Welcome to the last Footnotes of 2022! We appreciate you stopping by as always and hope you get a chance to recharge over the holidays. We will be out of office next week but have scheduled some things to run while we’re gone for those individuals who are severely addicted to accounting shitposts and simply cannot go without. We’ll be checking the tipline during this time so feel free to text if anything of note happens while we’re feasting, resting, and putting in way, way too many hours on the PS5. Merry Christmas to those who celebrate!
Big 4
EY cuts costs to boost profits ahead of planned spin-off [Financial Times]
EY has begun cutting costs to boost profits next year, as it seeks to maximise the valuation of its consulting division ahead of a planned spin-off and public listing of the business. Hiring, travel for internal events, training and staff Christmas parties have been targeted as part of efforts to curb expenses at the audit and consulting firm ahead of the break-up known as “Project Everest”, people familiar with the matter told the Financial Times. “There’s a huge clampdown on expenses at the moment to make the numbers for Everest valuation look good,” said one of the people at EY’s UK operations, who said the firm’s bosses had cited “economic conditions” for the cuts.
Deloitte Receives Multiple Honors at the International Innovation Awards 2022 [PR Newswire]
Deloitte won top honors for its platform innovation with the Deloitte Omnia Platform, and top honors for its product innovation with the Omnia ESG Module. Omnia is an end-to-end, globally integrated cloud-based platform that provides professionals with cutting-edge technology and a flexible experience that promotes quality, transparency, and trust across Deloitte’s services. The Omnia ESG Module is a comprehensive and structured framework, powered by machine learning, to help Deloitte professionals provide ESG reporting readiness and assurance with quality and agility. Deloitte Audit & Assurance also achieved recognition as a leading organization committed to driving innovation and change through its approach to culture, inclusion, talent, and company mission.
UK wages next year will be at their lowest level since 2006, report says [CNN Business]
Brits hoping for a new-year salary bump to offset soaring food and energy costs may be disappointed. The average British worker’s pay in 2023 is expected to fall back to 2006 levels once inflation is taken into account, according to PwC. Real wages, which factor in inflation, are expected to fall by as much as 3% in 2022 and another 2% in 2023, PwC has predicted in a report on the UK economy shared with CNN. The report confirms that wages have stagnated in Britain even as inflation hits double digits, sparking the worst cost-of-living crisis in decades. That’s led to widespread strikes across the UK economy, encompassing railways, schools, nurses, hospitals and the postal service.
KPMG announces Stuart Bedford as new UK Head of Law [KPMG]
“We’re delighted to welcome Stuart to head up our ever-growing UK Law business. He is a highly experienced partner with a great track record of delivering for clients. I know his extensive network and expertise will be a great asset to our business and our clients as we look to build on two years of stellar growth and deliver on our ambitious investment plan,” said Nick Roome who has led KPMG’s UK law practice since 2015 and has now been promoted to take on a global focused role, concentrating on growing KPMG’s global legal solutions. The KPMG Law business has experienced a tremendous period of growth, with revenue growing by in excess of 80% in the last two financial years. It recently revealed an ambitious investment programme to double in size over the next two years by taking on a further 220 legal professionals, including 45 new Partners and Directors. This investment plan would take the number of legal professionals in the UK to over 400.
Audit
PCAOB Proposes Tighter Requirements for Audit Firms Verifying Outside Information About Clients [Wall Street Journal]
The Public Company Accounting Oversight Board proposed tightening the requirements around how audit firms obtain and verify outside evidence about their clients, such as from customers and lenders, a process aimed at preventing fraud. Under the current rule, audit firms must send out requests, typically electronically, asking a third party to confirm the accuracy of certain information, such as the amount of accounts receivable. Audit firms are allowed to assume that the lack of a response is a corroboration of accuracy. The process, known as confirmation, is part of nearly every audit. The PCAOB now wants audit firms to go a step further by confirming the amounts of cash and cash equivalents held by third parties—typically lenders. Current rules don’t require this.
UK companies brace themselves for escalating battles with auditors [Financial Times]
UK companies are gearing up for conflicts with auditors next year as economic and political uncertainty add to the difficulty of signing off accounts and forecasting financial outlooks. Auditors, who do not want to be blamed for not raising red flags ahead of business failures during the recession, also warned companies to expect uncomfortable conversations about their financial outlook. “Uncertainty is at an all-time high and, quite rightly, I think auditors are sceptical about management forecasts and whether they’ll be achievable against that backdrop,” said Andrew Walton, UK head of audit at EY. “I think you will see a lot of challenge of management.” Hemione Hudson, UK head of audit at PwC, said it was “the kind of environment in which auditing is the most difficult”, adding that companies should expect “a high level of scrutiny” in areas such as going concern, impairment of assets, ability to meet bank loan covenants and access to finance.
Crypto
EY Says It Is ‘Aware’ of ‘Unauthorized’ Quadriga Wallet Transfers [CoinDesk]
Ernst & Young said it has “become aware” that bitcoin (BTC) that’d been sitting QuadrigaCX’s cold wallets has been moved elsewhere, according to a statement Tuesday. The company, which is acting as the bankruptcy trustee for the defunct Canadian trading platform, made the announcement four days after more than 100 BTC moved out of the wallets, which the company said Quadriga did not have access to. CoinDesk reported on Monday that EY had not initiated the transactions, which EY confirmed in its Tuesday statement. “Ernst & Young Inc. acting in its capacity as court appointed Monitor and subsequently as Trustee in Bankruptcy worked with management and others to recover the bitcoin transferred to these wallets,” the statement said. “However, the private keys associated with the cold wallets have not been located despite the detailed review.”
Be ‘very wary’ of crypto proof-of-reserve audits: SEC official [Cointelegraph]
“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” said SEC’s acting chief accountant Paul Munter in a Dec. 22 interview with The Wall Street Journal. A number of crypto firms have commissioned proof-of-reserves audits since the collapse of crypto exchange FTX, aiming to quell concerns over their own exchange’s financial soundness. However, Munter said the results of these audits isn’t necessarily an indicator that the company is in a good financial position. “Investors should not place too much confidence in the mere fact a company says it’s got a proof-of-reserves from an audit firm.”
Crypto auditors are disappearing right when the industry needs them [Quartz]
At a time when the crypto industry is trying to rebuild trust, auditors who help crypto companies report their financials are backing out of the industry.
Without reliable auditors, investors who were once enthusiastic about digital currencies may stay on the sidelines.
After performing a proof-of-reserves assessment for crypto exchange Binance earlier in December, auditing firm Mazars announced it was withdrawing the assessment that its South African arm had put out, and its work with crypto firms in general. The audit was quickly criticized by regulatory experts for being insufficient and creating confusion.
For its part, Mazars said it had withdrawn the report because of “concerns regarding the way these reports are understood by the public” and the reports “do not constitute either an assurance or an audit opinion on the matter.”
When was the last time Mazars had pulled a report very publicly like this? This year, when its US arm severed ties with Donald Trump after years of working with the former president and amid the New York Attorney General’s investigation into the Trump Organization.
Michael Burry, who started Scion Asset Management and predicted the financial crisis of 2008, said in December auditors who work with crypto firms are “learning on the job.”
Tax
IRS delays Form 1099-K $600 reporting threshold [Journal of Accountancy]
The IRS on Friday announced a delay in the $600 reporting threshold for third-party settlement organizations, which had been in effect for the 2022 calendar year. As a result, the IRS says third-party settlement organizations will not have to report tax year 2022 transactions on a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS or the payee for the lower, $600 threshold amount that was enacted as part of the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2.
Should we tax robots? [MIT News]
What if the U.S. placed a tax on robots? The concept has been publicly discussed by policy analysts, scholars, and Bill Gates (who favors the notion). Because robots can replace jobs, the idea goes, a stiff tax on them would give firms incentive to help retain workers, while also compensating for a dropoff in payroll taxes when robots are used. Thus far, South Korea has reduced incentives for firms to deploy robots; European Union policymakers, on the other hand, considered a robot tax but did not enact it. Now a study by MIT economists scrutinizes the existing evidence and suggests the optimal policy in this situation would indeed include a tax on robots, but only a modest one. The same applies to taxes on foreign trade that would also reduce U.S. jobs, the research finds. “Our finding suggests that taxes on either robots or imported goods should be pretty small,” says Arnaud Costinot, an MIT economist, and co-author of a published paper detailing the findings. “Although robots have an effect on income inequality … they still lead to optimal taxes that are modest.”
Trump tax controversy fuels passage of presidential audits bill [POLITICO]
Legislation that would require the IRS to audit presidents’ tax returns and make reports of the audits public passed the House largely along partisan lines on Thursday, echoing the divide over a bombshell report this week on former President Donald Trump’s tax returns. Five Republicans voted for the legislation, even though GOP leaders said it was a sham designed to politically damage Trump, who has launched another bid for the White House. Democrats on the House Ways and Means Committee released a report Tuesday that showed Trump paid little or no federal income tax while he was in office and that the IRS delayed auditing his returns despite its policy of auditing all presidents.
Trump’s lawyers called this accounting firm “negligent,” but the IRS believed it ensured his taxes were accurate [CBS News]
Bit of a long read but interesting nonetheless:
When Congress’ Joint Committee on Taxation investigated the IRS audits of Donald Trump’s taxes, an agent’s note on Trump’s 2017 filings stood out. The IRS agent wrote that Trump “hires a professional accounting firm and Counsel to prepare and file tax return,” and they “ensure” that Trump “properly reports all income and deduction items.” Joint Committee staff were befuddled by the note, according to a report on the IRS’ mandatory audit of the former president’s taxes, published Tuesday by the House Ways and Means Committee. “The staff failed to understand why the IRS believed that use of counsel and an accounting firm ensures accuracy,” the Ways and Means Committee wrote in its report.
The accounting firm, Mazars USA, is one of the country’s largest, and it worked for Trump for decades until February of this year, when it cut ties with the former president and his company. In the months since, Trump and attorneys for his company have harshly criticized the firm’s work.
It’s a common practice for IRS agents to give some deference to large accounting firms, according to forensic accountant Bruce Dubinsky. “If I’m a revenue agent and I see that he’s got Mazars or (another firm) I’m going to go, ‘Okay, look, the returns are all computerized, they’re done properly. I’ve got some level of faith that somebody in their quality control process—because all these firms have a quality control review process—has laid eyes on several layers on this, and I’m not gonna look at every number,'” said Dubinsky.
Firm Watch
Pensacola Humane Society hires accounting firm to review ‘misappropriation’ allegations [Pensacola News Journal]
Amid a cloud of controversy, the Pensacola Humane Society’s board of directors announced Monday it has hired two professional organizations to help review and mediate concerns regarding the organization’s finances and operations. A group of Humane Society staff, volunteers and fosters acting under the name We The Organization issued a public statement this month accusing the board of mismanagement, misappropriation of funds and violations of organizational bylaws. The group also called for the resignation of Gerald Adcox, the president of the facility’s board of directors. In a statement released Monday morning, the Humane Society’s board of directors announced it had hired Pensacola-based accounting firm Saltmarsh Cleaveland & Gund to “investigate and resolve financial concerns raised by We The Organization.”
Albany accounting firm joins fight against hunger [Albany Herald]
The Albany office of Mauldin & Jenkins LLC provided more than 200 meals worth of food that will support efforts to eradicate hunger in the Albany community this December. The firm donated all of the canned goods and other foods collected during a food drive for Feeding the Valley Food Bank, which serves Dougherty and nearby Georgia counties. James Langston, community service chair of M&J’s Albany office, is used to high participation rates and enthusiasm for the firm’s numerous charitable initiatives and volunteer efforts. Even so, he was a bit surprised by the level of engagement he witnessed during the food drive. “The response and efforts we received from the Albany office were amazing,” Langston said in a news release.
Change at the top of Pittsburgh accounting firm Sisterson [Pittsburgh Business Times]
Name checks out.
Other Stuff
Accounting Chief Fends Off Critics, Talks Up Rules for Investors [Bloomberg Tax]
It was the year’s biggest conference for accountants and auditors. Instead of a wonky rundown of new standards, the head Financial Accounting Standards Board stressed the board’s commitment to the end users of its rules—the investors who read corporate financial statements. Investors want more details and more transparency from companies in financial statements, and FASB wants to deliver, board Chair Richard Jones told the American Institute of CPAs signature conference in Washington earlier this month.
