SEC Chief Accountant letter to FASB Chairman re: O'Malley Panel recommendations

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July 18, 2001 Mr. Edmund Jenkins Chairman Financial Accounting Standards Board 401 Merritt 7, P.O. Box 5516 Norwalk, CT 06856-5116 Dear Ed: Next month a year will have passed since the issuance of the report and recommendations by The Panel On Audit Effectiveness (O'Malley Panel). As you are aware, it contains many useful recommendations for the various parties associated with financial reporting and the auditing thereof. A number of the recommendations were made to the Financial Accounting Standards Board as described in the attachment. As you are aware, we have asked the Public Oversight Board (POB) to report publicly on the progress being made on the implementation of these recommendations. We are keenly interested in the steps taken with respect to the recommendation for establishing a protocol with the Auditing Standards Board (ASB) to assess the auditability of proposed accounting standards before they are issued, including evaluation of auditability when field standards are field tested and formalizing the existing liaison with the ASB. To this end, the ASB did provide the FASB with comments regarding its recent exposure draft on business combinations and we look forward with interest to the Board's response. We also note that interest that has been renewed, which we share, in the issue of going concern reports and the quality of associated disclosures by companies, due in part to the demise of many dot.com companies. We look forward to the POB's reports on the progress the FASB has made on these important recommendations. If you have any questions, John Morrissey or I would be happy to discuss the O'Malley Panel report with you at your convenience. Sincerely, Lynn Turner Chief Accountant Attachment cc: John Morrissey Charles Bowsher James Gerson Manuel Johnson

Financial Accounting Standards Board

Auditing revenue

2.142 The Panel recommends that the FASB add revenue recognition to its agenda. The Panel believes that an authoritative statement on the broad principles of revenue recognition is sorely needed. Because this may be a long-term project, in the interim the FASB (or other appropriate bodies such as the Accounting Standards Executive Committee [AcSEC] or the Emerging Issues Task Force [EITF]) should identify and resolve or clarify areas of diverse or uncertain practice. Auditing estimates and judgments

2.163 The Panel recommends that the FASB:

Clarify the accounting for contingencies to enable more consistent application of the criteria for accruing losses. Establish a protocol with the ASB to assess the auditability of proposed accounting standards before they are issued, including evaluations of auditability when proposed standards are field tested. Formalize the existing liaison between the ASB and the FASB to help ensure timely identification of and reaction to audit issues arising from newly issued standards

Going concern considerations

2.190 The Panel recommends that the FASB:

Define the going concern concept and clarify that management, not the auditor, has the primary responsibility to assess whether the entity has the ability to remain a going concern Consider the appropriateness of the one-year time horizon in SAS No. 59. The FASB should evaluate this time horizon and recognize its importance to auditors in framing their audit reports. Promulgate explicit going concern disclosure requirements to fit various circumstances. Such requirements should include disclosures about the entity's reliance on the financial support of related or third parties to mitigate the adverse effects of conditions and events that create substantial doubt about the entity's ability to continue as a going concern.

http://www.sec.gov/info/accountants/staffletters/fasb071801.htm

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Modified: 07/31/2001