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FEI Newsletter Archive

In This Issue:
SEC Chairman Levitt Calls For New Rules To Govern Auditors
FEI Survey on Auditor Independence
Harvard Case Studies
MCI WorldCom 1999 Annual Report
Stock Option Compensation and Dilution
Member-Get-a-Member
Transforming Into an E-Business
Asset Allocation: What's New with Investment Styles?
SEC and Electronic Media
New Member Welcome
Job Posting

The SEC made a major policy statement today and we wanted you to hear about it quickly. Implications for both public and private companies, really, in that the auditing profession is facing major changes. One additional comment from my perspective - the tone of this debate has been nasty and at times counter-productive. I hope this is the bottom and the turning point towards more productive dialogue.

SEC Chairman Levitt Calls For New Rules To Govern Auditors
In a major policy address today decrying a "culture of gamesmanship" in financial reporting and conflicts of interest at audit firms, Chairman Levitt called for new SEC rulemaking and other measures to tighten the screws on auditors. Addressing an audience at New York University's School of Law, Levitt said, "Independence is the core of the profession," and criticized the AICPA for being "unable to discipline its own members for violations of its own standards of professional conduct".

Issues to be addressed by the rulemaking include:

• Limits on types of services auditing firms can provide
• How audit firms should be structured to assure independence
• Consequences of public ownership of accounting firms or affiliates
• Affiliation of audit firms with entities that provide to audit clients services the audit firms themselves are not allowed to provide

"I am concerned that the audit function is simply being used as a springboard to more lucrative consulting services," Levitt said.

In a May 1 letter to chief accountant Lynn Turner, FEI's Committee on Corporate Reporting recommended that the SEC "refrain from a further historical review of independence matters" and instead focus on the future. But Levitt said that "Nothing less than a serious assessment of the scope of yesterday's control deficiencies is needed to provide a basis for improvement."

Levitt harked back to the Savings and Loan crisis and called for "stronger, more effective oversight" of the accounting profession, including more power for the Public Oversight Board. He said he was "saddened" to learn last week that the AICPA's SECPS Planning Committee had informed the Public Oversight Board (POB) that it was "cutting off" funding for the special independence compliance reviews, noting that "This development is a significant setback to self-regulation and independent oversight."

(In a media briefing immediately following the SEC Chairman's speech, POB Chairman Charles Bowsher, sharing the dais with Chairman Levitt, was even more blunt. "The POB is not going to be intimidated or pushed around by people cutting off our funding. We want to make sure that in the future people understand this clearly.")

In addition to new SEC rulemaking, Chairman Levitt also called for modernization of rules prohibiting investments by audit firm professionals in audit clients. He said that changes to the rules could be expected within sixty days, and would also address mutual fund investments and investments by family members especially in dual income families.

The full text of the chairman's speech is available here.

FEI Survey on Auditor Independence
As noted above, auditor independence is a hot public policy issue. Last month we surveyed 218 FEI members on the subject of auditor independence and consulting work. The full results of the survey can be accessed here. Basically, we tried to find out the level of spending on non-audit or attest function services compared to the fees paid for audit work. Only 15% of the respondents paid NO fees (did no consulting work) with their auditors.

One of the most interesting parts of the survey was an open-ended question at the end that asked "Do you have any comments on the relationship of consulting work as it relates to the independence of your external auditor?"

Here is a sampling of the comments. I think this reflects the bulk of the comments, but you can view all the comments (cleaned of all names) here.

"We try to limit it to tax. Tax because of the expertise and knowledge of company. We use other big five firms for consulting in other areas to maintain independence."

"We spent considerable time with our audit committee reviewing the nature of non-audit services provided, and our auditors have reviewed with them steps taken inside the firm to protect independence."

"This is a value-added service to us. The accounting firm understands our business … which makes the consulting work more effective."

"We believe that any consulting work performed by our auditors should exclude any areas which may impact the financial statements. Such areas would include valuation of derivatives or valuations of purchase business acquisitions."

"We monitor consulting work done by our audit firm very closely to ensure independence."

"We have used our audit firm in various capacities over the years and independence has never been a real concern."

Harvard Case Studies
Finance Professor Rick Ruback of the Harvard Business School is looking for finance professionals and corporations willing to volunteer information sufficient to be an HBS case study. Two of my past companies had HBS case studies written about them, and it was rewarding to the companies and its employees. In future years the management team is regularly invited to join classes as they discuss the case. If you're interested, contact Professor Ruback at rruback@hbs.edu. Send him a brief description of your idea for the case.

MCI WorldCom 1999 Annual Report
The future of financial reporting is clearly on the Internet. I recently received the annual report of MCI WorldCom reflecting this reality. Their "printed version", as they call it, is done in a low-cost way with no graphics, pictures or fancy paper. This version contains only a brief letter to shareholders, the MD&A and financial statements. At every chance they direct the reader to their web site, and in the letter they say:

"We hope you enjoy this printed version of our annual report. However, true to form, the best place to get all the information you need on WorldCom is online at http://www.wcom.com/investor. This allows us to leverage the Internet and save over $1 million in traditional annual report expenses."

Traditional financial statements are in the last stage of life. It's not just the paper that is going to change, it's the content too. Easier navigation, graphics and multi-media are going to make endless footnotes meaningless and unused.

Stock Option Compensation and Dilution
Fred Cook is a top, top executive compensation consultant, quoted widely in the press. A strong proponent of equity ownership for employees, Fred has great experience from the field (endless compensation committee meetings with leading companies). In a May 31 FEI teleconference we will discuss stock option dilution - how much is appropriate and how you should think about managing it. It is an important subject that financial officers -- as the champions of driving up per-share value for shareholders -- must be conscious of.

This is not an ad for Fred, but we are lucky to get his time for this call and he doesn't need more work. Hope you can join us. Invite your HR leader to join you and discuss the topic afterwards. Sign up here.

Member-Get-a-Member
Thanks to the 24 members that responded to the recent initiative to bring in new members. As a result we are extending a new incentive through June 30. Bring in a new member (any qualified new member), and you get your choice of one-year subscription to Harvard Business Review, Quicken Deluxe 2000 or an FEI polo shirt. Total FEI membership stands at 14,400, up just over 400 from last year this time or about 3%. There are many potential members that need to join FEI. Give them a hand! To nominate a member, send an e-mail to jstankard@financialexecutives.org.

By the way, many companies give retiring finance officers a life retired membership in FEI as one retirement gift. One-time cost is $400 for members active for 20 years or more, $800 for all others.

Transforming Into an E-Business
I've talked to a lot of members who are struggling with how to transform their business into an e-business. Some of you may have had the opportunity to hear Jeff Henley, CFO of Oracle, speak on this subject. Their product, Oracle Financials, helps identify the bottlenecks, drive down transaction costs, consolidate global financial positions and close your books faster. Find out how Oracle has helped customers make the transformation and save millions in the process by clicking here.

Asset Allocation: What's New with Investment Styles?
This Friday, May 12, we have one of our increasingly popular teleconferences. This time we turn to the world of asset management and investment alternatives. FEI partner SEI Investments is leading the discussion with their Chief Investment Officer, Robert Ludwig, guiding us. His presentation is on our web site.

Sign-up at: http://www.financialexecutives.org/teleconference_signup/upcoming_signup.cfm and get one CPE credit as well.

SEC and Electronic Media
The SEC has just issued an Interpretive Release on the Use of Electronic Media. Even though the interpretations are effective upon publication, comments are being sought by the SEC. Comments are due by June 19th.

The release was issued to address the uncertainty regarding the application of securities laws that have resulted from the increase in the use of the Internet for widespread dissemination of information . The purpose of the release, according to the SEC's Fact Sheet, is to remove this uncertainty and the barriers to the use of electronic media. The interpretations cover electronic delivery, web site content, online offerings and other concepts on the use of technology. The release can be downloaded from the SEC's web site.

New Member Welcome
Congratulations to Greg Coffey, VP and Treasurer, Pier 1 Imports in Fort Worth, TX; and to Andre Louit, CFO and VP, Finance, Hermes of Paris in New York.

Job Posting - CFO
for a growing public telecommunications company with several business units. Based in Jacksonville, Florida and reporting to the CEO, the CFO will have strong Wall Street and strategic planning experience, SEC, M&A, investor relations and private/public placements. MBA/CPA preferred. Compensation is $250K plus bonus and options. Please respond to Mike Tanner, CFO Services, Inc., at mtanner@cfo-services.com.

To view more jobs, please visit the FEI Job Posting Center.

That's all for now,

Phil