Volume 2, Issue 11

December 2008

I. Fair Value Remains the Best Approach, say CAQ and Other Stakeholders

The Center for Audit Quality continues to play a leading role in support of fair value, or mark-to-market, accounting.

FinancialWeek published an op-ed by CAQ Executive Director Cindy Fornelli and Jeff Mahoney, general counsel of the Council of Institutional Investors, that explained how fair value benefits investors. “The Fair Value Fallacy” (Nov. 30) concluded that the concerns of fair value critics “can be addressed without suspending our best existing approach to financial instrument valuation, and without suspending our independent, thorough and public accounting standard-setting process.”

The CAQ has also submitted a comment letter to the Securities and Exchange Commission as part of the SEC’s 90-day study on mark-to-market accounting. The SEC is scheduled to complete its review and report to Congress by Jan. 2. The Commission hosted the second of two roundtable discussions on fair value on Nov. 21. Participants included KPMG's Sam Ranzilla, who chairs the CAQ's Professional Practice Executive Committee, and Jay Hanson of RSM McGladrey.

II. Fixing Financial Reporting

In a Nov. 10 BusinessWeek article entitled “How to Fix Financial Reporting,” Cindy Fornelli discussed potential financial reporting recommendations, referencing the CAQ’s 10-city Public Dialogue Tour as a source of insight on the subject. She noted “one suggestion that came out of the panels was that companies start to list key performance indicators for their specific industry in their reports, which would allow investors to compare information between competing companies.”

III. CAQ Board Member Named to Key Global Post

CAQ governing board member Harvey Goldschmid has been named co-chair of an international advisory panel formed to consider financial reporting issues arising from the global economic crisis.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced the panel’s formation on Nov. 14 to consider “how improvements in financial reporting could help enhance investor confidence in financial markets.”

Goldschmid, one of three public CAQ board members, is a law professor at Columbia University and a former SEC commissioner. Working with Goldschmid as panel co-chair will be Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets.

IV. What is Audit Quality?

In recent newsletters, we have offered the views of public company auditors and other market stakeholders in response to the question, "What is audit quality?" This month, we hear from Elizabeth Gantnier, CPA, who is quality control director for Stegman & Company:

“Audit Quality is a process affected by the audit firm, the engagement team and the company’s audit committee with the engagement partner at the helm. Together, they ensure the following objectives:

1. The process employs individuals who are properly trained (competent), sufficiently supervised and empowered to be objective and professionally skeptical;
    
2. Audit documentation is sufficient to support the conclusions reached and complies with auditing standards;
    
3. The audit conclusions reached are appropriate; and
    
4. Material weaknesses in internal control over financial reporting and material errors in financial data are detected in a timely manner.

The result is an audit opinion that inspires investor confidence as material weaknesses in internal controls over financial reporting and material errors, whether due to error or fraud, are detected with reasonable but not absolute assurance.”