• FEI Lists The Top Challenges for 2009 – An Interview With James Abel

    By • Dec 17th, 2008 • Category: Audit Quality, Fair Value, Subprime, Where I've Been

    Financial Executives International has just released the results of their survey, “2009 Top Challenges for Financial Executives,” and it’s quite interesting to see what a difference a year makes.

    To provide a comparison of how the financial landscape has changed in the past year, included below is FEI’s list of Top Challenges for 2008 and 2009 (lists are in no particular order):

    FEI Top Challenges
    2009 Global Economic Crisis, Business Combinations,  Complexity in Financial Reporting, Financial Statement Presentation, Business Taxation, Fair Value Measurements, Global Convergence of U.S. GAAP and IFRS, Employee Benefits Issues, Controls and Risk Management, XBRL, Climate Change Legislation and Regulation
    2008   Audit Profession, Business Combinations, Complexity in Financial Reporting, Corporate Taxation, FV/Subprime Market Crisis/Derivatives, Global Convergence of U.S. GAAP and IFRS, Healthcare Internal Controls, XBRL
    IRS Policy of Restraint/Privilege, Rating Agency Regulation
    Last Friday morning I spoke to FEI President and CEO James Abel about the list and the additions and changes to it from 2008 to 2009.
    I was most curious, given my emphasis on the business of the Big 4, in the disappearance of “Audit Profession” from the list of concerns.  Last year’s emphasis on the audit profession was probably driven by the development of the U.S. Treasury’s Advisory Committee on the Audit Profession (ACAP) and the CIFR Committee out of the SEC.  As these recommendations were finalized this year, Jim’s feeling was that “Audit Profession” as a topic had been crowded out given most CFOs’ preoccupation with the impact of the credit/financial crisis on their companies.  “However,” Jim stated, “unless you want a purely commodity type audit product, auditors must have a role and share in responsibility and potential liability for their judgments.”
    Rather than replace the focus on the auditors’ role and responsibilities, the financial crisis should increase scrutiny of the role of auditors, in my opinion.  The SEC may take action based on the final report from the Advisory Committee To Improve Financial Reporting and the PCAOB is considering recommendations developed by the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP).
    I have less confidence than some that any significant changes will take place, as I have discussed here and here. Auditors, so far, have been left pretty much out of the picture when either the causes or suggestions for solutions to the current financial crisis have been discussed.
    On the list again in 2009 are two topics that Jim feels are inextricably tied to each other – IFRS and corporate taxation.  Reducing the overwhelming deficit, funding any of the promises of the new US administration and providing personal tax cuts for the middle class at some point will require the new administration to address corporate taxation.  Corporate CFOs are not looking forward to that.
    “Political rhetoric aside, most of the rest of the items on the list can’t move forward without addressing their tax implications. This may mean effectively lowering corporate taxes. Phase-in of IFRS, which most agree is a train that has already left the station, has tax implications and may drive legislation that zeroes in on these situations. There is talk of eliminating LIFO, for example. We assume that officials would know which industries would be affected and to what extent and make the policy choices accordingly.”
    The ratings agencies were a concern in 2008 and have also dropped off the 2009 agenda. Recent scrutiny by Congress and actions by the SEC seems to have done what many thought it was about time to do. 

    But I asked Jim, “Why so much focus on the rating agencies and not the on the auditors?”

    He responded, “The ratings agencies ended up front and center regarding subprime because they were overdue for the scrutiny. It’s the muddled direction on fair value and the overall economic decline that’s keeping the auditors out of the picture so far. The SEC is looking at fair value but they’re afraid of doing something precipitous. We are going to be in turmoil, and it will be hard to blame auditors for anything, as long as we don’t get a definitive answer.”

    Implementation of mandates for XBRL is still strongly in focus. Most companies have accepted the requirement as a given, even though issues such as liability have yet to be resolved. There are also concerns from preparers that the SEC, according to Jim, is still turning a “deaf ear” regarding the functionality of viable software solutions and the need to support and encourage this part of the process.

    The mention of “controls and risk management” in 2009 expands on the theme of “internal controls” from 2008. I saw that when I attended the Compliance Week Conference last June. Although not so much a conference full of CFOs as much as CROs, CCOs, and General Counsels, the focus on Enterprise Risk Management was palpable. Which begs the question: Where is legal and regulatory compliance on this list? FCPA and other compliance issues are white hot. Sarbanes-Oxley is not going to get repealed any time soon as much as the emphasis by external auditors and regulators, in my opinion, is going to shift dramatically from traditional financial reporting controls to fraud and IT risk.

    Finally, 2009 introduces the topic of “climate change regulation and legislation” onto the CFO agenda. I asked Jim, “Where did this come from?  Seems like suddenly everyone and their brother is talking about it.  Can’t be because of Al Gore winning Nobel Peace Prize. What suddenly happened to put this front and center and what are CFOs worried about?”
    Jim responds: “I think the seemingly sudden interest and concern emanates from the oil/gas shock. When gas hit $4 almost $5 per gallon this past summer, suddenly the fear of dependence on foreign oil and sustainability issues hit hard. Companies saw they can’t afford to ignore the uncertainty and volatility. Looking at alternatives and contingency plans may even reduce their risk profile and the higher gas prices gave them the economic incentive to explore the issue.

    The political campaigns brought it front and center. I think interest in the issue will continue regardless of gas prices because of a strong generational push. The younger generation is very acutely aware of the threat to economic growth. Seeing the high prices made people feel more vulnerable than they have since the long lines at the gas pump in the 1970’s. I think the full impact is still to be felt.”

    The list, and additional FEI commentary, will be published in the January 2009 edition of Financial Executive magazine.

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    4 Responses »

    1. The recommendations in the Advisory Committee Report on the Audit Profession (“ACRAP”) are pretty trivial, because the Committee members kept trying to avoid mentioning the “elephants in the room” (oligopoly, litigation risk, etc.) Hard times may produce political pressure for major changes in how financial markets are regulated. And since @ 60% of all Congressional campaign contributions by the Big-4 Political Action Committees went to Republicans last year, http://www.opensecrets.org
      the incoming Congress may not be too sympathetic. As folks in Chicago know, “Politics ain’t beanbag.”

    2. Hey Francine,

      Blood is in the water and sharks are going on the hunt…

      http://uk.reuters.com/article/burningIssues/idUKTRE4BH16Q20081218

    3. I’m not entirely satisfied that the issues with rating agencies were entirely solved in 2008 and it would be nice if they (and the auditors as you mention) made the 2009 list.

      I’m also skeptical about Climate Change regulation as the market has a very short memory and lower energy prices with the market downturn and economic stimulus front and center will probably push this further into the future (unfortunately).

    4. […] there’s no plan in place as a result of so many studies and committees over at the SEC (CIFR in early 2008) or Treasury (ACAP in March 2008). Each time one of those groups get together, […]