AUDITING
The PCAOB proposed for public comment a new auditing standard on engagement quality review and a conforming amendment to the board’s interim quality control requirements. The proposed standard would supersede the board’s interim quality control standard, SECPS Requirements of Membership § 1000.08(f).

Section 103 of the Sarbanes-Oxley Act of 2002 directs the board to include in its auditing standards a requirement that each registered public accounting firm “provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance.”

The proposed standard, which would apply to all engagements performed in accordance with PCAOB standards, is risk-based and designed to increase the likelihood that engagement deficiencies would be identified and corrected before the auditor issues a report. Comments are due by May 12.

The proposed standard provides a firmer framework for an engagement quality reviewer to objectively evaluate the significant judgments made by the engagement team and the conclusions reached in forming the overall conclusion on the engagement and in  preparing the engagement report. The proposed standard is available at www.pcaobus.org/Rules/Docket_025/2008-02-26_Release_No_2008-002.pdf.

Comments are due by May 12.

The Center for Audit Quality released 2007 Year In Review, a report on the organization’s first year in operation. The report highlights activities including the Public Dialogue Tour series of events, during which the CAQ gathered ideas from investors and other market stakeholders on improving financial reporting. The CAQ will issue a report with specific recommendations when the tour ends this summer. 

According to the report, the center is also working closely with two federal advisory panels: the Department of the Treasury’s Advisory Committee on the Auditing Profession and the SEC’s Advisory Committee on Improvements to Financial Reporting.

“In a short space of time, the CAQ and its public board members have brought the profession together and are actively engaged with market participants,” CAQ Governing Board Chair and Ernst & Young LLP Chairman and CEO James S. Turley says in the report. The 12-page document is available at http://thecaq.org/about/CAQ_Year_In_Review_2007.pdf

BANKING
The banking industry’s “golden period of record profits” came to a halt in the second half of 2007 as write-downs by large banks contributed to a 27.4% drop in earnings for FDIC-insured commercial banks and savings institutions in 2007.  The group’s net income of $105.5 billion was down from a record $145.2 billion in 2006.

FDIC Chairman Sheila Bair said in the agency’s Quarterly Banking Profile that the previous “golden period” is helping many institutions weather the current business climate. She said the “overwhelming majority of banks and thrifts remain[ed] wellcapitalized and profitable” in 2007. She said 99% of institutions were well-capitalized at the end of 2007 and nearly 90% were profitable.

In addition to the steep earnings decline, growing asset quality problems were reflected in an increase in loan-loss provisions from $29.5 billion in 2006 to $68.2 billion in 2007. Trading revenue plummeted to $4.1 billion in 2007 from $14.9 billion in 2006. Return on assets (ROA) fell from 1.28% the previous year to 0.86%. The average net interest margin (NIM)—the difference between the rate banks earn on their loans and other investments and the rate they pay to fund those assets—declined slightly to 3.29% from 3.31%, the sixth straight annual decline and lowest NIM since 1988.

Bair said asset quality will be a key focus in coming months and that “writeoffs and loss provisions will likely remain high for the near future.”

More industry statistics are available in the Quarterly Banking Profile at www2.fdic.gov/qbp/index.asp.

The downturn in housing led to record losses of $5.24 billion for thrifts in the fourth quarter of 2007, according to the Office of Thrift Supervision. Write-downs, restructuring costs and record levels of provisions for anticipated loan losses all battered an industry that saw full-year earnings decline to $2.87 billion in 2007 from $15.85 billion in 2006.

Return on assets fell to 0.19% in 2007 from 1.06% in 2006. In the fourth quarter, ROA was –1.38%. Troubled assets rose to 1.65% of all assets in the fourth quarter, up from 1.19% in the third quarter.

The complete report of the thrift industry’s results for 2007 is available at www.ots.treas.gov.

The FDIC released a guide aimed at helping bankers and other financial professionals calculate proper insurance coverage for deposits of revocable and irrevocable trusts at insured financial institutions. The FDIC Guide to Calculating Deposit Insurance Coverage for Revocable and Irrevocable Trusts uses a standard set of questions and answers to help analyze insurance coverage for different types of trusts. The publication also contains a full set of FDIC rules and regulations pertaining to revocable and irrevocable trusts.

The guide is available at www.fdic.gov/deposit/deposits/di_trust_accounts/complete.pdf.

Regulators from five countries issued a report that assesses a range of risk management practices among major global financial services organizations.

The report, Observations on Risk Management Practices during the Recent Market Turbulence, summarizes a joint review initiated in the fall of 2007. The seven regulatory agencies participating in the project were the French Banking Commission, the German Federal Financial Supervisory Authority, the Swiss Federal Banking Commission, the U.K. Financial Services Authority, and, in the United States, the Office of the Comptroller of the Currency, the SEC and the Federal Reserve.

The report also includes results of a roundtable discussion that participating agencies held with industry representatives Feb. 19 at the Federal Reserve Bank of New York. The regulators said in a joint cover letter that they would use the report’s findings to help define an agenda for strengthening regulatory oversight of relevant areas that include:

Supporting the efforts of the Basel Committee on Banking Supervision to strengthen the efficacy and robustness of the Basel II capital framework to enhance incentives for firms to develop more forward-looking approaches to risk measures.

Strengthening the management of liquidity risk.

Reviewing and strengthening, as appropriate, existing guidance on risk management practices, valuation practices and the controls over both.

Addressing issues—including the quality and timeliness of public disclosures of financial services firms, accounting and disclosure treatments of off-balance-sheet vehicles and compensation practices—that may benefit from discussion among market participants, regulators and other key players such as accountants.

To download a copy of the report, visit www.sec.gov/news/press/2008/report030608.pdf.

FINANCIAL REPORTING
FASB issued proposed FASB Staff Position FAS 117-a, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures.

“The issues addressed by this FSP have widespread importance to the not-forprofit sector, especially organizations with sizable endowments, and the users of their financial statements, such as donors, credit rating agencies, and regulators,” Jeffrey Mechanick, FASB project manager, said in a press release.

The proposed FSP provides guidance on classifying the net assets (equity) associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006. The act serves as a model for states to modernize their laws governing donor-restricted endowment funds. A number of states have already done so, and more are expected to do so over the next few years.

The FSP, which is available at www.fasb.org/fasb_staff_positions/prop_fsp_fas117-a.pdf, would also require additional disclosures about endowments (both donor-restricted funds and boarddesignated funds) for all organizations, including those that are not yet subject to an enacted version of UPMIFA.

The provisions would be effective for fiscal years ending after June 15, 2008, with early application permitted for organizations that have not previously issued annual financial statements for that fiscal year.

FASB issued proposed FASB Staff Position SOP 90-7-a, An Amendment of AICPA Statement of Position 90-7. The FSP seeks to resolve a conflict between the guidance requiring early adoption of new accounting standards for entities required to follow fresh-start reporting under AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and other authoritative accounting standards that expressly prohibit early adoption.

 At the time SOP 90-7 was issued, new accounting standards were being issued with effective dates that encouraged early adoption. However, in several recent standards, FASB decided to prohibit early adoption. The FSP amends SOP 90-7 to nullify the requirement in paragraph 38 regarding changes in accounting principles. As a result of the amendment, an entity emerging from bankruptcy that uses fresh-start reporting only should follow the accounting standards in effect at the date of emergence.

The FSP is available at www.fasb.org/fasb_staff_positions/prop_fsp_sop90-7-a.pdf.

FRAUD
Suspicious Activity Reports (SARs) related to mortgage loan fraud jumped 35% in the first six months of 2007 compared with the first six months of 2006, according to a report by the Financial Crimes Enforcement Network. Mortgage loan fraud is now the third most common type of suspicious activity reported by depository institutions behind Bank Secrecy Act/structuring/ money laundering and check fraud.  FinCEN said it is preparing a more comprehensive analysis of mortgage fraud.

Other findings from FinCEN’s ninth issue of SAR Activity Review—By the Numbers show that non-depository institutions account for a growing percentage of SARs.  In 2001, depository institutions filed more than 95% of all SARs. In the first six months of 2007, almost 44% of SARs were reported by non-depository institutions, which include money services businesses, casinos and card clubs, and the securities and futures industries.

The review also noted a 58% jump in check kiting reports in the first half of 2007 compared with the first half of 2006.  Terrorist financing reports for the first six months of 2007 from depository institutions increased 19% compared with the first half of 2006.

The complete report is available at www.fincen.gov/sars/sar_by_numb_09.pdf.

GOVERNMENT
FASAB has issued Technical Release 8, Clarification of Standard Relating to Inter-Entity Costs, and Technical Release 9, Implementation Guide for Statement of FASAB 29: Heritage Assets and Stewardship Land.

TR8 provides guidance to federal entities on three aspects of full costing specified
in SFFAS 4: (1) guidance on costs that should be considered Broad and General for all entities, (2) guidance on Directness of Relationship to the entity’s operations as used in determining if a transaction should be considered material to the receiving entity, and (3) guidance on Identifiability as used in determining if a transaction should be considered material to the receiving entity.

TR9 assists federal entities in reporting information on heritage assets and stewardship land in accordance with SFFAS 29, Heritage Assets and Stewardship Land. It covers materiality considerations; identification, categorization and quantification; assessing and reporting condition; and government-wide reporting.

The technical releases supplement the relevant federal accounting standards, but are not a substitute for and do not take precedence over the accounting standards issued by FASAB They are available at www.fasab.gov. Printed copies are available by calling 202-512-7350.

GASB issued an exposure draft of a proposed statement, Fund Balance Reporting
and Governmental Fund Type Definitions, to address inconsistencies in state and local government fund balance reporting. According to GASB research, “fund balance is one of the most widely used pieces of information in state and local  government financial statements,” says GASB Chairman Robert H. Attmore. Differences in reporting have led to confusion among preparers and users of financial statements.

The ED establishes clearer fund balance categories and classifications based on the extent to which a government is bound to observe spending constraints imposed upon the use of resources reported in governmental fund balances. It also distinguishes fund balance between amounts that are considered nonspendable (such as fund balance associated with inventories); clarifies definitions of special revenue fund types; and modifies the debt service and capital projects fund types for consistency.  Comments on the draft are due by June 30. For more information and to download the draft, go to www.gasb.org/exp/ed_fund_balance_reporting.pdf.

The SEC issued a report reminding public pension funds of their responsibilities under the federal securities laws, and warning them that they assume a greater risk of running afoul of antifraud and other provisions if they do not have adequate compliance policies and procedures in place to prevent wrongdoing in their money management functions. A copy of the report, issued pursuant to Section 21(a) of the Securities Exchange Act, is available at www.sec.gov/litigation/investreport/34-57446.htm.

A GAO study to assess compromises to personal information and long-standing weaknesses in federal information security found that 22 of the 24 major federal agencies surveyed had developed policies requiring encryption of personally identifiable information on mobile computers and devices.  Fifteen of the 24 agencies had policies to use a “time-out” function for remote access and mobile devices requiring user reauthentication after 30 minutes of inactivity. Fewer agencies (11) had established policies to log computer-readable data extracts from databases holding sensitive information and erase the data within 90 days after extraction.  Several agencies indicated that they were researching technical solutions to address these issues. Gaps in their policies and procedures reduced the ability to protect personally identifiable information from improper disclosure.

The full report is available at www.gao.gov/new.items/d08343.pdf.

INTERNATIONAL
The International Accounting Standards Board (IASB) published a discussion paper on the distinction between equity financial instruments and other financial instruments (non-equity instruments). The discussion paper is the first stage of the IASB’s project to improve and simplify the requirements in International Accounting Standard no. 32 (IAS 32), Financial Instruments: Presentation.

The project is a modified joint project between the IASB and FASB. In a modified joint project, one board leads the initial stage. In this case, FASB led the research stage and published a preliminary views document, Financial Instruments with Characteristics of Equity, in November 2007. The IASB’s current discussion paper will solicit the views of interested parties on whether the proposals in the FASB preliminary views document are a suitable starting point for the IASB’s deliberations. If the project is added to the IASB’s active agenda, the IASB intends to undertake it jointly with FASB. Comments are due by
Sept. 5. For more information, visit www.iasb.org or www.fasb.org/draft/pv_liab_and_equity.pdf.

XBRL
The SEC launched a Web-based tool called Financial Explorer to help investors analyze the financial results of public companies.  The tool, which uses XBRL, allows investors to automatically generate financial ratios, graphs, and charts depicting important information from financial statements. Users can also compare information including earnings, expenses, cash flows, assets and liabilities across competing public companies. The source code for the software is available to the public for free so that users and  software developers can update and enhance the software. In addition to Financial Explorer, the SEC currently offers investors two other online viewers—the Executive Compensation viewer and the Interactive Financial Report viewer. To access the tools, visit www.sec.gov/spotlight/xbrl/xbrlwebapp.shtml.