setting project is to reexamine existing standards for 

financial statement presentation by not-for-profit organizations, focusing on 

improving net asset classification requirements and information organizations 

provide about liquidity, financial perfonnance, and cash flows. The FASB's Notfor-Profit Advisory Committee had identified those areas as in need of 

examination. 

3. Not-for-Profit Financial Reporting: Other Financial Communication-a research 

project (November 2011). The objective of this research project is to study how 

not-for-profit organizations use written communications, other than financial 

statements, to communicate their financial story. At the conclusion of this 

research effort, the Board expects to consider whether educational or standardssetting efforts can contribute to promoting such communications. 

4. Nonpub1ic Entity Fair Value Measurement Disclosures (November 2011). The 

objective of this project is to evaluate whether nonpublic entities should be 

exempt from some or all required disclosures about Level 3 fair value 

measurements, in light of stakeholder concerns about the costs of preparing and 

providing those disclosures. 

5. Application of Asset- or Entity-Based Guidance to Nonfinancial Assets Held in 

an Entity-a research project (November 2011). 

e. New projects considered but not added to the agenda: 

1. A proposal that the Board address a lender's accounting for in substance real 

estate when a borrower ceases to have a controlling fmancial interest in an in 

substance real estate subsidiary as a result of default by the subsidiary on its 

nonrecourse debt. The F ASB chainnan decided not to add this narrow project, 

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but rather, to research whether a more fundamental change would solve a wider 

set of issues and provide a more durable solution. (See #d (5) above). 

2. The Board considered several proposals relating to private companies and 

directed the staff to address these issues as follows: 

a. To explore ways to clarify and provide examples about how private 

companies should apply consolidation guidance for variable interest entities. 

b. To explore a request to exempt nonpublic entities from recognition and 

measurement of intangible assets acquired in a business combination. 

c. To explore a request to permit private companies to disclose the terms of 

"plain vanilla" interest rate swap agreements and the fair value of the asset 

or liability positions of the swaps in the notes as a proxy for swap 

agreement's current termination value. 

3. A proposal to address the scope of the exception allowed for measuring the fair 

value of ~ portfolio of fmancial instruments in paragraph 820-10-3 5-18D of Topic 

820, as amended by Accounting Standards Update 2011-04. We will address this 

as part of our 2012 annual teclmical corrections project. 

f. No projects were removed from the teclmical agenda. 

g. At the November 30, 2011 Board meeting, the Board ratified the consensus-forexposure reached by the Task Force on Issue No. II-A. The comment period for the 

Proposed Accounting Standards Update posted to the FASB website will end on 

February 6, 2012 (see Exposure Documents Issued above). 

h. At the November 30,2011 Board meeting, the Board ratified the final consensus 

reached by the Task Force on Issue No. 10-E (see Final Documents Issued above). 

i. All seven Board members participated in the November 3, 2011 EITF meeting. 

j. Outreach Activities-Meetings of F ASB Standing Advisory Groups: 

1. Financial Accounting Standards Advisory Council (FASAC): 

a October 2011 meeting: All Board members and several staff members 

participated in the October meeting of the F ASAC. Council members 

discussed a variety of topics, including the F AF Trustees' plan for private 

company standard-setting, areas of difference between U.S. GAAP and 

IFRS (accounting for inventories; contingencies; impairment of 

nonfinancial assets; and property, plant, and equipment), disclosure 

framework, and risks and uncertainties. 

b. December 2011 meeting: Six Board members and several staff members 

participated in the December meeting of the FASAC. Council members 

participated in an F ASB webcast on the Revised Exposure Draft for 

Revenue Recognition and discussed various aspects of the proposed 

model, including identifying and satisfying performance obligations, 

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transaction price and allocation, onerous performance obligations, interim 

disclosures, and transfers ofnonfmancial assets. Council members 

discussed a variety of other topics, including other comprehensive income. 

2. Investors Technical Advisory Committee (ITAC): Three Board members and 

several staff members met with the ITAC in November 2011 in a closed meeting 

to discuss a variety of topics, including the use of IFRSs in the u.s. (including 

two SEC papers: An Analysis of IFRS in Practice and A Comparison of us 

GAAP and IFRS), fmancial instruments: impairment and risk and liquidity 

disclosures, hedge accounting research, European debt disclosures, the revenue 

recognition proposal, and two Proposed Accounting Standards Updates: 

Investment Property Entities and Investment Companies. 

3. Small Business Advisory Committee (SBAC): Six Board members and several 

staff members participated in the November 2011 meeting of the SBAC. The 

FAF president and CEO provided an overview of the FAF Board of Trustees' 

Plan to Establish the Private Company Standards Improvement Council. 

Committee members discussed the proposed plan and a variety ofFASB projects, 

including the project to develop a decision-making framework for private 

companies, leases, disclosures about risks and uncertainties and the liquidation 

basis of accounting, and financial instruments: liquidity risk and interest rate risk 

disclosures. 

4. Private Company Financial Reporting Committee (PCFRC): The PCFRC met in 

Norwalk for 112 days in November. A Board member and several staff members 

participated in the closed session held on the first day. Six Board members and 

several staff members participated in the public session on the second day. 

During the meeting, the FAP president and CEO discussed the FAP's Plan to 

Establish the Private Company Standards Improvement Council. Committee 

members discussed the proposed plan and a variety of FASB projects, including 

the project to develop a decision-making framework for private companies, leases 

(including related-party leases), investment property entities, disclosures about 

risks and uncertainties, revenue recognition, long-lived intangibles, and 

consolidations. 

k. General Outreach Activities--Meetings with Industry or Other Representative 

Groups: 

1. October 20ll activities: 

a. Edison Electric Institute (EEl) and American Gas Association (AGA). 

Two Board members and several staff members met with EEl and AGA in 

a closed meeting. 

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b. Corporate Reporting Users Forum (CRUF). A Board member met with 

representatives of CRUF (closed meeting). 

c. National Association of Corporate Directors (NACD). A Board member 

met with representatives ofNACD in a (closed meeting). 

d. Group of North American Insurance Enterprises (GNAIE). Two Board 

members and several staff members met with GNAIE representatives and 

several insurance company CEOs (closed meeting). 

e. Committee on Bank Accounting and Reporting. A Board member and the 

F ASB technical director participated via teleconference in a closed 

meeting with the association oflarge banks. 

f. American Coalition of Stock Plan Administrators. A Board member and 

the F ASB technical director met privately with members of the American 

Coalition of Stock Plan Administrators (closed meeting). 

g. Small Business Financial & Regulatory Affairs Committee of the Institute 

of Management Accountants. A Board member discussed via 

teleconference various projects that may affect small businesses (closed 

meeting). 

h. AICPA Auditing Standards Board (Audit Issues Task Force Members). A 

Board member and some staff met with members of the Audit Issues Task 

Force (closed meeting). 

1. Representatives oflarge public accounting firms. Two Board members 

and the FASB technical director met with representatives from the 

national offices of several large public accounting firms (closed meeting). 

2. NovemberlDecember 2011 activities: 

a Committee on Corporate Reporting of Financial Executives Institute. A 

Board member discussed via teleconference various projects of interest to 

the committee (closed meeting). 

b. Independent Community Bankers of America (lCBA). Three Board 

members and several staff met with the ICBA (closed meeting). 

c. Business Accounting Council (BAC) within the Financial Services 

Agency of Japan. Two Board members, the F AF chairman, and the F AF 

president and CEO met with the BAC (closed meeting). 

d. Academic outreach: A Board member participated in a roundtable of 

research academics and a meeting of the American Accounting 

Association. 

I. Project-Specific Outreach Activities. Summaries of outreach activities on priority 

projects follow. 

1. Accounting for financial instruments: Board and staff members obtained 

user perspectives on the FASB's and IASB's hedge accounting proposals 

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through more than a dozen calls with financial analysts from more than 10 

organizations. Staff and/or Board members also discussed with various 

investors the usefulness of proposed disclosures for impaired financial 

assets. The staff met with representatives of eight different corporations, 

primarily financial institutions, and the major accounting firms to learn 

about the operability of the FASB's tentative classification and 

measurement approach. Staff members discussed the so-called threebucket approach to impairment with representatives of the American 

Bankers Association, the International Bankers Federation, and the major 

accounting flfIllS. Staff also discussed the Board's proposals related to the 

accounting for impairment of debt securities with companies and 

representatives of industry groups that would be significantly affected by 

those proposals. 

2. Leases: Board and staff members discussed the leases project at six 

conferences and at three F ASB standing advisory group meetings (F ASAC, 

SBAC, and PCFRC). Staff and/or Board members also discussed the 

project with six different investor/user groups, several industry 

representative groups (National Association ofInvestment Real Estate 

Trusts and Aviation Working group), a major accounting firm, and an 

accounting firm focused primarily on the nonpublic entity sector. 

3. Revenue recognition: The Board and staffraised awareness through 

participation in revenue recognition webcasts sponsored by two major 

accounting firms and discussions of the project with two F ASB advisory 

groups (F ASAC and IT AC). To gather information about the operability of 

the approach, staff and/or Board members have begun extensive outreach 

with stakeholders, including targeting specific industries that will be 

particularly affected by the proposals. The staff and Board members have 

discussed the Board's proposals with well over a dozen various preparer 

groups and two of the four major accounting firms. To obtain the 

perspectives of nonpublic entities, the project was discussed at meetings of 

the FASB's SBAC and PCFRC. In addition, staff or Board members 

presented information at approximately a dozen different conferences 

focused on the nonpublic sector including private companies and not-forprofit entities. Targeted outreach also was performed with private 

companies primarily in the construction industry, which included industry 

groups and associations. 

4. Insurance contracts: Staff or Board members discussed the project with 8 

different user groups and 18 different insurance companies or insurance 

industry representative groups. 

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5. Consolidation of investment companies and investment property entities: 

The project was discussed at a meeting of the FASB's IT AC and four other 

groups of investors and other users (these groups consisted of 

approximately 15 user organizations). Board or staff members gathered 

input and reactions on the proposal through meetings with five different 

prepareriauditor groups (these groups consisted of more than 25 

organizations) and the FASB's PCFRC. Significant user outreach and 

additional prepareriauditor outreach for these proposals is planned to be 

completed in the first quarter of2012 (to align with the comment period 

deadline). 

6. Risks and uncertainties (formerly going concern): The project was 

discussed at meetings of the FASB's advisory groups (FASAC, SBAC, and 

PCFRC). To gather information about the needs of users, the staff 

discussed the project with members onT AC and another group that 

represents users. The staff gathered information about a possible going 

concern assessment by management and held discussions and other 

correspondence with various preparers and accounting firms. 

7. Reporting comprehensive income: The staff discussed various application 

issues with several stakeholders. 

8. Private company issues roundtables. Three Board members and some staff 

participated in a roundtable in Chicago, and three other Board members 

and some staff participated in a roundtable in San Francisco. 

COLLABORA nON WITH THE lNTERNA nONAL ACCOUNTING STANDARDS 

BOARD 

a The FASB and the IASB held several multi-day joint video-conference Board 

meetings and two face-to-face joint Board meetings (Norwalk and London). 

b. The F ASB and the IASB held an insurance working group meeting in London. 

c. An F ASB Board member attended an IFRS Advisory Committee meeting in London. 

d. The FASB technical director attended the IASB Valuation Advisory Committee 

meeting. 

e. Two Board members attended the DeloittelIFRS Summit in New York. 

f. The F ASB and the IASB held small-group video-conference meetings on insurance, 

leases, and financial instnunents classification and measurement. 

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g. The F ASB and the IASB directors met periodically to discuss technical and 

administrative matters. 

OTHER INTERNATIONAL ACTIVITIES 

a. The F ASB chairman attended the IFRS conference in Boston. 

b. One Board member, the FASB technical director, and the F AF president and CEO 

met privately with the Australian Financial Reporting Council (closed meeting). 

c. The FASB chairman, a Board member, and the F ASB technical director participated 

in a conference call with EFRAG (closed meeting). 

d. An F ASB Board member participated in the Financial Stability Board roundtable on 

risk disclosures in Basel, Switzerland (open meeting). 

e. An FASB Board member participated in a discussion about the joint insurance 

contracts project at the IFRS Advisory Council meeting (open meeting). 

f. Two Board members and the FASB technical director met with members of the China 

Ministry of Finance (closed meeting). 

g. The FASB research director attended a meeting of the EFRAG project team on 

disclosure framework and participated by phone in two meetings. 

XBRL ACTIVITIES 

The F AF is responsible for the ongoing development and maintenance of the U.S. GAAP 

Financial Reporting Taxonomy applicable to public issuers registered with the SEC. The 

F AF has delegated these responsibilities to the F ASB. 

a. The F ASB delivered the final US GAAP Financial Reporting Taxonomy (UGT) and 

all supporting collateral to the SEC as per the SEC MOU requirements dated 

February 4, 2010, to enable its [mal review of the UGT). 

b. The staff hosted a face-to-face meeting of the FASB Taxonomy Advisory Group 

(TAG). The TAG includes participants from preparers, CPA firms, service providers, 

data aggregators, and analysts. This advisory group provides valuable input on the 

changes and directions taken with each taxonomy release. 

c. An F ASB Board member and staff visited with management of SNL Financial to 

solicit their feedback and provide guidance on using the UGT. SNL Financial 

collects, standardizes, and disseminates corpomte, financial, market, and M&A data. 

This was an initial outreach for the purpose of understanding XBRL consumption 

issues and how those consumption issues affect UGT developments, and providing 

guidance on using the current XBRL formatted data. 

d. XBRL staff participated in several presentations at the XBRL Intemational23,d 

Conference held in Montreal. 

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e. An F ASB Board member represented the F ASB at an SEC roundtable, hosted by 

Columbia University, which brought together representatives from the filer and 

analyst community to address XBRL document creation and consumption issues. 

f. XBRL staff participated in the IASB XAC and XQRT face-to-face meeting in 

London. These two groups provide input and guidance for the IFRS taxonomy effort. 

g. FASB hosted an IN FOCUS webinar, "Summary of Changes for the Proposed 2012 

Taxonomy and Using XBRL Tables." In addition to providing an overview ofthe 

proposed 2012 Taxonomy, this was a technical session designed to help users with 

the more challenging aspects of using the Taxonomy. This was the 3rd XBRL 

webinar in 2011. These webinars continue to be very popular with over 1,000 live 

viewers participating in the latest session. 

ITEM 2: EDUCATION AND COMMUNICATIONS 

EDUCATIONAL WEBCASTS AND PODCASTS DELIVERED 

a. Webcasts (which averaged 850 participants for the live webcasts): 

1. IN FOCUS: Summary of Changes for the Proposed 2012 Taxonomy and 

UsingXBRL 

2. The FAF's Plan to Improve Private Company Financial Reporting 

3. IN FOCUS: Understanding the FASB's Proposals for Investment Companies, 

Investment Property Entities, and Consolidations 

4. IN FOCUS: Understanding the FASB's Exposure Draft Revenue from 

Contracts with Customers 

5. IN FOCUS; FASB Update for Nonpublic Entities. 

b. Podcasts: 

1. November: Proposed Accounting Standard Update: Revenue Recognition 

from Contracts with Customers. 

SPEECHES DELIVERED 

F ASB Board members or staff delivered speeches at the following conferences and 

events: 

AICPA Annual Health Care Industry Conference 

• AICP A Governmental & NFP Training Program 

• AlCPAlIFRS Conference on International Financial Standards (!FRS): 

The North American Perspective 

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• AICPA National Conference on Credit Unions 

• AICPA National Conference on Current SEC and PCAOB Developments 

• AlCP AlSIFMA Financial Management Society National Conference on the 

Securities Industry 

• Alabama Society of CP As Educators Conference 

• American Accounting Association Northeast Region Conference 

• American Accounting Association 2011 Midwest Region AAA Meeting 

• Assoc. General Contractors of America Financial Management Conference 

• CalCPA Education Foundation 2011 Accounting and Auditing Conference 

• COBAR Fall Meeting 

• Connecticut Society of CPAs Not-for-Profit Organization Committee Session 

• Deloitte & Touche IFRS Summit 2011 

• Ernst & Young Financial Services Accounting Change Symposium 

• FDIC Division of Finance and Corporate University 2011 Accounting & Auditing 

Conference 

• FEI CFRI Conference 

• FEI Central P A Chapter Meeting 

• FEI Northeastern Wisconsin Chapter Monthly Meeting 

• Financial Executives Networking Group 

• Financial Stability Board Roundtable 

• Financial Times and Credit Suisse Lex Forum Series 

• Florida Institute of CPAs (FICP A) and the University of Florida Fisher School of 

Accounting Conference 

• Geneva Association Insurance and Finance Seminar 

• Georgia Society of CP As A&A Conference 

• Greater Washington Society ofCPAs 23,d Annual GWSCPA Not-for-Profit 

Organizations Symposium 

• Illinois CPA Society Accounting & Auditing Conference 

• Investment Company Institute Conference 

• Kennesaw State University Financial Reporting Roundtable 

• KPMG Financial Reporting & Valuation Conference 

• Michigan State University Postgraduate Technical Assistant Program Presentation 

• Mortgage Bankers Association Accounting, Tax & Financial Management 

Conference 

• NASBA Annual Meeting 

• National Association ofRea1 Estate Companies Annual Conference 

• National Council for Public Private Partnerships Real Estate Forum 

• NYSSCP A Rockland Chapter CPE Program 

• NYSSCPAIFAE IFRS Conference 

• NYSSCPA Banking Committee Breakfast 

• NYSSCPAAnnuai SECIFASB Conference 

• Ohio Society ofCPAs SEC Conference 

• Oklahoma State University Financial Reporting Conference 

• Padgett Stratemann 2011 Construction Conference 

• Pennsylvania Institute of Certified Public Accountants Construction Industry 

Conference 

• Pepsico Annual Conference 

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• PhRMA and PharmalBiotech Companies Accounting and Reporting Annual 

Meeting 

• PKF North American Summit 

• PricewaterhouseCoopers 13th Annual Meet the Experts 

• Professional Development Institute University of North Texas Accounting & 

Financial Reporting Update Conference 

RR Donnelly SEC Hot Topics Institute 

• Society of Insurance Financial Management SIFM December Meeting 

• South Carolina Association ofCPAs 2011 Accounting & Auditing Conference 

• Standard & Poor's Accounting Hot Topics Conference 

• The Clearing House First Annual Business Meeting & Conference 

• Washington Society ofCPAs Annual NFP Conference 

Washington Society of CP As Accounting & Auditing Update Conference 

• William & Mary College Veris CPA Trek Program 

ITEM 3: ADMINISTRATIVE, PROCEDURAL, AND STRATEGIC ACTIVITIES 

a. Administrative Matters: 

1. All Board members attended the November F AF Trustees meeting. 

b. Professional Development-F ASB Board and Staff 

1. The following professional development sessions were presented to the Board and 

staff: 

a. Long-Term Health Care Planning, Owen Svalestad, Financial Representative 

with New England Financial Grou~e facts and myths of long-term health 

care and the importance of proper planning. The presentation covered the cost 

of care and who pays the bills (what Medicare and Medicaid cover). 

b. The Fiscal Policy Space and Condition of Cities, Christopher Hoene, Center 

Director, Research & Innovation, National League of Cities (NLC). The 

presentation provided an overview of the "fiscal policy space" of cities-the 

structures and attributes that determine the fiscal policy tools available to 

cities, including state rules and constraints, underlying economic drivers, 

variation in local service demands, and local political and institutional 

factors. The presentation also provided the latest assessment of the fiscal 

health of the nation's cities, drawing on NLC's release of "City Fiscal 

Conditions in 2011," a report based on an annual survey of city fmance 

officers and city budgets. Contemporary concerns about pension and health 

care costs, municipal default, and municipal bankruptcy also were addressed 

in the presentation. 

c. Lunch and Learn: Real Estate Today, Patricia Rattray. Selling your home 

and finding qualified buyers can be extremely challenging in today's real 

estate market, but it is absolutely possible. This workshop helped employees 

11 Oct-Dec 2011 Chainnan Report 
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avoid losing thousands of dollars in price reductions and provided a step-bystep process for adding 10 percent or more to the price of a sale. 

d. The Conceptual Framework Project: An Overview, Part 2---Current Issues, 

Ron Lott, F ASB Research Director, and Jim Leisenring, F ASB Senior 

Advisor. Messrs. Lott and Leisenring continued their discussion on the 

history of the Conceptual Framework, including the issues that were in 

process when work on the framework was suspended. At the conclusion of 

this presentation, participants were able to understand the difficulties that the 

Board will face when deliberations are resumed. 

e. Reflections on My Time at the Securities and Exchange Commission, Wayne 

Carnall, Partner-PriceWaterhouseCoopers, Former Chief Accountant in the 

Division of Corporation Finance. Mr. Carnall discussed his experiences at 

the Securities and Exchange Commission and focused on discussing 

accounting and reporting issues in which the staff noted entities that had 

challenges complying with the accounting guidance and/or the staffhad 

challenges enforcing compliance with the accounting guidance. He also 

shared his perspective on changes that can be made to improve financial 

reporting. 

f. Successful Leaders in Today's Business Environment (the third of the F AF 

Leadership Series), Ursula Burns, Chief Executive Officer, Xerox 

Corporation. This session provided the staff with Ms. Burns' insights on what 

makes a good leader; how good leaders inspire, motivate, and coach others to 

work together for a common objective; and what she believes are the 

challenges and obstacles to good leadership. The objective of this session was 

to provide the staff with a better understanding of what makes a great leader 

and how those traits can be used to find success outside the workplace. 

c. Professional staff attended the following external conferences: 

1. FEI 30th Annual Current Financial Reporting Issues Conference 

2. AICPA National Conference on Current SEC and PCAOB Developments 

3. 2011 FASB-IASB Financial Reporting Issues Conference. 

ITEM 4: GOVERNMENT AND REGULATORY LIAISON ACTIVITIES 

a. Members of SEC, PCAOB, Congress, their staffs, and the Administration were 

informed about the activities of the FASB through various meetings and other 

forums, including: 

1. An F ASB Board member participated in a meeting of the Financial Reporting 

Series, with the Chairman of the PCOAB, the SEC Chief Accountant, and 

12 

Oct-Dec 20 II Chainrum Report 
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numerous external participants. The topic was measurement Wlcertainty. Several 

planning and follow-up calls were held. 

2. An F ASB Board member, the FAF president and CEO, and F AF staff conducted a 

conference call with U.S. Treasury Deputy Assistant Secretary for International 

Markets & Development to discuss the drafting of the G20 communique for 

accoWlting issues. 

3. FASB Board members, FASB senior staff, and the F AF president and CEO 

participated in a monthly update conference call conducted by F AF staff on 

pending and emerging congressional activities and issues as well as 

Administration regulatory initiatives. 

4. F ASB Board members and F AF staff provided a quarterly briefing of emerging 

technical, and policy issues to the SEC and PCAOB leadership and senior staff, in 

additional to numerous telephone conversations about various matters. 

5. The FASB chairman, an FASB Board member, and the FASB technical director 

met with a representative of FINRA to discuss matters of mutual interest. 

ITEM 5: OTHER COMMUNICATIONS ACTIVITIES 

a. The F ASB issued the following press releases/media advisorieslTweets: 

1. 10.3.11: FASB Not-for-Profit Advisory Committee Recommends Improvements 

to Financial Reporting 

2. 10.12.11: MEDIA ADVISORY: F ASB Adds Agenda Project to Consider 

Deferring Certain Aspects of AccoWlting Standards Update No. 2011-05, 

Comprehensive Income (Topic 220): Presentation o/Comprehensive Income 

3. 10.14.11: FASB Seeks Comments on Proposed Technical Corrections to 

Codification 

4. 10.21.11: F ASB Seeks Comments on Proposal to Clarify Criteria for Investment 

Company AccoWlting 

5. 10.21.11: F ASB Seeks Comments on Proposal on AccoWlting for Investment 

Property Entities 

6. 11.4.11: FASB Seeks Comments on Proposal for Improving Financial Reporting 

of Consolidations 

7. 11.9.11: FASB Chairman Adds Two Agenda Projects to Improve Financial 

Reporting by Not-for-Profit Organizations 

8. 11.14.11: lASB and F ASB Publish Revised Proposal for Revenue Recognition 

9. 11.17.11: MEDIA ADVISORY: Registration Is Now Open for November 28 

Webcast, IN FOCUS: Understanding the FASB's Proposals/or Investment 

Companies, Investment Property Entities, and Consolidations 

10.11.29.11: FASB Chairman Adds an Agenda Project on Fair Value Measurement 

Disclosures for Private Companies and Not-for-Profit Organizations 

11. 11.30.11: MEDIA ADVISORY: Registration Opens for December 20 Webcast, 

IN FOCUS: FASB Update/or Nonpublic Entities 

12. 12.1.11: MEDIA ADVISORY: Registration Opens for December 8 Webcast, IN 

FOCUS: Understanding the Exposure Draft, Revenue from Contracts with 

Customers 

13. 12.16.11: lASB and FASB Issue Common Offsetting Disclosure Requirements 

13 

Oct-Dec 2011 Chainnan Report 
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14. 12.21.11: The F ASB Announces Public Roundtable Meetings to Solicit Input on 

Proposal to Improve Accounting for Investment Companies and Proposal on 

Investment Property Entities 

15. 12.23.11: FASB Defers Certain Aspects of Comprehensive Income Accounting 

Standards Update 

b. The FASB issued "FASB in Focus" documents for the following; 

1. 11.18.11: Proposed Improvements to Criteria for Investment Company 

Accounting and Proposed Accounting Guidance for Investment Property Entities 

2. 11.23.11: FASB Issues Proposed Improvements to Consolidation Accounting 

3. 11.14.11: F ASB and IASB Publish Revised Exposure Draft on Revenue from 

Contracts with Customers 

4. 12.19.11: FASB Issues Accounting Standards Update No. 2011-11: Balance 

Sheet (Topic 21): Disclosures about Offsetting Assets and Liabilities 

5. 12.23.11: F ASB Defers Certain Aspects of Comprehensive Income Accounting 

Standards Update 

c. Media Outreach: 

1. During the quarter ended December 31, 2011, members of the F ASB or its staff 

participated in numerous interviews with media. 

llEM 6: GASB LIAISON ACTIVITIES 

a. GASB meeting minutes were sent to the F ASB directors. 

b. The GASB and F ASB directors met monthly to discuss their technical agenda 

projects and other matters of mutual interest. The FASB and GASB chairmen and 

their respective directors held their quarterly meeting to discuss technical issues and 

other matters of mutual interest. 

c. The GASB staff distributed the following draft to the FASB for review: 

• Exposure Draft, Government Combinations. 

d. The FASB staff distributed the following drafts for GASB's review: 

• Accounting Standards Update, Property. Plant, and Equipment (Topic 360): 

Derecognition of in Substance Real Estate-a Scope Clarification (a consensus of 

the F ASB Emerging Issues Task Force) 

• Accounting Standards Update, Balance Sheet (Topic 210): Offsetting Disclosures 

• Accounting Standards Update, Comprehensive Income (Topic 220): Deferral of 

the Effective Date for Amendments to the Presentation of Reclassifications of 

Items of Other Comprehensive Income in Accounting Standards Update No. 

2011-05 

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• Proposed Accounting Standards Update, Financial Services-Investment 

Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure 

Requirements 

• Proposed Accounting Standards Update, Consolidation (Topic 810): Principal 

versus Agent Analysis 

• Proposed Accounting Standards Update, Revenue Recognition (Topic 605): 

Revenue from Contracts with Customers 

• Proposed Accounting Standards Update, Comprehensive Income (Topic 220): 

Deforral of the Effictive Datefor Amendments to the Presentation of 

Reclassifications of Items of Other Comprehensive Income in Accounting 

Standards Update No. 2011-05 

• Proposed Accounting Standards Update, Consolidation (Topic 810): Parent's 

Accountingfor the Cumulative Translation Adjustment upon the Sale or Transfor 

of a Group of Assets That Is a Nonprofit Activity or a Business within a 

Consolidated Foreign Entity (a consensus of the FASB Emerging Issues Task 

Force) 

• Proposed Accounting Standards Update, Revenue Recognition (Topic 605): 

Revenue from Contracts with Customers-Proposed Amendments to the FASB 

Accounting Standards Codification®. 

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Oct-Dec 2011 Chairman Report 
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- - - - - -

II ~~~"''' ~~~~_!'l' ~'t~ ~~ _ - - - _ _---

- - - -

- --

FASB Accounting Standards Updates 

Effective July 1,2009, changes to the source of authoritative U.S. GAAP, the FASB Accounting Standards Codification® 

(FASB Codification), are communicated through an Accounting Standards Update (Update). Updates will be published for 

all authoritative U.S. GAAP promulgated by the F ASB, regardless ofthe form in which such guidance may have been issued 

prior to release of the FASB Codification (e.g., FASB Statements, EITF Abstracts, FASB Staff Positions, etc.). Updates also 

will be issued for amendment'i to the SEC content in the F ASB Codification as well as for editorial changes. 

An Update is a transient document that (1) summarizes the key provisions of the project that led to the Update, (2) details the 

specific amendments to the F ASB Codification, and (3) explains the basis for the Board's decisions. Although ASUs will 

update the F ASB Codification, the F ASB does not consider Updates as authoritative in their own right. 

Prior to the release of the FASB Codification as the single source of authoritative U.S. GAAP, the FASB amended preCodification standards and issued them in an "as amended" fonn. The F ASB will not amend Updates. It will only amend the 

FASB Codification. 

FASB Accounting Standards Updates 

Update No. 2011-12-Comprehensive Income (Topic 220): Deferral ofthe Effective Date for Amendments to the 

Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards 

Update No. 2011-05 

Uodate No. 201l-II-Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities 

• Undate No. 201l-HI-Propcrty, Plant, and Equipment (Topic 360): Derecogoition of in Substance Real Estate----a Scope 

Clarification (a consensus of the FASB Emerging Issues Task Force) 

Update No. 201l-09-Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures 

about an Employer~s Participation in a Multiemployer Plan 

Update No. 201l-0S--Intangibles----Goodwill aod Other (Topic 350): Testing Goodwill for bmpainment 

Update No. 20ll-07-Health Care Entities (Topic 954): Presentation aod Disclosure of Patient Service Revenue, 

Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus ofthe 

FASB Emerging Issues Task Force) 

• Update No. 201l-06--0ther Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurer.; (a 

consensus of the F ASB Emerging Issues Tao;k Force) 

Update No. 201l~O~omprehensive Income (Topic 220): Presentation of Comprehensive Income 

Update No. 2011-04---Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value 

Measurement and Disclosure Requirements in U.S. GAAP and IFRSs 

• Update No. 201l-Q3--Traosfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase 

Agreements 

Update No. 201l-O~Receivables (Topic 310): A Creditor's Detenmination of Whether a Restructuring Is • Troubled 

Debt Restructuring 

Undate No. 20ll-Ol--Receivables (Topic 310): Deferral of the Effective Dale of Disclosures about Troubled Debt 

Restructurings in Update No. 2010-20 
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FASB: Financial Accounting Standards Board Page 1 of3 

=--= --_ -----_:=--~~i~---=- ~~-;~~ -=-=- ;;--~ :;---=-_- --=--=--~ -=-= -~~-= -~- -=--=-~_ - ---=-= ~-=---_ ~-==- ~--=-~~~ 

~~~~--~ -"_cc:-=_~~=-=-~~~ -~~= -_=~~ "-= =~-_ 

--= --~- =:- ~-=-~-~=-;-=-~~ -=--=-==-=-~=---= ~~~- ~---=--:-~ -~ ~-=---=---~~-~-~--=-~--~ -=----~~-~- -=~~~~-~=---=- ---~ 

Current Technical Plan and Project Updates 

The FASB prepares a project plan to communicate information about 

its standards-setting activities to stakeholders. The project plan Jists an agenda projecJs and includes: 

EsBmoted publication dates through 2012 (Discussion Papers (D), 

EXPQSUfU Drafts (Es). and Final Accounting Stand8rds Updates or 

Final Conceptual Framework chapters (Fs).) 

Comment periods 8xpeded to close in the next 4 quarters (indicated 

byaC) 

Roundtable meetings or other public forums planned (indicated by 

anR) 

The FASB sets standards fOllowing estabHshed due process 

procedures that include extensive consultation. This project plan is 

subject to change as a result of those consultations or for other 

reasons, 

The project plan includes links to staff prepared project summaries that 

descn'be Board decisions and provide other information. The decisions 

are tentative and do not change current accounting. Official positions 

of the FASB are determined only after extensive due process and 

deliberations. 

Current Teehnical Plan 

ACTIVE JOINT FASBIIASB PRO~ECTS: 

2012 

1Q2Q2H 

Standards Projects: .. ". ." 

, Ii)! Accounting for Financial Instruments 

(Updated December 1, 2011) 

Liquidity and Interest Rata Risk Disclosures 

! til Impairment 

(Updated November 10, 2011) 

; t1 Hodging 

, (Updated Docember 1, 2011) 

~-

1 Ii)! Consolidation; Policy and Procadures 

, (Updated December 13, 2011) 

: t1 ~1~;;;';;;;t-~;;;;;'I9S 

, (Updated March 21, 2012) 

: f! Bevenue Recognition , (Updated March 15, 2012) 

(i.;1.:;;;;;.----mmu 

, (Updated March 9, 2012) 

1 tllnsuranse Contracts 

: .. (Updated March 7, 2012) 

tt1INACTIVE JOINT FASBIIASB PRO.JECTS: 

1 The following joint"projeCts W'efS rea~~~ as lower prion-ty 

j projects. Further action is not expected in the near term. 

teE;;i;;I-~-T~djM·S~;;;;; -, 

(Updatad December 6, 2010) 

a Flnanciallns!ruments with Characteristics of Equity 

(Updated Odober 26, 2010) 

R 

, E' 

b.ttp:l!www.fasb.orgljsplFASB/Page/SectiooPage&cid=12 1 8220137074&pf=true 3126/2012 
235 


75084.176

FASB: Financial Accounting Standards Board 

: m Financial Statlmem Presentation 

: (Updated May 3,2011) 

l'mR~;;rti~'~'pjsc,;nti~-~;d c;;,:;ti;';''" (Updated July 29,2010) ~--~. ,--- ---- -- .. _" ! Earnlnas per Share 

: (Updated May 7, 2009) 

l jnco~e Ta~~ i (Updated November 6, 2009) 

j 'P~t~;tii8-~entBOn;fit" Oblig;tions i~C!Udi~ti-p~~;I~'~ -(PhasO'zj'; ; (Update~ Ja~~ary~! '.2009) 

m Conceptual Framework Prolact: 

(Updated 8S of November 23, 2010) 

~""_rtInl!E.ntity ... Measurement 

FASB PROJECTS: 

: m Disclosures about Risks and Uncertainties and 

the liquidation Basis of Accounting lform&rly 

Going Concern) 

(Updated February 24, 2012) 

! ~ Investment Property Entities 

(Updated March 20, 2012) 

1 m CodifICation Technical Corractions (including 

1 Certain Amendments 10 various Codification 

mlcs to Conform Terminology to TopIc 820) 

(UpdaCedOcloberI9,2011) --- - .- " ... _._----_ .... _ .. _-----_ .. a Nonpublic Entity Fair Value Measurement 

. Disclosures 

(Updated November 29, 2011) 

: ~ Disclosure Framework 

(Updated February 15, 2012) 

2012 

1Q 2Q 2H 

E 

R· 

E 

o 

i m Impairment of lndefinite:Liyed Intangible Assets C 

, (Exposure Dra~ Issued 01125112. Updated February 

21,2012) 

m Disclosure of Certain Loss Contingencies 

(Updated October 24, 201/) 

! m Not-for-Profit Financial Reporting: Financial 

Sta\lImants 

(Upd"te<1_~",,"'.be:.!I_, 2 ..0 .. 1 .. 1.:.) .. _ ... 

i m Presentation of Comprehensive Incorne' , ReclassWcations Out of Accumulatad Other 

ComPrehrmsiY' Incom! (Updated January 5, 2012) 

j m Definition of a Nonpublic Entity 

(Added to agenda March 2012. Updated March 7, 

2012) 

Repurchase Agreements and Similar 

Transactions 

(Added 10 agenda March 2012) 

FASBRESEARCIiPItIl::/EC"rS' .. 

Application of AS8st- or Entlty-Basad Guidance 

to Nonfinancial Assets Held in an Entity 

~ m 

~ 

Decision-Making Framework for Private 

(Updated October 18,2011) 

2012 

1Q2Q2H 

E: 

http://www.fasb.org/jsp/F ASBlPage/SectionPage&cid=1218220 137074&pFtrue 

Page 2 of3 

3/26/2012 
236 


75084.177

FASB: Financial Accounting Standards Board 

Not~for-Profit Financial Reporting' Other 

financial Communications 

(Updflted November ", 2Q11) 

'FA$B !!!M!!!R~!~G ISSUES TASK FORCE 

PROJECTS: 

j Parnnt's'Accounting ';C:;~-the·Cu-.:n~lative Translation 

!Adjustment upon the Sale or Transfer of a Group of 

j Assets That Is a Nonprofit Activity or a Business 

l~_thin a_~~~.~.~~~~. ~~~~~~~JJ~~L ; Not-for-Profit Entities: Classification of Gifts of 

i SecuriUas Immediatety Sold In the Statement of 

;ca!hF~~(1~:A.) 

Not-for-Profit Entitres: Contributed Servicos from an 

A!fll.i~,! (12-Ei) 

: Subsequent Accounting for an Indemnification Asset, 

~ Recognlzad as a Result of a Govemmont-Anisted ' 

;_~~~!!~IO_~_O_~,,:,. ~!~~~. ~!!~~~_~~!~::.L ... _ : Accounting for Joint and Savoral Uabllity for Which 

t.~!. ~~~~ .~_~~!:I~!_~~_~~_~~I<~~_~~~~_~_~.~~!~i1"~:~J _ ; Accounting for Fair Value Information That Arises 

!~~=:~i~\t~ ~=~=~~:~ ;~n!!ortiZed : ,Film Costs (12,£) 

fA~counti~·f;·~·tti·p1e Fo~ig~"C~;"~ncy Exchang~' 

• R~te~ (16-8) .(!nactive I~) 

2012 

1Q 2Q 2H 

'F 

E' 

1The FASS IS continuIng to redeliberate the Issue, in this projed.and ontethOse 

redeliberations. are completed, the Board. Iib!Iy will deckle whelherto Tt!eKpDSe Ihose 

declsions.for public comment However, olTlclaJ poslllons are rnached by the FASS 

only after exlfInslw due process and deliberations. AI a mlnimum, before issung the 

final document, the FASB inlends tQ eXpOSe lor public commenllhe proposed 

amendments to lhe FASS Accounting standards CocIiflcati0n'3 (liS required by the 

FASS', RuIHOf Procedure). 

?rhB timing of the DIscussion Paperwm be comfinated with Iheoutcome oflhe 

FAF's ptsn to Establish the Private Comptnv Standards IIDPf9V!/1lMt CouneJl 

1.ElaJl<l. 

Codes: 

C - Comment Deadline 

D - Discussfon Paper 

E - Exposure DraR F - Final Document 

R- Roundtable Discussion 

Iltlp:llwww,fasb,org/jspIFASB/Page/SectionPage&cid=121822013 7074&pf=true 

Page 3 of3 

3126/2012 
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75084.178

The Financial Accounting Foundation 

Board of Trustees 

Request for Comment 

Plan to Establish the Private Company Standards 

Improvement Council 

October 4, 2011 

Norwalk, Connecticut 

Financial Accounting Foundation 

401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116 

www.accountingfoundation.org 
238 


75084.179

Table of Contents 

Executive Summary of the FAF Board of Trustees Plan to Establish 

Page 

Number 

the Private Company Standards Improvement CounciL ......................................................... I 

Background ................................................................................................................................. 3 

Key Conclusions ......................................................................................................................... 5 

The Private Company Standards Improvement Council ............................................................ 7 

Considerations ............................................................................................................................. 9 

Common Constituent Concerns ................................................................................................ 10 

Request for Comments ................................................................................................. '" .......... II 

Public Roundtable Meetings ..................................................................................................... 12 

Appendix: FASB Initiatives to Improve the Standard-Setting Process for 

Private Companies .................................................................................................................. 13 
239 


75084.180

EXECUTIVE SUMMARY OF THE FAF BOARD OF TRUSTEES PLAN TO 

ESTABLISH THE PRIVATE COMPANY STANDARDS IMPROVEMENT COUNCIL 

As a result of outreach to external stakeholders, study, and deliberation, the Financial 

Accounting Foundation (FAF) Board of Trustees plans to establish a "Private Company 

Standards Improvement Council" (PCSIC) to improve the standard-setting process for private 

companies. The Trustees seek public comment on the plan, as outlined in this document, until 

January 14,2012. The Trustees will make a final decision on the plan following the end of the 

comment period. 

Authority and Critical Responsibilities 

The PCSIC would determine whether exceptions or modifications to nongovernmental US 

Generally Accepted Accounting Principles (US GAAP) are required to address the needs of 

users of private company financial statements. Jointly with the Financial Accounting Standards 

Board (FASB), which sets accounting standards for public and private companies and not-forprofit organizations in the United States, the PCSIC would develop criteria for determining 

whether and when exceptions or modifications to US GAAP are warranted for private 

companies. Based on those criteria, the PCSIC would conduct a review of existing US GAAP 

and identify standards that require reconsideration and vote on possible exceptions or 

modifications for private companies. Any proposed changes to existing US GAAP would be 

subject to ratification by the FASB and undergo thorough due process, including public 

comment. The PCSIC would be overseen by the FAF Board of Trustees. 

Formation and Membership 

The PCSIC would comprise a chairman and 11 to 15 members. The PCSIC chairman, who 

would be selected and appointed by the Trustees, would be a F ASB member with substantial 

experience with and exposure to private companies during his or her career. PCSIC members 

also would be selected and appointed by the Trustees. Members would include users, preparers, 

and practitioners who have significant experience using, preparing, and auditing (and/or 

compiling and reviewing) private company financial statements. 

Nominations for membership on the PCSIC would be sought from a broad array of interested 

stakeholders and stakeholder groups. Members would be appointed for a three-year term and 

could be reappointed, based on input from the PCSIC chairman and FASB chairman, for up to 

two additional one-year terms (for a total of five years). Membership tenure would be staggered 

to assure appropriate continuity on the.PCSIC. F ASB staff would be assigned to support and 

work closely with the PCSIC on outreach and research projects to leverage the FASB's resources 

and to avoid duplication of efforts. 

Meetings 

The PCSIC would meet four to six times per year. The meetings would be held at the FASB's 

offices in Norwalk, Connecticut, with the intention that all F ASB members would participate. 

PCSIC meetings would be webcast and open to the public, except for discussions of an 

administrative nature, which could be closed. 

Page 1 
240 


75084.181

Oversight 

During the first three years of operations, the PC SIC would provide periodic in-person reports to 

a newly created, special-purpose Private Company Review Committee of the FAF Board of 

Trustees. The PCSIC also would provide quarterly written reports to the full FAF Board of 

Trustees. Following the three-year period, the oversight responsibilities of the Private Company 

Review Committee would be transferred to the existing Standard-Setting Process Oversight 

Committee of the Trustees. Quarterly written reports by the PCSIC to the Trustees also would 

continue following that transition. In addition to this oversight, the Trustees would conduct an 

overall assessment of the PCSIC at the end of the three-year period to determine whether its 

mission is being met and whether further changes to the standard-setting process for private 

companies would be warranted. 

The planned PCSIC best addresses constituent concerns 

The F ASB has made recent, substantive changes to the manner in which it engages with private 

company stakeholders, and has demonstrated a greater operational and structural commitment to 

further address these issues. However, constituents continue to express concerns about private 

company needs. 

In addressing these concerns, the Trustees considered a range of options, including: 

I. Creating a new, autonomous, and authoritative standard-setting board for private 

company issues, under the oversight of the FAF, as recommended by the Blue-Ribbon 

Panel on Standard Setting for Private Companies 

2. Establishing a new body, under the oversight of the FAF, to identify standards that 

require modification and to vote on specific proposed exceptions or modifications that 

would then be subject to ratification by the F ASB and submitted to the public for 

comment 

3. Establishing a new committee on private company issues that would serve solely in an 

advisory role to the FASB 

4. Continuing to monitor the FASB's existing and ongoing initiatives to better serve the 

needs and interests of private companies. 

In deciding on the second option, the Trustees concluded that creating a separate standard-setting 

board for private companies would likely lead to the establishment of two separate sets of US 

accounting standards-a so-called "little GAAP" for private companies and a "big GAAP" for 

public companies, which is not a desired outcome. 

Concerns communicated to the Trustees about the complexity and relevance of US GAAP to 

private companies appear to involve a small but key group of standards. The Trustees concluded 

that improvements should focus on those standards first. 

In addition, the Trustees concluded that the F ASB should address-and is committed to 

addressing---complexity, relevance, and cost-benefit issues more broadly, as other constituents, 

in addition to private companies, have expressed similar concerns. 

Page 2 
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75084.182

Plan to Establish the Private Company Standards 

Improvement Council 

BACKGROUND 

Since it was created in 1972, the Financial Accounting Foundation (F AP) has committed itself to 

the challenging mission of balancing two critical, but sometimes conflicting, objectives: 

• Ensuring that its standard-setting bodies (the Financial Accounting Standards Board and 

the Governmental Accounting Standards Board) develop high-quality accounting 

standards that provide investors, lenders, and other users of financial statements with 

clear, comparable, and decision-useful financial information about a wide variety of 

companies, not-for-profit organizations, governmental bodies, and other entities 

• Ensuring that those standards also take into account the individual needs and 

circumstances of the constituents of the disparate entities that issue financial statements 

under US Generally Accepted Accounting Principles (US GAAP), specifically related to 

relevance, complexity, and costs versus benefits. 

The ongoing effort to reconcile those two goals has continued for nearly 40 years. One of the 

greatest challenges has involved the needs of nonpublic entities, including privately held 

companies and not-for-profit organizations. Over the years, no fewer than 12 separate reports, 

studies, or formal recommendations on issues related to private companies were produced, with 

varying degrees of impact and success. 

In the past ten years, as businesses and business transactions have become increasingly global 

and complex, some have argued that the needs of public company and private company users of 

financial statements have moved further apart, even as the demands of capital markets have 

made it more important to maintain the comparability of financial reporting among disparate 

companies and organizations. 

Focus on Private Company Issues 

In 2006, the Financial Accounting Standards Board (FASB) created the Private Company 

Financial Reporting Committee (PCFRC) in an effort to further improve its ability to incorporate 

the views of private company constituents in its standard-setting process. Comprised of a 

chairman and 12 members representing nonpublic business entities, regardless of size, the 

mission of the PCFRC was to provide recommendations to the FASB on issues related to 

standard setting for private companies and to focus on how standard setting affects day-to-day 

technical activities at private companies. 

Three years later, the FAF Board of Trustees undertook a nationwide "listening tour," during 

which groups of Trustees and senior FAP leadership met with diverse constituents to hear and 

Page 3 
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75084.183

understand their views on the indleplmdent standard-setting process and key issues affecting 

financial reporting. 

During the tour, the Trustees learned that many constituents continued to be concerned about the 

cost and complexity of standards for nonpublic entities and, frankly, were not satisfied with the 

results of the collaboration between the FASB and the PCFRC. Some constituents believed that 

in the PCFRC's early years, the FASB did not participate fully in its processes or pay sufficient 

attention to its recommendations. In addition, they said the PCFRC was not initially effective in 

engaging with the F ASB and adVocating on behalf of its constituents. A major issue cited by 

constituents was that the FASB and the PCFRC did not develop and agree upon a framework for 

considering exceptions or modifications to US GAAP for private companies. 

Blue-Ribbon Panel on ;}tGfIIIJarll Companies 

As a result of these concerns, the Trustees collaborated with the American Institute of Certified 

Public Accountants (AICPA) and the National Association of State Boards of Accountancy 

(NASBA) to create the Blue-Ribbon Panel on Standard Setting for Private Companies. The panel 

was charged with studying the needs of users of private company financial statements and 

making recommendations to the Trustees about how the standard-setting process can best meet 

those needs. 

Separately, the FASB took additional steps to improve the process for private 

companies. The FASB, for example, assembled a team of professionals focused on formally 

representing and input from private companies; established a series of roundtables on 

private company issues; undertook efforts to develop a framework for identifying whether and 

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when differences in standards are warranted for private entities; increased education efforts to 

help private company constituents become informed about changes in US GAAP; created a 

dedicated electronic portal to make it easier for private company stakeholders to access 

information; developed an electronic feedback forum to enable private company stakeholders to 

more easily comment on the FASB proposals; and specifically addressed private company 

concerns in a series of standard-setting decisions related to goodwill impairment, revenue 

recognition, and financial instruments. 

In January 2011, the Blue-Ribbon Panel submitted a report to the Trustees with its 

recommendations, including, among others, the creation of a new, separate, and authoritative 

standard-setting board (under the oversight of the Trustees) that would establish exceptions or 

modifications to US GAAP for private companies. 

The Working Group 

In March 2011, the FAF appointed several Trustees and senior FAF staff members to a 

"Working Group" to further consider standard setting for nonpublic entities. 

The Working Group received significant input from users, practitioners, and preparers of private 

company and not-for-profit financial statements. The Working Group also reviewed the current 

process by which the FASB considers the concerns of private companies and not-for-profit 

organizations. Specifically, the Working Group conducted a series of meetings with 

stakeholders, including meetings with representatives oflarge, mid-market, and small CPA 

firms, all with significant practices serving private companies and not-for-profit organizations. 

The Working Group also met with leading members of the academic community who have 

reviewed and, in some cases, undertaken significant research on issues relating to private 

company and not-for-profit financial reporting. Representatives of the Working Group also 

participated in discussions with the FASB's advisory groups, including the Financial Accounting 

Standards Advisory Council (FASAC), the PCFRC, the Not-for-Profit Advisory Committee 

(NAC), and the Small Business Advisory Committee (SBAC). 

Representatives of the Working Group had meetings with lenders, investors, regulators, donors, 

and others. Also, the Working Group considered the content of more than 2,800 unsolicited 

letters, most of which made similar points in support of the Blue-Ribbon Panel's 

recommendation for a separate standard-setting board for private companies. 

KEY CONCLUSIONS 

As a result of this outreach and their analysis of the Blue-Ribbon Panel's report, the Trustees 

reached these key conclusions: 

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Despite significant progress made in recent years by the FASB and the PCFRC in 

addressing the needs of the constituents of private company financial reporting in the 

standard-setting process, I their efforts stopped short of achieving all of their intended 

objectives. In other words, private company needs were not addressed as thoroughly or 

directly as had been intended. 

• A new body with increased authority and scope-the Private Company Standards 

Improvement Council (PCSIC)--should replace the PCFRC (which would be disbanded) 

as part of a new structure to ensure that the needs of private companies are appropriately 

addressed in the standard-setting process. 

• As an essential element in creating the new structure, the PCSIC, jointly with the F ASB, 

should be responsible for developing specific criteria for determining whether and when 

exceptions or modifications to US GAAP for private companies are warranted. Those 

criteria would be subject to public comment. 

• Using the new criteria, the PCSIC should develop, deliberate, and formally vote on 

specific exceptions or modifications to US GAAP. PCSIC meetings should be attended 

by all FASB members and the conclusions of PC SIC deliberations should be subject to 

F ASB ratifieation. Those ratified exceptions or modifications should then be exposed for 

public comment. At the conclusion of the public comment process, the PCSIC should 

publicly redeliberate in meetings attended by the F ASB the proposed exceptions or 

modifications, vote on final changes, and submit them to the FASB for final ratification. 

• The FAF should create a special-purpose committee of Trustees, the Private Company 

Review Committee, to oversee the activities of the PCSIC and its interactions with the 

FASB during a three-year transition period. (Following the transition, that responsibility 

should be assumed by the F AF Standard-Setting Process Oversight Committee.) 

• The Private Company Review Committee should hold both the PCSIC and the FASB 

accountable for achieving the objective of ensuring adequate consideration of private 

company issues and input in the standard-setting process. The Review Committee should 

be chaired by a Trustee, appointed by the Board of Trustees, who has had substantial 

experience with and exposure to private companies during his or her career. The 

Committee should include among its members Trustees who also have significant 

experience with private company accounting issues. 

• The needs of the users of not-for-profit financial statements differ substantially from 

those of private company financial statements. In fact, not-for-profits have many 

characteristics that are more in common with publicly traded companies than with 

privately held companies, particularly related to the variety and diversity of their user 

constituents. Further, the FASB recently established an advisory group, the Not-far-Profit 

Advisory Committee (NAC) to consider issues specifically related to not-for-profit 

organizations. Accordingly, the Trustees have limited the current plan to addressing the 

concerns of private companies. 

I As described in detail in the appendix. 

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THE "PRIVATE COMPANY STANDARDS IMPROVEMENT COUNCIL" 

Because of the outreach and analysis outlined above, the Trustees plan to establish a Private 

Company Standards Improvement Council (PCSIC), under the oversight of the Trustees, to 

improve the standard-setting process for private companies. The plan, following a period of 

public comment, will be subject to further discussion and deliberation by the Trustees, including 

consideration of comments received, before it becomes final. 

Authority and Critical Responsibilities 

The PCSIC would determine whether exceptions or modifications to US GAAP are required to 

address the needs of the users of private company financial statements. 

In that regard, the PCSIC will have the following critical responsibilities: 

The PCSIC, jointly with the FASB, would develop a set of specific criteria to determine 

whether and when exceptions or modifications to US GAAP are warranted for private 

companies. 

• Based on those criteria, the PCSIC would identify aspects of existing US GAAP that its 

members believe require exceptions or modifications for private companies, based on the 

criteria it developed. 

• For those areas of US GAAP identified through this process that are not already under 

active reconsideration on the FASB's technical agenda, the PCSIC would obtain input 

from a broad array of constituents and then deliberate and vote, in meetings attended by 

FASB members, on specific modifications to those standards to ensure that they meet the 

needs of users of private company financial statements. 

• Any proposed changes to existing US GAAP would be subject to ratification by the 

FASB and thorough due process, including public comment. 

• Following the public comment period, the PCSIC would publicly redeliberate the 

proposed exceptions or modifications at meetings attended by the F ASB members and 

then vote on final changes. Changes would have to be approved by a supermajority (twothirds) of PC SIC members. Following an affirmative vote, the final changes would be 

forwarded to the FASB for final ratification. 

• For items under active consideration on the FASB's technical agenda, the PCSIC would 

serve as the primary source of advice on appropriate treatment for private companies by 

working actively and closely with FASB members and staff, and providing advice for 

consideration by the FASB members in their deliberations. In addition, the PCSIC would 

have the ability to vote to take a position on the appropriate treatment for private 

companies related to issues under active consideration by the FASB. 

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Formation and Membership 

The chainnan of the PCSIC, who would be selected and appointed by the Trustees, would be a 

FASB member with substantial experience with and exposure to private companies during his or 

her career. The Trustees believe that appointing a FASB member as chainnan and having FASB 

members attend meetings of the PCSIC would establish a strong and direct link between the two 

bodies and ensure that private company issues raised by the PCSIC would receive a thorough, 

detailed, and considered hearing by the FASB. The PCSIC chainnan would be a voting member 

of the Council; other FASB members would not vote but would be expected to add perspective 

to the issues being deliberated. 

The PCSIC would comprise 11 to 15 members (in addition to the chainnan), including users, 

preparers, and practitioners who have significant experience using, preparing, and auditing 

(and/or compiling and reviewing) private company financial statements. 

Members of the PCSIC would be selected and appointed by the Trustees. Nominations for 

membership on the PCSIC would be sought from a broad array of interested constituents and 

stakeholder groups. Members would be appointed for a three-year tenn and may be reappointed, 

based on input from the PCSIC chainnan and FASB chainnan, for up to two additional one-year 

tenns (for a total offive years). Membership tenure would be staggered to assure appropriate 

continuity on the PCSIC. 

FASB staffwill be assigned to support and work closely with the PCSIC on outreach and 

research projects in order to leverage the FASB's resources and to avoid duplication of efforts. 

Meetings 

PCSIC would schedule meetings four to six times per year. The meetings would be held at the 

FASB's offices in Norwalk, Connecticut, with the intention that all FASB members would attend 

and participate. Participation of FASB members would facilitate their understanding of PCSIC 

member views and enable a more efficient ratification process. 

PCSIC meetings would be webcast and open to the public, except for discussions of an 

administrative nature, which could be closed. 

Oversight 

The PCSIC will provide periodic in-person reports to the FAF Private Company Review 

Committee during its first three years of operation, as well as quarterly written reports to the full 

Board of Trustees. Following the three-year transition, the PCSIC will provide in-person reports 

to the F AF Standard-Setting Process Oversight Committee and continue to provide quarterly 

written reports to the full Board of Trustees. 

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The FAF's post-implementation review (PIR) process, as currently designed, includes 

engagement with and input from private companies. The PIR process will be further enhanced to 

include the input of the PCSIC and the post-implementation evaluation of changes made to US 

GAAP as a result of the PCSIC's work. The objective of this evaluation is to consider whether 

the resulting standards are achieving the intended objectives. In addition to this oversight, the 

F AF Trustees will conduct an overall assessment ofthe PCSIC in three years to determine 

whether its mission is being met and whether further changes to the standard-setting process for 

private companies are warranted. 

CONSIDERATIONS 

In developing this proposal, the Trustees considered a range of options, including: 

1. Creating an autonomous, new, and authoritative standard-setting board for private 

company issues, under the oversight of the F AF, as recommended by the Blue-Ribbon 

Panel 

2. Establishing a new body, under the oversight of the FAF, to identify standards that 

require modification and to vote on specific proposed modifications that would then be 

subject to ratification by the FASB and submitted to the public for comment 

3. Establishing a new committee on private company issues that would serve solely in an 

advisory role to the FASB 

4. Continuing to monitor the F ASB's existing and ongoing initiatives to better serve the 

needs and interests of private companies. 

In deciding on the second option, the Trustees observed the following: 

• Establishing two sets of US GAAP (informally described as "big GAAP" and "little 

GAAP") is not a desired outcome. Creation of a separate standard-setting board would 

likely lead to that outcome over time. 

• Concerns communicated to the Trustees about the complexity and relevance of US 

GAAP to private companies appear to involve a small but key group of standards. 

Therefore, improvements should focus on those standards first. 

The F ASB should address---ruJd is committed to addressing--complexity, relevance, and 

cost-benefit issues more broadly, as other constituents, in addition to private companies, 

have expressed similar concerns. 

• The F ASB has made recent, substantive changes to how it engages with private company 

constituents, and has demonstrated a greater operational and structural commitment to 

further address these issues.2 The Trustees believe it is appropriate to allow a period of 

time for those efforts to mature and are monitoring those efforts closely. 

Z As described in detail in the appendix. 

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• The PCFRC has not been wholly successful in achieving its mission, in part because in its 

early years, the FASB did not participate fully in its processes or pay sufficient attention 

to its recommendations. In addition, the PCFRC was not initially effective in engaging 

with the F ASB and advocating on behalf of its constituents. Other factors contributing to 

the shortcomings of the partnership were: (1) the FASB and the PCFRC did not develop 

and agree upon a framework for considering exceptions or modifications and exceptions 

to US GAAP for private companies and (2) the two organizations did not integrate their 

administrative processes in support of their common objective. Based on their outreach 

and analysis, the Trustees believe that meaningful change in the standard-setting process 

for private companies can occur only if a common understanding of mutual objectives for 

the F ASB and private company constituents is embedded in both the structure and 

processes of the F ASB. 

COMMON CONSTITUENT CONCERNS 

As noted above, the Working Group in the course of its outreach efforts received significant 

input from users, practitioners, and preparers of private company financial statements. That input 

was instrumental in helping the Working Group frame and consider many of the issues discussed 

in this paper. 

Summarized below are the issues and concerns most commonly raised by constituents in 

meetings with Trustees and representatives ofthe Working Group during the outreach process: 

• While some practitioners and preparers expressed support for the formation of a separate 

board as recommended by the Blue-Ribbon Panel, the view was not widely held. In fact, 

many of those who initially spoke in support of the creation ofa new authoritative board, 

moved away from that view after hearing concerns of others. Such concerns included the 

likelihood of confusion, the lack of acceptance of new standards by banks and sureties 

who expect to see US GAAP financial statements, the establishment of a bifurcated 

profession, a recognition that the formation of a new board and the promulgation of new 

rules would take years, and a fear that financial statements prepared in accordance to 

"little GAAP" would be viewed as inferior to "big GAAP" financial statements. 

• Many constituents noted that "complexity" in financial reporting is, in many ways, the 

real problem that concerns the private company community. Complexity, however, 

affects all entities whether public or private, large or small. There is a general belief that 

the F ASB does not do a sufficient job undertaking a cost-benefit analysis before issuing 

standards. Nor has the F ASB performed systematic post-implementation reviews to 

determine whether the standards have achieved their goals. There is a concern that GAAP 

financial statements sometimes do not properly capture the economics of transactions and 

the standards are not "faithful to the transaction" and do not reflect the "real economic 

situation." Nonetheless, there was an acknowledgement that complex financial 

transactions often require complex accounting. 

• A number of constituents believe that the FASB historically has not been attentive to 

concerns of private companies. Yet, there also was a recognition that private company 

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constituents do not actively participate in the standard-setting process. Several 

participants suggested that the FASB should develop methods to more easily facilitate 

private company input (recognizing that preparing comment letters can be difficult and 

time consuming for resource-constrained enterprises). 

• Despite these criticisms, most participants believe that recent changes at the F ASB 

demonstrate a significant move in the right direction. There are concerns, however, about 

whether this improvement is sustainable and permanent or dependent on the current 

board and its interests. To address these concerns, the Trustees will continue to monitor 

the FASB's efforts and will hold both the FASB and the PCSIC accountable for ensuring 

that the concerns of private company stakeholders are addressed. 

• There also is consensus that between six and ten current standards cause most, if not all, 

of the problems for private companies. 

• When speaking with users of private company financial statements, representatives of the 

Working Group heard that US GAAP financial statements provide a useful and sound 

starting point for underwriting and investment decision making. In fact, some said that 

they are "critical." But, since lenders and investors have significant access to 

management and outside accountants, financial statements are neither the only nor the 

best source of information. 

The Trustees also acknowledge receipt of more than 2,800 unsolicited letters, most of which 

made similar points in support of the Blue-Ribbon Panel's recommendation for a separate 

standard-setting board for private companies. 

REQUEST FOR COMMENTS 

The FAF Board of Trustees invites individuals and organizations to send written comments on 

the "Plan to Establish the Private Company Standards Improvement Council." 

The Trustees request that responses from those wishing to comment on the plan be received in 

writing by January 14,2012. Interested parties should submit their comments by email to 

PrivateCompanyPlan@f-a-f.org. Those without email should send their comments to "Private 

Company Plan," FAF, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Please do not 

send responses by fax. 

All comments received constitute part of the F AF's public file. The F AF will make all comments 

publicly available by posting them to the F AF website. 

An electronic copy of this plan is available on the FAF's website. 

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PUBLIC ROUNDTABLE MEETINGS 

The FAF Board of Trustees plans to hold public roundtable meetings after the end of the 

comment period to hear the views of, and obtain information from, interested parties regarding 

the "Plan to Establish the Private Company Standards hnprovement Council." The Trustees plan 

to seek participants for the meetings that represent a wide variety of constituents (including 

users, preparers, auditors, and others) to ensure that it receives broad input. The schedule, 

location, and other details of the process for participating in these roundtables will be announced 

in the coming weeks by the Trustees on the FAF website (www.accountingfoundation.org). 

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APPENDIX: FASB INITIATIVES TO IMPROVE THE STANDARD-SETTING 

PROCESS FOR PRIVATE COMPANIES 

As noted earlier, the Trustees concluded that the F ASB has made considerable progress in 

addressing private company concerns in the standard-setting process, a view that was confirmed 

by many of the constituents with whom members of the Working Group spoke. Some 

constituents, however, were concerned that this improvement may not prove to be sustainable 

and permanent, depending on the composition of future boards and their members' interests. To 

address these concerns, the Trustees will continue to monitor the FASB's efforts and will hold 

both the F ASB and the PCSIC accountable for ensuring that the concerns of private company 

stakeholders are addressed. 

The following appendix outlines the manner in which the F ASB is addressing private company 

issues: 

The FASB has increased its effort to understand and address the needs of the users and 

pre parers of private company financial statements. 

• The FASB released an initial staff analysis (FASB in Focw-July 11,2011) identifying 

six specific ways in which use of financial statements for private companies differs from 

that of public companies. 

• FASB staff is working closely with its Private Company Resource Group (pCRG), a 

working group, to make recommendations on developing a set of criteria that will assist 

the FASB in deciding whether and when to adopt exceptions or modifications to US 

GAAP for private companies. 

• While efforts to develop these criteria are proceeding, F ASB staff is working to evaluate 

potential exceptions or modifications for private companies for the F ASB' s 

consideration, in current standard-setting projects. 

The F ASB has put in place the infrastructure and processes required to develop, field test, and 

implement accounting standards for private companies. 

• The FASB has built a team of professionals dedicated to soliciting the input of private 

company stakeholders in all standard-setting projects. 

• The FASB's due process incorporates feedback and opinions from these constituents. 

The FASB has been increasingly responsive to criticism of the manner in which the F ASB 

handfed private company issues in the past. 

• The FASB has established a series of roundtables during which private company 

stakeholders share their views directly with F ASB members. 

• For major standard-setting projects, the FASB has created issue-specific roundtables for 

private company stakeholders. 

• F ASB members now regularly attend meetings of the PCFRC. 

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• The FASB created a dedicated electronic portal to make it easier for private company 

stakeholders to access infonnation that pertains to their needs. 

• The FASB developed the Electronic Constituent Feedback Forum to make it easier for 

private company stakeholders to offer comments on the FASB proposals. 

• FASB staff has developed a resource list of private company contacts that can be 

consulted on an ad hoc basis. 

• The FASB has increased the transparency of its decision-making process on US GAAP 

related to private companies, including increased use of video webcasting of its meetings. 

The FASB is increasingly willing to take action on private company concerns as part of the 

standard-setting process. For example: 

• In response to recommendations from private company financial statement preparers, the 

Board completed a project (Testing Goodwill for Impainnent) to reduce the cost and 

complexity of testing goodwill for impainnent 

• In its revenue recognition project, the FASB has tentatively decided to exempt private 

companies from certain new disclosure requirements. 

• In its financial instruments projects, the FASB has proposed a measurement exemption 

for nonmarketable equity securities. 

• For many recent projects, the F ASB instituted one-year deferrals for nonpublic entities to 

enable them to implement new standards more effectively and efficiently. 

The FASB has undertaken a series of new educational efforts intended to provide more 

information to stakeholdltrs about their private company initiatives and issues. 

• In June 2011, the FASB held its first FASB Update webcast geared specifically to 

nonpublic entities-including private companies-for CPE credit and has scheduled the 

next semiannual webcast for December 2011. 

• The FASB provides plain-English executive summaries (FASB in Focus docwnents) and 

briefpodcasts for all new proposed and final ASUs, as well as educational webcasts for 

major projects. 

• FASB Board and staff members participate, as presenters and panelists, in many 

educational conferences and meetings geared primarily toward the private company 

sector, at both national and local levels. 

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Questions for the Hearing Record 

House Financial Services Capital Markets & Governm,ent 

Sponsored Enterprises Subcommittee 

"Accounting & Auditing Oversight: Pending Proposals & Emerging Issues 

Confronting Regulators, Sta~dard Setters and the Economy" 

March 28, 2012 

Ouestions for Ms. Leslie F. Seidman, Chairman, Financial Accounting Standards Board, 

from Congresswoman Biggert: 

1. U.S. GAAP is a well-established, well understood,functioning set of accounting 

standards. However, we have been moving steadily toward adopting a set of uniform 

international accounting standards. Some U.S. stakeholders are concerned that 

converging U.S.GAAP with IFRS could have a potential accounting tax impact of $50 

billion due to changes in inventory methods and potential debt compliance issues for 

retailers and restaurants due to changes to lease accounting standards. What is the 

F ASB doing to address those concerns as they continue to negotiate convergence with 

IFRS? Is the FASB, in light of tough economic conditions, considering the costs and 

benefits of changing our accounting model? If so, do these benefits outweigh the 

potential risks? 

The FASB's mission is to establish and improve standards of financial accounting and 

reporting that foster financial reporting by nongovernmental entities that provides 

decision-useful information to investors and other users of financial reports. That 

mission is accomplished through a comprehensive and independent process that 

encourages broad participation, objectively considers all stakeholder views, and is subject 

to oversight by the F AF' s Board of Trustees. We recognize the critical role that reliable 

financial reporting plays in supporting the efficient functioning of the capital markets. 

Robust financial reporting increases investor confidence, which in turn leads to better 

capital allocation decisions and economic growth. Accounting standards are not intended 

to drive behavior in a particular way; rather, they seek to present financial information so 

that financial statement users can make informed decisions about how to best deploy their 

capital. 

Many stakeholders, including leaders ofthe G-20 nations and the SEC, have called for 

the F ASB and the IASB to continue efforts for achieving convergence of accounting 

standards in key areas. On May 26, 2011, the SEC staff issued a paper titled, Exploring a 

Possible Method of Incorporation under the SEC's Work Planfor the Consideration of 

Incorporating International Financial Reporting Standards into the Financial Reporting 
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75084.195

System/or u.s. Issuers. The SEC Staff Paper described an approach to incorporation 

colloquially referred to as "Condorsement." The FAF Board of Trustees and the FASB 

Board members carefully considered the proposed approach and the comments made by 

U.S. stakeholders to the SEC about the approach. In November 2011, the Chairman of 

the FAF, on behalf of the Board of Trustees, submitted a letter to the SEC supporting an 

incorporation approach with some recommended modifications and c1arifidations 

intended to address the concerns that were raised by many who offered comments to the 

SEC staff.l The SEC is considering the decision to incorporate IFRSs into U.S. financial 

reporting based on the feedback it received on this specific approach as well as other 

information it has analyzed relating to the remaining differences between U.S. GAAP and 

IFRS and the use of IFRS in practice2

• 

The FASB continues to support the goal of developing high-quality, comparable global 

accounting standards, and we have been working together with the IASB to develop 

converged standards in several key areas that are widely acknowledged as needing 

improvement.3 However, it is ultimately the SEC's decision as to whether, or how, to 

incorporate IFRS more broadly into U.S. financial reporting, 

In the area of accounting for inventory, the application ofIFRS prohibits using the lastin-first-out (LIFO) inventory accounting method that is used by some entities that report 

under U.S. GAAP. This difference could have consequences on those U.S. entities' 

income taxes if they were to adopt IFRS and change their inventory accounting method. 

At this time, the F ASB is not considering making changes in the accounting for 

inventory, nor eliminating the use of the LIFO inventory method. The SEC staff has 

highlighted this issue in its reports to date. 

The F ASB is actively deliberating improvements to lease accounting standards to address 

the concerns expressed among many stakeholders that the current guidance does not 

provide transparency to lease transactions that are today recognized off-balance-sheet. 

'John J. Brennan, Letter to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, November 15, 

2011. http://www.sec.gov/comments/4-600/4600-158.pdf. 

2 Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial 

Reporting System for u.s. Issuers: A Comparison of u.s. GAAP and IFRS, A Securities and Exchange Commission 

Staff Paper dated November 16, 2011. http://www.sec.gov/s!,otlightlglobalaccountingstandards/ifrs-work-planpaper-111611-gaap.pdf. Work Plan forthe Consideration of Incorporating International Financial Reporting 

Standards into the Financial Reporting System for u.s. Issuers: An Analysis of IFRS in Practice, A Securities and 

Exchange Commission Staff Paper November 16, 2011. 

http://www.sec.gov/spotlight/globalaccounlingsta nda rds/ifrs-work -pia n-paper -111611-practice .pdf. 

, Based on the 2002 Norwalk Agreement and the 2006 Memorandum of Understanding (MOU) (as updated in 

2008).The MOU reflects the decision by the FASB and the IASB, with concurrence of the SEC, that their resources 

should focus on developing converged and improved standards in those areas in U.S. GAAP and IFRS that were 

most in need of improvement. 
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75084.196

Investors have told us that they routinely adjust the financial statements of companies to 

add the liabilities relating to operating leases. The proposal that the F ASB is discussing 

jointly with the IASB aims to provide that important information in a consistent and 

unbiased way to investors-not to influence business activities in any particular way. 

The F ASB has already decided to make numerous changes to the 2010 Exposure Draft on 

leasing and continues to seek input from financial statement users, preparers, auditors, 

and regulators as we deliberate additional issues relating to our lea~e accounting 

proposal, including cost-benefit concerns. We are aware of the concern that there could 

be debt covenant compliance issues caused by the proposed changes to lease accounting, 

specifically from the proposed requirement to recognize lease liabilities on the balance 

sheets of lessees. We will consider that issue as well as other implications of the 

proposals in our ongoing discussions. 

Following those redeliberations, the F ASB and the IASB will issue a revised Exposure 

Draft on lease accounting so that stakeholders will have another opportunity to evaluate 

the proposals and provide feedback. The Exposure Draft will include a specific request 

for additional feedback on the expected costs and benefits of the proposals. 

2. The proposed guidance/or impairments o/financial instruments increases the 

complexity and subjectivity o/the impairment calculation. How does thisfit into the 

objective 0/ creating well-understood and comparable financial statements? How is it 

an improvement to U.S. GAAP? 

We acknowledge that the estimation of credit losses is inhcrently SUbjective and requires 

practitioners to exercise professional judgment. As with each of our standard-setting 

projects, our aim is to improve U.S. GAAP through a focus on clear objectives and 

principles, supported by a sufficient level of implementation guidance. By focusing on 

the primary characteristics of relevance and reliability and on the qualities of 

comparability and consistency, we are committed to ensuring that the guidance that we 

are developing jointly with the IASB results in useful financial information for investors. 

The impairment guidance for financial assets currently in U.S. GAAP includes several 

different approaches depending on the types of financial assets (for example, loans versus 

debt securities) and the characteristics associated with those types of financial assets (for 

example, financial instruments resulting from securitizations and debt securities 

purchased at an amount that includes a discount related to credit quality). Our 

stakeholders have expressed concerns to us about both the complexity of having several 

different impairment approaches for similar financial instruments and the timing of when 

credit impairment losses are recognized under these approaches. For example, the. 

existing incurred loss impairment guidancc for loans has been criticized because it delays 

the recognition of a loss until the loss becomes probable of occurring. 
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The goal of the impairment guidance that is being developed jointly with the IASB is to 

reduce some of the complexity associated with the various impairment approaches and to 

provide for earlier recognition of impairment losses. This approach is based on expected 

losses and is more forward looking than the current incurred loss guidance. Under this 

approach, companies would recognize losses as financial assets deteriorate on the basis of 

supportable information (for example, past events, current conditions, and reasonable and 

supportable forecasts) that is consistent with externally available information and is 

considered relevant in measuring the associated credit impairment allowance. We~lso 

aim to leverage existing best practices for estimating credit losses. 

The F ASB continues to perform extensive outreach to determine whether the proposed 

approach is operational; our deliberations are not complete. The F ASB and the IASB are 

planning to issue converged Exposure Drafts in the second half of2012 so that our 

stakeholders will have an opportunity to provide us with feedback on the proposal. 

3. If IFRS is fully implemented, the current proposal from the IASB states that there is 

only one accounting model for insurance and no distinction behveen life and non-life 

contracts. However, these insurance products are financially and economically 

different businesses. Are you concerned that requiring the use of the same model 

would result in less useful information for the users of non-life fin ancial statements? 

We believe that there are important economic differences between some life insurance 

and non-life insurance products and that, accordingly, many non-life insurance contracts 

warrant a separate and distinct model. The F ASB believes that the use of two different 

models best facilitates the delivery of the most relevant information to investors and other 

financial statement users that represents the underlying economics of different insurance 

products. The FASB and the IASB are discussing jointly improvements to insurance 

accounting. The Boards have tentatively decided on criteria that, if met, will require 

insurers to account for those insurance contracts under a separate accounting model. 

Under the tentative decisions reached to-date, we believe that most non-life insurance 

contracts would meet these criteria. The F ASB is planning to issue an Exposure Draft 

later this year which will allow our stakeholders to provide 'feedback to us on the 

improvements we have made to insurance accounting. The changes to existing U.S. 

GAAP will be highlighted within this Exposure Draft. 

4. Much of the world is already using the U.S. GAAP reporting standards, or something 

very similar,for insurance accounting. For example, international companies use a 

combination of "local GAAP's" (e.g. UK GAAP) that is very similar to U.S. GAAP, 

even if not derived specifICally from u.s. GAAP. These standards have been refined 

and developed over many years, Why not work toward improving the current GAAP 

accounting standards, instead of starting over and trying to develop a controversial, 

unproven and entirely new insurance accounting standard? 
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75084.198

In August 2007, the Board issued an Invitation to Comment, An FASB Agenda Proposal: 

Accountingfor Insuri:mce Contracts by Insurers and Policyholders, Including the IASB 

Discussion Paper, Preliminary Views on Insurance Contacts, which included the IASB's 

Discussion Paper. Many 'of the comment letters in response to the Invitation to Comment 

expressed a strong desire for a global standard on insurance and urged the F ASB to 

participate in the project jointly with the IASB (in their previously initiated insurance 

contracts project) as a means to ensure that U.S. stakeholder perspectives were 

adequately represented. In deciding to participate jointly with the IASB in this project, 

the F ASB identified a number of targeted improvements that we believe would improve 

the transparency and informational usefulness of insurance company financial statements. 

The insurance contracts proposal that we are currently developing heavily leverages 

many of the proven concepts already contained within U.S. GAAP. While we are 

discussing the proposal jointly, our starting point has been different from the IASB, since 

we look at how we can improve the guidance that exists currently under U.S. GAAP, and 

the IASB does not currently have any insurance accounting standards within IFRS. In 

several circumstances, the F ASB and IASB have come to different conclusions on certain 

fundamental aspects of the proposal. As a result, it is unlikely that we will have 

proposals that are completely converged. The F ASB is planning to issue an Exposure 

Draft later this year which will allow our stakeholders to provide feedback to us on the 

improvements we have proposed to insurance accounting. The changes to existing U.S. 

GAAP will be highlighted within this Exposure Draft. 

5. Many investors have expressed concerns about replacing the U.S. GAAP accounting 

system; they believe the life insurance industry could become "uninvestable" if the 

current proposal is adopted. Has the Board considered these concerns and the 

possibility that the current proposal many not constitute and improvement over current 

accounting systems. 

The F ASB proactively reaches out to investors and other user stakeholders and places 

significant weight on feedback that we receive from them. This ensures that financial 

accounting and reporting standards provide investors with the information they need to 

confidently invest in the U.S. markets. The FASB continues to perform extensive 

outreach with investors to solicit their views and understand their concerns and 

recommendations. In our decision-making process, we consider current key performance 

indicators used by investors and the effect that our decisions will have on those key 

performance indicators. Inevitably, different investors have different perspectives, but we 

continue to be responsive to feedback we receive from investors by the impact it has on 

our exploration of alternative solutions. 
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75084.199

For example, we heard specific concerns from investors in the life insurance industry that 

were addressed through the proposals highlighted in the FASB's Discussion Paper, 

including limiting the number of accounting models for different insurance products; 

using updated assumptions in the measurement of the liability; and reflecting the entire 

contract, such as guarantees and options, in the financial statements. We also received 

feedback on the Discussion Paper from investors in the life insurance industry about the 

need for transparent volume information regarding insurer growth and the related _ 

obligation, the volatility created through the use of discount rates that reflect the 

characteristics of the liability, and accounting mismatches between the insurance liability 

and the financial instruments backing those liabilities. We continue to explore solutions 

for these concerns as we continue to discuss the proposal, including considering 

additional disclosures that will provide investors with the information they seek. 

The F ASB is planning to issue an Exposure Draft later this year which will allow our 

stakeholders to provide feedback to us on the improvements we have proposed to 

insurance accounting. The changes to existing U.S. GAAP will be highlighted within this 

Exposure Draft. 

Question for Ms. Leslie F. Seidman, Chairman Financial Accounting Standards Board, 

from Congressman Capuano: 

1. I would like to know how the FASB is communicating with each of the other 

organizations {SEC and PCAOBl on accounting standards guidance so that you have 

one, clear, unequivocal rule that every practitioner will be able to utilize in the same 

fashion. 

Members of the F ASB and its staff meet with the staffs of both the SEC and the PCAOB 

on a quarterly basis as a way to exchange information, provide updates on current 

accounting standards projects and identify emerging financial reporting issues. In 

addition, we regularly communicate specifically about the progress we have made on our 

technical projects and invite the staffs of the SEC and PCAOB to participate as observers 

in our roundtables and working group meetings. With this coordination among the 

FASB, SEC and PCAOB, we have an effective and coordinated means to address any 

major financial reporting issue that may arise. In addition, last year, the SEC launched a 

Financial Reporting Series, which is a series of roundtables designed to assist in the 

proactive identification of risks related to, and arcas for potential improvements in, the 

reliability and usefulness of financial information provided to investors. The FASB 

Chairman and the PCAOB Chairman are participants in these roundtables. 
259 


75084.200

Since the banking regulators have a keen interest in u.S. GAAP financial statements as a 

starting point in assessing the safety and soundness of financial institutions, we also meet with 

them on a quarterly basis and otherwise, as appropriate. 
260 


75084.201

Statement of the Investment Company Institute and the Independent Directon; 

Council 

Hearing on "Accounting and Auditillg 

Issues Confronting Regulators, 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Committee on Financial Services 

United States House of Representatives 

March 28, 2012 

The Investment Company lnstitute'and the Independent are 

pleased to provide this written statement connection with 

and auditing to consider amending the Sarbanes-Oxley Act to prohibit 

Public Company Accounting Oversight Board ("PCAOB") from requiring public 

companies to use auditors or require use of dilferent auditors on rotating 

basis---commonly as mandatory audit firm rotation"' 

support the draft While and IDC support 

PCAOB's focus on strcngthening the and integrity of the audit process would 

, The Investment Institute the nationai of U.S. investment companies, including 

cxchauge·trdded funds (ETFs), dnd unit trusts (UITs). leT seeks 

to encoura.ge adherence to eth1cJ.l standards, promote pnhlk and othcnvise advance 

the interests of funds, thejr difcctor~, and advisers, Memhers m.zi.llZlgc tot,]J assets of 

$14,98 and serve over 90 million sharehoiders. 

iDC serve's the flmd imiq:,endent 

There .Jfe <11mo::;t 

, I ,as! Augus!, the PCAOH published other 

measures to enhancE' auditor indE'pendr-nn:, Relcase on 

Auditor independence and Audit RoLlhon, No. 201J~o6 ("Release') 

Tlw PCAOB over 600 comment letters on this proposal, with over 90 percent opposed to it. 

4 leI and fDe submitted comment leHers to the PCAOB rn<lodatmyaudit rotation. 

Letter from Gregory M. Smith, Director Fund i\.:cOlmting, Gordon Seymour, Secretary, 

reAOS, Concept Release on Auditor Independence and Audit Rotation; PC/lOB 

No. (Dec. Letter from Dorothy 1\. Berry, IDC GCY'I'crning 
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75084.202

be open to considering alternative proposals, we strongly oppose mandatory audit firm 

rotation for investment companies ("funds"). With no empirical basis for the mandate, 

and in light of the negative consequences, an audit firm rotation requirement would be a 

costly and disruptive solution in search of a problem. Indeed, the PCAOB has not cited 

any concerns with respect to fund audits, nor are we aware of any, and there is no clear 

correlation between any audit deficiencies and a lack of auditor independence, yet such a 

requirement would impose unnecessary burdens on funds, diminish the quality of audits, 

enhance the risk that problems may be associated with the audit, and increase audit 

costs, all to the detriment of fund shareholders. Also, an audit firm rotation mandate 

would be impracticable for funds given the limited number of qualified audit firms. 

Finally, a mandatory audit firm rotation requirement would inappropriately marginalize 

the role of fund boards and their audit committees. 

Existing Safeguards in the Fund Industry Promote the Integrity of Fund Audits 

We firmly believe, and history has shown, that existing safeguards are more than 

adequate to assure the independence of auditors. In addition, the premise behind 

mandatory audit firm rotation-that audit deficiencies are attributable to a lack of 

auditor independence-is not applicable to funds. The PCAOB has not cited to any 

deficiencies in fund audits, nor are we aware of any such deficiencies. 

The Investment Company Act of 1940 ("1940 Act") and SEC rules have long 

required funds to have strong systems of controls and procedures in place to protect 

investors and to ensure the integrity of financial statements. The Sarbanes-Oxley Act of 

2002 bolstered these protections. 5 In 2003, the SEC, in implementing various sections of 

Sarbanes-Oxley, adopted a variety of rules designed to strengthen auditor independence. 6 

For instance, the rules expand the types of non-audit services that, if provided to an audit 

client, would impair an audit firm's independence. The rules also establish a "cooling off' 

period before a member of the audit engagement team could work at the audit client. 

Most notably, though, the rules impose rotation requirements for lead audit partners and 

concurring review partners. 

Council, to Mr. J. Gordon Seymour, Secretary, PCAOB, regarding Concept Release on Auditor 

Independence and Audit Finn Rotation; PCAOB Rulemaking Docket Matter No. 37 (Dec. '4, 20U). 

5 We note that the SEC's Chief Accountant recently expressed his belief that "auditor performance and the 

reliability of financial reporting have improved significantly in the past decade." Speech by James L. 

Kroeker, SEC Chief Accountant, Remarks Before the 20U AICPA National Conference on Current SEC and 

PCAOB pevelopments (December 5, 2011). 

6 See Strengthening the Commission's Requirements Regarding Auditor Independence SEC Release No. 33-

8183 (January 28, 2003). 

2 
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75084.203

In adopting these reforms, the SEC worked to "strike a balance between the need 

to achieve a fresh look on the engagement and a need for the audit engagement team to 

be composed of competent accountants."7 We agree with the SEC's balanced approach 

and believe that requiring the audit partner, rather than the audit firm, to rotate best 

promotes the twin goals of an independent audit performed by qualified and experienced 

auditors. For this reason, we also agree with the GAO's conclusion that mandatory audit 

firm rotation may not be the most efficient way to strengthen auditor independence and 

improve audit quality considering the additional costs it would entail and the other 

reforms being implemented at the time. 8 More recently, in its comments on the Release, 

the GAO indicated that the PCAOB has not provided compelling evidence that the root 

cause of audit quality issues is related to a break down in auditor independence. The 

GAO goes on to state that even if such a link could be established, it is unclear that the 

problem would be prevented or mitigated by mandatory audit firm rotation. 9 

Moreover, fund independent directors provide a critical safeguard with regard to 

the fund's auditor under the 1940 Act and the rules thereunder. Specifically, the statute 

requires independent directors to select the fund's auditor.lO Funds are exempt from 

seeking shareholder ratification for the selection of the auditor if, among other things, the 

fund's board has an audit committee composed solely of independent directors. The 

importance of this responsibility is underscored by the fact that the selection of a fund's 

auditor is one of only four responsibilities specifically assigned by the 1940 Act to 

independent directors. 

In addition, fund independent directors are guided by their own responsibilities 

and duties-namely, their fiduciary duty to protect the interests of fund shareholders-to 

promote the integrity of fund audits. Virtually every fund's audit committee is composed 

entirely of independent directors. This has been adopted as a best practice even though 

funds are not required to do so unless relying on certain SEC rules. ll The vast majority of 

fund boards (97%) also have an audit committee financial expert." This strong oversight 

7 fd. 

8 See U.S. General Accounting Office, Required Study on the Potential Effoets of Mandatory Audit Firm 

Rotation (November 2003) ("GAO Report"). 

9 See Letter from James R. Dalkin, Director - Financial Management and Assurance, GAO to the Office of 

the Secretary, PCAOB, regarding PCAOB Rulemaking Docket Matter 037 (December '4, 20U). 

w Section 32 of the '940 Act. 

" See ICI Report of the Advisory Group on Best Practices for Fund Directors' Enhancing a Culture of 

Independence and Effectiveness (June 24, '999). 

" ICI/IDC Overview of Fund Governance Practices, '994-2010. 

3 
263 


75084.204

mechanism provides ample protection and further renders an audit firm rotation 

requirement unnecessary. 

Finally, there are a number of other incentives, such as the PCAOB's own 

inspection and enforcement programs, as well as the ever-present threat ofiitigation, that 

help to ensure the independence, objectivity, and professional skepticism of audit firms. 

Mandatory Rotation Would Likely Have Adverse Effects on Fund Audits 

An audit firm rotation requirement would likely have adverse effects on fund 

audits. Specifically, mandatory rotation would impose unnecessary burdens on fund 

boards and fund managers, diminish the quality of audits, enhance the risk that problems 

may be associated with the audit, and increase audit costs. We do not believe that the 

PCAOB fully considered the important differences between funds and operating 

companies with respect to a mandatory audit firm rotation and the impact that such a 

requirement would have on funds. 13 

Funds can and do change audit firms under circumstances appropriate for the 

particular fund, but replacing one of a fund's principal service providers is a significant 

undertaking and one that funds do not typically undergo without serious consideration.'4 

First, the process of selecting a new audit firm can be burdensome to both the fund's 

board and the fund's manager. This process includes interviewing auditors and 

evaluating a significant amount of information regarding the resources, capabilities, 

reputation, and independence of each audit firm under consideration. Once selected, the 

new auditor would need to spend additional time working with the fund's manager to 

understand and document the fund's structure, trading strategy, operations, and internal 

controls to enable it to develop its initial audit plan. This process could be complicated 

by the extent to which fund operations are outsourced. A new audit firm's lack of 

familiarity with the fund also could increase the risk of problems with the audit. 

The new audit firm's initial review, as well as the transition process, would be 

disruptive and time-consuming, and likely distract the fund manager and board from 

other important responsibilities. The disruption of changing audit firms would be 

particularly acute for fund complexes that stagger the fiscal year ends of their funds and, 

13 The United States Court of Appeals for the District of Columbia recently vacated the SEC's proxy access 

rule, finding that with regard to the application of the rule to investment companies, the SEC had failed to 

failed adequately to address whether the regulatory requirements of the '940 Act reduce the need for, and 

hence the benefit from, proxy access for fund shareholders and whether the rule would impose greater costs 

upon investment companies by disrupting the structure of their governance. Business Roundtable et. aT v. 

SEC, No. 10"305 (D.C. Cir. Decided July 22, 20U). 

'4 See IDC Task Force Paper on Board Oversight of Certain Service Providers (June 2007). 

4 
264 


75084.205

thus, are in a "continuous audit cycle."'5 Moreover, the additional time and effort 

involved in "getting up to speed" could translate into an unnecessary increase in audit 

costs, which ultimately would be borne by fund shareholders.'6 

Another negative impact on audit quality and cost may occur by virtue of the fact 

that audit firms will know their client relationships will end at a set time. If an audit firm 

knows its relationship with a client will sunset at a predetermined time, the auditor may 

be more focused on looking over the horizon for its next client and less focused on the 

existing client's audit. Likewise, if an audit firm knows its engagement is for only a 

limited period, the auditor may have less incentive to negotiate its fees. Higher audit fees 

would likely have a disproportionate impact on smaller fund complexes, and in particular 

new complexes, that struggle to compete with more established and larger fund 

complexes. 

Our Concerns are Heightened by the Limited Number of Qualified Audit Firms 

Our concerns about a mandatory audit firm rotation are heightened in the fund 

context due to the limited number of audit firms that are qualified-in terms of expertise 

and independence-to audit funds. If funds are forced to rotate audit firms and engage a 

firm that does not have sufficient experience and expertise in auditing fund financial 

statements, the impact on audit quality, risk, and cost would be that much more severe, 

to the detriment of fund shareholders. 

Auditing fund financial statements requires specialized industry and regulatory 

expertise. Only a limited number of audit firms currently possess this expertise. Firms 

that perform fund audits typically have personnel dedicated to the asset management 

industry who are knowledgeable about the industry-specific accounting model required 

by FASB Topic 946, the special tax status afforded funds under Subchapter M of the 

Internal Revenue Code, and the overlay of SEC regulation imposed by the1940 Act. In 

addition, because fund audits require the audit firm to test the valuation of 100 percent of 

a fund's assets, the audit firm would likely need a dedicated team of valuation experts, 

who can value complex or thinly traded securities where market quotes are not readily 

available. A "deep bench" of audit partners with this expertise is oftentimes necessary for 

complexes with continuous audit cycles for funds with staggered fiscal years. 

'5 The use of staggered fiscal years is a mechanism to help manage the workflow associated with the end of 

each fund's fiscal year, which includes the update to the fund's registration statement as well as the 

preparation and audit of its financial statements . 

• 6 Indeed, in a study by the GAO, large audit firms estimated that, under mandatory audit firm rotation, 

initial year audit costs would increase by more than 20 percent over subsequent year costs because of the 

need to acquire the knowledge necessary to perform the audit. See GAO Report, supra note 8. 

5 
265 


75084.206

Moreover, the prevalence of mutual funds as investment options in 40l(k) plans, 

including those plans offered to audit firm employees, may limit choice in hiring a new 

auditor. For example, if a particular fund family's funds are offered through an audit 

firm's 40l(k) retirement plan to the audit firm's employees, then that audit firm likely 

would not be willing to audit those funds because of the independence issues it would 

raise.'7 While the audit firm could cause its employees (and their immediate family 

members) to sell their investments in the funds in order to cure the independence 

problem, we believe that the audit firm would be unlikely to do so because of the 

disruption it would cause its employees and their retirement planning. Indeed, we 

understand that certain audit firms have identified certain fund families which they will 

not audit, so as to ensure funds from these families are available to their employees for 

investment through the audit firm's 40l(k) plan. In addition, audit firm personnel may 

hold investments outside of tax-deferred accounts in those funds and any forced 

divestment could impose significant tax consequences on the audit firm personnel. 

The limited number of qualified audit firms in the fund industry is evidenced by 

informallCI data, which reveal that only four accounting firms serve as auditors to 94% 

of funds and that these funds represent about 99% of industry assets. In addition, the 

remainder of the funds in the industry, which are among the smallest funds in the 

smallest complexes, are audited by only a handful of other accounting firms. Some 

believe that mandatory audit firm rotation could present an opportunity for accounting 

firms other than the few large audit firms to compete more effectively. ,8 But these firms 

currently do not have the expertise and experience typically necessary to audit fund 

financial statements. Assuming that they would be able to develop this expertise is 

speculative and fails to take into account the significant time and resources necessary to 

do so. 

The Authority and Discretion of Fund Boards and Audit Committees Would Be 

Undermined by Mandatory Audit Firm Rotation 

A mandatory audit firm rotation would ignore both the important role of fund 

boards and their audit committees in overseeing fund audits and the unique statutory 

and regulatory framework for funds established by Congress in the 1940 Act and by SEC 

rules. We firmly believe that the PCAOB should not infringe upon this long-standing and 

successful framework by imposing a mandatory audit firm rotation requirement. 

'7 We recognize the concept of "covered person" within rule Z-Ol of Regulation S-X affords employees not 

associated with the engagement, in the engagement office, or in the chain of command to invest in the 

funds. We understand, however, that audit firms may adopt more restrictive poliCies that prohibit all 

employees from investing in the funds. 

18 See Release, supra note 3. 

6 
266 


75084.207

A primary duty of a fund board audit committee is to recommend to the board's 

independent directors the selection of the fund's auditor. A mandatory rotation of audit 

firms would undermine the authority and discretion of the committee, which works 

diligently to oversee the auditor and make determinations that are in the best interest of 

the fund and its shareholders. Determining whether to retain the fund's current auditor 

and, if not, the most appropriate time to replace the auditor is a decision best left to the 

judgment of a fund's independent directors, taking into account the particular facts and 

circumstances of the fund. 

Conclusion 

lCI and IDC strongly support the proposed legislation to prohibit the PCAOB from 

requiring mandatory audit firm rotation. We fail to see a basis for the mandate for funds 

inasmuch as the PCAOB has not cited any concerns with respect to fund audits, nor are 

we aware of any, and there is no clear correlation between any audit deficiencies and a 

lack of auditor independence. We firmly believe that mandatory audit firm rotation 

would impose unnecessary burdens on fund boards and fund managers, diminish the 

quality of audits, enhance the risk that problems may be associated with the audit, and 

increase audit costs, all to the detriment of fund shareholders. Also, an audit firm 

rotation mandate would be impracticable for funds given the limited number of qualified 

audit firms. Finally, a mandatory audit firm rotation requirement would inappropriately 

marginalize the role of fund boards and their audit committees. 

We appreciate your consideration of our views. 

7 
267 


75084.208

Written Statement ofthe 

MulualFund Directors Forum 

House Financial Services Subcommittee on 

Markets and Government 

March 2012 

Standard 
268 


75084.209

December 13, 2011 

Office of the Secretary 

PCAOB 

1666 K Street, NW 

Washington, D.C. 20006-2803 

Re: PCAOB Rlllemaking Docket Matter No. 37 

Dear Board: 

The Mutual Fund Directors Foruml ("the Forum") welcomes the opportunity to 

respond to the request for comments by the PCAOB (the "Board") on its recent concept 

release discussing mandatory audit firm rotation ("Concept Release").2 

The Forum, an independent, non-profit organization for investment company 

independent directors, is dedicated to imprnving mutual fund governance by promoting 

the development of concerned and well-informed independent directors. Through 

continuing education and other services, the Forum provides its members with 

opportunities to share ideas, experiences and information concerning critical issues facing 

investment company independent directors and also serves as an independent vehicle 

through which Forum members can express their views on matters of concern. Mutual 

fund independent directors, partknlady those independent directors who sit on audit 

committees, share the Board's interest in a robust financial reporting process and good 

audit quality and therefore are keenly interested in how the issues discussed in the concept 

impact investment company shareholders. 

  

I. Summary 

The Concept Release seeks comment on whether mandatory audit firm rotation 

would enhance auditor independence, objectivity and professional skepticism. Yet the 

reJease cites no empirical evidence and the Forum is aware none - showing that 

Forum '5 current membership includes over 650 independent directors, representing 98 inrtpn"nd"", 

director Each member selects :;;erve on the 

Committee. comn1cnt letter reviewed the Steering Committee and 

Forum's Board of Directors. although docs not necessarily represent the views of all 

respect. 

Release on Audit ma''/J'!lIacnc'e 

1-006. PCAOB "n,,,,,,'a"'n~ 

hOl ::\"Yr., .suite [150 '" \\";-l:,h1ngwn, DC 

Firm Rotation: }%ticc: 

No. 37 (August 16.20] 

"\""v,mfdf.org 

/(OI'II1,,!laflie. PCAOB Release 
269 


75084.210

2 

mandatory audit firm rotation has any positive impact upon auditor independence, 

objectivity, and skepticism. The proposal would, however, raise costs to shareholders. The 

Forum sees no justification for imposing additional shareholder costs in return for 

speculative potential benefits. 

The Forum believes that mandatory firm rotation would impair the ability of an 

audit committee to do its important work, a result contrary to the express purpose of 

recent regulatory initiatives designed to strengthen the responsibilities and independence 

of audit committees. Further, mandatory auditor rotation could critically damage the 

ability of mutual funds to obtain the high quality and specialized audit services required. In 

sum, the concept of mandatory audit firm rotation represents a potentially costly initiative 

that would reduce the choices available to fund boards for audit services without empirical 

evidence that it would have a positive impact on auditor independence, objectivity, and 

skepticism. Consequently, mandatory audit firm rotation is not in the best interests of fund 

shareholders and the Forum respectfully opposes the concept. 

II. Fund Independent Directors 

Under the federal securities laws, mutual funds are overseen at two levels. At the 

federal level, the Securities and Exchange Commission ("SEC") oversees and regulates the 

activities of funds pursuant to the Investment Company Act of 1940 ("1940 Act"). In 

addition, funds also have a second layer of oversight - an independent board of directors 

(or trustees) that oversees the management of each fund on behalf of its shareholders. 

Under the 1940 Act, a fund's independent auditor must be selected each year at an inperson meeting by a majority of the fund's independent directors. As a practical matter, 

the involvement of fund independent directors with the audit team is significant. For 

example, the Sarbanes-Oxley Act of 2002 mandates rotation of the lead and concurring 

audit partner every five years.3 When audit partners are required to rotate off the audit 

engagement, the fund independent directors approve the proposed replacement audit 

partners. 

Independent directors represent a coming together of a fund's investors to 

collectively supervise their investment. Because fund independent directors have detailed 

knowledge of the funds they oversee, they are able to respond flexibly and quickly to the 

specific issues faced by their funds. The ability of fund audit committees to act in a manner 

best suited to the shareholders' needs is a critical component of the statutory scheme 

governing funds. 

III. Audit Committee Oversight 

Since the federal securities laws were originally enacted, regulators have focused on 

ensuring that a strong and engaged board, particularly the audit committee of the board, 

oversees the accounting and financial reporting processes of the issuer as well as the 

Release No. 33-8183 (January 28, 2003). 

1501 ;"1 Street :-.!W, Suite 1150 • Washington, DC 20005 • T: 202.507.4488 • F: 202.507.4489 

",,"\\-w.mfdf.org 
270 


75084.211

3 

independent audits of the issuer's financial statements.4 In the investment company 

context, Section 32(a) of the 1940 Act provides that the independent auditors must be 

selected each fiscal year by a majority vote of the independent directors at an in-person 

meeting. Because virtually all fund audit committees are independent of fund 

management, no shareholder ratification of the board's decision is required.s 

Regulators, as well as the auditing and business communities, have long sought to 

promote effective and independent audit committees. The consistent regulatory objective 

has been for the audit committee to play "a critical role in providing oversight over and 

serving as a check and balance on a company's financial reporting system."6 For example, 

the Sarbanes-Oxley Act of 2002 resulted in new requirements for all listed companies 

related to matters such as the independence of audit committee members, the audit 

committee's responsibility to select and oversee the issuer's independent auditor, and 

funding for the independent auditor and any outside advisors engaged by the audit 

committee. While these Sarbanes-Oxley provisions only apply to listed companies, they 

have commonly been adopted by investment company audit committees'? 

The purpose of these changes was to further strengthen the ability of the audit 

committee to provide "independent review and oversight of a company's financial 

reporting processes, internal controls and independent auditors."3 As the SEC has noted, 

By effectively carrying out its functions and responsibilities, the audit 

committee helps to ensure that management properly develops and adheres 

to a sound system of internal controls, that procedures are in place to 

objectively assess management's practices and internal controls, and that the 

outside auditors, through their own review, objectively assess the company's 

financial reporting practices. 9 

The Sarbanes-Oxley Act also required all registered investment companies to either 

identifY and disclose the name of at least one audit committee member who is an "audit 

committee financial expert," or explain why the audit committee lacks such an expert. The 

purpose of such a person, the SEC explained, is to serve as a resource for the audit 

committee in carrying out its functions.1o The practical result of this disclosure obligation 

has been for virtually all fund audit committees to have at least one designated audit 

committee financial expert. 

10 

Section 3(a)(58) of the Exchange Act (15 U.S.C. 78c(a)(58)). 

Rule 32a-4 under the 1940 Act exempts investment companies from obtaining shareholder approval of the 

selection of independent accountants if the fund has an audit committee composed entirely of independent 

directors and the audit committee has adopted a written charter. 

Release 33-8220, Standards Relating to Listed Company Audit Committees, effective date April 25, 2003. 

Robertson, Fund Governance Legal Duties of Investment Company Directors, section 4.04; A.B.A. Section 

of Bus. L., Fund Director's Guidebook 15-17 (2006). 

Release 33-8220. 

Release 33-8220. 

Investment Company Act ReI. No. 25775 (Oct. 22, 2002). 

1501 M Street NW, Suite 1150 • Washington, DC 20005 • T: 202.507.4488 • F: 202.507.4489 

"\\"WW.mfdf.org 
271 


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4 

Several times in the past, the existence of well-functioning audit committees has 

been judged sufficient to encompass any perceived benefits of mandatory audit firm 

rotation, without the increased costs that the release notes will inevitably accompany such 

a regulatory move. For example, in 1978 the AICPA's "Cohen Commission" recommended 

against mandatory audit firm rotation, noting that the audit committee would be in the best 

position to determine, under the facts and circumstances of each individual company, 

whether a change in auditor would be appropriate.!! Similarly, Congress considered, but 

rejected, including the requirement in the Sarbanes Oxley Act of 2002, instead determining 

to enhance and strengthen audit committee independence as well as require mandatory 

rotation of the lead and concurring audit partner ever five years. 

The Sarbanes-Oxley Act also required the GAO to study the potential effects of 

mandatory audit firm rotation. In 2003, the GAO concluded that "mandatory audit firm 

rotation may not be the most efficient way to enhance auditor independence and audit 

quality."!2 Instead, the GAO highlighted the important role that audit committees play in 

enhancing auditor independence and audit quality. As the GAO noted, if audit committees 

regularly evaluate whether audit firm rotation would be beneficial and are actively 

involved in helping to ensure auditor independence and audit quality, many of the intended 

benefits of audit firm rotation could be realized at the initiative of the audit committee.!3 

IV, The Critical Importance of Well-Functioning Fund Audit Committees 

The relationship between a fund's audit committee and its independent auditors is 

critically important. The two work together to build a shared understanding of the control 

environment and the personnel at the firm. The relationship allows the audit committee to 

gain additional, independent insight into the fund's risk control environment, the internal 

accounting processes, and other important matters. To get the full benefit of the 

information flow, the independent auditor and the audit committee must have a shared 

trust and confidence which is developed over time. 

The relationship is particularly important in the investment company context. Each 

year the audit committee evaluates whether to continue the engagement or to hire new 

independent auditors. Under the statutory scheme, the independent directors of the board 

are responsible for, under the unique facts and circumstances of each fund, determining 

whether shareholders would be served best by retaining the current outside auditors or 

replacing them. Requiring mandatory audit rotation would disrupt this appropriately 

crafted regulatory approach, which recognizes that the various and changing 

circumstances at each fund complex require the audit committee members to make an 

independent evaluation of how the audit relationship can best serve shareholders going 

forward. 

II 

12 

13 

The Commission on Auditors' Responsibilities, Report, Conclusions and Recommendations xi (1978) 

("Cohen Commission Report") at 109. 

November 2003 report, Public Accounting Finns: Required Study on the Potential Effects of Mandatory 

Audit Firm Rotation (GAO-04-216) at 8. 

Id. at 9. 

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Importantly, it takes time for an audit firm to become sufficiently familiar with the 

fund to be of optimal help to the audit committee. Mandatory audit firm rotation might 

well require an audit firm transition just as the audit committee has achieved an effective 

working relationship with the outside auditors. Such a result is not in the best interests of 

fund shareholders. The Concept Release provides little justification for superseding the 

judgment of an audit committee and independent directors of how best to manage the 

relationship with the independent auditor. 

The Concept Release appears to be aimed at issues not relevant to investment 

companies. For example, the Release asks whether mandatory rotation might 

"dramatically reduce" what it sees as an inherent distortion of the system - the entity 

paying for the audit is the one creating the financial statements being audited. Yet in the 

investment company context, the independent directors who select the auditor are 

directors of the fund, and the audit fees are paid from the fund. It is the adviser or a third 

party whose personnel prepare the financial statements, yet those entities do not select the 

auditor. 

V. Mandatory Audit Firm Rotation is Not in the Best Interests of Fund 

Shareholders 

Question 6 of the Concept Release asks whether there are reasons for applying an 

audit firm rotation requirement only to companies in certain industries. Sound reasons to 

exempt the mutual fund industry from any audit firm rotation requirement. 

A. Few Audit Firms and a Specialized Area Mean Fewer Available Eligible Firms 

The structure and nature of investment company operations are quite different 

from other reporting issuers. Investment company audits require specialized knowledge, 

especially in the area of valuation of portfolio securities. There is a separate audit guide for 

investment companies, as well as unique regulatory requirements. As a result of the 

unique nature of the industry, fewer firms have developed expertise in auditing investment 

companies than those available to audit operating companies. 

The problem of relatively few audit firms with the appropriate level of expertise in 

this area is exacerbated by the fact that some of the otherwise qualified audit firms may 

have a financial business relationship with the fund complex, such as lines of credit with a 

bank or management of the audit firm's retirement plan, which may render the firm not 

independent with respect to the audit of the fund. Financial business relationships can also 

suddenly create independence issues when the fund complex, as part of normal business 

operations, develops new affiliations, merges, or in some other manner changes a portion 

of its business relationships. The limited universe of appropriately qualified audit firms 

can be particularly significant when the fund is part of a broadly diversified financial 

services enterprise. In such cases, consulting services provided to other portions of the 

enterprise can be financially much more significant than audit fees, which in turn will cause 

individual accounting firms to view the fund as an undesirable audit client. These factors, 

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6 

combined with the relatively small size of the available pool of qualified, high quality audit 

firms that possess the requisite expertise to audit mutual funds, mean that mandatory firm 

rotation would present a significant issue for many investment companies. 

B. In Practice, Many Fund Complexes Use Several Audit Firms 

The Concept Release appears to suggest that one benefit of mandatory audit firm 

rotation would be to bring a different auditor's viewpoint to the engagement. Yet many 

fund complexes already engage several audit firms and thus already have the benefit of 

multiple viewpoints when the independent directors believe it important to do so. For 

example, it is not uncommon a mutual fund complex to use two audit firms to audit the 

funds. The independent fund directors of these complexes have determined that, for the 

complex they oversee, this is the best arrangement for fund shareholders. In addition, 

although not required under the 1940 Act, some fund audit committees have adopted the 

practice of using a different audit firm to audit the funds than that which audits the funds' 

advisor. 

These practices, which are not formally required under the securities laws and 

regulations, have been judged by the independent directors of some fund audit committees 

to be in the best interests of their fund shareholders, given the unique facts and 

circumstances of each individual fund. However, particularly in view of the relatively 

limited available pool of qualified high quality audit firms with expertise in the investment 

company area, a requirement of mandatory audit firm rotation might well make it 

impossible for audit committees voluntarily to engage the services of multiple audit firms, 

because at the time of the mandatory firm rotation, there may well not be multiple 

alternative firms available that are independent. The Concept Release offers no 

justification for diminishing the ability of independent fund directors to make the auditor 

selections they deem to be in the best interests offund shareholders. 

C. Individual Funds Have Various Fiscal Year Ends 

By their very nature, investment company complexes do not file a single set of 

quarter or year-end statements, as do other reporting entities. Instead, each fund or series 

of funds in an investment company complex has its own filing requirements. Different 

funds within a single complex often have different year-ends. Therefore, it would be 

difficult to identify a natural cut-off date at which it would be appropriate to change the 

audit firm. Rather, in a complex with many different fiscal year ends, there would need to 

be a period of auditor overlap. For a period of time, both audit firms would need to be in 

place, reviewing and testing internal controls of the fund complex. This duplication would 

not occur as a result of a decision by the audit committee that doing so would benefit 

shareholders; rather it would stem solely from an arbitrary rule. The result would be 

costly to shareholders and disruptive to fund management as well as to audit committee 

oversight of the fund's accounting and financial reporting processes. 

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D. Fund Shareholders Should Not Be Financially Penalized for a Speculative 

Result 

The Concept Release appears to implicitly concede that the early years of an 

auditor-client relationship pose higher audit risks than other years.14 It also admits that 

there is no evidence that mandatory audit firm rotation will significantly enhance auditors' 

objectivity and independence.15 While the benefits of mandatory firm rotation are 

speculative, rotation would clearly increase mutual fund investors' costs as new audit 

personnel are brought on, and the audit committee and fund management work to 

establish new relationships with entirely new personnel. For mutual fund shareholders, 

the costs of such a requirement would appear to far outweigh the speculative goal 

advanced by the proposal, that theoretically, such a move would enhance auditors' 

objectivity. Therefore, we do not believe this result would be in the best interests of fund 

shareholders. 

** *** 

We look forward to continuing to participate in this ongoing discussion, as 

independent directors have an important role to play in fostering healthy audit 

environments. If you would like to discuss our comments further, please feel free to 

contact us at 202-507-4488. 

14 

15 

Release at p. 24. 

Id. at 17. 

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III Property Casualty Insurers 

Association of America 

Shaping the future of American Insurance 

March 27, 2012 

Committee on Financial Services 

Capital Markets and Government Sponsored Enterprises Subcommittee 

2129 Rayburn House Office Building, 

Washington, DC 20515 

Re: Subcommittee Hearing on "Accounting and Auditing Oversight: Pending Proposals 

and Emerging Issues Confronting Regulators Standard Setters and the Economy" 

Dear Chairman Garrett and Ranking Member Waters: 

The Property Casualty Insurers Association of America (PCI) appreciates your oversight of the 

Securities Exchange Commission (SEC), International Accounting Standards Board (IASB) and 

the Financial Accounting Standards Board (FASB) as they negotiate convergence of U.S. 

Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting 

Standards (I FRS). PCI represents the broadest cross-section of insurers of any national 

property/casualty trade association, with over 1000 members writing over $180 billion in direct 

written premium annually, over 38 percent of the nation's property/casualty insurance. While PCI 

supports movement toward more uniform high quality global accounting standards, 

comprehensive adoption of IFRS for property-casualty (P/C) insurance in its current form would 

create needless confusion for investors and impose excessive costs and unwarranted burdens on 

the marketplace. 

U.S. GAAP is a well-established, well understood, functioning set of accounting standards, which 

recognizes the fundamental differences between life and PIC insurance contracts by providing 

separate standards for each type of contract. However, there is pressure from the international 

community to move toward a set of uniform international accounting standards that provides only 

one standard for all types of insurance. 

We have heard from U.S. stakeholders that such a "one-size-fits all" approach could have many 

negative impacts, including: 

Less meaningful financial results stemming from discounting requirements in IFRS that are 

not a part of GAAP 

Greater volatility in the financial reports resulting from the internationally-proposed 

discounting requirements, which would lead analysts to seek to "unwind" the discounting to 

get a clearer picture from a U.S, accounting perspective 

Costly system changes for insurers, which would not help consumers or investors. 

While greater international convergence is a worthy goal, the US must be vigilant to resist 

international requirements that are ill-suited to the US marketplace and that will therefore be 

unhelpful to US consumers and investors and costly to US insurers. 

We note that a study conducted last year by the SEC indicated that, among those countries 

currently using IFRS, local differences are allowed. The current convergence discussions must 

similarly accommodate local differences in order to avoid the negative results noted above. 

2600 South River Road, Des plaines, IL 60018 Telephone 847·297·7800 fasdmile 647·297·5064 www.pciaa,net 

444 North capitol Street NW, Suite 801, Washington, o.c. 20001 Telephone 202·639·0490 Fasdmll. 202·639·0494 www.pdaa.net 

© 2012 Property Casualty Insurers Association of America 
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PCI appreciates the openness of FASB in continuing to recognize the need for distinct treatment 

of life and PIC insurance and encourage it to maintain existing U.S. GAAP accounting treatment 

for PIC insurers. We encourage the Subcommittee to support FASB's strong work in this area. 

Please feel free to contact James Olsen with any questions at 847-553-3664 or via email at 

james.olsen@pciaa.net 
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Blue-Ribbon Panel on Standard Setting 

for Private Companies 

Report to the Board of Trustees of the 

Financial Accounting Foundation 

January 2011 
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TABLE OF CONTENTS 

Page 

Number 

I. EXECUTIVE SUMMARY ...................................................................................... 1 

II. BRP RECOMMENDATIONS ON STANDARD-SETTING MODEL 

AND STRUCTURE .................................................................................................. 3 

III. WHAT THE RECOMMENDATIONS ARE ADDRESSING-THE 

PROBLEM STATEMENT ...................................................................................... 6 

IV. WHY THE BRP'S RECOMMENDATIONS BEST ADDRESS THE 

PROBLEMS ........................................................................................................... 13 

V. ADDITIONAL BRP RECOMMENDATIONS: SHORT-TERM, 

TRANSITIONAL, AND OTHER .......................................................................... 17 

VI. ALTERNATIVE VIEWS ....................................................................................... 20 

VII. BRP CONCLUDING COMMENTS ...................................................................... 21 

DISSENTING VIEW 

APPENDICES 

A. About the Blue-Ribbon Panel (BRP)--Mission, List of Members, Participating 

Observers, and Staff .............................................................................................. A-I 

B. BRP Process-Agendas, Outreach, and Invited Guests ....................................... B-1 

C. Recommended New Board Structure and Operating Protocol Chart ................... C-I 

D. List of Previous Studies and Reports Considered by the BRP ............................. D-I 

E. Overview ofthe F AF and the F ASB .................................................................... E-I 

F. Recent Changes at the F ASB ................................................................................ F-I 

G. List of Respondents to Questions Posed by the BRP and Summary of Written 

Submissions .......................................................................................................... G-I 

H. Models and Structures Considered ....................................................................... H-I 
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BL UE-RIBBON PANEL (BRP) ON STANDARD SETTING FOR PRIVATE 

COMPANIES 

I. EXECUTIVE SUMMARY 

In December 2009, the American Institute of Certified Public Accountants (AICPA), the 

Financial Accounting Foundation (FAF), the parent organization of the Financial Accounting 

Standards Board (F ASB), and the National Association of State Boards of Accountancy 

(NASBA) cstablished a "blue-ribbon" panel (the Panel or BRP) to address how accounting 

standards can best meet the needs of users of U.S. private company financial statements.' The 

Panel was charged with providing recommendations on the future of standard setting for private 

companies to the FAF Board of Trustees (the Trustees). (See Appendices A and B for additional 

information about the Panel and the conduct of its work.) This report represents the culmination 

of the Panel's work and includes its members' recommendations to the Trustees. 2 

The Panel has concluded that there are urgent and growing systemic issues that need to be 

addressed in the current system of U.S. accounting standard setting. The Panel members believe 

that the system has not done a sufficient job of (a) understanding the information that users of 

private company financial statements consider decision-useful and how those information needs 

differ from those of users of public company financial statements and of (b) weighing the costs 

and benefits of GAAP for use in private company financial reporting. These issues have caused 

a lack of relevance of a number of accounting standards for many users of private company 

financial statements and an overall level of complexity in U.S. GAAP that continues to concern 

preparers of private company financial statements and their CPA practitioners. Some members 

believe that GAAP is overly complex for public companies, too. Many Panel members believe 

that within the U.S. marketplace, significant, unnecessary cost is being incurred for GAAP 

financial statement preparation and audit, review, or compilation services. Thus, change is 

urgently needed. 

This report proposes major and other enhancements aimed at fostering an accounting standardsetting system that would seek to maintain a high degree of financial reporting comparability for 

business entities, regardless of capital structure, but also significantly increase the chances of 

effecting potential differences, where warranted, in measurement, recognition, and presentation, 

and not just disclosure. The Panel believes that, at least in the near term, the system should focus 

on making exceptions and modifications to U.S. GAAP for private companies that better respond 

to the needs of the private company sector rather than move toward a separate, self-contained 

GAAP for private companies or a wholesale reorganization of GAAP. 

'While some stakeholders had suggested that the Panel's work include private-sector not-for-profit entities (NPEs) 

as well, the Panel has limited its work to private for-profit companies. The Panel acknowledges that many NPEs 

have a much broader and somewhat different set of users of their GAAP financial statements, either directly or 

indirectly (through the IRS's Form 990), than do many private companies. 

2As noted in Appendix A, the Panel or BRP comprises 18 members (including I nonvoting member) but also 

benefited from input from several nonvoting participating observers. References in this report (0 Panel conclusions 

and recommendations should be interpreted as those of its voting members rather than its participating observers. 

The BRP acknowledges that on January 14, 2011, the FAF announced the appointment of Daryl Buck to the FASB 

for a term beginning February 28, 2011. In light of this announcement, Mr. Buck resigned as a member of the BRP 

on January 17, 2011, and did not participate in the final vote. 
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One major enhancement, supported by a supermajority of Panel members, is to establish, under 

the FAF's oversight, a separate private company standards board to help ensure that appropriate 

and sufficient exceptions and modifications are made, for both new and existing standards. That 

new board would work closely with the FASB to achieve a coordinated and efficient standardsetting process but would have final authority over such exceptions and modifications. A 

comprehensive review of the new board would be conducted in three-to-five years to evaluate its 

c!Iectiveness and determine whether to maintain it as is, make additional process improvements, 

or sunset it. 

Another major enhancement, supported by all Panel members, is to create a differential 

framework (set of decision criteria) to facilitate a standard setter's ability to make appropriate, 

justifiable exceptions and modifications. 

The Panel is also recommending certain short-term and transitional actions by the FAF and the 

FASB to provide near-term relief for private companies and help ensure a smooth transition to a 

new board. 

These recommendations were developed after examining a full range of options that included 

everything from maintaining the status quo to developing an entire new set of standards for 

private companies. In making the recommendation for a new board, the Panel has considered the 

actions currently under way by the F ASB to help improve the standard-setting process for private 

companies (including those described in Appendix F), along with the recommended short-term 

and transitional actions. A supermajority of the Panel believes that these actions do not remove 

the need or the urgency for a new standards board for private companies. 

Section II of this report contains the Panel's principal recommendations of a U.S. GAAP model 

with exceptions and modifications for private companies and a separate private company 

accounting standards board to set those exceptions and modifications. Section III describes the 

problems that the Panel has identified in the current standard-setting system. Section IV 

describes why the Panel believes its recommendations will best address the problems identified. 

Section V contains the recommendations that the Panel believes are important in helping 

transition to and otherwise achieving the recommended model and structure. Section VI captures 

alternative views held by a small minority of the Panel members. 

We urge the Trustees of the FAF to consider carefully and act upon each of the recommendations 

of the BRP, and we thank the FAF, the AICPA, and the NASBA for requesting us to consider 

this important issue. 

2 
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II. BRP RECOMMENDATIONS ON STANDARD-SETTING MODEL AND 

STRUCTURE 

GAAP with exceptions and modifications for private companies (with process 

enhancements) 

• Separate private company accounting standards board 

The BRP recommends a U.S. GAAP model with exceptions and modifications for private 

companies, with process enhancements. A supennajority of BRP members further recommend 

that a separate private company standard-setting board under the FAF be established to ensure 

that those enhancements are made and result in appropriate and sufficient exceptions and 

modifications for private companies. 

A. RECOMMENDED MODEL 

U.S. GAAP with Exceptions and Modifications for Private Companies (with Process 

Enhancements) 

The BRP recommends that accounting standards for private companies be based on existing U.S. 

GAAP (The FASB Accounting Standards Codi/icationTM) but with exceptions and modifications 

that would result in financial statements that provide relevant, decision-useful infonnation that 

meets the needs of users of private company financial statements in a cost-effective manner. 

Private company accounting standards under this model would be based on existing U.S. GAAP 

modified as necessary in the standard-setting process. This model contemplates the continued 

use of U.S. GAAP for public and private companies, with exceptions and modifications made for 

private companies. The BRP believes that appropriate modifications and exceptions to existing 

GAAP should be made to better meet the needs of users of private company financial 

infonnation. This could result in different measurement, disclosure, presentation, and recognition 

standards for private companies, but the modifications and exceptions would have to be justified 

using a differential framework (set of decision criteria) and not created just for the sake of having 

differences. 

A cost-benefit analysis would be perfonned to take into account the costs to prepare, report on, 

and use the financial statements. The benefit side of the equation would consider whether or not 

users would be able to make appropriate decisions with the infonnation provided and whether 

those users have access to management to obtain additional infonnation. In other words, is the 

infonnation in the financial statements relevant and necessary, and can additional infonnation be 

made available to such users, if needed? The BRP understands that the cost-benefit analysis can 

sometimes be subjective in nature because of the difficulty in estimating the monetary 

consequences of omitting infonnation in the financial statements or having one measurement 

attribute versus another. 

Another important aspect of the BRP recommendations is the creation of a differential 

framework to enable the private company accounting standard-setting board to evaluate whether 

exceptions or modifications are needed for private companies. The BRP envisions the framework 
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functioning as a guide to evaluate whether differences would be appropriate, rather than as an 

entirely new foundation from which to develop a separate body of GAAP for private companies. 

The BRP considers this framework, and the willingness to interpret the framework to create 

differences, to be essential to the successful implementation of this model. Historically, 

standards have been established with differential reporting for private companies without 

defining what should constitute a difference. This lack of a differential framework has 

contributed to the current private company concerns about relevance, complexity, and costs. 

B. RECOMMENDED STRUCTURE 

Separate Private Company Accounting Standards Board 

To complement the model, a supermajority ofBRP members recommend that the FAF create a 

separate accounting standards board (hereinafter referred to as "new board") with the ultimate 

standard-setting authority to determine and set exceptions and modifications in GAAP for private 

companies. The paragraphs below highlight some of the key features that the Panel recommends 

for the new board. Additional detail is provided in the chart in Appendix C. 

New Board Mission and Process 

As stated earlier, the new board's mission would be to establish appropriate exceptions and 

modifications to GAAP for private companies, while helping to ensure that users of private 

company financial reports receive decision-useful information. The new board would monitor 

the activities and deliberations of the FASB and work alongside the FASB as necessary to ensure 

that differences in GAAP for private companies, where warranted, are promulgated efficiently 

and effectively. The BRP believes the FASB, working with the new board, should try to develop 

the best possible standards for all entities. The differential framework, as discussed above, will 

help in determining whether differences in GAAP for private companies are warranted. 

Either the new board or the F ASB could promulgate differences depending on the circumstances 

of the topic. However, the Panel members believe it is critical that all differences reside in the 

one GAAP codification. For example, the FASB likely would not attempt to promulgate a 

difference on an existing GAAP standard that is not on its project agenda, and thus the task 

would be handled by the new board, which would initiate its own project. If a topic is on the 

FASB's agenda, the FASB might promulgate a difference (with the support of the new board) or 

the new board might promulgate a difference if the F ASB believes such a difference is 

unwarranted. 

Regardless of how the boards choose to operationalize the promulgation of differences on a 

facts-and-circumstances basis, the Panel believes that the ultimate authority to approve the 

exceptions and modifications should reside with the new board. The new board could also 

initiate its own projects as deemed necessary. 

Other Specifics on Board Recommendation 

The new board would consist of members that are representative of the private company sector 

and would work closely with the F ASB. The new board would have the responsibility to 

4 
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75084.224

conduct outreach to private company stakeholders and provide input and feedback to the F ASB. 

Nothing would preclude the FASB from receiving input from private companies, but the specific 

responsibility for seeking such input would reside with the ncw board. The F ASB and new 

board would each have official observers at their respective meetings to maintain effective twoway communication. (The F AF could further solidify this coordination by having the primary 

advisory board to the new board also advise the FASB on private company matters.) Much of 

the cost for the new board and staff would likely require funding by a viable, new source, such as 

mandatory annual or one-time (endowment) contributions from stakeholders. 

Comprehensive Review ofthe New Board 

The BRP believes that the FAF's oversight and governance should include a comprchensive 

review of the new board after three-to-five years. This comprehensive review should evaluate 

the effectiveness of the board and determine whether to maintain the board as is, make additional 

process improvements, or sunset the board. The FAF's review should include but not be limited 

to the following qualitative and quantitative measures: 

A survey to collect qualitative infonnation from private-company-sector stakeholders, 

such as, but not limited to, financial statement users' concerns about relevance and 

complexity and preparers' and practitioners' concerns about complexity and cost-benefit. 

A baseline survey could be taken in the near future, and subsequent surveys would be 

compared with the results of the baseline survey. 

To the extent the information can be obtained, obtain quantitative information on the 

prevalence of (I) audit/review/compilation reports with GAAP exceptions and (2) Other 

Comprehensive Basis of Accounting (OeBOA) financial statements. Information 

obtained in subsequent years would then be compared to such baseline information. 

Additionally, the BRP believes that the FAF's recently initiated post-implementation assessment 

ofFASB and GASB standards also should apply to significant differences in GAAP that the new 

board may approve for private companies. Such reviews would be crucial in assessing how well 

the two-board system is functioning and also help assist the FAF in determining the next stage of 

evolution in standard setting for private companies as described below. 

The BRP believes that the recommendations on the model and structure described above are the 

best solution to the problems in the current standard-setting system for private companies that are 

discussed in the following section. Section IV of the report provides the BRP's primary reasons 

for this belief. 
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III. WHAT THE RECOMMENDATIONS ARE ADDRESSING-THE PROBLEM 

STATEMENT 

There are approximately 28 million private companies in the United States.' Many are very 

small businesses that have no reporting requirements other than filing income tax returns. 

However, a significant number of private companies are required to prepare GAAP financial 

statements by lenders, bonding companies, regulators, and others, in addition to the 

approximately 14,000 public companies, which have SEC reporting requirements. Most of thc 

private companies preparing GAAP financial statements do not have the accounting resourccs 

that public companies have, especially larger public companies. 

The BRP has concluded that the current U.S. accounting standard-setting process has systemic 

issues, involving (a) an insufficient understanding of the needs of users of private company 

financial statements and (b) an insufficient weighing of the costs and benefits of GAAP for use 

in private company financial reporting. These issues have caused a lack of relevance of a 

number of accounting standards-for example, those on variable interest entities, uncertain tax 

positions, fair value measurements, and goodwill impairment-for many users of private 

company financial statemcnts. Since it also appears that the least relevant standards for private 

company users are often the most complex, the BRP believes that private companies are 

incurring significant unnecessary cost for GAAP financial statement preparation and audit, 

review, or compilation services. Indeed, the increase in costs to provide potentially irrelevant 

information has led to more uscrs who are willing to accept qualified opinions-a development 

that calls into question whether those aspects of GAAP are truly "generally accepted." These 

increasing instances of nonacceptance, coupled with a concern about the overall complexity of 

GAAP expressed by many private company preparers and their CPA practitioners-a concern 

that some BRP members have noted extends to public companies as well--have led the BRP to 

conclude that, at a minimum, the current accounting standard-setting system needs to be 

improved to better address the needs of users of private company financial statements in a costeffective manner. 

Based on both the FASB's history and the competing standard-setting pressures on the FASB 

that are emanating from the public company sector, including those related to the FASB's joint 

projects with the International Accounting Standards Board (lAS B), a supermajority of BRP 

members believc that the FASB will not be able to fully assess and respond sufficiently and 

appropriately to the needs of the private company sector. 

In arriving at these conclusions, the BRP has considered: 

• Previous studies 

'This number is based on the U.S. Census Bureau's Nanemployer Statistics: 2008 report (21.4 million nonemployer 

establishments) and 2008 County Business Patterns report (7.0 million employer establishments, excluding not·forprofit and government establishments, and the approximately 14,000 public companies). Only businesses that are 

subject to federal income tax are included in the Nonemployer Statistics: 2008 report. Accordingly, most not-forprofit entities are excluded from that figure, except those that are not exempt from federal income tax. 

6 
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• The experience of the Private Company Financial Reporting Committee (PCFRC), as 

described primarily by the current PCFRC chair and a former PCFRC member, who 

serve as a participating observer and a BRP member,' respectively 

• The FASB's activities historically 

• The growing use of reports with GAAP exceptions and the availability ofIFRS for Small 

and Medium-sized Entities (SMEs) 

Individual BRP members' perspectives (generally representing their constituent 

organizations) about the current system 

• Feedback received through written public submissions 

• The experience of international standard setters who have addressed similar issues. 

PREVIOUS STUDIES 

BRP members were given an overview of the numerous studies, reports, and recommendations 

on private company accounting that have been prepared over the last 40 years. (A full list of 

those studies and reports is contained in Appendix D.) Most of the older studies were 

practitioner-driven. The last time that the F ASB formally researched the needs of private 

companies was in 1983. Since that time, the number of standards that have been issued by the 

F ASB (now included in the Accounting Standards Codification) has increased greatly. Some 

private company constituencies have said that some of the more recently issued standards have 

shown little to no relevance to their users coupled with an overall increase in complexity of those 

standards. Two of the more noteworthy reports were the Wheat and Castellano Reports. 

The Wheat and Castellano Reports, Conclusions, and Associated Activities 

In 1971, the AICPA conducted a study (Study) that had a significant effect on the standardsetting process in the United States and produced what was called the Wheat Report. 'The Study 

was charged with examining the process and means by which accounting principles were 

established in the United States and providing recommendations for improvement. At that time, 

accounting standards were being established by the Accounting Principles Board (APB), a senior 

committee within the AICPA. The Study recommended the creation of the FAF and the FASB. 

The FAF would oversee the FASB, hence replacing the APB. The FASB would be an 

independent body with a full-time board and research staff. The Study reached this conclusion 

after reviewing and addressing the independence of the current APB board and the benefits and 

costs of having a part-time board. (Appendix E provides current information about how the 

FASB is constituted, operates, and is overseen by the FAF.) 

After the creation of the FASB, there were a number of other studies (as listed in Appendix D) 

conducted that were generally focused in part on what the accounting profession calls "standards 

overload." The most recent study on private company accounting was done in 2005 by an 

AICP A task force, which produced what is referred to as the Castellano Report. 

'Daryl Buck was a PCFRC member from 2007 to 2009. The BRP acknowledges that on January 14,2011, the FAF 

announced the appointment of Mr. Buck to the FASB for a term beginning February 28, 20ll. In light of this 

announcement, Mr. Buck resigned as a member ofthe BRP on January 17,20 II, and did not participate in the final 

vote. 

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The AICPA fonned the Private Company Financial Reporting Task Force (the Task Force) to 

conduct research to detennine whether private company GAAP financial statements were 

meeting the needs of their users and whether the cost of providing GAAP financial statements 

was justified compared to the benefits of doing so. On the basis of the research perfonned, the 

Task Force concluded that the users of private company financial statements have different needs 

than users of public company financial statements, that GAAP exceptions and OCBOA should 

not be the resolution to the private company financial reporting problems, and that fundamental 

changes should be made to the current standard-setting process. 

The Castellano Report was presented to the FAF Trustees in 2006. The FASB responded by 

issuing an Invitation to Comment, Enhancing the Financial Accounting and Reporting Standard 

Setting/or Private Companies, and subsequently fonning the PCFRC in 2007 and adding a staff 

member with extensive experience in the private company sector. That individual's role was to 

work with the PCFRC, otherwise liaise with the sector, educate the F ASB Board and staff about 

private company issues, and offer alternatives for private companies during the standard-setting 

process.' 

Because of the extensiveness of the research conducted in connection with the Castellano Report, 

and because the BRP's ensuing discussions and the responses contained in the written public 

submissions were generally consistent with the Castellano Report's tindings, most BRP members 

do not believe that additional fonnal research is needed at this time. 

THE PCFRC AND FASB ACTIVITIES SINCE 2007 

The PCFRC began its work in 2007. By its charter, the PCFRC consists of a chair who is a parttime employee of the F ASB, four users of private company financial statements (currently two 

commercial bank lenders, a surety, and a venture capitalist), four preparers of private company 

financial statements (current members represent companies with annual revenues ranging from 

$25 million to $) billion), and four CPA practitioners (who have been from small to mid-size 

finns). Since very small private companies generally rely on their CPA finns to assist with the 

preparation of financial statements in accordance with GAAP, the CPA practitioners are seen as 

representing the smaller companies. 

'These changes built upon the FASB's creation of a Small Business Advisory Committee (SBAC) in 2004. 

Stakeholders viewed the SBAC as an important step forward in the standard-setting process, helping to put the 

Board more in touch with the concerns of smaller businesses~ both public and private. However, some stakeholders 

also felt that the SBAC did not provide sufficient input for the Board to comprehensively address private company 

concerns. 

Over the years, the SBAC has played a valuable role in providing strategic and other advice to the F ASB about 

its standard-setting process and proposed and existing standards, as they pertain to small businesses, both public and 

private, In discussing standard setting for private companies, its members have noted that the informational needs of 

private company users are often different from those of public company investors and that those differences should 

be considered by the FASB throughout its projects. Its members have also called upon the FASB to continue to 

improve the Board's outreach to the private company sector throughout the standard-setting process. 
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The PCFRC's miSSIOn is to provide recommendations that will help the Board deternline 

whether there should be differences in prospective and cxisting accounting standards for private 

companies. The PCFRC meets four to five times per year to evaluate existing and proposed 

standards from a private company perspective to develop positions for their recommendation 

letters. Consistent with the PAS8's open due process, the PCFRC's meetings are open to the 

public. Beginning in April 2010, Board members began attending the PCFRC meetings on a 

rotating basis, allowing for better two-way communication. 

The FASB addresses the PCFRC's recommendations and is supposed to articulate within the 

basis for conclusions section of standard-setting documents (both Exposure Drafts and final 

Accounting Standards Updates) the basis for its decisions on whether differences should exist for 

private companies. 6 Although the Board considers the recommendations received from the 

PCFRC, it has not always documented in the basis for conclusions why it did not agree with the 

PCFRC's recommendations. 

Over time, internal changes have been made at the FASB to better focus on private company 

issues. In June 2009, an assistant staff director was named to oversee all nonpublic entity (private 

company and not-for-profit organization) issues. The BRP also notes that all recent Exposure 

Drafts have directly posed questions about how a proposed standard would affect nonpublic 

entities.' 

The PCFRC has submitted approximately 40 recommendation letters since its fOIDlation in 2007. 

The Board, considering PCFRC input along with input from other sources, has madc various 

modifications to standards, generally involving different effective dates for private companies 

and in some cases different disclosures. These changes notwithstanding, the PCFRC chair has 

indicated that many stakeholders in the private company sector have seen the PCPRC's work 

with the F ASB as not being wholly successful because the F ASB has not also shown a 

willingness to consider carefully and approve, where appropriate, the possibility of measurement, 

recognition, or presentation differences. (This message was echoed in the written public 

submissions. ) 

GROWING USE OF REPORTS WITH GAAP EXCEPTIONS AND AVAILABILITY OF 

IFRS FOR SMEs 

Unlike other countries around the world, the United States has no statutory requirement for 

private companies, other than certain regulated companies such as financial institutions, 8 to 

prepare GAAP financial statements. Under current practice in the United States, private 

companies may report under U.S. GAAP or OCBOA (usually cash or income tax basis). Because 

the AICP A now recognizes the lASB as an authoritative standard setter, in many instances 

private companies (other than financial institutions) may also report under IFRS or IFRS for 

'This requirement was articulated in the Invitation to Conunent that preceded the PCFRC's formation (see p. 8). 

'In recent months, the FASB has continued to make various changes to its processes concerning nonpublic entities, 

including transferring additional staff to specifically work in that area. These changes are described in Appendix F. 

'Federal law requires accounting principles applicable to reports or statements required to be filed with the federal 

financial institution regulators by insured depository institutions and credit unions to be unifonn and consistent with 

GAAP. 

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SMEs,' although thus far there do not appear to be many private companies that have chosen this 

option. 

Because of the lack of relevance, and the complexity, surrounding some GAAP standards, 

notably accounting for variable interest entities (formerly FASB Intcrpretation No. 46(R), 

Consolidation of Variable Interest Entities, as recently amended by FASB Statement No. 167, 

Amendments to FASB Interpretation No. 46(R), many private companies have opted to receive 

qualified or except-for opinions. Lender and CPA-practitioner members of the BRP have 

reported that they have seen an increase in the acceptance of such reports from private 

companies, mainly because application of some standards does not produce relevant information 

for lenders and is costly to prepare and audit, review, or compile. Some would respond that this 

is not necessarily a problem, as users of private company financial statements accept them. 

However, it does raise concerns about potentially reaching a point at which the frequency of 

exceptions undermines the very idea of "generally accepted." In addition, many loan covenants 

for larger private companies require GAAP financial statements and these companies typically 

do not have the option of taking exceptions or using OCBOA. 

INDIVIDUAL BRP MEMBER PERSPECTIVES 

At its first meeting, the BRP heard from its members who are users of private company financial 

statements. Users of private company financial statements primarily include lenders, other 

creditors, bonding and credit-rating agencies, regulators, and business owners. While the specific 

informational needs varied among users, they told the BRP that they liked the "gold standard" of 

GAAP, for consistency, comparability, and related assurance. According to these members, most 

users focus heavily on cash flow measures, adjust the financial statements to meet their end 

needs, and do not make decisions on the basis of the financial statements alone. Users almost 

always require additional information when making decisions to lend, invest, or bond, and many 

users have access to management to obtain that information. (This contrasts to the lack of direct 

access to management for certain users of public company financial statements under the SEC's 

Regulation FD.) These members stated tlmt certain GAAP standards are complex, and that most 

companies, especially smaller ones, need outside CPA assistance to comply. They also noted that 

more recently, companies seem to be taking more exceptions to GAAP because certain 

information is not relevant. These users statcd that while comparability is certainly important to 

them, they would not oppose differences in GAAP for private companies, perhaps even a 

separate standalone set of U.S. GAAP along the lines ofIFRS for SMEs or Canadian GAAP for 

Private Enterprises, if that would spur more companies to move from OCBOA to GAAP 

financial statements. However, some BRP members observed that the call for change did not 

seem to be coming, in any widespread way, from the user community and that the users of 

private company financial statements are accustomed to adjusting financial statements to make 

the financial statements more useful for their end needs. 

At the second meeting, preparers and practitioners agreed that there are broad-based concerns 

about the current standard-setting system. They stated that private company issues have not been 

'IFRS for SMEs specifically preclude all financial institutions, including those that are privately held, from using 

these standards. 

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heard or fully considered by the F ASB, and that the F ASB has not made sufficient exceptions or 

modifications for private companies in measurement and recognition, as well as disclosure. As a 

result, those preparers and practitioners indicated that standard setting seems to be driven to a 

large degree by public company financial statement user needs and often tends to be more 

relevant to some of the users in that sector (especially equity investors) than it does to many 

users in the private company sector. 

At later meetings of the BRP, the word relevance was frequently used when speaking about 

accounting standards. Most BRP members agreed that too many GAAP requirements were not 

relevant to some users of private company financial statements and that the benefits of 

complying with certain standards did not justify the costs. The BRP noted that change would not 

be driven by private company financial statement users. Rather, the users would likely accept 

differences in GAAP for private companies, since some GAAP pronouncements are not useful or 

relevant to providing appropriate understanding or analysis of the entity's relative financial 

position. 

FEEDBACK FROM PUBLIC SUBMISSIONS 

The BRP published a set of questions on August 5, 2010, requesting written input from the 

public. Appendix G to this report contains the questions asked, a list of respondents, and a full 

summary of the responses received. Many CPA practitioners and preparers responded but few 

users submitted responses. 

The common issues and concerns cited by respondents were: 

Private company financial statements often lack relevance to users. 

• Standards have become increasingly complex. 

The pace ofthe standard-setting process has increased. 

Costs often exceed benefits. 

• There has been an increase in qualiiied opinions and use ofOCBOA where possible. 

The general thrust of the written responses did not differ from the general thrust of comments 

made by most BRP members, with many respondents indicating that there were systemic issues 

with the standard-setting process. The largest firms, however, generally recommended attacking 

the issue of complexity through simplification efforts for all entities, both public and private, 

especially until the SEC makes a decision about whether to incorporate IFRS into the financial 

reporting system for public companies. While supporting one set of high-quality standards for 

all public and private companies in the United States, the Federal financial institution regulators 10 

recognized that accounting standards need to address the circumstances and needs of all financial 

statements users, for both public and private companies. In their written response to the Panel, 

the regulators recommended that the standard setters include more small-firm and private 

company representation on a single board and incorporate practical expedients, wherever 

I°The U.S. federal financial institution regulatory agencies as a group is a participating observer on the Panel, but is 

not a member of the Panel. 

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possible, that would allow the standards to be implemented by all companies in a cost-effective 

manner. 

THE INTERNATIONAL EXPERIENCE 

The Panel consulted standard setters outside the United States to learn what is being done for 

private companies as their public companies adopt IFRS. Most standard setters have come to 

believe that one size does not fit all when it comes to accounting standards and that there needs 

to be significant differcnces for private company reporting: 

A number of countries around the world have adopted IFRS for SMEs. Most of these 

countries have universal or widespread statutory reporting requirements for all 

companies, public and private, which in part drove the initiative for the SME project. 

The U.K. is planning to adopt lFRS for SMEs for use by its private companies and, for 

now, to continue to allow very small private companies to use its Financial Reporting 

Standard for Smaller Entities (FRSSE) standards. 

• Canada has taken a "made in Canada" approach by simplifying existing Canadian GAAP 

and creating a standalone set of accounting standards for private enterprises. It has an 

advisory board to the Canadian Accounting Standards Board, which will propose updates 

and changes, but the ultimate authority to change accounting standards for private 

enterprises remains with the Canadian Accounting Standards Board. Going forward, 

changes to IFRSs will be examined to determine whether similar changes should also be 

made to the accounting standards for private enterprises. This does not mean that the 

private enterprise standards are on a path to converge with IFRSs for SMEs. The private 

enterprise standards are a long-term solution focused on the needs of the private 

enterprise marketplace and will exist as long as the marketplace finds them useful. 

BRP CONCLUSIONS 

After considering prior studies, the PCFRC's experience, trends in the marketplace, the 

perspectives of BRP members, the public written submissions, and the experience of 

international standard setters, the BRP believes that significant change is needed in the system of 

setting accounting standards for private companies to address the issues underlying the lack of 

relevance of a number of GAAP standards for many users of private company GAAP financial 

statements and the complexity of GAAP for private companies. Some of the BRP members 

acknowledge that some of the complexity concerns extend to public companies and that some of 

the relevance concerns extend to some users of public company GAAP financial statements; 

however, the BRP's focus is on providing recommendations that are within its purview-the 

accounting standard-setting system as it pcrtains to private companies. The BRP believes that 

the recommendations in Sections II and V are in the best interest of users of private company 

financial statements and will sufficiently address the systemic issues in a cost-effective manner. 

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IV. WHY THE BRP'S RECOMMENDATIONS BEST ADDRESS THE PROBLEMS 

To develop its best recommendations for addressing the systemic issues described in Section III, 

the BRP considered various models and structures as alternatives to the current standard-setting 

process. The individual models and structures contemplated what would be in the best interests 

of the private company sector in the United States, that is, the process and product that would 

best facilitate financial reporting to meet the needs of users of private company financial 

statements in a manner that is cost-effective for private company preparers, practitioners, users, 

and others in the financial system. The models and structures, which are further detailed in 

Appendix H, describe an end-state process, taking into account that there might be certain shortterm and long-term actions that would need to occur to achieve a particular model or structure. 

This section provides a brief overview of the models and the structures considered and explains 

why a U.S. GAAP model with exceptions and modifications for private companies and a 

separate private company standard-setting board are the best recommendations to address the 

problems noted in Section III of the report. 

OVERVIEW OF MODELS AND STRUCTURES 

The BRP initially debated the following models: 

U.S. GAAP Models 

• U.S. GAAP with Exceptions and Modifications for Private Companies---current 

system 

• U.S. GAAP with Exceptions and Modifications for Private Companies-with 

process enhancements 

• Baseline U.S. GAAP with Add-ons for Public Companies 

• Separate, Standalone U.S. GAAP for Private Companies Derived from Current U.S. 

GAAP (the "Canadian" Approach) 

Separate, Standalone U.S. GAAP for Private Companies Developed from the 

Ground up Based on Robust Private Company Framework 

IFRS Models 

IFRS for SMEs as Issued by the IASB 

• IFRS for SMEs Customized ("Americanized") for U.S. Private Companies 

These models were viewed as two continua, one based on U.S. GAAP and another based on 

IFRS. Within each continuum, the change necessary to achieve such models gradually increased 

with respect to current standards and the standard-setting system. In all the U.S. GAAP-based 

models except the current system model, the creation of some sort of underlying, standardsetting framework for private companies was viewed as a near-term necessity. The private 

company framework in the respective models ranged from a differential framework to a separate, 

ground-up framework. The IFRS-based models already have an underlying set of decision 

criteria ("Concepts and Pervasive Principles") created by the lASE. 

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The Panel rejected four of the models during its initial deliberations: 

U.S. GAAP with Exceptions and Modifications for Private Companies--current system 

Separate, Standalone GAAP for Private Companies Developed from the Ground up 

Based on Robust Private Company Framework 

• IFRS for SMEs as Issued by the IASB 

• IFRS for SMEs Customized ("Americanized") for U.S. Private Companies. 

In general, these models were rejected because that BRP felt that: 

The status quo is unacceptable. 

Separate, standalone GAAP created from the ground up could take a significant amount 

of time to create and could be significantly different from current U.S. GAAP. 

• U.S. private companies should not be leading the charge, en masse, to an IFRS-based set 

of standards before the SEC makes a decision on U.S. public companies, especially given 

the extent of change managemcnt efforts that private company stakeholders might have to 

undertake. 

The remaining three models were refined for further deliberations. Two of the models 

contemplated two structural variations, one featuring a restructured F ASB and the other featuring 

a separate private company board. Because of the nature of the baseline model, only a version 

with a single standard-setting board for both public and private companies (a restructured FASB) 

is feasible and was considered. II 

The baseline U.S. GAAP with add-ons for public companies and the separate, standalone GAAP 

for private companies derived from current U.S. GAAP were not supported by the majority of 

the BRP members. However, most members believed a baseline or a separate private company 

GAAP (based on current U.S. GAAP) could be in the best, long-term interest of users of U.S. 

private companies' financial statements within the broader context of the overall U.S. financial 

reporting system. Under a baseline GMP model, the "burden of proof' would shift more to 

justifying why users of public company financial statements need certain information, rather than 

why users of private company financial statements do not. And a separate private company 

GAAP could permit a more exclusive focus on the needs of users of private company financial 

statements, more than would other models. 

There was an overriding concern among BRP members that a baseline GAAP model or a 

separate private company GAAP model would likely take much longer and be more costly to 

implement than a GMP model with exceptions and modifications, with enhancements to the 

current system. As such, the BRP rejected these models because of expediency. Many users on 

the BRP also support a GAAP model with exceptions and modifications, with enhancements to 

the current system, for reasons of consistency and comparability. 

"Baseline GAAP with add-ons for public companies contemplates reviewing and reorganizing current (existing) 

U.S. GAAP into a baseline GAAP for all entities, based on user needs, and with additional GAAP requirements 

("add-ons") for public companies. Having two boards sharing responsibility for determining that baseline was not 

considered practicable. 

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PRIMARY REASONS FOR THE BRP RECOMMENDATIONS 

As noted above, many of the models had attributes that were attractive to BRP members, but thc 

overriding factors that led the BRP to choose the recommended model from others are a sense of 

urgency and the support by many users for financial statcment comparability. A U.S. GAAP 

model with exceptions and modifications for private companies affords the best opportunity to 

implement change quickly and, with proper coordination between the boards, affords relatively 

less opportunity for unintended divergence to a separate, standalone GAAP, which could result 

in less comparability and confusion in the marketplace. 

Change Needs to Be Made Quickly 

As noted above, some models were appealing as long-term solutions, but the BRP believes that 

those models could not be achieved quickly enough to provide relief to private companies in the 

near term. For example, some BRP members noted that a model with a baseline GAAP for all 

companies and additional requirements ("add-ons") for public companies would be their ideal 

solution but that the time to develop such a model would be significant and would not provide 

near-term relief. That model would require an analysis of all GAAP requirements, possibly with 

significant involvement by the SEC. Such a task would be difficult at best and might have been 

more appropriate years ago. 

Another model that had some appeal to BRP members but that was rejected to achieve a nearterm solution was the creation of a separate set of U.S. GAAP for private companies. That 

solution was viewed by some BRP members as a long-term goal, but it would require much more 

time to develop because it would involve a similar analysis of all GAAP requirements as would 

be required to create the baseline GAAP portion of the baseline-with-add-ons model described in 

the preceding paragraph (though it would probably not necessitate significant SEC involvement). 

Those BRP members who perceived other models as potcntial long-term solutions believe that 

U.S. GAAP with exceptions and modifications could be a stepping stone or bridge to those ends. 

They note that the recommended model does not close off the possibility of a strategic shift by 

the FAF and the standard setter(s) to one of these other models if it is determined, sometime in 

the future, to be in the best interest of users of private company financial statements and other 

stakeholders in the U.S. financial reporting system. 

Comparability 

BRP members that are primarily financial statement users indicated that comparability is an 

important attribute for them. A GAAP model with exceptions and modifications for private 

companies would be based on a single foundation or set of core principles. If GAAP for private 

companies were a separate document created independently from GAAP for public companies, it 

could result in two GAAPs that might diverge more dramatically than would be desirable, 

resulting in less comparability and potentially more confusion in the marketplace. 

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New Board 

The supermajority view of BRP members is that the current FASB and even a restructured FASB 

cannot producc the needed exceptions and modifications to GAAP for private company financial 

reporting. Those BRP members believc that throughout its history, the FASB has been geared, 

in its composition and its processes, very heavily toward public companies, with exceptions and 

modifications in GAAP for private companies too rare and extremely difficult to achieve, 

especially in areas other than disclosurc-that is recognition, measurement, and presentation. 

Members of a board with authority to set accounting standards for private companies must 

possess the perspective of those stakeholders, and the F ASB cannot be sufficiently restructured 

or possess enough of the essential private company representation needed to set GAAP for 

private companies. A new board is the most realistic path forward in overcoming the systemic 

issue related to the relevance of GAAP for private companies. 

PROS AND CONS CONSIDERED FOR THE BRP RECOMMENDATIONS 

The BRP considered the following pros and cons in its deliberations to arrive at the 

recommended model and structure: 

Pros: 

A GAAP-with-exceptions-and-modifications model: 

• Can be achieved more quickly than some of the other models considered 

• Maintains a significant degree of consistency and comparability between public and 

private companies compared with other models considered 

• Minimizes the costs to private companies that choose to "go public" compared with other 

models considered 

• Avoids confusion and system complexity from two highly divergent sets of U.S. GAAP 

• Has lower education and training costs than other models considered. 

A separate private company board: 

• Could provide appropriate structural separation from the pressures that the F ASB faces in 

addressing the needs of public company stakeholders, including the SEC 

• Could better address the different needs of private company financial statement users 

given a targeted focus on one constituency. 

• A GAAP-with-exceptions-and-modifications model might not be perceived as being 

sufficiently responsive to complexity and cost issues for private companies (compared 

with, for example, a separate, self-contained set of private company standards). 

• Since the pace of standard setting is often driven (or perceived to be driven) by SEC! 

public company sector needs or concerns, a GAAP-with-exceptions-and-modifications 

model probably affords less opportunity for the standard setter to keep the pace of 

standard-setting activities to a level that facilitates participation by the private company 

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sector (which generally has fewer resources) in the standard setter's due process 

compared with other models considered. 

Depending on the extent of exceptions and modifications made by the new board, the 

result could be substantially different accounting standards for private companies 

resulting in a lack of comparability, and additional costs and strain to some in the U.S. 

financial reporting chain. Once a separate board is given authority over privatc company 

standard setting, there may be limited ability to stop any such divergence. 

• Two boards having authoritative responsibility for an overall, single-GAAP model is 

unproven and has not been used in other countries. 

• It could make engagement in due process inefficient and even confusing for stakeholders 

that are interested in both public and private companies, and it could possibly undermine 

the authority of one or both boards. 

Additional funding sources will be required. 

The BRP considered the various pros and cons and placed more weight on some factors than on 

others. The general consensus was that although some models had appeal in the long term, the 

recommended model has the advantage of achieving needed relief in the near term without 

adding significant complexity or comparability complications. The BRP also believed that, with 

a clear mission for the new board, proper coordination of the board with the F ASB, and 

appropriate oversight ofthe board by the FAF, at least some of the cons would be mitigated. 

CONCLUSION ON BRP RECOMMENDED MODEL AND STRUCTURE 

In light of the frustrations expressed about the lack of relevance of some GAAP standards and 

the complexity and rapid pace of change in GAAP by many private company preparers and CPA 

practitioners in the written public submissions and elsewhere, and because of the length of time 

needed to achieve the various end-state models, the BRP recommends the U.S. GAAP model 

with exceptions and modifications for private companies, set by a separate private company 

board. The BRP believes that this model and structure would be the most effective approach to 

improve relevance of standards and to get relief for private company stakeholders in the near 

term. The BRP acknowledges that a two-board structure has risks (as noted above) but firmly 

believes that through proper coordination and effective two-way communication, the two boards 

will be able to set appropriate standards that best meet the needs of users of private company 

GAAP financial statements in a cost-effective manner. 

The BRP also recognizes that the FAF or the new board could consider a succession (evolution) 

of models, such as described on page 15, as a longer-term solution. 

V. ADDITIONAL BRP RECOMMENDATIONS; SHORT-TERM, TRANSITIONAL, 

AND OTHER 

Short-term and Transitional Actions by the FASB and the FAF 

While the BRP firmly believes that significant change is urgently needed and encourages the 

FAF to take prompt action to implement the Panel's recommendations on model and structure, 

the Panel recognizes that the Trustees will need time to vet the recommendations, especially 

concerning the creation of a new board, both internally and publicly, and, if the Trustees concur, 

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to then put a new board into place. In light of this, the BRP recommends that the F AF and the 

F ASB take, or in some cases continue to take, certain actions that can be implemented in the 

short term or can be transitional actions to achieve needed near-term relief for private companies 

and help ensure a successful transition to the model and structure that the Panel recommends. 

The BRP believes that these actions, in whole or in part, do not change its recommendations for 

fundamental ehangcs or thc urgency needed to enact them. 

Those recommendations are: 

1. The FAF should fill at least one of the currently open board positions with individuals 

who have primarily private company background and experience. " 

2. The F ASB should continue to work closely with the PCFRC or another similar dedicated 

work stream. It should continue to have one or more board members present at each 

PCFRC mecting. PCFRC recommendations on Exposure Drafts and other matters should 

be discussed specifically at open F ASB Board meetings. 

3. In the short term and continuing as transitional actions until a new board is in place, the 

F ASB should perform the following: 

Continue to hold separate private company roundtables for major projects at 

locations around the country. 

• Incorporate private company concerns expressed at roundtables and in comment 

letters in the ongoing projects to evaluate whether there should be differences in 

recognition, measurcment, presentation, disclosures, and/or effective dates. In 

view of publicly expressed concerns, if the board decides that there should be no 

differences, a clear explanation of their reasoning should be included in the basis 

for conclusions section of the final standards. 

• Consider a delay for private companies in the effective date of major new 

standards, especially those issued in connection with the F ASB-IASB 

Memorandum of Understanding (MOU) projects, that is longer than the nowroutine one-year delay.]J 

These processes described above will most likely continue once the new board is in place 

but will be led by and/or significantly involve the new board. 

4. The BRP recommended that differences in GAAP for private companies be based on a 

framework (set of decision criteria). Using what it has learned from the two recent 

roundtables on private company issues with existing GAAP standards as key input, the 

FASB should begin to articulate "what differentiates private companies from public 

companies." This articulation would be used to create the differential framework for 

private company accounting. The framework would be used to determine whether 

differences for private companies should be approved. 

"The BRP acknowledges that on January 14, 2011, the FAF announced the appointments of two new FASB 

members, one of which has substantial experience as a private company CFO and the other of which has substantial 

experience as a user of financial statements, including financial statements of private companies. 

13The delay would be with respect to the public company effective date. Thus, if, for example, the effective date for 

a particular MOO project is 2014 for public companies, this recommendation would contemplate an effective date of 

2016 or later, rather than 2015, for private companies. 

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The F ASB Board and staff could do much of this work, perhaps with the assistance of an 

appropriate, broad resource group, even before a decision by the Trustees on a desired 

model and board structure is finalized. The broad resource group should include 

significant user representation. 

If and when a new board is cstablished, it could then complete this work or, if already 

completed, could review it and either ratify it or revise it. 

5. The FASB should look at the public eomment process in its standard setting and consider 

taking steps to make it simpler to encourage responses by a broad base of stakeholders. 

FAF and FASAC Structure 

The BRP also believes that it is important that the F AF reassess the composition of its Board of 

Trustees to see that it has an appropriate number of members from the private company sector, 

including small and mid-sized private companies, to ensure its ability to reach out to and 

consider the needs of private companies in its oversight of the F ASB and, if approved, a new 

private company standard-setting board. 

In order for the F ASB to consider private company needs in the standard-setting process, the 

FAF should reassess the composition of the FASB's primary advisory body, the Financial 

Accounting Standards Advisory Council (FASAC), to ensure that it has an appropriate number 

of members from the private eompany sector, including small and mid-sized private companies, 

to ensure its ability to consider the needs of the private company sector when providing strategic 

and other input to the FASB. 

Marketplace Solution 

In addition to its primary recommendations on private company accounting standards, BRP 

members generally believed that allowing the marketplace to effectively and efficiently function 

and allowing choices for private companies would prove to be a successful course for standard 

setting to follow. If GAAP with exceptions and modifications for private companies were 

developed, the choice of which version of GAAP a private company would apply-the set of 

standards under the new board's authority ("private company GAAP") or the set of standards 

under the FASB's authority ("FASB GAAP")-should be market driven, rather than set by the 

standard setters themselves." If the users of a private company's financial statements demanded 

adherence to FASB GAAP, that would be a cost-benefit decision that the company would have 

to make in consultation with the users of its financial information. Some regulated private 

companies (such as privately-held financial institutions) could be required, by statute or 

otherwise, to adhere to F ASB GAAP in order to comply with specific industry requirements. 

Regardless of these situations, the standard setter would not be the decision maker; rather, the 

decision of which GAAP a private company (if not subject to regulatory requirements) should 

14For example, both IFRS for SMEs and Canadian GAAP for Private Enterprises specifically preclude all financial 

institutions, including those that are privately held, from using those standards. 

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use would be in the hands of the company and its financial statement users. The BRP believes 

there should be a market-driven choice as to whether a private company would follow OAAP as 

set by the FASB or private company OAAP. 

VI. AL TERNA TIVE VIEWS 

Dissenting View 

One BRP member dissents from the BRP's recommendations for differential standards for 

private companies and a separate private company standard-setting board. This member's 

dissent may be found following Section VII. 

Minority View 

A small minority of BRP members, while generally agreeing with the other recommendations 

contained in this report, believe that the F AF should not create a new board but instead: 

Allow sufficient time to determine whether the recent changes in the FASB staffing and 

processes (see Appendix F) have improved the systemic issues of relevance, complexity, 

and the cost of certain standards 

Restructure the Board, and its processes, as necessary to help ensure that it produces 

accounting standards that meet the needs of users of private company financial 

statements in a manner that is cost-effective for both users and preparers 

• Implement the actions described in Section V to achieve the best possible outcome for 

private companies. 

These members believe that a decision to create a separate board is premature at this time 

because of the number of changes the F ASB is currently implementing and the uncertainties 

about the future role of the F ASB concerning public companies. These members feel that the 

FAF in its oversight role, including its post-implementation reviews, should hold the FASB fully 

accountable for standard-setting activities that achieve an appropriate cost-benefit balance for 

private companies, minimizing irrelevant information for users of private company OAAP 

financial statements and reducing the complexity of OAAP where appropriate for private 

companies, and likely for public companies as well. (Indeed, these members believe that the 

BRP's recommendation concerning a separate board may well have been different if the 

concerns of both public company stakeholders and private company stakeholders had been 

considered by the BRP as being under its purview.) 

These BRP members also recommend that the FAF examine the FASB's composition and adjust 

as necessary to ensure that the Board includes members with sufficient private company 

experience and perspective to appropriately consider private companies in the standard-setting 

process. These BRP members recommend that the F AF explore the following restructured 

FASB Board scenarios as alternatives to a new board: 

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As the F AF has already announced, increase thc F ASB board size to seven members 

from the current five and ensure that at least one member has primarily a private 

company background. 15 Or, the F AF could further expand the F ASB and increase the 

proportion of members with primarily private company backgrounds. 

Regardless of changes to the F ASB Board, create an advisory task force structure (work 

stream) with the ability to effectively consider and determine exceptions and 

modifications in GAAP for private companies. In this scenario, the structure's decisions 

are subject to F ASB Board ratification. This approach is akin to the way the F ASB Board 

ratifies decisions of its Emerging Issues Task Force. 

These BRP members believe that a single board, coupled with the enhancements noted in 

Section V of this report, provides the best opportunity for improving the standard-setting process 

for all companies. A single group of individuals that collectively has broader experience and 

pcrspective regarding private as well as public companies, along with the help of an advisory 

task force structure that can supplement the board composition and bring the needed focus and 

perspective for the private company constituency, will overcome the systemic issues in standard 

setting. These BRP members also feel that a single board lessens the risk of unintentionally 

diverging to a separate set of private company GAAP standards. 

VII. BRP CONCLUDING COMMENTS 

The BRP has spent a considerable amount of time developing recommendations that we believe 

will help address how accounting standards can best meet the needs of users of U.S. private 

company financial statements. We are pleased to be able to present our report to the FAF and 

hope that our conclusions and recommendations will be helpful to the F AF Trustees as they 

strategically address the standard-setting system for private companies. 

We believe that significant improvements to the system are urgently needed, and we stand ready 

to assist in any way that we can to help ensure expeditious, beneficial change. 

15The BRP acknowledges that on January 14, 2011, the F AF announced the appointments of two new F ASB 

members, one of which has substantial experience as a private company CFO and the other of which has substantial 

experience as a user of financial statements, including financial statements of private companies. 

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DISSENTING VIEW 

Teri Lombardi Yohn dissents from the recommendations of the Blue Ribbon Panel on Private 

Company Financial Reporting suggesting the establishment of differential standards for private 

companies and a separate private company standard-setting board. According to the FASB's 

Conceptual Framework, the objective of financial reporting is to provide financial information 

about the reporting entity that is useful to cxisting and potential investors, lenders, and other 

creditors in making decisions about providing resources to the entity. In addition, financial 

reporting should provide information to help users assess the amount, timing, and uncertainty of 

future cash flows as a result of providing resources to the entity. 

In the view of Ms. Y ohn, there has been no compelling evidence presented to the Pancl to 

suggest that the objectives of financial reporting are not being met for private companics. An 

argument presented to the Pancl in support of differential standards is that users of private 

company financial statements are more likely to be lenders than equity holders and that U.S. 

GAAP focuses on information needs of equity investors. However, financial statements 

presented under U.S. GAAP are intended to provide decision-useful information for external 

users in general, and the Panel has not been presentcd with arguments or evidence that private 

company financial statements do not meet the needs of users. In fact, the push for differential 

standards has not been driven by users of private company financial statements, suggesting that 

the financial statements are providing decision-useful information. 

There has also been no compelling evidence or framework presented to the Panel to suggest that 

the objectives of financial reporting differ between private companies and public companies. 

The Panel has merely been presented with a list of standards that accountants associated with 

private companies do not find desirable. The specific standards that have been highlighted are 

those related to fair value, uncertain tax positions, variable interest entities, and financial 

instruments. Public companies have similar concerns about the same standards. This suggests 

that perhaps these standards need to be reviewed to determine if they mect the objective of 

financial reporting. If the concerns over these standards are valid, then the standards should bc 

improved for both private companies and public companies. 

Proponents of differential standards for private companies suggest that some of the standards 

under U.S. GAAP are not relevant and/or are not cost beneficial for private companies and, 

therefore, that all private companies should be exempt from these standards. There is potentially 

a basis for differentiation of financial reporting for different classes of entities; however, the 

Panel has not been presented with evidence suggesting that there are sufficient similarities 

among private companies to warrant general exemptions. In addition, the Panel has not been 

presented with evidence to suggest that there are sufficient differences between private 

companies and public companies to warrant different standards for private companies. For 

example, there has been no analysis presented to the Panel suggesting that the differences for 

private versus public companies are any more significant than differences across other classes of 

companies, such as industry membership. The relevance of a standard should be judged on the 

basis of whether it meets the objectives of financial reporting. Without evidence that the 

financial reporting objectives differ between private companies and public companies, there is no 

basis to conclude that the relevance of standards differs across private and public companies. 

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There have been concerns presented to the Panel about the complexity of the standards under 

U.S. GAAP. However, the complexities in U.S. GAAP arise from an attempt to best capture the 

economics of the business and its transactions. By applying more simplified standards, the 

economics of the transaction are not likely to be captured in the same meaningful manner. If the 

economics could be captured more simply, then the standards for public and private companies 

should be modified to do so. 

Proponents of differential standards for private companies focus on the costs and benefits of 

applying standards from the company's perspective. The proponents have considered only the 

cost of providing financial information and having the information audited. This is a narrow 

view of the costs and benefits associated with financial reporting. It is important to note that not 

providing relevant information to financial statement users can also be costly. In addition, 

establishing separate standards for private companies will add significant complexity and cost to 

other dimensions of financial reporting. For example, differential accounting standards will make 

it more costly for users to understand, standards setters to develop and maintain, educators to 

teach, and assurance providers to obtain proficiency in financial rcporting. 

Establishing differential standards for private companies will also reduce the comparability of 

financial statcments. It is widely accepted that comparability of financial statements between 

entities, and over time for a given entity, enhances the decision usefulness of the information. 

The FASB's Conceptual Framework suggests that comparability is the principal reason for the 

development of accounting standards. Allowing for differential standards for private companies 

will reduce comparability across public and private companies. In addition, given that private 

companies would be allowed to follow either U.S. GAAP or private company standards, the 

comparability of financial reporting will be diminished even across private companies supplying 

audited financial statements. 

Proponents of differential standards for private companies raise a concern over the number of 

qualified opinions that have been issued for private companies. However, given that there is no 

regulatory requirement to file audited financial statements for most private companies, these 

companies can choose to not prepare financial statements under U.S. GAAP if it is not 

beneficiaL If a company chooses to apply U.S. GAAP, then the company should recognize that 

U.S. GAAP was established to best capture the economic position and profitability of a 

company. This is the "gold standard." There is no reason to modifY the standards so that 

companies can get unqualified opinions. This is like writing an exam so that every student gets 

100 percent. Just as formulating exams so that everyone would obtain a perfect score would 

make a mockery of exams, writing standards so that all companies get unqualified opinions 

would make a mockery of the standards. It is much bettcr for a company to be held to the gold 

standard and have audit qualifications that explicitly state the standards that the company chose 

not to apply. This is morc informative and transparent than having a differential set of standards 

with general exemptions. If private companies do significantly differ from public companies in 

terms of cost-benefit analyses of specific standards, then perhaps these concerns should be 

addressed through modifYing the auditing standards and/or types of qualifications issued rather 

than through establishing a separate set of standards. 

In summary, the Panel has not been presented with compelling evidence that the financial 

reporting objectives for private companies are significantly different from the objectives for 

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public companies. The Panel has also not been provided with guiding principles or compelling 

evidence to elicit how the financial reporting needs of users of private company financial 

statements differ from those of public company financial statements. The Panel has merely been 

presented with opinions as to what standards are preferred by accounting practitioners associated 

with private companies. Differential accounting standards for private companies will add 

significant complexity and cost to financial reporting. Given these costs, it is the responsibility of 

proponents of differential standards to articulate underlying principles and to provide compelling 

evidence to suggest that such a change is warranted. 

For these reasons, Teri Yohn has concluded that, absent supporting evidence, there should be one 

set of U.S. GAAP standards and one standard-setting board. She thinks that changes could be 

made to the structure of the F ASB and the supporting staff to better incorporate the views of 

private companies into the standard-setting process. Given the arguments and evidence presented 

to the Panel, Teri Y ohn sees no basis to support the establishment of differential standards or a 

separate standard-setting board for private companies. 

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APPENDIX A 

About the Blue-Ribbon Panel (BRP}---Mission, List of Members, Participating Observers, 

and Staff 

I. Blue-Ribbon Panel Overview 

As mentioned in the report's Executive Summary, the American Institute of Certified Public 

Accountants (AICPA), the Financial Accounting Foundation (FAF, the parent organization of 

the Financial Accounting Standards Board (FASB)), and the National Association of State 

Boards of Accountancy (NASBA) established a "blue-ribbon" panel (the Panel or BRP) to 

address how accounting standards can best meet the needs of users of U.S. private company 

financial statements. 

II. History 

Three key factors led to the formation of the BRP: 

• Summer 2009 FAF Listening Tour 

Fall 2009 AICP A Council meeting 

Fall 2009 Private Company Financial Reporting Committee (PCFRC) Letter to the F AF 

Summer 2009 FAF Listening Tour 

After John J. Brennan became Chairman of the FAF, he, other FAF Trustees, and FAF staff 

embarked upon a "listening tour" in various cities around the country in the summer of 2009 as 

part of the FAF's strategic planning process. The team heard from all key stakeholder groups of 

the FASB. One of the primary lessons learned from this tour was the need for the FASB to 

improve its consideration of private companies' views during the standard-setting process. 

Fall 2009 AICPA Council Meeting 

At its 2009 Fall Council meeting, the AICPA's governing council discussed the current state of 

standard setting for private companies. More than 95% of Council members at that meeting 

supported differences in the GAAP applied by U.S. private companies, where appropriate, from 

GAAP applied by U.S. public companies (most of them strongly supporting such differences). 

Additionally, more than 90% said the idea of having a self-contained, standalone GAAP for U.S. 

private companies is worthy of major exploration. 

November 2009 PCFRC Letter to the F AF 

In November 2009, the PCFRC "'Tote a letter to the FAF recommending that it strategically 

consider the issue of U.S. private company accounting in the context of both the mission of the 

FASB and global developments, such as the creation of International Financial Reporting 

Standards (IFRS) for Small and Medium-sized Entities (SMEs) and Canadian GAAP for Private 

Enterprises. In its letter, the PCFRC indicated that its preferred approach was a separate, self~ 

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contained set of standards for U.S. private companies tailored to the needs of statement users, 

though the F AF should explore other alternatives as welL 

III. Composition and Outreach 

The Panel is chaired by Rick Anderson, Chairman and CEO of Moss Adams, LLP, and FAF 

Trustee,16 and comprises 18 members. Panel Members are senior leaders who represent a crosssection of financial reporting constituencies, including lenders, investors, and owners, as well as 

preparers and auditors. All members have both extensive experience in their field and a keen and 

broad interest in financial reporting for private companies. In addition to the Panel members, the 

Panel has invited certain regulators and other key stakeholders to serve as participating observers 

for all of the Panel's work (see below for list of members, participating observers, and staff). 

The Panel also invited other guests to specific meetings for their expertise and perspective, and it 

solicited written submissions from the public on a series of questions on private company 

financial reporting. 

16Mr. Anderson's tenn as an F AF Trustee ended as of December 31, 2010, due to tenn limits. 

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PANEL MEMBERS: 

CHAIR: 

Rick Anderson, Chairman and CEO, Moss Adams, LLP 

MEMBERS: 

Billy Atkinson, Board Chair, NASBA 

Daryl Buck, 17 Senior Vice President and CFO, Reasor's Holding Company, Inc. 

Steve Feilmeier, Chief Financial Officer, Koch Industries 

Hubert Glover, President and Co-founder, REDE, Inc. 

David Hirschmann, President and CEO, Center for Capital Markets Competitiveness, U.S. 

Chamber of Commerce 

William Knese, Vice President, Finance and Administration, Angus Industries 

Kewsong Lee, Managing Director, Warburg Pincus 

Paul Limbert, President and CEO, WesBanco, Inc. 

Krista McMasters, CEO, Clifton Gunderson 

Barry Melancon, President and CEO, AICPA 

Jason Mendelson, Managing Director and Co-Founder, Foundry Group 

Michael Menzies, President and CEO, Easton Bank and Trust Company 

David Morgan, Co-Managing Partner, Lattimore, Black, Morgan, and Cain, PC. 

Terri Polley,18 President and CEO, F AF 

Dev Strischek, Senior Vice President and Senior Credit Policy Officer, Corporate Risk 

Management, SunTrust Banks, Inc. 

17The BRP acknowledges that on January 14,2011, the FAF announced the appointment of Daryl Buck to the FASB 

for a term begirming February 28, 2011. In light of this announcement, Mr. Buck resigned as a member ofthe BlueRibbon Panel on January 17, 20 11, and did not participate in the final vote. 

I'Non-voting member. 

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PANEL MEMBERS: (continued) 

Mark Vonnahme, Professor, University of Illinois; former Executive Vice President, Surety, 

Arch Insurance Group 

Teri Y ohn, Associate Professor, Indiana University 

PARTICIPATING OBSERVERS: 

Karen Kclbly, U.S. Federal Financial Institution Regulatory Agencies Group 

Dan Daveline, National Association of Insurance Commissioners 

Dillon Taylor, U.S. Small Business Administration 

Judith O'Dell, Chair, FASB Private Company Financial Reporting Committee 

Mark Ellis, Member and Agenda Subcommittee chair, F ASB Small Business Advisory 

Committee 

Russ Golden, Board member, FASB; former Technical Director, F ASB 

Jeffrey Mechanick, FAFI FASB 

Meredith Vogel, Grant Thornton LLP 

Robert Durak, AICP A 

Paul Glotzer, FAFI FASB 

Daniel Noll, AICP A 

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APPENDlXB 

BRP Process-Agendas, Outreach, and Invited Guests 

To accomplish its mission, the Panel held five in-person meetings, during which it considered: 

• Previous studies and other reports on standard setting for U.S. private companies (see 

Appendix D) 

The currcnt standard-setting system from the perspective of the various members, 

participating observers, invited guests, and the public (through a summary of the written 

submissions; see Appendix G) 

• Efforts of global and other national standard setters concerning private companies 

Various alternatives to the current system, in terms of processes (models) and structures, 

including short- and longer-term actions that may be necessary for putting into place any 

desired alternatives (see Appendix H). 

As part of its process, the Panel invited other guests to its meetings for their expertise and 

perspective on topics relevant to the Panel's work and conducted an outreach effort to private 

company stakeholdcrs. 

I. Meetings Agendas and Minutes 

Meeting I - April 12. 20 I 0 (New York. NY) 

The agenda for the Panel's first meeting included a general overview session, including a history 

of the debate on private company standards within the U.S. financial reporting system and a brief 

overview of actions taking place in other countries on private company financial reporting. 

Panel members reviewed and discussed the current U.S. standard-setting process (see Appendix 

E) and previous studies and reports, especially the 2005 Private Company Financial Reporting 

Task Force Report ("Castellano Report") (see Appendix D). 

To better understand the views of and issues facing private company financial statement users, 

Panel members and participating observers representing a user perspective delivered prepared 

remarks to the Panel. The Panel discussed the following questions: 

• Who are the actual users of private company financial statements? 

What is the key, decision-useful information that the various users need from GAAP 

financial statements? Is there information users don't need or can't get? 

Are current U.S. GAAP financial statements meeting those needs? Why or why not? 

• Do users routinely "adjust" the GAAP financial statements to meet their needs? 

Are users concerned about the cost-benefit issues of preparing GAAP financial 

statements? 

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Meeting 2 - May 14,2010 {Norwalk, en 

The Panel continued its discussion about private company financial statement user needs and 

continued to hear testimony from those users, including a corporate director and a credit analyst. 

Panel members then heard the viewpoints of private company financial statement preparers and 

practitioners. Panel member preparers and practitioners delivered prepared remarks, and Panel 

members heard testimony from a "Big Four" practitioner. The Panel considered whether US 

GAAP is meeting private company user needs in a cost-effective manner for both users and 

preparers. 

The Panel then looked at alternative private company financial reporting standard-setting 

processes in other countries in some detail. After reeeiving an overview of standard setting in 

other countries and regions, the Panel listened to a presentation about Canadian GAAP for 

Private Enterprises, a proposed standard-setting system for private companies in the United 

Kingdom, and a presentation about IFRS for Small and Medium-sized Entities. Afterwards, 

Panel members considered the following questions: 

How does standard setting for private companies in the U.S. compare to standard setting 

in other countries, both those that have adopted IFRS for Small and Medium-sized 

Entities and those that have not? 

To the extent that current U.S. GAAP is not meeting user needs in a cost-effective 

manner, what can the Panel learn from the alternatives seen in other countries? 

Meeting 3 -July 19,2010 (Chicago, IL) 

After some additional discussion about the nature of the problems in the standard-setting system 

with respect to private companies, the Panel considered alternative models and structures for 

private company standard setting (see Appendix H). Panel members expressed their views on 

which alternative(s) was preferable and why, on whether there were any new or different 

alternatives not identified by staff, and on what structural changes, if any, would be needed to 

achieve the preferred model(s) and why. 

The Panel also held a discussion about overarching issues surrounding the models and 

considered whether there should be scope limitations regarding the Panel's recommendations, 

specifically: 

Should private companies with some form of public accountability or over a certain size 

be excluded? 

Alternatively, should this be left up to the U.S. marketplace, that is, to users and possibly 

regulators? 

Meeting 4 - October 8, 2010 (New York, NY) 

The fourth meeting began with Panel members learning about recent changes at the FASB (see 

Appendix F). After that, the Panel reviewed and discussed a summary of written submissions 

received from the public in response (0 the Panel's outreach (see Appendix G), 

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The Panel then continued its discussion of alternative models and structures, while considering 

the following questions: 

• Generally, which model is prcfcrable in the long run and why? 

• Given the amount of timc requircd to achicve that model, are there other models (or 

aspects of other models) that should be considered as intermediatc steps and why? 

• What short-term and/or long-term structural changes are necessary to achieve the 

preferred model (or combination or sequence of models) and why? 

After considering those questions, the Panel worked on reaching a consensus about which model 

and structure to recommend to the F AF. 

Meeting 5 - December 10,2010 (Norwalk. CT) 

At its last meeting, the Panel worked on finalizing the details of its recommendations to the FAF, 

including a discussion about the new private company standards board's mission, role, structure, 

composition, protocols, budget, and funding. 

The Panel also discussed: 

What other short-term andlor long-term actions may need to be taken by the FAF, FASB, 

or both? 

Are there any other recommendations that should be discussed by the Panel? 

For further information, refer to the Panel Meeting Minutes webpagc on the FAF's website. 

II. Guests Invited to Panel Meetings 

Meeting I 

• Paul Beswick (Deputy Chief Accountant for Professional Practice in U.S. Securities and 

Exchange Commission Office of the Chief Accountant) 

Jim Castellano (RubinBrown) 

Meeting 2 

• Keith Aim (National Association of Corporate Directors) 

• Greg Edwards (Accounting Standards Board, Canada) 

• Tom Jones (former Vice Chairman, International Accounting Standards Board) 

• Joyce Joseph (Standard and Poor's) 

• Ian Mackintosh (Chairman, UK Accounting Standards Board) 

• Tricia O'Malley (Chairman, Accounting Standards Board, Canada) 

• Joel Osnoss (Deloitte & Touche LLP) 

• William Schramm (PricewaterhouseCoopers LLP) 

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Meeting 3 

• Paul Beswick (Deputy Chief Accountant for Professional Practice in u.s. Securities and 

Exchange Commission Office of the Chief Accountant) 

• John Perrell (Trustee, F AF) 

Meeting 4 

• Douglas Donahue (Trustee, FAF) 

• John Perrell (Trustee, F AF) 

• Leslie Seidman (Chairman, FASB) 

Meeting 5 

• Jeff Diermeier (Trustee, FAF) 

John Perrell (Trustee, FAF) 

• Leslie Seidman (Chairman, FASB) 

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APPENDlXC 

Recommended New Board Structure and Operating Protocol Chart 

Alternatives 

Function Recommendation Considered BRP Commentary 

Ncw board The mission of the new board is to Wording is 

mission establish exceptions and consistent with 

modifications to GAAP for private FASB's mission, 

companies, while cnsuring that but tailored to the 

such exceptions and modifications specifics of this 

provide decision-useful board. 

information to lenders and other 

users of private company financial 

reports. That mission is 

accomplished through a 

comprehensive and independent 

process that encourages broad 

participation, objectively considers 

all private company stakeholder 

views, and is subject to oversight 

by the Financial Accounting 

Foundation's Board of Trustees. 

New board model New board has authority to modify To some degrec the 

and how it works existing and future GAAP for new board and 

with the F ASB private companies, where F ASB will be best 

appropriate. positioned to 

F ASB board considers input from decide how to 

all companies (including private operationalize the 

companies) during the standard- promulgation of 

setting process. 

modifications and 

exceptions, 

1. The goal is the F ASB should depending on the 

try to produce the best possible facts and 

standard for all entities (public circumstances of a 

companies, privatc companies, standard-setting 

not-for-profit entities). topic. 

2. The new board has the 

responsibility for outreach to 

private company stakeholders, 

and it provides input to the 

F ASB Board along the way so 

that the F ASH can produce the 

best possible standards for all 

companies (both public and 

private companies). 

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Alternatives 

Function Recommendatiou Considered BRP Commentary 

3. Nothing precludes the F ASB 

on a current agenda project 

from receiving input directly 

from private company 

stakeholders, but the specific 

responsibility for seeking such 

input resides with the new 

board, which then shares the 

results of such outreach with 

the FASB. 

4. The new board reviews the 

product of the F ASB and 

effectively endorses it or 

proposes modifications/ 

exceptions through its own due 

process. 

5. The new board takes formal 

due process actions when it 

believes modifications/ 

exceptions are warranted 

beyond what the F ASB has 

promulgated; otherwise, F ASB 

output is accepted through nonaction. 

6. The new board, not the F ASB, 

ultimately authorizes 

modifications/exceptions in 

GAAP for private companies, 

but such differences may be 

promulgated within a FASB 

standard (with the support of 

the new board). 

7. The new board adheres to a 

differential framework to help 

ensurc that there is no undue 

divergence in GAAP for public 

and private companies. 

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Alternatives 

Function Recommendation Considered BRP Commentarv 

New board overall The new board works with the The new board The BRP believes 

process F ASB throughout the standard- issues a separate the two boards and 

setting process; the new board ED and final staff should work 

conducts robust outreach to private standard on together to ensure 

company stakeholders when the everything the that GAAP remains 

need arises; it issues Exposure FASB a single "language" 

Drafts (EDs) when proposing (including EITF) wherever possible, 

modifications/exceptions. The does. and that the F ASB 

boards can issue joint EDs on fast still should attempt 

moving topics, thus allowing the to consider input 

F ASB and the new board to from private 

propose modifications/exceptions company 

within a joint ED; the FASB or the stakeholders with a 

new board (which one depends on goal of developing 

facts and circumstances) issues the best possible 

final standards for such differences standard for all 

that are then embedded in the companies. 

Codification. 

New board Full-time chair, filll- or part-time The F AF should 

composition! other members, consider the pros 

structure Possibly 5 to 7 total members, and cons of a full1-2 users time versus a part1-2 practitioners time board. A full1-2 preparers time board would 

Possibly 1 academic allow for greater 

independence while 

a part-time board 

would require less 

funding and could 

help the board 

members stay 

better connected 

with private 

company 

constituencies and 

private company 

financial reporting 

issues. 

Staff composition Staff should have primarily private Staffing 

company sector background. composition 

Some shared staffing with F ASB depends on the 

desirable. board's structure 

and workload. 

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Alternatives 

Function Recommendation Considered BRP Commentary 

Board observers Full-time new board chair or other Official Cross voting is 

mcmber of new board attends all observers have impractical-for 

F ASB board meetings as an the right to vote example, an 

official observer; the F ASB (meaning they observer might vote 

designates one board member as serve in effect as for something as 

an official observer to all new a board part ofthe FASB 

board meetings. Official observers mcmber). Board and then 

have the right of the floor but do would be hardnot vote. pressed to change 

hislher vote as a 

new board 

observcr. 

Advisory groups The new board forms a primary 

advisory grouJr-the PCFRC could 

possibly become such a body. 

New board The F AF oversees the new board 

governance as it does the F ASB/GASB; there 

is a 3-5 year sunset provision. The 

FAF increases the number of 

Trustees with private company 

stakeholder backgrounds; the 

FAF's post-implementation 

assessment on FASB/GASB 

standards is also applicable to new 

board. 

Approximate $4--6 million; that could vary 

budget upward or dO\vTIward subject to 

operating and structural specifics. 

Funding sources A portion ofFAF publications State board An endowment 

sales and mandatory contributory licensing fee approach might be 

model from stakeholders (subject allocation. an appropriate 

to further analysis, including mandatory 

legal). contributory model. 

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APPENDIXD 

List of Previous Studies and Reports Considered by the BRP 

The following is a list of previous studies conducted and reports issued by the FASB, various 

AICPA committees, and others concerning private company standard setting in the U.S. The 

Panel reviewed these as background information and discussed some of them during the course 

of its meetings. 

I. Report of the Study on Establishment of Accounting Principles, AICPA, March 1972 

("Wheat Report") 

2. Report of the Committee on Generally Accepted Accounting Principles for Smaller 

and/or Closely Held Businesses. Accounting Standards Division of AICPA, Discussion 

Paper, August 1976 

3. Report of the Special Committee on Small and Medium-Sized Firms, AICPA, 1980 

("Derieux Committee") 

4. Tentative Conclusion and Recommendations of the Special Committee on Accounting 

Standards Overload, AICPA, December 23, 1981 

5. Report of the Special Committee on Accounting Standards Overload, AICPA, February 

1983 

6. a. Invitation to Comment, Financial Reporting by Private and Small Public Companies, 

F ASB, November 1981 

b. Special Report, Financial Reporting by Privately Owned Companies: Summary of 

Reponses to FASB Invitation to Comment, F ASB, 1983 

7. Research Report, Financial Reporting by Private Companies: Analysis and Diagnosis, 

FASB, August 1983 

8. Standards Overload: Problems and Solutions, AICPA, June 1995 

9. Report of the Private Companies Practice Section Special Task Force on Standards 

Overload, August 1, 1996 

10. What Do Users of Private Company Financial Statements Want?, Financial Executives 

Research Foundation, 1996 

II. Private Company Financial Reporting Task Force Report, AICPA, February 28, 2005, 

and supplementary survey results: 

a. Random Research Survey Results 

b. Broad Outreach Survey Results 

c. Comparison of Certain Random and Broad Outreach Survey Results 

12. Invitation to Comment, Enhancing the Financial Accounting and Reporting StandardSetting Processfor Private Companies, FASB, June 8, 2006 

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APPENDIXE 

Overview of the FAF and the FASB 

The Blue-Ribbon Panel on Standard Setting for Private Companies (the Panel) was formed to 

develop a recommendation to the Financial Accounting Foundation (FAF) addressing accounting 

standards for private companies and the standard-setting process used to develop those standards. 

Organized in 1972, thc F AF is the independent, private-sector organization with responsibility 

for: 

Establishing and improving financial accounting and reporting standards 

Educating stakeholders about those standards 

The oversight, administration, and finances of its standard-setting Boards, the Financial 

Accounting Standards Board (FASB) and the Governmental Accounting Standards Board 

(GASB), and their advisory councils 

• Selecting the members of the standard-setting Boards and advisory councils 

Protecting the independence and integrity of the standard-setting process. 

Although the FAF has responsibility for establishing and improving financial accounting and 

reporting standards, it does not set those standards. That responsibility falls on the two Boards it 

oversees, the FASB and GASB. The FAF's role is to ensure that the Boards are indcpendent and 

act with objectivity and integrity through an open due process which encourages active and 

collaborative involvement from all interested parties. It accomplishes that role through the 

oversight, administration, and financing of the Boards and their advisory councils, the Financial 

Accounting Standards Advisory Council (FASAC) and the Governmental Accounting Standards 

Advisory Council (GASAC). The FAF recently augmented its oversight procedures by 

establishing a formal post-implementation review process for the standards issued by the two 

Boards. 

The Financial Accounting Standards Board (FASB), established in 1973, has been the designated 

organization in the private sector for establishing standards of financial accounting that govern 

the preparation of financial reports by nongovernmental entities. The FASB's mission is to 

establish and improve standards of financial accounting and reporting that foster financial 

reporting by nongovernmental entities that provides decision-useful information to investors and 

other users of financial reports. 

Accounting standards issued by the FASB have been recognized by the U.S. Securities and 

Exchange Commission (SEC) as generally accepted for federal securities law purposes. State 

Boards of Accountancy and the AICP A have also recognized those standards as GAAP for 

financial statements of nonpublic entities. 

For more information, the FAF website provides an overview of the FAF, with additional links 

to information about its officers and Trustees and contact information. For additional 

information about the F ASB, the F ASB website provides an overview of the F ASB, with links to 

information about the Members of the FASB and its Rules of Procedure. 

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APPENDIXF 

Recent Changes at the FASB 

Since mid-2009, the FASB has made, and has continued to make, changes to bring greater focus 

on and otherwise improve its standard-setting activities with regard to the private company 

sector. FASB Board Chairman Leslie Seidman reported on these activities during the October 8, 

2010, and December 10,2010 BRP meetings. 

Some of the key changes have involved augmenting the staff dedicated to private companies. In 

June 2009, the FASB appointed an assistant director who is responsible for strategic and 

technical oversight of private entity issues, including those of both private business entities and 

not-for-profit organizations, in addition to the project manager who was already dedicated to 

private company issues. In the last half of 2010, the F ASB reassigned three other staff members 

to the private entities tcam to help address private entity issues throughout the FASB's projects, 

espccially its Memorandum of Understanding projects with the lASS. 

In August, 2010, the FAF announccd that the FASB Board would increase in size from five 

members to seven members, with a private company background being one of the focal areas in 

recruiting for the new members. Among other benefits, the additional members will enable the 

Board to do more outreach through meetings and conferences attended by representatives of the 

privatc entity constituencies. 

Beginning in 2010, a Board member started attending all meetings of the Private Company 

Financial Reporting Committee (PCFRC) to hear firsthand about private company issues arising 

from proposed standards. The interaction between the PCFRC and the Board benefits both 

groups, and thus the standard-setting process. The Board gets a better understanding ofthe issues 

and hears potcntial solutions. The PCFRC hears from a Board member why the Board has made 

the decisions it has made. 

Outreach activities have been expanded in other ways to obtain more information specifically 

trom the private company perspective. For the major projects, the Board and staff meet with 

private companies in field visits. To illustrate, the Financial Statement Presentation project team 

with help from the Technical Issues Committee (TIC) of the AICPA Private Companies Practice 

Section obtained financial statements from approximately 20 private companies, representing 

various industries, that recast the statements from the current presentation model to the proposed 

model. The recast statements were used in a study to see whether those statements resulted in 

better information for making lending decisions. A panel of 20 users of private company 

financials was assembled to provide feedback on those recast financials. The Board and staff are 

also now conducting public roundtables for various projects to hear specifically from the private 

entity constituencies about their issues and concerns on proposed standards. 

The FASB held roundtables in October and November 2010 to hear about private company 

concerns with existing GAAP. Two items on the agenda were FIN 48, Accounting for 

Uncertainty in Income Taxes, and FIN 46R, Consolidation of Variable Interest Entities. The 

format of the roundtables allowed for users, practitioners, and preparers to discuss issues with the 

Board and help give insight as to what information is useful, and how it can be provided costF-I 
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effectively. Another issue raised was the use of fair value by private companies, especially with 

regard to impairment testing. At the December 10th Panel meeting, Ms. Seidman stated that the 

F ASB had added a near-term project to its agenda to look at this issue. 

Other activities designed to better serve private entities include the use of plain English in 

webcasts, podcasts, and Twitter feeds to help educate them about the FASB's projects and to 

solicit more participation by them in the standard-setting process. 

Ms. Seidman stressed that these actions show that the Board is committed to understanding 

private company issues and incorporating a careful consideration of them in the standard-setting 

process. 

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APPENDIXG 

List of Respondents to Questions Posed by the BRP and Summary of Written Submissions 

WRITTEN SUBMISSIONS FROM THE PUBLIC 

List of Interested Parties Who Responded to Questions Posed by the Blue-Ribbon Panel (in 

order received) 

Letter Affiliation or Individual" 

1 Thomas Malkoch 

2 Jodi Gill 

3 Russell Abernathy 

4 Carl Bagge 

5 Jeremy Veilleux 

6 Lance Mann 

7 Laura Lewis 

8 Lauren Barnet 

9 Frankel And Topche, PC 

10 Joan Waggoner 

11 Anonymous 

12 Bruce Benator 

13 O'Sullivan Creel, LLP 

14 Jay Tolsma 

15 David Wagner 

16 Todd Lisle 

17 Morris, Kalish + Walgren, P.C. 

18 Howard Bomstein 

19 Mike Sedam 

20 Gross, Mendelsohn & Associates, P.A. 

21 Michael Nesland 

22 KenPosncr 

23 Peter Kwong 

24 Philip Stoler 

25 Ernest Lapp 

26 Frank Minter 

27 Flexco 

28 Nancy Mccleary 

I'Some ofthe respondent letters were grouped together by affiliation. 

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Letter Affiliation or Individual 

29 Shaun Bawden 

30 Scott Robinson 

31 Peter Philbrick 

32 Eric Smith 

33 Scott Womble 

34 Brenda Smith 

35 Carl Chatto 

36 Michael Atkins 

37 Medina Company, PSC --

38 Theodore Medrek 

39 Parente beard, LLC 

40 David Johnson 

41 Carol Uhl 

42 Quick & Mcfarlin, P.c. 

43 Garry Hutchison 

44 Larry Sample 

45 Art Thielen 

46 Robert Foley 

47 Steve Freimuth 

48 Doug Knights 

49 Leatham & Associates, CP As 

50 Curtis Root 

51 Doug Hawkes 

52 Withumsmith+Brown P.C. 

53 Alan King 

54 Doug Chaffins 

55 Hoots, Baker & Wiley, PC 

56 Tommy Thomson 

57 David Frizzell 

58 Charles Postal 

59 James Lagana 

60 Stu Harden 

61 Steve Rabin 

62 Caler, Donten, Levine, Porter & Veil, PA 

63 Bart Tiffany 

64 Vickie Martin 

65 Gish Seiden, LLP 

66 Candido Fernandez 

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Letter Affiliation or Individual 

67 Michael Moore 

68 Shennan Rosenfield 

69 Hogan - Hansen, PC 

70 David Hurley 

71 Doug Donaghue 

72 Mahesh Chithkala 

73 Cherry, Bekaert & Holland, LLP 

74 David Strottmann 

75 Susan Ryan 

76 Culver Lamb 

77 National Rural Electric Cooperative Association 

78 Steve Morris 

79 National Cooperative Business Association 

80 Kennedy And Coe, LLC 

81 Arthur Hendricks 

82 Institute Of Chartered Accountants In England And Wales 

83 Yeo & Y co CP AS and Business Consultants 

84 Dee Brown, Inc. 

85 Stan Sterk 

86 Packer Thomas 

87 Mike Beach 

88 Don Lueger 

89 O'Brien Energy Company 

90 Deseret Power 

91 Kreston International 

92 Vickie Beer 

93 Ernst & Young LLP 

94 The Madray Group 

95 John Litchfield 

96 Beach Fleischman 

97 Jerry Mcmillon 

98 Steakley & Gilbert, P.C. 

99 Prather Kalman, P.C. 

100 Geoff Flynn 

101 Jerry Woods 

102 Tom Hoey 

103 Heidi Lee 

104 Patrick Murry 

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Letter Affiliation or Individual 

105 David Baugh 

106 David Kasuba 

107 Bart Adams 

108 James Branch 

109 Karen Keller 

110 Pricewaterhousecoopers 

111 Pennsylvania Institute of Certified Public Accountants 

112 Financial Executives International, Committee on Private Company Standards 

113 Barfield Murphy Shank & Smith, P.C. 

114 Munninghoff, Lange and Company 

115 Clifton Gunderson, LLP 

116 Deloitte & Touche, LLP 

117 Anders Minkler & Diehl, LLP 

119 Ohio Society of Certified Public Accountants 

120 John Mcdaniel 

121 Texas Society of Certified Public Accountants 

122 Susie Repl'o 

123 Pershing Yoakley & Associates, P.e. 

124 Rea & Associates, Inc. 

125 Ima/Sbc 

126 Marc Porter 

127 Plante & Moran PLLC 

128 Emilio Colapietro 

129 Maryland Association of Certified Public Accountants 

130 Mark Blackburn 

131 James Pistillo 

132 Ted Lodden 

133 Illinois CPA Society 

134 Battelle & Battelle, LLP 

135 California Society of Certified Public Accountants 

136 Hines Interests L.P., Southwest Region 

137 Weiserrnazars, LLP 

138 Harry Drew 

139 Sensiba San Filippo, LLP 

140 Fort Pitt Group, LP 

141 Barnes Wendling CP As 

142 Crowe Horwath, LLP 

143 Clark Nuber P.S. 

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Letter Affiliation or Individual 

144 Grant Thornton, LLP 

145 Piercy Bowler Taylor & Kern, CP As 

146 McGladrey & Pullen, LLP 

147 Managed Health Care Associates, Inc. 

148 KPMG,LLP 

149 Great American Insurance Company, Contract Surety Division 

150 CPAmerica 

151 Federal Financial Institution Regulatory Agencies 

RESPONDENT PROFILE 

I. As of October 1, 2010, the Panel received written submissions from 14820 

respondents. Three additional response letters (#149-151) were received after 

October 1,2010, and were not included in the summary below but were discussed at 

the October 8, 2010 BRP meeting. Certain key aspects of letter # 151 have been 

included in the body of the report. The entire respondent population has been 

identified below: 

Respondent Type Number of Respondents Percentage 

CPA firm with fewer than 5 partners 36 24% (including sole practitioners) 

CPA firm with 6 to 20 partners 26 17% 

CPA firm with 21 to 100 partners 13 9% 

CPA firm with 101 to 500 partners 5 3% 

CPA firm with over 500 partners 6 4% 

CPA firm, size not specified 11 7% 

Lender 2 1% 

Owner 2 1% 

Preparer 15 10% 

State CPA society 6 4% 

Trade organization 4 3% 

Regulator 1 1% 

Other (anonymous or not specified) 24 16% 

TOTAL 151 100% 

2OSome oftbe respondent letters were grouped together by affiliation. 

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SUMMARY OF RESPONSES 

2. The opinions of respondents varied considerably. Given the quantity of the comment 

letters, the following sections are meant to highlight common themes they presented. 

QUESTIONS FOR SUBMISSIONS 

All respondents: 

Question 1: Please complete the attached form to help compile information on the 

respondents and send as a separate attachment. 

3. See above respondent profile. 

Question 2: Users (e.g., lender, surety, invcstor, owner) only: 

a) Briefly describe how you use U.S. GAAP financial statements in your decision making 

concerning private companies. 

4. One trade organization indicated that users use GAAP financial statements as one of 

their tools to monitor a company's performance and to ensure that they have a 

complete picture of the company. A member of a different trade organization said 

they use financial statements to look for "red flags" but not much else. This member 

felt that financial statements provide some comfort but also mentioned that users 

didn't feel that GAAP financial statements are very useful. 

5. Another trade organization felt that GAAP financial statements are not a desired tool 

for operating an enterprise. 

6. Lenders stated that they use financial statements to analyze a customer's financial 

position to make appropriate lending decisions. One lender stated that the majority 

of its eustomers prepare financial statements on a cash or tax basis. 

7. One owner stated that they only use GAAP financial statements once a year to share 

the results with their employee owners and with their bankers. This owner further 

discussed certain GAAP accounting requirements that would terribly misstate 

information if the owners used the statements to manage the business. 

b) Tell us about any issues or concerns that you may have with respect to the relevance of 

the information contained in those statements. Please be as specific as possible in your 

answer. 

8. Many of the trade organizations commented that there is an overload of financial 

information in GAAP financial statements that is not relevant. One trade 

organization felt that if GAAP tinancial statements were simplified, it would be 

more useful to small and private companies from an operational perspective. 

9. One lender felt that if all financial statements were prepared in the same fashion, it 

would help make decision making more uniform. However, in reality, a "one size 

fits all" approach in relation to GAAP financial statements does not work. This 

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lender stated that fair value accounting is not relevant to an investor and owner and 

that it frequently increases accounting costs and confusion. 

Question 3a: Tell us about any issues or concerns you have with current U.S. GAAP 

accounting standards as those standards apply to private company financial statements. 

Lack of relevance to users 

10. CPA practitioners with fewer than 5 partners shared several concerns about the 

relevance of U.S. GAAP to private companies. These respondents generally shared a 

view that there is a disconnect between private companies and the standard-setting 

process that has led to reporting requirements that do not seem to be useful or 

relevant to the users of private company financial statements. 

11. These small CPA practitioners also stated that the users, generally banks and 

bonding companies, are interested in financial information that can help them 

determine the amount, timing, and uncertainty of cash flows. Many of the most 

costly standards for private companies to implement contain complex disclosures 

that focus on information that their users do not understand and which does not 

provide value to the users. One respondent suggested that their bankers will often 

ignore fair value disclosures because of this reason. This point is further 

demonstrated by the fact that many users have been accepting of financial statements 

that are prepared on an other comprehensive basis of accounting ("OCBOA"), 

usually the tax basis. 

12. CPA practitioners with 6 to 20 partners shared some of the views above. Some of 

these respondents noted that accounting standards are primarily designed to meet the 

needs of equity analysts. There are certain disclosure requirements that do not 

provide any incremental benefit to the users of private company financial statements. 

For example, these users will not be concerned about how a stock price increases in 

value based on how a company performs. These respondents maintained that 

different users have distinct needs, and that the current accounting standards are not 

fulfilling the needs of users of private company financial statemcnts. 

13. Most CPA practitioners with 21-500 partners also agreed that the public company 

focus of standard-setting activities leads to complex accounting and that ultimately 

provides little benefit to many users of the financial statements. 

14. Certain CPA practitioners with over 500 partners shared the general concern that 

some standards are not relevant to certain users. However, these respondents arrived 

at some different conclusions. One such respondent noted that, broadly speaking, 

accounting should faithfully represent the economics of an underlying transaction. 

As a result, recognition and measurement should be based on the transaction itself 

and applied consistently regardless of the nature of the reporting entity. Moreover, 

there is a benefit to using consistent standards as a private company grows and 

becomes more similar to its public counterparts. This respondent noted that both 

private and public companies have questioned the relevance of certain standards, at 

times the same standards, to the decision making of their users and further concluded 

that the improvements and changes should relate to all companies. 

15. CPA practitioners with over 500 partners also felt that the issue of relevance is not 

confined to private company financial reporting. Echoing the sentiments of the other 

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CPA practitioners' responses, they noted that public and private company financial 

statement user needs vary by user. However, users arc already currently equipped to 

deal with this, and they have the ability to adjust financial statements prepared under 

GAAP to tailor them and eliminate the effects of certain standards that they do not 

nnd rclevant. 

16. Responses from lenders expressed a similar view that information they look for 

depends on the specific entity, and a "one size fits all" approach would not be able to 

fulfill their necds. 

17. A preparer respondent stated that "we do not use GAAP financial statements for any 

business decision making in our capacity as asset manager or investor" and that 

GAAP financial statements provided little value to their particular user group. 

Another stated that: 

"In theory, if all financial statements were prepared the same, it would simplify 

thc analysis of the information and make decision-making more uniform. 

However, in application, this is not practical. One size does not fit all. There is a 

cost/benefit perspective that needs to be applied. And relevance becomes the 

overriding issue." 

18. Trade organizations shared similar sentiments to the CPA practitioners above. One 

rcspondent specifically pointed out that as fair value becomes more embcdded into 

the balance sheet, the assets and liabilities that are presented do not translate into 

future cash flows. As a result, users find it difficult to make sense of that 

information. 

19. Owners expressed a lack of interest in the GAAP financial statements. One 

respondent stated that the GAAP financial statements were used only once a year to 

share results with their owners. Owners and lenders have a historical cost 

perspective, and the information they are interested in is not being captured by the 

financial statements. 

Complexity and pace of standard setting 

20. CPA practitioners with fewer than 5 partners generally agreed that there were 

challenges related to not only the complexity of standards but to the recent pace of 

standard setting. Many respondents found that complexity not only led to difficulty 

for their clients in preparing the financial statements but also to a lack of 

understandability by internal and external users. Some respondents felt that the 

disclosures required by GAAP are incomprehensible to both the average reader and 

even some sophisticated users. At the same time, the increased pace of standard 

setting recently has only served to intensify this issue. Respondents explained the 

difficulty of keeping abreast of new Exposure Drafts issued by the F ASB. These 

respondents have found it challenging to find the means to comment on Exposure 

Drafts and to participate in the stages of due process. 

21. CPA practitioners with fewer than 5 partners also believed that the complexity of the 

standards are exposing firms to additional liability and risk because they do not have 

the in-house capabilities and time to stay abreast of the changing standards. 

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22. CPA practitioners with 6 to 20 partners echoed the sentiments about the complexity 

of standards. One practitioner felt that the new and complex accounting standards 

have placed an unnecessary burden on small businesses and CP As. 

23. A CPA practitioner with 21 to 100 partners also noted that the increased complexity 

of accounting standards has been causing clients to rely more heavily on CPA firms, 

potentially causing independence issues. 

24. CPA practitioners with over 500 partners shared many of the same concerns about 

complexity. One practitioner felt that the increase in complexity was partly due to 

the increasing complexity of business transactions and partly due to certain 

disclosure requirements that have become too burdensome. 

25. Several CPA practitioners, varying in firm size, and trade organizations were 

concerned about the increasing frequency with which proposed standards are being 

issued. One practitioner stated that it appeared the window of time during which 

FASB accepts comment letters had decreased. In addition, the pace of change makes 

it more ditllcult to keep up with and evaluate the applicability of new proposals. 

Other practitioners and preparers also claim that the timing of certain standards was 

rushed. As such, there has been an increase in revised standards and numerous staff 

positions (now ASUs) to help deal with complexities that they felt were not 

addressed prior to the initial release of the standards. 

26. Chief financial otllcers and a respondent from a state CPA society felt similarly that 

accounting standards had become too complex for the average accounting 

department at a private company and frequently were beyond the expertise of their 

auditors. One CFO stated that: 

"Those of us out in the economy doing day in and day out financial reporting 

find it almost impossible to even keep up with the changes in GAAP and what 

current GAAP applies to our companies' (sic) situations and financial 

transactions. Most people, no matter how well educated, cannot read much less 

understand a GAAP financial report ... they are for use by the "financial elite" 

who probably do not understand them either." 

27. A preparer responded that the biggest challenge was not the complexity of the 

standards themselves but rather having to provide the nccessary education for private 

sector accountants. 

Costs exceed benefits 

28. CPA practitioners with fewer than 5 partners generally agreed that the cost of 

preparing GAAP financial statements has increased compared to the perceived 

benefits that certain new standards have brought to financial reporting. One 

practitioner felt that "there seems to be no consideration of the cost to implement a 

standard, whether in terms of internal resources, external costs or even the ability of 

the CPA to get paid for the additional work necessary to conform a client to new 

standards." Practitioners in the same group felt that the FASB is so concerned with 

public companies that they do not consider the cost to implement certain standards 

with respect to private companies. They believed the cost to pay for external 

valuation analysis such as goodwill impairment, acquisition accounting, and stock 

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compensation is a greater financial strain for private companies than for public 

companies. 

29. CPA practitioners with 6 to 20 partners generally agreed that the benefits do not 

exceed the costs because private company users have the ability to confer directly 

with managcment. This group also believed that if private companies were subject 

to a limited or simplified set of standards, companies would benefit because they 

would be more apt to have a financial statement audit. These practitioners felt that 

many of their clients rely on the CPA firm to draft their financial statements, so the 

compliance costs and CPA firm's liability goes up. Generally, this group felt that 

the new standards are placing an undue financial burden on many private companies 

while there is no perceived benefit for private company users. 

30. CPA practitioners with 100 to 500 partners also generally felt that the cost of GAAP 

financial statements often exceeds the benefits. One practitioner felt that the costs 

that private companies incur to obtain technical knowledge to comply with GAAP 

and to be able to prepare GAAP financial statements outweigh the benefits. 

31. CPA practitioners with 500 or more partners felt that the F ASB should develop 

concepts to help the standard setting with cost-benefit analysis. One practitioner in 

this group stated that "private companies face different costlbenefit considerations 

that make it difficult to justify application of certain aspects of U.S. GAAP." 

Another practitioner suggested that the cost-benefit considerations could differ 

between public and private companies, which could justify disclosure differences for 

private companies. 

32. Another CPA practitioner with 500 or more partners stated that "because the needs 

of private company users may be different from those of public company users, we 

encourage the F ASB to increase its outreach to private company preparers, users, 

and auditors to better ascertain the costs and benefits of applying new accounting 

standards. The feedback received will help the FASB better evaluate the situations 

in which divergence in the guidance for public and private companies is appropriate. 

Disclosure, transition, and effective dates are examples of areas in which such 

divergences may be warranted." 

33. Some trade organizations felt a cost-benefit analysis based on some clearly defined 

parameters to help guide deliberations on new standards may help with cost-benefit 

considerations. Another trade organization felt that companies without audited 

financial statements pay a premium to obtain capitaL 

34. A lender response also pointed out a concern relating to unintended consequences of 

new GAAP as it relates to regulatory requirements. The lender noted that, often, 

changes in GAAP will lead to changes in the regulatory requirements to which a 

private company must adhere. However, in many of these cases, the regulatory 

requirements will not consider materiality thresholds, and private companies will 

become su~ject to extensive and sometimes onerous regulatory reporting. 

35. One chief financial officer felt that accounting standards such as fair value are not 

useful to the users and compliance costs are going up to comply with such standards. 

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Increasing Qualified Opinions and use of OCBOA 

36. Some CPA practitioners expressed concerns about the increasing number of 

qualified opinions that they see issued for private companies. 

37. One respondent fTOm a firm with 6 to 20 partners observed that small businesses are 

increasingly receiving deficiencies in internal controls because of the inability to 

preparc financials with appropriate footnotes. 

38. A respondent from a firm with 101 to 500 partners felt that GAAP departures dilute 

thc usefulness of financials because such departures allow private companies to pick 

and choose which standards to comply with. 

39. Many of the smaller practitioners stated that their clients prepare financial statements 

under an OCBOA mcthod. One practitioner from a firm with fewer than 5 partners 

that provide statements on the income tax basis noted that "our firm quit providing 

our clients and their lenders and owners GAAP statement over ten years ago. We 

could not justifY the cost of compliance to these standards for the benefits rcceivcd." 

Standard-setting process 

40. Many CPA practitioners felt that the standard-setting process has historically been 

driven by the needs of public companies. Many of the CPA practitioners with fewcr 

than 5 partners felt that some recent standards are perceived as being reactionary 

measures borne from emergencies, political pressures, and fraud. 

41. Some responses from CPA practitioners cited concerns about the responsiveness of 

the standard-sctting process to the needs of private companies. One respondent from 

a CPA firm with fewer than 5 partners noted that there is a perception that the input 

that private companies provide is not taken seriously, and that the time and effort 

spent on that endeavor is wasted. Other respondents felt that the standard-setting 

process is overly focused on the perceived needs of users of large public company 

financial statements. One respondent from a firm with 6 to 20 partners suggested 

that the vo luntary nature of the comment process does not capture the needs of small 

companies. 

42. A CPA firm with over 500 partners felt that: 

" ... ra] board composed of accounting experts whose experience and dedication 

is primarily to meet the objectives of preparers, auditors, and users of the 

financial statements of publicly accountable entities is likely not the best choice 

for setting standards for private companies that are less focused on capital 

allocation decisions and more concerned with meeting the needs of a broad range 

of users in a cost-effective manner." 

43. One trade organization stated that issues and concerns about the standard setters has 

been a growing issue and hit a "tipping point" when the F ASB voted against the 

work of the PCFRC relative to the release of FIN 48 and FIN 46R. 

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Question 3b: Are those issues or concerns confined to one or more specific standards, or 

are they more systemic? 

44. The overwhelming majority of the respondents felt the issues or concerns were 

systemic. Approximately 60% of the respondents cited certain accounting issues as 

being most problematic. Over half of those respondents had specific concerns 

regarding income taxes/uncertain tax positions, variable-interest entities, and fair 

value. Other accounting issues cited included derivatives and other financial 

instruments, stock compensation, straight-lining of leases, comprehensive income, 

business combinations, and the proposed lease and revenuc recognition standards. In 

addition to the problematic standards, the majority of the respondents felt the issues 

were systemic due to the broad-based issues such as the increase in complexity, the 

pace of change of U.S. GAAP, the increase in qualified or exception-based GAAP 

opinions, the number of companies reporting under OCBOA, and compliance costs 

as mentioned above. 

Question 3c: Do you believe that those issues or concerns are largely confined to private 

companies, or are they broader'! Please be as specific as possible in your answers. 

45. There were varying responses regarding whether the issues or concerns were largely 

confined to private companies. Many respondents did not respond directly to this 

question or indicated that they were not able to judge whether the issues were 

broader because they only deal with private companies. Many respondents suggested 

that the issues and concerns were broader and also applied to public companies. 

However, many of those respondents felt that public companies have more resources 

to deal with the problems. Some of the respondents indicated that the issues also 

apply to smaller public companies, in particular, because, similar to many private 

companies, tlley tend to have limited company resources. One trade organization 

stated that complexity is a problem for all, but "public companies enjoy access to 

public capital as a benefit. Private companies and their users do not receive the 

benetits but have the same costs." 

Question 4: What short-term and/or long-term actions do you believe are neeessary to 

address those issues or concerns? Please be as specific as possible in your answer, and 

explain your reasoning. 

Short-term actions 

46. CPA practitioners with fewer than 5 partners generally felt there is some urgency in 

the need to take action. With regard to proposed new accounting standards, these 

respondents felt that there should be increased education and awareness about the 

proposals, specifically targeting private companies. Some suggested webcasts, 

educational publications, and field tests to fully gauge the real-world impact of new 

standards on private company stakeholders. One respondent from a CPA firm with 6 

to 20 partners felt that the F ASB should specifically seek commentary and feedback 

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from creditors and creditors' organizations. Respondents also expressed the need for 

delayed effective dates and longer implementation periods on the new standards. 

47. CPA practitioners with over 500 partners generally echoed the sentiments that the 

F ASB should seek more input from private companies during the standard-setting 

process. One respondent suggested developing a standardized method of collecting 

and considering views from private company constituents to capture their 

perspective during the deliberations of each new standard. Additionally, one 

respondcnt added that the F ASB could strive to provide clearer explanations in the 

basis for conclusions section of new standards. 

48. One CPA firm with over 500 partners also felt that, going forward, an effort should 

be made to ensure that new standards are more easily understood by all companies. 

Moreover, practical expedients for private companies should be considered, and 

disclosure requirements should be scaled to be appropriate for the primary users of 

private company financial statements. 

49. A lender responded stating that one short-term solution would be to slow the current 

pace of standard-setting activities, allowing more private companies to stay current 

with and participate in the process. 

50. With regard to existing standards, CPA practitioners with fewer than 5 partners telt 

that there should be more willingness by the F ASB to provide private companies 

with exceptions to specific standards. Firms with 6 to 20 partners felt similarly, 

stating that there should be exemptions from standards that do not benefit the 

assessment of essential operations. One respondent from a firm with 6 to 20 partners 

suggested that standards that have been identified as having questionable relevance 

to the users of private company financial statements should be immediately 

suspended and a cost-benefit analysis performed. One respondent proposed forming 

a coalition of creditor users and those engaged in the standard-setting process to 

identify areas of the accounting literature in which the needs of creditor users and 

equity investors differ. This analysis would be performed first on the conceptual 

framework and second on a standard-by-standard basis. 

51. A chief financial officer similarly requested that more exemptions be allowed for 

private companies. This respondent felt that the problems with some standards, for 

example fair value, warranted differences in recognition and measurement. 

52. Other respondents also supported exemptions from certain standards, specifically 

those that did not focus on cash inflows and outflows. Another suggestion was a 

simplified checklist format for disclosures, with an emphasis on understandability 

and use of non-technical language. 

53. CPA firms with over 500 partners generally indicated that, in some cases, relevance 

and cost-benefit concerns might warrant differenees in effective date, transition, and 

disclosure requirements for private companies. One firm noted that reduced 

disclosures may be appropriate if it can be shown that users can obtain any 

incremental information they might need directly from management. 

54. Others suggested that the F ASB suspend all proposed standards for private 

companies until a definitive resolution is determined by the FAF. 

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Long-term actions 

55. Respondents discussed a wide varicty of possible long-tern1 actions. Several CPA 

fim1S with fewer than 5 partners advocated a separate board devoted to developing 

standards for private companies. One respondent stated that such a board should be 

made up of CP As from regional fim1s, who would bettcr understand closely held 

companies. Another respondcnt advocated for differential reporting and regulatory 

standards based on size rather than filing status. 

56. One response from a CPA practitioner with 21 to 100 partners supported an 

approach in which the standards issued up to a certain date would be retained for use 

by privatc companies. Going forward, each new standard promulgated for public 

companies would be evaluated for its relevance to private companies. All private 

companies would retain the option of reporting under full public company standards. 

Thus, the market would essentially detem1ine which set of standards a private 

company would report undcr. 

57. Another respondent from a CPA fim1 with 6 to 20 partners shared a similar idea. 

This respondent stated that banks were the primary users of private company 

financial statements. As such, they would ultimately detem1ine the standard setter 

and level of reporting that is appropriate to meet their needs. 

58. Several CPA fim1s with over 500 partners felt that any substantial recommendations 

by the Panel might be premature in light of the SEC's forthcoming decision 

regarding IFRS for public companies. Although the SEC's actions would only 

directly affect public companies, there would be ramifications for private companies 

as well. Actions by the Panel may result in unnecessary confusion and complication. 

59. Another practitioner with over 500 partners stated that the Disclosure Framework 

and Conceptual Framework projects should consider the needs of private companies 

in their goal to create meaningful and effective financial statement disclosures. This 

respondent also recommended perfom1ing some research to help detem1ine whether 

there were disclosures that could be easily eliminated for private companies. 

60. Another respondent from a CPA fim1 with over 500 partners had a similar 

suggestion to perfom1 research in order to detem1ine how best to meet the different 

needs of users of private company financial statements. However, this respondent 

discussed changes beyond disclosures and into possible differences in recognition 

and measurement. 

61. Another possibility presented was utilizing special-purpose reports to fulfill the 

diverse needs of users when the use of audited GAAP financial statements is limited. 

62. One respondent from a CPA fim1 with over 500 partners presented several 

alternative solutions to consider. The first possibility was establishing two distinct 

standard-setting boards, one to focus on standards for publicly accountable entities 

and another to focus on the reporting objectives of private companies. The second 

possibility was creating two boards that had some level of overlapping membership 

in order to foster collaboration and maintain some consistency. The third possibility 

was retaining one standard-setting board but creating a subsidiary board to focus on 

issues relating to private company and not-for-profit entity issues. Respondents from 

this group also noted that with any of these potential solutions, there would be a nccd 

for increased funding and education. 

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63. Responses from preparers generally indicated that substantial changes were desired. 

They felt that the lack of relevance of certain standards justified differences not only 

in disclosure but in recognition and measurement as well. One respondent also had 

specific concerns about the current cash flow statement. This respondent 

recommended examining whether the statement wa~ providing value to users in its 

currcnt form. 

64. A response from a state CPA society concurred that some distinction was needed 

betwcen the reporting for public and private companies. Another state society felt 

that prcparing financial statements on the tax basis was a practical solution to the 

relevance issue. However, this state society also noted that more guidance was 

necessary to support using the tax basis as OCBOA. 

65. Other respondents had some differing views. Some felt that developing a new set of 

standards would introduce unnecessary complications since private companies 

already have the choice of reporting under othcr comprehensive bases of accounting. 

On top of that, the complexity of an additional set of GAAP would have implications 

for academia and practice. 

66. Alternatively, a respondent felt that the existing accounting literature should undergo 

a full relevance review with the perspective of private company concerns. 

67. There were other mixed reviews about whether a separate board should set private 

company standards. One CPA practitioner suggested a practitioner board composed 

of small to medium firms should set private company GAAP. Another practitioner 

felt that the separation of standards was long overdue and that a separate private 

company board made up of users, preparers, and issuers of private companies should 

set those standards. 

68. Another practitioner felt that any attempt to revise U.S. GAAP for private companies 

would not be successful without a related revision to the framework. This 

practitioner shared similar views to other practitioners that private companies should 

have a greater representation in the standard-setting process. 

Question Sa: To what extent, if any, would an SEC requirement for public companies to 

adopt IFRS at a date certain affect your answers above? Why? 

69. Some respondents felt that while a separate set of standards might be desirable, the 

SEC decision to require public companies to adopt IFRS should be made first. Some 

felt IFRS for SMEs would be a viable option. Some of these respondents felt that 

the Panel may have been too hasty in rejecting IFRS for SMEs. 

70. CPA practitioners had widely differing views on IFRS and the role that it might play 

in financial reporting for private companies. Some respondents from CPA firms with 

fewer than 5 partners found that their clients did not have a great concern for or 

awareness of IFRS broadly and IFRS for SMEs. They indicated that many small 

firms simply do not care and feel that IFRS is irrelevant for companies that do not 

have significant international operations. One respondent from a CPA firm with 6 to 

20 partners agreed that IFRS should not be mandatory for private companies that do 

not have international investors. 

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71. On the other hand, a CPA practitioner with 6 to 20 partners observed that its clients 

were increasingly engaging in international transactions. 

72. Some CPA practitioners with fewer than 5 partners felt that the move toward IFRS 

in the realm of public companies would have a trickle-down effect on private 

companies in the U.S. Some of the perceived consequences of this trickle-down 

effect would be increased complexity and limited comparability, increased costs for 

conversion, and division ofthe talent pool. 

73. Still other respondents felt that private company financial reporting could benefit 

from a shift toward IFRS. IFRS for SMEs was developed to address the differing 

reporting needs of privatc companies. One respondent felt that a move toward a 

single global standard and worldwide comparability is a positive step. 

74. A respondent from a CPA firm with over 500 partners shared a similar sentiment, 

noting that IFRS for SMEs could bc used as a starting point for developing any 

differential standards for private companies or not-for-profit entities. The respondent 

maintained that this could help to provide some timely relief for private companies 

while mitigating some of the risk of diverging too grcatly if financial reporting for 

public companies in the U.S. moves towards IFRS. 

75. A preparer expressed conccrns about inconsistent application and the subjectivity 

involved in the morc principles-based international standards. Another rcspondent, 

howcvcr, felt that the principles-based approach could help to address the 

overwhelming complexity of the current rules. 

76. One respondent also noted that a move towards IFRS could increase companies' 

exposure to international interests, potentially opcning up new commercial 

opportunities. 

77. Some respondents feel that IFRS for SMEs was created for very small companies 

and for developing nations that lack much accounting structure. 

78. Another respondent indicated that the future of accounting of private companies 

affects not only the U.S. It is an issuc in Europe and the rest of the world as a 

growing number of countries are moving toward IFRS. 

Question 5b: To what extent, if any, would other outside factors affect your answers 

above? Which factors and why? 

79. Some commented that the needs of users could have an impact on their answers. 

Another respondent felt that users would be practical about the financial information 

they would be willing to acccpt. Other respondents stated that if users started to 

require IFRS statements, some of their answers would change. 

80. Another respondent suggested that the biggest outside factor is the income tax 

system. 

Question 6: Is there any other input that you'd like to convey to the Panel? 

81. Some CPA practitioners had general concerns regarding comparability if the Panel 

were to recommend going to two separate standards. One CPA practitioner with 6 to 

20 partncrs stated that "many new pronouncements appear to be geared toward the 

complex transactions of the public filcrs. That all being stated, I have some angst 

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with respect to the impact two sets of standards might have, given that two sets of 

standards would clearly mean differences in comparability of a public company 

versus a private company, both of which might also operate internationally. I'm 

unsure how analysts, investors, creditors and other would assess the differences, or 

what impact those differences might have on such things as the cost of financing, 

investor confidence and our financial markets." 

82. One practitioner felt that two sets of standards would appropriately address the 

problems but most standards should remain the same for comparability issues. The 

practitioner believes that standard setters should try to fix the main issues for private 

companies but leave the majority of the standards the same. 

83. One practitioner with 6 to 20 partners felt that there was a benefit to retaining 

consistency between the financials for private and public companies, but that some 

relief was necessary. The practitioner suggested retaining a single set of accounting 

literature but varying the degree of application for public and private companies; in 

this way, there would be consistency across accounting principles, with flexibility in 

application. 

84. One trade organization felt that a more principles-based approach could also 

decrease comparability among companies. 

85. Some respondents felt that the standard setters should keep the economics of 

implementation in mind. 

86. Some respondents were concerned about the proposed leasing standard. One CPA 

practitioncr was concerned that putting leases on the balance sheet would not 

improve the value of financial statements and would overcomplicate and confuse 

users. Another practitioner maintained that CFOs and banks need to know the true 

cash impact of leases as approximated by Earnings Before Interest, Taxes, 

Depreciation and Amortization (EBITDA). If nearly all operating leases become 

capital leases, interest and depreciation associated with the capital leases will be 

added back to EBITDA calculations resulting in the illusion that these leases do not 

impact EBITDA. 

87. One trade organization felt that the cost of capital is another part of the problem. 

Companies without audited financial statements or without clean opinions pay more 

for capital. 

Questions 7: Do these responses represent your individual views or are they submitted to 

represent the views of the organization with which you are associated? 

88. Many respondents indicated that their response represented their individual views 

and many indicated their response represented the view of their particular 

organization. It appeared that the larger the CPA practitioner the individual 

represented, the more likely he or she responded as an organization. 

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APPENDIXH 

Models and Structures Considered 

The staff prepared public meeting handouts to facilitate the audience's understanding of the 

issues being discussed by the Blue-Ribbon Panel during its July 19,2010 and October 8, 2010 

meetings on alternative standard-setting models and structures for U.S. private companies. This 

appendix contains portions of those handouts. 

"Blue-Ribbon Panel" on Standard Setting for Private Companies 

Third Meeting (July 19,2010): Alternative Standards/Standard-Setting 

Models and Structures for U.S. Private Companies 

Based on what the "Blue-Ribbon Panel" (the Panel) has heard at its first two meetings, there 

appear to be broad-based concerns among private company stakeholders, especially preparers 

and practitioners, with the current standard-setting system (especially some of the resulting 

standards). In this meeting, we will focus primarily on various alternative models and structures 

for standard setting for private companies. 

The discussion of models will focus on what type of standards and standard-setting process will 

best facilitate financial reporting that will meet the needs of users of private company financial 

statements in a manner that is cost-beneficial for private company preparers, practitioners, users, 

and others in the financial system. The models are as follows: 

U.S. GAAP-BASEDI "HOMEGROWN" MODELS: 

Modell - U.S. GAAP with Exclusions for Private Companies - current system 

Model 2 - U.S. GAAP with Exclusions for Private Companies - with enhancements 

Model 3 - U.S. GAAP-Baseline GAAP with Public Company Add-Ons 

Model 4 - Separate, Standalone GAAP Based on Current U.S. GAAP (the 

"Canadian" Approach) 

ModelS - Separate, Standalone GAAP from the Ground up Based on New 

Framework 

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IFRS-BASED MODELS: 

Model 6 - Unmodified IFRS for SMEs 

Model 7 - IFRS for SMEs Customized {"Americanized"} for U.S. Private Companies 

Many of these models, which are briefly described in the Appcndix, build upon work pcrfonned 

by the Private Company Financial Reporting Committee (PCFRC) and other organizations. 

Most of the models contemplate the creation and/or use of some sort of private company 

conceptual framework. The models represent two continua, one based on U.S. GAAP and 

another based on IFRS. Along these continua, the model that the Panel ultimately homes in on 

may actually combine features of more than one of the models. Or, the Panel might home in on 

a succession of models, one shorter-tenn and potentially another longer-tenn-if, for example, 

the ultimate model would take a long time to achieve or if the choice of an ultimate model is 

viewed as somewhat dependent on outside factors, such as the SEC's decision regarding whether 

and how to adopt/incorporate IFRS for public companies. 

In its discussion of models, the Panel will weigh the pros and cons of the models, both in the 

specific context of the private company sector and the broader context of the financial reporting 

system as a whole. 

The Panel will also discuss various possible structures for the standard-setting board (and related 

resources, such as advisory groups), perhaps the key driver in achieving the desired model(s). 

These structures are arrayed along the following two continua: 

STRUCTURES FOR U.S. GAAP-BASEDI HOMEGROWN MODELS: 

Structure A - Current FASB Board 

Structure B - Restructured FASB Board (with greater private company 

representation) 

Structure C - New, Separate Private Company Standards Board 

STRUCTURES FOR IFRS-BASED MODELS: 

Structure D - IASB Board 

Structure E - Board Structure for Customized IFRS for SMEs (in addition to IASB 

Board) 

i) Current FASB Board 

ii) Restructured FASB Board 

iii) New, Separate Private Company Standards Board 

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As with the models, the Panel eould ultimately home in on only certain elements of the structure, 

on a combination of structures, or on an evolutionary series of structures. 

APPENDIX: MODELS 

Model 1- U.S. GAAP with Exclusions for Private Companies - current system 

Current U.S. GAAP (the Codification) would be used by all companies and improvcd 

as nccessary through the F ASB' s regular standard-setting activitics. 

Those activities utilize the current FASB Nonpublic Entity staff (Assistant Director, 

Projcct Manager, Postgraduate Technical Assistant), who work with the FASB project 

staff and the F ASB board in a close, consultative capacity (leading to explicit 

consideration of private company issues and feedback, documented in the Basis for 

Conclusions section of all proposed and final Accounting Standards Updates), and 

with the PCFRC and FASB's Small Business Advisory Committee in their current 

advisory roles. 

Differences (exclusions) for private companies would continue to be determined on a 

standard-by-standard basis. 

• This model would not contemplate the creation of a separate conceptual framework for 

private companies. 

• However, a project to simplify standards, especially in the area of disclosures, could 

be undertaken for all entities (private and public), perhaps in connection with the 

FASB's Disclosure Framework Project. 

Model 2 - U.S. GAAP with Exclusions for Private Companies - with enhancements 

• Current U.S. GAAP (the Codification) would be used by all companies and improved 

as necessary through the FASB's regular standard-setting activities. 

• Differences (exclusions) for private companies would continue to be determined on a 

standard-by-standard basis. 

A conceptual framework for private companies would be created to serve as a basis for 

making exceptions. Such a framework would be based on user needs but would be 

modest (approximately on the level of the "Concepts and Pervasive Principles" chapter 

that the IASB put into thc IFRS for SMEs document). 

• Various other enhancements could be made, such as to board structure, staffing, and 

other elements of standard-setting. For example, the FASB could be expanded to 

include a member with small, private company experience. Together with the private 

company conceptual framework, these enhancements might further ensure that 

appropriate and adequate focus is placed on private company issues, with resulting 

differences for private companies. 

Model 3 - U.S. GAAP-Baseline GAAP with Public Company Add-Ons 

• Current (existing) U.S. GAAP (the Codification) would be reviewed and reorganized 

into a baseline GAAP for all entities, based on user needs, and with additional GAAP 

requirements ("add-ons") for public companies. 

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• The approach to standards currently under development could be changed to establish 

a baseline standard for all entities and additional requirements for public companies 

even before completion of the overall baseline separation project. 

• This model contemplate the need to create a separate conceptual framework for private 

companies, or to reexamine/revise the existing conceptual framework, to serve as a 

basis for making decisions as to what to put in the baseline. If separate, such 

framework would be modest (approximately on the level of the "Concepts and 

Pervasive Principles" chapter that the IASB put into the IFRS for SMEs document). 

Model 4 - Separate, Standalone GAAP Based on Current U.S. GAAP (the 

"Canadian" Approach) 

• Current U.S. GAAP would be reviewed, modified, and developed into a 

comprehensive and self-contained set of accounting standards for private companies. 

• This approach contemplates a major overhaul project to review and significantly 

streamline current U.S. GAAP, as well as ongoing activities to update but keep 

simplified (similar to what the IASI3 and the Canadian AcSB will be doing with their 

respective private company standards). 

• This model contemplate the need to first create a conceptual framework for private 

companies that would serve as a yardstick for making streamlining and other 

simplification decisions. Such a framework would be modest (approximately on the 

level of the "Concepts and Pervasive Principles" chapter that the IASB put into the 

IFRS for SMEs document). 

ModelS - Separate, Standalone GAAP from the Ground up Based on New 

Framework 

• This model is focused solely on the private company sector and begins with the 

creation of a new private company conceptual framework based on private company 

user needs. As opposed to the private company framework described in Models 2-4, 

which could be described as a "differential framework," the framework would be from 

the ground up, entail a major project to create, and could be significantly different 

from the current GAAP conceptual framework (including revisions currently being 

contemplated by the FASB and IASI3). The model framework suggested in the draft 

white paper released by FEl's Committee on Private Companies-Standards (the 

Committee) is an example of this type offramework. 

• A comprehensive set of standards would be developed based on this new framework 

and would then constitute a separate, self contained set of standards for use by private 

companies. 

Model 6 - Unmodified IFRS for SMEs 

• This models would use IFRS for SMEs as it exists today 

• fFRS for SMEs, as promulgated by the IASB, is not intended for entities that have 

public accountability (e.g., financial institutions). 

o Part of a possible recommendation of IFRS for SMEs could be a 

recommendation about whether IFRS for SMEs should be permitted to be used 

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by private companies with public accountability. (However, if used by such 

entities, they would not technically be able to refer to such standards as IFRS 

for SMEs.) 

• IFRS for SMEs includes a group of Concepts and Pervasive Principles that serve as a 

framework for the simplifications made from full IFRS. 

Model 7 - IFRS for SMEs Customized ("Americanized") for U.S. Private Companies 

• The IFRS for SMEs standards would be tailored to suit the needs of private company 

stakeholders in the U.S. 

• This model contemplates an initial project to review and modify IFRS for SMEs as 

appropriate, possibly significantly. (However, depending on the nature and extent of 

the modifications, we might not actually be able to refer to the resulting standards as 

IFRS for SMEs.) 

• Ongoing decisions would be required to elect to accept IASB revisions to the SME 

document verbatim or elect to modify them for U.S. private companies. 

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"Blue-Ribbon" Panel on Standard Setting for Private Companies 

Fourth Meeting (October 8, 2010): Discussion of Standard-Setting Models 

and Structures (cont'd), Recommendations 

In this meeting, the "Blue-Ribbon" Panel (the Panel) will continue its discussion and debate on 

alternatives to the current standard-setting system. At its July 19, 2010 meeting, there was wide 

agreement among Panel members that: 

The status quo is unacceptable 

U.S. private companies should not be leading the charge, en masse, to an IFRS-based set 

of standards in advance of a potential move by U.S. public companies 

Accordingly, the Panel asked staff to make rciinements to the following set of U.S. GAAP-based 

standard-setting models discussed at the July 19 meeting: 

Model 2 - GAAP with exceptions for private companies 

Model 3 - Baseline GAAP with add-oilS for public companies 

Model 4 - Separate, standalone GAAP for private companies 

For Models 2 and 4, the staff also outlined two structural VarIatIOns, one featuring a 

restructured FASB (Models 2A and 4A) and the other featuring a separate private company 

board (Models 2B and 4B). Because of the nature of Model 3, only a version with a single 

standard-setting board for both public and private companies (a restructured F ASB) is feasible, 

so only one refined version of that model has been outlined. The outline of the five models is 

contained in the pages that follow. 

After discussing a summary of responses received in connection with the Panel's call for written 

public submissions-with a focus on any new information-the Panel will proceed with the 

discussion and debate of the models. The Panel's aim will be to reach a substantial consensus 

among Panel members as to which model to recommend to the FAF Board of Trustees as being 

in the best long-term interest of users of financial statements of U.S. private companies within 

the broader context of the overall U.S. financial reporting system. 

Because the models represent points along a continuum of possible models, the Panel could 

recommend a hybrid model. And, because the models will take a period of time to fully achieve, 

with the length of time varying somewhat among the models, the Panel could recommend an 

evolutionary sequence of models, and/or some additional shorter-term actions by the FAF and/or 

the FASB. 

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Blue-Ribbon Panel 

Model Outline 

Based on what we heard at the last meeting, the staff has narrowed the alternatives to three 

possible models, with structural variations for two of those models, to bring forward for 

discussion at the October 8th meeting. As with the first round of models and structures, the 

models and structural variations outlined here are meant simply as a starting point for discussion. 

The model that the Panel ultimately homes in on may actually combine features of more than one 

of the models, or the Panel might recommend something in-between models. Please also note 

that, in this round of models, the staff has avoided speculating within the models about what 

recognition, measurement, disclosure, or presentation differences could occur, since the standard 

setter will ultimately determine those differences. 

In reviewing the models, the Panel should consider what short-term and long-term changes may 

need to be made to be able ultimately to achieve the respective models. The most effective 

approach to accomplish the desired end-state model could well be a succession (evolution) of 

models. 

Overview of Models and Structures 

In the pages that follow, we present the following models/structures: 

Model 2A - GAAP with exceptions for private companies (enhanced) with 

restructured FASB Board 

Model 2B - GAAP with exceptions for private companies (enhanced) with separate 

private company standards board 

Model 3A - Baseline GAAP with add-ons for public companies with restructured 

FASB Board 

Model 4A - Separate, standalone GAAP for private companies with restructured 

FASB Board 

Model 4B - Separate, standalone GAAP for private companies with separate private 

company standards board 

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MODELS: U.S. GAAP-Based 

urn 

2 GAAP with exceptions for private 3 Baseline GAAP with add-ons for public 4 Separate, standalone GAAP for 

::.:::.: 

E--;;J companies, enhancements to current companies companies mE-- model 

'tl MODEL2A MODEl3A MODEL4A 

.. Description: I Description: Description: '" 0 . Current U.S. GAAP (the • Current U.S. GAAP (the Codification) . Current U.S. GAAP (the Codific

CodifiCation) would be used by all would be reviewed and reorganized into a would be reviewed, modified, an

rJJ companies and continue to be baseline GAAP for all entities, based on developed into a simplified, self-

< improved as necessary through an user needs, and with additional GAAP set of accounting standards for p

I";.. 

'tl exception-based standard-setting requirements ("add-ons") for public companies, which would then be 

'" ..process, with specific enhancements companies, and continue to be improved improved as necessary on a perio

= as discussed below. A restructured as necessary through a standard-setting A restructured FASE would act 

... 

... F ASB would act as the standard process based on that split. A standard setter. 

... 

.. = setter. restructured FASB would act as the 

'" standard setter. '" 

<' Framework: Framework: Framework: • The current conceptual framework . The current conceptual framework would . The current conceptual framewo

would be examined and augmented be examined and augmented as necessary be examined and augmented as n

as necessary to include a differential to include a differential framework, to include a differential framewo

framework, which would serve as a which would serve as a basis for making would serve as a basis for makin

basis for making decisions about decisions about what is the appropriate streamlining and other simplifica

what is appropriate for private baseline for all companies and what are decisions. 

company exclusions. appropriate as add-ons for public 

companies, 

"" H·8 

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MODELS: U.S. GAAP-Based 

U'" 

2 GAAP with exceptions for private 3 Baseline GAAP with add-ons for public 4 Separate, standalone GAAP for 

companies, enhancements to current companies companies 

.... model 

MODEL 2A----;:ontinued MODEL 3A----;:ontioued MODEL 4A----;:ontioued 

Boards: Boards: Boards: 

· In the expansion of the FASB back to · In the expansion of the FASB back to · In the expansion of the FASB ba

seven members and perhaps seven members and perhaps ultimately seven members and perhaps ultim

ultimately more, the F AF should more, the FAF should assess the FASB's more, the FAF should assess the 

assess the FASB's composition and composition and adjust as necessary to composition and adjust as necess

adjust as necessary to include include sufficient private company include sufficient private compa

sufficient private company experience and perspective. In experience and perspective. In c

experience and perspective. In connection with this, the F AF should with this, the F AF should consid

connection with this, the FAF should consider appointing one or more appointing one or more member

consider appointing one or more members whose experience is primarily experience is primarily with the 

members whose experience is with the private company sector. company sector. 

primarily with the private company · Assess and adjust the FAF's composition · Assess and adjust the FAF's com

sector. as necessary to ensure its oversight as necessary to ensure its oversig

· Assess and adjust the F AF' s function has the appropriate private flmction has the appropriate priv

cOlnposition as necessary to ensure company experience and perspective. company experience and perspec

its oversight function has the · Assess and adjust Financial Accounting · Assess and adjust Financial Acc

appropriate private company Standards Advisory Council (F ASAC) Standards Advisory Council (F A

experience and perspective. composition as necessary to ensure its composition as necessary to ensu

· Assess and adjust Financial advisory function has the appropriate advisory function has the approp

Accounting Standards Advisory private company experience and private company experience and 

Council (F ASAC) composition as perspective. (FASAC is FASB's primary perspective. (FASAC is FASB'

necessary to ensure its advisory advisory group.) advisory group.) 

function has the appropriate private 

company experience and perspective. 

(FASAC is FASB's primary advisory 

group.) 

H-9 

75084.286

I MODELS: lJ.S. GAAP-Based 

UrF.l 

2 GAAP with exceptions for private 3 Baseline GAAP with add-oDS for public 4 Separate, standalone GAAP for 

..::;;, companies, enhancements to current companies companies 

model 

.. MODEL2B A separate. private company standard-setting MODEL4B 

0 Description: board under a baseline GAAP model would Description: 

'" . Current U.S. GAAP (the not be feasible. · Current U.S. GAAP would be re

.. Codification) would be used by all modified and developed into a si

companies and continue to be and self-contained set of accoun

= improved as necessary through an standards for private companies, 

.... exception-based standard-setting would then be improved as nece

rJJ. 

process, with specific enhancements periodic basis. This model woul

>. 

= as discussed below. This model contemplate a new, separate priv

j;;l. would contemplate a new. separate company standards board under 

e pri vate company standards board FAF-see board section. 0 

U under the FAF-see board section. 

... Framework: 

.... Framework: The current conceptual framewo

.. . The current conceptual framework · be examined and augmented as n

.;:: would be examined and augmented to include a differential framewo

.... 

... as necessary to include a differential would serve as a basis for makin

framework, which would serve as a .. streamlining and other simplifica

basis for making decisions about j;;l. decisions. 

... what is appropriate for private 

· Alternatively, a separate, robust rJJ. company exclusions. conceptual framework specifical

... to private companies could be cr

Z help the board develop a "from t

s:- up" private company GAAP. (T

described as model 5 in the prev

model write-up.) 

H-IO 

75084.287

-

MODELS: U.S. GAAP-Based 

--

U'" 2 GAAP with exceptions for private 3 Baseline GAAP with add-ons for pnblic 4 Separate, standalone GAAP for 

companies, enhancements to current companies companies "''"' model --

I MODEL 2B--continued MODEL 4B-continued 

Boards: Boards: 

· Separate private company standard- · The board under this model wou

setting board that follows the work of standard setter for the separate, s

the FASB. The private company GAAP for private companies. 

board would be empowered to · Assess and adjust the F AF' s com

review both proposed standards and as necessary to ensure its oversig

existing standards that the FASB sets function has the appropriate priv

and detemline whether to make company experience and perspecexceptions or modifications for · The new standard-setting board 

o private companies. need new primary adVisory grou

· Assess and adjust the FAF's of FA SAC. composition as necessary to ensure 

its oversight function has the 

appropriate private company experience and perspective. 

· The new standard-setting board would need new primary advisory 

group in lieu of FASAC. 

H·ll