Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
I know, the headline stunned me when I read it the first time too. First via James Turk, I had to stop and look at that for a second. Don’t they make it? How could they possibly need it?
Initially, the Fed called this proposed deposit facility a component of its “exit strategy” (the existence of which, much like Sasquatch, is still up for debate), insisting that by creating an interest-bearing drain for banks’ funds held at the Fed, it could clear out some of the money sloshing around in the system.

Although they also believe asset sales to be an option, I’m still not sure who the hell they are expecting to buy these bonds (unless they’re willing to take a loss, and knowing the Fed that’s not too likely) so stay tuned.
I believed this whole interest-bearing deposit facility nonsense was really just a Bad Bank for Dirty Fed money but it’s actually the Fed begging for deposits, so I guess I was wrong. But why, then, would they paint this as an exit strategy?
From the Turk piece:

The US government needs ‘deposit currency’ – or ‘electronic’ currency, to put it into Mr. Bernanke’s terms – so that it can pay its bills by check or wire transfer. Payment for goods and services by deposit currency are made through the banking system, and nearly all commerce in the United States is conducted in this way. So where will the Federal Reserve get enough deposit currency to enable it to continue purchasing US government debt?

In 2008, “public debt” was considered to be $9.9 trillion dollars or 70.2% of GDP. By 2009, that number had ballooned to over $12.9 trillion dollars, nearly 91% of GDP. Even more disconcerting? This is using governmental accounting rules which — as any of you who have ever worked in government can attest to — don’t necessarily coincide with GAAP logic.
Let’s not forget that a large chunk of this debt is owed to the Fed itself (for some reason) perhaps because inflation isn’t bad enough and we somehow should pay them more for the convenience of having printed money and payment systems.
I’m not 100% on what’s going on here but it’s beginning to look awfully suspicious.

After last week’s talk with Sam Antar, he got me thinking about our major capital problems, reminding me of something I’d seen earlier in the year on the world running out of capital.
How is that even possible? Isn’t capital just an accounting entry?
In the April piece, it was argued that the global capital trench is not possibly large enough to cater to the budgetary debauchery of the Obama administration. The stimulus. Health care. Afghanistan. Pick one and you can easily identify where the problem lies; put them together and you realize that we are fighting an uphill battle against investor demand for risky assets – including sovereign debt. In other words, T-bills aren’t what they used to be.

So how can regulators impose stricter capital requirements when trillions in fake capital built upon fantasy accounting in the years leading up to the financial crisis was vaporized?
Credit Suisse believes new capital requirements in Europe will cost affected banks £33 billion, some of which will inevitably come from those banks’ clients.
FT Alphaville:

Indeed, one of the theories about why lending by UK banks has yet to pick up — despite the Bank of England’s QEasing efforts — is that banks have been preparing for higher capital rules just like the ones above. That rather implies there are, perhaps less expected, costs for consumers as well.
As the FSA notes in the consultation:As noted in Table 1, costs for firms will rise substantially as a result of these measures and these costs will be passed on, at least in part, to consumers. This increase may manifest itself as lower deposit returns and higher borrowing interest rates. The extent to which this occurs depends on a number of factors, including the extent to which firms may already be able to charge above competitive prices for some products.

Know what’s happening? You’ve got to pay back your share of that fake capital vaporized in the decoupling process. You borrowed against it and bought crap with it and got a raise because of it and now you’ve got to give it back.
That’s all.

Going Concern’s own Jr Deputy Accountant did a pretty interesting piece this week via the Mortgage Lender Implode-o-Meter (which brought us such fabulous bloggers as Option ARMageddon – now at Reuters – and Mandelman Matters) that might be of interest to GC readers, at least those with a lawyer bent.
Can anyone tell me what Richmond Fed was thinking?! Anyone? Please?
Anyway. Just a reminder, GC did LandAmerica long ago.

How did LandAm’s Gluck end up at the Richmond Fed?

“With her broad range of leadership experience and extensive legal expertise, I know she’ll make great contributions to the Bank and to the Federal Reserve System,” said Richmond Fed President Jeffrey Lacker in July of the Fifth District’s new Legal Counsel Michelle Gluck. It leads one to wonder how thoroughly Lacker was briefed on Gluck’s sordid history at Richmond-based LandAmerica Financial Group previous to his statement. I still can’t understand why the Bank would hire her, maybe by the time I’m done with this I will.

For the not-so-quick background on Gluck and both previous and current employers, do check out LandAmerica: The final days appeared like a Ponzi scheme, The Good, the Bad, and the Less Bad for Richmond Fed and her bio that still sits on the LandAm web site:

“Executive Vice President – Chief Legal Officer Michelle has more than 20 years of experience in the legal profession. As General Counsel, she contributes sound legal reasoning and practical insights into legal issues facing LandAmerica. As Corporate Secretary, she oversees the governance of our Board of Directors. Michelle joined LandAmerica in 2003 after serving Kmart Corporation as VP – Associate General Counsel & Assistant Secretary. She holds a juris doctor degree from the University of Michigan Law School and a bachelor’s degree in English from the University of Michigan, where she graduated with honors.”
This Tuesday is the deadline for LandAmerica 1031 exchange victims (LES – dubbed exchangers amongst themselves) to accept pennies on the dollar for funds lost in LandAm’s bankruptcy proceedings. It is suspected that many Exchangers will vote for the plan, which guarantees at least some monies returned to victims instead of an excruciating court battle that many of LandAm’s unsecured creditors simply cannot afford.

For the rest of Michelle Gluck’s not-so-pretty resume and more musings on WTF Richmond Fed was thinking, head over to the Implode-o-Meter for the rest. I warn you, it’s ugly. Financial terrorism never is pretty you know.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Over the weekend, I covered an obscure financial reform proposal that may mean taking away final responsibility of accounting standard-setting from FASB af “emergency” switch for use solely in situations of undue financial stress. This type of “escape hatch” might be familiar; the practical application of the Fed’s 13(3) rule left the door wide open for Bear Stearns and AIG.

In regards to Meet the FASB Override Button, I received a note from reader Ron with the simple rhetorical question:

Do you think a system this corrupt can survive in its present form?

He even gave me an out, qualifying the email with “No need to reply.”
Well thanks, Ron, but how in the hell am I supposed to ignore a loaded question like that?
In the article, HuffPo calls it “Civil War in Corporate America”:

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.
The mechanism is contained in an amendment set to be introduced in mid-November by Rep. Ed Perlmutter (D-Colo.) that would move final authority over the Financial Accounting Standards Board (FASB) from the Securities and Exchange Commission to a new body, a so-called “oversight” board, that would include the officials charged with managing systemic risks to the financial markets.

The Center for Audit Quality came back with a nasty letter to Barney Frank — among others — insisting that accounting setters must remain independent (implying that they have been all along). I assume that the CAQ has forgotten about FAS 157-e by now.
So do I believe in financial reform at this point? No, and I can’t say I ever did. Did I ever believe we could duct tape our way through recovery with a little accounting magic and some confident words from Tim Geithner? Yeah right.
And that therefore betrays my opinion on saving our financial system in its current form. FASB merely exists under the guise of independence, and while European accounting standard setters have a far worse reputation when it comes to allowing themselves to be politically swayed, something must change moving forward.
I doubt that an emergency FASB override button is a step in the right direction to that end.
But if they’re trying to sneak in accounting standard escape hatches, that means something must be working correctly with the currently regulatory framework – they wouldn’t be looking for ways to bypass it if it was totally useless.
Past GC coverage of Congress meddling in accounting rules:
Congress Needs More Testimony on Accounting Stuff They Won’t Understand
Barney Frank Doesn’t Legislate Accounting, He Only ‘Exerts Pressure’
Newt Gingrich Doesn’t Like the FASB

On Friday I did a post for Jr Deputy Accountant on Accounting “Irregularities” on the Rise in the Recession after I saw a piece in Reuters about battered financial statements:

Corporate balance sheets may be showing signs of the wear and tear from the prolonged U.S. recession as accounting irregularities are starting to surface at growing numbers of U.S. companies.

Going Concern also covered this so it’s been decided by the blogosphere that this one deserves your attention.

Friend of both yours truly and Going Concern, Financial Armageddon’s Michael Panzner caught this tale and tied it in to one he’d done the day before on banking shenanigans.

In yesterday’s post, “Bad C’s,” I highlighted a few reports that lent further weight to the notion that the financial sector has not been a paragon of virtue, to put it mildly. Yet while many banks and brokers have engaged in some pretty bad behavior — which, among other things, helped bring about the worst financial crisis this century –they are apparently not the exceptions to the rule, as jr deputy accountant reveals in “Accounting ‘Irregularities’ on the Rise in the Recession”:
Reuters is reporting accounting fudging and fraud are on the rise in the US as a result of “pressures” for companies to perform despite the hostile economic environment.

The previous post he refers to sums it up nicely:

In an interesting twist of fate, the firms that have traditionally decided who should get credit have been put in the position of needing extraordinary amounts of other people’s money just to stay alive. Unfortunately, based on what we’ve seen so far, including reports like those that follow, it’s doubtful whether most, if not all, of today’s troubled financial institutions would even qualify for a loan based on traditional measures of suitability — like “character,” for example — if their friends in high places weren’t so intimately involved in the process.

Going Concern agrees in “Homebuyer Credit to Continue Helping People Get into Crazy Debt?”
Worse, large banks (or rather Regions Financial) are willing to lend to bankrupt municipalities and bank regulators will not step in and say “Hey, WTF are you doing?” (yes, I’m talking to you, Atlanta Fed). This is your bank and it’s quite obvious even to the common man what they are doing – you don’t loan money to someone who has no money and has not paid their sewer bill in 16 months. Red flag!
It’s ugly out there and it doesn’t appear to be getting any prettier any time soon.
Oh and Economic Populist has some additional ideas on the subject. You’re welcome.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
There’s a new regulator in town and if his recent comments are to be taken seriously, he’s not kidding around.
The Fed gets plenty of face time these days as the regulatory face of the financial crisis, leaving the SEC, PCAOB and auditors limping behind. Unlike federal regulators, the Fed has a unique muscle due to its dual role as central bank and supervisor and Fed governor Daniel Tarullo would like you know that he is not afraid to flex it.
That’s great, but Tarullo might be getting a tad ahead of himself. I believe one former Fed official called him an “egotist”.

In recent months, Tarullo has been fairly quiet since he was installed at the Board of Governors in January of this year but he seems intent on speaking out lately, positioning himself as an early hero of commercial real estate and a regulatory force to be reckoned with. He even kicked off his week with a thorough Wall Street Journal rub:

The rise of Daniel Tarullo, a lawyer with a longstanding interest in bank regulation appointed to the Federal Reserve Board by President Barack Obama, is a sign the era of light-touch bank regulation is over.
New guidelines on bankers’ pay proposed by the Fed last week reflect Mr. Tarullo’s influence. He is shaking up the Fed’s 2,858-person army of bank supervisors, weighing in on issues ranging from the way regulators deal with troubled commercial real estate loans to the rules that will govern global banking for years to come.

Oh please, how ominous.
Regulatory rewrites might not be the first thing on his to-do list as newbie Fed governor, Tarullo’s first big takedown may be the Atlanta Fed.
As Tarullo came in, Atlanta Fed’s head of banking supervision went out, with the Board in Washington dispatching a few Board goons to keep an eye on Atlanta’s supervision department until they find a new sucker to head things up over there. With 20 Georgia bank failures for 2009 (out of 106), you can see why Daddy in DC might be worried about what Atlanta is (or isn’t) doing.
Tarullo appears to be positioning himself as a bad ass regulator ready for war and I wouldn’t take that threat lightly if I were Atlanta Fed, especially since they already know what it feels like to be on his shit list.

Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.

I have often been accused of taking the term “audit” in “Audit the Fed” a tad too literally. Thinking as an auditor might stem from spending far too many hours in Audit class (I’m not a CPA, I just play one on teevee). Nevertheless, I cannot help but wonder what proponents of a Fed audit think they’ll find once they crack open the books.

My primary concern is that Fed accountants do not use GAAP but rather a bizarre hybrid of GAAP, governmental, and WTF accounting. In fact, they write their own 325 page manual on accounting for Federal Reserve Banks and if you’re really really bored you can find that document here. What auditor is qualified to audit those statements? In no other situation would the client hand you their accounting manual and say, “Do us a favor and make sure we prepared our statements in accordance with our own special rules, would you? Thanks!” except in this case. And maybe that’s where I’m hung up on the word “audit.”

Some have argued that the “audit” in “Audit the Fed” actually means “crack open the books and figure out where the bailout bodies are buried.” Okay, that’s all well and good but even if that’s the case, how would an independent, outside source identify these bodies? It goes back to the client-provided handbook and we’re back at square one: defining the Fed balance sheet as a freak of nature.

It’s right there in the footnotes – pulling out the closest Fed annual report I’ve got (Richmond Fed 2007), both Deloitte and PwC agree that the Fed is a special case in Note 3: Significant Accounting Policies:

Accounting principles for entities with unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies.

The note goes on to explain why government securities held by the Fed are presented at amortized cost instead of GAAP’s fair value presentation because “amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy.” Right there, you can see why auditing this thing might be a problem.

Proponents of HR 1207 and now newer proposed legislation to storm the Fed’s financials say that we need transparency from our central bank but I have argued time and time again that we’ll never get there poking around their statements trying to find the bloody glove. We’re
going to have to do better than an audit. Hell, Citigroup can pass an audit.

For more on Fed audits from yours truly, check out Fed Economic Rocket Scientists on Auditing the Fed, Liquidity Crises, They’re Comin for Dat Ass, Bernanke: Defining “Federal Reserve Accountability”, Auditing the Fed: Redux, and You Want to Audit the Fed. But Why?

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.

Inspired by recent events which I shall not get into here because of CPA Wrangler/client privilege, I figured now might be the time to do a quick “how to survive if you thought you were starting with the Big 87654 but suddenly won’t be until 3 quarters from now” refresher. Here you thought you got a sweet gig and now it’s all about making it until your delayed start date.
First and foremost, you’ve got your parents. They might have even put you through school. Your Dad may have called me at the CPA Factory asking if he could put your CPA Review course on his credit card (awww what a nice guy). Maybe they aren’t totally disappointed in you yet and haven’t lost their savings to Alan Greenspan’s bubble fixation. Whatever the situation, you should know by now that this is the first place to tap for extra cash, not your couch.
More, after the jump

Secondly, maybe the Universe is trying to tell you something. Is this really what you want to do with your life? Public accounting? Really? No one’s saying you’ve got to have a spiritual awakening or anything but maybe this is the time to evaluate the direction your life is trying to take. If nothing else, take it as a sign that you could use a Sabbatical.
Let’s not forget that you should be employable somewhere else. So instead of sitting around on the Xbox 360 eating ramen until you show up all pretty and polished for your first day at the Big 87654, go shop your shiny ass to other firms who might have the cash to cover your paycheck. If you’re looking for an easy way to meet the experience requirement and get your CPA and are lucky enough to have a trust fund, you’re totally fine sitting around pwning 12 year olds at Halo. But if you actually want to be an accountant for the rest of your life, go out there and sell yourself to a smaller firm who might appreciate your skills, not leave you waiting like a bad Craigslist blind date.
The last thing to keep in mind here is that sometimes it really is not you but me. Firms are scrambling to keep the quality staff they have and replenish the stock that are moving out of public accounting; take advantage of this. As we pointed out here on Going Concern already, don’t trip on the recruiters, they might be out of a job in a few months. It’s a bloodbath out there so slap on your gloves and try not to get any on your nice blue tie.
And if things get really bad, you can always froth lattes at the local coffee shop for the next few months. Give me a discount on my quad black eyes and I’ll tell you what *I feel* might be on the FAR exam next window *cough*
Hang in there, kids!

Editor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant. You can see all of her posts for GC by going here. By day, she teaches unlicensed accountants to pass the CPA exam, though what she does in her copious amounts of freetime in the evening is really none of your business. Follow her adventures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
Holy crap, wait a minute, is FASB trying to do something useful?
If you’re the sort of person annoyed by having to pay for software updates for your iPod, then perhaps. As with anything FASB does, intention and practical application are always two distinct and not necessarily related items. It remains to be seen whether or not this frees Apple of the strange accounting noose critics of the FASB rule claim has stifled sales.
Continued, after the jump

If you’ve ever been irked at the small charges you’ve had to pay for an iPod touch software upgrade, this may be about to go by the wayside. According to Ars Technica, a rule governed by the Financial Accounting Standards Board, that’s been heavily lobbied for by Apple and other electronics companies, may be enough to lift the charge that iPod touch owners have had to pay for updates of significant features to their devices. The rule focuses on “subscription accounting”, or devices that gain “significant new functionality” after their sale, like the iPhone, have to be reported over a series of years rather than all at the same time (presumably because the revenues associated with the product were the result of a series of updates, not just one lump sum).

(source)
Those same critics (or the financial reporting nerds, we’re not sure) claim that Apple has technically been underreporting its iPhone earnings as a result of this rule, a reversal of which would fortify Apple’s balance sheet of steel. That’s great for Apple, I suppose.
The rule is as yet in comment draft form, so go nerd on over to FASB and tell them what you think.
Does this mean billions in iPhone revenues will have to be restated going back to 2008? Rub it in, why don’t you?
This is where it gets really magical.
Stefan Sidahmed via Seeking Alpha:

The projected EPS really shows the true impact of the iPhone on Apple’s earnings. The FY10 EPS of $16.80 includes $4.02 in deferred income, so the ‘real’ EPS would be $12.78, more than double FY09 projected GAAP earnings. Likewise, the FY11 EPS contains $1.92 of deferred EPS. This should not be interpreted as Apple doubling their EPS, but rather that their current EPS is artificially suppressed by subscription accounting.

Good news for them and maybe FASB has at last done some good. Guess we’ll see when the deferred earnings run out.

This is the sort of story that you can’t make up. Like the story of the guy who tried to write off prostitutes and porn as a “medical expense”.
Wait a second. Oil “programs,” federal misconduct, drugs, sex, AND bad accounting?! This might be the best thing I’ve read in weeks.
Continued, after the jump

NYT:

The Interior Department announced on Wednesday that it was ending an oil and gas royalty program that ignited a scandal last year when it was disclosed that federal employees had engaged in corruption, drug use and sexual misconduct with oil industry officials.
Ken Salazar, the interior secretary, told a House committee that he was phasing out the royalty-in-kind program, which is administered by the department’s Minerals Management Service. It allows oil companies to pay the government in oil and gas rather than in cash for the right to drill on federal lands. Recent audits have shown that the government has failed to collect tens of millions of dollars worth of royalties owed it under the program.

Everyone knows I am not the mathlete but tens of millions seems fairly clear to me. Did NYT really have to use “right to drill” in that too? This might be the seediest accounting scandal I’ve seen since the phone sex company that booked revenues too soon (I think that’s called the premature double entry method):

Four Star Financial was another firm with results too good to be true. Once a thriving financial services firm that paid as much as 18 percent on returns to investors, Four Star performed well for years. The closely held firm had invested in 900-numbers and collected on their unpaid receivables. It also made short-term loans at high interest rates. But when the 900-number industry began to slide in the mid-1990s, the firm (then called 900 Capital Services) sought new ways to pay off investors.
A class action lawsuit alleges that Four Star undertook a Ponzi scheme described as the “‘Argentina arbitrage transaction” defrauding investors of at least $40 million. The deal purportedly involved the sale of long-distance telephone arbitrage contracts in Argentina.
According to the Web site Four Star Fraud.com, which apprises former investors of ongoing litigation and company news, most investors–largely concentrated on the Westside–believed Four Star dealt exclusively in telecommunications. The suit further claims that both 900 Capital and Four Star had questionable investments from their inception.

Too easy. It’s almost as if they write themselves sometimes.

Editor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant as well as regular contributor to leading financial/investment sites like Seeking Alpha and GoldmanSachs666. You see all of her posts for GC by going here. By day, she teaches unlicensed accountants to pass the CPA exam, though what she does in her copious amounts of freetime in the evening is really none of your business. Follow her adventures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
What do you get when you cross a Federal Reserve governor and the AICPA? Well I wish I could say unicorns and rainbows but really all you get is Fed Governor Elizabeth Duke on, what else, regulation.
Regulatory Perspectives on the Changing Accounting Landscape doesn’t exactly sound like a party but what do you expect? Unemployment is up, revenues are down and let’s face it, things aren’t looking too good for the short term. You’ve got to give Duke some level of credit for trying.
More, after the jump

Firstly, we feel it prudent to point out that Duke is no CPA. She couldn’t tell a debit from a credit if her life depended on it, at least in j/e form, but we’re willing to bet as a banker she’s probably better at sniffing out capital requirements than, say, that brainiac Bernanke.

Given my background as a community banker, I feel it is crucial that an accounting regime directly link reported financial condition and performance with the business model and economic purpose of the firm. It is difficult for me to comprehend the value of an accounting regime that doesn’t make that link.
To be frank, it has been frustrating to try to assess that viability when the value of an asset is based on the nature of its acquisition rather than the way in which it is managed or the way in which its economic value is likely to be realized.

What’s so frustrating about assessing an asset? Either it’s worth something or it’s worthless. Any idiot can figure that out, even yours truly.
Duke implies in her speech that fair value is only useful if the instrument (read: creative and probably entirely made-up security) is being sold or desired by some third party (read: those gullible Chinese who bought all of our weak ass mortgage-backed securities back in the good old housing bubble days) and entirely useless for anything else. In other words, the proof is in the cash flows.
Leave it to a banker to assume that balance sheets are so easily manipulated by instruments passing from buyer to seller and somehow entirely irrelevant in the time in between. As a banker, we expected better from her. Surely she understands that capital requirements dictate those “useless” securities on the “assets” side of bank balance sheets count towards the bank’s overall viability? Apparently not.
In fact, Duke seems to think that fair value can backfire on smaller institutions who may not have the borrowing leverage of, say, a beast like Goldman Sachs. Or better, Lehman Brothers. Before they went bankrupt that is.
All in all, interesting thoughts from the Fed Board on this one but until they pull out someone with practical accounting experience, it might as well have come from Perez Hilton for all I care. Next!

Editor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant as well as regular contributor to leading financial/investment sites like Seeking Alpha and GoldmanSachs666. You see all of her posts for GC by going here. By day, she teaches unlicensed accountants to pass the CPA exames in her copious amounts of freetime in the evening is really none of your business. Follow her adventures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
I don’t know about you guys but when I’m trying to avoid spilling the beans, I’ll skirt around the issue as much as possible. God forbid my words come back to haunt me later, it’s so much easier to be as vague as possible.
Turbo Tim Geithner obviously subscribes to this method as well. Skirting around the issue of a tax increase? Our Treasury Secretary has that little song and dance down.
More after the jump

Politico:

Treasury Secretary Timothy Geithner said in an interview aired Sunday that the administration will do “what’s necessary” to revive the economy, and didn’t rule out new taxes as a means to do so.
“We’re going to have to look at – we’re going to have to do what’s necessary,” Geithner told ABC’s George Stephanopoulos, host of “This Week.”
“Remember the critical thing is people understand that when we have recovery established, led by the private sector, then we have to bring these deficits down very dramatically. We have to bring them down to a level where the amount we’re borrowing from the world is stable at a reasonable level. And that’s going to require some very hard choices. And we’re going to have to do that in a way that does not add unfairly to the burdens that the average American already faces.”

Well what the hell is that supposed to mean? Sounds like a tax increase to me. With our Chinese credit card already cut and record-blowing amounts of Treasury auctions flopping week after week, one can only wonder where we’re going to be forced to make those “hard choices” Geithner is talking about.
Well instead of an across the board tax increase, we have some other ideas for raising the United States’ revenue. Hope you’re listening, Timmy!
• Obama Cabinet bikini car wash on Pennsylvania Ave. – Listen, no one wants to see Larry Summers in a bikini, so maybe the fundraising will come from paying him to keep his clothes on.
• White House yard sale -Taking a cue from California, the White House could put up all those black Secret Service helicopters up for a deep, deep discount. I’m sure they could pull at least $20 a pop for cardboard cutouts of Bill Clinton that have been gathering dust in the basement
• Rent out Ben Bernanke’s industrial strength money printing machine by the hour – Listen, we already know the thing works, why not rent it out to other nations engaged in quantitative easing? I’d say rent it out to Zimbabwe but they might not be able to cover the bill
• FOMC cage match fights at Fedquarters – We’ve all heard about dissent at FOMC meetings but what if we kill two birds with one stone – bring new transparency to the monetary policy-setting process AND pull in $75 a ticket to see “El Jefe” Jeff Lacker take on “Helicopter Ben” Bernanke in spandex and Luchador masks? I know I would pay to see that.
If you’ve got other ideas, we’re all ears. And if none of these work, I guess there’s always legalized prostitution. Though I’m not quite sure how well Tim “Eraserhead” Geithner would do as a man whore… Oh well. Tax increase here we come!

Deutsche Bank wins the prize for the most well-capitalized art collection, racking up 53,000 works in one of the largest corporate art collections in the world – as of 2004, worth an estimated $124 million (USD). Does that fall under PP&E? How does one depreciate a Cezanne hanging in a corporate office anyway? Oh wait, you don’t.
In honor of the year anniversary of Lehman’s fall, we find it worth noting here that Lehman’s Dick Fuld and his wife found that when you’re in desperate need of a capital infusion and facing epic failure, pawning off your precious fine art pieces works in a pinch.
More, after the jump

Guardian UK:

The bankrupt investment bank Lehman Brothers wants to sell at least $8m (£5.2m) worth of the art collection that once decorated its offices. The news comes as $20m of postwar art, put up for sale by the former Lehman boss Richard Fuld and his wife Kathy, goes on the block tonight at Christie’s in New York.

That’s got to hurt.
But Dick isn’t alone. If only banks would have considered these precious assets while spiraling down the toilet.
Portfolio has a do-not-miss on the art collections left behind by bank failures:

From coast to coast, millions of dollars of corporate art that once hung in the offices of well-known banks has itself become entangled in the fallout from the financial crisis. The fate of that artwork is still being sorted out, along with the assets involved in many of the unprecedented bank failures and resulting mergers that took place last year. Some of the surviving financial institutions appear to be holding onto the valuable artwork for their own collections, despite the chance to cushion their coffers with its sale. Others are selling the art or donating it to local museums and nonprofits.

Well, wait a minute, will this art have the same fate as the $4 billion in WaMu deposits the failed thrift is fighting to get back from JP Morgan? Just sayin.
This is nothing new. In 1991, the FDIC netted a cool $250,000 for the art collection of failed Boston Trade Bank. Though that was a pathetic catch in comparison to the $800,000 the collection of 219 pieces was estimated to be worth but hey, every little bit helps.
Wonder why no one’s thought to tap AIG for some precious paintings? Surely General Motors has a few pricey pieces lying around corporate offices, let’s use that to recoup that $23 billion American taxpayers may never see again!