SEC looking into auditors in options backdating investigation

The SEC has announced it’s going to be including companies’ external auditors in their investigation into options timing abuses commonly known as backdating.

Authorities were said to be looking at what auditors knew about company manipulation of options’ grant dates and exercise prices to boost their value to executives who got them. About 30 companies are known to be involved in the largest multi-agency probe into corporate wrongdoing in two years, with fraud and insider trading charges seen as possible outcomes.

The SEC typically expands its investigations beyond corporate executives immediately involved to look at auditors, directors, lawyers and others who may have known about the misconduct or been in a position to halt it.

Ah, corporate governance. The hot topic gets hotter. Corporate governance to Chartered Accountants is basically an issue of organizational effectiveness. Audit committees doing their job. Boards doing their job. Everything running smoothly from a company’s health point of view. But when securities regulators are involved, it’s all about making sure they didn’t let the executives get away with something that isn’t in the investors’ best interests.

Backdating involves retroactively dating the grant and exercise price of an options issue to precede a rally in the underlying shares, maximizing option profits for executives. The practice can pose disclosure, tax and accounting problems.

Spring-loading involves looking forward to set the grant date and exercise prices ahead of the release of positive news expected to raise share values, also boosting option profits.

Originally I’d thought the issue with backdating was reducing their value at the grant date, thereby reducing the expense the company reports on their income statement. But I guess I was wrong. It is apparently even more insidious than boosting the company’s profits! This is about putting more cold, hard cash in executives’ pockets.

(Via the AAO Weblog.)

Google spreadsheet app will not catch on

According to Om Malik, Google is rumored to be coming out with an online spreadsheet application tomorrow, but I don’t think it’s going to have much of an impact.

Why? Well, in my experience at least, everything I do in Excel is with data that I don’t want anyone, even Google (imagine that), to have a look at. 99% of the time I’m working with confidential client data, and the other 1% of the time I’m working with my own data that might as well be confidential!

I might be the exception, but I doubt it.

Why would a company like Google, who has in the past been so focused on the user, be ignoring spreadsheet users’ needs as it develops its spreadsheet product? Here’s CNET’s take on it as well: They seem to be psyched about the possibility of putting their confidential data in Google’s hands for some reason.

Maybe I’m missing something.

More discussion of rules versus principles

Dennis over at AccMan Pro has commented on the difference between rules-based US GAAP and international principles-based IFRS, and his thoughts echo mine:

Recent commentary has suggested the idea of convergence between US GAAP and IFRS won’t happen until hell freezes over. I’ve long held the view that the rules based US GAAP system is primarily responsible for many of the problems US based companies have experienced. It is the structural defect of being rules driven. Any time there are rules in place, companies and individuals will seek to find ways around them. It allowed CA and PeopleSoft to engage in creative accounting practices, which, in the case of CA, have been deemed fraudulent. And which eventually led to the corporate nose bleed that is SOX.

I’m discouraged that he seems so certain that convergence of US GAAP and IFRS won’t happen any time soon. Canadian GAAP is moving towards convergence, as is the rest of the world it seems.

I suppose we’ll have to wait until the US is no longer a superpower (which will no doubt happen in my lifetime) before they start to work with the rest of the planet. Rules are meant to be broken, or so the saying goes, and its been played out for all to see in the cases mentioned by Dennis above and with Enron and WorldCom and countless others.

Under a principles based system, professional judgement takes centre stage and the aim is to reflect the substance of the transaction as opposed to fitting it into the rules as they exist. It allows the professionals to do their job: Determining whether the statements are fairly presented. It doesn’t take a professional to figure out if the rules are met.

Lease accounting to get overhaul

Apparently FASB is going to overhaul the US GAAP for leases. I’m not sure what exactly is going to be changed, or why it needs changing, but it’ll be interesting to see. Of course, Canadian standards are moving towards harmonization with International Financial Reporting Standards (IFRS), so we might not see Canada following the US revision like we usually have seen occur in the past.

I’ve been discussing the current method of accounting for leases with Greg, whose site I stumbled upon today searching Technorati for accounting-related content. He was blogging about an article in Business Week, and what follows is a quote from that article that may give us some insight into the possible changes:

One new model that FASB will explore, says Herz, would treat a lease as a “right to use” the property, which would be given a value and included among the liabilities and assets of the company that is leasing it. Companies argue that information about these leases is not secret, but is readily available in the footnotes of their annual reports. However, Bear Stearns analyst Chris Senyek has found that such disclosure is far from consistent, with some companies leaving out vital information such as the length of the lease. And the databases that many investors consult to sort through a company’s performance generally don’t include the data from footnotes.

Not sure what the “right to use” means as far as the difference between current rules about leases goes, given that we already have a good method for valuing a lease (the present value of minimum lease payments) asset and corresponding liability. Basically the FASB believes the rules need to be clarified because the criteria have been abused to show more leases as operating versus capital. But that’s just the difference between US rules-based accounting and Canadian and international principles-based accounting.

Plus, the article even notes that the information is already contained in the notes to the financial statements. My firm has a footnote on every page of the financial statements we produce that clearly states “The accompanying notes are an integral part of the financial statements.” If investors are ignoring that information, is this really an accounting problem?

Bank of Canada chief pushes smarter provincial sales tax

David Dodge, the governor of the Bank of Canada and the current architect of our monetary policy, suggested the province of Ontario should revamp the provincial sales tax (PST) to more closely resemble the value-added federal GST in a rare appearance before the Commons industry committee.

The suggestion is a solid one, as it would allow producers some relief from their tax burden and still tax ultimate consumption by end users. The GST is an interesting tax in that producers deduct the GST they pay on inputs from the GST they collect on outputs, hence they are only taxed on the value they add to their product. Turning Ontario’s 8% PST into a value-added tax would help producers compete in the global economy.