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Enron Fallout Felt Across the Atlantic?
U.S. and Europe Seek to Improve Accounting Standards

SEC Proposes New Requirements for Corporate Reporting; European Union to Adopt "Tougher" Principles Approach

New York, Jun 19, 2002

Since the investigation into the collapse of Enron Corp., corporate financial reporting procedures have been called into question. Not only has the U.S. Securities and Exchange Commission (SEC) announced proposed new rules governing quarterly and annual reports, the European Union (EU) has also stated that it will adopt "tougher" accounting standards. Although the documents in question are developed by groups operating outside the ANSI Federation, these changes will have a tremendous impact on corporate America and, as such, are of particular interest to the Institute's members and constituents.

On June 12, 2002, the SEC announced that it had taken the first step toward requiring U.S. corporations to provide more information to stockholders on material events and transactions affecting the company in more timely manner than is currently mandated. In addition, the company's principle executive officer and principle executive financial officer would be required to certify that the information contained in quarterly and annual reports reflects the true financial condition of the organization. In a recent Wall Street Journal (WSJ) article, SEC chairman, Harvey Pitt, stated that these measures, if adopted, would provide investors with a "greater sense of comfort" about investing in public companies. Proposed changes are presently undergoing a 60-day public review and comment period, after which time the SEC will vote to enforce the new rules.

One day after the SEC announcement, WSJ reported the EU's plans to require companies listed on European stock exchanges to adopt International Accounting Standards (IAS), emanating from the International Accounting Standards Board (IASB), a London-based developer of global accounting standards. An EU spokesman is quoted as stating that the IAS "would significantly change the way many European companies record profits and losses." In addition to harmonizing the diverse accounting practices adhered to by companies in the 15-member EU, accountants would be required to certify the accuracy of information provided in financial statements and stock options would be treated as regular salary and bookable as an expense.

IAS implementation is expected to begin January 1, 2005, with a temporary exemption through January 1, 2007 offered to companies currently trading in the U.S. As these companies must comply with American accounting practices, the EU has stated its intent to ask the SEC to "allow European [companies following IAS] to be listed on U.S. exchanges without having to produce a second set of books [that adhere] to Generally Accepted Accounting Principles (GAAP)." GAAP reflect the standards of financial accounting and reporting promulgated by the U.S. Financial Accounting Standards Board (FASB) and are officially recognized by the SEC as authoritative.

It is no coincidence that the proposed changes follow on the heels of the Enron scandal. Many financial organizations have reacted to the collapse of the energy giant with suggested improvements to current financial practices in an effort to avert a similar occurrence. ANSI covered this event from the investor's perspective earlier this year when one of its members, the Certified Financial Planner Board of Standards (CFP Board), along with five other associations in the financial planning community, published an open letter to the public. Their intent was to promote increased employee education about financial planning and the value of diversification when preparing for retirement with a call to Congress to collaborate on joint initiatives in this regard.

The CFP Board also promoted a new field of international activity on Personal Financial Planning, which the Institute submitted to the International Organization for Standardization (ISO). Work in this area is being performed by ISO Technical Committee 222 in collaboration with four working groups, each of which is led by the national standards body of the U.S., Germany, Canada and New Zealand. [Editor's note: CFP Board administers both the international committee secretariat and the ANSI-accredited U.S. Technical Advisory Group, which establish and manage the administrative framework for developing financial planning standards on behalf of ISO and ANSI, respectively. For more information on this issue, please refer to "Financial Planners React to Enron Collapse" on the ANSI Online News page.]

According to John J. Harrington, Jr., CPA, ANSI's vice-president of Finance and Administration, "A company's senior management currently provides their company's auditor with a written statement attesting to the openness of information provided for the audit. This includes an affirmation that no material information was intentionally withheld from the auditors. The SEC action takes this a significant step further by requiring that senior management publicly acknowledge that the financial statements accurately represent their company's financial condition. This squarely places the ultimate responsibility for fair representation of the company's financial health on those ultimately responsible for it. That is, the most senior individuals managing the company's operations and performance."

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