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Cutting Out SarbOx for Small Business? Here’s a Better Idea: Take the PCAOB…Please

pcaob.jpgHR 3817: Investor Protection Act of 2009. We’re going to stop worrying about HR 1207 since “auditing the Fed” was always a fundamentally moronic idea (even when I cheered it in lieu of ending the Fed outright) and worse, just here, since no one even knows what it means anymore) is on the chopping block now, and for some reason a ballet dancer with a serious grudge against the world is going after it. Fine, he’s just a little later than some of us.


HuffPo reports:

The White House is quietly working to undercut a key post-Enron reform, significantly weakening protection for everyday investors and threatening the administration’s image as a champion for financial regulatory reform.

I’m not sure whose image they are referring to but it certainly cannot be this administration’s (and I say that in the most politically asexual way possible). The only part that bothers me about this is the “quietly”, don’t make it so sinister, please.
HuffPo continues:

White House Chief of Staff Rahm Emanuel has been telling Democratic members of the House Financial Services Committee that he supports amending the Investor Protection Act of 2009 — a bill designed to beef up protection for investors — in order to exempt small businesses from a requirement in the Sarbanes-Oxley Act that mandates audits of internal controls. The Sarbanes-Oxley Act was enacted in 2002 in the wake of accounting scandals at Enron and Worldcom that rocked investors and damaged confidence in the markets.

Accounting Onion explains the effectiveness of Sarbanes Oxley in a little more detail than we care to, and if it doesn’t feel like you’re chasing your tail yet, wait, we’re not done.
Former SEC Chairman Arthur Levitt made it sound as though investors’ balls — and our only hope of getting out of this mess — were instantly twisted at the news.
Call me absolutely out of my fucking mind but this sounds like a small business bailout to me, at least indirectly. Save small business the costs (and benefits) of extensive audits and allow them to pocket the difference?
Good. While we’re at it, fire the PCAOB to save more money.
The PCAOB seems to think that we’ve got an audit problem. I contend here that the problem is with the auditors, and how many of them are being asked to go in there head down and pretend they don’t see a thing? I talk to them all the time. Does the PCAOB? I tell all of them to take notes when they ask me what to do. You PCAOB people should really see some of this, you’d be absolutely appalled.
Skeptical CPA argues that this was bullshit all along and I agree. He shares a moment at a Houston Financial Reporting Symposium. The PCAOB’s own Charles Niemeier (CN) is kind enough to explain his agency’s uselessness:

Someone asked, “Are PCAOB CPAs competent”? CN fumfered that one. Someone else noted most PCAOB CPAs were “former” Big 87654 partners. CN has no problem with that, since only those with large client audit experience could inspect the Big 87654’s work. Hey, CN, I’ve got some oceanfront property in Arizona to sell you. CN explained Sarbox was passed to prevent fraud. I ask, has Sarbox improved bank accounting? Some CPAs do what I call “disclosure” audits, i.e., they never dig into “non-accounting” data to ascertain the correctness of a client’s accounting records. For instance, looking at industrial engineering reports which might underlie a manufacturing company’s inventory costs. The Big 87654 is full of CPAs who do not understand cost accounting. CN reminded us the “PCAOB can’t reveal its findings”. I ask why not. Who or what is the PCAOB protecting?

I agree, they don’t know cost accounting. Do you know how many of them fail BEC every CPA exam testing window? It gets tiring.
The point is, I’m not sure this is worth bemoaning. Or maybe it’s just not worth caring anymore, they’re going to do whatever they want with accounting.
Worse, Citigroup, Bank of America, SunTrust, LandAmerica (the list goes on and on) all of these large, unstable financial firms continue to get unqualified audit opinions while 1,790 of 1,800 CPA firms have these guys breathing down their necks. Well not LandAmerica, they already failed miserably.

Meticulous Records Save Billionaire $27 Million in Taxes

julian_robertson.jpgSo you’re Julian Robertson and you’re a billionaire right? You’re on the Forbes list &mdash right behind that cheater Raj but ahead of Wilbur Ross! &mdash and you don’t have many worries.
Except for the City of New York trying to nab $27 million dollars from you! Subways stations falling apart, government employees being laid off. Bah. That’s over 1% of your net worth (based on Forbes’ latest count) and you’ll be damned if the City is going to get their grubby mitts on it.


WSJ:

At issue was Mr. Robertson’s whereabouts on four days during [2000]: April 15, July 23, July 31 and Nov. 16. The other 362 days were accounted for, with documentary proof of 183 days spent in the city and 179 spent outside. The New York State Department of Taxation and Finance argued that because he didn’t have documentary proof for the four days, he was therefore a resident and owed city taxes of $26,792,341.

Four days. Four days standing in between you and $27 million. As we mentioned, it’s not like this is a substantial amount but this was one of those qualitative over quantitative decisions: “$27 million, an amount important enough to the hedge-fund manager that he and his staff spent hours and developed a complicated calendar system to track his whereabouts.”
See? It’s the principle. Robertson is bending over backwards to play by the rules since he once told an assistant — who meticulously tracks New York City days and non-New York City days — that crossing the GW Bridge at 11:45 pm is considered a New York City day.
Between the human GPS and Robertson’s wife saying there was no way he was in the City — she doesn’t stand for him being ‘in her hair’ prior to vacay — the court was convinced that he wasn’t a New York City resident. Can’t say Robertson didn’t work for it.
In Tax Case, 4 Days Save Robertson $27 Million [WSJ]

Preliminary Analytics | 11.04.09

buffet-and-blankfein.jpg• Buffett Joins Goldman in Bid for Fannie Mae Tax Credits – “The credits are virtually worthless to Fannie Mae and require the company to take losses each quarter as their value declines. Companies such as Berkshire Hathaway and Goldman Sachs could use them to offset federal tax expenses.” Who doesn’t hate seeing good tax credits go to waste? [WSJ]
• Congress Poised to Keep Homebuyers’ Tax Credit – Despite toddlers’ insistence of homeownership and widespread SNAFUs, the bill could pass as early as today. [NYT]
• AT&T sues Verizon – AT&T doesn’t think the map commercials are funny or accurate. [NYP]
• ‘Osama’ Funding Appeals as U.S. Independent Filmmakers Hurt – Desperate times, right? Just so long as you don’t have any political aspirations. [Bloomberg]
• Surprise! NJ Doesn’t Like High Taxes – “New Jersey holds the distinction of the state with both the highest property taxes per capita and the worst business tax climate in the nation, according to the Tax Foundation.” [Tax Girl]
• Fears of a New Bubble as Cash Pours In – “Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable.” [WSJ]

Review Comments | 11.03.09

Thumbnail image for Tax Code.jpg• Don’t forget to vote in our two polls from today.
• “Complexity of Tax Law” Not a Challenge for IRS? – Over budgeted modernization projects are numero uno. [Tax Girl]
• SEC Madoff exhibit list now available… – Got time? 536 exhibits. [Footnoted.org]
• Pratt: Deductibility of Fertility Treatment – “Katherine Pratt (Loyola-L.A.) has posted Deducting the Costs of Fertility Treatment: Implications of Magdalin v. Commissioner for Opposite-Sex Couples, Gay and Lesbian Same-Sex Couples, and Single Women and Men” [TaxProg Blog]
• Accounting for Business Dummies – WSJ gives bad tips on accounting. [Accounting Nation]

Deloitte: Your Source for Decision 2010

Thumbnail image for DTa.jpgElection Day isn’t even over and while most of you probably don’t feel bad about not going to the polls, Deloitte is already getting you amped for next year’s state gubernatorial elections:

[The] 2010 election cycles are shaping up some of the most consequential state elections in decades. Many of the nation’s largest states, from California to Pennsylvania to Florida, will see new governors in 2011. All in all, there will be at least 17 open races for governor, the most in years. Control of state legislatures is also expected to be highly competitive.

Because you can never get started too early on diving into dense policy issues, Deloitte lists seven “featured insights” that will be crucial in “regain[ing] the public’s trust” in 2010. Wow, this firm is looking out for you or what? Thanks Deloitte! You’re better than Fox News!
And just in case you didn’t think Deloitte was serious about getting you informed about the issues, the 2010 site is introduced by none other than Tom Ridge, who — unbeknownst to us — is a Senior Advisor to Deloitte.
One would think that it would be impossible for us to be saturated by election coverage for next year prior to it even starting. BY AN ACCOUNTING FIRM. Deloitte, you’ve outdone yourself.
2010 Gubernatorial Elections [Deloitte]

The PCAOB Might be Caving on Auditor Signatures

Thumbnail image for Thumbnail image for lawn chair.jpgLet’s not jump to the conclusion that the PCAOB will scrap the whole auditor sign-off proposal just yet. They’ve been doing a hell of a job making auditors’ lives difficult lately ly wants to feel like it’s an important part of the bureaucracy. Especially since their lives are potentially at stake.
But the belly-aching on this one by the usual suspects is reaching fever pitch. They are saying enough is enough and that their partners’ names should not be written in blood for all to see.
It shouldn’t surprise anyone that the firms hate this idea since the owners of the firms are being given explicit instructions to put their names — and asses — on the line.


The PCAOB received a grant total of 23 comments on the concept release and all but two were negative. Not surprisingly, the two that weren’t negative came from “investor representatives”.
Francine McKenna gave you the lowdown on the firms responses in her GC post from September 30 and it sounds like it’s working.
Here’s a quote from PCAOB Deputy Chief Auditor Greg Scates:

“The board is going to discuss this and make some decisions in this fourth quarter on what to do and whether to move forward in this area. This is not uncommon in Europe. Partners do sign the report in other countries. In our country, of course, this is not the way we’ve been doing business, so it is a new concept. We’ll see what the board wants to do as they look through the comment letters and make a decision on what to do.”

A whopping 21 negative comments and the PCAOB is getting cold feet? Get better at spreading the word to people that will take your side, PCAOB. Were you just testing the waters with this or did you really want to make auditors accountable?
But maybe the firms got the Board members’ personal side:

Even more disturbing than the potential liability exposure is the specter of individual auditors coming under public attack by disgruntled investors and a “lynch mob” media mentality. “Engagement partners and their families could be subject to unwarranted and unwelcome communications from shareholders who are unhappy with a particular company’s performance in matters that are wholly unrelated to the completeness and accuracy of the financial statements,” Grant Thornton warned.

There are a lot of irrational people out there we’ll give you that, but a media circus outside an auditor’s house? Sort of like a bean counter paparazzi? That could be kind of fun, couldn’t it?
Oh, but what about the websites that would get put up?:

Groveland, Mass.-based CPA Frank Gorrell, for one, warned that identifying engagement partners by name could prompt irate investors to set up Internet sites to “vent their frustrations” by criticizing individual accountants and even publishing their home addresses online.

Sweet Jesus. Apparently accountants want to be invisible. No criticism for me, thankyouvermuch. And venting frustrations? On a website? Who ever heard of such a thing?
AUDIT FIRM REGULATION: No Autographs [Web CPA]
PCAOB May Scrap Auditor Sign-off Proposal [Web CPA]

Madoff Auditor Pleads Guilty, Solidifies ‘Worst Auditor Ever’ Status

That’s not an official title but if you’ve got suggestions for someone else, please, enlighten us.


Reuters:

He told the court that he did not conduct any independent auditing or verification of financial statements or tax returns provided by Madoff and “others” at Bernard L. Madoff Investment Securities LLC in New York.

Friehling did not state who the ‘others’ were but the U.S. Attorney hinted that we’ll get to know sometime. For now, Friehling is a free man, out on $2.5 million bond until his sentencing which is tentatively set for February.

He faces up to 114 years in prison but similar to Madoff’s chief bald-faced liar, Frank DiPascali, his cooperation should result in a lighter sentence. And by lighter we’re guessing that means he’ll still leave prison horizontally.

Madoff Accountant Pleads Guilty [WSJ]

Layoff Watch: PwC November ’09 Edition

Thumbnail image for becks.jpgWe’re not going to say that the pending endorsement of Becks’ undies has anything to do with it but that guy doesn’t come cheap.

Our contributor, Francine McKenna, is reporting on her blog that PwC Advisory cuts will be going down next week:

I’ve just received word: There was a PwC Advisory partners emergency conference call tonight announcing upcoming involuntary staff reductions.
(This time the source is impeccable.)

New US Advisory Leader, Dana McIlwain laid out the bad news: The time has come to cut. Average utilization is hovering at 69%. Cash collections are millions short. Campus recruiting for Advisory has been stopped cold. Business sucks and then there’s the 800+ BearingPoint folks to absorb.

On November 11th the rank and file partners, fortified after training and coaching by HR via a webcast in the next few days, will chop 300+ professionals from PwC Advisory, at all levels, all geographies, all practices. Most have already seen the writing on the wall via forced ranking.

Well, crap. We’re not talking Lotus Notes developers this time around. If the guillotine does indeed drop next week, it probably won’t come as a surprise with the less-than exciting revenue numbers and the rumors that the firm was phoning in no raises for fiscal year 2010.

Oh and then after whoring themselves out for AHIP, P. Dubs turned around and folded like a cheap lawn chair. That probably won’t win you clients.

We’ll keep our ear to the ground on this but in the meantime, let us know if you’ve got more details on these rumored layoffs or if you get an unexpected email much earlier than next Wednesday. It’s been known to happen.
Veteran’s Day In PwC Advisory: Say Auf Wiedersehen [Re: The Auditors]

Earlier: PwC’s Re-thinking of the Bell Curve Ranking

Also: Ratings, Raises, and Promotions: Forced Ranking in the Big 4

FINS: Big 4 on the Resumé Is a Must-Have

Thumbnail image for Thumbnail image for hire me2.jpgWe have had some lively discussions regarding how important having a Big 4 firm on your resumé is.
According to FINS, it’s a must-have:

PricewaterhouseCoopers, Ernst & Young, Deloitte or KPMG. Resumes that boast experience at a Big Four firm are a step ahead of the pack.
These names signal that candidates are well-trained and meet stringent hiring standards, says Lisa Garcia, a marketing manager at Adecco’s Ajilon Professional Staffing, a recruiting firm based in Melville, N.Y. Other large firms such as Grant Thornton and BDO Seidman will also catch a recruiter’s eye.

“[S]tringent hiring standards” could be called in question in some instances but for the most part, we agree that having a big name on your resumé is definitely something that a lot of employers notice.
Our thread on Life After Big 4 life is a good place to get some further discussion.
Contrary to popular belief, your career is not dead in the water if you don’t have experience at a Big 4 firm. FINS lists some other must-haves including:
• IFRS – It’s coming people (albeit slowly). If you’ve got experience with it, make it known.
• SEC – Regardless of the Commission’s track record, there will always be filings.
• Experience with specific industry software – Caseware, SAP, PeopleSoft, Deltek, and Black Baud
• Numbers – listing specific accomplishments that result in cost savings or creating revenue streams
• Customer service skills – Yes, you socially awkward types will be at a disadvantage.
So a good presence of all these things will look good on your resume but we wouldn’t get too hung up on any one aspect. If there’s anything else you’ve noticed that get the recruiters giving you that extra look, please share in the comments.
Now get out there and impress the pants off somebody. January will be here before you know it. Good hunting.
Six Must-Haves for CPA Resumes [FINS]

Satisfied with Your Salary?

unsatisfied.jpgThis is the last thing we thought we would see: No grumbling from accountants over pay freezes.
Maybe our number crunching friends across the pond are less hung up on money but Stateside “No grumbling” is, at the very least, debatable.
We figured getting a comparison poll was in order. So, continuing the theme of election day, we’ll ask you to vote again, this time on how you feel about your current salary. Feel free to elaborate in the comments.

Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

In last Tuesday’s Preliminary Analytics we mentioned the case of Tom Petters, the Minnesota businessman accused of running a multi-billion dollar Ponzi scheme.

The trial is in its first week and already there has been testimony from the star witness — Petters’ former office manager — that included a recording of Petters saying ‘This is one bi his own defense counsel comparing him to a cocker spaniel:

[Defense counsel, John] Hopeman countered that while Petters was an accomplished salesman, he didn’t have the corporate skills necessary to run companies.
“He has the attention span of a cocker spaniel — about 15 seconds,” the defense lawyer told the 10-woman, six-man jury. “He couldn’t read a whole book if his life depended on it.”

Okay, a couple things before we get to the crux.

• Most cocker spaniels we know have attention spans exponentially longer than fifteen seconds. It would be much more believable if defense counsel had said, “He has the attention span of a pomeranian and you can’t leave him home alone or he’s eats the furniture.”

• Petters couldn’t read a whole book if his life depended on it? Are we talking classic literature? Because if we are, then he’s got company. What about children’s books? Do magazines count? He strikes as a guy that could at least make it through the pro football season preview.

Moving on…

Now that the trial is underway we’ll be following the more interesting developments in the case but we’ll be especially interested in the litigation involving the auditors of the hedge funds that cycled funds to Petters’ businesses.
There is pending litigation in Texas that involves both Ernst & Young and McGladrey & Pullen related to the audits the two firms performed for feeder funds for Petters’ businesses.

These feeder funds received purchase orders for high-end electronics from Petters’ businesses that were seemingly made by big-box retailers such as CostCo. The feeder funds then solicited money from investors, including the plaintiffs in the case, in return for promissory notes for Petters’ businesses. The merchandise on the purchase orders secured the notes. Allegedly, there was no merchandise and Petters used the money received to pay off other investors who were looking to get out and so on and so forth.

The feeder funds that are the defendants in this case are Arrowhead Capital Partners II, L.P. of Minnetonka, Minnesota, Palm Beach Finance Partners, L.P. and Palm Beach Finance Partners II, L.P. of Palm Beach Gardens, Florida, and Stewardship Credit Arbitrage Fund, LLC of Greenwich, Connecticut. The general partners and investment managers of these funds are also listed as defendants.

E&Y served as auditors for Stewardship while M&P served as the auditors of Arrowhead. A small Florida firm, Kaufman, Rossin, & Co., P.A. served as the auditors for the two Palm Beach funds. The firms are being sued, naturally, for not detecting the alleged fraud. In this case, however, the firms may have it coming since the fraud was run by someone with the alleged attention span of a canine.

We spoke with Guy Hohmann, who is representing the plaintiffs in this case, and according to Mr. Hohmann, M&P has the most significant exposure in the Petters case as they also served as the auditor for Lancelot Investors Fund and Colossus Capital Fund, L.P. both Oak Brook, Illinois based hedge funds. M&P also faces litigation from the investors of those funds in Illinois.

Lancelot’s Vice President of Finance was Harold Katz, who just pleaded guilty last month to one count of conspiracy to commit wire fraud. Mr. Hohmann was recently informed that before taking the job at Lancelot, Katz was a senior manager at M&P that worked on the Lancelot audit. M&P would not comment. It has been speculated now that Katz — who pleaded guilty September 2nd — is cooperating with authorities in the cases against Petters and Lancelot founder, Gregory Bell.

In another strange twist, Mr. Hohmann told GC that Lewis Freeman — the forensic accountant that is under federal investigation that we told you about last week — was appointed as the Chief Restructuring Officer of the Palm Beach funds. The Palm Beach funds are not currently listed as an active case on the forensic firm’s website.

We reached out to all the firms named in the lawsuit, McGladrey & Pullen declined to comment while calls to E&Y, Kaufman Rossin & Co., and Kenneth A. Welt, the current receiver listed on the Lewis Freeman website, were not returned.

According to the complaint, the amount lost by the plaintiffs was $24 million dollars, however, according to a October 6, 2008 Bloomberg article, the two Palm Beach Funds were responsible for approximately $1.1 billion of the alleged $3 billion the scheme while the Lancelot funds held approximately $1.0 billion with Petters. Mr. Hohmann’s understanding was that the Palm Beach funds had provided approximately $1.0 and that Lancelot held approximately $1.6 billion. Because of the complex web of companies in this case, the final dollar amounts may not ever be known.

So regardless of the fact that the case in Texas is in its early stages, future lawsuits from other investors could arise, and all three firms could continue to face significant litigation.

We’ll continue to keep you updated on any developments in the cases involving these accounting firms and will be following any noteworthy developments involving the Petters trial.

The case is SSR v. Arrowhead et al., District Court of Dallas County.
SSRvArrowhead.pdf