When accounting goes unaccounted for
Easton, Massachusetts resident Michael Freese recently discovered that the town’s meal tax cost him an extra 4¢ on his $5.75 hamburger, reports the Enterprise News. Freese was under the impression that only “New York and Seattle and California had that.”
While Freese is probably aware that this extra 4¢ would get him 80% closer to a Hershey Bar when he was growing up, he can also take comfort that in this day and age it will get IRS Agents off your back. [Enterprise News]
Good morning capital market servants. I know the first day back from an epic holiday weekend is a tough pill to swallow, as many of you couldn’t bear the thought of returning to work today. And because some people like to prolong the agony by taking today off, I’ll do my best to take you back to last Friday. A McGladrey reader dropped this note after I checked out for the day.
The company leaders have recently rolled out this lean working platform [GC coverage here]. They are trying to say work smarter not harder. What most people think lean means though is “do more with less” which is trademark of this company. CE [Andrews] and Joe [Adams] talked on a webcast the other day and they were trying to rile us up. What for? So in the end, they can tell us “despite our great efforts there isn’t money for salary increases”.
CE and Joe and other leaders are all excited about letting the entire firm off at 3 p.m. Friday., July 1 for the weekend holiday WOW! Don’t get too crazy CE and Joe, not 3 p.m. on a Friday? Holy cow!
When Steve Tait was President [of RSM McGladrey] we would get two days off during the Fourth, but under new leadership we get to get off at 3 p.m. on Friday? What a deal. What work-life balance. No wonder we make Working Mothers top 100 each year. Oh and you know what, the firm took away summer hours too…all because they want us to focus on ongoing flexibility…and working lean, which means no one can take time off because departments are too lean.
It’s 3 p.m. now on Friday, and boy I am lucky to be off. Nevermind most employees checked out – officially or unofficially – a few days ago already. I am sure major accounting and tax deals are going down right now on this holiday weekend, but we were fortunate enough to get off at 3 p.m. What a joke!
I think I might get a small putting green cake to celebrate!
Many firms – we’ve confirmed PwC and KPMG – gave their employees last Friday off, which does make for a nice four day weekend. And our tipster is correct, early July is a pret-tay, pret-tay, pret-tay slow time of year for accounting firms so a 3 pm let-out for a Friday before the grandest, pyrotechnic digit-losing holiday of the year might feel like a slap in the face.
That said, if you’re so bent out of shape about it, why not use some PTO (God forbid!)? You’re completely in control of this situation, friend. You want an extra-long weekend? Make it happen. Expecting accounting firms to just hand you a four-day weekend is a little bitchy and you have no excuse if you have a grip of PTO banked. Don’t make the same mistake come Labor Day.
Though the following inquiry from what we assume to be a Going Concern reader was addressed to my dearest, most lovely editor, I’m hijacking it because I’ve been wanting to write about this for a long time. While the idea of CPAs unionizing seems ridiculous to some, I’m sure more than a few of you have dreamily drooled at the prospect of collective bargaining power while two months in to the most horrendous busy season ever. Is it that silly of an idea?
Hi Caleb,
I am a Big4 Tax Senior and had a question regarding the possibility/benefit of having a union. To my knowledge, one currently does not exist, but why? Entertain me for a second.
If every staff through manager (there ing managers in, so maybe just staff and seniors) were to band together and create a union across all service lines and all of the four firms, what would stop us from getting fair compensation and slightly better hours? If the threat of a strike of 70% of each of the firm’s workforce (who probably actually do 90% of the work on any given engagement) could happen at any time, would the partners really treat their subordinates the way they currently do? Maybe there’s something written somewhere that CPAs can’t join a union?
Imagine if this raise/bonus season were to go poorly, and the union decided that on March 1, 2012…every staff, senior and manager FROM ALL FIRMS would stage a walk out and go on strike until our compensation demands were met. What could the partners do? Could they realistically try to do all the work themselves? Could they really try and replace 60,000 employees (I am guessing on that figure)? Could they try and get all the work done out of India? I HIGHLY DOUBT ANY OF THESE WOULD BE REALISTIC OPTIONS. I can’t imagine the possibility of replacing a dozen auditors overnight with Accountemps personnel in the middle of an audit for a fortune 100 client.
I understand that the possibility of being able to coordinate such a union across all the firms would be next to impossible, but can someone tell me why/how it wouldn’t work assuming it was legal for us to do? Could you post up a poll of those who would be interested?
Wait a second, are you trying to tell us that you don’t feel you are fairly compensated? Are you prepared for the burden of union fees and the inconvenience of having to picket your downtown Big 4 office chanting “Hell no we won’t go!” in business casual should it come down to that?
Why stop at the Big 4? Second-tier capital market servants are just as mistreated as you are (or at least feel that way, and who are we to tell them they don’t get enough engagements to feel burned out?). Think of the collective bargaining power then.
I think part of the reason why anyone you suggest this to might think you’re one tax season away from the funny farm is that CPAs already have a large, powerful trade association which allegedly exists to serve its interests. Granted, the AICPA does more lobbying in Washington than it does to accounting firm partners about easing up on you poor shlubs who have to do all the work, but it’s still a trade association.
In an article about the recent showdown in Wisconsin between teacher unions and Governor Scott Walker, Ann Coulter wrote “the need for a union comes down to this question: Do you have a boss who wants you to work harder for less money? In the private sector, the answer is yes. In the public sector, the answer is a big, fat NO.” Well shit, there’s your answer. We already know how most of you in public accounting feel, no need to elaborate.
Former Congressional candidate and CPA Krystal Ball is all for unions, especially when it comes to balancing the gender inequality that still exists in this country. If criminals in Canada can unionize, why not CPAs? Well for starters, though it may not feel like it, most of you are paid pretty fairly compared to, say, McDonald’s cashiers, Starbucks baristas and Walmart greeters. It may not feel fair based on the service you provide (understandably) but in the big picture, making $50,000 a year fresh out of school in middle America ain’t too bad of a gig. You get vacations, safe work conditions, bonuses, insurance and even free CPA review materials if you’re lucky. I bet OSHA has never seen the inside of a Big 4 office to investigate a fatal Excel accident or random intern decapitation at the coffee machine.
Let’s keep in mind that, if necessary, the Big 4 probably could scrape up a motley crew of Indian and Sri Lankan accountants and reluctant partners to do the work while you’re out front calling Raj a scab. Is what you do all that difficult? Look at the moronic intern in your office… a little training and that guy is going to be doing your job in a few years.
Lastly, there’s the legal issue. With all the money the Big 4 throw at lobbying and keeping some of the country’s best lawyers on payroll, do you really think you stand a chance? Someone has to give you the OK to unionize and I just don’t see the Big 4 lawyer machine slipping up and letting that one through. You really are one busy season away from the funny farm if you believe otherwise.
But I’m 100% behind you guys if you try to go for it anyway. Si se puede!
In addition to the Nets’ financials, you’ve got plenty of reading to do over this long weekend.
Some highlights from Zynga’s S-1 courtesy of Zero Hedge:
• Q1 2011 revenue: $235.4MM, up from $100.9MM YoY, LTM revenue $731.9 MM
• Q1 Net Income: $11.8MM up from $6.4MM YoY, LTM Net Income: $96.2MM
• Q1 Adjusted EBITDA: $112.2MM, up from $93.5MM, LTM EBITDA: $411.4MM
• Adjusted EBITDA definition also excludes stock based comp and change in deferred revenue
• Cash: $995.6MM, almost the same size as the entire proposed IPO
• Working Capital: $603.4MM
Some other fun things of note:
&bull Jeffrey Katzenberg, CEO of DreamWorks is on the Board of Directors and serves on the compensation committee.
• CFO David Wehner is formerly of Allen & Company, an investment bank that specializes in media and technology. He has an M.S. in Applied Physics from Stanford and a B.S. in Chemistry from Georgetown. His total compensation for 2010 was $17,996,057, $16,087,500 of which was stock awards.
• The audit committee consists of Brad Feld, Reid Hoffman and Stanley Meresman. Feld is a MD at the VC firm Foundry Group, Hoffman is the former CEO of LinkedIn and Meresman, the chair of the committee, selected for “his background as chair of the audit committee of other public companies and his financial and accounting expertise from his prior extensive experience as chief financial officer of two publicly traded corporations.”
• Mark Vranesh is the Chief Accounting Officer and had total compensation for 2010 of $1,544,940, $1,287,000 was stock awards.
There’s plenty more to pour through, so have it. And yes, Ernst & Young says everything is kosher, so who wants a piece of this?
Zynga S-1 [SEC]
For some people, NASCAR is a big deal. So big that it, like other “sports,” deserves a hall of fame. The location of which is carefully chosen after a competition amongst cities who feel they are best suited to give the legends of the sport an appropriate and worthy grounds which to immortalize their seemingly noteworthy accomplishments. For NASCAR, this city was Charlotte, North Carolina. The Charlotte Regional Visitors Authority, who operates the Hall of Fame, predicted that the facility would be a monstrous success with 800,00 visitors coming to this shrine of southern boys behind steering wheels in its first year.
Things didn’t really turn out as planned with disappointing attendance and operating losses. Of course this ruffled a few feathers and they invited PwC to perform an “80-hour, monthlong audit” to see what’s what.
Among its findings: Projections for 800,000 visitors in the $200 million NASCAR museum’s first year of operation were based on bluster as much as anything. “Our limited analyses have not identified due diligence or studies supporting these projections,” the PwC report states. “Rather, we understand from our discussions with CRVA representatives that earlier, more modest attendance projections were revised as the competition between Charlotte, Atlanta, and Daytona intensified for the Hall of Fame. It is not clear what, if any, due diligence was conducted in support of these upward revisions.”
Deadspin has gotten its hands on more sports team financial statements, this time those of the NBA’s New Jersey Nets for fiscal years 2004-2006. The NBA owners are set to officially lock out the players tonight at midnight and the strangest piece of information – and some say the cause of the owner/player beef – is highlighted in Tommy Craggs’ post which is known as “roster depreciation allowance.”
UPDATE: Deadspin has updated their post to state that the initial analysis of the RDA was incorrect. That is, the $25.1 million was not RDA but rather the loss the team took on a player contract in that fiscal year (Craggs speculates that it was Dikembe Mutombo). Craggs then writes:
The example is bad, and I apologize for that. I’m leaving the text here for a couple reasons: 1.) The roster depreciation allowance is real, even if we’ve misidentified it here, and it provides owners with a significant tax shelter based on a baroque logic. 2.) The Nets, like all franchises, do use large paper losses to pad their expenses.
I’ve updated the blockquote after the jump to show Deadspin’s note of the correction. They’ve also included some analysis from ESPN and a statement from the NBA’s CFO.
In 2004, the Nets had a $25 million “Loss on players’ contracts” which you can see here on the team’s income statement:
Craggs explains:
The first thing to do is toss out that $25 million loss, says Rodney Fort, a sports economist at the University of Michigan [See correction above.]. That’s not a real loss. That’s house money. The Nets didn’t have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.
Bear with me now. The RDA dates back to 1959, and was maybe [sports franchise owner] Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset.
The underlying logic is specious at best. As Fort points out, a team’s roster at any given moment isn’t actually depreciating. While some players are fading with age, others are developing and improving. But the Nets don’t have to pay more taxes when a player becomes more valuable. And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.
As Craggs notes, if that loss, which also saved the team about $9 million in taxes, doesn’t exist, you’ve got a $7 million profit (see update above). But since we’re talking about rich owners with the hands in honeypots all over the place, a profit really doesn’t do them any good on an investment like a sports franchise. Particularly one in New Jersey that was in the process of being sold back in 2004.
Craggs’ whole post is excellent, so check it out. In the meantime, I’ll note some other interesting things from 2004 (financials, in full on page 2) include:
• An enormous working capital deficit of $124 million. This was mostly due to a $95 million term loan the team was guaranteed by a partnership called “YankeeNets” which was created when the then-owners, Lewis Katz and Ray Chambers, bought 37.5% of the New York Yankees Partnership. YankeeNets was 99% owned by Katz and Chambers. It’s all pretty convoluted but I don’t know of any business that wants a huge working capital deficit like that. Even if the term loan was omitted, the negative working capital would be over $29 million, with accrued salaries being nearly double of current assets.
• The enormous members deficit of $81 million, again exacerbated by the phony loss of $27 million.
• Negative net cash flow from operations of $20 million.
• Under Note 5, “Intangible Assets” you can see that players’ contracts were completely amortized for a net value of $0.
Of course when you look at the 2005 and 2006 financial statements (page 3), things look very different.
• For starters the term loan has jumped into long-term liabilities but the team still has a pathetic working capital of negative $16.8 million in ’06 and negative $25.3 million in ’05.
• Note that depreciation and amortization is now itemized on the income statement for $41 million and $42 million in ’06 and ’05 respectively. These make a huge portion of their losses from operations. D&A did not have its own line item in the ’04 financials.
• In the two years presented there were member distributions of over $15 million and large negative balances for cash flows used in operating activities.
As we’ve seen with the New Orleans Hornets, you can own a NBA franchise but that doesn’t mean you have to run it like anything that closely resembles successful business (at least i the traditional sense). For starters, you don’t have to answer to anyone except your co-owners with whom you worked out this strategy. I guess you could consider loyal fans to be stakeholders in your organization but my guess is most owners don’t.
I gave these a real quick and dirty look, so if you’ve got the time (and need to distract yourself until the holiday weekend starts) pour over these and call anything else weird you see. Enjoy.
Yes, you read that headline correctly. Not inflation, not emerging nations, not more people on this planet than we have food to feed them and not Ben Bernanke’s penchant for leaning on the PRINT MORE button but inventory. Well, a specific inventory method and the accountants who encourage companies to use that particular method.
Speculators, the weather, biofuels and the growing appetite for meat in developing countries have all been blamed for the high food prices that have hit countries such as Kenya, Somalia and Ethiopia particularly hard.
But what about the accountant accountants. Greg Smith, managing director of Global Commodities, an Australian investment fund, said fund managers were being unfairly scapegoated. He argued that measures to curb speculative activity, such as limits on contracts and higher margins (less reliance on borrowed funds when making trades), would not deal with the fundamental problems, such as the weather and, more pertinent from Smith’s viewpoint, just-in-time inventory.
“We have volatility in food prices because of inventory shortages,” said Smith, who was attending the fourth annual world agriculture investment summit in London, bringing together investment managers, policymakers and NGOs. “What we need is more inventory instead of this just-in-time approach. We need to look at how we increase buffer stocks of grain. After the second world war, governments would have three to six months of supply of grain. Now it’s two or three weeks.”
Smith feels the accountants bear the brunt of the blame for this just-in-time issue as they are the ones who try to convince companies to adopt this particular inventory method in the interest of cost cutting.
While they don’t specifically come out and blame the accountants like Smith, Oxfam recently published a paper called Preparing for Thin Cows in which they question the current view on food reserves. “International institutions have warned G20 leaders that renewed food price volatility is now a high risk. However, the same institutions have summarily dismissed food reserves as one of the ways to stabilise prices,” said the report’s co-author Thierry Kesteloot. “Food reserves were largely dismantled in the 1990s and have been ignored ever since as too expensive and ineffective.”
Check out this 2008 piece from The Hightower Report which foretells the problem with the just-in-time idea. “The combination of oversupply, ultra high interest rates and new business practices quickly turned the idea of owning extra inventory into financial heresy of the highest order. Accountants, bankers and MBAs descended on America’s businesses to preach the gospel of wringing every last ounce of unnecessary corn, wheat, cotton, copper or wing nuts out of every conceivable supply ‘pipeline.’ To a large degree, the gospel of just-in-time inventory control has prevailed right up to the present – or at least into 2007.” The article blames a global attitude that inventory can easily be had should it be needed – thereby eliminating the need to keep excess reserves – for just-in-time’s popularity.
Problem being this attitude assumes an unrealistic scenario in an inflationary environment in which 40% of the U.S. corn supply is used as “fuel” (ask Joe Kristan about ethanol if you’re not hip) and completely ignores unforeseen issues like, oh, I don’t know, drought and higher demand in emerging nations for corn-fed meat.
There’s a problem alright, just not sure if it’s with the accountants.
You think I’m kidding, don’t you?
Earlier:
You’d Be Wrong If You Thought Americans for Tax Reform Were a Bunch of Humorless Killjoys
We understand that complying with financial reporting in the U.S. can be difficult, so don’t get too worried about it. But we do ask that you keep the workpaper hostage taking to a minimum.
China is looking into accounting issues involving Chinese companies listed in North America, an official at the country’s securities regulator said in the watchdog’s first public remarks since a series of accounting scandals. Corporate misbehaviour, unfamiliarity with the U.S. market and some practices involved in overseas listings had all contributed to recent investor distrust of Chinese companies, said Wang Ou, vice head of research at the China Securities Regulatory Commission (CSRC). “First, we have to admit that some of our companies may have flaws. Second, our (companies’) understanding of the U.S. market and the measures to tackle risk there may be inadequate,” Wang said at a conference in Beijing this weekend. “We have contacts with the U.S. and its relevant regulatory bodies and we’re studying the issue together.”
Oh, and it isn’t necessary to issue a press release when your auditor ties out your cash balances.
[via Reuters]
In May, IASB member Prabhakar Kalavacherla threatened India by telling a conference in Mumbai “to put it in one sentence, we strongly encourage adoption as against convergence,” suggesting that India could totally contribute to the rule-setting if it will just go ahead and adopt IFRS now. That sort of attitude is hilarious and why watching the IFRS “condorsement” plan getting burped up around the world is so much fun. Really? Adopt first, ask questions later?
India isn’t buying it, although looking to the U.S. and Japan for answers isn’t going to help matters either.
The Economic Times has the story:
The government is planning to introduce additional changes to global accounting standard, IFRS, to make it more palatable for Indian companies, overriding the international opposition to amendments already made. Such a move will extend the eventual migration by Indian companies to the global standard and also insulate local firms from any short-term capital market shocks that may arise due to erosion in valuations.
However, any changes to the Indian version of the International Financial Reporting Standards (IFRS) will take time as the government will initially look at some of the revisions being suggested globally, specially by the developed markets of US and Japan, before finalising the road map, secretary, ministry of corporate affairs D K Mittal told ET on Thursday. “We have to see how IFRS will meet our requirements. Our markets are different, our standards are different,” he said.
Quote of the convergence! “Our markets are different, our standards are different.” I’m sorry, maybe I’m confused on how this convergence thing is supposed to work (entirely possible as I’m not an accountant and therefore not required to understand what’s happening here) but couldn’t each country getting IFRS shoved down its throat say the same? That’s why global economies are (read: were) such a beautiful thing; different markets breed different standards, and market participants have the option to say whether or not they find a particular country’s financial standards appealing. With forced adoption of a single arbitrary standard, determined by an entity with questionable self-interest at work, you take away investors’ ability to put their money where their mouth is.
GAAP has obviously failed. The evaporation of capital in the United States over the last 3 years proves it. But the whole Adopt-or-Else plan isn’t necessarily any better either.
In my humble opinion, it just makes the IASB look desperate and India look awesome. For now.
In case you forgot, Sir David Tweedie is retiring next week as the head of the IASB. It’s been quite a run for Tweeds and good money says his friends at the Board will send him off in style worthy of a knighted Scotsman (read: getting him blind drunk and some hooliganism). He’s had many accomplishments in his time running the IASB but there’s one goal that will ultimately elude him when he hangs up the eyeshade. That is the dream of converged accounting standards. It certainly has been a noble quest worthy of his accounting “rock star” status but you can’t help but imagine that you might happen across SDT in a pub muttering to himself over a pint about “the one that got away.”
Sir David’s biggest project has been convergence of IASB’s rules with those of America’s Financial Accounting Standards Board (FASB). The two had set a June deadline, timed to coincide with Sir David’s retirement, to iron out their differences. That won’t be met.
Just because he won’t reach his ultimate goal that doesn’t mean Tweeds hasn’t tried. Or been BEEN INFINITELY FUCKING PATIENT with the Yanks.
But you can’t do it all. So now the task of accounting rule copulation will now fall to Dutchman Hans Hoogevorst but if Sir David is feeling a little like a failure, he should know that there are people out there still think he’s pretty badass since he got the SEC to come to the table:
Sir David should not be too disappointed that convergence is not complete. That the process has come as far as it has—and that America’s Securities and Exchange Commission might decide later this year to adopt IASB’s standards—is something no one could have predicted ten years ago, says Nigel Sleigh-Johnson of the Institute of Chartered Accountants of England and Wales.
So enjoy your retirement, oh knighted one. Your double-entry immortality is secure.
The balladeer of the balance-sheet [The Economist]
Nationally, after three consecutive years of declines, CPA firms “finally” are projecting positive growth between 3% and 4%, said Allan D. Koltin, CEO of Koltin Consulting Group, a Chicago firm that specializes in the accounting profession. The industry had enjoyed enormous growth and enormous hiring between 2003 and 2007, Mr. Koltin said, but the recession year of 2008 ushered in a dark chapter.
Many firms instituted hiring freezes and made cuts. Most of the 100 largest firms let go of anywhere from 10% to as many as 20% of their accountants, he said. “It probably was the worst bloodbath of layoffs that the accounting profession has had in well over a couple decades,” Mr. Koltin said. “The bloodbath is definitely over. Firms all over the country, Cleveland and everywhere, for the first time are doing serious hiring after a serious drought.” [Crain’s]