At-A-Glance
Change continues to be one of the few
constants in the accounting profession,
like the rest of the world. The
diversity of stakeholders calling for a
whole new world of content in company
reports is growing rapidly, as our first
article on integrated reporting points
out. Meanwhile, the requested changes in
the American private company reporting
standards process, covered in our July
Issue, took a step forward with a newly
released FASB Invitation to Comment. The
Discussion Paper lays out criteria for
determining exceptions to US GAAP for
non-public entities, as described in our
second article. Finally, change
continues to bring new opportunities for
fraud and wrong doing. But, ironically,
the underlying behaviors and motivations
are surprisingly familiar. Our third
article describes a recent example.
Editor Gerald E. Herter, CPA
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In This Issue
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Sustainability Accounting
Integrated Reporting adds the environmental and
social perspective
At the annual AICPA Practitioners Symposium
in June, AICPA President, Barry Melancon, and
Chairman Greg Anton, addressed current items
impacting the accounting profession as well as
emerging issues and potential service
opportunities on the horizon. During his
comments, Anton made a prediction: “I truly
believe that private companies and our staff are
going to be working in an integrated reporting
space in the future. I can’t tell you whether it
is two, three, four, five years out, but there
will be private companies that will want to
start using integrated reporting.”
For a lot of accountants, integrated
reporting is not yet on their radar. But several
recent announcements shed some light on
endeavors already well under way. According to a
September 2011 discussion paper exposed for
comment by the International Integrated
Reporting Committee (IIRC),
Integrated Reporting
brings together material information about an
organization’s strategy, governance, performance
and prospects in a way that reflects the
commercial, social and environmental context
within which it operates. It provides a clear
and concise representation of how an
organization demonstrates stewardship and how it
creates and sustains value, now and in the
future.
Integrating sustainability into capital
markets is the core mission of Ceres, originally
known as the Coalition for Environmentally
Responsible Economies. Ceres, founded in 1989,
the year of the Exxon Valdez oil spill, was an
originating point for integrated reporting.
Ceres launched the Global Reporting Initiative
(GRI) in 1997. According to its website, “GRI
works towards a sustainable global economy by
providing organizational reporting guidance.”
GRI’s first Sustainability Reporting Guidelines
were published in 1999 to establish an initial
context. On June 25, 2012, GRI issued the second
draft of G4, its fourth generation of
guidelines, to further refine and harmonize with
other international standards.
The guidelines have assisted organizations in
evaluating how their early sustainability
reporting efforts have measured up, while also
providing a process for determining how and what
to report. Categories for disclosure are
economic, environmental and social. The
reporting assesses both how effectively an
organization will function going forward
considering the current and impending realities
in these categories, as well as the impacts the
organization will have on them in return. For
example, maintaining market presence would be an
aspect of the economic category, whereas
availability and means of acquisition of key
resources would be an aspect of the
environmental category. The social category is
further subdivided into labor practices, human
rights, society and product responsibility.
Taking the final step toward creating a fully
integrated reporting framework that could gain
worldwide authority, GRI, along with the
International Federation of Accountants (IFAC)
and the British Prince’s Accounting for
Sustainability Project, created the IIRC in
2010. Seeking input internationally from a wide
range of stakeholders, the IIRC summarized the
responses to its 2011 paper in a May 2012
report, followed in July by a draft outline of
the reporting framework that hopefully can lead
to a formal exposure draft in 2013.
Though wide support was expressed for the
general idea of an international integrated
reporting framework, respondents voiced
substantive difficulties in achieving that goal.
This mindset is reminiscent of the reaction when
the prospect of international financial
reporting standards was first broached.
Attainment for integrated reporting may well
take as long as globally accepted IFRS has
taken.
Current document drafts acknowledge the need
to address concerns such as materiality and
timing while fleshing out more specifics and
flexibility for various industries and
stakeholders. Before proceeding much further,
results will be analyzed from a pilot program
that 70 organizations from 22 countries will be
participating in this year to experiment with
integrated reporting and to test concepts.
Even so, advances are being made globally and
locally. The South African stock exchange has
required a type of integrated report since 2010,
while the Brazilian and Singapore exchanges
require or recommend inclusion of environmental
and social data in reports. In the United
States, the recently formed Sustainability
Accounting Standards Board (SASB) plans to
design industry-specific ESG (environmental,
social and governmental) information that can be
adapted for inclusion in the risk factors
section of SEC 10-k reports. Finally, the IAASB
in June issued ISAE 3410: International Standard
for Assurance Engagements on Greenhouse Gas
Statements. This statement appears to be none
too soon, since the United Kingdom also in June
announced a requirement for large listed
companies to report on greenhouse gas emissions
starting next year.
For further information, see
International Integrated Reporting Committee
and
Global Reporting Initiative
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FASB Seeks Input on Private Company Reporting Framework
Results to be deliberated with new Private Company
Council
The May 30, 2012 report of the Financial Accounting
foundation, Establishment of the Private Company
Council, restored a sense of hope in the private sector
that financial reporting standards could finally be
attained that are both practical and relevant in the
non-public arena.
In our July Audit & Accounting Alert, we pointed to
two provisions that could determine whether the Private
Company Council (PCC) is successful: agenda setting and
FASB endorsement. While the effectiveness of FASB
endorsement will come further down the road, agenda
setting is now under way. According to the May report,
the PCC and FASB are to jointly agree on criteria for
determining whether and when exceptions or modifications
to GAAP are warranted for private companies. When agreed
upon, these criteria are to be exposed for public
comment before finalizing. The PCC is then to use these
established criteria for setting their agenda.
On July 31, the FASB took the first step, issuing the
Invitation to Comment-Private Company Decision-Making
Framework: A Framework for Evaluating Financial
Accounting and Reporting Guidance for Private Companies
(ITC). While waiting for the new PCC to be formed, which
is anticipated by the end of the year, the FASB had its
staff prepare the ITC with the staff’s initial
recommendations, based on input received over the past
two years from users, preparers and auditors of private
company financial statements. Once the comment period
ends on October 31, and the PCC is formed, the FASB and
PCC will jointly deliberate on the comments and make the
final decision on what the criteria will contain.
The ITC emphasizes that the process is not seeking a
completely new conceptual framework for private company
reporting, but just a formal means for determining when
differences in the application of GAAP are appropriate.
The ITC lays out for comment six significant factors
that differentiate the financial reporting
considerations of private companies from public
companies:
- Types and number of financial statement users
Private companies control who financials are given
to, and tend to have a smaller number of users,
usually creditors and owners with specified needs,
such that relevance and cost effectiveness of
information are considerations.
- Access to management
Private company users have direct access to
management for further information, which can be
tailored to their specific requests, reducing the
need for detailed disclosures.
- Investment strategies
Private company investors tend to be longer term and
look for a sale or buyout of the company as opposed
to selling shares on the stock market, making
disclosures of cash flow and EBITDA most relevant.
- Ownership and capital structures
Private company structures deal with tax
ramifications and succession as opposed to
sophisticated equity instruments, signifying a need
for a different accounting and disclosure focus.
- Accounting resources
Private companies have less accounting personnel and
resources, indicating that cost-benefit analysis of
reporting standards should be a consideration.
- Learning about new financial reporting
guidance
Private company preparers need more time to learn
about and assimilate new guidance, such that
deferred effective dates are appropriate.
Also, five areas where financial accounting and
reporting guidance might differ for private and public
companies are specified for consideration when assessing
issues such as relevance, cost complexity, and special
industry needs:
- Recognition and measurement
- Disclosures
- Display (presentation)
- Effective dates
- Transition methods
Illustrative flowcharts are incorporated to assist in
visualizing the decision making framework for these
issues.
Additionally listed in the ITC are thirteen financial
statement categories typically focused on by users that
the staff feels should not be subject to exceptions or
modifications.
A separate FASB project is working on a definition of
a nonpublic entity, which will determine who will fall
within the scope of the new framework. An appendix in
the ITC covers the status and tentative decisions
reached.
For further information, see
Private Company Decision-Making Framework
Frauds are a Continuing Menace
“Those who don’t learn from the past…”
One of the worst nightmares for auditors and their
malpractice insurance carriers is when a subsequent
fraud is discovered at a company where the auditor had
issued a clean opinion. While auditors are well aware of
the limitations for audits to detect defalcations, the
average public has much higher expectations..
No matter how stringent standards and procedures
become, the complete elimination of fraud is not
realistic as long as human beings are involved.
Nevertheless, despite the increasing sophistication in
areas, such as electronic systems, which may take
experts to assess the adequacy of controls, many
present-day frauds involve classic techniques that can
be detected by traditional internal controls and
professional skepticism, if they are in place and
effectively employed.
In a recent example, with a perpetrator that could
have come “straight out of Central Casting”, over $200
million in cash was proven to be missing from the bank
account of Peregrine Financial Group’s PFGBest unit, a
commodities trading firm. While the company’s founder
and chairman, Russell Wasendorf, Sr., was inhaling
carbon monoxide fumes through a hose in a suicide
attempt, a belated audit procedure was finally
uncovering the scam that had succeeded for nearly twenty
years.
In a suicide note, Wasendorf laid out his plan of
deception:
“Through a scheme of using false bank statements I
have been able to embezzle millions of dollars from
customer accounts at Peregrine Financial Group, Inc.…The
bank statements were always delivered directly to me
when they arrived in the mail. I made counterfeit
statements within a few hours of receiving the actual
statement and gave the forgeries to the accounting
department…
“I had no access to additional capital and I was
forced into a difficult decision: Should I go out of
business or cheat? I guess my ego was too big to admit
failure. So I cheated, I falsified the very core of the
financial documents of PFG, the Bank Statements…I also
made forgeries of officials letters and correspondence
from the bank, as well as transaction confirmation
statements. Using a combination of Photo Shop, Excel,
scanners, and both laser and ink jet printers I was able
to make very convincing forgeries of nearing every
document that came from the Bank.
“With careful concealment and blunt authority I was
able to hide my fraud from others at PFG… If anyone
questioned my authority I would simply point out that I
was the sole shareholder…I was also the only person with
online access to PFG’s account.
“When it became a common practice for Certified
Auditors…to mail Balance Confirmation Forms to Banks and
other entities holding customer funds I opened a post
office box. The box was…in the name of…
(the)Bank....When online banking became prevalent I
learned how to falsify online Bank Statements and the
Regulators accepted them without questions.”
The Peregrine fraud was uncovered by the use of an
electric confirmation through Capital Confirmation’s
Confirmation.com system, a newly established requirement
by the industry regulator, National Futures Association.
Confirmation.com has become a major player in this
arena, which should reduce this type of fraud where it
is employed. Even so, Wasendorf’s scheme could have been
uncovered years ago if the auditor had simply verified
where the paper confirmation request was being sent.
This crime was revealed nine years after billions of
dollars of cash were lost in a similar scandal at
Parmalat. For this type of fraud to go undetected for so
long should be unacceptable in the audit profession.
Integra International members will recall the San
Diego conference in 2004 where Barry Minkow, convicted
felon of the ZZZZ Best Ponzi scheme fraud, described
techniques similar to those of Wasendorf’s. Minkow
forged countless documents among other creative
deceptions back in the 1980’s. At the time of the 2004
conference, Minkow, apparently reformed, had been out of
prison for almost ten years. But in 2011, he was
incarcerated once again, for a subsequent securities
conspiracy conviction involving the stock of Lennar
Corporation.xposure draft to be
issued in June 2013 and finalized in June 2014.
In the case of Peregrine, investors using the
company to invest their money should also accept some
responsibility. The auditor for Peregine happened to be
a one person shop, Jeannie Veraja-Snelling, who operated
out of a house in Glendale Heights, Illinois. After the
Bernard Madoff scandal in 2008, which was also
facilitated by a one person CPA firm, investors should
be expected to evaluate more closely the audit firm that
reports on the financials of a company with whom they
plan to invest. Of course the regulators, as well,
should have exercised more scrutiny on these accounting
firms, long before these tragedies occurred.
A fraud like the one at Peregrine should worry
auditors and investors alike. How many others are out
there that have been going on for years undetected? In
recent weeks, the SEC even uncovered two more Ponzi
schemes costing investors tens of millions of dollars.
Modern techniques such as Confirmation.com will assist
in tackling some of the problems. But careful attention
to the basic concepts of internal controls and fraud
detection must continue to be a primary focus.
For further information see
Anti-Fraud Initiative of the Center for Audit Quality
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
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Accounting Differences Crimp Cross-Border Mergers
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FASB proposes presenting amounts reclassified out of
accumulated OCI
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PCAOB Adopts New Standard for Communications with
Audit Committees
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FASB Agrees to Tighten Sale Accounting Criteria
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AICPA releases draft of proposed not-for-profit
guide
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US won’t adopt IFRS for at least five years, says
AICPA chairman
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