Tag: Financial reporting

President’s Council on Jobs Report Suggests We Should Try Sarbanes-Oxley Light for IPOs

Barbara Roper wrote a commentary piece in WaPo Capital Business over the weekend that suggests the unthinkable: softening hard ass SOX rules for IPOs could actually kill jobs. How is that possible? Aren’t IPOs great for the economy?

Well, not always. Case in point: Groupon. Healthy, financially strong businesses are good for the economy. Scams, frauds or even overambitious accounting tricks might temporarily get the economy’s spirits up like a few rails of coke but eventually reality sets in and the economy is left broken and penniless in the alley looking for its next hit.


The report is an effort on the part of the Obama crew, who surveyed 27 business executives (including AOL’s Steve Case… and we know how his business turned out) for ideas on how to get the economy moving again. Among the suggestions, the report recommends Congress make compliance with all or part of Sarbanes-Oxley voluntary for public companies with market valuations up to $1 billion or, alternatively, exempt all companies from SOX compliance for five years after they go public.

The report blames burdensome SOX rules for the sharp drop in small IPOs in recent years, writing:

In the aftermath of the dot-com bubble and unintended consequences stemming from the Spitzer Decree and Sarbanes-Oxley regulations, the number of IPOs in the United States has fallen significantly. This is especially true for smaller companies aspiring to go public. As noted earlier, the share of IPOs that were smaller than $50 million fell from 80% in the 1990s to 20% in the 2000s. Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies.

That would totally work as a justification except the SEC already debunked this silly idea. In a report earlier this year recommending no new 404(b) exemptions, SEC analysis showed that the United States has not lost U.S.-based companies filing IPOs to foreign markets for the range of issuers that would likely be in the $75-$250 million public float range after the IPO. “While U.S. markets’ share of world-wide IPOs raising $75-$250 million has declined over the past five years, there is no conclusive evidence from the study linking the requirements of Section 404(b) to IPO activity,” the report stated.

And as we all know, companies under $75 million haven’t had to worry about the SOX burden at all thanks to Congressional intervention. So how could it be that the burden they haven’t had has somehow prevented them from going public?

New boogeyman, please. I’m no huge fan of SOX but you’re going to have to come up with something better than this to convince me it’s a good idea to can it.

Who Among Us Considers the IASB a “Success Story”?

Count IASB Vice Chairman Ian Mackintosh as one.

Ian Mackintosh called the IASB a success story, saying global standards are now accepted in more than 120 countries and high-profile non-signer the US will make a decision later this year.

A high-profile non-signer who increasingly sounds pessimistic about the whole exercise. Oh! India and Japan aren’t sold either. Sounds like a winner, doesn’t it?

Investors: IFRS unfit for purpose [Accountancy Age]

(VIDEO) FEI’s Edith Orenstein and the Singing CPA Present a Love Song to the Pozen Committee

FEI’s Edith Orenstein has dropped a track on YouTube with “The Singing CPA” Steven Zelin called “Hey There Bob Pozen” (as of the date this is posted, we haven’t been able to find a Doctor P remix of the hot track) that really doesn’t need commentary at this moment. But we’ll be back after the jump with a few things to say.

Oh, I didn’t mention it’s to the tune of “Hey There Delilah” did I? Yeah. It totally is.

Anyway, it’s a tribute to the Pozen committee, of which Edith is a huge fan, in honor of its 3rd birthday:

I am a big fan of the Pozen committee, mainly because, like other committees that have fascinated me (such as the EITF , the PCAOB SAG, and the U.S. Treasury Advisory Committee on the Auditing Profession) it has a fascinating cross-section of preparers (issuers), auditors, investors, and others. I loved watching the webcasts where you could see folks discuss things from different vantage points at the same time. I think that kind of broad-based committee has an advantage over committees made up of only one segment of the constituent community, such as preparers, auditors, or investors. I think the standard-setters and rulemakers can receive the most efficient and effective input when the various segments of constituents face off against one another (I mean that in a polite way, I should say, ‘dialogue’ with each other) on issues of mutual interest.

I assume here approximately 6 to 7 percent of you have any clue what the Pozen committee is (unless you regularly read Edith, which you should if you’re into serious financial reporting shit of which we rarely if ever cover), here’s some financial reporting porn (PDF) to groove on. The short version is that the August 2008 report recommends steps to improve the usefulness of financial information to investors.

In case you’ve forgotten, this isn’t Edith’s first venture into the world of YouTube. Surely you remember “If I Were an Auditor,” filmed completely in Second Life with the help of the MACPA and friends.

Could you imagine what would happen if we could get the Maryland Association of CPAs’ dancing flash mob to do a mashup with Edith and Steven? Someone please get on that.

PCAOB, SEC to Be All Up in China’s Business Next Week

Perhaps you’ve heard that some U.S.-listed Chinese companies have had some trouble with their financial reporting. Often times this leads to CFOs quitting, auditors resigning or workpapers being held hostage. None of which are good. Occurrences such as these have been going on for a little while and more recently the SEC admitted that they had, in fact, heard something about it. Perhaps even more surprisingly, a Chinese official also confessed that some of these companies weren’t exactly on top of their shit and in some may not have the faintest idea of what they’re doing.

All this excitement has finally gotten the teams at the SEC and PCAOB worked up enough that it has been decided that they’re popping over to Beijing to meet with the country’s Ministry of Finance and the China Securities Regulatory Commission next Monday and Tuesday to see what’s what.

“This meeting is the commencement of our accelerated efforts with the People’s Republic of China to forge a cooperative resolution to cross-border auditing oversight. I believe we share a common objective with Chinese regulators to protect investors and safeguard audit quality through our mutual cooperation,” said James R. Doty, PCAOB Chairman.

The delegation will be led by Board Member Lewis H. Ferguson and include staff from the PCAOB’s Office of International Affairs and Division of Registration and Inspections, and the SEC Office of International Affairs and Office of the Chief Accountant. The delegation will meet with senior leadership of the Ministry of Finance and the CSRC.

“The purpose of this meeting is to provide an opportunity to exchange information about how each country conducts inspections of auditing firms and to move toward a bilateral agreement providing for joint inspections of China-based auditing firms registered with the PCAOB,” said PCAOB Board Member Ferguson.

Reuters reports that Ferguson considers the trip a “confidence-building exercise,” just in case you were still a little queasy on Sino-Forest, et al.

Statement on Delegation to China [PCAOB]
U.S. audit watchdog, SEC plan Beijing visit [Reuters]

Chinese Official: Some Companies Listed in U.S. Have ‘Flaws,’ May Not Know What the Hell They’re Doing

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]

Study: Analysts Just as Illiterate as Investors When Reading Financial Reports

Convoluted corporate financial reports are just as unreadable for professional stock analysts as they are for the average investor, according to a new study.

The study, published in the current issue of the American Accounting Association journal Accounting Review, tested the readability of tens of thousands of company filings over 12 years and found that analysts’ earnings forecasts for firms with less readable reports “have greater dispersion, are less accurate, and are associated with greater overall analyst uncertainty.” Ironically, however, the syntactic and linguistic complexity of these reports generated greater demand from investors for analysts’ commentary and greater reliance on their forecasts. [AT]

Singapore Stock Exchange Weighs Mandatory Sustainability Reporting

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Moves are underway around the world to define and mandate reporting on the sustainability of companies’ operations. Using the aftermath of the crisis as a cover, securities regulators, industry bodies such as FASB and IASB and investor groups are looking at how companies can usefully report on the sustainability – environmental, operational and financial – of their businesses.


The latest move comes from Singapore where the stock exchange SGX has issued a policy paper on whether or nor to mandate sustainability reporting for all companies listed on the exchange. The policy paper calls for expressions from the public prior to a deadline of October 29. SGX does not say whether or not it will introduce mandatory sustainability reporting, but it hints that it might.

“Investors who lead world opinion expect listed companies to be accountable for their financial results, how they achieve the results, and what impact they have on the communities within which they operate. SGX encourages more listed companies to commit to sustainability practices and reporting,” it says in the preamble to the policy document.

The move comes a few weeks after the creation of the International Integrated Reporting Committee (IIRC), a working group of companies, investors and industry bodies to find ways to improve corporate reporting.

The scope of the IIRC is wider than sustainability, but sustainability is nevertheless likely to form a major part of any upheaval in the reporting process. Indeed, no less a body than the G20 has said that it wants changes to the global system of reporting so that all company reports follow the same global standard. Such an overhaul is likely to be very protracted. But in the meantime, it looks as if sustainability reports will form part of the eventual package. CFOs who are still behind the curve had better start planning now.

Accounting News Roundup: 1099 Reporting Is the Latest Political Football; Financial Reporting Overhaul in the Works?; Zynga’s CFO Hire Spurs IPO Talk | 08.02.10

Parties Play Politics With Unpopular Tax Measure [WSJ]
The new 1099 reporting requia bit of belly aching to point of many groups asking for a repeal. Too bad the members of Congress are the ones with the power to actually make something happen:

“The House rejected a bill Friday that would have repealed the provision. The two parties disagreed on how to make up the lost revenue.

‘This foolish policy hammers our business community when we should be supporting their job growth,’ Sen. Mike Johanns of Nebraska said in the Republicans’ weekly radio and Internet address Saturday. ‘It’s only one example of how the administration’s promise to support small businesses really rings hollow.’

Democrats blamed Republicans for Friday’s failure.

‘Despite all of their rhetoric about the need to eliminate this reporting requirement, Republicans walked away from small businesses when it mattered most,’ said Rep. Sander Levin (D-Mich.), chairman of the House Ways and Means Committee.”

FASB Alumnus Trashes GAAP (and IFRS) [The Accounting Onion]
“I suspect that the folks being paid the big bucks to make the tough calls on accounting standards don’t pay a lot of attention to to the likes of Tom Whatshisname, even were I to announce that the sky is falling. But, I don’t take it personally. Over the past 40 years, any PhD not drawing a salary from the Big Four has been viewed with more suspicion than respect by the standard setting establishment.

I mention all of this now, because there is a new voice, whose credibility and qualifications cannot be so easily dismissed. That voice belongs to FASB alumnus David Mosso, who has written an 80-page monograph entitled Early Warning and Quick Response: Accounting in the Twenty-First Century). If you don’t want to believe me, take it from him: GAAP is broken.”

Group formed to overhaul financial reporting [Accountancy Age]
Meanwhile: “A project to overhaul company reporting has been launched by a high level group of accountants, businesses, regulators and market participants.

The International Integrated Reporting Committee will look at the wider concerns about financial reporting, in terms of addressing risk, and presenting a clearer and broader picture of companies’ performance, including governance and environmental issues.”


Goldman Details Its Valuations With AIG [WSJ]
“How did Goldman come up with the mortgage-securities prices it used to extract cash from AIG?”

Before There Can Be An IPO, First Comes A New CFO For Zynga [Tech Crunch]
Dave Wehner comes in from Allen & Co. taking the spot of Mark Vranesh who is becoming Chief Accounting Officer. What does all this mean? First, it gives most MSM outlets a day or two worth of stories about when Zynga will go public but mostly it means the business of Farmville, no matter how you hate it, is serious business.

Facebook Would-Be Owner Says He Owes His Claim to Arrest [Bloomberg]
“Paul Ceglia, who claims in a lawsuit that he owns 84 percent of Facebook Inc., said his case wouldn’t have been possible if state troopers hadn’t come to his house in October to arrest him for fraud.”

Forced Employee Engagement and the Overworked Employee [The Exuberant Accountant]
“In my many interactions with business owners, I have heard some speak of employees as being ‘lucky to still have a job.’ While that may be true, thinking (and acting) in such a manner is very short sighted.”

Twitter, Facebook, LinkedIn? [AccMan]
Got business model?

COSO Study Finds Accounting Frauds Getting Larger, Execs Named in Nearly 90% of Cases

If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?

If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or lessway: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.


If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.

The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:

• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.

• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.

• Revenue frauds accounted for over 60 percent of the cases.

• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.

• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.

• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.

Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.

Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.

While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.

COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,

[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”

And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.

One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.

COSO Press Release [COSO]
Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies [COSO]
COSO Fraud Study Catalogs Latest Decade of Incidents [Compliance Week]