New M&A guidelines under FAS141R are taking effect in 2009, and there’s been some talk about how it might impact the deal process. In fact, this Accounting Today article cites a study by Deloitte that concludes “out of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity.”

This doesn’t surprise me, as some of the pending changes will have a destabilizing effect on post-merger balance sheets. However, I also feel strongly that accounting challenges should never hold back a strategically sound deal. The accounting, valuation and auditing experts simply need to adjust to the new guidelines and structure deals accordingly – not forego or delay them.

Here are some of the significant changes headed our way:

1. Timing of deals and reporting

FAS141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road. Expanded disclosure requirements will make the deadlines even more difficult to meet and could force companies to speed through the process, so prioritize the planning process and have the right team in place early to avoid sacrificing quality and accuracy for speed.

2. Contingent consideration

The purchase price of a business combination now includes the fair value of contingent considerations. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting. Given the major uncertainties as to future amounts and timing of payments of the contingent payment, the fair value of this liability may materially fluctuate over time as more information is obtained.

3. In-process R&D

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction. FAS141R, however, requires that it be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

These changes and others will bring us closer to international standards, and they will in the end make for a clearer picture of deals. We’ll take a more in-depth look at FAS141R in an upcoming MFA Perspectives article, and we encourage you to check it out when it’s posted on our Thought Leadership page.

New guidelines on fraud prevention tactics were issued this summer in a joint effort by the Association of Certified Fraud Examiners, the AICPA, and the Institute of Internal Auditors. You can check out a summary press release here; the general theme they convey is that companies need to do more to prevent fraud along a number of fronts:

Five key principles within the guidance address governance, risk assessment, fraud prevention and detection, investigation, and corrective action. Following the guidance will help ensure that there is suitable oversight of fraud risk management, that fraud exposures are identified and evaluated, that appropriate processes and procedures are in place to manage those exposures, and that fraud allegations are addressed in a timely manner.

The risk of fraud is substantial and the median loss amounts have been increasing steadily over the years. For that reason I certainly share the desire to alert company leaders to the risk, especially in the current economic climate. The pressures of fraud are increasing on individuals as consumerism meets a downturning economic environment. The credit crunch, falling housing prices and the pressures of a consumption lifestyle will turn the unlikeliest individuals to acts of misappropriation (more on that in this MFA audiocast).

Though trust and delegation of authority are integral parts of enabling an organization’s members to achieve truly remarkable levels of performance, the lack of oversight can also open up gaps that enable fraud. They can be closed, however, through sound management principles that create oversight mechanisms that will monitor activity, promote transparency, and ensure that the collective assets of the organization are protected from malfeasance.

Despite suffering loss, organizations still have the onus of proving it and recovering lost property, often without the active involvement of law enforcement. Public agencies have limited resources and are often diverted by other causes — and no preventive regulations will ever match the safeguards provided by sound management and a well laid out process.

Local PD’s don’t have the resources to conduct forensic audits, and state and federal agencies only commit to glamour cases. These glamour cases are often restricted to publicly traded companies, identity theft, defrauding investors and other public related matters…there are many gems in this area, but a regional standout was the TJX case that surfaced last year. Internal breaches of fiduciary responsibility, especially when they involve businesses, are often low on the law enforcement totem pole.

The most important starting point in fraud prevention is realizing that the responsibility rests squarely on management’s shoulders to minimize opportunities for a potential fraudster. These newly issued guidelines cite practical approaches to prompt responsible managers to institute appropriate control mechanisms into their organizations. Applying such principles of effective oversight can promote efficiency, create transparency and effectively mitigate an organization’s risks of fraud.

My inaugural blog for MFA has me thinking about transparency in business. After all, what is a corporate blog if not the embodiment of a transparent means of communication with one’s clients, colleagues, and interested stakeholders. Transparency has been, in part, facilitated by technology, and hence the birth of tools such as this blog. My goal each week is to use this tool, like so many of the technological tools before it, to deepen our relationship with MFA’s core constituencies and encourage open dialogues on a varying degree of subjects over time.

Like business in general, change is ever-present in public accounting. We must remain expert on technical financial reporting pronouncements that are continually evolving; we must continually demonstrate our expertise of complex federal, state and international tax laws; and we must have a solid understanding of the economic environment in which we all live and operate our businesses. One need look no further than to recent FASB actions to understand how the theme of transparency continues to pervade business. More and more, FASB projects are actively addressing the questions of fair value accounting, convergence of US accounting standards with international accounting standards, and simplification of the existing bodies of accounting knowledge – all great examples of how transparency in business and reporting continues to pervade every facet of what we do.

Having grown up in the 80s, my first introduction to the use of technology to speed up business was in the form of fax machines and so-called portable computers that probably weighed fifteen pounds without a modem or network access. Many enterprises did not have local area networks, the internet was barely known to most and the World Wide Web had yet to come into existence – I lived online in the limited world of AOL and couldn’t email someone unless they, too, were an AOL member.

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From 409A to audits, independent valuations are a popular topic of discussion these days…and for good reason. They can make all the difference in defending your position – and that of portfolio companies – with the IRS and financial statement auditors.

Q. Why do I need an independent valuation for stock options, as opposed to a valuation performed internally?

A. A decade ago we may have said, “You don’t.” But these days, the big picture tells us that you should only use an internal valuation if your in-house capabilities have the right expertise. Valuations come into play on too many levels to take a chance, especially when dealing with 409A (taxation of deferred compensation), GAAP and audit concerns.

Just as important, an internal appraiser needs to understand how the valuation will be defended if regulators take a closer look and require you to “show your work.” Also, your auditors will be assessing the valuation as part of their audit of compensation.

Q. You mentioned 409A in relation to granting stock options as compensation, which is common practice for us. What will an independent valuation accomplish?

A. On the tax side, under 409A, regulators may at some point be checking into whether the stock option was granted at Fair Value. An independent valuator gives you a safe harbor for these stock options when the IRS comes calling.

There are certain safe harbor provisions for internally prepared valuations, as well. However, your in-house appraiser needs to have qualifications similar to an external valuation expert in order to meet the standards.

If you don’t meet safe harbor and are deemed to have granted stock options at less than Fair Value, you’re looking at significant penalties: the recipient of the options will be hit with a 20 percent penalty on top of regular taxes and interest.

Q. Is 409A the main driver for independent valuations, then?

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