The Financial Accounting Standards Board has finalized a deferred effective date for investment companies in complying with new consolidation rules intended to bring more assets on to corporate balance sheets.

FASB recently added Accounting Standards Updated No. 2010-10 to its Accounting Standards Codification to defer the effective date of the consolidation requirements of Financial Accounting Statement No. 167, which have been folded into the Codification under Topic 810 Consolidation. The deferral applies only to companies that meet the criteria of an investment company, however, meaning it does not apply to a reporting unit that has either a direct or in indirect obligation to fund any losses that could potentially be significant to the entity.

FASB said the deferral does not apply to interests in securitization entities, asset-backed financing entities, or entities that once held the designation of qualifying special-purpose entities. Those, in fact, are precisely the vehicles FASB had in mind for bringing on the balance sheet when it wrote FAS 167 to curb off-balance-sheet abuses.

After FASB approved the original standard, it started hearing concerns that it produced a different outcome for investment companies than the International Accounting Standards Board likely would pursue for international rules. In addition, and perhaps even more importantly, the new rule also produced some unintended consequences for investment companies, whose investment managers would be required under the new rule to consolidate onto their corporate balance sheets investment funds that they manage.

That’s because the new standard requires consolidation based on a control concept, said Jay Hanson, national director of accounting for McGladrey & Pullen. “That just didn’t make any sense,” he said, so the board agreed to carve investment companies out of the requirement for at least a year while it re-examines how to address the concern.

“The deferral is quite limited,” Hanson said, applying only to entities that have all the attributes of investment companies. Every other entity – where the standard was aimed in the first place – is required to comply with the original effective date, which is for all interim and annual periods beginning after Nov. 15, 2009.

Audit regulators have sanctioned a Grant Thornton engagement partner and staff auditor for failing to flag questionable revenue recognition practices in the 2004 financial statements of a small technology company.

Partner Ray O. Westguard, 69, has been barred from being associated with a public accounting firm that is registered with the PCAOB to do public company audit work, though he can apply for reinstatement after two years. Staff Auditor Jennifer Nakao, 34, is suspended from being associated with a registered firm for one year.

Both Grant Thornton auditors worked in the firm’s Salt Lake City, Utah, office auditing financial statements for Imergent, Inc., a technology company whose revenue comes primarily from software licensing. Imergent  sells software that allows customers to build their own Websites, and most of the sales went to customers who were given 24-month extended payment term arrangements.

The PCAOB orders against Westguard and Nakao say the two failed to properly challenge Imergent’s practices around recognizing revenue when there was reason to doubt whether the company would fully collect on some of the extended payment plans. Even the firms’ internal concurring review partner questioned the accounting: “I am concerned that some of the company’s recognition conclusions are becoming less plausible,” the internal reviewer wrote in an e-mail message, according to the PCAOB. “Specifically, the company’s ‘bad debt’ experience raises questions.”

Imergent’s accounting ultimately caught the eye of the Securities and Exchange Commission’s Division of Corporation Finance in 2005, prompting the company to restate its 2003 and 2004 financial statements and fire Grant Thornton as its audit firm.

The PCAOB action does not make any findings of wrongdoing against Grant Thornton. The PCAOB’s inspection report regarding Grant Thorton’s 2004 audit work makes no mention of an audit deficiency with circumstances matching the claims against Westguard and Nakao. In that year, the PCAOB performed inspection work at the firm’s national office and 13 of its 49 field offices.

The Institute of Internal Auditors is trying to keep internal auditors on their toes with two new reports that raise attention to new proxy disclosure rules and emerging insight on fraud risks.

The first, titled Flash Alert: New SEC Proxy Disclosure Rules, discusses steps that chief audit executives should consider taking to get on top of governance and risk-management practices in light of new proxy disclosure rules from the Securities and Exchange Commission. The IIA gathered a group of internal audit professionals to pick their brains for a list of 10 actions chief audit executives should take to assure internal auditing is an integral part of the new proxy disclosure process.

The new rules from the SEC generally give analysts and investors more information by requiring companies to disclose a wide range of governance activities. The IIA is prodding internal auditors to advocate for audit opinions on the adequacy and effectiveness of risk-management processes and the accuracy of disclosures and compliance.

Richard Chambers, president and CEO of the IIA, said in a statement that the new disclosure requirements and the proper role of internal audit in compliance are top-of-mind for most internal auditors. “The new proxy requirements will place greater pressure on boards to demonstrate their role in the oversight of risk management. And by extension, this presents both challenges and opportunities for CAEs and their internal audit teams,” he said.

Based on the internal audit group’s recommendations, the IIA is telling internal auditors to get up to speed on the new requirements and the related guidance, determine who in the organization is taking charge of compliance, and assure internal audit has a voice in the process. Internal auditors should review the organization’s determination of its status under the new requirements and consider the need for auditing, keeping management, the board, and the audit committee in the loop, the report suggests.

The IIA’s second report, Knowledge Alert: Emerging Trends in Fraud Risk, says a recent survey affirms that fraud risk is still a topic of great debate for many companies. The survey of 300 chief audit executives found that programs to manage fraud risks are moving higher on corporate priority lists. They’re also receiving more attention at the senior management and board levels and are becoming more effective, the results suggest.

The Financial Accounting Standards Board has decided to go ahead with a proposed deferral for certain elements of its new consolidation requirements. The final Accounting Standards Update is being drafted by FASB staff and is expected to be published in mid-February.

At a regular weekly meeting, the Board reviewed comments to its proposed update, Consolidation (Topic 810): Amendments to Statement 167 for Certain Investment Fund, which would defer the effective date of FAS 167. That’s the accounting standard FASB adopted along with FAS 166: Accounting for Transfers of Financial Assets in the wake of financial crisis to bring more off-balance-sheet activity on to corporate balance sheets. (Both are now found in the Accounting Standards Codification under Topic 860 Transfers and Servicing and Topic 810 Consolidation.)

The one-year deferral is being granted for interests in entities that have all the attributes of an investment company as specified under existing guidance under Topic 946 in the Codification and where it is industry practice to apply the financial reporting measurement principles found in the same guidance.

FASB expects the deferral to apply most significantly to those in the investment management industry, but it is not intended to apply for interests in securitization entities, asset-backed financing entities, or entities that formerly considered “qualifying” special purpose entities. The Board plans to provide details in the final Update on what qualifies for the deferral and what does not.

FASB agreed to consider the deferral in the interest of convergence with international accounting rules. The International Accounting Standards Board is working on a similar project to bring more off-balance-sheet instruments on to corporate balance sheets, but it was reaching some different conclusions about how to address funds directed by investment managers. FASB agreed to set the requirements aside for now for those funds while the two boards work on a more comprehensive solution for both U.S. and international rules.

The Securities and Exchange Commission has approved a new auditing standard on engagement quality reviews, clearing the way for the standard to take effect for audits of 2010 financial statements.

Auditing Standard No. 7, Engagement Quality Review, establishes a new, more rigorous approach for audit firms to follow in reviewing their own audit work internally before issuing audit reports. It was developed and adopted by the Public Company Accounting Oversight Board to beef up the traditional “concurring partner” review, which audit firms have long performed internally as a professional practice.

AS 7 will take effect for audits on interim periods and fiscal years beginning on or after Dec. 15, 2009. In approving the new standard, the SEC suggested the PCAOB consider offering some implementation guidance, especially regarding new documentation requirements. The PCAOB said such guidance will be published “in the near future.”

The SEC received only nine comments on the proposed standard, most generally supportive, but a few raising questions about documentation requirements and other details. The SEC said it didn’t find anything inconsistent between the new standard and existing requirements. “However, since several comments were related to this point, we encourage the PCAOB to provide further implementation guidance on the documentation requirement,” the SEC wrote in its adopting release.

The PCAOB’s acting chairman, Daniel Goelzer, said the standard represents an important milestone in the PCAOB’s mandate to improve auditing under Sarbanes-Oxley. “This standard should improve the reliability of audited financial statements by increasing the likelihood that reviewers will identify significant engagement deficiencies before audit reports are issued to the investing public,” he said in a statement.

Martin Baumann, chief auditor for the PCAOB, said a well-performed engagement quality review “can serve as an important safeguard against erroneous or insufficiently supported audit opinions.”

The PCAOB developed the standard because it found in audit firm inspections that firms generally were not performing adequate internal reviews on audit engagements before issuing their audit reports. Reaction to the initial proposal raised concern that prescriptive language would compel audit firms to regard the review process as, in essence, a second audit. The PCAOB revised language through the comment and deliberation process to guard against such a result.

More than six months after adopting new standards governing off-balance-sheet activity and consolidation of variable interest entities, the Financial Accounting Standards Board has at last added them to the Accounting Standards Codification, making them officially part of U.S. Generally Accepted Accounting Principles.

FASB adopted Financial Accounting Standard No. 166: Accounting for Transfers of Financial Assets in June to end widespread off-balance-sheet treatment of securitized assets, most notably failing loans that were changing hands beyond the view of investors. At the same time, it adopted FAS 167: Amendments to FASB Interpretation No. 46R to give new direction on when a company should consolidate a special purpose entity, or add it to the parent company’s balance sheet.

FAS 166 is now codified under Topic 860 Transfers and Servicing as Update No. 2009-16. FAS 167 is codified under Topic 810 Consolidations as Update No. 2009-17.

FASB adopted the Accounting Standards Codification as the sole authority for all U.S. GAAP in July 2009. The Codification organizes all of GAAP by topic rather than by historical accounting pronouncements that were organized chronologically as issued.

At a recent accounting conference, FASB Project Manager Chris Roberge said the delay in getting FAS 166 and FAS 167 codified was only administrative in nature. Financial institutions have grimaced over the new accounting guidance because it will increase the level of assets and liabilities carried on their balance sheets.

The Federal Reserve took note of the new guidance when it was issued in June, saying it would have a “material effect” on the accounting for off-balance-sheet entities. The Fed said it was reviewing regulatory capital requirements associated with adopting the new standards and it advised banks to take the new rules into account in their own internal capital planning processes. Banks should “assess whether additional capital may be necessary to support the risks associated with vehicles affected by the new accounting standards,” the Fed said.

Dodging questions about when the Securities and Exchange Commission will set a date for U.S. adoption of international accounting standards, senior SEC staff have suggested the more important issue is reducing differences between U.S. and international rules.

Jim Kroeker, chief accountant at the SEC, said at an accounting conference today that he understands companies are eager to know when they’ll be expected to adopt International Financial Reporting Standards. He said he believes, however, there needs to be more progress on converging U.S. Generally Accepted Accounting Principles and IFRS.

The Financial Accounting Standards Board and the International Accounting Standards are working on eight major projects that would fundamentally change the nature of financial reporting, said Kroeker, addressing the American Institute of Certified Public Accountants in its annual conference on regulatory developments. “I’m not exactly certain how an entity would put in place a new system to adopt IFRS” when rules under both GAAP and IFRS are still changing so dramatically, Kroeker said. “There needs to be a stable platform that people would be talking about moving to. That doesn’t mean people don’t need or want a greater level of clarity. You can expect to hear more from us in the short term.”

Kroeker said in October that the SEC would provide more clarity about its plans for U.S. adoption of IFRS “in the fall.” The SEC issued a proposed roadmap in November 2008 and accepted comments through mid-February, just as the economy spiraled into a credit and liquidity crisis.

According to Kroeker, the 200-plus comment letters sent to the SEC generally praised the pursuit of a single set of accounting standard but raised scores of challenges and questions about how best to get there. He noted the economic crisis has “highlighted the importance of developing and maintaining” a single set of high-quality accounting standards globally.

Julie Erhardt, deputy chief accountant in Kroeker’s office, said while capital markets in other countries are well developed, the U.S. standards and processes still serve as a benchmark for other countries. “People still do look to what the U.S. does and the U.S. view when establishing processes, procedures, and global norms,” she said.

As such, the U.S. role in influencing capital markets and global standards shouldn’t be overlooked. “We are blessed with a lot of resources in our profession in the United States,” she said. “We have a lot to offer.”

Paul Beswick, another deputy chief accountant, acknowledged companies need to know what to do to prepare for IFRS. He said he would recommend companies follow the progress of IASB and the general movement toward IFRS, but hold off on making significant changes. “As far as moving systems, I don’t think I would be expending a lot of resources going through that right now,” he said.

Amid some uncertainty about its own future, the Public Company Accounting Oversight Board approved a five-year strategic plan and an increased budget for 2010 calling for more staff to beef up audit inspections and enforcement.

The PCAOB anticipates a budget of $183.3 million for 2010, a 16-percent increase over the 2009 budget to cover additional staffing in inspections, enforcement, the Chief Auditor’s office, and the Office of Research & Analysis. The board expects overall headcount to reach 636 by the end of 2010 compared with the 576 expected to be on staff at the end of 2009. The budget must be approved by the Securities and Exchange Commission, which oversees the PCAOB. The PCAOB said it will make the budget available publicly after it is approved by the SEC.

“Following a year when investors incurred tremendous losses due to the financial crisis on Wall Street and in the housing markets, investors are looking to regulators, including the PCAOB, for reassurance about the quality of financial reporting in the marketplace and to see that their interests are safeguarded,” said PCAOB member Steve Harris in a prepared statement.

Acting Chairman Dan Goelzer noted the board is dealing with an increasing number of litigated enforcement proceedings, although those proceedings remain private until appeals are exhausted. “The board notes in its strategic plan that the privacy provisions “provide an incentive for respondents to litigate disciplinary actions, which in turn could result in an inefficient use of PCAOB resources and delay important information about disciplinary sanctions.”

The board also notes international inspections are proving more time consuming and complex than anticipated at the PCAOB’s inception. Despite efforts to work with regulatory counterparts in other countries, the board still hits obstacles in completing some required inspections. “If the PCAOB remains unable to inspect certain registered firms, the PCAOB may require additional resources to address firms’ failure to cooperating,” either through disciplinary actions or additional disclosure requirements, the board said.

As the board approves its five-year plan and its 2010 budget, one of the five board seats is vacant and two seats are held by board members whose terms have already expired. The SEC is mulling a replacement for former Chairman Mark Olson, who left in July, and for Charles Niemeier, who has remained after his term expired in October 2008 and has said he wants to leave soon. Bill Gradison also is remaining on the board although his term expired in August 2009.

SEC spokesman John Nester said the selection process is under way, no decisions have been made, and no time line has been established for naming permanent board members.

The PCOAB’s operations remain under challenge as the U.S. Supreme Court prepares to hear arguments in the case of a Nevada audit firm that believes the regulator’s existence and the manner by which board members are selected is unconstitutional. Nester said the case of the Free Enterprise Fund vs. the PCAOB is not a factor in the current selection process.

The board also notes a number of other legislative and regulatory proposals that could alter its operations, including possible revocation of the Sarbanes-Oxley internal control audit requirement for smaller public companies and new requirements to regulate the activities of broker-dealers.

Seeking an escape from volatile contribution requirements, pension plan sponsors increasingly are adopting investment strategies that focus more on matching liabilities than on generating overall return on plan assets.

A recent poll by SEI, an asset management and investment firm, suggests more than half of executives overseeing pensions are adopting a “liability driven” investment strategy—one where the investment objective is to meet the liability and minimize necessary cash contributions rather than seek overall return on plan assets. The SEI poll showed 54 percent of plan sponsors are pursuing such an approach in 2009 compared with only 20 percent in 2007. Only 15 percent of respondents said absolute return is the most important metric for measuring plan performance.

SEI said 70 percent of survey participants see greater value in a liability-driven investment strategy as a result of recent market volatility. Nearly all participants said they use long-duration bonds as part of the liability-driven strategy, though less than half said they use interest rate derivatives to achieve the objective.

“In the past, plan sponsors had a much more asset-only perspective when measuring the success of a portfolio,” said SEI Chief Actuary Jon Waite. “Given the losses they’ve incurred in 2008 and 2009, plan sponsors are now saying ‘how can we avoid that pain in the future?’ Liability driven investing is getting a lot more attention after all the ups and downs plan sponsors have suffered in the past 18 months.”

As it continues to police public company financial reporting, the Securities and Exchange Commission has demonstrated once again that it can’t get effective control over its own financial reporting.

In its latest report on SEC financial statements, the U.S. Government Accountability Office said the SEC’s 2008 and 2009 financial statements are fairly stated, and the government auditor found no problems with SEC’s compliance with laws and regulations based on the testing performed. However, GAO says the SEC ended its fiscal year on Sept. 30 with ineffective internal control over financial reporting, a now recurring theme since the SEC was first required in 2002 to submit audited financial statements to Congress and the Office of Management and Budget.

“In connection with our prior audits, the GAO has made numerous recommendations to the SEC to address the internal control issues that continued to persist during fiscal year 2009,” the GAO wrote in its report. The deficiencies that most troubled the government auditor were problems with information security, financial reporting processes, fund balance with the U.S. Treasury, registrant deposits, budgetary resources, and risk assessment and monitoring processes.

The deficiencies add up to a material weakness, the GAO said, giving good reason to wonder whether data processed by the SEC’s systems are reliable and adequately protected. The problems also force the SEC to rely on “extensive compensating manual procedures” and result in errors and unsupported entries in the general ledger.

The GAO says it noted in last year’s report that the SEC relies too heavily on processes and systems that are not designed to give accurate, complete, reliable information. This year, the GAO adds that it appears the SEC was not able to commit the amount of effort and resources necessary to compensate for its deficient systems and processes.

“These deficiencies are likely to continue to exist until the SEC’s general ledger system is either significantly enhanced or replaced, key accounting activity is fully integrated with the general ledger at the transaction level, information security controls are strengthened, and appropriate resources are dedicated to maintaining effective internal controls,” the GAO wrote.

In a response attached to the report, SEC Chairman Mary Schapiro says the SEC will make resolution of the problems “a priority of the very highest order.” She notes some of the issues underlying the deficiencies “have been building and accumulating for years. While some of them can—and will—be addressed quickly, others will take more time to solve. But our resolve to diligently correct all of these problems is strong.”

Even the GAO is quick to point out that the SEC’s already strained credibility is getting stretched with these persistent unflattering audit outcomes. “Successfully addressing these issues is critical to maintaining the SEC’s credibility given its important role in the financial reporting process of registrants, and is vital to achieving the SEC’s stated vision to be the standard against which federal agencies are measured,” said the GAO.