Codification Has Officially Arrived
For those of you calendar year end issuers the time to eliminate references to the pre-codification GAAP standards is here. Your 3rd quarter interim financial information will no longer contain references to the various layers of GAAP. Instead of taking the time to use the cross-reference tool to the old standards and inserting long paragraph number references in place of the SFASs, EITFs, SOPS, and SABs, a better approach would be to transform your footnote disclosures to what the SEC continually refers to as “plain English”.
The benefit of using this approach is actually providing your investors with a meaningful description as to how your company actually applies the appropriate accounting guidance, instead of simply regurgitating accounting standards that few, and a lessening number of people, honestly understand.
A good starting point is to review your internal accounting policies and procedures, which in my experience, do not generally reference or contain any language from the accounting standards. Further, remember the following keys when drafting financial statement footnotes and compliance documents in general:
- Know your audience – remember these compliance documents are designed to provide useful information to investors and prospective investors, so be aware of the general level of sophistication and educational backgrounds of these groups.
- Focus on the significant and material items – Don’t spend a lot of time writing about things that ultimately are not going to be material to the financial statements or operations of the Company.
- Write concisely and avoid redundancy – Run-on sentences are the best way to lose the interest of your reader in addition to confusing them. Redundancy leads to inconsistency leads to SEC Comment Letters.
For more tips you can find a “plain English” handbook on the SEC’s website.
Don’t fear codification, overcome the learning curve as quickly as possible; it should ultimately make complying with the accounting standards easier and provide more understandable disclosure to keep your investors interested.
Risky Business for Directors – How’s your ERM?
Not so many years ago, being elected to the Board of Directors of some companies essentially required you to act as a figurehead. Lunch in an expensive restaurant once a month, an annual retreat to a vacation resort to discuss corporate ’strategy’ and a small stipend were all that was required in trade for the collective experience and informal leadership. That’s all changed with the increased exposure to liability now faced by corporate governance. With the current state of our business environment, that exposure is greater this year than ever.
In an on-line article Executives Anticipate Rise in Fraud nearly two thirds of the executives polled anticipate an increase in fraud and misappropriation this year. In conjunction with auditors anticipating that nearly 25% of all firms may not be going concerns; the myriad of new regulatory requirements related to governance; and the corporate challenges fomented by a floundering economy this may not be a desirable year to be a Director. The current hot topic seems to be enterprise risk management.
While a long time focus of management, ERM has often been given little attention by the board. Recently, COSO published a document highlighting four critical areas that contribute to effective board oversight. It can be downloaded at www.coso.org.
As public company auditors and consultants we have observed the importance of an integrated approach to governance between the board and management. We regularly participate in joint meetings as frequently as allowed (we don’t charge for meetings with management and the board), for our own self-interest. Our best clients have the strongest most engaged boards. Boards of Directors are invaluable resources. Take full advantage.