Author: Adrienne Gonzalez

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
The IRS is going after off-shore tax shelters and international banks to get its cut (presumably to make up for some tax revenue it has been missing out on in the last, oh, 8 years or so) but according to WebCPA, the IRS might want to tighten up its game on refunds.
It isn’t that the IRS is cutting checks for the heck of it – it turns out that the Treasury Department may need a quick refresher on controls for payments.

WebCPA:

[The Treasury Inspector General for Tax Administration report] found problems in the IRS’s handling of taxpayer payments that are subsequently dishonored by the banks in which they are deposited. Dishonored payments are not processed by banks for a variety of reasons, the report noted, including insufficient taxpayer funds. The IRS occasionally issues a refund to a taxpayer who had submitted an overpayment of taxes before the IRS realizes that the taxpayer’s check has been dishonored by the bank. This results in the taxpayer receiving an erroneous refund.
Between Jan. 1, 2008, and July 17, 2008, the IRS generated refunds as a result of dishonored check overpayments totaling approximately $53 million. TIGTA estimates that the IRS was unable to stop more than $20 million in refunds from being erroneously issued to nearly 14,000 individuals.

Well wait a minute, it was going to issue $53 million but was able to figure out $33 million were cut in error. That’s not so bad, is it?
The IRS cop out is that tricky stimulus check business of 2008 in which several dishonest taxpayers stopped payment on tax checks and made off with the stimulus booty instead of the money going towards offsetting the taxpayer’s tax liability. Sneaky!
Seriously, in the age of electronic funds transfers and billion dollar money market runs that cripple the financial system in a matter of minutes, how is it the IRS is still so far behind the times?
The TIGTA report claims that resolving this issue with proper controls on the IRS’ end could “protect approximately $102 million over the next five years from being issued to taxpayers in error.”
What’s $102 million nowadays anyway? That’s not even a fraction of an AIG bailout. No wonder the IRS isn’t trying too hard.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Don’t Mess With Taxes had an interesting piece over the weekend on populist rage – you know, angry mobs with pitchforks ready to come after the first Goldman rat who even whispers the word bonus – and some interesting numbers to chew on, specifically when it comes to taxing the rich:

The top income tax rate of 35 percent is the lowest it’s been since 1992. For a good chunk of the 20th century, the wealthiest U.S. taxpayers handed over much more (90-plus percent from 1950 to 1963) to Uncle Sam.
Capital gains rates also are at historic lows. And richer folks tend to take advantage of capital gains (and losses) more often than the general populace since wealthier individuals usually are more active investors.

DMWT’s column was inspired by an NYT piece entitled All This Anger Against the Rich May Be Unhealthy in which the rich bemoan their tricky fate:

For the wealthy, their public image is a secondary concern since so many of them seek to live anonymously.
“They feel mischaracterized,” Mr. LaMothe said. “They know the time and effort they contribute. They fund scholarships and all the things they do routinely, and then to be characterized as not doing their fair share begins to wear on them.”
From the outside, the wealthy seem to be one big money-minting group. But how they came upon their wealth differs greatly. And those who did not make their fortunes in finance seem just as angry as everyone else about what Wall Street has wrought.

NYT’s got a good point. Outrage against Wall Street is one thing but what’s this blanket sentiment of anger towards rich people in general?
A recent Bain and Co. report projects a 8% drop in luxury good purchases (or about $227 billion) for 2009 with a “full” recovery in the luxury sector by 2011. Were it not for “populist outrage” against the wealthy, perhaps we’d see slightly more growth in this area moving forward but the wealthy have – wisely – trimmed down conspicuous purchases, presumably to keep the angry mob off their backs.
Worse, once Geithner and Co. wise up and realize how low tax revenues from the wealthy have been in recent years, it will be like a brand new financial vein to tap with or without much-needed tax reform.
Looks like a pretty convenient time to be broke, eh?

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
It’s official, I’m sick of hearing “experts” weigh in on fair value. After my anti-PCAOB rant earlier this week, I thought I’d heard all there was in terms of the fair value argument.
Leave it to Goldman Sachs’s fearless leader to pull this little rabbit out of his hat and shock the shit out of me. In a Financial Times op-ed earlier this week, Blankfein doesn’t directly toot Goldman’s horn, though anyone who knows the lotion in a sock trick might recognize this as a blatant jerk-off.

For a man whose institution lurks in the cesspools, erm, dark pools, Blankfein is awfully incredulous as he criticizes both regulators and institutions for slacking on their valuations. GS calculates the fair value of their positions daily? Christ, no wonder they’re making buckets of cash.
FT:

It is not enough even that all exposures be identified. An institution’s assets must also be valued at their fair market value – the price at which willing buyers and sellers transact – not at the (frequently irrelevant) historic value. Some argue that fair value accounting exacerbated the credit crisis. I see it differently. If institutions had been required to recognise [British sic] their exposures promptly and value them appropriately, they would have been likely to curtail the worst risks. Instead, positions were not monitored, so changes in value were often ignored until losses grew to a point when solvency became an issue.
At Goldman Sachs, we calculate the fair value of our positions every day, because we would not know how to assess or manage risk if market prices were not reflected on our books. This approach provides an essential early warning system that is critical for risk managers and regulators.

FT’s own John Gapper even gets in on the Goldman fapfapfap, defending their practices as not exactly illegal, just really, really clever.

Its run of success since its 1999 initial public offering has not been based on “pump and dump” broking but on sticking obstinately to the institutional, less-regulated elite end of the market.
One rival Wall Street executive describes Goldman (with rueful admiration) as “a bunch of clever thugs”. He means that Goldman has been tough about seizing profitable opportunities even if that involves, for example, bidding for an asset against a former client.
Whatever Goldman is doing to make money, it works.

Crack dealers and prostitutes also make a lot of money but that doesn’t make it right. Just sayin.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
You know that annoying roommate you had in college who always stuck his finger in your peanut butter jar? That’s the PCAOB meddling in fair value and it won’t be pretty.
On October 14 – 15th, the PCAOB’s Standing Advisory Group (SAG) is slated to meet to discuss the particulars of fair value and starts off by admitting that “The Board has no authority to prescribe the form or content of a public company’s financial statements.” OK, so WTF are they doing then?

Via CFO.com:

For the past couple of years, regulators have nudged auditors to get more skeptical when it comes to evaluating fair-value measurements. In the meantime, the controversial accounting rules governing how companies apply fair value have been tweaked and companies’ use of judgment for assigning fair-value price estimates to their financial instruments has grown.
The Public Company Accounting Oversight Board is dipping into contentious waters again by suggesting that new fair-value auditing rules are necessary. The board’s staff has long contended that the use of estimates based on market value — rather than historical cost — adds uncertainty and subjectivity to financial reporting and an added risk of material misstatements. At the same time, the regulator has been slow-footed on previous attempts to change its rules when it comes to auditing fair-value calculations.

So what gives, PCAOB? Don’t you trust that auditors are trained to do their damn jobs?
Apparently not. The PCAOB is concerned that auditors lack the technical skill to evaluate complex financial instruments and frankly I could see why they might be a tad concerned.

Regardless of the applicable accounting requirements, it is a fundamental requirement that the auditor obtain sufficient competent audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with the applicable accounting principles.
The staff believes that a standards-setting project to revise its existing standards on auditing fair value measurements and using the work of a specialist may be appropriate for a number of reasons. Information obtained from the Board’s inspection and enforcement programs indicate that some auditors might not be exercising sufficient professional skepticism when performing audit procedures and evaluating results in higher risk areas of the audit.

Well that’s fabulous. Isn’t it already in an auditor’s job description to approach an audit with professional skepticism and to obtain sufficient audit evidence? So, uh, is the PCAOB implying that auditors have no idea what they are doing? Why doesn’t the PCAOB just do all the audits?
It’s a brave new world, kids, and the PCAOB knows it. Perhaps if regulators had done their job in the first place, auditors wouldn’t be facing increased pressure to somehow decode increasingly complex securitization, off balance sheet entities, and absolutely bizarre financial instruments. But since that’s our reality these days, might as well pop a few Xanax and start ticking and tying your way through those billions in derivatives. Quick, the PCAOB is coming!

Telecom company Comverse hasn’t filed financial statements in 4 years and the SEC has just now gotten around to settling with them. Does that make sense to anyone?
Continued, after the jump

Three years after getting caught in a huge stock-options backdating scandal, technology company Comverse appears to be nearing the end of its crisis. The company recently reported that it had come to an agreement with the U.S. Security and Exchange Commission, consenting to a permanent injunction over any future violations by the company of American securities laws.
Comverse will also have to meet its periodic reporting requirement to the SEC no later than Feb. 8, 2010.
The agreement acknowledges that Comverse neither admits nor denies the allegations that the SEC filed against the company, and no fines will be imposed. The settlement is subject to court approval.
Comverse President and CEO Andre Dahan called the settlement an important step forward. “With these matters resolved, we remain focused on our plan to be relisted and on carrying out our strategies for the long-term success of Comverse Technologies,” he said.

(source)
That’s all well and good but no fines? That sounds like encouraging bad behavior to me. What the SEC is saying, in effect, is that companies don’t really need to file financial statements, and if they do they can backdate all they want and perhaps the SEC will come around eventually to slap them on the wrist. Sounds like effective regulating to me.
Comverse subsidiary Ulticom finally filed 2005 – 2008 financial statements with the SEC this month and the company promises it will resume issuing quarterlies to the SEC in 2010. Well shit, why?

During the probe of the effects of the options backdating affair, following which Comverse CEO Kobi Alexander fled Israel to Namibia, Ulticom discovered additional accounting irregularities in the company’s financial statement preparations. Mistakes had been made in the recognition of postponed revenues in the years 1998-2004, and the expenses on intangible assets during 1999-2004 had been incorrectly assessed.
The correction of these irregularities resulted in a $6.8 million write-off from revenues prior to 2005, after which the company filed complete statements.

(source)
What’s the lesson here, kids? Do whatever the hell you want, it’s not like the SEC is going to stop you. It’s the IRS you’ve got to be afraid of, not the children over at SEC Elementary.
Also see: Where’s the Sex Tape, Comverse?

Having come down from a two-day smackdown of Live CPA Review classes this weekend, I’ve got CPA Review on the brain. It’s sort of like spending the weekend doing rails off toilet seats with strippers (not like I’d know) except I can’t see what sort of nutjob would wake up at 5 am for coked-out whores like I did for BEC on Saturday. Whatever, I do it for the kids.
Anyway, I thought it important to point out here that major changes to the CPA exam are coming down the pipe – so now is the time to get off your lazy ass and get this thing over with already. Seriously.
Continued, after the jump

My dear editor here at Going Concern already covered this briefly and frankly I share his concern that perhaps you kids will still be struggling with variance analysis by the time the AICPA Board of Examiners’ changes actually hit the exam.
Don’t worry, I speak AICPA BoE so let’s decode this, shall we?
First of all, the adoption of IFRS in the United States is still up in the air. The AICPA BoE wants you to know that they aren’t playing around when it comes to International Financial Reporting Standards.
They are already pre-testing IFRS questions on the exam (allegedly, or so my gut says) so don’t get shocked if you get an XBRL question in BEC. Unless you didn’t study, you already know 15% of CPA exam questions are pre-tested. This shows the AICPA isn’t shooting rubber bullets, they’re serious about this IFRS stuff.
While IFRS will eventually revolutionize the FAR exam, for the first few testing windows it isn’t likely that you’ll see much more than comparison questions (e.g.: “under GAAP, an asset is recognized thusly… in IFRS, it is recognized…”).
So it isn’t like you’re going to take FAR in the last testing window of 2009, fail, and then suddenly have to be an IFRS expert come the January window. In fact, the AICPA BoE has a pretty sad track record as far as these things go (if they weren’t painfully predictable, I might be out of a job) so don’t feel let down if you end up taking FAR in the last window of 2010 and only get a handful of tame IFRS MCQ.
As for this whole business about communications in BEC? Be grateful. This will likely cut a half hour off of Audit (as of now the longest exam) and tack it on to BEC. As always, communications are the easiest component of the exam since you don’t actually have to know what the hell you’re talking about, you just have to stay on topic and write correctly.
CBT-e means communications will disappear from AUD, REG, and FAR because apparently writing skills aren’t important to a CPA and 2 of the 3 writing portions will count towards your BEC score.
So stop panicking but take this as a huge hint that you should hurry up and knock this thing out once and for all. The computerized CPA exam is still relatively new and the AICPA is still working out the kinks. This may be the largest change to date but it’s certainly not the last.

What’s with the PCAOB being all up in everyone’s business? Is this the most effective way to tackle total financial failure or just more bureaucratic red tape?

The good news is that there may be some, er, technical difficulties in the implementation of the PCAOB’s latest move. But don’t think you’re off the hook just yet, they’ve got their little web monkeys all over it.

Journal of Accountancy:

The PCAOB postponed the effective date for registered public accounting firms required to report under its new rules to Dec. 31, 2009, from the previous date of Oct. 12, in order to resolve technical issues related to deploying the board’s new Web-based system for processing and publishing filings on the new forms, according to a news release.

Forms 1, 2, 3 and 4 must be filed electronically through that system.

The postponement will not affect the timing of the first annual reports required from registered firms, which will still be due on June 30, 2010, for the 12-month period ending March 31, 2010.

Under the new rules, approved by the SEC on Aug. 13, 2009, certain events– ranging from administrative matters such as changes in a firm’s contact information to more substantive matters, including certain types of legal proceedings against a firm or its personnel–that occur on or after the Dec. 31 effective date must be reported by a registered firm in a special report on PCAOB Form 3 within 30 days after the event.

Since the PCAOB appears to be on a roll, we have a few more suggestions for reports that they may find useful, while we’re on the mandatory reporting tip, and hopefully implementation of these won’t cause the PCAOB Internets to go all wonky:

• All management must submit weekly urine samples, and samples must be signed off by partners, who must also submit weekly samples.

• All new hires must complete Ropes Course team-building exercises, as well as sensitivity training. First years will also be required to watch the Gilmore Girls box set and will be required to submit hours dedicated to this to the PCAOB each month. No cheating, Golden Girls is not a substitute and firms who do not comply will be fined $25 for each DVD in the box set.

• Firms must report staff Facebook status to the PCAOB on a weekly basis, as well as what staff “likes” and the results of “Which Superhero are You?” quizzes. Twitter status updates from firm staff are optional reporting, and the PCAOB will accept public comment on this issue (via @ reply only) until December 31st, 2009.

If you have suggestions for more PCAOB mandatory reporting that will just make for more headaches at work, do let us know in the comments (and no, “shove it up your ass, PCAOB” is not a good suggestion, and frankly we’ve suggested that one already ourselves).

In the first part of our two part interview with Financial Armageddon’s Michael Panzner, we dealt with the ugly part, but what about the bright side? I guess one wouldn’t expect a doom and gloomer to have a silver lining tucked into his rain cloud but trust me, it’s there and it’s not nearly as bad as it seems.
In case you mi=”http://www.goingconcern.com/2009/09/do-it-like-an-eagle-scout-be-p.php”>it may be found here.
Of all of the things we got out of speaking with Panzner, two key points resonated above all the fear and panic and fright: A) though it’s bad and will likely be bad for quite some time, what results once we flush out the garbage will leave us better off than we were before the shit hit the fan and B) it’s actually really not as bad as it appears.
Huh?
Continued, after the jump

Panzner insists that while China may have the upper hand at the moment, they are also of the pack mentality; meaning that they may not be entirely equipped to cut and run like investors in the West and instead loyal to an ideal that dictates following the pack is sometimes the safest move one can make. What the hell does that mean?
A little bit of Panzner wisdom:

China and other emerging economies have for years used various methods to “protect” domestic industries, including managing foreign exchange rates and creating lots of hoops for outsiders to jump through to do business in domestic markets. So it is probably fair to say that the notion of widespread protectionism is not something new. But with economic circumstances becoming decidedly more hostile, it shouldn’t be surprising to see more and more countries adopting strategies that give local concerns an advantage over outside firms. Not all of them will look like traditional trade barriers, however.

Protectionism is a threat but not all that unlikely of a scenario. Some – Panzner among them – argue that bailouts could be translated as protectionism, and it is no small wonder that sovereign nations would adopt such a strategy in times of economic turmoil. But China doesn’t appear to be prepared to pull the trigger on the economic WMDs, at least not now.
“In the short run, I don’t see the Chinese resorting to the ‘nuclear option,’ where they decide that the strategic advantages of dumping the dollar outweigh the damage they might do to themselves,” he says, reminding us that screwing the US means screwing themselves, something Asian investors tend to find distasteful, to say the least.
As we pointed out in the first part of this Panzner brain-picking, the best strategy to adopt is one of preparedness in the face of uncertainty. This means you, little accountants.
“If the events of the past few years have not convinced people to ask plenty of questions and challenge any sort of assumptions, I don’t know what will,” he tells us. “I would suggest that everybody — including accountants and CFOs — take the Boy Scout motto to heart in their personal and professional lives. That is, hope for the best, expect the worst, and be prepared for whatever happens.”
The “expect the worst” isn’t pretty, at least from Panzner’s qualified perspective, and whether or not you agree with his assessment (as yours truly does), it can’t hurt to be reasonable about the long hard slog called “recovery” ahead of us. “In the end, wishful thinking won’t make it go away, but having a firm grip on reality might make the experience a lot less painful. Ultimately, there is a light at the end of the tunnel, but I personally think that point could be up to a decade away.”
His is but one opinion of many and as always, it is all in perspective. Regardless of what you believe lies ahead, it can’t hurt to consider the many possibilities that we find in our particular fork in the road. With unemployment climbing and the fate of the dollar in the hands of financial crack addicts at the press, it makes sense that he and others would believe in a future that is only slightly less rosy than the one painted by the powers that be in hopes that we’ll hit the mall and kick consumer spending in the ass once again.
The days of big screen TVs and SUVs are gone but your future remains. It’s all in how you handle that.
We are not here because our central bank did or didn’t do anything, Panzner reminds us, we are here because there has been a crisis of faith in our money, in markets to work their regulatory magic naturally, and in the traditional weapons of monetary policy and politics to scare events into compliance along the way. Does that mean it’s all hopeless and we should just curl up in a ball and cry?
Well no. Didn’t you read the damn interview?
Thanks go out to MP for letting us pick his brain, and we’d love to revisit again 6 months down the road if everything hasn’t fallen apart by then. Just a reminder, you can find him blogging over at Financial Armageddon and When Giants Fall, as well as Huffington Post, Seeking Alpha, and pretty much all over the Internet. Love ya, MP, even though you make me cry sometimes!

Maybe the problem here is not that the audits are not being performed correctly but that the PCAOB has no idea what it’s doing in the first place.
Continued, after the jump

WebCPA:

Many accounting firms are doing a good job of following new standards for conducting risk-based audits of internal controls, but others are not applying the standards properly, according to a new report by the Public Company Accounting Oversight Board.
The PCAOB examined portions of approximately 250 audits of internal control over financial reporting by the eight largest domestic registered firms in 2007 and 2008. The report assesses the first year of implementation of the risk-based Auditing Standard No. 5.

Listen, internal control isn’t like sex education, you can’t just say “listen, kids, be careful out there lest you end up with a funny rash on your cash flows” and leave a jar of condoms on the desk hoping management uses them. How does the PCAOB hope to be taken seriously when it slashes the minnows to death and leaves the sharks patrolling the waters for oblivious swimmers?
Case in point, in late 2008, GM settled with shareholders to the tune of $277 million for “accounting irregularities” (gee, this sounds familiar), and presumably for shits and giggles, Deloitte tossed another $26 million in there since, you know, as auditors they should have caught said irregularities. Irregularities? More like blatant fraud. But GM trudged on and ended up costing the American taxpayer $23 billion, most of which we shouldn’t expect to see any time soon, if ever. Would Deloitte like to kick in a few billion for that, perhaps?
The PCAOB should have stormed Deloitte and shook the auditors like crying babies until they confessed their sins at the regulatory pulpit. Instead they are going after puny firms and levying increased fees against them in the name of compliance – compliance! Compliance with what? Isn’t it criminal for the PCAOB to turn the other cheek? Compliance?! I’m not sure where the PCAOB comes from but where I come from, we call that being in cahoots. In some courts, it might be considered accessory to the crime but who the hell am I to judge?
So while the PCAOB is busy deciding whether or not it’s appropriate to require an auditing partner to sign off on audits (thereby invalidating the entire purpose of an audit committee in the first place), the blatant criminal behavior continues and no one seems to be minding the store, not even the guy who refills the condom jar.