Intermediate Accounting: Financial Reporting and Analysis Blog

Nice article for discussion of stock options

2006-04-06T09:43:00.000-04:00

A recent USA TODAY article provides a nice way to lead into the discussion of expensing of stock options. We cover the issue of stock option compensation in chapter 18 of our text. One item of interest is:

Massive charges. The change is still causing some major earnings turbulence. Merrill Lynch this week said it would expense $1.2 billion for stock options in the first quarter, vs. the $350 million previously expected. Richard Wagner, president of Strategic Compensation Research Associates, says the magnitude of that is staggering. He says accounting watchdogs eliminated a technicality Merrill had been using to delay having to expense options. Rather than taking a hit to earnings over several years, Merrill took it all in the first quarter.

Caribou Coffee's Asset Retirement Obligation

2006-04-05T16:49:00.000-04:00

When Caribou Coffee announced its recent earnings one thing that stood out was its reference to FIN 47:

Effective October 3, 2005, the Company adopted FASB Financial Interpretation No. 47 ("FIN 47") Accounting for Conditional Asset Retirement Obligations. FIN 47 requires the Company to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the fixed assets and leasehold improvements at some of our coffeehouse locations. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. The Company recognized an expense for the cumulative effect of this accounting change in the fourth quarter of 2005 of $0.4 million or ($0.02) per share.

The story also presents Caribou's balance sheet, which includes the following:

Notes payable and capital lease obligations,
less current maturities - 19,923,930
Asset retirement obligation liability 760,997 -
Deferred rent liability 10,485,177 8,420,509
Deferred revenue 2,964,000 3,055,000
Minority interests in affiliates 138,159 217,206
Total long term liabilities 14,348,333 31,616,645

Software revenue

2006-04-04T15:42:00.000-04:00

Motive, Inc. disclosed in an 8-K, that it would have to restate its past financial results because of difficulty applying the software revenue recognition rules.

The discussion of the software issue demonstrates how difficult it is to apply software revenue recognition rules.

Specifically, the 8-K reported:

In its 8-K, Motive said it recently concluded that insufficient evidence existed to support the Company's prior determination that vendor specific objective evidence (VSOE) of fair value for maintenance existed for the majority of its software arrangements. Generally speaking, the presence of VSOE of fair value permits the revenue of a bundled software arrangement to be allocated among that arrangement's various elements, such as license, maintenance, consulting, and hosting services.

The absence of VSOE of fair value is expected only to impact the timing of revenue recognized and does not call into question the validity of the underlying transactions or revenue. Generally speaking, the absence of VSOE of fair value is expected to result in the recognition of revenue over longer periods of time.

Money for Nothing

2006-04-03T14:07:00.000-04:00

Home Depot reported revenue from unused gift cards. This would seem to be an interesting topic to bring before intermediate accounting students given Home Depot's rationale:

Home Depot calculated the $43 million in "breakage"—unredeemed value of cards sold—by analyzing historical redemption patterns and tallying the remaining balance of outstanding gift cards that are unlikely to be redeemed. But the cards have no expiration date or service fees, and cardholders can redeem their gift cards at any time.

Home Depot will regularly track income from unredeemed gift cards
"Our breakage reporting will never affect a customer that has an unused gift card," Smith said. "If there is a remaining balance on the card, the customer will always be able to use that card and be assured that the money is there and available for them to use in our stores."

This is interesting: Should HD recognize revenue when the cards have no expiration date?

The article goes on to detail:
About 12% of gift card value is never spent, according to research firm TowerGroup, Needham, MA. That will be about $5.7 billion in the U.S. this year, up from more than $4 billion in 2002, per TowerGroup.
Sales of retailers' gift cards will reach $47.5 billion this year; $50.8 billion in 2006; and top $57 billion in 2008, TowerGroup projects.

$5.7 BILLION in unused gift cards!!

The new Pension Exposure Draft is released

2006-03-31T10:51:00.000-05:00

The FASB released the Pension exposure draft today.

Some important items:

The Exposure draft would require:
a. Recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation would be the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation would be the accumulated postretirement benefit obligation.

The second important point is that the standard would become effective for most companies in 2007:

Issue 4: This proposed Statement would require a public entity that currently
measures plan assets and benefit obligations as of a date other than the date of its statement of financial position to implement the change in measurement date as of the beginning of the fiscal year beginning after December 15, 2006. If that entity enters into a transaction that results in a settlement or experiences an event that causes a curtailment in
the last quarter of the fiscal year ending after December 15, 2006, the gain or
loss would be recognized in earnings in that quarter. Net periodic benefit cost in the year in which the measurement date is changed would be based on measurements as of the beginning of that year.

SOX and derivatives

2006-03-30T14:36:00.000-05:00

There is an interesting article on TCS Daily today that looks at SOX, it is interesting when compared to Jack Ciesielski blog entry for today at the Accounting Observer Blog. The TCS piece is a good example of how business people downplay the benefits of SOX and accentuate the costs. But many times SOX work has uncovered weak internal controls on basic accounting functions. Mattson Technologies 8-K is a good example, not derivatives, not Fin 46, rather it was:

In connection with the preparation and review of the Company's financial statements for the year ended December 31, 2005, management became aware that the Company's previously reported results for the first, second and third quarters of 2005 contained errors related to its recognition of revenue, assessment of inventory valuation, recording of depreciation and amortization expense for certain assets, and estimation of statutory liability for severance payments earned by certain foreign employees.

Why we still need to care about Defined Benefit Plans.

2006-02-24T12:34:00.000-05:00

When teaching pensions I sometimes think that maybe I should just give the pension expense/ Cash entry that is needed by firms that provide defined contribution plans, since it seems that no company would start (or maybe even continue) a defined benefit plan.

However, we have to remember that most companies still maintain separate defined benefit plans for highly compensated employees. These pension plans are non-qualified plans, in that they do not qualify for tax benefits but they are still provided by companies and they are quite lucrative.

A nice article about these types of plans.

Intergraph's Accelerated Share Buyback program

2006-02-09T15:39:00.000-05:00

From Intergraph's July 29, 2004 8-K:

Share Repurchase Update
On July 28, 2004, the Company repurchased 3,797,949 shares from Goldman, Sachs & Co. in a private transaction in connection with an Accelerated Stock Buyback (ASB). No trading activity has occurred in the public market related to this transaction prior to the issuance of this press release. The shares were repurchased for an upfront payment of $100 million or $26.33 per share, subject to a market price adjustment provision based on the volume weighted market trading price over the next nine months. Separately, during the second quarter the Company
repurchased 250,000 shares of its common stock through transactions on the open market for approximately $6.4 million. As a result, giving effect to the ASB, the Company has approximately $28 million remaining (subject to any accelerated buyback adjustments) under its $250 million open market repurchase program. In total, the Company has repurchased more than 20 million shares for approximately $485 million since late 2001.

Accelerated Share Buyback

2006-02-09T14:32:00.000-05:00

Buying back shares outstanding has been a pretty straight-forward accounting topic, but here is a new twist that will add to a lecture. Obviously the benefit of a stock buyback is that it reduces the number of shares outstanding (or keeps the shares outstanding constant given all of the employee stock options that are being issued). However, one problem that has occurred is that buybacks take a good bit of time and thus any boost to your EPS is not directly shown.

Accelerated Share Buyback programs are a new way of buying back a large chuck of stock all at one point in time. Here is how it works:

Company X talks to its investment bank and says that it wants to repurchase 10% of its outstanding shares. The investment bank "borrows" 10% of the outstanding shares immediatly and sells them to Comp. X. (The investment bank has shorted the stock)

This would seem dangerous for the investment bank since lower shares outstanding may lead to higher EPS which would boost the stock and make it more expensive to buy back. However, in most of these agreements the investment bank price protects itself from higher future prices by making company X reimburse it for any additional costs of buying back the stock.

This is the issue: this means that the true cost of the buyback program is not known until much later while the company is showing higher EPS right away.

Leasing, FASB and the IAS

2006-02-08T12:56:00.000-05:00

I start teaching leasing tomorrow and it is always a difficult subject for everyone. In addition, it is hard to get through to students how much of an impact the leasing standard has had on the leasing profession. There is currently before the FASB a motion to adopt the international standard on leasing, which would greatly curtail operating leasing. CFO Magazine had a good article about the how the adoption of the international accounting standard would even affect outsourcing which can be found here:

Under an accounting rule enacted in January 2004 by the International Accounting Standards Board, moreover, much of any cost savings could disappear, since companies would no longer be able to transfer any of their outsourced assets from their balance sheets to that of the service provider. That's because the contract would be considered a form of leasing, and the IASB rule won't allow assets financed by leases to be transferred for purposes of financial reporting. While the international rule won't automatically become part of U.S. GAAP, standards-setters in the United States and are bent on aligning their regimes as closely as possible (see "The Narrowing GAAP," Experts say the change could have a sizable effect on a company's reported results. "Outsourcing customers are likely to find that these new rulings have a significant impact on their balance sheets, depreciation schedules, and potentially even their earnings," Julie Giera, an analyst for Forrester Research, noted in a research report last June.

Amazon's earnings miss

2006-02-03T10:22:00.000-05:00

Amazon released its earnings last night and one of the interesting things is that the company is running out of tax benefits. It seems almost hard to believe that the company that had so many years of losses and had built up so many tax benefits is now profitable and having to pay taxes.

The Seattle-based Internet retailer said net income for the quarter ended March 31 fell to $78 million, or 18 cents a share, from $111 million, or 26 cents a share, from the same period a year ago. Profits for the latest period were affected by $56 million in income tax expense, compared with a $2 million income tax benefit in the same period a year ago.

FASB Update

2006-02-03T10:09:00.000-05:00

The FASB released information from its Jan. 18th board meeting. The meeting focused on Pensions and leveraged leases. There would be a number of changes to Pension disclosures:

The disclosure requirements of FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, would be revised as follows:

The existing requirement to disclose a reconciliation of the over- or underfunded status to amounts recognized in the statement of financial position would be eliminated (paragraph 5(c) of Statement 132(R)).
The existing requirement to disclose information about a recognized additional minimum liability would be replaced with a requirement to disclose the nature and amount of changes in plan assets and benefit obligations recognized in net income and in other comprehensive income of each period (paragraph 5(i) of Statement 132(R)).
Disclosure would be required in the postretirement benefits footnote of the accumulated amount of changes in plan assets and benefit obligations that have been recognized in other comprehensive income and will be recycled into net income in future periods.
The examples in Statement 132(R) would be amended to clarify and illustrate the existing requirement to disclose the current and noncurrent portion of postretirement benefit plan assets and liabilities.
The current requirement to disclose the measurement date (if other than the reporting date) would be eliminated when the measurement date change is effective (paragraphs 5(k) and 8(j) of Statement 132(R)).
Disclosure would be required of the amount of estimated net actuarial gains and losses and prior service costs that will be amortized from accumulated comprehensive income into net income over the next fiscal year.

Google: Taxes

2006-02-01T10:17:00.000-05:00

Last night Google's earnings were announced and one of the interesting questions focused on the company's tax rate, which climbed to 41% for Q4 and increased to 31.6% for all of 2005 (Google had estimated the tax rate at 30%).

Teaching Deferred taxes is difficult as it is, but the Google conference call provides an interesting discussion that might make DT a bit more "real", here it is from the conference call:

George Reyes, Chief Financial Officer

Now I’ll turn to taxes. Our effective tax rate for Q4 increased to 41.8% this quarter and to 31.6% for the year, above expectations of approximately 30% for the year. The amount of tax expense we recognized in any particular quarter is driven by our estimates for the year. And as we’ve said in the past, our estimates for the year are sensitive to the mix of earnings in the US and overseas. These estimates are complex and 2005 was the first year we realized any reduction to our effective tax rate as a result of profits earned overseas under our international structure. At the end of the year, we must true up the tax provision for the year, which could and in the case of Q4, did have a disproportionate impact on the 4th quarter. In calculating our true up for the year, the proportion of expenses allocated to international operations was greater than we expected. Primarily as a result of this a greater percentage of our profits were taxed at a higher domestic tax rate, which resulted in a greater effective tax rate, compared to our expectations. Keeping in mind the complexity of projecting tax rates, we expect our effective tax rate for 2006 to be approximately 30%.

Teaching long term debt

2006-01-30T17:01:00.000-05:00

I sometimes find it difficult to find real world articles that make long term debt more interesting. Usually, there is discussion about the features and then pricing. However, I don't think students get a good feeling for covenants, standing and default issues. There is an article in the WSJ today (not free to link) that is really interesting and discusses a number of interesting real world bond issues:

For months, bond investors have lamented the swing by companies to shareholder-friendly practices such as stock dividends, which often lead to credit-rating downgrades and take money away from such bond-friendly pursuits as debt repayment.

At the same time, the syndicated-loan market -- debt that carries recovery claims senior to bonds -- has exploded. In some cases, that means reduced recovery prospects for bondholders because holders of bank debt have the first claim on collateral.

Bondholders are forced now to become more vigilant, keeping one eye trained on the bank debt on the top of a company's capital structure and the other on stockholders, who are growing increasingly insistent on moves that benefit shareholders.

A number of interesting issues are brought up in the article, and issues that would create a lot of intereting classroom discussion.

Will the FASB kill pension plans?

2006-01-30T14:40:00.000-05:00

There is an article in the Seattle Post Intelligencer today discussing how the FASB's intention to require full recognition of pension assets and liabilities will lead to companies killing their pension plans.

But some experts say new regulations requiring companies to more accurately calculate and show the cost of their retirement promises could speed up the move by employers away from guaranteed pensions and other benefits.

"Changing accounting rules can cause companies to change their behavior," said David Zion, an accounting analyst with Credit Suisse First Boston.

Everyone really should read this entire article. Once again we seem to be going back to the economic consequences argument. I always like to discuss these types of issues with my students to get their opinions on disclosure and measurement issues.

Maybe its not accounting that is doing this but rather short- sighted managers who do not see their employees as partners. I wonder how many of the firms who will end their general pension plans (open to all employees) will maintain their pension plans for high level executives?

For another take on this debate read Slate's article by Daniel Gross: The Cram Down Decade

FASB - IAS convergence

2006-01-30T14:31:00.000-05:00

An Accountancy Age article reports the recent fair value proposal by the FASB:

The FASB today moved a step further along its IFRS convergence journey with a proposal that would allow companies the option of reporting financial assets and liabilities at fair value.

The article goes on to provide this information:

The FASB added that the change would simplify accounting and reduce earnings volatility caused by differences in current accounting rules.

If implemented, the new standard will allow financial assets and liabilities to be measured at fair value on a contract-by-contract basis. Companies will have to display these values separately from those measured under different attributes on the balance sheet.

I wonder how having an accounting fully based on market value principles would lead to reduced earnings volatility? It would seem to me that mark to market accounting would only lead to more volatility as the changes in interest rates, market values etc. would create a lot of variability.

The new restatement issue

2006-01-27T15:01:00.000-05:00

There is an interesting article in the Wall Street Journal today (subscription required) about the number of restatements occuring due to firms' misunderstanding of the requirements necessary to qualify a transaction for hnedging treatment:

Hedge accounting is complex, but the goal is easy to understand: When a company uses derivatives to hedge exposure to risks like changes in interest rates and fluctuations in foreign currencies, it wants those derivatives to qualify for hedge-accounting treatment under accounting rules because any changes in the derivatives' value can be excluded from current earnings. The value changes are "smoothed" into earnings over time. Without that special accounting status, the derivatives' ups and downs would make earnings unpredictable, which companies and shareholders dislike.

To qualify for hedge accounting, however, companies have to meet a strict set of criteria. And dozens have discovered lately that either they haven't fully complied or have cut corners they shouldn't have. Some have found their hedges don't do the job they're supposed to in offsetting the changes caused by the risk they're hedging. Others don't have sufficient documentation for their hedges.A

A number of companies are filing non-reliance 8-Ks because they have used the short cut method without ever having checked for hedge effectiveness in the firstplace. Here is the 8-K from Great Southern Bancorp. Remember one of the keys to applying the shortcut method is the that the features of the hedge match precisely the features of the instrument being hedged (i.e. there is no value at initiation):

On January 18, 2006, management and the Audit Committee of the Board of Directors of the Company determined that the Company's financial statements as of and for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, and as of and for the years ended December 31, 2004, 2003, 2002 and 2001, should no longer be relied upon as a result of the accounting treatment applied by the Company in connection with certain interest rate swaps associated with brokered CDs.

Since mid-2000, the Company has entered into interest rate swap agreements to hedge the interest rate risk inherent in certain of its brokered certificates of deposit (CDs). From the inception of the hedging program, the Company has applied a method of fair value hedge accounting under Statement of Financial Accounting Standards ("SFAS") 133 to account for the CD swap transactions that allowed the Company to assume the effectiveness of such transactions (the so-called "short-cut" method). The Company has recently concluded, in conjunction with BKD, LLP, its independent registered public accounting firm at all relevant times, that the CD swap transactions did not qualify for this method in prior periods because the method to pay the related CD broker placement fee was determined, in retrospect, to have caused the swap to not have a fair value of zero at inception (which is required under SFAS 133 to qualify for the "short-cut" method). Although the impact of applying the alternative "long-haul" method of documentation using SFAS 133 and the results under the "short-cut" method are believed to result in no significant difference in the hedge effectiveness of the majority of these swaps, and management believes these interest rate swaps have been effective as economic hedges, hedge accounting under SFAS 133 is not allowed for the affected periods because the proper hedge documentation was not in place at the inception of the hedge.

The Company is charged a fee in connection with its acquisition of brokered CDs. This fee is not paid separately by the Company to the CD broker, but rather is built in as part of the overall rate on the interest rate swap. In connection with the restatement, the Company has determined that this broker fee should be accounted for separately as a prepaid fee at the origination of the brokered CD and amortized into interest expense over the maturity period of the brokered CD. If the Company calls the brokered CD (at par) prior to maturity, the remaining unamortized broker fee is expensed at that time. The remaining unamortized prepaid broker fees related to these brokered CDs at December 31, 2005, were $6.5 million.

International standards gain another partner

2006-01-26T13:47:00.000-05:00

It appears that South Korea will adopt International Financial Reporting Standards starting in the second half of 2006.
"The preparatory body will hold monthly meeting starting next month to check the issues at hand," said Kim Yong-hwan, a director at the commission. "The commission formed the body to fit our accounting principles to international standards without giving any shock to local companies."

The pressure on the US, Japan and Australia will continue.

Hello

2006-01-23T16:58:00.000-05:00

Hello, I am back from hiatus and will be back to blogging tomorrow.

Where is the harmonization?

2005-10-24T11:29:00.000-04:00

Maybe the move to international standards won't be so easy. Here is an article from Accountancy Age discussing European criticism of proposed standard IFRS#3 (here is a link to the US Exposure draft). Much of the criticism regards the inclusion of fair value accounting into the measurement process.

The European Financial Reporting Advisory Group (Efrag) has drafted a letter to the IASB expressing 'major concerns' over ammendments to IFRS3. It says the new standard would introduce unreliable fair value measurements, and claims that standard-setters are changing their approach without prior discussion.

Efrag's concern is that the IASB and FASB are seeking to reinvent financial reporting with new rules rather than harmonise the existing standards.

The new standard would have major effect on post-transaction earnings per share as a result of M&A activity. This is a key measure of a deal's success, and would lead to drastic changes in the balance sheet of acquirers.

Flu vaccine shortage due to revenue recognition rules?

2005-10-21T13:19:00.000-04:00

When I saw the WSJ headline "Death by Accounting" I was skeptical that accounting was somehow responsible for the flu vaccine shortage. The artticle discussed the ramifications of SAB 101 on bill and hold revenue recognition issues. The vaccine industry is an excellent example of a bill and hold situation, vaccine companies receive a lot of money upfront in payment for vaccines that will be sent out later. However the revenue for these prepaid vaccines can not be recognized until the vaccines are "delivered".

I am still skeptical after reading the article. Companies increase value by taking on positive NPV projects not because they recognize revenues this period as oppossed to a later period. In fact some of the quotes in the article are just plain wrong, take for example:

The upshot of this policy is that no matter how much cash the government puts in vaccine-makers' hands for making drugs for the stockpile, they cannot include this money in their official sales until it is actually delivered to doctors when and if there is a disease outbreak. This period can last more than a year. While one part of government is urging manufacturers to have a reserve on hand for a flu outbreak, another is telling them that they won't show any gain on their books for doing so. In fact, companies that contribute to the stockpile will take a paper loss for this part of their business, because the SEC is not about to let them postpone "recognition" of their costs of making the vaccines. And because of other regulations and trial lawyers always eager to pounce on "deceptive" accounting, it is difficult for companies to communicate with investors about this distorted earnings picture.

Is the author really suggesting that if a drug company explained to its shareholders the revenue recognition policy behind the stockpile program and clearly disclosed it in its financial statements that it would be sued for "deceptive" accounting?

I am still skeptical. I imagine what the SEC wants to prevent is a drug company that is not going to meet its earnings number dump a bunch of vaccines into the national stockpile so that it can recognize revenue.

A classroom discussion about ethics

2005-10-21T13:12:00.000-04:00

One item that I don't remember seeing when I was an accounting student was a news story about an accounting partner denied bail and under indictment. An article on WEBCPA discusses the case of David Greenberg, the KPMG partner indicted by the federal government as part of the investigation into unlawful tax strategies.

David Greenberg, 46, was one of 10 former KPMG executives indicted Monday in connection with the design and marketing of alleged phony tax shelters, and was the only defendant to be arrested by authorities. Greenberg has been accused of falsifying documents to hide his involvement in questionable tax shelters, coaching a co-conspirator to lie to investigators and misleading investigators about whether he had surrendered all his passports.

This story allows for a good discussion of ethics in the accounting profession.

international standards

2005-10-20T12:12:00.000-04:00

There is an interesting article on FT.com which examines the effect of public companies in England adopting international standards and what that means for private companies. Currently, UK standards do not harmonize with international standards so there is a situation in which two competitors,one public, one private, may be accounting for similar transactions in a different manner. The UK standard setters goal is to harmonize with international standards over time but what happens in the mean time? In addition, the article states that there are three issues that are casting doubt about harmonization:

There was widespread agreement with this and, in 2004, the first of these "convergence" standards appeared. But three developments have since clouded the consensus.

One was the agreement by the International Accounting Standards Board to start a separate "small and medium-sized enterprises project", aimed at developing a separate set of standards suitable for private companies.

The second factor was the ASB's proposal to extend the application of its financial instruments standard FRS26 (the effective equivalent of the infamous IAS39) to all entities using full UK standards. It seemed strange to make UK private companies apply a version of IAS39 when even large listed companies were complaining about its onerous requirements. This convinced many that convergence of this sort might not be what was needed.

Finally, reinforcing this unease was the IASB's own proposals to converge with US GAAP. This seemed to be importing lengthy and elaborate rules, based on some new and unfamiliar concepts.

These factors will also come into play when (and if) the US adopts international standards.

R&D spending

2005-10-19T15:15:00.000-04:00

There is an interesting article inUSA Today concerning recent cutbacks in R&D spending by various companies. The article states:

Spending on R&D by companies in the benchmark S&P 500 index has grown 3.3% over the past four quarters, well below the 11.6% growth in revenue during the same period, S&P says.

The article also cites a recent study by the consulting firm Booz Allen Hamilton that discusses the link between current R&D spending and future profitability.

A new study by consultant Booz Allen Hamilton encapsulates these fears. It found that big R&D spenders don't get returns on their outsized investments and that R&D spending has no effect on growth, profitability or shareholder return. R&D is "a roll of the dice of what you will get back," says Barry Jaruzelski, vice president of Booz Allen and co-author of the study that looked at 1,000 companies going back six years.

I always enjoy the discussion among students on the question of expensing versus capitalization of R&D. They recognize the link to future profits, but also understand the accounting reason for expensing. I try to get them to some middleground or why can't we as accountants be comfortable with not being able to exactly measure the the future linkage.

Profiting from Sarbanes-Oxley

2005-08-05T12:49:00.000-04:00

An article on SmartMoneydiscusses the price performance of Resources Global Professionals a financial consulting company that has profited greatly from Sarbanes-Oxley. The company has been doing extremely well over the last 12 months and gives a solid forecast for the future:

But one comment sheds particular light on the company's continued success: "Fiscal 2005 saw the expansion of many client relationships with companies who initially became familiar with Resources for Sarbanes-Oxley compliance efforts, but have extended their work with us into other core business areas."

Cross-selling, in other words. And Resources is still doing plenty of compliance and audit work for foreign companies, as well as companies that are trying to resolve problems that initial audits uncovered. That reflects pretty cleanly an observation from CIBC analyst Thatcher Thompson that we mentioned in our last story, that "upfront compliance is revealing shortcomings at many companies that will involve other projects to fix."

I assume that this is also good news for the other accounting firms and consulting companies (althought the shares of Accenture have been basically flat for the past 18 months).

The next round of Sarbanes-Oxley may result in less work, but be more specialized. Deloitte in a recent newsletter stated the following:

Many financial institutions are evaluating next steps in their 404 programs. Some are sitting back and waiting until next year to repeat the cycle of testing and evaluation of their internal controls. Others are taking the lessons learned and using them to implement new processes and modify system shortcomings. For several reasons, we believe the latter approach is far more prudent.
First, Section 404 is more than a pass/fail test of controls. The misleading implication of viewing Section 404 in this way is that a firm that passes has nothing to worry about. But this might not be the case. A pass does not necessarily mean that all is right with a firms risk management program. By its nature, compliance and reporting can never be entirely fail-safe. 404 programs will require constant fine-tuning and vigilance.