Happy President’s Day! As we mentioned on Friday, we’ll keep you company throughout the day but it will be a little lighter schedule than normal. Most of you are suffering from a Valentine’s Day/Chinese New Year/Olympic Fever hangover anyway.
• For Some Firms, a Case of ‘Quadrophobia’ [WSJ]
Shout if you’ve heard this before: a study profiled by the Journal states that “many companies tweak quarterly earnings to meet investor expectations, and the “companies that adjust most often are more likely to restate earnings or be charged with accounting violations.”
So here’s another study on restatements and the companies that you . BFD right? Earnings management is rampant. What makes this particular study unique is the authors looked at the frequency of companies rounding their numbers up to meet expectations and discovered that the number 4 appears less frequently in general and especially in the earnings of companies that restate their financial statements. Naturally, they call it “quadrophobia”:
When they ran the earnings-per-share numbers down to a 10th of a cent, they found that the number “4” appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance…
In theory, each digit should appear in the 10ths place 10% of the time. After reviewing nearly 489,000 quarterly results for 22,000 companies from 1980 to 2006, however, the authors found that “4” appeared in the 10ths place only 8.5% of the time. Both “2” and “3” also are underrepresented in the 10ths place; all other digits show up more frequently than expected by chance…
In their most intriguing finding, the authors found that companies that later restate earnings or are charged with accounting violations report significantly fewer 4s. The pattern “appears to be a leading indicator of a company that’s going to have an accounting issue,” Mr. Grundfest said.
So it’s safe to say that you can add Quadrophobic to Patrick Byrne’s list of potential ailments.
• Deloitte chief reignites accounting debate [FT]
Deloitte CEO Jim Quigley told the Financial Times that banks should “account for losses in two radically different ways to meet the opposing demands of politicians and accountants.” We’re not crazy about trying to please everyone but Quigs might have a good point here.
This would require banks to report two separate line items on their income statements, one for “incurred losses” and one for “expected losses”. Incurred losses report loan losses as they occur while “expected losses” would require banks to calculate an estimated loss provision over the lives of the loans.
PwC hates this idea saying it would ‘muddy the waters’. Richard Murphy thinks PwC is still living in fantasy land, “PWC is arguing against is anti-cyclical provisioning to ensure capital retention. To put it anothjer [sic] way, PWC wants pro-cyclical accounting that encoruages recklessness.”
Since the waters are already pretty f—ing muddy we’re not sure that it would do much harm. Users of financial statements already have a mind-numbing amount of information to dig through, one additional piece of information — a crucial piece in the case of bank financial statements, we might add — shouldn’t cause too much headache.
Joe Francis Off the Hook for $33 Million Tax Bill [TMZ]
Joe Francis’ IRS troubles seem to have magically disappeared, as TMZ reports that the IRS has dropped its $30+ million lien against the Douche of the Decade.
That eliminates one possible motive for the IRS shotgun shopping spree.
So waaaay back in the early to mid Aughts when Ayal Rosenthal was slumming over at 300 Madison, he got a little entrepreneurial (P. Dubs auditors don’t make shit, you know) with his Dad, two brothers and a host of others. They made a little bit of extra dough ($3.7 million) by running an insider trading scheme based on various tips, some of which were related to clients that Ayal worked on at PwC.
By the grace of God, the SEC caught on to the shenanigans and busted the gang in early 2007 (was this the reason they missed Madoff, Stanford?).
For this little stunt, NYU revoked AR’s MBA after the SEC brought the charges against him. He’s now suing the University because, “the university was ‘excessive and unfair,’ and that the proceedings violated his right to a ‘fair and timely hearing’ because NYU took nearly seven months before considering his case in September 2007.”
First of all, if an academic institution gets back to you in seven months, we’d say that’s a pretty decent response time. Second, “unfair” doesn’t work on anyone.
Having said that, we know full well how hard the young lad must have worked to get that MBA, so we’re not surprised that he wants the prestigious degree back.
If NYU really wanted an airtight reason for taking his degree they should have cited his inability to dupe the SEC for less than five years. Open and shut.