Author: Caleb Newquist

Founding editor, Going Concern.

Accounting News Roundup: Digimarc Fires Grant Thornton for KPMG; Ernst & Young’s Liability Risk; Auditing the Fed…For Real? | 12.29.10

Groupon Seeks to Sell Shares [WSJ]
Flying high with cash and confidence after snubbing Google Inc.’s reported $6 billion purchase offer, daily deals company Groupon Inc. has set its sights on raising nearly $1 billion in private funds. The Chicago-based company has filed a certificate with the State of Delaware, where it is incorporated, seeking authorization to sell up to 30.1 million preferred shares of stock at $31.59 per share, or a little more than $950 million.

Digimarc changes auditor after clash [Portland Business Journal]
Grant Thornton fired for KPMG. Have we heard this story before?

PE Outlook: KPMG’s Hessing On Private Equity’s Changing Seasons [Private Equity Beat/WSJ]
Things are looking up!

Tax Reform Won’t Happen in 2011 (or 2012) [TaxVox]
And everyone seemed so serious about it pre-November.

Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash [Bloomberg]
At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens. The money — including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes — is supposed to be taxed at up to 35 percent when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.

Ernst & Young’s Liability For Lehman Larger Than Claimed [Forbes]
Don’t forget the 10-Q’s in 2008! “EY’s claim of an arbitrary cutoff for responsibility for the audit after the 2007 10-K is intended to fool the casual reader of media reports. Lehman remained an EY client until the bankruptcy in September 2008. This period included two more 10-Qs.”


Woman in disbelief that pastor broke into her home [Salon]
The tithe in the offering plate obviously wasn’t cutting it.

GAO will be able to audit Fed [On the Money/The Hill]
Somebody has an opinion on this, “The GAO under the Dodd-Frank financial reform bill is now required to audit the Federal Reserve’s emergency lending program instituted in the wake of the financial crisis.”

CPA Who Allegedly Embezzled Funds from Client May Have Been Desperate to Get Rid of Shag Carpeting

From John Veihmeyer’s favorite local broadsheet, the South Bend Tribune:

A local certified public accountant has been arraigned in Berrien County Trial Court in St. Joseph in connection with the alleged embezzlement of nearly $100,000 from a trust fund.


As for the how and the why:

Officers said the funds allegedly were taken from the trust fund account of Winifred Lentz around the time of Lentz’s death in 2005. Falsified documents were used to disguise where the money actually went, police said

They said Barnes used the money to carpet his home and purchase Euros during a period when he took a cruise. He also allegedly took more than $45,000 to pay off a personal loan.

Accounting News Roundup: H&R’s Tax Refund Loans Blocked; California’s Delayed CPA Scores Explained; City of Riverside Drops Mayer Hoffman McCann | 12.28.10

H&R Block Shares Drop as U.S. Decision Scuttles HSBC Tax-Refund Loan Deal [Bloomberg]
H&R Block Inc. fell almost 10 percent after saying U.S. regulators blocked funding for its tax-refund loans and that alternative products mahe 2011 season. The Office of the Comptroller of the Currency told HSBC Holdings Plc not to make refund-anticipation loans, according to a statement H&R Block released after business hours on Dec. 24. The order scuttled a deal the two companies reached after H&R Block, the biggest U.S. tax preparer, sued to force HSBC to offer the loans under a contract that was set to expire in 2013.

“Texodus” Is Now A Thing According to IRS, NY Post [Gothamist]
All those New Yorkers are moving to…Texas?

Oscar Nomination Ballots Mailed Monday to 5,755 Academy Members [Hollywood Reporter]
FYI for any Academy voters – PwC will not be counting any ballots returned after 5 PT on January 14th, so you best not fuck with the protocols.

What Took California So Long to Release CPA Exam Scores? [JDA]
Di-rectly from the mouth of a hipster chick CPA exam maven, “If you’re a CPA exam candidate in California who sat the last testing window of 2010, you might still be waiting for your score. If this is your first exam, get used to it. If you’ve been around the block at least once, you are probably used to the waiting game but wondering what the hell is taking so long. Comments from the Peanut Gallery are that candidates have never had to wait this long for their scores, with the Board pretty quiet on what’s holding things up. Since they won’t tell you, I will.”

Stranded Travelers Face `Long’ Wait After Winter Storm [Bloomberg]
Passengers stranded when airlines canceled more than 6,000 flights amid a winter storm in the eastern U.S. may face lengthy waits to rebook their trips as carriers move aircraft and search for seats on crowded planes. “It’s a mess,” Jay Sorensen, president of consultant Ideaworks and a former airline marketing executive, said yesterday. “It takes a long time for this to sort out. With every day of cancellations, the problem just compounds itself.”


Long Finger Linked to Cancer Risk, Study Finds [WSJ]
Rejoice if your your pointer is longer than your ring finger.

Val Kilmer facing ‘Heat’ from feds [Tax Watchdog]
Ice Man is getting his tail ridden by the IRS.

Riverside to drop auditors after problems in Bell [AP/SFC]
Mayer Hoffman McCann’s association with Bell isn’t helping their business in California.

AMD Shifts GlobalFoundries Accounting Method [DJ]
For those of you interested in the technical stuff.

Accounting News Roundup: Former Yukos Head Found Guilty; There’s Snow News; KPMG Reports on Fake Handbags | 12.27.10

~ Attention GC faithful, please let it be known that we’ll be on an abbreviated publishing schedule this week, with roundups, periodic updates and the occasional ranty rant from Adrienne. We still want to hear from you this week, so if anything worthy of these pages crops up, such as last-minute inventory assignments, holiday party pictures or Andrew Cuomo showing up at 5 Times Square demanding a snowball fight, email us the details.

Khodorkovsky Found Guilty of Oil Theft, Lawyers Say [Bloomberg]
A Moscow judge found Mikhail Khodorkovsky, the jailed former head of Yukos Oil Co., guilty of embezzling crude, adding to a 2005 conviction, in a trial that has raised European concerns about the rule of law in Russia. Khodorkovsky and his former business partner Platon Lebedev, already serving eight-year sentences for fraud and tax evasion, may be sentenced this week or after Jan. 10 when Russia’s New Year holidays end, their lawyers said. The men face six more years in prison, the defense team has said.

Northeast airports, roads shut down by blizzard [MSNBC]
Commuters and long-distance travelers across the Northeast faced snow drifts, stranded and crashed vehicles, as well as hundreds of canceled flights on Monday as a blizzard put a brutal end to the Christmas holiday weekend. New York City was especially hard hit. All three international airports have been closed since Sunday, forcing the cancellation of some 2,000 flights. Stranded travelers got cots and blankets but some said they were not allowed to retrieve their checked luggage and had no extra clothing or toiletries.

Rapper Trick Daddy took ‘Thug Holiday’ from IRS [Tax Watchdog]
“I’m a Thug” probably won’t work as an excuse for owing $157k.

Taking It Back – Santa [The Summa]
A video where Santa saves the accounting world. If you really use your imagination, that is.


AIG Secures New Credit Lines to Replace Fed Funding [WSJ]
American International Group Inc., which is preparing to repay its aid from the U.S. government, said it has obtained $4.3 billion in new credit lines from commercial banks to replace its funding from the Federal Reserve Bank of New York. The government-controlled insurer said it has established $3 billion in new bank credit facilities, split between a 364-day line and a three-year facility, under which banks have agreed to make loans to AIG. In addition, AIG’s property and casualty insurance subsidiary, Chartis Inc., entered into a one-year, $1.3 billion letter of credit facility.

If You Are Buying Fake Goods In London, It’s a Real Ripoff, Says KPMG [Big Four Blog]
Just London?

Accounting News Roundup: Holiday Edition | 12.24.10

~ Happy Holidays! Here’s some reading to keep you occupied this weekend whether you’re celebrating someone’s birthday, enjoying Chinese food or doing nothing at all.

IRS says tax changes will cause some filing delays [AP]
The Internal Revenue Service says some taxpayers will have to wait until mid- to lat- February to file their returns dulaw approved by Congress in its lame-duck session. The changes apply to tax breaks on college tuition, state and local property taxes and out-of-pocket expenses for teachers. The IRS said Thursday the delays would be minimal for people who itemize deductions, because they normally must wait for financial documents before filing their returns.

Accountants, Texas board still at odds over Enron [Bloomberg]
To many in the accounting world, Carl Bass is a hero. Long before Enron became a worldwide symbol of scandal, Bass told his supervisors at Arthur Andersen LLP that something was amiss with the Houston energy giant. But the Texas state board that licenses accountants sees Bass differently — as unfit to continue in his profession. Nearly a decade after Enron collapsed and took Arthur Andersen with it, the work of Bass and another former Andersen partner, Thomas Bauer, as Enron auditors is still being debated in a highly contentious and costly proceeding.

Can You Break the Law by Complying With It? [DealBook]
The state claims Lehman’s auditors aided in a fraud, using Repo 105 transactions to make the books look healthier than they actually were. Ernst & Young proclaimed it did nothing wrong because its work complied with Generally Accepted Accounting Principles, or GAAP. Both may well be right — although that won’t necessarily preclude a claim against Ernst & Young.

TLP: No Animals Were Harmed … [JDA]
Reindeer like boomies!

The 12 gadgets of Christmas: Top tech toys of 2010 [Business Zone]
There’s still time.

Accountant Accused of Swindling Actress [WSJ]
A New York City man who did accounting work for entertainers was accused of swindling a “Law & Order” actress out of more than $1 million Thursday. The man, 50-year-old Joseph Cilibrasi of Manhattan, pleaded not guilty in Manhattan Supreme Court, where nine charges were levied against him and his company, Cilibrasi & Associates. Mr. Cilibrasi, who faces up to 25 years in prison on the top charge, was held on $100,000 bond or cash.

Blame game: Accountant denies claims in Koss case [TBJGM]
Julie Mulvaney, Sujata Sachdeva’s alleged accomplice at Koss Corp., claims she did nothing wrong and simply followed orders from Sachdeva, who Mulvaney described as a “powerful, insistent, imperious, overbearing superior.”

Deloitte plans to move offices to Midtown [NYP]
Deloitte has decided to consolidate its offices in Midtown, putting the kibosh on a long expected downtown deal for the accounting giant to move from 2 World Financial Center into 400,000 square feet at 4 World Financial Center owned by Brookfield Properties. Instead, Deloitte, which was also going to lease an additional 100,000 square feet at 30 Rockefeller Center in Midtown, may consolidate in that tower and lease even more space — if it can find the elbow room, The Post has learned.


Best of 2010: Accounting [CFO]
In the realm of accounting, no one moved more rapidly this year than the Financial Accounting Standards Board and the International Accounting Standards Board. The two standard-setting bodies set forth an aggressive agenda that called for a dozen or so new rules to be issued by 2011.

Congress Resolves Many Tax Issues During Lame-Duck Session [JofA]
Congress adjourned its year-end lame-duck session on Wednesday after passing legislative fixes for several pending tax issues, including the estate tax, the expiration of the 2001 and 2003 tax cuts, an alternative minimum tax (AMT) patch, and extensions of many expired provisions. However, it failed to repeal the expanded Form 1099 reporting requirements that were enacted as part of this spring’s health care reform legislation. The tax changes made during the lame-duck session were enacted as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010, PL 111-312), which Congress passed on Dec. 16, and President Barack Obama signed into law the next day.

Demand Media Uses Fancy Math to Support Aggressive Accounting

Henry Blodget crucifies Demand Media today for their accounting treatment for the cost of their “army of freelance writers” as the company attempts to go public.

But before we get to that, first a little quick and dirty for those of you that don’t surf the web all day (like some people we know). Demand Media runs “content farms” like eHow, Livestrong.com and Cracked. To put it simply, the idea is that aggregating freelancers in this fashion is much more efficient “sly, lots of people take exception with this model.

As we said, Demand is trying to go public and Kara Swisher at All Things Digital writes that the latest draft of the S-1 attempts to explain some questions the SEC had on its “capitalized media content.”

Currently, using a concept of “long-lived” content, Demand has been amortizing those expenses over five years, since it says it continues to generate revenue on that material over that much time.

As the company noted in its S-1 filing:

“Capitalized media content is amortized on a straight-line basis over five years, representing the Company’s estimate of the pattern that the underlying economic benefits are expected to be realized and based on its estimates of the projected cash flows from advertising revenues expected to be generated by the deployment of its content. These estimates are based on the Company’s plans and projections, comparison of the economic returns generated by its content of comparable quality and an analysis of historical cash flows generated by that content to date.”

If you find that last paragraph hard to read, it’s because it is hard to read. Demand is essentially saying that their content is extra-special and will be making them money down the road, unlike the drivel you read elsewhere. Accordingly, this situation calls a useful life of five years and for the amortization expense to recognized over that life. That’s where Henry loses it (at least that’s the vision we have), writing that despite it being a “theoretically reasonable judgment” this whole notion of not recognizing content/editorial expenses (aka: bloggers) immediately is “bogus”:

• It’s unusual and aggressive. Other publishers don’t account for editorial costs this way

• It makes the company “profitable” when it’s actually hemorraging cash, so it is obviously a gimmick used to spruce up the financial statements

• It leads to an instant argument/interrogation about how long a writer’s content will ACTUALLY be valuable (and Demand Media hasn’t even been around for five years, so confidently saying “five years” begs more questions)

• It is an EASY knock against a company that is controversial anyway

For these reasons, Demand Media should just drop this accounting immediately.

But going back to Swisher, the company has an explanation – it’s mathematical! So, it just works, mmmkay?

To be allowed to expense over five years, Demand said, the company has to use a sophisticated algorithmic platform–which other content creators do not have–to provide proof of “probable economic benefits” from that content over that time.

Since Demand has long claimed that it has a new and innovative approach to content creation, it is making the case to investors that it needs to have the correct accounting for that approach.

OH! Since you have rocket scientists on the job, it’s totally legit. NOW WE GET IT. But despite having someone John Nash-esque on staff, the company admits that there is a big catch:

Changes from the five year useful life we currently use to amortize our capitalized content would have a significant impact on our financial statements. For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2010, our net loss would decrease by approximately $1.6 million for the nine months ended September 30, 2010, and would increase by approximately $2.4 million should the weighted average useful life be reduced by one year.

In other words, if the company can’t use five year amortization for its content, things will get ugly fast (Blodget illustrates with an example). The whole thing has caused enough of a ruckus that the IPO is being put off until next year which, considering there’s probably lots of tricky stuff involved (x’s and y’s and whatnot), seems like a good idea.

Bonus Watch ’11: Some Details on KPMG’s New Utilization Bonuses

Who cares what they’re doing in Luxembourg, anyway? Our tipster qualifies some of these numbers for the new bonus program but assures us that they’re in the ballpark.

Details of the utilization bonus came through to managers in the NY Office to prepare them for the announcement to staff. Payments will be made in April and October based on total billable hours. Three Tiers T1 – 1700 hours, T2 1800 hours, T3 1900 hours, must meet or exceed hours listed. Bonus amounts based on base salary and level.

Associates are as follows as a percentage of base (might be slightly off, SA here and didn’t pay much attention to Associates pay) T1 – 2% T2 – 3%, T3 – 4%. Senior Associates T1 – 2.5%, T2 3.75%, T3 5%. So for a year if you reach 1900 hours, 950 Oct-April and 950 April-Oct, you would have received 10% of your base pay as a bonus broken into 2 payments.

I might have some of the numbers slightly off, as I read over my managers shoulder, and am only interested in Tier 3 SA as I had 2100 billed hours last year, but I think they are generally accurate. This was for IT Advisory. I know other Advisory practices have the same pay out rates but lower hour expectations by tier. No idea about Audit or Tax.

UPDATE: Tables from the advisory email that was sent out earlier today:

If anyone can confirm these numbers for IT Advisory, please get in touch. Likewise, [I]f you’re in other advisory groups, audit or tax and have the details, email us and we’ll update.

Leslie Seidman Is No Longer Acting Chairman of the FASB

She’s officially the boss for reals.

From the FAF:

The Board of Trustees of the Financial Accounting Foundation (FAF) today named Leslie F. Seidman chairman of the Financial Accounting Standards Board (FASB), effective immediately. Ms. Seidman has served as the acting FASB chairman since the retirement of Robert H. Herz on September 30, 2010.

“Our Board of Trustees is thrilled that Leslie Seidman has agreed to accept the position as Chairman of the FASB. She brings both unparalleled standard-setting experience and outstanding leadership skills to her new role,” said FAF Chairman John J. Brennan. “As the FASB continues its efforts to address the many significant accounting and financial reporting issues both here in the U.S. and globally, Leslie’s depth of experience with international and domestic financial reporting issues will enhance our progress toward meeting the needs of all of our varied constituents. On behalf of the FAF Trustees, we are delighted that she will be leading the FASB’s efforts to tackle these many challenges for the betterment of capital markets participants both here and abroad.”

How does Les feel about being the new punching bag of the anti-IFRS contingent, House Financial Services Committee, the American Bankers Association and countless letters and emails of ridicule? Pretty good, actch:

“I am honored to be leading the FASB at such a pivotal time in our history,” said Ms. Seidman. “The FASB remains committed to developing standards that will provide investors and other capital providers with decision-useful information. We are at a crucial point in our convergence program, and my fellow Board members and I are working in close partnership with the IASB to improve the comparability of financial information around the world. We want our standards to enhance communication and confidence in financial reports, and we will continue to seek new ways to keep our stakeholders informed and engaged in the standard-setting process.”

It’s just accounting rules after all, how bad could it be?

Making Sense of the Ernst & Young Defense

Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

Weil says E&Y is missing the point entirely:

That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

“If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

“Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.