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December 6, 2022

Accounting News Roundup: Alibaba’s Auditors and Mandatory Arbitration | 05.27.16

Ed. note: We're cutting out early today, capital market servants. You should do the same. Drop stories and questions in Open Items for discussion. Enjoy the long weekend and we'll be back to full speed on Tuesday.

Alibaba's auditors

Alibaba disclosed earlier this week that the SEC was investigating some its accounting practices. And while that has a number of people concerned, they shouldn't forget one other troubling aspect: 

While Alibaba is listed on the New York Stock Exchange, it is based in China and audited by the Hong Kong affiliate of PricewaterhouseCoopers. China, citing concerns over sovereignty, has long barred inspectors from the U.S. Public Company Accounting Oversight Board from reviewing the work of local audit firms in charge of scrutinizing Chinese companies’ books. Alibaba is one of the largest U.S.-traded companies whose auditor is in that position.

I wonder what would happen if someone at the PCAOB just said, "Open Sesame"?

Arbitration

One topic that we've kicked around in the past is that of accounting firms — most notably, PwC — requiring its new employees to agree to mandatory arbitration and waive their right to class action. A ruling in Seventh Circuit Cout of Appeals yesterday said not so fast:

A federal appeals court on Thursday ruled that companies cannot force their employees to sign away their right to band together in legal actions, delivering a major victory for American workers and opening an opportunity for the Supreme Court to weigh in.

The United States Court of Appeals for the Seventh Circuit in Chicago struck down an arbitration clause that banned employees from joining together as a class and required workers to battle the employer one by one outside of court.

And I think most of you will appreciate the case, Lewis v. Epic Systems, because it will sound all too familiar:

The case began when an employee, Jacob Lewis, sued Epic Systems over denying him and other employees overtime wages. Epic, citing an arbitration clause that Mr. Lewis was required to agree to, tried to get the case thrown out. The district court thwarted the company’s request. Ultimately, Epic appealed, sending the case to the court of appeals. 

This Seventh Circuit ruling contradicts others elsewhere that have said mandatory arbitration is fine. This should be fun.

Non-GAAP worries

The chorus of non-GAAP worrying will get quite a boost if it can manage to draw in the executive pay worriers:

[T]hese adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets.

Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.

Companies that use non-GAAP measures to set their executives' performance targets run the risk of managers using the metrics "to hit performance bogeys [that] say less about a company’s underlying health than about executives desire to get paid more."

Previously, on Going Concern…

Megan Lewczyk wrote about underwater datacenters. And in Open Items, someone asks: "Why do Partners teach as adjuncts?

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