Robert Herz Speech to the National Press Club June 26th

Robert Herz, Chairman of the FASB, gave a speech to the National Press Club on June 26, 2009. There he commented on his perspective of the financial crisis root causes as well as possible solutions going forward.

In the speech he said, “History does not repeat itself—people repeat history”.

Highlights from his speech include:

1. Need to improve and strengthen certain accounting and reporting standards.
2. Transparency is not just a buzz word or a cliché. It is a fundamental and absolutely essential attribute of sound financial markets.
3. Need to strike the right balance—between regulation that’s respected and that effectively recognizes and manages risks—and regulation that fosters sound economic growth and competitiveness and that lets institutions fail.
4. Must clearly acknowledge the need to have proper infrastructures supporting financial markets to facilitate the timely flow of relevant and reliable information that enable informed decisions, ready price discovery and effective clearing mechanisms.
5. Must stop exploitation of regulatory gaps at many levels and the failure of regulators, rating agencies, leaders of financial institutions, investors, and others to appreciate the risks.
6. The proper operation of capitalism depends on the appropriate regulation of institutions, of financial products, and of market participants and on the existence of infrastructures that support transparency and the smooth functioning of markets.
7. Proper accounting and valuation require that companies and market participants identify, understand, and reasonably calibrate risks and returns emanating from financial assets and obligations, and be able to readily ascertain transaction prices in exchange markets.

8. Supports a greater decoupling between the determination of bank regulatory capital and FASB standards.
9. Regulations must not stifle innovation and appropriate risk taking.

Making Strawman Proposals Effective

When I first heard the term “strawman” proposal, I could not help but think of the scarecrow accompanying Dorothy in the Wizard of Oz. Rather than a character from a beloved movie, a Strawman proposal is a very useful business tool in an environment which fosters creative thought.

A Strawman proposal is a preliminary presentation of ideas at the early stages of conceptualization with the intent to “blow away” or tear down certain pieces and replace with better, more efficient, more productive and/or less costly ideas. Basically it serves as a starting point for brainstorming.

It is critical when presenting such a proposal to ensure that the audience understands up front that it is a “strawman” and that the intent is to generate ideas and critique. As such, the audience should understand that information presented is incomplete and not intended to stand on its own merit without alteration. It should also be made clear that the main reason it is an incomplete solution was to disseminate ideas as quickly as possible and without spending significant additional time on ideas that will not ultimately be utilized.

The attempt to prepare an initial presentation that is complete and strong, and therefore not considered a strawman, may result in a presentation which is not timely or result in analysis paralysis for the individual or team that prepares the proposal.

Strawman proposals are very useful and a company would be wise to strengthen its culture to embrace such types of presentations. The environment in which such a proposal is made must be one that does not criticize the presenter for ideas that are not fully developed. The audience receiving the presentation should also feel comfortable sharing their ideas as well.

Please share your ideas on ways to make strawman proposals more effective.

FAS 165 – Clarification on Subsequent Events Disclosures

FASB issues statement 165.

GAAP requires disclosure of events or transactions that occurred after the balance sheet date, but before financial statements are issued. These events or transactions provide evidence about conditions that existed at the date of the balance sheet.

This guidance is generally straightforward for public companies that have a universally understood issuance date. For companies, generally non public, which may not widely distribute their financial statements, FAS 165 introduces the concept of “Financial Statements are Available to be Issued”. FASB defines this by stating that, “Financial statements are considered available to be issued when they are complete in form and format that complies with GAAP and that all approvals necessary for issuance have been obtained, for example, from management, the board of directors, and/or significant shareholders.”

As a result of this clarification, companies that do not widely distribute their statements will not need to continue to evaluate subsequent events for an extended period of time following their completion. The date through which subsequent events have been evaluated must be disclosed.

This statement effective for interim and annual financial statements ending after June 15, 2009.

Obama Unveils Sweeping Changes To Financial Regulation

Obama is unveiling on June 17th some very broad and significant changes to the financial regulatory environment including:

1. Creation of a Consumer Financial Protection Agency.
2. New oversight over largely unregulated derivatives markets .
3. Requirements on how banks turn their investments, such as mortgages, into complex securities (possibly retention of 5% will be required).
4. Create of a Financial Services Oversight Council, headed by the Treasury secretary.
5. Eliminating the Office of Thrift Supervision (OTS), the regulator for savings and loan institutions.

Resource for the Economic Crisis - AICPA Launches Site

AICPA introduces a very useful and information packed website entitled “Economic Crisis and Resource Center”. This resource allows researching by:

Topics Include:
a. Accounting and Auditing
b. Finance, Risk Management, and Specialties
c. Human Resources and Career Information
d. Tax

The Website also allows searching business category such as Business & Industry, Government, and Public Practice. For those who enjoy the interactive nature of a blog, there is a link located on the site for just such activity.

Examples of recent articles include:

1.The American Reinvestment and Recovery Act of 2009: A Primer for Audit Committees

2.Infocast: Scouring Your Balance Sheet …Where Cash is King

3.CPA Job Finder – The Official CPA Job Board of the AICPA

Here is the link which will take you directly to this site:

http://economy.aicpa.org/

FASB Board Discussing "Going Concern"

FASB is continuing its discussion around the concept of "Going Concern" and will likely continue to discuss at future meetings the following:

1. Enhancing the disclosures of short-term and long-term risks, specifically risks for which there is more-than-remote likelihood of occurrence.
   
2. Defining substantial doubt in terms of an entity’s ability to continue as a going concern.
   
3. Defining when it is appropriate for an entity to apply the liquidation basis of accounting.

FASB indicated that general time horizon to be 12 months, but indicated that reasonably foreseeable events beyond 12 months should also be disclosed.

Reverse Mortgages - OCC Controller Dugan Wants Protections

Comptroller of the Currency John C. Dugan, while acknowledging the benefit of reverse mortgages for some consumers, would like to see regulators step up their efforts towards ensuring that these type of loans, which have some of the same characteristics of subprime lending, are done in such a way that is prudent for both borrower and lender.

He expressed several concerns:

1. Aggressive cross selling of other products, sometimes as a condition of getting a loan.
2. Targeting the elderly, a group perceived to be more vulnerable.
3. Complexity of this loan type.
4. Substantial fees.
5. Inappropriateness of this loan type for some consumers.
6. Lack of escrows for insurance and taxes raises the risk of foreclosure.

“We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities,” he said.

True Cost of Layoffs and Lost Productivity

In some cases, layoffs are a necessary evil of business. The overall real cost savings of such an action, however, are difficult to determine. Simplistically, the savings could be determined by netting the salaries and benefits, less severance and retention, of impacted employees. The problem with this simple approach is that it does not consider the impact to productivity of remaining employees. A recent article in the Dallas Morning News by Cheryl Hall cited a study by Leadership IQ which indicated that, “Leadership IQ recently surveyed more than 4,100 layoff survivors at 318 companies and found that nearly 75 percent felt their productivity had declined significantly. Nearly as many said that their cohorts' work had slacked off, too”. Respondents in the survey attributed these feelings to guilt, anxiety and anger. Ms. Hall refers to this as "post-traumatic layoff syndrome." Couple layoffs with a salary freeze or reduction, and the impact can be devastating. A company, therefore, should give significant thought to the total impact of a right sizing action. If a layoff is inevitable, a company should be very vocal about providing both tangible and intangible resources and support for the remaining staff.

Say Goodbye to QSPE's

Qualified Special Purpose Entities (QSPE’s) days appear to be numbered. When new FASB guidance is issued in June 2009, effective sometime in the beginning of 2010, it will eliminate the exemption from consolidation for QSPE’s. This was announced in a FASB briefing document issued May 18th.

This change in direction will, in essence, eliminate QSPE’s, which have been a tool primarily used by banks to keep assets off their balance sheets through a process called securitization. The process of moving assets off the balance sheet involved the repackaging of loans into securities which were sold off to investors.

Consolidation will now center on “effective control” along with increased usage of “fair value” accounting. Once this change goes into effect, look for banks to potentially move substantial amounts of assets back on their books.

So your Bank Lender Just Failed - Now What?

On May 5th, the Federal Deposit Insurance Corporation (FDIC) issued short, but helpful, guidance directed towards borrowers of failed financial institutions. Businesses with a borrowing relationship with a failed institution should be aware of procedures adapted by the FDIC to ensure a smooth transition. Some points covered by their guidance:

Communications with Borrowers during Interim Servicing - The FDIC will be responsible for interim servicing of a loan until transferred to another institution. The FDIC strongly encourages refinancing of loans with other institutions. In some instances the FDIC will offer an incentive to refinance in the form of reimbursement of closing costs.

Modifications and Reductions in Principal - If borrower experiences financial difficulties, the FDIC encourages contacting them for possible modification of terms or reduction of principal.

Lines of Credit - If a borrower has a line of credit or a construction/development loan, the FDIC prefers not to continue to loan additional funds, but will do so to protect or enhance collateral value.

Additional Funds Requested - If a borrower seeks additional funds, the FDIC will first utilize information in the failed bank's loan file. In many situations, documentation is incomplete and therefore, it is not unusual for a business to be asked to provide additional documentation.