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Navigating the Current Economic Crisis: What It Means for Businesses March 2009 ©2009 The American Institute of Certified Public Accountants Introduction • Our world at a glance • Bolstering the economy • Key considerations and risk factors in a recessionary environment • Resources Our World at a Glance • Global economic challenges and issues • U.S. economic growth slowed – recession • Changing regulatory environment • Financial markets turmoil • Scandals: Madoff, Satyam, etc. • Social Security questions • Public pensions at risk • Shrinking workforce and massive layoffs • Sustainability and environmental issues Bolstering the Economy The Economy Recovery American Recovery and Reinvestment Act of 2009 Where the money is going: Education & Training Health Care 7% 8% Energy 5% Other 1% Tax Relief 37% Protecting the Vulnerable 10% Infrastructure & Science 14% State & Fiscal Relief 18% Overview of Financial Stability Plan Troubled Assets Relief Program Homeowner Affordability and Stability Plan • 10/3/2008 - $700 billion • 3/4/2009 - $75 billion Capital Assistance Program • 2/25/2009 –“Stress Test” Term Asset-Backed Lending Facility • 3/3/2009 - $1 trillion American Recovery and Reinvestment Act Small Business and Community Lending Initiative • 2/17/2009 - $787 billion • 3/16/2009 - $15 billion Small Business & Community Lending Initiative Purchase AAArated SBA loans Raise the SBA guarantee on its loans to 90% Reduce 7(a) and 504 loan fees, and increase oversight and processing funding Regulatory Restructuring Proposals • Currently several proposals recommending regulatory restructuring. • General consensus emerging for the creation of a systemic risk regulator. • The Federal Reserve would be natural place for this position. Key Considerations and Risk Factors During Economic Downturn Risk Management Financial Statement Disclosures Fair Value Impairment Complex Financing Arrangements Pension Plans Fraud Liquidity and Going Concern Internal Controls and Processes Risk Management • Review current risk management process – Provide information on risk to the right people at the right time • Identify new areas of risk due to ongoing economic turmoil – Counterparty risk – Amounts of recourse, non-recourse and unlevered financings – Liquidity requirements - renewing lines of credits Financial Statement Disclosures • Transparency is important for investors and other stakeholders • Expanding disclosures in the financial statement footnotes and discussion in MD&A for: – Liquidity and debt covenants – Impairments – Risk factors – Relationships with distressed businesses – Post-retirement plan assets and pension funds Fair Value • Fair value measurement ... a debate surrounds fair value in illiquid markets – SEC mark-to-market study recommends against the suspension of fair value accounting standards – FASB added new fair value projects to agenda • Related to the application guidance used to determine fair values • Disclosure of fair value estimates Impairment • Determining when an investment is impaired • Factors to consider – Whether the investor expects to collect all amounts due according to the contractual terms of a security – If an adverse change in cash flows has occurred, the investment is other than temporarily impaired – The degree of decline in value, the time until anticipated recovery of value, and period of time a decline has existed – Professional judgment is required • Disclosure of impairments Complex Financing Arrangements • Complex financing arrangements – Securitizations – Other structured entities (SPEs) – Recourse or non-recourse • A thorough understanding of the transaction and the underlying economics of the transaction • Identification of the risks associated with the transaction • Adequately disclosed in the financial statements and discussed in the MD&A Pension Plans Internal Controls and Processes • Review of internal controls and processes during periods of change – Company and organization changes – Process controls for potential downside – Impact on financial statements certification – Increase potential for fraud – Use monitoring guidance issued by COSO Fraud • “Tone at the Top” is important • Fraud happens in companies of all sizes • Fraud happens globally –Foreign Corrupt Practices Act still applies • Company’s fraud prevention plan Liquidity and Going Concern • Cash flows, ability to obtain cash and debt covenants – Tied in with “going concern” • Many factors to consider during uncertain economic times for “going concern” – Geographic area – Industry company operates in – Financial health of customers and suppliers – Financing sources • Disclosures related to liquidity Resources • Online centers and publications • Economic Crisis Resource Center • CPA Straight Talk podcast series Online Centers & Publications • Online Centers → www.aicpa.org – – – – Economic Crisis Resource Center Financial Management Center Audit Committee Effectiveness Center 360 Degrees of Financial Literacy • Publications → www.cpa2biz.com – Current Accounting Issues and Risks 2008: Strengthening Financial Management and Reporting – Not-for-Profit Organizations Accounting Issues and Risks 2008: Strengthening Financial Management and Reporting Economic Crisis Resource Center CPA Straight Talk Podcast Series Questions? ©2009 The American Institute of Certified Public Accountants