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Footnotes is a collection of stories from around the accounting profession curated by actual humans and published every Friday at 5pm Eastern. While you're here, subscribe to our newsletter to…
Yesterday we received a news release from a communications firm working for a group called GPTZero. Now you should know that we receive probably a hundred or more news releases…
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Good morning, capital markets servants. Got a little news for you. Gonna be a short one, Friday Footnotes got all the good stories. In this news briefGrant Thornton Pay DayDoes…
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Struggling to Find Remote Accounting or Tax Talent? We’ve Got You Covered.If your firm or internal team is having a tough time sourcing qualified remote tax and accounting professionals, you're…
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While the House of Klynveld is enjoying their town hall circa now, we’ll share you the latest scoop from Deadspin, who has published the audited (courtesy of KPMG) financial statements of the NBA’s New Orleans Hornets.
We’ve skimmed the financials, noting some interesting items here:
• In 2009, the franchise paid $115,000 for their audit, an additional $10,000 for “accounting issues” and $35,000 for tax compliance services.
• The team has a partners’ deficit of over $80 million thanks, in part to $111.5 million in long-term debt at June 30, 2009.
• The team did have operating income of over $5.8 million for the fiscal year ended June 30, 2009, however, paying nearly $9 million in interest (among other things) swung them to a much narrower net income of $1.8 million.
• Net cash from operating activities were a negative $7.4 million for the FYE June 30, 2008 but improved to a negative $1.5 million for FYE June 30, 2009. The team’s cash balance at June 30, 2009 was a mere $650k.
• George Shinn, the team’s owner, owes the franchise approximately $5 million from “various advances” but has also loaned the team over $8.3 million.
• The franchise has various investment associated with the NBA that have negative equity including: NBA Joint Venture; WNBA Holdings, LLC; NBDL Holdings, LLC
• The team has principal payments of approximately $115 million coming due through 2014.
• Guaranteed contracts to players through the 2013-2014 season amount to $247.5 million.
• “Revenue assistance” from the NBA (team is eligible if it has both an actual loss and a pro forma loss) for the FYE June 30, 2009 was $3.4 million.
Whew! So as you can see, the franchise isn’t in the best of shape. Our analysis is just a scratch on the surface so if you’ve got some time, crunch some numbers and share your findings with the group below.
Part of perpetually-acting PCAOB chairman Dan Goelzer’s speech at the AICPA’s Conference on SEC and PCAOB Developments had to do with the future and it kinda, sorta sounds like the Board might start asking for more than just the auditor’s opinion of yore. He spoke this afternoon at the conference, saying, “it is clear that there is considerable investor hunger for more insight from the auditor into the audit process and the company’s financial reporting. Further, the 2008 report of the Treasury Advisory Committee on the Auditing Profession recommended that the Board reconsider the audit report.”
What kind of ideas? Glad you asked!
The Board will have to make some difficult choices next year if it decides to change the time-honored pass/fail report. There is no shortage of ideas. During a discussion of the reporting model at our Standing Advisory Group meeting last April, some suggested that the auditor should provide more information about the audit itself and how it was performed. Others want the auditor’s views on the management judgments embodied in the financial statements regarding such things as estimates and the selection of accounting policies. Auditors have proposed that their reports should be clearer about limitations on the ability to detect fraud. Some users have suggested expanding the auditor’s current opinion to include new material; others have suggested that the pass/fail report should be accompanied by a separate auditor’s report akin to the MD&A.
Do investors really want to know how the audit sausage is made? Some auditors have trouble pulling things together so we see little up side there.
If you’ve got your own suggestions on making audits even better, feel free to share them at this time.
From the CPA exam grab bag, this question came in just before 2010 testing ended but since there were other things to write about, it sat collecting dust in my inbox. Fret not, our asker got her answer in time to sit for the exam on the second-to-last day of testing and now you get the answer too. Let’s go!
I’m studying for REG and I am fairly concerned about tax law changes. I’m using the 2009 Becker materials, and I try to use their website to see updates to tax law change, but when I’m taught through the lectures and the homework a certain law, it’s hard to then switch it up based on a little post from Becker’s online database.
An example is the estate tax disappearing. Or unemployment exclusion (2,400 in 2009, but now what? 0[%|] I think, right?). Anyways, I’m not too worried about understanding concepts and rules as much as worrying about not realizing that certain rules have changed.
Here’s the deal: REG can be a little tricky because it’s the one section where the AICPA allows newer pronouncements before the usual 6 month effective date. Usually what happens is the PCAOB comes out with some new audit standards and – assuming the SEC has approved them – they cannot appear on the CPA exam earlier than 6 months after adoption. The AICPA Board of Examiners does have its exceptions – like FASB 141(r) – where they are too excited to wait for it to be on the exam and will make a special announcement but for the most part, you can pretty much assume that there is a 6 month lag between the time rules/numbers/pronouncements come out and the time they appear on the exam.
For the estate tax and other such tricky issues that are still unresolved as yet, be glad they’re unresolved as it means you don’t have to worry about any new rules until decisions are made. And with the AICPA scrambling to load your 2011 exams with international financial reporting and other such awesomeness, it’s unlikely that their priority will be integrating new tax rules into testing once they are finalized.
Remember also that you are not expected to be an expert in any area, let alone the complicated abyss of tax rules. So the numbers are not as important as the fundamentals (read: concepts) in Regulation.
Hope that helps and if you have a question for us – new 2011 excitement, studying, how to convince Prometric that your fake mustache is actually medically necessary, etc – feel free to email us.
Receiving news that you might be expected to earn less money would upset the most mild-mannered of Americans.
But if you’re the King of All Media and you hear through the grapevine that your company’s Chief Financial Officer says this: “At the time of the [Sirius and XM Radio ] merger we were in many long-term contracts. As they come up for renewal, we’ll have the opportunity to get more favorable economic terms there.”
“I am not taking a f—ing paycut,” Stern said. “Why would I have to take a paycut? … Who is this guy to say this in public?”
“I know what I have done in this company,” he said. “I am more important than Oprah, in this company anyway. Oprah’s out getting the Kennedy Center honor and I’ve got the CFO announcing to Wall Street that I have to take a paycut.”
“Nevermind getting respect from the industry,” Stern continued, “I want respect from the company.”
Which you might follow up with this:
“I am calling my agent today that want more f—ing money. I don’t want it perceived that I took a paycut,” Stern railed, disclosing that Frear got a raise in 2008, putting his annual salary at $3.3 million. “Where’s your paycut, David?”
To be fair – if you tell someone who makes 3% of what you’re pulling in to take a paycut, it may be time to get some perspective.
Giving promotions to the white shirt and red tie wearing undead who can’t help but devour their co-workers for their own good? Sounds like a pretty realistic game.
Get to wasting some billable hours on the demo or full version by going to the Zombie Accountant page on Xbox’s website. And if you’re one of the few people that has a Windows phone, you can play it on the go.
Deal Struck on Tax Package [WSJ]
President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.
Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.
Gadget wish list for 2010 [AW]
iPad. Tablet stand. Done.
Schapiro Aims to Expand Accounting Oversight of Broker-Dealers [Bloomberg]
The accounting industry will play a crucial role in helping investors regain confidence in the wake of Madoff’s scheme and the 2008 financial crisis, said Schapiro, who urged auditors to push for accuracy and clarity in reporting.
“Our markets depend on confident investors — and their confidence rests in large part in your hands,” she said. “The SEC and other agencies can increase the confidence investors bring to our financial markets, but our efforts will succeed only if those investors believe the numbers that you write on the bottom line.”
Private Company GAAP? Time to pay attention [CPA Success]
MACPA’s Tom Hood has been hearing about this debate for years but thinks this time around, things are different, “The tipping point towards the need for private company standards came after the announcement of FIN 48 and 46R. Many private companies have cried “uncle”, as these extremely onerous and complex standards have continued to arrive on the scene.”
The Facebook Factor for CPAs [CPA Trendlines]
If anyone gives you a hard time about Facebook at work, evoke something that Michelle Golden has said. She’s been at this for awhile.
U.S. exits Citigroup stake and earns $12 billion profit [Reuters]
The U.S. government sold off its remaining shares in Citigroup Inc on Monday for $4.35 each, marking an exit from ownership in the bailed-out banking giant with a $12 billion gross profit for taxpayers.
The U.S. Treasury said it will take in $10.5 billion in sale proceeds from a public offering of 2.4 billion Citigroup shares, announced just hours earlier. The price is 10 cents below the $4.45 closing price on the New York Stock Exchange.
Ponzi swindler who sacked John Elway gets 40 years [Reuters]
Why the long face, John?
Comments reflected “a lot of unanimity around, if we go in this direction, allowing sufficient time for companies to adjust,” said Schapiro in a question-and-answer session following her keynote address to the American Institute of Certified Public Accountants’ national conference on accounting and auditing issues for public companies. “It’s likely to be a minimum of four years,” but that’s still a point for the SEC to decide, she said, assuming it decides to incorporate IFRS into U.S. capital markets. [Compliance Week]
According toof reports, there is a tentative deal on tax cuts, with all of the current rates being extended for two years in exchange for an extension of unemployment benefits.
That has a few people upset with President Obama (notably, the “liberals,” whoever that is):
Daniel Roche, a 2008 Deputy Field Organizer in Nevada for Mr. Obama, is quoted in an email from the Progressive Change Campaign Committee saying that if the president “capitulates on this, there really is no point in voting for him in 2012.”
“The difference between voting for a Republican and voting for someone whose default negotiation strategy is rolling over and dying whenever the Republican Party says mean things is marginal,” he said. “This should be a ridiculously easy fight to win.”
A lead KPMG auditor who only learnt about a $1.9 billion [about USD $1.88 billion] error in his audit of Allco Finance Group through a report in BusinessDay was benched for nine months by the corporate regulator yesterday.
To be completely fair, it sounds like it may have been a tricky audit:
Christopher Whittingham, a KPMG partner, led a core team of 20 audit staff that signed an unqualified audit report on the notoriously complex accounts for Allco for the year ended June 30, 2007.
Or was it?
The error detected by BusinessDay involved the 2007 accounts classifying $1.9 billion in liabilities owed by Allco as non-current, telling investors they fell due more than a year later. The liabilities were, in fact, current liabilities, meaning they were due within the year. The amount of current liabilities is a significant issue for shareholders when considering whether a company can meet its debts when they fall due.
Whatever the case may be, Mr Whittingham shouldn’t sweat it too much:
[T]he Australian Securities and Investments Commission released an enforceable undertaking with Mr Whittingham, which included a nine-month suspension, a $10,000 fine and 10 hours of professional education.
Well, at least he’s taking responsibility for his mistake and isn’t pointing his finger at anyone else or making excuses, right?
Mr Whittingham said he had relied on managers for aspects of the audit, the error had no bearing on Allco’s collapse and he had reissued its accounts the day after he became aware of the error.
The GAAP actually directs us to spend first, then pay ourselves, and call the leftovers profit. How are you going to grow a successful business and accumulate wealth using that method? Generate more revenue, you say? Well, sure. Except that you’re going to spend it. So you’re right back where you started—working with the leftovers, if you have any.
I propose a new type of accounting: Profit First Accounting (PFA). The difference between GAAP and PFA is simple: Deduct profit first, from the top down. On a PFA income statement, the first line item is revenue, followed by a profit deduction, then your salary, followed by cost of goods and all other expenses.
Hey, guess what? We already have an alternative accounting system lurking in the wings. Allegedly IFRS will help companies that spend quite a bit on R&D buff up equity as R&D costs are considered assets, isn’t that an improvement over GAAP? IFRS also allows for financial statements to come together in whatever order, however those preparing the statements feel is most relevant to the entity’s economic picture. So what’s to stop them from slapping them together as the author suggests above?
GAAP is not meant to transform internal accounting departments into psychics and I doubt any U.S. companies use it because they feel it helps construct a useful picture of the entity that can be used for goal-setting and forecasting. That’s just not what it’s there to do and I think we can all agree on that.
Oh and by the way, Mike is the author of The Toilet Paper Entrepreneur, which he will be able to follow up with a sequel if we actually take his suggestion and try this Profit First idea. Yes business is all about profit but I think Mike is forgetting that companies file for the good of investors and regulatory bodies breathing down their necks, not necessarily for their own good or for the good of their almighty profits.
~Update 2 includes statement from Claudius Modesti, PCAOB Director of Enforcement and Investigations
Today in obscure accounting oversight board enforcement actions, an Ernst & Young Manager in the Boston office was censured by the PCAOB for repeated violations o y to Cooperate with Inspectors, and Auditing Standard No. 3 (“AS3”), Audit Documentation.
The violations occurred when 27 year-old Jacqueline Higgins “(1) added documents to the working papers without indicating the dates that documents were added to the working papers, the names of the persons preparing the additional documentation, and the reason for adding the documentation months after the documentation completion date; and (2) removed a document from the working
papers after the documentation completion date.”
The timeline goes like this: E&Y was given notice by the PCAOB that an inspection of the unknown company’s audit was being performed on March 30, 2010 and the partner, senior manager and manager on the engagement were given notice on March 31, 2010. The inspection fieldwork was set to begin on April 19, 2010.
On April 5th, the three Ernsters began preparing for the inspection and that’s when problems started cropping up which led to more trouble. The order has the details:
First, Respondent reported to the Engagement Partner and the Senior Manager that a “Review Procedures Memorandum” was missing from the external working papers. The Engagement Partner and the Senior Manager directed Respondent to create and print out the missing document, and to backdate the document to November 30, 2009. The Engagement Partner and the Senior Manager directed Respondent to backdate her sign-off on this working paper to November 30, 2009, and to add this document to the external working papers.
17. Second, Respondent reported to the Engagement Partner that the tie-out of the financial statements contained in the external working papers was performed upon a pre-final set of financial statements. The Engagement Partner directed Respondent to remove this document from the external working papers, and to replace it with a newly created document which tied-out the final financial statements, and which the Engagement Partner directed Respondent to backdate to November 2009.
18. Third, Respondent reported to the Engagement Partner that the Average Forward Foreign Currency Contracts Calculation (“A3a Working Paper”) was missing from the external working papers. The Engagement Partner directed Respondent to gather the missing document, backdate it to November 2009, and add it to the external working papers.
19. Finally, Respondent reported to the Senior Manager that three checklists were missing from the external working papers. The Senior Manager directed Respondent to assemble the missing checklists as a single document (“HH6.8 Working Paper”) and to backdate her sign-off on this working paper to November 2009. The Senior Manager directed Respondent to add the document to the external working papers. The Senior Manager and Respondent reported to the Engagement Partner the facts and circumstances related to the creation of the HH6.8 Working Paper, and the Engagement Partner took no steps to cause the document to be properly dated, or to have it removed from the external working papers.
So those are the wonky details. Where this particular story is most interesting (in our opinion) is that Ms Higgins was, prior to this little mishap, on the fast track. According to the order, she graduated in May of 2005 and started with E&Y in September. She was promoted to senior associate in October of 2007 and then promoted to manager in October of 2009. Now, perhaps she was an audit-savant or perhaps not but in just over four years, she was a manager, which is a much quicker pace than usual.
Granted, she was still under the supervision of the senior manager and partner on the engagement but a young manager nevertheless. Now, you might be asking yourself, “what about the senior manager and partner? Are they getting their wrists slapped?” Conventional wisdom tell us, “absofuckinglutely” but the PCAOB isn’t saying. We were told by a spokesperson that the Board cannot comment on any other action related to this case.
As far as what a censure by the PCAOB actually entails, we were told that “It is an official reprimand from the PCAOB.” Some might call it a wrist slap but we’re damn sure you don’t want that in your file when you’re 27 years old. The action also states that Ms. Higgins was removed from the engagement in July 2010 and “at that time Higgins ceased participating in issuer audit engagements.”
Messages with E&Y spokesperson Charles Perkins and A message left with an attorney for Ms. Higgins were not immediately returned.
Ernst & Young has issued the following statement:
Our firm policy clearly prohibits persons from supplementing audit workpapers in circumstances like those described in the disciplinary order. When we determined that firm policy had been violated, we put the three individuals involved on administrative leave and subsequently separated the partner and senior manager. We have advised the PCAOB of these facts and have cooperated fully with the PCAOB throughout its investigation of this matter.
Based on the above, you might conclude that more disciplinary action will be coming from the PCAOB but like we said, they’re not talking.
UPDATE 2 – circa 3:30 pm: Claudius Modesti, PCAOB Director of Enforcement and Investigations, explained the seemingly light punishment in an email to Going Concern:
As to the censure, under the facts and circumstances, the censure is appropriate given Higgins’ relatively junior position on the audit team and her overall role in the conduct. We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
It was then explained to us that the PCAOB has never explained a disciplinary action in this way: “We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
If that’s not quite clear, consider this: It is significant because, had Ms Higgins acted in the alternative (i.e. not settled), litigation would have been necessary and no one outside of the PCAOB, Higgins, her lawyers and E&Y would have known about the proceedings. Granted, it’s fairly common for lighter disciplinary action to result from a settlement but it also makes sense from a PR perspective (not to mention, transparency and investor protection) if the PCAOB can actually announce that they are taking action against people who break the rules. Part of the challenge the Board has faced is convincing anyone that they have teeth.
It will be interesting now to see if the senior manager and partner follow the same track as Ms. Higgins and how the PCAOB will respond to their cooperation (or lack thereof).
Receiving news that you might be expected to earn less money would upset the most mild-mannered of Americans.