Emerging Issues for Finance Professionals

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Emerging Issues for Finance Professionals

• Philip B. Livingston
• President and CEO
• Financial Executives International

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Topics Covered

• FEI Task Force Observations and Recommendations
• Recent FASB developments
• Special Purpose Entities
• Developments on Capital Hill
• Revised FEI Code of Ethics

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FEIs Reform Task Force

• FEI formed a member task force of financial
  executives from major multi-national
  corporations to
• Consider the systemic failures giving rise to a
  loss of confidence in U.S. capital markets
• Develop reform recommendations for consideration
  by the SEC, Congress, the Stock Exchanges,
  corporations and others

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FEI Task ForcePrincipal Areas of Focus

• Strengthening financial management and commitment
  to ethical conduct
• Improving corporate governance and the
  effectiveness of audit committees
• Rebuilding confidence in the accounting industry
  and the effectiveness of the audit process
• Modernizing financial reporting, and reform of
  the accounting standard-setting process

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Task Force Members

• Phil Ameen, GE
• Pete Bible, General Motors
• Scott Boggs, Microsoft
• Frank Borelli, Marsh McLennan
• Fred Corrado, AP
• David Fitzpatrick, United Technologies

• John Jessup, Dupont
• Dennis Powell, Cisco Systems
• Bryan Roub, Harris Corp
• Pedro Reinhard, Dow
• David Shedlarz, Pfizer
• David Sidwell, JP Morgan Chase

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Task Force Recommendations (12)

• 1. Require all financial executives to adhere to
  a specialized code of ethical conduct.
• 2. Actively promote ethical behavior and provide
  confidential mechanisms for reporting perceived
  violations.
• 3. Designate a principal financial officer and
  principal accounting officer as defined in the
  Securities Act of 1933.
• 4. Create a new oversight body for the accounting
  profession staffed with finance and accounting
  professionals.

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Task Force Recommendations (12)

• 5. Place restrictions on certain non-audit
  services supplied by the independent auditor.
• 6. Restrict the practice of hiring senior
  personnel from the external auditor.
• 7. Appoint a Blue Ribbon Panel to reform the
  Financial Accounting Standards Board (FASB).
• 8. Modernize financial reporting.

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Task Force Recommendations (12)

• 9. Require stock exchanges to set higher
  standards for audit committee financial
  experts.
• 10. Require continuing professional education for
  audit committee members.
• 11. Consider periodic rotation of the audit
  committee chair.
• 12. Disclose corporate governance practice.

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FASB ReactionSPE Accounting

• Fast track project-
• Exposure draft due late 2nd or early 3rd Qtr
• Broad applicability
• CP conduits, synthetic leases, etc.
• Transition a key
• Could apply to all pre-existing SPEs
• Would result in companies reporting another
  change in accounting principal

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FASB ReactionSPE Accounting

• Characteristics of SPEs
• Limited activities and purposes
• Decisions pre-determined, often limiting the
  power of shareholders, partners, investors,
  owners, boards, etc.
• Significantly leveraged
• Not always being consolidated by the controlling
  party
• Sometimes involve off the books value
  guarantees explicit and implied

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FASB ReactionSPE Accounting

• Proposed New Rules
• Establish criteria for determining the primary
  beneficiary
• Entity with the principal economic risks and
  rewards
• Entity that exerts control
• Require the Primary Beneficiary to Consolidate
  unless SPE has sufficient independent economic
  substance
• Equity investment must be at lease 10 of total
  capital.

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Congressional ReactionOxley Bill

• H.R. 3763 strikes a reasonable balance between
  too little and too much regulation
• Increases appropriations for the SEC for
  enforcement
• Charges the SEC to create an Independent Public
  Regulatory Organization (PRO) to oversee auditing
• Requires a Code of Ethical Conduct for financial
  executives of stock exchange listed companies (a
  la the FEI code)
• Encourages real-time disclosures and other
  revisions to improve transparency

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Congressional ReactionBoehner Pension bill, H.R.
3762

• Passed the House on April 11 and requires
• 30 day notice before a 401(k) plan blackout
  electronic notice is acceptable
• Quarterly benefit statements to all 401(k) plan
  participants electronic statements acceptable
• New diversification rights for employer company
  stock matches in 401(k) and K-SOPs
• Ban on sale of stock options by insiders during
  401(k) plan blackouts where more than 50 of the
  plan participants are prohibited from trading
  (Same language as in Oxley bill)
• Greater access to professional investment advice
• Clarification of tax treatment for ISOs and ESPPs

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White House Reaction

• Disgorge profits made based on bad financial
  reporting
• Dont change stock option accounting
• Hold CEOs Accountable
• For the veracity, timeliness and fairness of
  public disclosures and financial statements via
  CEO signoff
• Disbar executives and directors that do not do
  their duty

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SEC Reaction

• New accounting oversight body under SEC
• Greater involvement in FASB agenda and oversight
• Shorten 10K and 10Q filing periods
• Immediate electronic filing of insider stock
  transactions
• Enforcement escalated

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NYSE/NASDAQ Reaction

• Governance reform through changes in company
  listing agreements
• Stockholder approval for stock option plans
• Tougher independence rules for directors
• Audit committee should select the auditor
• Board approval for related party transactions
• CPE for directors
• Codes of conduct for all companies

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FEIs Code of Ethics

• FEI's mission includes significant efforts to
  promote ethical conduct in the practice of
  financial management throughout the world.
• Senior financial officers hold an important and
  elevated role in corporate governance. While
  members of the management team, they are uniquely
  capable and empowered to ensure that all
  stakeholders interests are appropriately
  balanced, protected and preserved.
• This code provides principles which members are
  expected to adhere to and advocate. They embody
  rules regarding individual and peer
  responsibilities, as well as responsibilities to
  employers, the public, and other stakeholders.
  Violations of FEIs Code of Ethics may subject
  the member to censure, suspension or expulsion
  under procedural rules adopted by FEIs Board of
  Directors.

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FEIs Code of Ethics

• All members of FEI will
• Act with honesty and integrity, avoiding actual
  or apparent conflicts of interest in personal and
  professional relationships.
• Provide constituents with information that is
  accurate, complete, objective and relevant,
  timely and understandable.
• Comply with rules and regulations of federal,
  state, provincial, and local governments, and
  other appropriate private and public regulatory
  agencies.
• Act in good faith, responsibly, with due care,
  competence and diligence, without misrepresenting
  material facts or allowing one'sindependent
  judgment to be subordinated.

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FEIs Code of Ethics

• Respect the confidentiality of information
  acquired in the course of one's work except when
  authorized or otherwise legally obligated to
  disclose. Confidential information acquired in
  the course of one's work will not be used for
  personal advantage.
• Share knowledge and maintain skills important and
  relevant to constituents' needs.
• Proactively promote ethical behavior as a
  responsible partner among peers, in the work
  environment and the community.
• Achieve responsible use of and control over all
  assets and resources employed or entrusted.

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Pro Forma Measures in Press Releases

• Use of pro forma measures continues to grow -
  alleged abuses proliferate
• The SEC issued a cautionary advisory and investor
  alert in December
• FEIs position these measures can help or hinder
  understanding the results
• FEI has developed Best Practice Guidelines in
  cooperation with NIRI

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Best Practices from FEI NIRI

• Endorsed by the SEC in speeches and the recent
  SEC Cautionary Advisory
• FEI Earnings Press Release Guidelines
• Include earnings per GAAP
• Present pro forma measures within the context of
  a GAAP Framework, consider a tabular format
• Measures should be consistent for periods being
  compared

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Best Practices from FEI NIRI

• Keep a reasonably balanced perspective
• Discuss both positive and negative factors
• Significant events reported should be consistent
  with MDA
• Discuss earnings outlook
• Use Safe Harborlanguage and keep it current

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the world of corporate finance
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FEIs Mission

• To be the preeminent association for financial
  executives and to
• Alert members to emerging issues
• Develop the professional and management skills of
  members
• Provide forums for peer networking
• Advocate the views of financial executives
• Promote ethical conduct

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FEI Internet Community

• www.fei.org
• FEI Express and other special interest
  e-newsletters
• Job Postings/Resume bank/Career coach
• Unlimited CPEs for 199/year through SmartPros
  Advantage course catalog, plus FMN Online
• Research Foundation publications
• Web conferences/teleconference registration
• Apply for or renew membership
• File Library of expert presentations
• Chapter Toolkit
• Member Database

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FEI Accomplishments

• Active Advocacy
• Post-Enron reform leadership
• IASC positioning/member representation
• International Employee Stock Option Coalition
  formed in December
• Business Combinations
• Consolidations project
• Exclusive member survey on post-Enron reforms
  with BusinessWeek

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FEI Accomplishments

• Popular conference calls
• 86 chapters hold more than 600 meetings -
  networking, development
• Annual sponsorship program includes NYSE, Marsh,
  The Financial Times
• Chapter Toolkit expanded
• More timely products from the FEI Research
  Foundations

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FEI Improvement Areas

• Responsiveness to member needs
• Building an Internet community
• Programs services delivered in new ways to
  accommodate busy members
• Program support for chapters
• Provide MORE networking for members
• More accessible professional development
• Grow our membership base
• Global vision

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Dec 01 Member Survey

• Member value of FEI 7.35 out of a 10
• 1 member benefit Networking (information
  second)
• Improvements needed for chapter programs and
  career services
• About 1 in 3 members visit the FEI web site 2x or
  more in a month more reach needed

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How YOU can make FEI even stronger ...

• Contemporary chapter operations
• Recruit colleagues
• Local leadership
• Join a national technical committees Private
  Co.'s or Technology
• Share your best practices

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Emerging Issues for Finance Professionals

• Philip B. Livingston
• President and CEO
• Financial Executives International