Last week the financial three-ring circus Overstock.com officially put an end to its 2009 by filing its 10-K with the SEC (after a two week extension). Ring managed to keep his promise about turning a profit and managed to keep his head about it in his letter to shareholders only mustering, “It’s nice to be profitable.”
As you might expect, Sam Antar was not impressed and since the Company’s filing he and others (including Gary Weiss) have pointed out major internal control problems, mistakes in the footnotes, false disclosures related to an alleged “tax dodge” and now, NOW the most unforgivable thing yet.
We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP.
Information technology program change and program development controls were inadequately designed to prevent changes in our accounting systems which led to the failure to appropriately capture and accurately process data.
These are the only two “control failures” identified by the Company in its filing that constitute material weaknesses. Naturally, the management team and the audit committee agreed with this assessment, “Our management concluded, and the Audit Committee of the Board of Directors agreed with management’s conclusions,” that former CFO David Chidester and former Treasurer Rich Paongo are the ones at fault here.
Is that class or what? So did Patrick Byrne finally realize that David Chidester and Rich Paongo, after several years at Overstock, lacked the “necessary knowledge, experience and training” so they and the Company “parted ways” (aka fired their sorry asses) for the latest restatement? What about the previous umpteen restatements? Why wasn’t didn’t the parting of ways occur after those?
Regardless of the answers to these questions, Sam has appealed to none other than Mary Schapiro to make sure the shenanigans don’t continue:
From: Sam E. Antar
Sent: Monday, April 05, 2010 3:56 AM
To: ‘Mary Schapiro’; ‘email@example.com’;
Cc: ‘Patrick Byrne’; ‘Joseph Tabacco’; ‘Board – Jonathan Johnson’
Subject: Open Letter to the Securities and Exchange Commission (Part 8): Bring Enforcement Action Against Overstock.com for False and Misleading Disclosures
To Chairperson Mary Schapiro:
Enclosed is a link to my blog post entitled, “Open Letter to the Securities and Exchange Commission (Part 8): Bring Enforcement Action Against Overstock.com for False and Misleading Disclosures.”
The blog post referred to in the link above, is to be considered a formal complaint to the SEC for continued false and misleading disclosures by Overstock.com and its officers. Please note that as a courtesy, I have cc’d Overstock.com on this email.
Sam E. Antar
Is the SEC not interested in a slam dunk case? We’ll see.
• Tax Freedom Day 2010 Is April 9; Historically Massive Deficits Promise Later Tax Freedom in the Future [Tax Policy Blog]
This year April 9th marks, Tax Freedom Day. That’s 99 days of work for you to pay all your federal, state and local taxes for 2010. This is only one day later than last year but two weeks earlier than 2007, according to the Tax Policy Blog. However, TPB notes that the earlier tax freedom isn’t really much to get excited about.
Tax Freedom Day does not count the deficit even though deficits must eventually be financed. Since 1948, when Tax Freedom Day was first calculated, the difference between what governments are spending and what they’re collecting has never been as great as during 2009 and 2010. If Americans were required to pay for all government spending this year, including the $1.3 trillion federal budget deficit, they would be working until May 17 before they had earned enough to pay their taxes—an additional 38 days of work.
• Expressing a Going Concern Doubt on the United States Government, Not According to GAAP [JDA]
Speaking of deficits, what does the U.S. Government’s deficit look like on a GAAP basis? Somewhere in the nabe of $4 trillion. But before you get all huffy about spendy Democrats, this is true bipartisanship at work. The deficit that includes social security and medicare was $11 trillion in 2004 and was all over the map throughout the aughts. Anyone thought of giving the U.S. a GCO?? AG notes that it’s a bit of problem when the government can’t even make things look rosy, “[W]hen even the government accounting makes things look bad (see: pensions), you really know you’ve got a problem on your hands.”
• Google’s Schmidt Got $245,322; CFO Paid $24.7 Million [Bloomberg BusinessWeek]
The $24.7 million in total comp that Patrick Pichette received for ’09 was up from $7.63 million in ’08, the year he joined the company. Most of this year’s haul was from $10.9 mil in stock awards and $10.8 in stock options. His salary was only a measly $450k.
Most investors appreciate seasonality. They get that retail peaks around Christmas and that your big back to school sale will be in August.
Still, some executives like to remind us that their business is busier at certain times of the year than at others. And it’s not uncommon for execs to claim the weather ate their earnings.
All in all, these explanations are pretty lame. Either investors already understand the business cycle or they don’t want to hear the excuse.
Given that, I like the approach of Carol Tome, CFO of Home Depot.
At a retail conference sponsored by Citigroup, “Tome said that while the retailer hates to be one that cites the weather for sales trends variability, Home Depot does experience that, and it has seen ‘great variability’ in weather conditions across the country so far this year.”
So, there you go. Tome agrees that blaming the weather is lame. But, at the same time, you have to agree that the weather this year has been pretty outrageous, right?
Then again, Tome isn’t totally going to hide behind the clouds.
“Nothing has come to our attention that suggests we can’t hit the financial objectives that we’ve set forth,” she said, according to Dow Jones.
In the end, if you’re a Home Depot investor, pray we don’t have a June like last year.
“When the sun is shining, we’re very, very pleased with our performance,” Tome said.
Plenty of lessons came out of the financial crisis. For some it was that Big 4 auditors are irrelevant. For others it was that we need one set of high quality accounting standards ASAP. Aaaannnd for others, it was that the SEC needs to get better at pretty much everything.
For CFOs, it appears that at least some of them learned that miserable employees are a drag. Robert Half Management Resources surveyed 1,400 CFOs and 27% of them said “they learned to place greater focus on maintaining employee morale.”
It’s likely that this isn’t a lesson learned by just CFOs. Plenty of CPA firms have probably realized that a bunch of morose auditors and tax pros hanging around doesn’t make for a happy shop and are looking to improve their cheerleading skills going forward. KPMG has already brought back the Standing O, PwC, Ernst & Young, and Grant Thornton have all guaranteed merit increases for this year so there are signs that your happiness is no longer an afterthought.
CFOs Advise Keeping Employees Happy [Web CPA]
• JPMorgan, Citigroup Helped Cause Lehman Collapse, Report Says [Bloomberg]
There’s so much blame to go around: Dick Fuld! Every Lehman CFO that ever worked there! JP Morgan, Citi, Ernst & Young (who we’ll get to shortly), you’re all at fault too! But mostly Dick Fuld. He was putting lots of pressure on Lehman’s balance sheet magicians to reduce the bank’s debt. The report states that Fuld was “at least grossly negligent” and if it gets worse than that, you’ll certainly hear about it.
According to the Bankruptcy Examiner’s report, there was plenty of parties that didn’t help matters. JP Morgan and Citi were demanding more collateral from Lehman as the firm tried to stave off death while E&Y sat back as LEH got all hocus-pocus with their accounting. So pick a company or person you don’t like and point the finger. It sounds like an argument can be made.
All this amounts to largest bankruptcy in history and boy will it sell a helluva lot of books, movie tickets, and HBO subscriptions. Silver lining!
• Trader faces up to 6 1/2 years in prison [Bloomberg via Boston Globe]
Former Boston Provident CFO Ezra Levy pleaded guilty to securities and wire fraud after being accused of stealing $3 million from New York-based Boston Provident Partners, LP. Levy told the judge that he used the money to pay ‘personal expenses’ although no word on what the loot was. Presumably not a fleet of limos.
• We Bought A Toxic Asset; You Can Watch It Die [NPR]
Ever dreamed of owning just a small piece of a toxic asset just watch the slow, agonizing death? Of course! Some reporters at NPR chipped in to invest $1,000 in a bond with over 2,000 bad, really bad mortgages all for the sake of journalistic interest. If the team somehow manages to make money it’s going to charity.
• A Growing Contagion: Accounting Fatigue Syndrome [CFO Blog]
Anyone getting worn out from all the guidance that is coming from the alphabet soup of regulators? You’re not alone and there appears to be an epidemic, something that CFO Blog has deemed “Accounting Fatigue Syndrome.” The long/short of it is that things are only going to get more complex as FASB and IASB continue to converge their rules and guidance continues to come out of both rule making bodies.
“Like many finance executives, Terry Lillis, CFO of Principal Financial Group, is tired. The constant stream of guidance from regulators and accounting standard-setters — plus the expected inflow of more to come over the next few years — has created “huge accounting fatigue” among his finance staff”
What’s the solution to AFS? How about just getting out of the biz altogether? “While the panelists gave no hope to CFOs who wish the standard-setters would either slow down or cut back on their agenda, they did offer one tip for ending accounting fatigue. ‘If I were a CFO, the first thing I would do is look at my early-retirement provisions,’ quipped J. Edward Grossman, a Crowe Horwath partner.”
• High-profile Miami accountant Lew Freeman to plead guilty to fraud [Miami Herald]
A couple of weeks ago we told you about “go-to” forensic accountant turned swindler Lewis Freeman and his legal trouble.
Today he is expected to plead guilty in Miami to embezzling $2.6 million from his clients. Prosecutors have alleged that Freeman, “wrote 162 unauthorized checks to himself totaling about $6 million from the accounts of five failed businesses once under his company’s control, but put back about half of the money.” Freeman has been cooperating with investigators since his arrest but still may face 10 – 20 years in prison.
• In Pari Delicto: Are Auditors Equally At Fault In The Big Fraud Cases? [Re: the Auditors]
Francine tackles PwC and KPMG’s defense strategy involving in pari delicto to avoid their roles in fraud cases.
The way I see it, the in pari delicto doctrine is being used like a pair of needle nosed pliers by audit firm defense lawyers to diffuse a bomb – huge liability for some of the biggest frauds in history. The in pari delicto doctrine attempts to pull the auditors’ tails from the fire by excusing any of their guilty acts due to the approval of those acts by potentially equally guilty executives.
CFOs around the world are looking on in a mixture of admiration and jealousy at the success of a former member of the ranks. Tidjane Thiam, CEO of the U.K.’s Prudential PLC is in the process of trying to pull together what must be the biggest deal of his life. The potential $35 billion takeover of AIA will, at a stroke, convert the company from a rather staid UK life insurer into a fast growing Asian financial services behemoth.
This is not the way that text books say it should happen. Generally when a CFO is elevated to the CEO position – as happened to Thiam in the middle of last year – it is usually because there is some dreadful financial crisis looming that only an experienced CFO can really manage. Indeed the promotion of the CFO to the CEO position is likely an admission that there will not be any major strategic moves, rather a relentless of pursuit of cash, debt repayments and risk hedging.
What makes Thiam’s move even more remarkable is that it was reported that he tried to scupper the plans of his predecessor Mark Tucker when he was thinking of making a bid for AIA a year ago. Cynics might say that he wanted to do the deal himself.
Other ex-CFOs of banks, who now find themselves in the top seat, could be forgiven for feeling pangs of jealousy at what Thiam is trying to do. For instance, Stephen Hester, the CEO of RBS is the ex-CFO of Credit Suisse. His job is now all about finding ways to offload toxic assets, keep bankers from leaving and trying to explain to a furious public why bankers need to be paid even if the bank suffers a loss. How much more fun to throw the whole institution at a deal that will not only define a decade but transform the geographic and growth profile of the business.
The trend of promoting CFOs to CEOs is only around 15 years old and can be partly attributed to the private equity business. Once companies are bought out by PE firms, the first priority is to manage the financials as tightly as possible, paying down the acquisition debt and serving interest before arranging an exit. This placed great emphasis on financial skills as opposed to strategic vision. Just such a situation happened last week when Carlyle led a group of investors in a $550 million deal buying into Bank of Butterfield in Bermuda. In the process, the existing CEO Alan Thompson left the bank. His successor? Bradford Kopp, the CFO.
The promotion of the CFO to the top spot can be seen as an admission that all the focus will be on the balance sheet and not the income statement. That could explain why CFOs at Goldman Sachs and HSBC – David Viniar and Douglas Flint respectively – tend not to be mentioned as the next CEOs of the banks; these institutions have very strong internal strategic cultures matched by fortress balance sheets. An admission that either is needed in the top spot would be a sign both of a weak culture and balance sheet. But with Thiam now pioneering the way, it can be shown that CFO’s can make great strategic CEOs. Who will be next?
We briefly discussed work-inspired nightmares yesterday but as professiona robably don’t get a whole lot more unsettling than Joe L. Price’s.
Price, the former CFO at Bank of America, must be tossing and turning lately, what with the attorney general of New York naming him personally last week in a lawsuit over the bank’s handling of the ugly Merrill Lynch acquisition/investor-subsidized bailout/compensation party in late 2008.
Now, Price and former BofA CEO Ken Lewis face another unpleasant twist in what they must’ve thought originally was a slam dunk in an awkward but palatable settlement with the SEC over the Merrill Lynch deal (beware that slam-dunk feeling [see Tenet, George]).
Recall how Jed Rakoff, the irascible U.S. District Court judge presiding over the BofA/Merrill Lynch case, last year rejected a settlement between the SEC and BofA, saying that $33 million wasn’t nearly enough for the bank to make things right with investors who were kept in the dark about the unsavory downside – if that’s not too generous a word – for taking on Merrill Lynch’s baggage. And then on Monday Rakoff started asking mean questions about the second rendition, in which the SEC and BofA are saying, okay, fine, how does $150 million sound?
Going by some of the doubts Rakoff raised, he isn’t leaning toward letting the BofA executives ease on out of their difficult litigation-riddled winter into a springtime of sun-dappled redemption and new life. Easter, as it were, may yet be cold and wet (as may Passover, choose your festival). But don’t blame Rakoff because there are better scapegoats – the SEC, Andrew Cuomo, Punxatawny Phil …
Cuomo, that pesky AG in Albany, asserted in his allegations against Price et al. that BofA lawyers who had counseled against pulling the curtain aside on certain details about Merrill Lynch were essentially operating in the dark and that they were, therefore, misled. “Bank management failed to provide any of their lawyers with accurate information about the losses which the disclosure issue concerned,” the civil-suit complaint says, adding painful elaboration that alleges “false and incomplete information provided by Price.” (Ron Fink explains here).
This is not the kind of thing a CFO likes to read about himself or herself, which is why it may be best as a rule to come clean from the get-go. At the heart of the controversy is the assertion that BofA execs were simply not forthright about how they allowed Merrill Lynch brass to receive billions of dollars in bonus bucks in exchange for having lost billions of investor dollars.
In such a context, Radoff has implied, $33 million is chicken feed and $150 million is – I don’t know – cat food? The good judge apparently wants the bankers to throw some steak over the wall.
Also at issue, and fundamental to how BofA is managed going forward, are questions about how certain aspects of corporate governance are handled, perhaps especially about how compensation is set. Rakoff suggested that there might be better ways to come up with a reasonable pay scheme than leaving it to BofA’s compensation committee to pick its compensation consultant of choice.
A big clue about how he might rule on this is in his observation on Monday as to the “incredibly bloated compensation of too many executives in too many American companies.”