We're currently holding our most popular conference - Current Financial Reporting Issues (CFRI) - here in New York City's Waldorf Astoria Hotel. There are about 600 "FEI-ers" in attendance, eager to hear a year-end update of important new FASB and SEC rules. In addition, the conference offered discussion on reporting issues related to the new economy and e-commerce. If you've never been to this conference, you really should think about attending in the future.

As I write this from the balcony of the hotel's Grand Ballroom (which, by the way, is the site of Hillary's election night gathering tonight), the SEC staff is covering their hot topics. The following are some highlights from the conference:

Business Combination Accounting
The SEC staff is clearly seeing a push for transactions to be completed before the end of pooling. Scott Taub of the SEC staff warned that they are still scrutinizing these transactions carefully. He further warned that although the debate on the amortization period for goodwill is very active, be careful about trying periods longer than 20 years.

FAS 133
Documenting of hedging transactions should be considered carefully. Hedges must be designated at the start of the transaction, and supporting documentation must be in place from that point. FAS 133 allows hedge accounting only if the documentation process is carefully implemented. The SEC has forced some restatements by companies without that documentation.

Interpretation #44 on APB 25 on Stock Compensation
"Effective stock option re-pricing" is on the SEC's radar screen. They have seen a number of cases in which a company has cancelled options and reissued the options in creative ways. Variable accounting is triggered if they deem it to be an effective re-pricing.

SEC Audit Alert Letter to the AICPA
The SEC has suggested that over half the frauds they studied found CUT-OFF problems in revenue accounting. The SEC has encouraged auditors to increase their testing of cut-off procedures. A copy of that letter is available here.

Anatomy of an Accounting Failure
Charles Niemeier of the Enforcement Division emphasized the SEC's continuing focus on earnings management. Charles indicated that failures in accounting begin with a smoothing of quarterly earnings. Then, the problem spreads to year-end, where the auditor is aware of the problem but issues a clean opinion anyway. When the problem worsens, the auditor has to acknowledge his part in the process. May you never meet Charles in your professional career!

Robert Bayless
His review predicted that routine SEC filings by corporate finance departments will be up significantly by next year. They have been under the gun from IPO filings and staff shortage, but are reorganizing priorities on 10-K's other reports.

Robert expressed a high level of concern over segment reporting. Specifically, he pinpointed insufficient product line revenue disclosure and incomplete disclosure of operating segments and too much aggregation of the segment data.

Audit Committee Governance
Billie K. Rawot, Vice President & Controller of Eaton Corp., did a great job of organizing and summarizing the new rules established at the end of 1999 by the SEC, the NYSE, NASDAQ and the AICPA. We will be posting her presentation, as well as those from other speakers, on the FEI Web site in the File Library. Her presentation was followed by a distinguished panel, whose members assured the audience that they believe the new rules are not intended to expose audit committees to greater possible litigation. Rather, they are intended to result in audit committees that are engaged, questioning, and active in performing their oversight role.

The panel also observed that regardless of how the chips fall with the proposed auditor independence rules, a careful examination of any independence issues during the newly required annual review with the external auditor will be an essential part of good audit committee governance.

Keynote Speech by Frank Zarb, Chairman of NASDAQ
Zarb infused a sense of history into a wide-ranging speech about the markets and the changes sweeping over them. Zarb, a former official in several Republican administrations and a former CEO of Smith Barney, recalled that in the days before fixed commissions, trading amounted to "rich guys selling stock and bonds to other rich guys." Now, markets have been democratized and are global and around-the-clock.

Information technology has transformed the trading of securities in enormous ways, Zarb said, and NASDAQ is at the forefront of those changes. Time and again, Zarb noted that markets move quickly and hunger for information. "The market will get what it wants, when it wants it and without you," he told the FEI audience. Even today, NASDAQ and other leading exchanges could be disintermediated by new entities that give investors better information. And some pressures for information may be political, he added, since "voters are investors and want a free flow of capital."

Integrity of information is critical, Zarb said. "Tomorrow's markets will link global pools of liquidity with integrity," he said. International regulators need to work harder at harmonizing standards and enforcement, he argued, noting that little is done outside the U.S. on issues like insider trading. "Integrity is integrity - you know it when you see it."

Zarb also noted that NASDAQ is operating in Japan and is laying the groundwork in Europe, where he thinks existing exchanges are ripe for consolidation. Already, NASDAQ's Web site is getting 20 percent of its daily hits from outside the U.S. Asked about the pending FASB ruling to dismantle pooling treatment, Zarb said that no one could show him how things would be better today if pooling had been eliminated 20 years ago.

Financial Implications of New Business Trends
Thomas Pizzuti, director of strategic finance in the Internet Incubator CMGI, argued that investors are now demanding that Internet companies speed up their life cycles and demonstrate more quickly that they can have cash flows, be valued and can indeed be profitable. He argued that a strong model for an Internet company involves a "virtuous circle," where resources are moving between investor and operator segments.

It makes sense for Internet holding companies to be public, Pizzuti said, but operating entities need not be. They could be limited-liability companies or partnerships, which can provide tax advantages. Pizzuti added that goodwill issues are "enormous" for Internet companies, adding that goodwill is frequently amortized over very short periods, often as little as three years.

Mary Pat McCarthy of KPMG said that from the auditing perspective, there has been more change in the past year than any of the past 23 she has been in the accounting arena. Audit clients want more for less, adding that auditors must turn increasingly to technology to deliver more customized services - even, perhaps, "real-time" audits. In fact, McCarthy sees auditors increasingly becoming technologists, using tools like data mining, artificial intelligence and predictive modeling. She believes audits will become business process-oriented, which will help clients manage risk and leverage knowledge. Industry specialization, too, will become more important, with the days of auditors jumping from industry to industry disappearing.

Ed Jenkins, Chairman of FASB, contended that today's economy is "fundamentally different" from that of a generation ago, and that traditional reporting "doesn't capture the value drivers." Today, there is an emphasis on value creation, as opposed to value realization, a more backward-looking measure. Intangibles are more important than ever, he said, and new accounting standards may be needed to reflect them.

He also stated that cash flow reporting will continue to grow in prominence, adding that FASB is beginning to think about broad-based performance reporting. Today's delivery system for financial reporting is outdated, he added, and a more accessible electronic format is needed.

Update on FASB/AcSEC/EITF Projects
This session was kicked off with a comprehensive overview of current FASB projects by Timothy S. Lucas, chairman of the Emerging Issues Task Force and director of research and technical activities for FASB. Lucas summarized FASB actions since 1997, but reassured the audience that nothing on the technical agenda is new since then.

On the business combinations/pooling issue, Lucas reiterated that FASB began re-deliberations last March and is continuing to explore related goodwill issues, as well as a non-amortization approach that would include an asset impairment test. Currently, the board has targeted a release date of March 31, 2001 for the new rule, and it would become effective in the first half of next year.

In what he called "coming attractions," issues that FASB may take on, he discussed areas such as recognition of liabilities and revenues, intangible assets and the New Economy, and performance reporting. International standardization of accounting issues is "a wild card," he said, and could affect FASB at any time.

Mark Sever, chairman of the accounting standards executive committee for the AICPA and a partner with Ernst & Young, reviewed the changes in motion picture accounting that were adopted last June. He added that AsSEC currently has projects involving areas such as real estate, lending and insurance, and a financial institutions guide that would include such wide-ranging forms as banks and credit unions, mortgage and finance companies. Sever jokingly noted that a standard on demutualization was being completed "in lightning speed" - two years.

He added that guidance on cost capitalization relating to "PPE" - property, plant and equipment - is being expanded at the request of the SEC. A key and controversial component of that, he said, is component depreciation, the idea that different components of PPE depreciate at different rates.

The Internet and E-Business: Accounting and Reporting Issues
Michael Kwatinetz, a managing partner with Azure Capital Partners, argued that Internet companies must "try to help the analyst" understand them. He covered issues like barter and subscriptions versus sales, arguing that barter has become an area of "huge abuse" for Internet companies who swap advertising or development costs with each other and obscure the true costs of doing business. Performance warrants, such as those taken by Arthur Andersen in a series of high-tech companies, also are hard to sort out, he added. Kwatinetz argued that analysts have become more enamored of subscriptions, which may result in lower short-term earnings but "seem to be creating more value" through relationships with customers and more consistency in earnings.

As you can see, there was a tremendous amount of knowledge to be shared here!

That's all for now,