Author: Caleb Newquist

Founding editor, Going Concern.

IRS Commish Admits That a Government Shutdown During Tax Season Would Be Kinda Weird

The head of the IRS said Thursday that a government shutdown during tax season would be a challenge the agency has never confronted before — and one that would become more complicated as the April filing deadline draws closer. Doug Shulman, the IRS commissioner, also signaled at a House Ways and Means subcommittee hearing that his agency was discussing how to address a potential shutdown with the Obama administration, though he did not spell out any details of those talks. “We run a $13 billion financial services operation, so the idea of stopping it for a few days or a few weeks is strange,” Shulman said, adding that he was hopeful, based on ongoing negotiations, that a shutdown could be averted. [The Hill]

(UDPATE) KPMG-Bermuda’s PCAOB Inspection Gets a Little Unwanted Attention

Most of you are acutely aware that PCAOB inspection reports, while chock full of interesting tidbits, are a little anti-climactic since we never learn who the auditees are. Oh sure, we can speculate until our heart’s content but the PCAOB says they took a vow of silence after 43 struck his signature on Sarbanes-Oxley.

The secrecy is frustrating (read: bor-ing) so it was especially cool to see Jonathan Weil let the cat out of the bag on at least one Big 4 client:

Two weeks ago,Accounting Oversight Board released its triennial inspection report on the Hamilton, Bermuda-based affiliate of KPMG, the Big Four accounting firm. And it was an ugly one. In one of the audits performed by KPMG- Bermuda, the board said its inspection staff had identified an audit deficiency so significant that it appeared “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

This being the hopelessly timid PCAOB, however, the report didn’t say whose audit KPMG-Bermuda had blown. That’s because the agency, as a matter of policy, refuses to name companies where its inspectors have found botched audits. It just goes to show that the PCAOB’s first priority isn’t “to protect the interests of investors,” as the board’s motto goes. Rather, it is to protect the dirty little secrets of the accounting firms and their corporate audit clients.

That’s why it gives me great pleasure to be able to break the following bit of news: The unnamed company cited in KPMG- Bermuda’s inspection report was Alterra Capital Holdings Ltd. (ALTE), a Hamilton-based insurance company with a $2.3 billion stock- market value, which used to be known as Max Capital Group Ltd.

Using his detective skills, Weil pieced together the number clients KPMG Bermuda had inspected, the timing of said inspections and the details of the audit deficiency (“the failure to perform sufficient procedures to test the estimated fair value of certain available-for-sale securities”) to come up with Alterra. Of course no one – the PCAOB, KPMG Bermuda or Alterra – would comment/confirm for Weil’s column but you probably knew that was coming. Nevertheless, JW gets into the how bad of an audit this really was:

It’s when you look at Alterra’s financial statements that the magnitude of KPMG-Bermuda’s screw-up becomes apparent. Available-for-sale securities are the single biggest line item on Alterra’s balance sheet. They represented almost half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.

This sort of screw-up, some might argue, falls somewhere in the range of “horrendously bad” and “really fucking bad” and Weil wonders if Alterra shareholders will have the stones to throw the bums out at the shareholders meeting on May 2. We can’t say where any of the shareholders stand on the usefulness (or lack thereof) of the audit report, so maybe this revelation is NBD to them. But if that is the case, it seems to make an even stronger case for the irrelevancy of auditors.

Weil’s larger point is that the PCAOB continues to hide behind their policies that are supposed to protect investors but in reality come off as talking points, not so unlike the firms they regulate. The PCAOB says they’re working on that but we’ll have to wait until summer to find out how crazy things get and whether it will be enough to shove auditors back into some respectability.

Dirty Little Secret Outed in Bermuda Blunder [Jonathan Weil/Bloomberg]

UPDATE:
Alterra cops to it with an 8-K that was filed about 90 minutes ago:

Alterra is aware of a recently issued report by the Public Company Accounting Oversight Board (the “PCAOB”) related to the PCAOB’s review of KPMG Bermuda’s 2008 audit files of a public company client located Bermuda, as well as an article posted on Bloomberg that indicates that the public company client is Alterra (formerly Max Capital Group Ltd.). Alterra confirms that it is the client referenced in the PCAOB’s report.

The PCAOB report findings question the sufficiency of procedures performed by KPMG Bermuda in its audit of Alterra’s estimated fair value of certain available-for-sale securities as promulgated by generally accepted audit standards (“GAAS”). The PCAOB report questioned whether the audit procedures used by KPMG Bermuda in 2008 to verify such values were sufficient. The PCAOB report does not question the appropriateness of the values that Alterra attributed to assets available-for-sale in 2008.

Alterra notes that the PCAOB made substantially similar findings in a number of inspections of 2008 and 2009 audits performed by the larger accounting firms and, since 2008, we understand the firms have issued additional guidance to clarify the work to be completed on the audit of fair value investments.

KPMG Bermuda has represented to Alterra and its Audit Committee that it believes it properly and appropriately followed GAAS as defined at the time of the audit. KPMG Bermuda confirmed in its response to the PCAOB report that “none of the matters identified by the PCAOB required the reissuance of any of our previously issued reports.” Alterra reaffirms its belief that the asset values ascribed to its available-for-sale securities in 2008 and subsequent periods remain appropriate.

KPMG Bermuda issued an unqualified opinion for Alterra’s year end financial statements for each of 2008, 2009 and 2010.

Did the Georgia Tea Party Call Grover Norquist a Socialist?

Maybe! As you know, Grover Norquist is the President of Americans For Tax Reform and has a staunch record of opposing any legislation – federal or state – that increases taxes and evokes Ronald Reagan (who hated taxes, dontchaknow) in every possible context, no matter how irrelevant. Grover and ATR are willing to get into a tussle (usually by sternly-worded letter) with whomever thinks that raising taxes will amount to anything positive (because that’s impossible). From the Illinois legislature to the American Lung Association to Lance Armstrong, if you give the slightest impression that higher taxes are a good idea, you can expect Grover & Co. to get Viking on your ass.


However, we learned this morning that in ATR’s most recent spat with the Georgia Legislature over that state’s tax overhaul bill, it appears that Grover has been out-Grovered by the Georgia Tea Party. You see, GN has informed the Georgia pols that he won’t give them any shit for supporting HB 387 after opposing their initial efforts.

This however, did not sit well with the GTP (our emphasis):

”One can not just look at the tax rate cut, one has to look at the deductions/exemptions that are slashed and, in many cases, removed in this bill. Taxes will be raised for some and will be cut for others. In other words, this bill re-distributes wealth.“

Okay, so…WHOA. Maybe we’re reading too much into this but take a gander at “socialism” and tell us what you think. So far there doesn’t appear to be a response over at ATR but this sort of aggression will likely elicit some sort of a response.

Your morning jolt: Grover Norquist, tea party split on tax overhaul [AJC via Joseph Thorndike]

Accounting News Roundup: GE’s Tax Planning – Everybody’s Doing It; More on the House of Lords Smackdown; KPMG Sued for Hicks Sports Audit | 03.31.11

Sokol Resigns From Berkshire After Investing in Lubrizol [Bloomberg]
David Sokol, once a candidate to succeed Warren Buffett as the head of Berkshire Hathaway Inc. (BRK/A), resigned as it was disclosed he helped negotiate a takeover while buying stock in the target company. Sokol, 54, bought about 96,000 Lubrizol Corp. (LZ) shares in January before recommending the company as a takeover target, Buffett, Berkshire’s chairman and chief executive officer, said yesterday in a statement. Sokol had initiated confidential talks with Lubrizol the month before. Berkshire agreed to buy the firm for $9 billion on March 14.

GE-Whizzes: Everyone’s Looking for an Edge on Taxes [WSJ]
GE isn’t the only corporate giant striving to pay as little as possible under the tax code. Wall Street firms, battered by losses during the financial crisis, wrote down their tax bills using a variety of methods and claimed benefits against other tax bills.

House of Lords Skewers Auditors; Over To You, Congress [Forbes]
Wish granted.

Tax Court: Woman Can Deduct Funds Withdrawn by Abusive Boyfriend [TaxProf Blog]
The Tax Court yesterday held that a women could deduct funds withdrawn from her businesses by her abusive boyfriend as theft losses.

Too many accounting bodies, bemoan Lords [Accountancy Age]
With six primary regulators of auditing and accounting in the UK, the Lords described their overseeing of the industry as “fragmented and unwieldy”, saying there is patent overlapping of jurisdiction and function. One unified regulator was held up as the gold standard and the committee seemed to be calling for outside powers to swoop in and break up the squabbling crew.

Sister act: Alabama tax prep sisters each face 129 years in prison [AW]
A couple of sisters looking at a Madoff-esque sentence.


Taxpayer Suggestions for Improving the I.R.S. [Bucks/NYT]
A Q&A with a regular Joe…er…Herb who sat on the Taxpayer Advocacy Panel.

KPMG Sued For Giving Tom Hicks “Clean Audit” a Year Before $525-Million Loan Default [Dallas Observer]
GPS alleges that KPMG “was well aware of the desperate financial condition of Hicks Sports” — specifically, the Texas Rangers and Dallas Stars — when it was hired to conduct the ’08 audit.

Deloitte Is Lending Michigan a Helping Hand

Did I say lending? Sorry, that’s not technically accurate. Deloitte Consulting is monitoring Michigan’s welfare computer systems and that involves billable hours. Lots of them. $15 million worth.

The state of Michigan is spending millions of dollars on a contractor to run its welfare computer system partly because it doesn’t offer enough money to attract new hires. A system called Bridges keeps track of welfare cases in the Department of Human Services. In February, Deloitte Consulting was given a one-year contract for about $15 million to maintain it and make regular updates.

Of course it would be cheaper if the Wolverine State did this themselves but there’s a small problem:

[The State’s technology department] lost 15 people to early retirement in December and had several vacancies starting at roughly $42,000 a year. Nobody applied.

Mich. spends millions on contractor [AP]

How Do You Like VAT?

[A]s globalization increases demand for a more competitive tax system, the United States must consider shifting from a system that primarily relies on income taxation to one that relies primarily on consumption taxation. Most other major economies around the world depend more heavily on consumption taxation than does the United States. And all indications are reliance on consumption taxes is increasing. [Martin Sullivan]

Should a Big 4 Audit Associate Ditch His Firm for a Client?

Welcome to the I’m-just-sick-about-the-Mad-Men-situation edition of Accounting Career Emergencies. In today’s edition, a Big 4 associate wants to apply for an analyst position at his client and wants to know if there will be backlash or independence issues that would accompany such a move. What’s in store for our turncoat? Let’s find out!

Have an interesting career dilemma? Need some ideas to cheer up the troops? Looking for some ways to offer some constructive criticism without resorting to veiled insults? Email us at advice@goingconcern.com and we’ll help you squash any temptation for name-calling.

Meanwhile back at traitor island:

Dear Going Concern,

I’m an Associate at a Big4 looking to do something more exciting. After checking out at my clients website, they seem to have a lot of entry-level analysts positions that interest me.

I was curious as to what your thoughts were about applying to one of your clients, and how my team might react if I get the job before busy season. Also, do I have to worry about independence issues if I’m only an Associate?

Thank you,
Extremely Bored Associate

Dear Extremely Bored Associate,

You think an entry-level analyst position sounds more exciting than Big 4? Your bar for thrills is awfully low, my friend. Never mind that you lack an inner Indiana Jones, I’m here to help you.

For starters, I’m not really sure what you mean by “just before busy season” since it’s March and busy season is all but over. However if you do ditch your team prior to busy season, some will sneer at your timing and then forget about you. And then there are the people that will hate you just on principle. You simply have to accept that as a cost of doing business. As far as independence is concerned, I don’t see any issues since you’re pretty low on pecking order but your firm may have a cooling off period or some other policy that forbids you from taking a position for a certain amount of time, so consider that your homework assignment.

Have said all that, I should tell you that it’s possible that your client may not be interested in offering you a job simply because you worked for the audit team. The argument being that maintaining a good relationship with their audit provider trumps any cog in the wheel so poaching you from their professional services firm is something they simply won’t do. Now are there exceptions? Probably. So the only the way to know is find out; run it up and see what happens. Good luck.

Going Concern March Madness: Moss Adams, Rothstein Kass Battle for the Title of the Coolest Accounting Firm

Well, we’ve finally reached the championship match-up and it’s a battle of the coasts. , NJ-based Rothstein Kass will take on Seattle-based Moss Adams for what will no doubt be the crowning achievement for either firm’s busy season. Moss Adams disposed of their rumored dancing partner Grant Thornton while Rothstein dismantled McGladrey. Rehash over; let’s get to the bracket.


Will Rothstein be the ultimate Cinderella? Will Moss spoil the ball? Will Reznick Group mount a firm-wide attack on MA just out of spite? WTFK? But vote so we can wrap this up. If I have to look at another bracket in next 365 days it will be too soon. Poll is open until FRIDAY at 11:59 PT.

Brits Call Big 4 Auditors ‘Disconcertingly Complacent’ During Financial Crisis

Not exactly what you would call a compliment. And while they were at it, the House of Lords would like the Office of Fair Trading to investigate why the “Big 4” isn’t a “Global 6” or “Universal 8” or “Dirty Dozen” or something similar.

Of course auditors have claimed that did everything they were legally obligated to do and the HoL admits that’s kindasorta true but not really:

Its report said: “We do not accept the defence that bank auditors did all that was required of them. In the light of what we now know, that defence appears disconcertingly complacent.” It added: “It may be that the Big Four carried out their duties properly in the strictly legal sense, but we have to conclude that, in the wider sense, they did not do so.” Bank auditors and regulators had been guilty of a “dereliction of duty” by not sharing more information with each other on an informal basis before the crisis, the committee claimed. Auditors were either “culpably unaware of the mounting dangers” at banks or they were at fault for not sharing any concerns with supervisors, it added. Either way, auditor complacency had been a “significant contributory factor” in the banking meltdown, the committee said.

So in “the wider sense,” auditors best step up their game. Go forth.

Auditors criticised for role in financial crisis [FT]

Accounting News Roundup: Crisis Will Delay Global Standards: Quigley; KPMG: GE’s Little Helper; Can Corporate Tax Cut Be Paid for By Raising Dividend, Cap Gains Rates? | 03.30.11

Tax Revenue Snaps Back [WSJ]
State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession. But the improvement masks deeper problems for state and local governments that are likely to linger for years. To weather the recession, state governments relied on now-depleted federal stimulus funds, which allowed them to put off painful cuts that would have otherwise been necessary to balance budgets. Meanwhile, demand for government services and the tab for public-worker pensions and health care have conting>Global Accounting Standard Delayed Years by Crisis, Quigley Says [Bloomberg]
The worst financial crisis since the Great Depression may have delayed adoption of a single global accounting standard “by a couple of years,” said James Quigley, chief executive officer of Deloitte Touche Tohmatsu. “The financial crisis may well have slowed that process down,” Quigley, 59, said in an interview yesterday. “National regulators, understandably, are thinking ‘How can I protect my investors in my country?’ You then start traveling a road of national standards and national regulation, and the momentum we had toward globalization and global standards to support global capital markets has been set back.”

GE Auditor KPMG: Supporting Their Tax Strategy For 102 Years [Forbes]
The world’s best tax law firm can always use some extra help.

Tax Season Gets Tricker for Some Gay Couples [Bucks/NYT]
Tax season often delivers more than the usual set of headaches for same-sex couples. But it’s about to get incredibly more complicated for couples living in California, Nevada and Washington. There is an upside, though. Many of them will save thousands of dollars in federal income taxes.

In Prison for Taking a Liar Loan [NYT]
Hopefully the IRS does choose all its investigative targets simply based on cars they drive.


IRS employees plan rally in support of federal, state workers in downtown Detroit [AP]
Detroit area Internal Revenue Service employees plan to rally in support of federal employees as well as state workers in Michigan, Wisconsin and elsewhere. National Treasury Employees Union Chapter 78 President Debra Carter plans to lead dozens of IRS employees in a rally at 3 p.m. Wednesday in front of the IRS Computing Center in downtown Detroit.

Senator Coburn Plan to End Ethanol Credit Tests Republican Tax Principle [Bloomberg]
Senator Tom Coburn is trying to challenge the proposition that all tax breaks are created equal. The effort by the Oklahoma Republican to end a tax credit for ethanol places him in conflict with farm-state senators who want to keep the tax incentive. It also puts him at odds with tax-cut advocates in the Republican Party, who argue that eliminating the tax break would result in an unacceptable tax increase. The proposal could reach the Senate floor this week.

Should We Cut Corporate Taxes By Raising Rates on Investors? [TaxVox]
While there seems to be growing agreement in Washington that the U.S. needs to cut its tax rate on corporations, there is (surprise) no consensus at all on how to pay for this. One way: Raise taxes on capital gains and dividends.