One of those concerns is to try to rationalize international accounting with U.S. GAAP, Sarbanes-Oxley and the new PCOAB developments. The SEC acknowledges that the International Financial Reporting Standards are improving rapidly and many people are asking about eliminating their reconciliation with GAAP. In 2005 the SEC intends to review the various reconciliation schedules to identify the principal remaining differences and help identify areas where convergence is a priority. People are encouraged to become familiar with international standards now. One issue is whether the international standards furnish as meaningful information as GAAP.
 
Recently, Andrew Bailey Jr., Deputy Chief Accountant, emphasized the need for auditor independence and encouraged substantive discussions as to whether certain non-audit services are consistent with auditor independence and auditor quality. He again emphasized the staff's disdain for contingent fees. He also commented that the staff is receiving a number inquiries where it is obvious that the questioner is seeking a way around the rules. That misses the point. Financial professionals should focus on principles-based standards rather than using the language of the standards to structure around the requirement.
 
This theme was reiterated by another staff member who noted that once a new accounting standard is published, certain people search for ways to structure or restructure a transaction to avoid reporting the very information sought by the new standard. For example, an entire industry has developed to structure leases in a manner for achieving certain results under GAAP. FASB 13 was adopted to make lease accounting more transparent. People are focusing on technical compliance while not making the type of disclosures that are in the best interests of investors and do not promote transparency. Another interesting approach is that where there is the particular accounting issue facing an entire industry, the industry should work with a staff to come to a solution. Again, the theme is not technical compliance but to have an environment that fosters ethical behavior and decision-making.
 
The staff has noted two other troubling trends. U.S. GAAP states a preference for the direct method of reporting cash flow. Yet virtually all companies still use the indirect method for reporting cash flow. Also, some companies are using the smoothing mechanisms that are allowed by FAS 87, which are not required, when its use distorts reporting.
 
The recent SEC enforcement action against the general counsel for Google is instructive on how the SEC now views the role and duties of professionals. In that case, the general counsel concluded that Google's stock options did not have to be registered. The staff believed that the general counsel not only ignored the legal requirements but failed to inform the board of the resulting risks.

Commissioner Johnson said that this case was sending three messages:

First, no violation of law is minor. Here there was no economic harm to investors, the options ended up being very valuable and there was no incentive to take advantage of the legally required rescission offer.

Second, the quality of the advice and diligence of the professional will be factors in an enforcement review if the staff determines that the advice or position was wrong. I recommend that you keep good records and explain the good-faith basis for your position when it is a close call or novel question. Definitely consult with the audit committee and set forth all of the relevant considerations so that this discussion can be used to bolster your defense.

Third, discuss the risks, if appropriate. Again you should focus on the underlying disclosure principles rather than structuring the transaction to be technically compliant. Form over substance is greatly discouraged.

See also: SEC Provides FAQs for Financial Professionals

CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Contact him at 212.490.3232 or visit www.securitiescounselors.com