Roundtable: Accounting for Medical Technology

FINANCE

In these times of accounting scandals and Sarbanes-Oxley requirements, medical device executives can't afford to neglect their numbers. Although tightly controlled and transparent accounting practices are mandates among public companies, private entities—particularly those that may want to position themselves for an eventual sale or initial public offering—can also reap significant benefits by adhering to stringent guidelines in their financial management.

To find out more about accounting challenges facing medical device manufacturers, MX recently spoke with five experts in the field (see sidebar). In this roundtable discussion moderated by MX editor-in-chief Steve Halasey, these industry experts discuss issues surrounding Sarbanes-Oxley compliance, revenue recognition practices, and other challenges facing medical device executives when balancing their companies' books.

MX: The field of accounting is a complex one, and many people who don't work in the industry may not quite understand how the industry is divided. Perhaps you can start by providing some background on how the accounting industry is organized.

Tracy T. Lefteroff: The big dividing line in accounting is between the audit practice and the tax practice. People working on the audit side are focused on producing financial statements related to generally accepted accounting principles (GAAP) and the associated Securities and Exchange Commission (SEC) offerings and filings that are a part of that process.

The tax practice is totally different. People working on that side of the industry are focused on income tax filings, income tax consulting, and compliance issues related to U.S. and foreign taxation, as well as state and local taxation.

In addition to audit practices and tax practices, most accounting firms have another division called the advisory practice. These practices, which used to be referred to as management consulting, can encompass a variety of different services that aren't audit or tax related. Such services may include due diligence and transaction services, as well as human resource applications or merger integrations—essentially anything outside the realm of pure tax or pure audit.

Jim, you work within a company that makes use of such services. Are the dividing lines Tracy outlined similar to the way in which you think about these functions?

James Press: Yes, I think along those same lines. In addition, companies have to take into consideration the need to maintain independence in these functions. The external public firms we hire need to be independent. They can't be performing management functions, and if a firm handles a company's tax provision, it should not be handling the company's audit, and vice versa.

When medtech manufacturers outsource accounting services, it's not a one-stop shopping trip like it was 10 years ago. Instead, if we hire PricewaterhouseCoopers (PwC; New York City), it may be for tax work, audit work, or consulting work—but not for a combination of those services. But regardless, we do need all three offerings.

Lefteroff: Basically, if an accounting professional provides consulting services, the person is pretty much precluded from doing any kind of audit work.

Scott Taylor: If a company hires our firm to be its auditor, the only other function we might perform if the company requests it is to prepare the company's income tax return.

If a company hires our firm to do its consulting, we can handle the Financial Accounting Standards (FAS) 109 work, which is the income tax provision and deferred income tax calculation.

We can also do stock valuation work. Some of the professionals in our valuation department can help assign value to equity instruments or help evaluate a company's stock compensation and accounting under FAS 123R.

What is your particular area of expertise?

Taylor: I'm not on the consulting side. I'm on the assurance side, so I am involved in the audit process.

Our firm has four lines of business. If our firm is not performing a company's audit, one of our other groups, such as tax or consulting services, can provide various other services to that company.

Press: Because Applied Imaging was acquired by Genetix Group during the course of the year, Burr, Pilger & Mayer (BPM) was no longer engaged as our accounting firm at our year end. But we needed some timely financial reports, so we engaged some of the people who had worked on the audit as our accountants to help us through the year end.

Taylor: At Applied Imaging, BPM shifted from the role of auditor to that of a consultant, because the company was acquired and now has a new auditor.

A Turning Point

It has now been five years since passage of the Sarbanes-Oxley Act, which was intended to reduce the possibility of corporate misbehavior. How would you characterize the general attitude of the American public toward corporations today?

Lefteroff: I'm not sure the general public fully understands Sarbanes-Oxley. Obviously the accounting firms and the companies that are subject to Sarbanes-Oxley understand the extent of the law, but most members of the general public may not fully appreciate how comprehensive and complex the process of complying with Sarbanes-Oxley really is.

Most members of the general public know that there were a number of corporate scandals a few years back, and they attribute these scandals to poor control and corruption among leaders at the top of the organizations that were involved. In addition, most people understand that Sarbanes-Oxley is the tool that was put in place to force companies to be more vigilant in detecting and preventing similar occurrences in the future. However, the average person on the street doesn't fully understand the extent of what the legislation did.

Jim, from an individual company's standpoint, has Sarbanes-Oxley proven to be a useful tool or just a compliance pain?

Press: When Sarbanes-Oxley initially emerged, the rules were very unclear. Public auditing firms and industry members had to struggle to interpret the rules in terms of what needed to be tested, how certain processes should be documented, and what phrases in the legislation, such as material weakness, really mean.

Since the legislation went into effect, all those details have been hammered out. But in doing so, all kinds of issues can arise. Compliance with all of these new requirements, for instance, can be a very expensive proposition for a growing company that hasn't broken even yet. So it becomes important to figure out how companies can comply in an economical manner, so that compliance doesn't become a financial burden.

Companies that are in the second tier, as measured by their market cap, have to be rooting for even more delays with regard to when they will be required to comply with Sarbanes-Oxley requirements. We were very relieved last year when we found out that our compliance was not going to be required until 2008. And I have to believe that second-tier companies and their audit committees are hoping for more delays that might permit some easing in the requirements, such as changing whether opinions will be required from both management and the auditors.

At this point, those kinds of changes are good news, and other changes are also being considered now that would make Sarbanes-Oxley less burdensome for small companies.

Overall, I think the work related to meeting Sarbanes-Oxley requirements needs to be done. They are good practices for a company. When we sold our company, potential buyers were interested in evaluating the reliability of our financials and the controls we had in place. Purchasing companies want a high degree of assurance that what they see is what they will get.

There has been pressure recently to make the requirements of Sarbanes-Oxley a bit more manageable. How do you see this situation playing out?

Taylor: I don't think the law will be changed, but I expect regulators will put out more guidance for people working in this area. Such guidance will likely direct them to take more of a top-down, risk-based approach to internal control auditing.

When Sarbanes-Oxley first came out, companies and auditors took more of a bottom-up approach. In a top-down approach, people would start by looking at a company's annual report, known as a Form 10-K. Then they would work their way down through the financial cycles that make up the transactions that are reported in the Form 10-K. This is in contrast to a bottom-up approach, in which people begin by understanding and documenting all the individual financial cycles and gradually work their way up to the Form 10-K.

A top-down approach will create some efficiencies and cost savings for companies. Also, if regulators push this concept in order to create more efficiency and reduce costs, it is likely to benefit companies' investors.

The spirit of Sarbanes-Oxley—which was to improve internal controls—has had a favorable outcome for all companies. The act promotes good internal controls so it should position companies for growth in the future. The way it was implemented caused companies to react negatively because the cost of compliance was so high. Now it's starting to shift to a more top-down approach. Hopefully that shift will reduce the cost of Sarbanes-Oxley Section 404 compliance.

Generally speaking, medical device companies seem to be relatively good corporate citizens. The industry has not been hit by the types of scandals that have emerged in other areas. What is your sense of the effects of Sarbanes-Oxley requirements on medical device companies?

Lefteroff: The medical device space is pretty straightforward, quite frankly. There is some industry crossover, however, such as with companies whose devices use software. That adds a little complexity. Device companies can also run into complexities associated with Emerging Issues Task Force (EITF) Issue 00-21, which deals with accounting for revenue arrangements with multiple deliverables.

But beyond that, accounting is pretty straightforward in the medical device industry. It's less problematic than in other industries, and the associated financial reporting is fairly transparent to the public due to such accounting simplicity. Unlike some other industries, there isn't much opportunity to manipulate revenue and other metrics in the device industry. The key issues to understand in regard to medical device companies are the ways in which they sell their products, the approval processes that medical device companies go through, and how such processes affect the way they operate.

Taylor: I agree that accounting tends to be pretty straightforward for medical device companies. In the past, there hasn't been as much scrutiny on the medtech industry as there has been on the software industry and others in which revenue recognition is more subjective.

However, this may change in the future. There may be more scrutiny by the Securities and Exchange Commission of medical device and biotech companies because of the software that is being incorporated into their products, as well as the multiple element revenue recognition arrangements that characterize the industries. These are areas in which errors and problems can occur.

So, although medical device manufacturers have enjoyed comparatively low levels of scrutiny in the past, it's possible their filings will receive more SEC scrutiny in the future as the industry continues to grow.

Press: Regulation is nothing new to the medical device industry. Companies in this industry are regulated by FDA and have to comply with good manufacturing practices (GMPs) and standards of the International Organization for Standardization (ISO; Geneva). Therefore, the medical industry has a mind-set that is tuned in to documentation, controls, audits, and reviews. It's the nature of the industry.

If you look at a small start-up company in another industry, it may have no foundation whatsoever on which to document and control its business. The company might just process transactions and get on with its business. But medical device companies are inherently surrounded by so much regulation that it's not necessarily a hard sell to get companies in the industry to comply on the financial side as well.

When it comes to accounting at a public medical device company, the requirements are no less onerous than in any other industry. Just like every other public company, our filings were reviewed by the SEC every three years, and we were subject to comment letters. And just like every other public company, we had to implement all the accounting pronouncements. And some of them are difficult to implement, such as FAS 123R, which covers stock-based compensation. Our company had to plan for issues such as segment accounting and goodwill impairment. So medical device manufacturers shouldn't get lulled into thinking that medtech companies are on an easy financial reporting track. They're not.

But because medical device companies deal with regulation in other functions, they are already keyed into the necessities of compliance?

Press: That's my impression. I've only worked with one medical device company. But moving into this industry really opened my eyes to the entire issue of compliance and the need for reviews, quality audits, and thorough documentation.

Revenue Recognition

How and when companies recognize revenue seems to be a focus of many recent audits. This area can be tricky, since medical device companies may sell products on consignment, or may sell products that require installation. What are the most-frequent causes of revenue recognition issues for medtech companies?

Taylor: The areas in which problems most frequently arise for medical device companies are situations in which multiple elements are being delivered to a client. For example, a medical device might include both hardware and software components. That makes it difficult to determine the proper time to recognize revenue related to the sale of that product. There are multiple issues that must be considered, such as arrangements related to software upgrades. There might also be maintenance agreements that needs to be considered. All those different revenue pieces need to be carved out and accounted for as they are earned. In such cases, revenue recognition accounting practices are similar to those in the software industry.

The complexity of these issues depends on the company. But generally, ensuring that revenues are recorded in the right period is one of the most challenging accounting issues encountered in an audit.

Carl Saba: Revenue recognition also has a significant impact on the valuation side—and ultimately on financial reporting—because valuations feed numbers back into the financial statements. Recently I was working on a valuation in which there was a lot of back and forth among the company's auditors as to how revenues should be recognized. A lot of the debate revolved around the fact that the company had trouble estimating its costs related to service contracts. The question of how much revenue should be recognized as it's collected versus deferred was causing a lot of heartache.

In turn, that debate caused complications with my valuation because I was trying to compare how the company was recognizing revenue relative to its peer group. It was a complex issue because many of the uncertain areas had to do with circumstances specific to this company and not the other companies with which we were comparing it. In this instance, revenue recognition is tied to the ability to estimate the costs associated with the revenues.

Jim, there seem to be multiple situations that present revenue recognition complexities for medical device manufacturers. For example, some systems have remote diagnostics built in that are a part of maintenance and service plans. In addition, some devices have a significant amount of disposables related to their sale, and certain systems are put into hospitals through lease-back arrangements. In these cases, the hospital may never actually own the system, and the manufacturer often makes most of its money from the sale of disposables. What has been your experience with situations like these that can raise revenue recognition concerns?

Press: Devices containing software offer some of the greatest challenges in revenue recognition. In fact, I recently received an announcement from a public accounting firm stating that it plans to bring people up to date on the process of software revenue recognition for nonsoftware companies.

One thing the firm specifically stated was that it was going to issue more interpretations on this process because many companies with products and services that include software must consider the procedures under the American Institute of Certified Public Accountants' Statement of Position (SOP) 97-2, Software Revenue Recognition. In short, this firm realizes that it needs to have a training class specifically for companies that may not have even considered that they are subject to software rules under 97-2.

When I started at Applied Imaging two years ago, I came on at the tail end of a restatement. The restatement was related to revenue. Prior management did not understand that the company was subject to SOP 97-2. They apparently believed that future software releases could be considered software maintenance releases, and they did not understand the accounting implications of the difference between the two.

The restatement was brought on by an analysis of one of our company's larger deals, during which the auditors noted that a functionality of the software was not available or delivered yet. This finding spun into a three-year restatement that carried a significant cost and required a large time commitment. In hindsight, it seems obvious that our company was subject to software revenue recognition rules. The deal stood out from others because typically, in the past, our company had shipped all promised software with the systems. In this case, though, the software came later.

Applied Imaging sells imaging analysis products in the genetic testing and cancer pathology markets. So when you break down the systems that we sell, they are essentially made up of cameras, slide loaders, microscopes, computers, and analysis software. However, there is relatively little margin on the hardware components. The real value in what we sell is in the software. Therefore, it's a wonder the lightbulb didn't go on sooner as to what we needed to do to be compliant in our accounting practices.

With revenue recognition, there are all kinds of pitfalls a company can run into. In comparison with other medical device manufacturers, our company is fortunate in that our systems require minimal training and minimal installation. Therefore, we don't have a lot of carve-out deferrals on multiple elements of a sale. However, as mentioned, our major issue is related to future commitments for software functionality and products and whether they are specified or unspecified.

When companies evaluate their need for 97-2 compliance, they should be attentive to their product roadmaps. Finance executives and salespeople should work closely with the engineering group in outlining such roadmaps. This can help avoid potential oversights.

In order to ensure we don't run into situations in which future releases are quoted but not available, our internal practice is to ensure excellent communication among engineering, sales, and finance. We don't want unintentional mistakes regarding future deliverables.

Although we're subject to (SOP) 97-2, we're fortunate in that our revenue recognition issues aren't much more complicated than dealing with future deliverables of software and occasional credit-worthiness issues.

Tracy, what are some of the other areas in which medical device manufacturers can run afoul of revenue recognition requirements?

Lefteroff: We could spend a lot of time on the topic of revenue recognition. In fact, EITF 00-21 recently raised the level of complexity to a whole new level. Depending on how a company draws up its contracts, a manufacturer could fall into any number of revenue recognition scenarios that previously didn't exist under the old accounting rules.

The environment for revenue recognition is much more complex than it used to be, and companies have to pay a lot more attention to how they contract and sell their products. That's a challenge for not only medical device companies, but all other technical industries as well.

Financing Complexities

Emerging medical device companies often go through several rounds of financing on their way to maturity as a private or public company—or to acquisition by a larger entity. What accounting-related difficulties can companies encounter because of such funding transactions?

Saba: I see many companies going through successive rounds of both debt and equity financing. From a valuation perspective, there are a few issues inherent to that process that can affect a company's financials. First, rounds of financing lead to a complicated capital structure for the company in which several different layers may exist. For example, a company may have common stock and several layers of preferred stock with different rights and liquidation preferences, as well as options, warrants, and occasionally convertible debt.

When companies are regularly issuing options, they have to comply with FAS 123R. This standard requires companies to set a price on stock options as they are issued and, subsequently, to expense them.

When my firm is asked to value a company's common stock, the process requires valuation of the equity of the company as well as allocation of that equity value through the company's complicated capital structure. This process can be challenging because much of the valuation hinges on when a liquidity event occurs for the various classes of stock for the various equity and debt holdings.

Our firm usually uses an options-based lattice model in performing a stock valuation. A lot of appraisers use an options-based model or a probability-weighted approach. But there is a certain amount of guesswork that goes into that, and some interesting questions are raised when a company—particularly a privately held company—plans to have a liquidity event, such as a company sale or initial public offering or some other exit strategy. Finding a reasonable way to handle those cases is one element that many appraisers are working through right now. Ultimately, the successive rounds of financing often lead to a complicated capital structure, and makes the valuations required for financial reporting more challenging.

When there is a financing where warrants are issued along with debt, accounting rules require a partitioning of the financing between the relative fair value of the warrants and the debt. Such a situation again requires a valuation to come into play to handle the accounting for the transaction. If there is convertible debt, the conversion feature on the debt has to be valued.

In short, there are many situations in which we have to use options models to do valuation work. In many of these situations, the simpler, more widely recognized Black-Scholes options pricing model does not work very well, and we have to switch to a more complicated model. The lattice model we employ requires us to assess various potential outcomes and their impact on the value of the underlying instrument.

Jim, your company recently went through a sale that required special accounting considerations.

Press: I've had a taste of just about every aspect of the financing smorgasbord since I've been with Applied Imaging. In preparing for the sale, it was important for us to have a good relationship with the bank with which we had a line of credit.

Another financial element leading to the sale was a private placement. The major question related to that placement was how much to take for our operating plans. We wanted to shore up our capital position and revitalize the business with the intent of selling the company, but we had to weigh that against the impact of dilution on current stockholders. The company had to walk a fine line in making the decision on how much to accept in the private placement.

In the end, the board got involved and we did take private placement financing. We did have some warrants, and we did encounter the issue of determining the value of the warrants and repricing some existing warrants.

The third event I was involved in was the sale of the company, which included two due diligence reviews. Going into a sale, it's good to have a company's financial blocking and tackling in place in order to instill confidence in potential buyers. Due to the restatement, one buyer appeared leery and wanted reassurance that our company's revenue recognition practices were cleaned up. And of course, our revenue recognition practices were. Therefore, we passed their evaluations with flying colors from the financial evaluation side. We had multiple bidders to drive up the offering price to purchase our company. That was interesting to watch.

Tracy, what are your thoughts on some of the issues that companies can run into when they are going through funding transactions?

Lefteroff: It depends on whether a company is public or private. In private transactions, due diligence is usually focused on companies' technologies and their management teams.

Usually private financings are led by venture capital or angel investors. So although issues such as fully diluted outstanding shares are important considerations, the due diligence and the decision-making process tend to be more focused on the technology itself.

Obviously, financings in the public environment are more concerned with compliance with the SEC process and the related disclosures, comfort letters, underwriters, and other elements that must be in place. Such elements can present challenges for companies that aren't prepared to be in the public sector and aren't prepared to meet the timetables associated with reporting under the Securities Exchange Act of 1934 after they're public. Those are the major differences between the issues faced by private and public companies when it comes to financings.

A lot of the mergers and acquisitions in the medical device industry involve emerging companies coming out of private ownership into the public arena. When these companies reach this point, are most ready to hit the ground running? Or does it typically take some time for these companies to adjust their financial reporting for the public arena?

Taylor: Our firm has been involved with a few transactions in which a private-company client has wanted to go public with what's called a reverse merger. This is a transaction in which a private company essentially steps into a public shell company that previously didn't have any operations. Often, the private companies may not be ready to handle the requirements that come with being a public company. As public companies, they must complete quarterly filings and have CPAs review their Form 10-Qs, and they must undergo annual audits. Private companies are familiar with annual audits, but the requirements and disclosures of the Forms 10-K and 10-Q are usually a lot more comprehensive.

In addition, as public companies, they must also comply with the requirements of Section 404 of the Sarbanes-Oxley Act and regularly have their internal controls audited. Depending on the size of the company, if it is a nonaccelerated filer, it will need to produce a management assessment of its internal controls for 2007, or produce an audit of its internal controls for next year (in 2008).

If companies plan to undergo the process of moving into the public realm, we recommend that early in the process, they hire financial personnel who are well versed in public company reporting. They must be able to manage the information that needs to be filed with the SEC. And even if they have financial personnel in place to handle reporting, they must still focus on getting their internal controls in shape to be audited. Often, the internal control systems at private companies aren't as sophisticated as they are at larger public companies. This may be an area that requires a significant amount of attention as well.

Where Credit Is Due

Medical device companies often qualify for tax credits related to their investments in research and experimentation. Can you define this credit and how companies qualify?

Lefteroff: The way in which medical device manufacturers qualify for such tax credits is by incurring expenditures that—as defined in the regulations—are for true research and development (R&D). Those expenditures can be grouped together and used to claim a credit that is calculated based on a fairly complex formula.

Companies can run into problems based on what they claim to be truly pioneering R&D. When a company gets audited, the Internal Revenue Service closely evaluates what costs were included in its filing for the tax credit, why those costs were included, and whether the company can substantiate that the costs were truly related to R&D as opposed to selling, general, and administrative expenses, or other areas.

T. J. Sponsel II: My firm is a specialty tax firm, and about 80% of what we deal with is R&D tax credits. The R&D tax credit is there to reward companies for their constant investment in R&D. However, the IRS is putting much more weight on the qualitative aspects of companies' R&D than it is on the calculation of the quantitative factors. The IRS doesn't want to see companies taking the credit on what the agency considers to be routine engineering as a part of the normal development of a product. Rather, the IRS wants to see companies pushing the envelope when it comes to developing new products in-house or helping their clients develop new products or processes.

Lefteroff: Yes. That is why I used the term pioneering; it has to be something new and innovative.

Does the IRS actually look at companies' laboratory notebooks to determine the extent and focus of their R&D, or is the agency's review based more on the attestation of the companies?

Sponsel: It depends on the level of the audit. The R&D credit is a fairly distinctive credit in the sense that the IRS maintains a dedicated team of about 17 or 18 engineers in Ogden, UT, who work exclusively on this credit. The first thing that team does is ensure a company has put together its documentation in a manner that can be presented to the IRS in the form of a report. They want to see a study that has been done either internally or by a third party that demonstrates the company has taken the steps needed to meet the criteria of the credit.

The team often also wants to see those lab notes. In some cases, we've had to make copies or PDFs of actual lab notes to demonstrate to the IRS that what the company is doing is different from previous work done in the field. The IRS wants to see that the fourth generation of a particular medical device is going to be different from the third generation. Companies must be advancing their technology to qualify for R&D credits.

Does the U.S. Patent and Trademark Office (PTO) have access to the material that is provided to the IRS with regard to the basic R&D that a company is doing?

Sponsel: A lot of times, it's the inverse situation. The documents that a company presents to the patent office often provide excellent evidence that the company meets the IRS criteria for the R&D credits. If a medtech client of mine has developed a utility patent, a lot of the notes developed in order to file for that patent contain the same information that I need to build that client's case for R&D credits.

Is the R&D credit available only at the federal level, or are such credits offered on a state and local basis as well?

Sponsel: The R&D tax credit is a federal credit. However, an increasing number of states are offering their own versions. Currently, about 35–45% of states offer some form of R&D credit.

At the federal level, the R&D credit is a general business credit. At the state level, such credits might be based on some sort of allotment. For example, Maryland sets a certain annual amount that it will give away for the R&D credit at the state level. Once it's gone, it's gone. So if a company files in September of a particular calendar year, it probably won't receive the credit because it's already been allotted to other companies that filed for it earlier in the year.

In terms of R&D credits, there is a significant amount of opportunity at the state level. In particular, California is a great state for such credits. My firm has a large client base in California, and in many cases, the state R&D credit for those companies tends to be larger than the federal credit.

Press: In regard to R&D credits, there could be some disappointment among companies with net operating losses (NOLs). For many companies, it may be a long time before they receive any benefit of an R&D credit, as there are expirations and caps.

Sponsel: In the case of companies with NOLs, those companies are often acquired by larger companies somewhere down the line. The smaller company's R&D credits—regardless of the company's NOL—do carry forward. And they can be carried over to the acquiring company. And in some states, the credits can actually be sold to outside companies.

Press: Prior to our company being purchased, we requested that PwC perform an Internal Revenue Code Section 382 study to identify what the NOL carryover amounts and timing would be in the event our company was purchased. In the end, it was a good analysis for us to go through, and there could be value in those R&D credits for a prospective purchaser.

Going Global

In March, the SEC hosted a long-planned forum to discuss its roadmap for the convergence of U.S. and international accounting standards. What are your thoughts on where that process stands and how it will affect medical device companies?

Lefteroff: The SEC has always wanted to have international standards play a much bigger role in its regulation, with the ultimate goal of having all capital markets around the world following the same basic accounting rules. However, the realization of that goal is still years away. We won't be seeing synchronized international standards in the short term. It took the European Union 4–10 years just to release its version of the International Financial Reporting Standards (IFRS) and standardize according to that. And it's going to take quite a long time to do something similar with U.S. accounting rules, which tend to be stricter than the IFRS rules. So although the dialogue is under way, with the intent of moving toward international standardization, it's a long way off.

In general, I don't see a big black cloud on the horizon. When it does happen, I don't expect it will have a huge impact on the way that medical device companies operate their businesses. It'll just be a different way of sorting through their financial reporting.

Jim, now that your company is a subsidiary of a UK company, would international accounting standardization make your job any easier or change your current processes?

Press: Currently, as a private company, we are changing some of our accounting policies to meet international accounting standards. We are not making a wholesale shift in accounting practices at this point, but we are making some modifications that will make it easier for our external parent in the UK to roll up our financials with its own.

Does global accounting make sense, and how will it affect companies?

Saba: If nations could agree on one standard, it would make life easier. Currently, difficulties arise for companies that need to look at comparables, particularly in the context of valuations for financial reporting purposes. Often, the comparables are not based on the U.S. GAAP standards. Therefore, it becomes very hard to use that data. It is already complicated enough within the United States itself, with issues such as revenue recognition varying from one situation to the next. If a company then has to deal with a different standard somewhere else, it adds even more complexity.

If everyone in the financial world can start speaking the same language, it will benefit everybody involved: the valuation experts, the readers of financial statements, and the auditors.

Taylor: I don't think there is going to be a lot of synergy between U.S. standards and international standards in the near term. That is a long-term project. The Financial Accounting Standards Board in the United States and the International Accounting Standard Board are starting to work together on projects. However, it is a very large task that will take several years to work through.

When discussing international accounting practices, one issue that comes up is the cost of complying with public company requirements in the United States because of Sarbanes-Oxley Section 404. Such costs may cause companies to consider going public on other exchanges outside the United States. Biotech and medical device companies looking to go public and to save on the cost of being a public company may look to other exchanges such as the London Stock Exchange, its Alternative Investment Market, or other exchanges. It seems that more companies are looking at potentially going public overseas instead of in the United States compared with what we have observed in prior years.

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