Author: Caleb Newquist

Founding editor, Going Concern.

The IRS, Not Too Hung Up on Priorities, Demands Delinquent Taxes of Four Cents

In this morning’s roundup we gave a couple of examples of why you should consider giving the IRS a break and remember that they’re civil servants just doing their jobs. All the violence, jokes and resentment are a little self-serving so maybe we should all just back off.

And then we heard about a couple of jackbooted agents (armed to the teeth, presumably) heading over to Herv’s Metro Car Wash in Sacramento to demand some delinquent taxes from the owner Aaron Zeff.

“They were deadly serious, very aggressive, very condescending,” says Harv’s owner, Aaron Zeff…

“It’s hilarious,” he says, “that two people hopped in a car and came down here for just 4 cents. I think (the IRS) may have a problem with priorities.”

How on Earth could two agents be ‘deadly serious, very aggressive, very condescending’ over four f—ing cents? How serious are they required to take their jobs? In the job description does it explain “the collection of delinquent taxes are to be vigorously pursued, regardless of the sum”?

Plus, the letter states $202.31 of penalties and interest are supposedly due on the delinquent portion. Has the IRS gotten so desperate for funds that it has delved into loan sharking? What’s more, Zeff has a letter from October 2009 stating that he ‘has filed all required returns and addressed any balances due,’ which now makes us think that the Service is pulling names out of hat and saying “who is our delinquent taxpayer of the day?”

It’s hard to believe that with just a few days prior to the first corporate filing deadline of 2010, that these two agents didn’t have anything better to do. Someone could have sent them to a sorting facility or, God forbid, have them review some returns. Jesus, put them on loan to the Utah branch if nothing else. They need all the help they can get over there.

IRS visits Sacramento carwash in pursuit of 4 cents [Sacramento Bee via TaxProf]

Accounting News Roundup: Sarbanes-Oxley’s Credibility Takes a Major Hit; You Shouldn’t Hate the IRS; You Especially Shouldn’t Tell Inappropriate Jokes About the IRS | 03.15.10

• The Valukas Report on Lehman Brothers: Sarbanes/Oxley’s Credibility Takes a Dive [Re:Balance]
Has the Vakulus report exposed Sarbanes-Oxley as a, dare we say it, a waste of time? Perhaps that’s a stretch but the question of its effectiveness in the case of Lehman Brothers is certainly worth noting, “if Sarbox didn’t have an impact on Dick Fuld and Lehman, what possible good has it wrought?” asks Jim Peterson.

CNBC tried having this discussion on Friday although it didn’t seem to get anywhere. And some may say that SOx has resulted in a many positive developments, although this latest disaster may indicate that overwhelming support of legislation should be a sign that something doesn’t smell right, “the hindsight revelation of the Valukas report is that the inability of Sarbox to reach global-scale problems shows the futility of legislation so politically anodyne that it passed the US Senate by a vote of 96-0.”


In other words, SOx was sold as the cure-all to the problems revealed by Enron et al. and it made for some nice pandering during an election year. Once the election was over, Congress figured their work was done and nearly eight years later people are asking questions. The question now is, who will pick up the Lehman/E&Y torch in this cycle? There’s less than eight months until election day!

• Why I Don’t Hate the IRS — and Neither Should You [Politics Daily]
Okay, so maybe the IRS isn’t perfect but using planes, guns or more subtle forms of dissatisfaction doesn’t really help matters.

“While it may be superficially gratifying, it is absurd to use the IRS as a whipping boy. Is there anyone who really believes that we could live in a world where citizens expect the government to provide benefits without raising the taxes needed to pay for them?”

Last we checked, the answer to that question is yes, starting with the fans of Joe Stack’s Facebook page.

• TIGTA Is Investigating 70 Jokes/Inappropriate Statements About the Attack on the Austin IRS Office [TaxProf Blog]
Aaaannnd another thing. If you think you can tell semi-serious jokes about the IRS plane crash, you will be dealt with in a swift and serious manner. Expect to receive yearly financial rectal exams for the rest of your time on Earth. Someone in Utah should be paying especially close attention.

Quote of the Day: Ernst & Young Partners Losing Sleep? | 03.12.10

“A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch – such a claim would be speculative – but it still should be scaring the heck out of the partners.”

~ John Carney

One Accountant Was Enough to Discuss Lehman’s Accounting on CNBC

Maybe it’s because everyone is still working like crazy and couldn’t get away for a TV appearance. Maybe Jim Turley couldn’t find decent footwear but how CNBC managed to get only ONE accounting expert in on this panel to talk about the Ernst & Young, Dick Fuld, et al. Sarbanes-Oxley and the Repo 105 is beyond our comprehension. Throw in four journalists and a “fellow” and you’ve got yourself quite the free-wheeling discussion on the double-entry system.


Personally, “[N]ot technically violating the rules, that’s why the auditors could kind of sign off on it even though it was incredibly misleading and deceptive,” was our favorite line.

But the poor accounting expert seemed to be a nervous wreck. Aren’t wet bars standard?

Are Big 4 Auditors Irrelevant?

Okay people, the calls for the complete obliteration of the accounting world have begun. Check that. It’s more or less the accounting world as it relates to auditors of public companies (i.e. Big 4 auditors).

Steve Goldstein at MarketWatch, for one, is NOT A FAN, “What precise purpose does it serve to have a supposedly independent auditor (paid for by the company) sign off on accounts? From Enron to Lehman to Satyam to Parmalat, it’s clear that the major accountants lack either the skill or the determination (or both) to ferret out fraud.”


So in case you didn’t catch it, he’s calling into question the Big 4’s (our assumption) integrity, competence and fortitude. Oh and before you start huffing about “it’s not the job of the auditor to detect fraud,” we’d argue that’s not even the point any more. Lehman was engaging in what a former CFO calls “shenanigans” that E&Y knew about for years and went along with it. Why? Because Lehman said everything was kosh.

Goldstein goes on:

Company executives already are forced to sign off on their accounts. When they are caught lying, companies face liability over disclosure.

So the threats that keep (some) companies honest are there regardless of whether the reports are audited. The outside auditors themselves are assigned a negligible value by the market.

A solution? Here’s two admittedly out-there solutions that the Securities and Exchange Commission probably won’t adopt.

One is quite simple: get rid of accountants. Who cares? They add no value, and their expenses weigh on the bottom line.

The other would be for someone else to hire the accountant. How about the company’s top five shareholders? While the likes of Fidelity would grumble about the added costs and the free-rider benefit for smaller shareholders, they would certainly have an interest in securing a far tougher audit.

Okay, Big 4 auditors, here’s your homework: explain why auditing for public companies isn’t irrelevant. We’ll listen, we swear. Or just start shooting off at the mouth if you feel it necessary. Goldstein isn’t the first to make this determination. Francine McKenna and Jim Peterson have argued that the value of an auditor’s opinion has been nil for quite some time and they’re both Big 876454 alums. It’s okay if you admit it. Acceptance is the first step.

What exactly is the point of having accountants? [MarketWatch]

Five Questions with Tracy Coenen

If you’re currently engaged in fraudulent activity at your company, eventually you’re going to find yourself in Tracy Coenen’s Fraud Files Blog. She has published two books on the subject, Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud and more than a 100 articles in industry publications.

When she’s not writing about all things fraud, Tracy runs Sequence, Inc., providing forensic accounting and fraud examination services. The Sue Sachdeva/Koss fiasco happened in her backyard of Milwaukee and she’s been all over it, providing fine quotes on the matter.


Why do you blog?
Somebody has to expose the frauds and scams!

Why should you accountants read your blog?
Because I have interesting insights and I’m not afraid to state my very strong opinions.

Who is your favorite blogger?
Mike Masnick at Techdirt

Best thing about blogging for accountants?
There is a wide open market for accounting bloggers to be thought leaders (and to market themselves) because so few accounting and finance professionals are blogging about their profession.

The biggest issue facing accountants today is…
Truly understanding how fraud happens and how to find and prevent it.

Ernst & Young Was ‘Comfortable’ with Lehman’s Shady Accounting

Late yesterday, U.S. Bankruptcy Examiner Anton Valukus released a 2,200 page report that details the collapse of Lehman Brothers. It points the finger at Lehman execs for engaging in shady accounting that Ernst & Young knew about and was comfortable with. Lehman’s Board of Directors were not informed of the questionable accounting treatment.

To put it in more technical terms: Ernst & Young is in deep shit. The lead partner on the Lehman audwed more times than Dick Fuld for crissakes.

The accounting in question was known inside Lehman as “Repo 105.” These transactions moved billions of dollars off of Lehman’s balance sheet that were described by emails in the report as “basically window dressing” and their global financial describing them as having “no substance.” The Times reports that the treatment was so crucial to LEH that one executive, Herbert McCade, was known internally as the “balance sheet czar” and that he described in an email that the treatment was “another drug we r on.”


The really bad part for Ernst & Young is that they were okay with the “drug.” From the report, the lead partner stated that E&Y “had been aware of Lehman’s Repo 105 policy and transactions for many years.” For you wonky types, Lehman was accounting for these “Repo 105” transactions based on guidance from Statement on Financial Reporting Standard 140, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.

E&Y’s “team had a number of additional conversations with Lehman about Repo 105 over the years,” although they were not involved with drafting the policy nor did the firm provide any advisory services related to the transactions. According to the lead partner on the engagement, the firm simply “bec[a]me comfortable with the Policy for purposes of auditing financial statements.”

The problem, according to the Examiner’s report is that E&Y was okay with the treatment based on the theory:

Ernst & Young’s view, however, was not based upon an analysis of whether actual Repo 105 transactions complied with SFAS 140. Rather, Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely “theoretical.” In other words, Ernst & Young solely assessed Lehman’s understanding of the requirements of SFAS 140 in the abstract and as reflected in its Accounting Policy; Ernst & Young did not opine on the propriety of the transactions as a balance sheet management tool.

According to Lehman’s Global Financial Controller Martin Kelly, “Ernst & Young ‘was comfortable with the treatment under GAAP for the same reasons that Lehman was comfortable.'” Don’t you love it when things work out like that?

Ernst & Young has issued a statement that simply addresses the final audit that the firm performed: “Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”

SO! E&Y is in a bit of a pickle. Civil suits have already been filed against both firms and more investigations will certainly be coming. If you’ve got some time over the weekend, take a flip through this beauty. We know there is accounting porn in there for some of you.

Report Details How Lehman Hid Its Woes as It Collapsed [NYT]
Examiner: Lehman Torpedoed Lehman [WSJ]
Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report [Jenner & Block]

Accounting News Roundup: Lehman Failure Was a Team Effort; Boston Provident Ex-CFO Faces Prison After Guilty Plea; Who Wants to Watch a Toxic Asset Die? | 03.12.10

• JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says [Bloomberg]
There’s so much blame to go around: Dick Fuld! Every Lehman CFO that ever worked there! JP Morgan, Citi, Ernst & Young (who we’ll get to shortly), you’re all at fault too! But mostly Dick Fuld. He was putting lots of pressure on Lehman’s balance sheet magicians to reduce the bank’s debt. The report states that Fuld was “at least grossly negligent” and if it gets worse than that, you’ll certainly hear about it.

According to the Bankruptcy Examiner’s report, there was plenty of parties that didn’t help matters. JP Morgan and Citi were demanding more collateral from Lehman as the firm tried to stave off death while E&Y sat back as LEH got all hocus-pocus with their accounting. So pick a company or person you don’t like and point the finger. It sounds like an argument can be made.

All this amounts to largest bankruptcy in history and boy will it sell a helluva lot of books, movie tickets, and HBO subscriptions. Silver lining!


• Trader faces up to 6 1/2 years in prison [Bloomberg via Boston Globe]
Former Boston Provident CFO Ezra Levy pleaded guilty to securities and wire fraud after being accused of stealing $3 million from New York-based Boston Provident Partners, LP. Levy told the judge that he used the money to pay ‘personal expenses’ although no word on what the loot was. Presumably not a fleet of limos.

• We Bought A Toxic Asset; You Can Watch It Die [NPR]
Ever dreamed of owning just a small piece of a toxic asset just watch the slow, agonizing death? Of course! Some reporters at NPR chipped in to invest $1,000 in a bond with over 2,000 bad, really bad mortgages all for the sake of journalistic interest. If the team somehow manages to make money it’s going to charity.

There’s a Very Good Reason Why Harry Markopolos Shouldn’t Be SEC Chairman

The man is a forensic sleuth, no question. Is he a hero? What’s a hero? Could he train young SEC grasshoppers to be fraud detecting machines like him? Probably. David Weidner — among others — isn’t enthused, especially with Harry’s idea about who should play him in a movie (Hanks, Damon, Cage).


And we’ll just go on record to say that we aren’t on board for Marks to take over either. Forget about our constant griping about the pipe dream that is accounting rule convergence and how HM’s input won’t likely amount to squat. That’s not what’s important.

What’s important to remember is that the man cannot control his bodily functions. As you may recall, the ACFE named Markopolos as their Fraud Examiner of the year and he spoke at their big to-do in Vegas where he admitted that he regularly soiled himself while investigating Bernie Madoff. This is unacceptable.

Look, maybe this isn’t a big deal for some of you but if the man wants to be in the big chair he can’t be changing his undies every couple of hours when he’s trying to crack a big case. Do you think Mary Schapiro has drawer full of extra VS? NO. WAY. So before you jump on the Marks bandwagon for the next Chair of Enforcing the Financial Universe, let’s not forget that when he gets nervous, he’ll be extra unpleasant to be around.

Harry Markopolos, SEC Chairman? [WSJ]

The Purpose of H&R Block’s Free Shred Day Is Not to Demonstrate How to Destroy Evidence

As you’re all aware, accountants suffer a myriad of stereotypes. The public’s notion that we shred anything and everything with pure, unadulterated joy to cover our asses is due mainly to folks like David Duncan, the Arthur Andersen partner who so famously ordered the shredding at Enron.  That sort of thing inspired this spot for Heineken:


So H&R Block, parent of RSM McGladrey, has decided that it will educate some of the fine residents in Spartanburg, South Carolina about the less dubious purposes of shredding financial information.

In order to increase awareness of the importance of being financially secure, H&R Block is hosting a Shred Day at Cleveland Village, 1564 Asheville Hwy in Spartanburg from 10am – 2pm on Saturday, March 20. The public is invited to attend to safely dispose of sensitive paper materials, learn about how to protect their ID, and find answers to any tax related questions.

We think this is fine idea on the part of H&RB although we foresee one problem. Since South Carolina has gone to great lengths to regulate “subversive organizations”, will this little demonstration of document destruction backfire? Will it allow the terrorists in the Palmetto state to destroy any and all evidence that would otherwise declare their intentions to overthrow the government? Is Glenn Beck aware that this being allowed to happen?

H&R Block Hosts Free Shred Day [Spartanburg News]

Why Isn’t Deloitte Ranked Higher on DiversityInc’s Top 50 List?

What a relief. We were really concerned that we would get half way through March without hearing about a list of companies being good at something that included the Big 4. Fortunately, DiversityInc comes to our rescue today with their list of Top 50 Companies for Diversity for 2010.

Aaaand as you might exall present and accounted for, although some firms may wish to be higher(?). How does one determine success on these lists? Just being on it? Making the top ten? Is it an honor just to participate in the survey?

Speaking of the survey, the website describes the methodology so you can get an idea of how this particular jumble falls together. The survey is broken down into four areas:


• CEO Commitment

• Human Capital

• Corporate and Organizational Communications

• Supplier Diversity

Digging further, we found more details:

The survey consists of more than 200 empirical questions (no subjective or qualitative information), which have predetermined weightings. Ratios between key factors, such as demographics of managers compared with managers who received promotions, play a significant factor in determining point scores. Companies must score above average in all four areas to earn a spot on the list. CEO Commitment is the most heavily weighted area because if a company lacks visible leadership, its diversity-management efforts will fail to be a priority.

SO! While this explains some things, it certainly brings up more questions. Since we spend the majority of our day perusing the web for every instance of Big 4 CEOs simply breaking wind, we’d like to think that any “CEO Commitment” as it relates to diversity would be noticed by us or our team of monkeys that work around the clock.

That being said, we’d be hard pressed to find a bigger diversity go-getter than Deloitte’s CEO Barry Salzberg. The man is tirelessly pursuing diversity at every waking moment. Even after Deloitte announced its freshly minted Chief Diversity Officer, Bar gave a speech earlier this week on as part of the DiversityInc festivities demonstrating that he’s still on this.

So then, our question is, how does Ernst & Young rank 5th, PwC 6th, KPMG 15th and Deloitte bring up the rear at 25th?

Perhaps the other firms display diversity fliers with their CEOs mugs on them to serve as constant reminder to all employees of the diversity in their firm but if CEO commitment is measured by MSM talking points, how does anyone beat Barry Salzberg? The only thing we can think of is there is some sort of secret anti-male pattern baldness bias at DiversityInc that quietly knocks Deloitte down the list. Sure Dennis Nally is slowly going Costanza there but Moritz in the tighty-whities probably made up for it.

So the efforts of Deloitte’s diversity commitment are rewarded but did they get the recognition they deserved?

The Unveiling of the 2010 DiversityInc Top 50 [DiversityInc]
The DiversityInc Top 50 Companies for Diversity [Full List]