After 5 successive years of delays, fiscal year 2009 will mostly likely be the year of reckoning for non-accelerated filers. Those companies with market caps at or below $75M are the last group of publicly traded companies that will need their controls attested to for the Sarbanes-Oxley Act. Many publications have waxed philosophically about the woes and the benefits of SOX, all of which can daunt the most confident executives of a small cap company.

Due to the projected costs,and the associated burdens of compliance, some companies retain the hope and belief that another delay or even more optimistic, a repeal of the Act will occur. Though we at MFA cannot profess to be an Oracle of the foibles of the legislative process, at the current time with the current market conditions, the likelihood of such a reprieve is not great. That being said, management’s attestation of the design and effectiveness of their internal control environments will be evaluated by the external auditors.

It may appear that our prognosis is self-serving, so in the interest of transparency, here are two points that outline why we think the deadline will stay.

1.  We hypothesize that after the recent collapse of the credit market, it is reasonable to conclude that politicians will not be receptive to lessening business regulations in the near future.

2.  Accounting Standard 5 (AS5), released by the PCAOB in June 2007, has scoped the compliance effort and added substantial clarity on being compliant. Specifically, the Standard provides details on how all public companies can insist their external auditors place more reliance on a top-down risk assessment, which is to identify what truly is a risk to the enterprise in question. In place of a blanket and all encompassing risk-averse assessment as dictated in AS2, greater credibility can be placed on the work a public company and its internal auditors have completed identifying and demonstrating operating controls. In fact, the PCAOB has further extended clarification that external SOX audits are not to be started from scratch, and are not to be “one-sized” for all.

With no place to go but onward into SOX initiatives, small public companies should be aware that they are not compelled to invest in “kitchen sink” compliance. They can implement a “pared down” Section 404 controls framework, the key to which is a focus on solid entity-level controls that are pervasive, supported by auditable evidence and that are sufficiently robust with clear threshold triggers. Companies that have successfully designed and implemented this class of strong oversight controls typically experience fewer issues during day-to-day operations.

Thanks to Rich Pacheco, who contributed to this post.

Well, it looks like we may be on our way.  After years of false starts and conjecture about U.S. adoption of - or complete convergence with - International Financial Reporting Standards (IFRS), the SEC issued a press release on August 27th entitled “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily“.  Despite this press release, a final decision as to whether the adoption of IFRS is in the best interest of the public is not expected until 2011, and U.S. issuers would not begin using IFRS before 2014.

While this development is significant in that it is the first time the SEC has publicly announced a roadmap for the use of IFRS, it doesn’t change my position on what should be done now. I’ve been reading a lot from the press and other news sources about the impending effect of IFRS on U.S. GAAP, and I’m not convinced that IFRS will be a reality any time soon in the U.S.  Call me a cynic, but the SEC gives itself a lot of wiggle room to delay (indefinitely, if it wishes to), and Chairman Cox doesn’t help the cause by using words like “cautious and careful plan”.

And remember folks…the SEC’s announcement will likely have an impact on private companies as well.  The chairman of the FASB, Robert Herz, has gone on record a number of times regarding the push to international standards, and the SEC’s actions will simply add fuel to that fire.  But similarly, the FASB is unlikely to allow the adoption of IFRS prior to the SEC, and thus any delays by the SEC will likely be reflected in actions by the FASB too.

Being the cautious and conservative CPA that I am, I continue to strongly advocate advanced education on the topic of IFRS and I still contend that companies do not want to, nor should they be, taken by surprise if/when IFRS becomes a reality here in the United States.  But I remain less convinced that this change will come about in the United States as “quickly” as outlined in the SEC’s proposed roadmap.

Time will tell, but as far as I’m concerned, the sky is not yet falling.

UPDATE 10/7/08:  OK, I’m generally not one to say “I’m right”, but slippage is already occuring.  Here’s a link to a brief article on CFO.com that discusses what’s happening (or NOT happening) as of late. 

A June forum on International Financial Reporting Standards (”IFRS”) held in New York saw some urgency around getting the United States aligned on timing and action steps for making a transition to IFRS.

For those new to the topic, migrating to IFRS will mean US companies will begin using the same reporting and disclosure guidelines that more than 100 financial markets around the world, such as Australia, the European Union, New Zealand and Israel, currently permit or require. While there are a number of similarities, there are also significant differences between IFRS and US GAAP (Generally Accepted Accounting Principles) — more on the finer points in this related audiocast and Perspectives article (click on the image above).

Assuming that the SEC continues its onward push toward convergence with IFRS, US companies may quickly find themselves unprepared unless they and their auditors begin to educate themselves now. Even the uniform CPA examination in the US is considering an exposure draft [PDF] that would incorporate new testing requirements of IFRS in the future.

For some, IFRS is the source of optimism for global growth, according to a study by the International Federation of Accountants (IFAC). The organization found that a move to IFRS is expected to boost business, as “approximately 50 percent of respondents said convergence to a single set of international standards…for [Small to Mid-Sized Enterprises] is important to economic growth in their countries.”

The American Institute of CPAs (AICPA) has been one of the most vocal proponents of raising awareness of IFRS. The AICPA recently launched www.ifrs.com as an information resource on the transition, and in April conducted a poll of CPAs to gauge expectations. While 55 percent of 1,240 respondents said that they expect the move to IFRS to directly impact their work, 59 percent said they have not begun to prepare for adoption. Most felt that three to five years was a reasonable time frame to ramp up. However, even more time might be necessary when one considers that public filers will need to report IFRS-processed numbers for three years of income statements and two years of balance sheets; arguably, one would have to start converting to IFRS now in order to be ready to report IFRS numbers in three to five years.

The SEC is currently reviewing a proposal to allow U.S. companies to file under IFRS voluntarily, with a mandated deadline to be set in the future. With these wheels in motion, CPAs are already preparing for IFRS and companies looking to compete across borders will be better armed for global business by doing the same.

Not everyone is convinced that IFRS will improve financial reporting in the United States. For one, IFRS came into being in the early 1970s and is arguably less developed than US GAAP, which got its start in the 1930s. Further, adoption is expected by many to be more complex than the adoption of the Sarbanes-Oxley Act of 2002, which saw internal and external costs for corporate America rise exponentially, and will require an overhaul of the SOX 404 internal controls to ensure proper alignment of systems with IFRS accounting standards. Given that the US arguably has one of the most dynamic economies and easy access to capital, one must wonder if adoption of IFRS is truly necessary to remain competitive in a global economy.

Despite the potential for controversy and debate, it is becoming more and more apparent that an understanding of IFRS and what it might mean to US companies is imperative. Efforts should be underway now to develop the expertise because it is likely that the ramp up time will be significant. Also, users of a company’s financial statements (e.g., Board members, audit committees, investors, bankers, etc.) should begin developing an understanding of what IFRS could mean to financial reporting. There are many resources available, such as the AICPA’s “IFRS Primer for Audit Committees“, that will provide support. Of course, you should work with auditors that are well versed in IFRS to help support your own educational development.

If you haven’t heard of XBRL before, don’t worry, many others haven’t either. Unless you enjoy following the actions of the SEC and their worldwide counterparts, XBRL doesn’t exactly come up at your usual dinner party. However, if you’re responsible for financial reporting at a SEC registered company or are planning to register your company’s shares with the SEC, then you should be familiar with XBRL and it’s potential impact on your financial reporting processes.

For the uninitiated, XBRL is an acronym for eXtensible Business Reporting Language. XBRL is not a new technology, but is a standards-based way to communicate business and financial information. There are a number of resources on the web to help educate yourself and your staff on the topic, such as the AICPA’s XBRL site. Whether you’ve heard of XBRL or not, one thing is for sure: whether you’re the director of financial reporting, a corporate controller, or the CFO for your organization, what you need to know about XBRL is that it will require planning and forethought and will certainly involve change to your existing systems and financial close processes.

Currently, the SEC does not require registrants to submit filings in XBRL format, though they did issue a proposed rule [PDF] on May 30, 2008 and are currently soliciting public comments until August 1st. This proposal may soon change things for registrants and investors alike. For registrants, there are a number of ways to tackle the implementation of XBRL reporting; some may opt to outsource the effort to their financial printers, others may convert their data ‘manually’ with easy-to-use software tools for each reporting period, and others may implement software solutions directly into their general ledger or ERM packages. Regardless of how one gets there, it is apparent that it will involve support from your IT and financial experts, and will likely require Section 404 considerations relative to the internal controls within the organization.

It is worthwhile to note that most major financial markets are are moving in this direction, and XBRL is now mandated for financial filings in multiple jurisdictions worldwide. XBRL is moving ahead with or without us, and other US agencies such as the IRS and state taxing authorities are considering the merits of XBRL filings. Despite this, according to a June 2008 Compliance Week survey [subscription required] of 236 financial reporting executives, 55% have either just started researching XBRL or are not aware of the subject at all, and less than 20% of respondents have anybody on staff considered to be an XBRL expert.

The time is now to consider the effect of XBRL on your business and planning process. The short term effects of XBRL will likely be limited; just ask the early voluntary filers. However, it is clear from SEC speeches and proposals that XBRL is coming, and coming fast. Long-term benefits are likely to be realized by those businesses that are willing and able to embrace the technological change that XBRL will bring about, such as easier and faster access to competitive information and knowledge. If you haven’t already, I encourage you to learn more about XBRL and prepare for the forthcoming changes.