BDO SEIDMAN, LLP’S

December 2006

FINANCIAL REPORTING UPDATE

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• Speakers– Jeff Lenz– Jan Herringer– Liza Prossnitz– Reva Steinberg

• Replay Access– www.bdo.com/about/publications/assurance

• CPE – Participation Verification– 3 key words provided during the call must be

confirmed on the evaluation

Speakers, Replay, and CPE Information

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• SEC Update• Internal Control Reporting Update

– SEC – PCAOB

• SEC Conference Report• Questions and Answers

Agenda

SEC UPDATE

December 2006

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SEC Update – Agenda

• Rulemaking• Personnel Changes• Paulson Speech and Committee

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Recent Rulemaking – Final Rules

• Further Relief From the Section 404 Requirements for Smaller Companies and Newly Public Companies (Release 33-8760)– http://www.sec.gov/rules/final/2006/33-8760.pdf

• E-proxy rule amendments (http://www.sec.gov/news/press/2006/2006-209.htm)

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404 – Compliance Dates (Final)

Type of filer Due Date

Before

Extended Due Date

Due Date Before

Extended Due Date

Management Management Auditor Auditor

Yrs ending on or after Yrs ending on or after Yrs ending on or after Yrs ending on or after

Nonaccelerated July 15, 2007 Dec. 15, 2007 July 15, 2007 Dec. 15, 2008

Accelerated FPI July 15, 2006 Unchanged July 15, 2006 July 15, 2007

Large Acc FPI July 15, 2006 Unchanged July 15, 2006 Unchanged

Newly Public Issuer

First 10-K Second 10-K First 10-K Second 10-K

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404 Implementation RoadmapNext Steps - SEC

• Defer compliance dates– Completed – Release 33-8730A (http://www.sec.gov/rules/final/2006/33-

8730a.pdf)• Accelerated foreign private issuers

– Completed – Release 33-8760 (http://www.sec.gov/rules/final/2006/33-8760.pdf)

• Non-accelerated filers• Newly public companies

• Obtain additional feedback (Concept Release)– Completed

• Issue guidance on management assessments – Proposal approved December 13, 2006

• Work in concert with PCAOB, revise AS 2 – Proposal issued December 19, 2006

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E-Proxy Rules

• Final rule adopted to allow (i.e., it is not mandatory) companies to furnish proxy materials to shareholders through a “notice and access” model using the Internet – Effective July 1, 2007– Early adoption not allowed– Final rule is not yet out, see SEC Press Release

2006-209 http://www.sec.gov/news/press/2006/2006-209.htm

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Proposed Rules December 13

• Require notice and access model (not optional) for all proxies not related to a business combination transaction– Comments are due 60 days after publication in the Federal

Register– Press release 2006-209

http://www.sec.gov/news/press/2006/2006-209.htm

• Foreign Private Issuer Deregistration– Base deregistration eligibility on average daily trading volume– Press release 2006-207

http://www.sec.gov/news/press/2006/2006-207.htm

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Personnel Changes

• Deputy Chief Accountant Scott Taub leaving December 31– Replacement not yet announced

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Paulson Speech and CommitteeInterim Report• Secretary Paulson Nov. 20 speech

http://www.ustreas.gov/press/releases/hp174.htm • Committee on Capital Markets Regulation

suggestions (the Paulson Committee) http://www.capmktsreg.org/research.html

– Target Congress as well as regulators– Risk-based approach; principles-based rules– Address excessive criminal and civil liability for

companies, directors, officers, and auditors– Exempt small companies from Section 404 if it’s too

burdensome

BDO SEIDMAN, LLP

The SEC’s Proposed Interpretive Guidance for Management to Improve

SOX 404 Implementation

December 2006

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Introduction – Where We are today

• Section 404(a) requires each annual report to include:– A statement of management’s

responsibility for ICFR– Management’s assessment of the

effectiveness of ICFR

• Rules adopted on June 5, 2003– No specific method to follow in

performance of evaluation

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SEC Proposals

• Interpretive guidance for management regarding evaluations of ICFR

• Amendments to Rules 13a-15 and 15d-15 clarify that performance of the proposed procedures satisfy annual evaluation

• Amendments to Reg S-X clarify auditor’s reporting requirement pursuant to Section 404(b)

• Find the Press Release at http://www.sec.gov/news/press/2006/2006-206.htm

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How the Interpretive Guidance was Developed…

• Concept release issued July 18, 2006

• Comments on release submitted by September 18, 2006

• Concept release published to better understand the extent and nature of guidance for management

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Comment Letters

• Comment letters available at http://www.sec.gov/comments/s7-11-06/s71106.shtml

• Approximately 170 comment letters were received by the SEC

• Feedback was requested on…– Risk and control identification– Management’s evaluation– Documentation to support assessment

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Interpretive Guidance for Management

• SEC voted on December 13th to propose interpretive guidance

• Guidance based on cumulative feedback from…– SEC Small Business Advisory Committee– GAO Report– COSO Guidance for Smaller Public Companies – Concept Release comment letters

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Proposed Interpretive Guidance – Two Principles

Proposed Guidance is principles-based that is organized around 2 principles

• Evaluate the design of controls– Determine possibility of a material

misstatement

• Gather and analyze evidence of effective operation of controls

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Smaller Public Companies

• Guidance intended to be scalable and flexible

• Small companies may be less complex

• Small companies are defined

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Risk Based Approach

• Proposed guidance is risk based

• Addresses concerns raised to the Commission about:– Excessive testing of controls– Excessive documentation of processes, controls

and testing– Scalability of AS 2

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Four Topics included in Guidance

• Identification of risks to reliable financial reporting

• Evaluation of operating effectiveness

• Results of management’s evaluation

• Documentation

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Identification of Risks to Reliable Financial Reporting

• Risk-based approach

• Use of judgment to determine– Areas that are both material and pose a risk to

reliable financial reporting

• Identify controls that address those risks– Including fraud considerations

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Evaluation of Operating Effectiveness

• Flexibility in how management supports its evaluation

• Illustrations provided regarding:– Daily interaction – Self-assessment– Ongoing monitoring activities

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Results of Management’s Evaluation

• Evaluation framework provided in proposed guidance

• Situations that are considered strong indicators of a material weakness are provided

• Factors to consider in evaluating the severity of deficiencies are described

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Documentation

• Nature and extent of evidential matter

• Includes methods and procedures used to gather evidence

• Daily interaction…limited documentation

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Conclusion

• Coordination with PCAOB

• Comments to the SEC will be due 60 days after publication in the Federal Register

BDO SEIDMAN, LLP

PCAOB Proposed Auditing Standard on ICFR and Related Other Proposals

December 2006

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Background

• Auditing Standard No. 2– Implementation monitored through

• Inspections• Roundtables (held April 2005 and May 2006)

– Benefits• New focus on corporate governance• Improvements in processes and controls

– Costs• Higher than expected

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PCAOB Proposals

• New auditing standard on internal control– Supersedes AS No. 2

• New auditing standard on using the work of others

• New independence rule on non-audit services

• Related amendments to interim standards

• Find the Proposals at http://www.pcaobus.org/Rules/Docket_021/index.aspx

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Proposal Objectives (for Revised AS 2)

• Focus the audit

• Eliminate unnecessary procedures

• Scale the audit for smaller companies

• Simplify requirements

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Focus the Audit

• Direct attention to most important controls– Using the top-down approach– Appropriate focus on controls that prevent or detect

fraud

• Emphasize risk assessment– Sufficiency of evidence depends on risk assessment– Consider results of substantive procedures in

determination of overall risk related to a control

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Focus the Audit - continued

• Revise definitions of Significant Deficiency and Material Weakness– Replace term “more than remote”– Re-articulation of definition of material weakness– Replace term “more than inconsequential”

• Revise strong indicators of a material weakness

• Clarify role of materiality

• Clarify role of interim materiality

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Eliminate Unnecessary Procedures

• Remove requirement to evaluate management’s process

• Permit consideration of knowledge obtained during previous audits

• Refocus Multi-location testing on risk

• Remove barriers to using work of others

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Eliminate Unnecessary Procedures and Other Objectives

• Refocus Walkthrough procedures– Only for each significant process– Use of probing inquiries– Permit direct assistance

• Scaling of audit for smaller companies• Reduced level of specificity in standard

provides flexibility

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Other Proposed Standards and Rules

• Considering and Using the Work of Others in an Audit

• Independence rule relating to the Audit Committee Pre-Approval Process

• Certain amendments to interim standards– Dating of Independent Auditor’s Report

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Conclusion

• Proposed changes are intended to…– Preserve the benefits of the audit of internal control

while obtaining efficiencies

• Easier to read– Reorganized to follow audit procedures

• Guidance is flexible and scalable

• Small business guidance should be out next year– Field testing draft guidance this year

SEC Conference Report

December 2006

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Agenda

• Conference themes• Conference topics

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Conference Themes

• Use judgment• Fight complexity• Promote transparency

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Conference Topics

• Compensation Disclosure & Analysis• Non-GAAP financial information• Management’s Discussion & Analysis• Statement of cash flows• FIN 48• Backdating• Fair value and financial instruments

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Compensation Disclosure & Analysis

• Effective for years ending on or after December 15, 2006

• Applies to 2007 proxy season• Principles-based overview

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Compensation Disclosure & Analysis

• Answer six broad questions 1. What are the objectives of the company’s compensation

programs?2. What is the compensation program designed to reward?3. What is each element of compensation?4. Why does the company choose to pay each element5. How does the company determine the amount (and

where applicable, the formula) for each element?6. How does each element and the company’s decisions

regarding that element fit into the company’s overall compensation objectives and affect decisions regarding other elements?

• Provide context for compensation policies and decisions

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Non-GAAP Income Statements

• Full non-GAAP income statements• Corp Fin objects

– See Regulation S-K, Item 10(e) and Regulation G– Refer to non-GAAP FAQ, Q8

http://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm

– Generally not accompanied by disclosures required by regulations

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MD&A

• Current state, provide more– Executive summaries– Tables and headers– Explanation and analysis– Critical accounting estimates– Liquidity information

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MD&A

• Liquidity– Likelihood that historical cash use equals future

use– Drivers of cash flow to provide understanding of

cash requirements and sources– Underlying causes of change

• Credit terms changes• New customers• New securitizations

– Borrowings as a key component

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Statement of Cash Flows

• Focus of investors and analysts• Questions on classification from the SEC

staff• Classification

– Look to Statement 95 for examples– If material issues, disclose why the classification

was chosen, the classification that was rejected and support for your conclusion

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FIN 48

• Interim period disclosures• Preferability letter not required• Statement 154, par. 17a disclosures not

required • AICPA CPCAF Alert 138

http://www.aicpa.org/cpcaf/download/FIN48_CPCAFAlert138.pdf • AICPA Practice Guide on Accounting for

Uncertain Tax Positions Under FIN 48 http://tax.aicpa.org/Resources/Professional+Standards+and+Ethics/Practice+Guide+on+Accounting+for+Uncertain+Tax+Positions+Under+FIN+48.htm

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Backdating – Stock Options

• SEC staff letter http://www.sec.gov/info/accountants/staffletters/fei_aicpa091906.htm

• Conference discussion and forthcoming guidance

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Fair Value and Financial Instruments

• Fair value • Hedge accounting• EITF Issue No. 00-19

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Statement No. 157, Fair Value Measurements

• Does not require any new fair value measurement

• Defines fair value – exit not entry price• Focuses on assumptions market place

participant would use• Expands disclosure requirements• Nullifies EITF Issue No. 02-3, “Issues Involved in

Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” footnote 3

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Statement No. 133 andHedge Accounting

• Hedge Documentation– What is sufficient?– Must it be perfect?– When is a change in documentation a

redesignation?

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Shortcut Method

• There is no spirit or principle• Nine criteria must be met• Examples of misapplication

– Trust preferred securities– Cash flow hedges of variable-rate debt that

include a call option permitting the debtor to repurchase the debt at interest reset date at par

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Other Methods that Assume No Ineffectiveness

• Critical terms match• Examples of misapplication

– FV hedge of an interest rate exposure using an interest rate swap

– Settlement date of the forecasted transaction and the hedging instrument differ by several days

– Variable rate debt and interest rate swap where interest payment dates on the debt and swap don’t match

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EITF Issue No. 00-19, “ Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock”

• Instrument subject to EITF 00-19• Embedded features subject to EITF 00-19• Registered unit offerings• AICPA Practice Aid on Complex Financial

Instruments