Financial Executives International (FEI) presents the top challenges for financial executives for 2013. Among key challenges are financial reform, ICEFR, cybersecurity, U.S. deficit and debt, taxes, private company accounting, IFRS, FASB/SEC appointments, health care, etc.
As has become a custom for Financial Executives International, we present the top challenges for financial executives for 2013. It is obvious the role of the senior-level financial executive is key in helping organizations meet their challenges. Our top areas identified are listed in alphabetical order:
COSO's Updated Internal Control Framework
In December 2012, FEI's Working Group on COSO filed its comment letter on the Committee of Sponsoring Organizations of the Treadway Commission's suite of three Exposure Drafts (EDs) updating COSO's landmark Internal Control-Integrated Framework. FEI is one of the five founding member organizations of COSO.
The COSO framework, originally published in 1992, was due for a “refresh” to reflect changes in the business environment, particularly in information technology. Additionally, over the past 20 years, COSO has increasingly become the “go-to” internal control framework, in the U.S. and in numerous countries abroad, as a result of being cited in regulations of the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board for purposes of implementing Sarbanes-Oxley Section 404 on internal control reporting by public companies, as well as being cited in certain American Institute of Certified Public Accountants literature for certain internal control-related engagements for private companies.
FEI’s letter acknowledged COSO’s refresh of the internal control framework, but questioned whether the EDs went beyond a refresh. Also, the letter questioned whether the 17 “principles” and 81 “attributes” or “points of focus” identified in the EDs could encourage too much of a checklist approach and significantly change the way the effectiveness of internal control over external financial reporting is determined, which could unduly harm companies that have not experienced any change in their underlying internal controls.
Similar to the experience with Sarbanes-Oxley, this is something members should focus on when the new guidance is issued in early 2013 and not wait until the final implementation date. If implementation issues are identified, members may be able to assist each other and raise issues, with the audit community and within COSO.
No matter how worried the top management team is about information security, it isn’t worried enough. The team should be terrified for at least two reasons: any system connected to the Internet can be breached by attackers; and cyberattacks could destroy the company.
What started as aggravating hacking by kids and disgruntled insiders has now expanded to vicious and plundering attacks by organized crime, fierce competitors and rogue nations. The number of attackers is increasing quickly, and the losses due to their attacks are soaring. The 2011 Norton Cybercrime Report estimated global losses of $400 billion a year, with one million victims a day.
Virtually all information is valuable to somebody besides its owner, whether it is internal data, such as bank accounts or new product designs, or external data, such as credit card numbers. The larger the company, the larger the loss, and the more it would be worth the time and resources required to crack its defenses.
Cyberattackers look for the easy hits, so companies with robust defenses aren’t often worth the trouble. But security breaches are now so common and so inevitable that a major part of any company’s defense should be a plan for reacting after the breach, and preparing for meeting legal requirements to announce breaches (now required in 46 states and many countries).
In the final analysis, the threat of cyberattacks puts every company in a position that is unprecedented in corporate history. The global economy is at risk, and technology has yet to solve the problem it has created. [This section is excerpted from the article “Every Company is a Potential Cyberrisk Victim,” by Glenn Alan Cheney, which appeared in the May 2012 issue of FEI’s flagship publication Financial Executive.]
Though the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010, regulators are still finalizing the hundreds of rules required by the law, which aims to reform financial market regulation and reduce systemic risk in the financial system. Though many aspects of the Dodd-Frank Act create uncertainty — from the Volcker Rule to the capital requirements on banks — senior financial executives whose organizations employ swaps to hedge business risk must pay careful attention to final over-the-counter derivatives rules and compliance dates in 2013.
Of utmost importance to end users — those commercial businesses hedging and mitigating risk — will be the final rules on margin requirements. Dodd-Frank provided an end-user exemption from new clearing requirements and its authors intended to also exempt end users from margin requirements. However, “prudential regulators” (five regulators, including the Department of the Treasury, Federal Reserve and Federal Deposit Insurance Corp.) have proposed rules that would apply margin to all swap transactions.
FEI and the Coalition for Derivatives End-Users have urged regulators to not impose margin on end users, and the U.S. House of Representatives passed legislation in the last (112th) Congress that would exempt nonfinancial end users from margin, as well as a bill to exempt inter-affiliate swaps from clearing and margin requirements. At the time of this writing, the U.S. Senate has not passed either bill, which means that to become law in 2013, the two bills would need to be introduced and passed in both chambers.
On another financial reform front, money market funds (MMF) could face regulatory changes in 2013. Last year, SEC Chairman Mary Schapiro had planned to hold a vote on MMF reforms, but was forced to remove the issue from the SEC’s regulatory agenda because of a lack of support from three SEC commissioners. Instead of letting the issue die, the Financial Stability Oversight Council (FSOC) — a council of regulators created by Dodd-Frank to oversee the financial system and mitigate systemic risks — revived it, releasing three reform options for public comment.
Among the options: requiring a floating net asset value, a capital buffer with certain redemption delays and a three percent buffer combined with other measures such as strict diversification requirements
After the public comment period on the proposal closes, FSOC is expected to make a formal final recommendation to the SEC, at which time the SEC must either vote on the recommendation or formally write to FSOC explaining the reason for not acting. In this case, FSOC could recommend other regulatory options. such as subjecting MMFs to Federal Reserve supervision. Financial executives should expect this issue to continue to be a hot topic in 2013.
With the Supreme Court’s decision to essentially uphold the Patient Protection and Affordable Care Act (PPACA) and President Barack Obama’s re-election for a second term, the year 2012 solidified what many expected — the 2010 health care reform law is here to stay. Since the future of the law was so uncertain, some senior-level financial executives may have held off on making major changes in terms of their organization’s health coverage.
However, 2013 will be the time for employers to make the big “pay or play” decisions, since those businesses with more than 50 employees will face a $2,000 penalty per full-time employee if they fail to provide health coverage, as of Jan. 1, 2014. Alternatively, they can choose to “play” in the system, providing adequate health coverage, but with potentially increasing costs of delivering coverage.
Other key changes for employers this year include new reporting on form W-2 the cost of coverage under an employer-sponsored health plan, which will generally be furnished to employees in January 2013. While the health insurance exchanges will not be fully up and running until 2014, by March 2013 the law requires employers to provide a notice to employees of their right to purchase health insurance coverage through a state insurance exchange. As regulations continue to be written to fully implement the law, this year will be critical for employers to weigh the overall costs and benefits of providing health coverage in the post-PPACA era.
Private Company Council
A highly anticipated development in 2013 is the gearing up of the Private Company Council (PCC) and, equally important, what the actual output may be this year. That, in turn, will be dependent on the genuine support, cooperation and honest dialogue PCC shows toward, and is shown by, the Financial Accounting Standards Board and its staff.
PCC was formed by FASB’s oversight body, the Financial Accounting Foundation (FAF), to advise FASB on how to make existing accounting standards and proposed accounting standards more meaningful to users of private company financial reporting and more cost-beneficial to preparers and auditors. FEI is pleased that the chair of its own Committee on Private Company Standards, George Beckwith, serves on the PCC.
At its inaugural meeting in December 2012, PCC identified four areas as priority areas for the FASB staff to study for possible improvement and simplification for private companies. These are (using “pre-codification” FASB standard numbers for reference): FIN 48: Accounting for Uncertainty in Income Taxes; FIN 46R and FAS 167: Variable Interest Entities (VIEs); FAS 141R and FAS 142: Business Combinations (specifically, acquired intangibles, other than Goodwill); and FAS 133 (specifically, “plain vanilla” interest rate swaps).
PCC also discussed feedback on the FASB staff’s Invitation to Comment on a Decision-Making Framework for Private Company Standards. It is FEI’s hope that real action on these important issues will not get bogged down in too much “study” or in an overly burdensome or theoretical decision-making framework and that we will see some sensible and practical relief on at least one or more of these standards finalized this year.
Among the current projects that the Public Company Accounting Oversight Board is working on — two with potentially great impact to companies — are the auditors’ reporting model and the project that proposes to require mandatory firm rotation. Final standards that could be issued in 2013 will be among matters that executives need to follow keenly and weigh in by participating in roundtables and filing comment letters.
The thought behind the request to require mandatory rotation is to improve auditor independence, objectivity and skepticism. Preparers pushed back stating, among other things, risk to audit quality, increased costs, role of the audit committee and complex operational challenges.
As has been the case over the course of the U.S. Securities and Exchange Commission’s 75-plus year history, the SEC staff keeps the regulatory train running on time, or at least running. But without a conductor at the helm, questions remain — even with strong and in some cases long-standing senior staff and Chairman Elisse Walter, who recently stepped up from commissioner to fill Chairman Schapiro’s vacancy. Who will the president appoint to fill new vacancy of commissioner, and will that signal his pick for a long-term chairman?
In the meantime, will the SEC take any definitive action on what some (in particular, the International Accounting Standards Board) view as the SEC’s “stalled” International Financial Reporting Standards (IFRS) road map, i.e. to consider whether, and if so, how, to incorporate IFRS into the U.S. financial reporting system? And will the SEC move on other highly politicized rulemaking under Chairman Walter?
Among other key appointments of interest at the SEC this year will be the naming of a chief accountant and director of the Division of Corporation Finance.
Similarly, at press time, we still await the naming of a new chairman at the Financial Accounting Standards Board (Chairman Leslie Seidman’s term as chair ends this June). Will it be an internal candidate, such as a long-standing board member? And who will the Financial Accounting Foundation Trustees bring in as a new board member and potentially new chairman if it does not choose an existing board member to serve in that role?
Further, what will the future of convergence be — with or without a formal SEC decision this year — once the formal FASB-IASB Memorandum of Understanding regarding convergence (which has been extended numerous times) effective through 2013, comes to a close this year?
Lastly, will there be much action on the FASB and IASB’s separate projects on their Disclosure Framework, which in the U.S., the SEC has indicated it will follow the FASB’s project more closely as well
With ongoing talk about deficit reduction and the need to overhaul the nation’s outdated tax code, tax reform in the 113th Congress is on the table in a big way. Both the House and Senate tax-writing committees have spent the last two years laying the groundwork for tax reform by holding more than 20 hearings, and both the White House and members of Congress have offered legislative proposals to get the ball rolling.
The lame duck session of the 112th Congress may set the stage for how tax reform moves forward, either by setting timeframes and parameters for action or strengthening the case for action in the new year as soon as possible to address longer-term fiscal concerns.
FEI members from both privately held and public companies have much at stake in this debate. Though policymakers appear to have consensus on lowering the U.S. corporate tax rates to better compete internationally, there is still the question of what to do with pass-through income that is taxed at the individual rates, as well as the estate tax, which is an important tax planning concern for privately held and family-owned businesses.
This is why it is imperative that both public and private companies, regardless of structure, be treated in a fair manner. The only way to successfully accomplish this is for a comprehensive tax reform package to be put forth that gives both public and private companies competitive rates, not just globally, but also with one another.
Tax reform is likely to be a bitterly contested legislative process. Everything is on the table — and there is nary a constituency not interested in its outcome. FEI, with its expertise and breadth of knowledge on tax and financial issues, is well positioned to be a key advocate for a competitive tax system for today’s realities and our nation’s future fiscal well-being.
U.S. Debt and Deficit
One year ago, senior financial executives expressed continued worry over the debt and deficit crisis facing the United States. As we kick off 2013, that concern remains. While there is optimism on some fronts, the U.S. is on the verge of breaking through the debt ceiling, which stands at an astronomical $16.4 trillion. Though this may not happen officially until the spring, credit rating agencies have already threatened a downgrade for the U.S. if the ceiling is breached. As in the past, the likelihood of raising the debt ceiling remains strong.
The fight over controlling the debt and deficits will certainly be front and center in the minds of elected leaders as the 113th U.S. Congress convenes.
FEI remains committed to a bipartisan solution to the nation’s fiscal situation. It is time for all sides to come together in the interests of America’s economic future. Senior financial executives are held to a high standard in maintaining an orderly fiscal house. It is time leaders in Washington do the same.
Financial Executives International
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