Unauthorized securities is something that the SEC frowns on a great deal. In the following case a charity like entity ran a fowl of the SEC by allegedly selling unregistered securities. The following is an excerpt from the SEC web site:
“The Securities and Exchange Commission announced today that it charged Association for Betterment through Education and Love, Inc. (“ABEL”) and its principal, Anthony O. DeGregorio, Sr., age 81 and resident of New Jersey, with offering and selling securities in unregistered transactions and obtained an emergency court order to halt the offerings and preserve assets for investors. The Complaint also names Margherita DeGregorio as a relief defendant.
The Commission's complaint, filed in the District of New Jersey, alleges that ABEL and DeGregorio have raised more than $1.3 million through unregistered securities offerings since ABEL’s inception in 1989, obtaining more than $1 million in the last four years through offering purported “CDs.” According to the Complaint, ABEL’s purported purpose was to invest funds raised in securities offerings and use investment profits to pay a “guaranteed” return to investors, and donate a portion to charity. The Complaint alleges that ABEL and DeGregorio offered securities in the form of charitable gift annuities, without complying with state registration requirements, and offered purported CDs that carried above-market interest rates. The Complaint also charges that, at times, ABEL used the proceeds from new offerings of securities to make promised interest payments to earlier investors.
The Complaint charges ABEL and DeGregorio with violating Sections 5(a) and (c) of the Securities Act of 1933.
Judge Freda L. Wolfson of the United States District Court for the District of New Jersey issued a temporary restraining order, which prohibits ABEL and DeGregorio from committing further violations of the federal securities laws and places a freeze on their assets and the assets of Margherita DeGregorio. In its enforcement action, the Commission is seeking additional relief, including orders enjoining ABEL and DeGregorio, preliminarily and permanently, from committing future violations of the foregoing federal securities laws, and a final judgment ordering ABEL and DeGregorio to disgorge their ill-gotten gains plus prejudgment interest, and assessing civil penalties against them.”
This is a photo of the National Register of Historic Places listing with reference number 7000063
Saturday, June 11, 2011
Friday, June 10, 2011
SEC ON REVERSE MERGERS
The following is an excerpt from the SEC web site:
SEC Issues Bulletin on Risks of Investing in Reverse Merger Companies
FOR IMMEDIATE RELEASE
Washington, D.C., June 9, 2011 – The Securities and Exchange Commission today issued an Investor Bulletin about investing in companies that enter U.S. markets through so-called “reverse mergers.”
“Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “As with any investment, investors should thoroughly research the company – including ensuring there is accurate and up-to-date information – before making a decision to invest.”
Reverse mergers permit private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing public shell company. The SEC and U.S. exchanges recently suspended trading in a more than a dozen reverse merger companies, citing a lack of current, accurate information about these firms and their finances.
SEC Issues Bulletin on Risks of Investing in Reverse Merger Companies
FOR IMMEDIATE RELEASE
Washington, D.C., June 9, 2011 – The Securities and Exchange Commission today issued an Investor Bulletin about investing in companies that enter U.S. markets through so-called “reverse mergers.”
“Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “As with any investment, investors should thoroughly research the company – including ensuring there is accurate and up-to-date information – before making a decision to invest.”
Reverse mergers permit private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing public shell company. The SEC and U.S. exchanges recently suspended trading in a more than a dozen reverse merger companies, citing a lack of current, accurate information about these firms and their finances.
A BAD GUY FINISHES LAST
THURSDAY, JUNE 9, 2011
OWNER OF ILLINOIS TECHNOLOGY COMPANY SENTENCED TO SERVE 12
MONTHS AND A DAY IN PRISON FOR ROLE IN CONSPIRACY TO DEFRAUD THE
FEDERAL E-RATE PROGRAM
WASHINGTON — An owner of an Illinois-based technology company was sentenced today to serve one year and a day in prison for his participation in a conspiracy to defraud the federal E-Rate program, the Department of Justice announced.
Barrett C. White was also sentenced by U.S. District Court Judge Eldon Fallon to pay a $4,000 criminal fine for conspiring to defraud the E-Rate program by providing bribes and kickbacks to school officials in multiple states. White was charged with the conspiracy in U.S. District Court in New Orleans on Nov. 18, 2010, and he pleaded guilty on March 3, 2011.
As a result of the Antitrust Division's investigation into fraud and anticompetitive conduct in the E-Rate program, including today's sentencing, a total of seven companies and 24 individuals have pleaded guilty, been convicted at trial or entered civil settlements. Those companies and individuals have been sentenced to pay criminal fines and restitution totaling more than $40 million. Sixteen individuals, including White, have been sentenced to serve prison time.
According to court documents, White participated in the conspiracy beginning on or about February 2004 through August 2005. The department said that White offered and delivered bribes and kickbacks to school officials responsible for the procurement of Internet access services. In return for those payments, E-Rate contracts were awarded to his co-conspirators' companies. White's co-conspirators, Gloria Harper and Tyrone Pipkin, have also pleaded guilty to the conspiracy in separate charges and await sentencing.
The E-Rate program was created by Congress in the Telecommunications Act of 1996 and is administered by the Universal Service Administrative Company, under the oversight of the Federal Communications Commission (FCC). The program provides subsidies to economically disadvantaged schools and libraries. Depending on the financial needs of the applicant schools, the program pays 20 to 90 percent of the cost for Internet access and telecommunications services, as well as internal computer and communications networks.
Today's sentencing resulted from an investigation by the Department of Justice Antitrust Division's Dallas Field Office, the FBI's Dallas Field Office and the FCC's Office of Inspector General, with assistance from the U.S. Attorney's Office for the Eastern District of Louisiana. Anyone with information concerning violations of the E-Rate program is urged to call the Antitrust Division's Dallas.”
OWNER OF ILLINOIS TECHNOLOGY COMPANY SENTENCED TO SERVE 12
MONTHS AND A DAY IN PRISON FOR ROLE IN CONSPIRACY TO DEFRAUD THE
FEDERAL E-RATE PROGRAM
WASHINGTON — An owner of an Illinois-based technology company was sentenced today to serve one year and a day in prison for his participation in a conspiracy to defraud the federal E-Rate program, the Department of Justice announced.
Barrett C. White was also sentenced by U.S. District Court Judge Eldon Fallon to pay a $4,000 criminal fine for conspiring to defraud the E-Rate program by providing bribes and kickbacks to school officials in multiple states. White was charged with the conspiracy in U.S. District Court in New Orleans on Nov. 18, 2010, and he pleaded guilty on March 3, 2011.
As a result of the Antitrust Division's investigation into fraud and anticompetitive conduct in the E-Rate program, including today's sentencing, a total of seven companies and 24 individuals have pleaded guilty, been convicted at trial or entered civil settlements. Those companies and individuals have been sentenced to pay criminal fines and restitution totaling more than $40 million. Sixteen individuals, including White, have been sentenced to serve prison time.
According to court documents, White participated in the conspiracy beginning on or about February 2004 through August 2005. The department said that White offered and delivered bribes and kickbacks to school officials responsible for the procurement of Internet access services. In return for those payments, E-Rate contracts were awarded to his co-conspirators' companies. White's co-conspirators, Gloria Harper and Tyrone Pipkin, have also pleaded guilty to the conspiracy in separate charges and await sentencing.
The E-Rate program was created by Congress in the Telecommunications Act of 1996 and is administered by the Universal Service Administrative Company, under the oversight of the Federal Communications Commission (FCC). The program provides subsidies to economically disadvantaged schools and libraries. Depending on the financial needs of the applicant schools, the program pays 20 to 90 percent of the cost for Internet access and telecommunications services, as well as internal computer and communications networks.
Today's sentencing resulted from an investigation by the Department of Justice Antitrust Division's Dallas Field Office, the FBI's Dallas Field Office and the FCC's Office of Inspector General, with assistance from the U.S. Attorney's Office for the Eastern District of Louisiana. Anyone with information concerning violations of the E-Rate program is urged to call the Antitrust Division's Dallas.”
DODD-FRANK: MORE CONFUSION THAN CORRUPTION FIGHTING
Although Dodd-Frank legistaltion has some good parts in it much of it is replete with stupid ideas that show that the congressmen and their congressional aids that wrote the bill have no idea of how th real world of fiance works. The following is an announcement by the SEC that clarification of some Dodd-Frank legilation is comming to a financial instutuion near you. Please read the following excerpt from the SEC web site and leave a comment about this bill if you like:
"Washington, D.C., June 10, 2011 – The Securities and Exchange Commission today said it is taking a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – and to provide appropriate temporary relief.
Title VII is the portion of the Dodd-Frank Act that establishes a comprehensive framework for regulating over-the-counter derivatives. In particular, it authorizes the SEC to regulate “security-based swaps” while also authorizing the CFTC to regulate other swaps. The portion of Title VII referred to as Subsection B, which deals with the new regulatory regime for security-based swaps, will take effect on July 16 (360 days after the date of the Dodd-Frank Act’s enactment).
The Commission will:
Provide guidance regarding which provisions of Subtitle B of Title VII will become operable as of July 16, and, where appropriate, provide temporary relief from several of these provisions.
Provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions of the Exchange Act that would otherwise apply to security-based swaps on July 16. Under Dodd-Frank, security-based swaps would be included in the definition of “security” under the Exchange Act. While such swaps will be subject to provisions addressing fraud and manipulation, the Commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the Commission can consider, what if any further guidance or action is required.
Take other actions such as extending existing temporary rules under the Securities Act, the Exchange Act, and the Trust Indenture Act, and extending existing temporary relief from exchange registration under the Exchange Act. This will help to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
The Dodd-Frank Act contains more than 90 provisions overall that require SEC rulemaking, as well as dozens of additional provisions that give the SEC discretionary rulemaking authority. Of the mandatory rulemaking provisions, the SEC already has proposed or adopted rules for about two-thirds of them. In addition to writing individual rules, the Commission has been focusing more generally on how Title VII and the rules thereunder will be implemented. The SEC and CFTC staffs held a joint public roundtable in April, and Commissioners and staff have had extensive discussions with market participants on the appropriate sequence for implementing the security-based swap regulations.
After proposing all of the key rules under Title VII, the SEC intends to consider publishing a detailed implementation plan in order to enable the Commission to move forward expeditiously with the roll-out of the new securities-based swap requirements in the most efficient manner, while minimizing unnecessary disruption and costs to the markets.
The SEC also announced today proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met."
"Washington, D.C., June 10, 2011 – The Securities and Exchange Commission today said it is taking a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – and to provide appropriate temporary relief.
Title VII is the portion of the Dodd-Frank Act that establishes a comprehensive framework for regulating over-the-counter derivatives. In particular, it authorizes the SEC to regulate “security-based swaps” while also authorizing the CFTC to regulate other swaps. The portion of Title VII referred to as Subsection B, which deals with the new regulatory regime for security-based swaps, will take effect on July 16 (360 days after the date of the Dodd-Frank Act’s enactment).
The Commission will:
Provide guidance regarding which provisions of Subtitle B of Title VII will become operable as of July 16, and, where appropriate, provide temporary relief from several of these provisions.
Provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions of the Exchange Act that would otherwise apply to security-based swaps on July 16. Under Dodd-Frank, security-based swaps would be included in the definition of “security” under the Exchange Act. While such swaps will be subject to provisions addressing fraud and manipulation, the Commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the Commission can consider, what if any further guidance or action is required.
Take other actions such as extending existing temporary rules under the Securities Act, the Exchange Act, and the Trust Indenture Act, and extending existing temporary relief from exchange registration under the Exchange Act. This will help to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
The Dodd-Frank Act contains more than 90 provisions overall that require SEC rulemaking, as well as dozens of additional provisions that give the SEC discretionary rulemaking authority. Of the mandatory rulemaking provisions, the SEC already has proposed or adopted rules for about two-thirds of them. In addition to writing individual rules, the Commission has been focusing more generally on how Title VII and the rules thereunder will be implemented. The SEC and CFTC staffs held a joint public roundtable in April, and Commissioners and staff have had extensive discussions with market participants on the appropriate sequence for implementing the security-based swap regulations.
After proposing all of the key rules under Title VII, the SEC intends to consider publishing a detailed implementation plan in order to enable the Commission to move forward expeditiously with the roll-out of the new securities-based swap requirements in the most efficient manner, while minimizing unnecessary disruption and costs to the markets.
The SEC also announced today proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met."
SEC ANNOUNCES EXEMPTIONS FROM REGISTRATION OF SECURITIES
The following is an excerpt from the SEC website:
“Washington, D.C., June 10, 2011 – The Securities and Exchange Commission today proposed rules that would provide certain clearing agencies with exemptions from the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 for security-based swaps that they issue.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a comprehensive framework for regulating the over-the-counter swaps markets, envisioned that certain security-based swaps would be cleared through a clearing agency. The proposed exemptions would facilitate the clearing of such security-based swaps.
A clearing agency generally acts as a middleman between the parties to a transaction, and when providing central counterparty services, assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.
The proposed rules would exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met. Public comments on the proposed rules should be received by July 25, 2011.
On several previous occasions, the Commission has acted to facilitate clearing of certain credit default swaps by clearing agencies functioning as central counterparties. Among other things, the Commission previously adopted temporary rules that would exempt credit default swaps from these same registration and qualification requirements. The new proposed rules would create permanent exemptions that would cover these credit default swaps and the security-based swaps brought in through the Dodd-Frank Act and, as a result, supplant the temporary rules.
Because the current termination date for the temporary rules – July 16, 2011 – is expected to pass before the proposed exemptions are adopted, the Commission intends to extend the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
The extension of these temporary rules is one part of a multi-step Commission effort to clarify the requirements that will apply to security-based swap transactions as of July 16 - the effective date of Title VII of the Dodd-Frank Act - and to provide appropriate temporary relief.”
“Washington, D.C., June 10, 2011 – The Securities and Exchange Commission today proposed rules that would provide certain clearing agencies with exemptions from the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 for security-based swaps that they issue.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a comprehensive framework for regulating the over-the-counter swaps markets, envisioned that certain security-based swaps would be cleared through a clearing agency. The proposed exemptions would facilitate the clearing of such security-based swaps.
A clearing agency generally acts as a middleman between the parties to a transaction, and when providing central counterparty services, assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.
The proposed rules would exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met. Public comments on the proposed rules should be received by July 25, 2011.
On several previous occasions, the Commission has acted to facilitate clearing of certain credit default swaps by clearing agencies functioning as central counterparties. Among other things, the Commission previously adopted temporary rules that would exempt credit default swaps from these same registration and qualification requirements. The new proposed rules would create permanent exemptions that would cover these credit default swaps and the security-based swaps brought in through the Dodd-Frank Act and, as a result, supplant the temporary rules.
Because the current termination date for the temporary rules – July 16, 2011 – is expected to pass before the proposed exemptions are adopted, the Commission intends to extend the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
The extension of these temporary rules is one part of a multi-step Commission effort to clarify the requirements that will apply to security-based swap transactions as of July 16 - the effective date of Title VII of the Dodd-Frank Act - and to provide appropriate temporary relief.”
SEC CHIEF ACCOUNTANT SPEAKS AT SEC FINANCIAL REPORTING INSTITUTE COFERENCE
The following speech was excerpted from the SEC web site:
James L. Kroeker, Chief Accountant, in Pasadena, California, on June 5, 2011.
U.S. Securities and Exchange Commission
Pasadena, California
June 5, 2011
As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.
Introduction
Good morning and thank you for that wonderful introduction. Once again, it is a pleasure to join you at the 30th SEC and Financial Reporting Institute Conference. As has been the case at each of these prior events, today, you will hear from a number of accounting experts — among them staff from the Commission’s Office of the Chief Accountant and Division of Corporation Finance. You will hear about a number of accounting and financial reporting matters, including those of particular focus for the staff. You will also learn about projects on our 2011 agenda.
Before I begin, I want to make clear that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners, or my colleagues on the Commission staff.
Last year at this Conference you heard about the comprehensive staff work plan on IFRS that we had developed and begun to execute. Since then, we have issued a progress report and, more recently, a Staff paper exploring a potential method of incorporation of IFRS, and I expect to continue to issue updates as our work progresses. The Commission is dedicating significant resources to the work of preparing the Commissioners to make a fully informed decision about IFRS – a decision that must reflect the best interest of U.S. investors and our capital markets.
Paul Beswick is here today and will be addressing the status of our work plan in further detail. While I would be happy to address any questions related to the work plan, today I would like to focus on several other accounting and auditing developments that are on our 2011 agenda.
Accounting
Let me start with several accounting developments.
Financial Reporting Series Forum
As part of our oversight of financial reporting, we are instituting a series of roundtable sessions – aptly named the Financial Reporting Series – to facilitate a balanced discussion of existing pressures or emerging issues in financial reporting.
The Financial Reporting Series will assist us in our early identification of risks related to, as well as areas for potential improvements in, the reliability and usefulness of financial reporting to investors. The approach will be one of inviting a cross section of capital markets participants, including investors, preparers, auditors, and others, to discuss their individual views.
The purpose of the roundtable is to gather a broad spectrum of views and foster an informed dialogue on some of the most difficult financial reporting topics. It is not meant to be some blue ribbon committee that produces a set of recommendations. Rather, I expect that the Series will provide the Commission staff, as well as the FASB and the PCAOB, with useful information about emerging issues and changes in the business environment that affect each of our respective roles in the financial reporting system.
In addition to the observer roles that the chairs of the FASB and PCAOB will have, we intend to invite other observers, for example staff from the federal banking regulators or Commission staff from other offices or divisions, depending on the subject matter of any given roundtable.
I anticipate that we will have three sessions per calendar year, depending on the nature and number of issues that arise. We will be looking for participants who are knowledgeable about the issue or issues to be discussed.
Consistent with other Commission roundtables, the sessions will be public and webcast and archived. I encourage you to watch for public announcements of the sessions in advance through a press release or on a devoted Financial Reporting Series webpage on the Commission’s website.
I expect our first roundtable session to be held later this year and to focus on a topic such as the role of uncertainty in financial reporting and whether right level of information about uncertainty is being provided.
Oversight of Standard Setting – Convergence Agenda
Another item on my agenda is convergence of accounting standards. As you will hear more about today, the FASB and IASB are jointly committed to enhancing and converging financial reporting standards and have been doing so with sustained focus over the past several years. They are nearing completion on a number of priority projects by the end of 2011 and are considering how best to require transition from the existing accounting standards to the standards that they are proposing.
I am pleased that the Boards are working on these important financial reporting issues, and that they are making progress toward resolution. Issuing high-quality standards is of the utmost importance. High-quality standards provide investors with relevant, reliable financial information to guide investment decisions. High-quality standards also can be understood and implemented by preparers and audited by auditors.
I am also pleased that the Boards are committed to following rigorous due process procedures, including pre-implementation testing and outreach, so that they are able to achieve the desired high-quality output. While performing research and conducting field studies are important elements of the process, it does take time. So, I support the Boards’ continued reprioritizing of their agendas and timelines to achieve high-quality, converged standards.
Further, I believe it is critical that, as it relates to the MOU projects, that the Boards take all reasonable steps to maximize the prospect of converged, high-quality solutions. For example, currently the Boards are not aligned as it relates to their approaches to consideration of hedge accounting in the context of their financial instruments project. Numerous conceptual, operational and practical questions have been raised based upon proposals to date that should be considered jointly by both Boards. I believe that , in the long run, a measure of added time to provide for joint deliberations on a project as critical and as complex as hedge accounting will prove to be far more beneficial than any gains that are perceived in finalizing deliberations individually.
In achieving high-quality, converged solutions, the Boards will inevitably be faced with difficult choices about how best to proceed. I continue to encourage the Boards to reconcile differences in the proposed standards and to work to reach converged and improved solutions to these difficult financial reporting issues. In monitoring the accounting standard-setting process, my focus tends to be on ensuring there is the appropriate balance between conceptual grounding and pragmatism in the standards being developed.
Oversight of Standard Setting – Standard Setting for Private Companies
I have also spent time understanding the report and recommendations put forward by a Blue-Ribbon Panel on Standard Setting for Private Companies. My focus in understanding those recommendations is to consider the nature and impact of any recommendations for private companies to apply accounting standards that may differ from those that public companies apply.
It is prudent, in my view, to carefully consider the nature of any differences and their effect on the capital formation process if private companies have to adopt a revised, and more stringent set of accounting policies in connection with preparing Commission filings to raise public capital. Further, it is important to understand why one might suggest a different standard for private companies.
I support the approach taken by the FAF Trustees in carefully considering the advice from this panel as they strategically assess the financial reporting system for private companies. Further, I believe that in a number of areas additional research, study, and outreach, particularly to investors, would be warranted prior to implementing any significant change in the standard-setting structure applicable to nonpublic entities.
Auditing
We also have a number of auditing items on our 2011 agenda, several of which arise from reflecting on lessons that can be learned as our nation emerges from the financial crisis.
Staff Study on Section 404(b) Internal Controls Reporting
As part of the Dodd-Frank Act legislation, the Commission was directed to study how the Commission could reduce the burden of complying with the auditor attestation requirement with respect to internal control over financial reporting in Section 404(b) of the Sarbanes-Oxley Act for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such issuers and encouraging companies to raise public capital through U.S.-listed offerings.
Let me provide you with an update on our work in this area. We have issued the study, which is available on the Commission’s website.
In performing the study, we considered actions taken by the Commission and others since the enactment of Section 404(b) to consider the effects of the significant steps that have already been taken to reduce the overall compliance burden. Those steps since the Commission’s initial implementing rule was issued in 2003 have included:
a phased-in approach to compliance;
several extensions to the compliance dates;
relief for companies in an IPO and in the first annual report after a company’s IPO;
interpretive guidance for management regarding its evaluation of internal controls and disclosure requirements, which coincided with the PCAOB’s release of guidance for auditors; and
a prior study on Section 404, which was released in 2009 and forms part of the basis for the current study.
The information compiled for the study provided us with an understanding that:
The costs of complying with Section 404(b) have declined since the Commission first implemented the requirements of Section 404;
Investors generally view the auditor’s report required by Section 404(b) as beneficial;
Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
Evidence does not suggest that Section 404(b) alone is affecting listing decisions of the studied range of issuers.
After considering the information gathered, we concluded the study with the following two recommendations:
The first recommendation was this: that the Commission maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers.
This recommendation reflects the staff’s view that the existing investor protections for accelerated filers to comply with the auditor attestation provisions of Section 404(b) should remain in place. There is strong evidence that the auditor’s role in auditing the effectiveness of ICFR improves the reliability of internal control disclosures and financial reporting overall and is useful to investors. I would note that the Dodd-Frank Act exempted approximately 60% of reporting issuers from Section 404(b), and the staff does not recommend further extending this exemption.
The second recommendation was this: that the Commission and Staff encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation.
For example, the staff has recommended that the PCAOB monitor its inspection results and consider publishing observations, beyond the observations previously published in September 2009, on the performance of audits conducted in accordance with AS 5. The objective in publishing these observations would be to provide auditors with the benefit of lessons that can be learned from internal control deficiencies identified through PCAOB inspections. I expect the PCAOB to consider taking action on this recommendation soon.
Role of the Auditor: Mitigating Financial Reporting Risk
We are also considering what lessons can be learned from the financial crisis about the role of the independent auditor, more broadly.
In exercising their vital function in our financial reporting system, auditors play a key role with respect to one particular type of risk: the risk of material misstatement in financial statements provided to investors, or “financial reporting risk.”
In looking specifically at the role of the auditor, it is critical to distinguish between financial reporting risk and other types of risk, such as business or operational risks, which may affect a company and impact investment decisions. While auditors must understand these risks to the extent that they impact financial reporting risk, the auditor’s procedures and communications are not designed to specifically address risks other than financial reporting risk or to make judgments about the merits of a company’s business strategies or management’s decisions in implementing them.
An audit is not designed, nor can it or should it be designed, to take all risk out of investing. An audit instead is designed to add to the credibility of the financial information provided to investors, so that investors can rely on that information when making his or her own investment decisions.
Focusing, then, on financial reporting risk, we are taking the opportunity to consider how the role of the auditor might be improved.
While PCAOB Chairman Doty will discuss in greater detail later today the PCAOB’s important role in improving auditor performance under existing standards and in improving existing auditing standards, I would like to underscore what I believe to be a good opportunity for renewed focus on the auditor’s reporting model.
I believe the PCAOB’s project relating to the auditor’s reporting model is a particularly important initiative in understanding whether there is information that investors are not getting from auditors today that would be useful in making investment decisions. Of course, there are fundamental questions to be considered. Questions such as: What information is needed? Who should provide it? In what form and manner should it be provided?
I look forward to the PCAOB’s work on that project. We will provide our perspective to the PCAOB on details of the project, including on questions such as whether the auditor should attest to information that is presented in MD&A or elsewhere outside of the financial statements.
While there might be opportunity for improved standards, I hasten to mention that there are existing requirements for disclosures of risks and uncertainties. To the extent that poorly performed audits failed to report substantial doubt about an entity’s ability to continue as a going concern where the auditing standards would have required such a warning, there are existing mechanisms for dealing with such misconduct, including SEC or PCAOB actions.
International Inspections
Before I conclude, let me turn to an international auditing matter.
U.S.-listed Foreign Companies
In recent years, we have seen a spike in private companies merging with a public shell companies While it is a number of companies from a particular country that have grabbed recent headlines, the problems coming to the forefront would not necessarily be limited to companies based in one geographic region.
There are a lot of different ways for companies to access the public markets of the United States, one of which is the reverse merger into a public shell. Since January of 2007, there have been over 600 registrations through a reverse merger.
The U.S. listing of certain companies located overseas has raised some unique issues. For example, the staff of the PCAOB recently highlighted concerns surrounding the quality of certain of the financial statement audits that they reviewed. As they noted, U.S. auditors may be issuing audit opinions on the financials, but not engaging in any of their own work. Instead, the U.S. firm may be issuing an opinion based almost entirely on work performed by audit firms outside of the U.S. This is significant for a number of reasons, including that the PCAOB has been to inspect audit firms in a number of countries.
While the majority of these listing via reverse merger may be legitimate businesses, some of them seem to have significant accounting deficiencies, even to the point of being frauds. We have recently seen an uptick in auditor resignations related to these sorts of issuers. The disclosed reasons for the resignations have included troubling information about the auditors being unable to confirm cash or other receivables, including in some instances allegations of falsified documents. We are looking at these situations closely, and I would encourage each of you to be vigilant as well.
Staff in my office, as well as across the Commission, have been working collaboratively and with the staff of the PCAOB and others to investigate concerns about financial reporting deficiencies or fraud in U.S.-listed foreign companies, with particular emphasis on companies engaging in reverse mergers to achieve registration.
Concluding Remarks
With that, let me end with where we started. We all have an important stake in these accounting and auditing topics to ensure that investors continue to have trust in the bedrock of our financial reporting system upon which so much of our capital market system rests.
Thank you.
James L. Kroeker, Chief Accountant, in Pasadena, California, on June 5, 2011.
U.S. Securities and Exchange Commission
Pasadena, California
June 5, 2011
As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.
Introduction
Good morning and thank you for that wonderful introduction. Once again, it is a pleasure to join you at the 30th SEC and Financial Reporting Institute Conference. As has been the case at each of these prior events, today, you will hear from a number of accounting experts — among them staff from the Commission’s Office of the Chief Accountant and Division of Corporation Finance. You will hear about a number of accounting and financial reporting matters, including those of particular focus for the staff. You will also learn about projects on our 2011 agenda.
Before I begin, I want to make clear that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners, or my colleagues on the Commission staff.
Last year at this Conference you heard about the comprehensive staff work plan on IFRS that we had developed and begun to execute. Since then, we have issued a progress report and, more recently, a Staff paper exploring a potential method of incorporation of IFRS, and I expect to continue to issue updates as our work progresses. The Commission is dedicating significant resources to the work of preparing the Commissioners to make a fully informed decision about IFRS – a decision that must reflect the best interest of U.S. investors and our capital markets.
Paul Beswick is here today and will be addressing the status of our work plan in further detail. While I would be happy to address any questions related to the work plan, today I would like to focus on several other accounting and auditing developments that are on our 2011 agenda.
Accounting
Let me start with several accounting developments.
Financial Reporting Series Forum
As part of our oversight of financial reporting, we are instituting a series of roundtable sessions – aptly named the Financial Reporting Series – to facilitate a balanced discussion of existing pressures or emerging issues in financial reporting.
The Financial Reporting Series will assist us in our early identification of risks related to, as well as areas for potential improvements in, the reliability and usefulness of financial reporting to investors. The approach will be one of inviting a cross section of capital markets participants, including investors, preparers, auditors, and others, to discuss their individual views.
The purpose of the roundtable is to gather a broad spectrum of views and foster an informed dialogue on some of the most difficult financial reporting topics. It is not meant to be some blue ribbon committee that produces a set of recommendations. Rather, I expect that the Series will provide the Commission staff, as well as the FASB and the PCAOB, with useful information about emerging issues and changes in the business environment that affect each of our respective roles in the financial reporting system.
In addition to the observer roles that the chairs of the FASB and PCAOB will have, we intend to invite other observers, for example staff from the federal banking regulators or Commission staff from other offices or divisions, depending on the subject matter of any given roundtable.
I anticipate that we will have three sessions per calendar year, depending on the nature and number of issues that arise. We will be looking for participants who are knowledgeable about the issue or issues to be discussed.
Consistent with other Commission roundtables, the sessions will be public and webcast and archived. I encourage you to watch for public announcements of the sessions in advance through a press release or on a devoted Financial Reporting Series webpage on the Commission’s website.
I expect our first roundtable session to be held later this year and to focus on a topic such as the role of uncertainty in financial reporting and whether right level of information about uncertainty is being provided.
Oversight of Standard Setting – Convergence Agenda
Another item on my agenda is convergence of accounting standards. As you will hear more about today, the FASB and IASB are jointly committed to enhancing and converging financial reporting standards and have been doing so with sustained focus over the past several years. They are nearing completion on a number of priority projects by the end of 2011 and are considering how best to require transition from the existing accounting standards to the standards that they are proposing.
I am pleased that the Boards are working on these important financial reporting issues, and that they are making progress toward resolution. Issuing high-quality standards is of the utmost importance. High-quality standards provide investors with relevant, reliable financial information to guide investment decisions. High-quality standards also can be understood and implemented by preparers and audited by auditors.
I am also pleased that the Boards are committed to following rigorous due process procedures, including pre-implementation testing and outreach, so that they are able to achieve the desired high-quality output. While performing research and conducting field studies are important elements of the process, it does take time. So, I support the Boards’ continued reprioritizing of their agendas and timelines to achieve high-quality, converged standards.
Further, I believe it is critical that, as it relates to the MOU projects, that the Boards take all reasonable steps to maximize the prospect of converged, high-quality solutions. For example, currently the Boards are not aligned as it relates to their approaches to consideration of hedge accounting in the context of their financial instruments project. Numerous conceptual, operational and practical questions have been raised based upon proposals to date that should be considered jointly by both Boards. I believe that , in the long run, a measure of added time to provide for joint deliberations on a project as critical and as complex as hedge accounting will prove to be far more beneficial than any gains that are perceived in finalizing deliberations individually.
In achieving high-quality, converged solutions, the Boards will inevitably be faced with difficult choices about how best to proceed. I continue to encourage the Boards to reconcile differences in the proposed standards and to work to reach converged and improved solutions to these difficult financial reporting issues. In monitoring the accounting standard-setting process, my focus tends to be on ensuring there is the appropriate balance between conceptual grounding and pragmatism in the standards being developed.
Oversight of Standard Setting – Standard Setting for Private Companies
I have also spent time understanding the report and recommendations put forward by a Blue-Ribbon Panel on Standard Setting for Private Companies. My focus in understanding those recommendations is to consider the nature and impact of any recommendations for private companies to apply accounting standards that may differ from those that public companies apply.
It is prudent, in my view, to carefully consider the nature of any differences and their effect on the capital formation process if private companies have to adopt a revised, and more stringent set of accounting policies in connection with preparing Commission filings to raise public capital. Further, it is important to understand why one might suggest a different standard for private companies.
I support the approach taken by the FAF Trustees in carefully considering the advice from this panel as they strategically assess the financial reporting system for private companies. Further, I believe that in a number of areas additional research, study, and outreach, particularly to investors, would be warranted prior to implementing any significant change in the standard-setting structure applicable to nonpublic entities.
Auditing
We also have a number of auditing items on our 2011 agenda, several of which arise from reflecting on lessons that can be learned as our nation emerges from the financial crisis.
Staff Study on Section 404(b) Internal Controls Reporting
As part of the Dodd-Frank Act legislation, the Commission was directed to study how the Commission could reduce the burden of complying with the auditor attestation requirement with respect to internal control over financial reporting in Section 404(b) of the Sarbanes-Oxley Act for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such issuers and encouraging companies to raise public capital through U.S.-listed offerings.
Let me provide you with an update on our work in this area. We have issued the study, which is available on the Commission’s website.
In performing the study, we considered actions taken by the Commission and others since the enactment of Section 404(b) to consider the effects of the significant steps that have already been taken to reduce the overall compliance burden. Those steps since the Commission’s initial implementing rule was issued in 2003 have included:
a phased-in approach to compliance;
several extensions to the compliance dates;
relief for companies in an IPO and in the first annual report after a company’s IPO;
interpretive guidance for management regarding its evaluation of internal controls and disclosure requirements, which coincided with the PCAOB’s release of guidance for auditors; and
a prior study on Section 404, which was released in 2009 and forms part of the basis for the current study.
The information compiled for the study provided us with an understanding that:
The costs of complying with Section 404(b) have declined since the Commission first implemented the requirements of Section 404;
Investors generally view the auditor’s report required by Section 404(b) as beneficial;
Financial reporting is more reliable when the auditor is involved with ICFR assessments; and
Evidence does not suggest that Section 404(b) alone is affecting listing decisions of the studied range of issuers.
After considering the information gathered, we concluded the study with the following two recommendations:
The first recommendation was this: that the Commission maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers.
This recommendation reflects the staff’s view that the existing investor protections for accelerated filers to comply with the auditor attestation provisions of Section 404(b) should remain in place. There is strong evidence that the auditor’s role in auditing the effectiveness of ICFR improves the reliability of internal control disclosures and financial reporting overall and is useful to investors. I would note that the Dodd-Frank Act exempted approximately 60% of reporting issuers from Section 404(b), and the staff does not recommend further extending this exemption.
The second recommendation was this: that the Commission and Staff encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation.
For example, the staff has recommended that the PCAOB monitor its inspection results and consider publishing observations, beyond the observations previously published in September 2009, on the performance of audits conducted in accordance with AS 5. The objective in publishing these observations would be to provide auditors with the benefit of lessons that can be learned from internal control deficiencies identified through PCAOB inspections. I expect the PCAOB to consider taking action on this recommendation soon.
Role of the Auditor: Mitigating Financial Reporting Risk
We are also considering what lessons can be learned from the financial crisis about the role of the independent auditor, more broadly.
In exercising their vital function in our financial reporting system, auditors play a key role with respect to one particular type of risk: the risk of material misstatement in financial statements provided to investors, or “financial reporting risk.”
In looking specifically at the role of the auditor, it is critical to distinguish between financial reporting risk and other types of risk, such as business or operational risks, which may affect a company and impact investment decisions. While auditors must understand these risks to the extent that they impact financial reporting risk, the auditor’s procedures and communications are not designed to specifically address risks other than financial reporting risk or to make judgments about the merits of a company’s business strategies or management’s decisions in implementing them.
An audit is not designed, nor can it or should it be designed, to take all risk out of investing. An audit instead is designed to add to the credibility of the financial information provided to investors, so that investors can rely on that information when making his or her own investment decisions.
Focusing, then, on financial reporting risk, we are taking the opportunity to consider how the role of the auditor might be improved.
While PCAOB Chairman Doty will discuss in greater detail later today the PCAOB’s important role in improving auditor performance under existing standards and in improving existing auditing standards, I would like to underscore what I believe to be a good opportunity for renewed focus on the auditor’s reporting model.
I believe the PCAOB’s project relating to the auditor’s reporting model is a particularly important initiative in understanding whether there is information that investors are not getting from auditors today that would be useful in making investment decisions. Of course, there are fundamental questions to be considered. Questions such as: What information is needed? Who should provide it? In what form and manner should it be provided?
I look forward to the PCAOB’s work on that project. We will provide our perspective to the PCAOB on details of the project, including on questions such as whether the auditor should attest to information that is presented in MD&A or elsewhere outside of the financial statements.
While there might be opportunity for improved standards, I hasten to mention that there are existing requirements for disclosures of risks and uncertainties. To the extent that poorly performed audits failed to report substantial doubt about an entity’s ability to continue as a going concern where the auditing standards would have required such a warning, there are existing mechanisms for dealing with such misconduct, including SEC or PCAOB actions.
International Inspections
Before I conclude, let me turn to an international auditing matter.
U.S.-listed Foreign Companies
In recent years, we have seen a spike in private companies merging with a public shell companies While it is a number of companies from a particular country that have grabbed recent headlines, the problems coming to the forefront would not necessarily be limited to companies based in one geographic region.
There are a lot of different ways for companies to access the public markets of the United States, one of which is the reverse merger into a public shell. Since January of 2007, there have been over 600 registrations through a reverse merger.
The U.S. listing of certain companies located overseas has raised some unique issues. For example, the staff of the PCAOB recently highlighted concerns surrounding the quality of certain of the financial statement audits that they reviewed. As they noted, U.S. auditors may be issuing audit opinions on the financials, but not engaging in any of their own work. Instead, the U.S. firm may be issuing an opinion based almost entirely on work performed by audit firms outside of the U.S. This is significant for a number of reasons, including that the PCAOB has been to inspect audit firms in a number of countries.
While the majority of these listing via reverse merger may be legitimate businesses, some of them seem to have significant accounting deficiencies, even to the point of being frauds. We have recently seen an uptick in auditor resignations related to these sorts of issuers. The disclosed reasons for the resignations have included troubling information about the auditors being unable to confirm cash or other receivables, including in some instances allegations of falsified documents. We are looking at these situations closely, and I would encourage each of you to be vigilant as well.
Staff in my office, as well as across the Commission, have been working collaboratively and with the staff of the PCAOB and others to investigate concerns about financial reporting deficiencies or fraud in U.S.-listed foreign companies, with particular emphasis on companies engaging in reverse mergers to achieve registration.
Concluding Remarks
With that, let me end with where we started. We all have an important stake in these accounting and auditing topics to ensure that investors continue to have trust in the bedrock of our financial reporting system upon which so much of our capital market system rests.
Thank you.
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