Accounting News Roundup: IASC Names New Chairman; New York Tax on Smokes To Get Even Higher; Medifast’s Revenue Recognition to Get Another Look? | 06.21.10
Accounting Body Picks New Chief [WSJ]
“Former Italian Finance Minister Tommaso Padoa-Schioppa has been named to head the group that oversees international accounting rulemakers. Mr. Padoa-Schioppa will assume the chairmanship of the trustees of the International Accounting Standards Committee Foundation in July. The foundation’s monitoring board appointed him chairman for a three-year term. The IASC Foundation oversees the London-based International Accounting Standards Board, selects its members and raises funds for its operations. It also helps promulgate the move toward a single set of accounting rules used world-wide.”
New York Reaches Deal to Raise Cigarette Tax [NYT]
Smokers might want to start hoarding cartons as Governor David Paterson and legislators have reached a tentative agreement to raise the cigarette tax in New York. Taxes on cigarettes in NYS, currently $2.75 a pack, would rise an additional $1.65. Taxes in New York City would rise to $5.85 a pack, marking the first city in America with a tax of greater than $5 on cigarettes.
The proposal would raise $440 million this year, according to the Times. The state’s budget deficit is approximately $9 billion.
Open Letter to the Securities and Exchange Commission: Is Medifast Complying with Revenue Accounting Rules? [White Collar Fraud]
Sam Antar is a little skeptical about a plethora of Medifast’s financial reporting and disclosures including: revenue recognition policy, “the company is possibly recognizing revenue up to 8 business days too early”; their low allowance for doubtful accounts, “the $100,000 reported for such an allowance does not seem reasonable enough given Medifast’s volume of revenues and the dates it either ships or delivers its orders to customers after processing them.”; and lack of deferred revenue liabilities, “Medifast’s financial reports going back to 2004 disclose no deferred revenue liabilities for customer orders processed before each fiscal year ended and either shipped or delivered after those respective fiscal years.”
This trifecta has Sam concerned enough that he’s asking the SEC to poke around a little more than they did the last SEC review in 2007, when the SEC found…nothing.
BP Chief Draws Outrage for Attending Yacht Race [NYT]
Probably seemed like a nice idea at the time, “BP officials on Saturday scrambled yet again to respond to another public relations challenge when their embattled chief executive, Tony Hayward, spent the day off the coast of England watching his yacht compete in one of the world’s largest races.”
BP, Transocean tap a well of Washington lobbyists and consultants [WaPo]
The obvious solution to CEOs attending yacht races, Joe Biden-esque articulation and such is paying someone a lot – a lot – of money to rep these companies. It’s pretty much the only option they have left.
Accounting News Roundup: UK Launches Probe of E&Y’s Final Lehman Audit; Revolving Door at SEC Scrutinized; Swiss Upper House Rejects Referendum | 06.16.10
UK watchdog launches Lehman audit probe [Reuters]
The UK’s Accountancy and Actuarial Discipline Board (AADB), investigative and disciplinary body for accountants, has started an investigation into the Ernst & Young’s final audit of Lehman Brothers’ UK operations for the year ending November 30, 2007.
E&Y, completely familiar with this drill, is sticking to their guns, “Ernst & Young’s audit opinion stated that Lehman’s financial statements for that year were fairly presented in accordance with the relevant accounting standards, and we remain of that view.”
SEC ‘Revolving Door’ Under Review [WSJ]
Currently, the SEC does not have a cooling off period for former staffers that take a position with a private firm. Former staffers (i.e. lower-level employees) need only to provide a written letter disclosing the fact that they will be representing their new employer in an investigation.
The Journal reports that Senator Charles Grassley (R-IA) announced on Tuesday that an investigation into the practice had recently been launched by the Inspector General David Kotz, “[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm,” Mr Kotz said.
The Journal reports that law firm in question “could not be determined.”
There have been several instances of quick transitions of former Commission staffers to new representing their new firms, including the most recent example of an attorney leaving the Division of Trading and Markets for the Chicago-based high frequency trading firm Getco, LLC and an accountant from the enforcement division who represented his new employer in a nonpublic investigation.
IRS hatches new assault on ‘Survivor’ [Tax Watchdog]
Thanks reality TV gods, Richard Hatch is still in our lives. He still owes $1.7 million in taxes from 2000 and 2001.
The CAE’s real challenge – ethics, courage, and complacency [IIA/Marks on Governance]
Norman Marks responds to a commenter that believes that a Chief Audit Executive need not focus on auditing and communicating those results and risks but instead “be conscious of and responsive to management expectations,” and basically substantiate that internal audit isn’t a giant waste of money.
Mr Marks questions this notion in its entirety, “It’s fine to supplement essential assurance activities with the tangible value-adding programs…But, the assurance work has to be covered or (in my opinion) internal audit is failing to do its job. When that is a conscious decision, I have to question the ethics – and the courage – of the individuals involved.”
Swiss Upper House Rejects Call for Referendum on UBS Pact [WSJ]
The upper house in Swiss Parliament would like their counterparts in the lower house to leave their popular referendum idea wherever they found it. Presumably everyone understands that super secret Swiss banking as the world knows it is over and lower house is a little slow to catch on. They’re supposedly debating the referendum circa now.
Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance [White Collar Fraud]
Amedisys got caught red-handed by the Wall St. Journal abusing the Medicare system and Sam Antar hopes that this is a sign of things to come:
The SEC rules under Sarbanes-Oxley for public company codes of ethics broadly define corporate malfeasance by senior financial officers, requires such companies to promptly report any misconduct, prohibits companies from ignoring any misconduct, and makes it relatively easy for investors to sue for misconduct.
…
Hopefully, more lawsuits will cite code of ethics violations by public company senior financial officers in the future.
AICPA: CFOs Want More Input from Auditors on IT Matters
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
Certified Public Accountants are increasingly being asked to solve information technology problems for clients and prospective clients, according to a survey by the American Institute of Certified Public Accountants.
But that raises a potential conflict of interest of the sort that led the Securities and Exchange Commission to keep auditing and IT consulting separate. The pressure for auditors to help provide IT solutions will persist nonetheless, says the AICPA.
“The tide has really turned this year with the economy and increasing regulations,” said Joel Lanz, co-chair of the AICPA’s Technology Initiatives task force in a prepared statement.
“As small and medium-sized companies increasingly place IT under their chief financial officers, it’s becoming much more of a broad scope of responsibility,” added Ron Box, Lanz’s co-chair.
With a renewed focus on IT-related issues, the survey makes clear that CPAs need to be literate about information technology in order to collaborate effectively with clients and their IT partners.
Data security clearly is driving the new interest, and CPAs believe the issue will persist in importance for years, the survey suggests.
The biggest surprise from the survey, Lanz told CFOZone, is the fact that “CPAs are not only providing guidance on financial issues, but there is an expectation by audit committees that CPAs could advise on different IT governance issues. CPAs are now commenting to audit committees about business operations in addition to pure financial issues.”
It’s not that CPAs are expected to be the technology expert, but the expectation is that the CPA is able to provide business insight and IT guidance which then enables their clients to effectively leverage their technology to enhance the businesses value, he added.
Is this simply recreating the problem that led to the separation post-Enron and WorldCom of audit services from consulting, much of which was IT oriented? There’s the potential for a conflict of interest here, and a slippery slope toward bad audits as result. SEC rules specifically say audit firms cannot provide IT consulting services on matters that relate to financial reporting for the same client. And the audit committee must sign off on other types of consulting services.
Lanz concedes that CPAs will have to be careful. “It is a fine line,” said Janis Parthun, senior technical manager – IT, for AICPA, but she added that CPAs can help companies avoid problem here. “Sometimes audit committees do need some education in these areas and this is where they can reach out to CPAs that have some understanding of IT to give the audit committee options to make the right decision.”
Lanz adds says that the AICPA has helped on this front with some recent guidelines. “Recent standards provide CPAs with specific criteria for when they need to communicate with audit committees, as well as the type of communication required,” he said.
A spokesman for the Securities and Exchange Commission declined to comment on the trend.
Accounting News Roundup: Dell Looks to Settle SEC Probe; BP’s Request for Tax Docs Causes Issues for Fishing Communities; Salesforce CFO: We Need Sales People! | 06.11.10
Dell, CEO Are in Talks to Settle SEC Probe [WSJ]
The SEC’s probe, launched in 2006, into Dell had initially focused on some accounting manipulation that has now ensnared founder and CEO Michael Dell focusing on disclosure and omissions related to Intel Corp. and negligence-based fraud charges.
The Journal reports that the possible fraud charges “suggests that the SEC may suspect that Mr. Dell unintentionally made statements that he should have known were misleading.”
In anticipation of the settlement, the company will restate its most recent earnings report, reducing its net income by $100 million.
The fishermen and the tax man [Los Angeles Times]
BP is requesting tax records from people in fishing communities in order process claims of lost work related to the Deepwater Horizon spill. Those seeking payment need to submit a commercial fishing license, proof of residence and tax statements. The problem is that many of these people do not keep tax records since they are paid in cash for their work.
More than 25,000 claims have been submitted so far and payments to about 12,000 have been made, totaling $36 million, according to the LA Times.
BP, through Graham MacEwan says that there’s a plan although like most of this crisis, the company isn’t sure how it will be fixed, “BP Chief Operating Officer Doug Suttles has been telling parish council members over the past few days that if someone’s tax documents are not available, we will find other metrics. I don’t know exactly how we are going to do that yet.”
Salesforce CFO: Company Aggressively Hiring Sales Staff [Dow Jones]
Cloud trailblazer Salesforce.com is looking to add more sales personnel, having added 18,000 new customers over the last 12 months according to CFO Graham Smith.
Mr Smith also said the company is rolling out two new products in the near future including Chatter, a “a social-networking application for office collaboration” and VMforce, a collaboration with VMware, Inc. that will give Java developers a new way to deploy applications over the web.
Charlie Gasparino: Former CFO Is Getting Some Extra Stink-eye in Lehman Probe
Namely, Erin Callan.
Mary Schapiro Isn’t Too Concerned About the Convergence Delay
Earlier in the week we heard the devastating news that the FASB and IASB’s convergence efforts, despite a good hustle, would not meet the G20’s deadline of June 2011.
FASB Chairman Bob Herz indicated that this was a serious case of the Boards having bigger eyeshades than their double-entry stomachs could handle but he tried to squelch the disappointment by assuring everyone that the mission is not a failure and the Boards would “get most if not all of [the accounting standard proposals] done by the end of 2011.”
Roberto and IASB Chair Sir David Tweedie, feeling bad about how the whole thing turned out, decided to send a letter to the G20, presumably to keep them from getting their panties in knot:
It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.
We appreciate the support of the G20 for the development of a single set of high quality global accounting standards. The two boards remain committed to achieving that objective. We shall continue to provide timely updates regarding our progress.
Ohhh, right. The SEC. What do they think about all this? Judging by Mary Schapiro’s attitude of “assuming completion of the convergence projects” as a precursor to IFRS, she’s totally cool with it, making her thoughts known in a statement yesterday:
The boards believe that the modified plan will contribute to increased quality in the standards because it provides additional time for stakeholders to thoroughly consider the proposals and give both boards quality feedback. I view this as time that is well invested.
Quality financial reporting standards established through an independent process are threshold criteria against which the Commission’s future consideration of the role of IFRS in the U.S. reporting system will be based. I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff’s analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff’s analyses.
Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers.
In other words, no rush guys. Take it from Mary, this happens all the time.
IASB and FASB update to G20 Leaders [IASB]
Chairman Schapiro Statement on FASB-IASB Decision to Modify Timing of Certain Convergence Projects [SEC]
SEC: Diebold Financial Execs Would Step Over Their Own Mothers to Meet Earnings Forecasts
The Diebold CFO, controller and Director of Corporate Accounting had a fairly standard routine back from 2002 to 2007 – 1) get daily “flash reports” 2) look at BS estimates that analysts came up with 3) cook up some ideas for meeting those estimates 4) make up the numbers.
Pretty standard stuff, especially if you buy the idea that “legally cooking the books is a critical skill for attracting investors.”
The SEC presented the accounting hocus-pocus earlier today:
The SEC alleges that Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.
…
Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:• Improper use of “bill and hold” accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.
Gotta give yourself some options, amiright? Can’t just simply rely on channel stuffing!
But in all seriousness, if you’re a top financial executive at a company and part of your daily routine is finding ways to increase profitability through accounting manipulation, at some point you’d have to think to yourself, “This is one shitty business we’re running.”
Accounting News Roundup: PwC Dealt a Blow on Penn. Healthcare Bankruptcy Ruling; Zipcar Going Public; Altria Gets Smoked by IRS | 06.02.10
PwC loses ruling on big Pa. healthcare bankruptcy [Reuters]
We’re a little late to the party on this one – holiday and all – but we’ll get you caught up. Allegheny Health, Education and Research Foundation (“AHERF”), a large Pittsburgh hospital system, sought Chapter 11 bankruptcy protection in 1998 with over $1.3 billion in debt. Unsecured creditors of AHERF accused Coopers & Lybrand of “conspiring with AHERF officials in the 1996 and 1997 fiscal years to hide the increasingly dire financial health of the Pittsburgh-based system.”
In 2007, a District Court in ruled that the creditors could not recover any damages from PwC on behalf of AHERF due to “a legal doctrine governing cases of equal fault, concluding AHERF was at least as much at fault as PwC.”
The Third Circuit Court of Appeals finally got the case on their docket and unanimously overturned the ruling saying that PwC could be liable if they had “not dealt materially in good faith with the client-principal.” The Third Circuit also disagreed with the lower court’s finding that misstated financial statements could have a short-term benefit to AHERF, saying “‘a knowing, secretive, fraudulent misstatement of corporate financial information’ cannot benefit a company.”
Zipcar Files for a $75 Million I.P.O. [DealBook]
The car-sharing company announced yesterday that it has filed for a $75 million offering to pay off debt and pay for general expenses as it plans to expand its business in the U.S. and Britain. DealBook reports that the company, founded in 2000, has lost money every year and warned in its S-1 filing that it might not become profitable as it incurs significant expenses in the expansion.
Man accused of ‘bomb bag’ threat at IRS office [SF Chronicle]
Lawrence Rios was charged yesterday for allegedly threatening an IRS employee after he handed the woman a note that read “bomb bag” and patted his backpack, insinuating that he had more than trail mix in there, in August of last year. This occurred after the employee had been assisting him for 10 minutes. We’d hate to see how he reacts at the post office.
SEC Is Boosting Scrutiny of Offshore Accounting, Fagel Says [Bloomberg BusinessWeek]
Shoddy accounting practices that were/are rampant in the U.S. – revenue recognition and outright fraud – have not been rooted out offshore, so the Commission is looking to tighten up the controls and practices of foreign subsidiaries. Marc Fagel, head of the SEC’s San Francisco office told Bloomberg, “They’re not doing that so much in San Jose, but they may have a Hong Kong office where they haven’t figured out they’re doing that, or that it’s a problem.” The San Fran office is looking to add a dozen attorneys and accountants to help with the Commission’s efforts.
Altria to pay $971 million in taxes, interest to IRS [Reuters]
The payment settles a dispute between the company (aka Philip Morris) and the Service over its 2000 to 2003 tax returns.
Accounting News Roundup: Reasons Why CFOs Are Still Stalling on Cloud Solutions; IASB Trumpets Latest Convergence Steps; OCA Gets a Deputy | 05.28.10
What’s stopping CFOs putting their money on cloud computing? [Silicon.com]
Some CFOs are still hesitant to jump into cloud computing for three main reasons: 1) They aren’t sure what they’re getting for their money 2) Security and information assurance 3) The cost of migrating their data.
All legitimate concerns, however steps can be taken and questions asked in order to address most concerns (or at least put CFOs in a better informed position than before):
1) “Ask providers to clarify how they intend to deliver your service so that you understand the risks involved and know exactly what you are getting for your money.”
2) “Undertake due diligence and ensure that cloud providers can replicate the appropriate security policies and procedures. Agree realistic [Service Level Agreements] and make certain that services are scalable enough to meet present and future requirements. Finally, ensure that everything is clearly written down in the contract.”
3) “Evaluate how much time, effort and money will be required to migrate data and rework business processes.”
IASB unveils profit and loss proposals [Accountancy Age]
It appears that Tweeds and Co. like the U.S. GAAP method of presenting Other Comprehensive Income: “If adopted, these proposals will result in further convergence of IFRSs and US GAAP in an increasingly important part of the financial statements.”
Buffett to Testify to Crisis Panel on Moody’s [WSJ]
This will be a breeze – folksy insights with a dash of sexual metaphors will clear up this area of the crisis. Plus, no one is going to scold an old man.
H & H bagel big cops to $369,000 tax fraud [NYP]
Helmer Toro simply kept the money. He’ll spend 50 weekends in jail for that little stunt.
Brian T. Croteau Named Deputy Chief Accountant for Professional Practice in SEC Office of the Chief Accountant [SEC]
Prior to the new gig, Mr Croteau was a Senior Associate Chief Accountant at the OCA. He joined the OCA after being a partner in the Assurance practice at PwC in the Auditing Services Group. He obviously wasn’t bothered by the Partner to Senior Associate title change. It must have been the “Chief Accountant” suffix.
Accounting News Roundup: The SEC’s Hunt on Banks’ Repos Continues; McKenna Named as a Loeb Finalist; Pabst Gets a New Owner After IRS Order | 05.26.10
SEC Shakes Down Banks on Repurchase Accounting [Compliance Week]
The SEC has received information from 19 “financial institutions” on their repurchase accounting that could help determine if the treatment at Lehman Brothers was ” an outlier in classifying asset repurchase agreements as sales even when those assets were destined to return to the balance sheet.”
Compliance Week reports that Steven Jacobs, associate chief accountant in the Division of Corporation Finance at the SEC said that the Commission wants companies (i.e. banks) to be more forthcoming in their disclosures, “In a situation like this, s a snapshot in time.” Disclosures should more clearly describe the company’s economic situation and its liquidity apart from the moment-in-time snapshot, he said. “I would be willing to bet companies would be more willing to do that if that position on the balance sheet didn’t look as good.”
2010 Gerald Loeb Award Finalists Announced by UCLA Anderson School of Management [UCLA]
Congratulations are due to our own Francine McKenna (look for her column later today) who was named as a finalist for a Gerald Loeb Award for Distinguished Business and Financial Journalism in the “Online Commentary and Blogging Category” for her work at re:The Auditors.
Other nominees include Adrian Wooldridge, Steven N. Kaplan, Nell Minow, Patrick Lane, Brad DeLong, Luigi Zingales, Saugato Datta, Thomas Picketty and Chris Edwards for “Online Debates” for The Economist; David Pogue for “Pogue’s Posts” for The New York Times; Jim Prevor for “Business, Finances and Public Policy” for The Weekly Standard.
Rewarding Failure [Portfolio.com]
The old idea of combining the SEC and the CFTC came up again last week and Gary Weiss thinks that it’s a terrible idea. Be that as it may, he thinks that it may “have some mileage” since some big names have recently come out to support the idea, including Mary Schapiro who was posed the question “can you explain any rational reason that both the CFTC and the SEC exist?”:
Schapiro’s response was wordy, but it boiled down to a qualified “yes.” If it were up to her, she said, there would be just one agency. Headed by her, I presume.
Evidently this seems to be a trend. Only about a week ago, the idea was endorsed by Arthur Levitt, the former head of the SEC. He told Barron’s that merging the two agencies is “so basic to any kind of regulatory reform, that to neglect that is really outrageous.”
Gary argues that an independent CFTC could “light a fire under a somnolent SEC” with the right leadership, although the current team doesn’t seem to be up for the job. If that continues, he adds, we could end up with one large(r) ineffective bureaucracy protecting the markets.
Pabst’s New Owner Built Fortune on Old Brands [WSJ]
The Journal has learned that Pabst is being purchased by investor C. Dean Metropoulos who has made a fortune in food branding. His past investments include Chef Boyardee, Duncan Hines and several others.
Pabst was up for sale after the IRS forced the sale by California-based Kalmanovitz Charitable Foundation. The Foundation had owned the company for a decade, after the Service allowed a five year extension for the nonprofit to own a for-profit business.
Accounting News Roundup: Cassano Dodges Criminal Charges; Mary Schapiro Acknowledges Some ‘Convergence Gaps’; IRS Audits of Colleges May Look at Coaches Salaries | 05.24.10
Crisis Probes Fail to Meet High Bar [WSJ]
Late on Friday, former AIG executive Joseph Cassano learned that he wouldn’t face criminal charges for his actions as the head of the company’s Financial Products division. According to the Journal, prosecutors did come close to filing criminal charges against Cassano and others but it was felt that the high burden of proof that “there was criminal intent behind executives’ decisions and that they intentionally misled investors” could not be met.
The government isn’t quite finished with Cassano, as he still may face civil charges from the SEC, which has a lower standard of proof.
The SEC’s Mary Schapiro on the Myths of GAAP/IFRS Convergence: The Lady Doth Protest Too Much [Re:Balance]
Jim Peterson took a closer look at Mary Schaprio’s speech at the annual conference of Chartered Financial Analysts where she mentioned IFRS but also convergence efforts between the IASB and the FASB. The SEC has maintained that convergence should be the initial goal for reporting standards.
Jim is concerned that the gap between the ultimate goal of convergence and the reality of some of the key issues at stake are no small feat:
There is, indeed, no more eloquent concession of the “convergence gap” than Schapiro’s own admission that “US GAAP and IFRS are currently not converged in a number of key areas,” including “the accounting for financial assets (the very types of securities at the center of the financial crisis), revenue recognition, consolidation principles, and leases.”
Any other problems, Madame Chairman? These on her list are so comprehensively grave that they will keep the international standards standoff alive until the end of time.
Which would put IFRS on a even longer track to adoption.
IRS audits of schools might delve into salaries of coaches [USAToday]
The IRS’ interest in the determination of the highest paid employees for colleges and universities has a few people worried. Not necessarily because anything is wrong but because the IRS is just a scary beast, “John D. Colombo, a University of Illinois law professor who has written about tax exemption and college athletics, says he doesn’t think the IRS action will fundamentally alter college athletics business. But he adds, ‘Audits are never comfortable. Just the IRS being there asking questions makes people nervous.'”
Primarily, the IRS is concerned over the business activities that higher education institutions engage in that aren’t “related to the schools’ primary purpose.” The interest in athletic coaches’ salaries is such that these individuals are often some of the highest paid employees of the school. The IRS is interested in how colleges and universities justify these salaries and to ensure that corporate sponsorships (not considered to be a business activity) are complying with certain rules so they are not considered advertising revenue.
You Can Forget About Landing That CFO Position at the SEC
Mary Schapiro took some time out of her fraud fighting Friday to ask Kenneth Johnson to quit acting as the Commission’s CFO and to take on the official responsibility of running the Office of Financial Management.
Mr Johnson (KenJo?) vehemently accepted the offer and threw in a shout out to the boss, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”
Presumably, the CFO position isn’t a kicking-down-doors type job so Johnson’s first order of business should be to determine the savings on a group rate at one porn site that can appropriate service all tastes.
Washington, D.C., May 21, 2010 — Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Kenneth A. Johnson has been named Chief Financial Officer for the agency.
Mr. Johnson has been serving as acting CFO for much of the past year. The agency’s CFO is responsible for leading its Office of Financial Management, which handles the budget, finance, and accounting operations for the SEC.
“I’m delighted that Ken has agreed to take on this role at the SEC,” said Chairman Schapiro. “His deep experience in the financial arena will be incredibly valuable as we grow as an agency.”
Mr. Johnson added, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”
Mr. Johnson, 37, joined the SEC in 2003 as a Management Analyst in the Office of the Executive Director. In that role, he advised on all aspects of the budget process, developed strategy initiatives, and responded to inquiries from the Office of Management and Budget (OMB) and Congress regarding the SEC’s budget and financial operations. He became Chief Management Analyst in 2006.
Mr. Johnson has served as a valuable staff expert on legislative proposals, and he managed the development of the SEC’s long-range Strategic Plan that would guide agency policy through 2015.
Prior to joining the SEC staff, Mr. Johnson worked as a Commerce Analyst at the Congressional Budget Office. His primary responsibility in that role was to analyze and report on the budgetary effects of committee-approved legislation.
Mr. Johnson earned his Masters in Public Policy from the Kennedy School of Government at Harvard University, and earned his BA at Stanford University.
At Which Point the SEC Will Announce That “Things Are Progressing” on IFRS
“As we move forward, we are committed to providing public progress reports beginning no later than October 2010 and frequently thereafter until the work is complete.”
~ SEC Chief Accountant James Kroeker’s testimony for tomorrow’s hearing before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.
Accounting News Roundup: In Defense of Sherrod Brown; Former H&R Block CFO Gets the Parachute; Intuit Snatches Up Medfusion for $91 Mil | 05.11.10
Sen. Sherrod Brown Prods SEC/FASB to Fix Accounting Standards [The Summa]
This is Professor Albrecht’s take on Senator Brown’s amendment SA 3853 to the S. 3217: Restoring American Financial Stability Act of 2010. The Professor is less concerned about this particular attempt at financial accounting legislation, reasoning that the SEC and the FASB have had plenty of opportunities to fix these issues (e.g. repurchase accounting) and have passed them up.
Given the severity of the problems, and the inability of today’s standard setters to gird their loins and solve the problems, is it appropriate for Congress to pass a law directing the SEC and its standard setter to produce a desired outcome? Absolutely. Accounting standard setting is an inherently political process, as I explained in my popular essay, “Economic Consequences and the Political Nature of Accounting Standard Setting.” Because the SEC has passed on its legislative charge to establish accounting standards that adjudicate between competing economic interests, and because the private standard setters follow their own political agendas when preparing accounting standards, it behooves Congress to step in when things get too far out of whack with national priorities. Such is the case here.
In other words, s— or get off the pot, FASB and SEC. The argument is a fine one, however, if legislation of accounting has to force the FASB’s into action, where does it end? When FAS 157 was being decried as the cause of all our problems, Barney Frank called in Bob Herz, scared the living bejeesus out of him, and got the result he wanted. Is that preferable to this situation? That depends. At the very least, the Sherrod Brown method susceptible to the influences of others while the B. Frank method skips the voting and signing stuff altogether (which has proven tricky in the past).
Former H&R Block CFO gets $620,000 cash in severance [KCBJ]
Becky Shulman (no relation to the Commish, as far as we can tell) is getting $620k for walking away from H&RB along with automatic vesting of 148,725 outstanding stock options. There’s no indication that she is eligible for lifetime complimentary tax prep service.
Intuit to buy Medfusion in $91M deal [SV/SJ Business Journal]
Intuit, owner of QuickBooks, Mint.com, Quicken, etc. has now added Medfusion to its stable, expanding its SaaS holdings. The deal is scheduled to close this July, the 4th Quarter of the company’s fiscal year. CEO Brad Smith, from the press release:
“This transaction expands our software-as-a-service offerings with a solution currently used by more than 30,000 healthcare providers, the vast majority of whom are essentially small businesses. The combination of Medfusion’s industry-leading patient-provider communication solutions and Intuit’s expertise in creating innovative solutions that improve the financial lives of small businesses and consumers, will help us create new solutions that make the clinical, administrative and financial side of healthcare easier for everyone.”
Grant Thornton Survey Shows That CFOs Might Be Ignoring the SEC’s XBRL Deadline
It has been well established in these pages and elsewhere that the SEC has had its share of problems. Take your pick: 1) missing the biggest financial fraud in the history of the world 2) hiring an army of porn-addicted accountants and lawyers to protect our markets 3) waffling on IFRS 4) did we mention missing huge frauds?
To be fair, the Commission has been working hard to redeem itself by cracking down on dubious activity (from Goldman to Overstock), hiring more fraud experts and giving those tranny porn-obsessed employees a second chance.
Regardless of the turnaround-in-progress, CFOs in this country seem to have ceased taking the SEC seriously. Sure the 10-Ks and Qs still get filed but those were in place long before the wheels fell off.
In a recent survey, Grant Thornton found that, despite a SEC deadline for public companies to utilize eXtensible Business Reporting Language (XBRL), a fair amount of CFOs don’t seem all that worried about reporting their financial statements using the technology:
64 percent of public companies do not currently report financial results using eXtensible Business Reporting Language (XBRL); and of those, half have no plans to in the future even though the SEC mandated that public companies have to report their financials using Interactive Data by 2011.
“It’s concerning that almost a third of public companies still have no plan on using XBRL to report their financials despite the requirement that all public companies comply with XBRL filing requirements by mid-year 2011,” said Sean Denham, a partner in Grant Thornton’s Professional Standards Group and a member of the AICPA’s XBRL Task Force. “I foresee a lot of companies playing catch up as the 2011 SEC deadline approaches.”
Whether this lack of action can be attributed to defiance, fear of technology, or pure laziness is not explained but we wouldn’t rule out the possibility that the SEC has an outright mutiny on its hands.
A third of public companies have no plans to use XBRL – despite SEC mandate requiring XBRL use by 2011 [GT Press Release]
Also see: XBR-Lax [CFO Blog]
Seems Hard to Believe That a Pre-Loaded Sponge Company Would Have to Resort to Fraud
Today in “they just made the numbers up” news, it’s shocking that a company with this business description:
We design, produce, market, and distribute cleaning products primarily for vehicular use utilizing patented technology relating to sponges containing hydrophilic, or liquid absorbing, foam polyurethane matrices and other technologies. Our products can be pre-loaded with detergents and waxes, which are absorbed in the core of the product then gradually released during use. We have designed and are conducting additional research and development for products and applications using hydrophilic technology and other technologies for kitchen and bath, health and beauty, auto, medial and pet use, which we intend to market and sell as part of our product offering. There is no assurance that we will successfully be able to market and sell products for kitchen and bath, health and beauty, auto, medial and/or pet use.
…would have to make up five customers out of thin air to account for 99% of their revenue:
According to the SEC’s complaint, after several years of relatively little business with a single customer comprising the bulk of Spongetech’s limited sales, Metter and Moskowitz began to paint a more promising and misleading picture of Spongetech’s business. Beginning in approximately April 2007, Spongetech issued dozens of phony press releases touting increasingly larger, yet fictitious, sales orders and revenue. The press releases fraudulently exaggerated the demand for pre-soaped sponges by referencing millions of dollars in sales orders, business, and revenue from five primary customers that purportedly accounted for 99 percent of Spongetech’s business, yet none of those customers actually existed.
Yes, they had an auditor. According to the the last 10-KSB filed it was Drakeford & Drakeford, LLC who has had their own share of trouble.
SEC Charges Spongetech and Senior Executives in Pump-and-Dump Scheme [SEC Press Release]
SEC v. Spongetech, et al. [SEC]
She Forgot to Mention How None of Her Porn-Watching Employees Were Fired
“Swift and vigorous prosecution of those who have broken the law is at the heart of the agency’s efforts to restore investor confidence.”
– SEC Chair Mary Schapiro in testimony before a Senate appropriations subcommittee Wednesday defending the SEC’s request to be self-funded.
The SEC Wants to Help the IASB Meet its ‘Arbitrary Deadline’
The SEC is interested in securing capital markets and protecting the interests of investors by putting a new level of priority on accounting standards setters… European accounting standards setters, that is.
SEC Chief Accountant James “P is For Principles” Kroeker announced today that the SEC’s new project will revolve around securing funding for the gatekeepers of IFRS, the IASB. “A stable broad based funding system with a diversity of capital market participants providing ‘no strings attached’ funding is of great importance to establishing a structurally sound international standards setter,” he said at a Baruch College accounting conference. Earlier in the week, JP was defending GAAP and calling the planned June 2011 adoption of IFRS in the US an “arbitrary” target but this leads us to believe that he’s since changed his mind and would like to see this convergence thing get rolling once and for all.
About 20 percent of the IASB’s funding is expected to come from US sources this year – the largest chunk of funding from any single source.
While Kroeker was busy cheerleading the IASB telethon this week, SEC Chair Mary Schapiro was off doing a little fundraising of her own, except hers failed miserably when the Senate rejected a request by Schapiro and several former SEC leaders to self-fund the agency. As everyone knows, the SEC has been plagued recently with accusations of regulatory laziness, not to mention problems with employees sitting around watching porn all day when they should be guarding capital markets. No increase in allowance for you, Mary!
Anyway, the main concern is – as always – independence. Without secure funding, the IASB is exposed to excessive political pressure and if you recall the fair value debate, you have already seen what happens when standards setters cave in. With secure funding, the IASB can be bought and sold as easily as some companies A/Rs so it makes sense that Kroeker would shift the SEC’s focus from begging Congress for a raise to funneling in cash to the IASB. You know, for convergence’s sake.
US seeks secure funding of global accounting board [Reuters]
Goldman Sachs May Inspire a Redefinition of “Fiduciary Duty”
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
One bit of commentary I’ve noticed in the blogosphere following yesterday’s Goldman show is that the bank could toggle back and forth between being an investment advisor and a broker dealer when it came to any fiduciary duty it owed to investors in its crappy mortgage deals.
That may or may not be a loophole that needs closing, as Senator Collins’ line of inquiry suggested. Surely, banks like Goldman shouldn’t be able to use it as such.
But it’s important to remember that this is not an issue in the SEC’s case against the bank.
Take another look at the complaint. It charges Goldman with violations of three specific provisions of the securities laws, Section 17 (a) of the Securities Act of 1933 and Section 10 (b) and Rule 10-b (5) of the Securities Exchange Act of 1934. All of them relate to deceit, plain and simple.
Here’s the exact wording from the complaint: Goldman, the SEC charges, “employed devices, schemes or artifices to defraud, made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons.”
Nope, nothing about fiduciary duty there.
Goldman’s defense here, essentially, is that the bank didn’t have to disclose those facts the SEC refers to, because the investors in the deal in question were sophisticated or already knew or should have known that another party that was betting against them had helped select the portfolio, and that any other information it failed to disclose wasn’t material.
Nothing about fiduciary duty there, either.
So while the back and forth over that issue may be important to any legislation aimed at reforming such practices, it’s not strictly relevant to the legal case.
Of course, we’re talking about a jury trial here, so the atmospherics surrounding the case, including what the bank should have done that it wasn’t legally required to do, aren’t totally irrelevant.
Anyway, I was somewhat puzzled over the significance of the fiduciary issue when I stumbled across it earlier this morning. And I figured others might be as well.
SEC’s No Rush Stance on IFRS Means a Nice Stroll Towards Convergence, You Know, Whenever
All the SEC foot-dragging on IFRS may end up benefiting adopters, if only by buying them a little extra time to get things in order and figure out how on Earth to converge the encyclopedias worth of GAAP rules with IFRS’ pamphlet of principles. At a discussion on global standards hosted by the Pace University School of Business. WebCPA’s Debits and Credits shares some excellent talking points, like this winner from IBM director of IFRS policy and implementation Aaron Anderson:
“We know we have time between now and when the SEC mandates it. We can do a brisk walk instead of a sprint.”
Speaking of the SEC, Chief Accountant James Kroeker is offended by the insinuation that IFRS is more principled-based than our precious GAAP, noting in his speech that “U.S. GAAP is founded upon principles, that’s what the P is supposed to stand for.” GAAR just doesn’t have the same ring to it and it’s a tad too late to be debating semantics if you ask me.
The SEC is understandably cautious, especially having to contend with criticisms in the media over regulatory mishaps that allowed for the unchecked misdeeds of Bernie Madoff, Allen Stanford, and of course Goldman Sachs (oops). Still, full-on adoption of IFRS implies a complete departure from GAAP and it doesn’t look like Kroeker is comfortable with that idea, even if companies looking to divert the estimated $32 million cost to convert to IFRS totally are.
IFRS Delay Helps Some Companies [WebCPA]
Accounting News Roundup: Goldman CFO’s ‘Unfortunate’ Response; EU Prepares to Scrutinize Auditors; SEC Chief Accountant: June 2011 Deadline for Convergence Is ‘Arbitrary’ | 04.28.10
Carl Levin To Goldman CFO: When You See ‘Sh–ty Deal’ E-mail, ‘Do You Feel Anything?’ [TPM]
Late in the proceedings of yesterday’s epic Senate subcommittee hearing (involving some of the Almighty’s finest), Goldman CFO David Viniar may have had a bit of a Freudian slip when he responded to potty-mouth Senator Carl Levin’s badgering.
Levin asked Viniar how he reacts to hearing about the email. “Do you feel anything?” Levin asked. Viniar replied: “I think that’s very unfortunate t hich got a smattering of laughter from around the room. Levin asked Viniar how he reacts to hearing about the email. “Do you feel anything?” Levin asked. Viniar replied: “I think that’s very unfortunate to have on e-mail,” which got a smattering of laughter from around the room. “On an e-mail?” Levin shot back angrily. “How about feeling that way?” Viniar started to backtrack: “I think that’s a very unfortunate thing for anyone to have said in any form.” “How about to believe that and sell that?” Levin asked. “I think that’s unfortunate as well,” Viniar responded.
That unfortunateness is in no particular order.
Brussels to scrutinise role of auditors [FT]
The EU has had it with auditors in their current form and is turning their stink eye towards the profession with a whole lot of skepticism, especially since Ernst & Young got in trouble over you-know-what.
Michel Barnier, the new EU internal market commissioner, joined the debate on Tuesday saying that the role of auditors needed closer scrutiny now that the financial turmoil of the past two years was subsiding.
“I’m convinced that it is the right time to launch a real debate at European level on the subject of audit. This conviction is reinforced by the questions recently raised in the context of the audit of the accounts of US bank Lehman Brothers,” Mr Barnier said.
The FT reports that the EU is kicking off this increased level of scrutiny by publishing a green paper this fall on the subject that will examine the way “audit firms are owned and governed…the concentration in the audit market and its implications on financial stability, the emergence of small and medium-sized practitioners, the audit of smaller companies and international standards on auditing,” and also the supervision of global audit firms.
PwC pays £427,000 damages over valuation work [Accountancy Age]
The original suit was for £35 million; that would a W for P. Dubs.
Miami accountant’s workers accused of aiding fraud [Miami Herald]
Two employees of “Miami’s go-to forensic accountant if you want to get ripped off” Lewis Freeman have been charged with conspiring with him in the embezzlement scheme that he pleaded guilty to last month.
SEC Chief Accountant Says Convergence Need Not Be Completed by June 2011 [Journal of Accountancy]
No rush on that, sayeth James Kroeker, on convergence by June 2011:
SEC Chief Accountant James Kroeker told the JofA Tuesday that he would support the boards’ cutting the number of projects due in June 2011, provided there was good rationale for a delay.
“June 30, 2011, is an arbitrary deadline and it’s not one that’s been put in place by the SEC or by our road map,” said Kroeker.
SEC Wins Backdating Case Against Former Maxim CFO
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
The SEC, under attack last week for its Goldman lawsuit and porn allegations, late Friday finally had a victory to celebrate.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securities fraud in a stock-option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securiti option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
It was a rare civil jury trial involving backdating allegations.
Even rarer, it was the second backdating case decided in a court in one week.
Earlier in the week the former CEO of KB Home was convicted of four felony counts in a criminal stock option backdating case.
In the Jasper case, the former finance executive of the maker of chips for laptop computers was found liable on eight out of 11 counts, and cleared him on three, according to The Recorder. Bloomberg said he was found liable for fraud, lying to auditors, and aiding Maxim’s failure to maintain accurate books and records.
“We are pleased that a jury sitting in the heart of Silicon Valley recognized that stock-option backdating is, in fact, a fraudulent practice that matters to investors, and that Mr. Jasper, as the CFO of a public company, was ultimately responsible for misleading investors about the accuracy of Maxim’s financial reports,” Mark Fickes, trial counsel for the SEC, told the wire service in an e-mail statement after the eight-day trial.
Jasper’s lawyer, Steven Bauer, told Bloomberg in an e-mail he will ask the judge to overrule the jury verdict at a May 24 hearing. “Carl Jasper is a good man who never intended to do anything wrong,” he reportedly said. “This is the first step in a long road, and we are confident that in the end he will prevail.”
In late 2007, the SEC filed civil charges against Maxim, Jasper and former chief executive officer John F. Gifford, alleging that they reported false financial information to investors by improperly backdating stock option grants to Maxim employees and directors.
The Commission alleged that Jasper helped the company fraudulently conceal tens of millions of dollars in compensation expenses through the use of backdated, “in-the-money” option grants.
In a separate action, Gifford agreed to pay more than $800,000 in disgorgement, interest, and penalties to settle charges relating to his role in the options backdating.
Maxim, without admitting or denying the Commission’s allegations, consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.
The Commission’s complaints also alleged that Jasper was aware of the improper backdating practices, drafted backdated grant approval documents for Maxim’s CEO to sign, and disregarded instructions from CEO Gifford to record an expense in connection with certain backdated options. According to the Commission, Gifford should have known that the company was not reporting expenses for those in-the-money stock options and instead was falsely reporting that they were granted at fair market value.
According to The Recorder, in his opening statement at the trial, Bauer said Gifford, who is now deceased, was to blame for the backdating and not Jasper.”You can’t talk about options at Maxim without talking about Mr. Gifford,” Bauer reportedly told the court. “You can’t talk about picking dates without talking about Mr. Gifford.”
The SEC is seeking injunctive relief, disgorgement of wrongful profits, a civil penalty, and an order barring Jasper from acting as an officer or director of a public company.
Early last week, Bruce Karatz, the former CEO of KB Home was convicted of four felony counts in a stock option backdating case. He was found guilty of two counts of mail fraud, one count of lying to company accountants and one count of making false statements in reports to the Securities and Exchange Commission, according to published reports.
He was acquitted on 16 other counts, including mail and wire fraud, securities fraud and filing false proxy statements, according to Bloomberg.
He faces up to 60 years in prison when he is sentenced.
(UPDATE) Let’s Take a Closer Look at This SEC Accountant’s Porn Activity
Since we’ve been out of the number crunching biz on a day to day basis, our reaction to the 16,000 attempts by an SEC accountant to access porn was simply, “Holy shit, that’s a lot.”
Thankfully, we still have plenty of friends that still burn up the 10-key calcs and we got a drop from one of them a little while ago:
I did [a] calc on that accountant that viewed porn sites up to 16,000 in one month. He was averaging 725x per day (including weekends). That is impressive. I don’t think I can hit 725 times in a year (and I don’t even have a girlfriend), let alone one month.
The best part of this whole ordeal is that it’s now becoming a political football and hyperbole that even makes us scoff.
UPDATE: Our stupid friend is obviously rusty on the calc (they’re no longer in public accounting) and we’ve been re-informed by said friend that 725x is based on 22 workdays (i.e. not including weekends).
Even more importantly, how many accountants out there double-checked this pre-update calc and then failed to get all self-righteous about it?
Furthermore, and perhaps most importantly, the bar has been raised in the wasting time department. Granted this accountant was wasting everyone’s tax dollars while those of you in public accounting are wasting your clients’ dollars but these porn surfing numbers are no doubt a challenge worth accepting. Go forth.
Accounting News Roundup: Ernst & Young Settles with HealthSouth Bondholders; SEC Accountant Tried to Access Porn 16,000 Times in a Month; The Best Accounting Rules Won’t Fix Everything | 04.23.10
UBS to Pay $217 Million to Settle HealthSouth Case [Bloomberg BusinessWeek]
After the better part of a decade, Ernst & Young has finally settled with the bondholders of inpatient service provider HealthSouth. Bloomberg is reporting that the firm agreed to pay the Company’s bondholders $33.5 million after settling with shareholders last year for $109 million. HealthSouths’ investment bank, UBS settled with shareholders and bondholders for $117 million and $100 million respectively.
The $2.7 billion fraud resulted in guilty pleas from 15 executives, including five former CFOs but an acquittal of CEO Richard Scrushy. Scrushy managed to wind up in prison on bribery charges instead and is currently serving 6 years and 10 months. As is typical in these matters, both UBS and E&Y ponied up yet denied any wrongdoing.
GOP ramps up attacks on SEC over porn surfing [AP]
The official SEC porn report has been leaked and some interesting things that are new include:
• One guy had so much porn on his computer that he had to bring in CDs and DVDs to help expand the collection. He thought it wise to keep these at the office.
• “An accountant” was blocked from accessing sites 16,000 times yet still amassed a “collection of ‘very graphic’ material on his hard drive by using Google images to bypass the SEC’s internal filter.” He refused to ” testify in his defense” and was suspended for fourteen days.
• Seventeen employees were “at a senior level” with the highest salary reported over $222k.
Darrell Issa (R-CA) is not amused by this porn bonanza, saying, “[it is] disturbing that high-ranking officials within the SEC were spending more time looking at porn than taking action to help stave off the events that put our nation’s economy on the brink of collapse,” according to the AP. Based on this response, it wouldn’t be surprising to find Issa ensnarled in a porn scandal of his own before this year’s election.
Best accounting rules are not enough [FT]
A reader responded to the epic article published by the Financial Times, raising the notion that “one set of high quality accounting standards” will not solve the world’s problems.
Those who prepare and use accounts very often have a different perspective on accounting questions from accountants as such, whether or not they have had an accounting qualification in the past…
[T]he report on Lehman explicitly did not address the question of accounting arbitrage. This was because Lehman used an accounting rule to disguise from the markets the weaknesses in the balance sheet in a way which, as the examiner reported, was invalid even if the rule itself was completely valid in all jurisdictions.
This points to the fact that the best accounting rules possible are not enough – the financial reporting chain has other links: corporate governance, auditing and regulation.
SEC Might Bring Civil Charges Against Ernst & Young Soon, Maybe
Charlie Gasparino is reporting that the SEC probe in the Lehman Brothers bankruptcy is “ramping up” and that the Commission is under hella-pressure to bring civil charges against Dick Fuld, Ernst & Young and whoever else is on the list.
It’s unclear if the SEC can muster the necessary proof to show that top executives like former CEO Richard Fuld or the firm’s outside auditor Ernst & Young intentionally misled investors about the health of Lehman’s balance sheet in the months before it filed for bankruptcy in mid-September 2008, according to people close to the probe…It’s unclear when any charges might be filed by the SEC, but people close to the inquiry say the SEC believes it does bring one, it must do so “very soon,” possibly within a few months given a combination of the outrage over the report’s findings and that Lehman’s bankruptcy is going on two years old.
Okay, so things are urgent but not that urgent. It’ll be Father’s Day maybe the 4th of July by the time we get a Mary Schapiro smackdown.
But that’s not all! Things are really serious at Ernst & Young now because Charlie reports that E&Y “has hired high-profile white-collar attorney William McLucas as its outside counsel in the matter, people close to the firm say. McLucas had been the SEC’s enforcement chief before entering private practice.” We checked with our friends over at ATL and it turns out that Mr McLucas is a partner at high-powered WilmerHale and was lead counsel to the special committee of the Enron Board that reported “hard-hitting findings” (sayeth he).
Since Mr McLucas doesn’t take shit from the likes of short-seller Jim Chanos, we’ll take Charlie’s word that things are pretty serious over at 5 Times Square.
E&Y spokesman Charlie Perkins declined to comment.
SEC Probe of Lehman Picking Up Steam [FBN]
See also:
Gasparino: SEC May Be Forced To Do Something About This Whole Lehman Thing [DB]
Accounting News Roundup: Former Dell Staff Facing SEC Action Related to Accounting; Herz, Tweedie to Present on Global Issues at GWU; NASBA Taking Back Some March Scores? | 04.02.10
We’ll be posting on a lighter schedule today. Hopefully many of you are enjoying a long weekend.
• Dell says several former staff may face SEC action [Reuters]
Some former Dell employees are facing possible SEC actions related to the company’s accounting. The Commission started its inquiry back in 2005 and Dell disclosed that the U.S. Attorney for the Southern District of New York had subpoenaed documents shortly after in 2006. This all led to the Accounting Code of Conduct that the Company implemented last fall. The company stated that it believes ‘monetary penalties’ will be part of the settlement but otherwise they’re keeping a lid on it.
• FASB Chairman Robert H. Herz and IASB Chairman Sir David Tweedie to Discuss Global Accounting Issues at The George Washington University [FASB]
Herz and Tweeds will be at G Dubs on Wednesday, April 7th kicking around global accounting issues. “Greater Global Transparency in Financial Reporting: Lighting the Path for Investors” starts at 6 pm and is free and open to the public, so you best get there early before the groupies overrun the joint.
• NASBA Takes Back (Some) Passing CPA Exam Scores for March [JDA]
In what could amount to the worst April Fool’s joke in history, Adrienne is reporting over at JDA that NASBA is taking back some of the scores for March after extending the test dates in the third month:
[F]rom a reliable source within the Big 87654 that test-takers outside of the blizzard-affected areas have actually gotten their scores taken away and thrown out. Yes, that means all of you who put it off until the very last minute and rescheduled for the March extension are pretty much screwed unless you also got snowed in on top of it. Yes, those of you who paid for and passed the exam in March.
Huh. We’re checking into this. We’ll get back to you if we learn more.
Accounting News Roundup: KPMG Dodges Madoff Feeder Fund Lawsuit; SEC May Disclose More Details in Settled Lawsuits; Tax Code? Now There’s an App for That | 04.01.10
• KPMG wins dismissal of Madoff feeder fund lawsuit [Reuters]
A class action lawsuit brought against KPMG by Meridian Horizon Fund, L.P. and other investors in Tremont Partners was dismissed yesterday in New York. Tremont had more than half of its assets were Berns andKPMG audited Tremont funds in 2006 and 2007.
Judge Thomas Griesa ruled that the plaintiffs’ case did not show that KPMG had any intent to deceive the investors in Tremont. Emily Chasan reports that Judge Griesa wrote, “Merely alleging that the auditor had access to the information by which it could have discovered the fraud is not sufficient,” and that the firm would have had to botch the engagements so badly that it would have amounted to “no audit at all.” He did not rule out the possibility of Meridian re-filing their lawsuit in the future.
• SEC may require more details of wrongdoing to be disclosed in settlements [WaPo]
The SEC is thinking about disclosing more details in their civil action settlements; a move that would do away with the quick and dirty “neither admitted nor denied the charges.” This could result in a more transparent process where violations of the law are — God forbid — disclosed in detail.
Securities lawyers said a more detailed public record of cases could make defendants less likely to settle and make it easier for shareholders to file class-action lawsuits piggybacking on the SEC’s claims. It could also lead to embarrassment for executives if the agency publicized their roles in violating securities law, even if they are not personally charged.
God knows we can’t have executives embarrassed.
• The Tax Code and Regs for Your iPhone [TaxProf Blog]
Who wants to schlep around the physical tax code?
Apparently the Porn Problem Has Spread from the SEC to the IRS
This is the last thing the IRS needs. Well, maybe next-to-last.
“An IRS employee is charged with having child pornography on a laptop computer that police said he left in a garbage bag in a wooded area in Sterling Heights. Alan E. Erickson, 45, of Sterling Heights is charged with one count of using a computer to commit a crime and five counts of possession of child sexually abusive material, officials said.”
Dumping a laptop in the woods? And child porn to boot? Jesus. You thought the death threats against IRS agents were bad before…
IRS employee charged in porn case [Detroit Free Press]
Image source: Sterling Heights Police via DFP
SEC Deadline Watch: Try Not to Make a Scene
So today marks the last major deadline for those working on SEC filers and that could mean that your life belongs to you once again. We should also mention that March 31st is a major deadline for many non-SEC clients so there are a lot auditors rejoicing today (or completely losing their shit).
Whether you plan on celebrating the end of your busy season by drinking yourself blind or sleeping at home rather than the office, is matter of personal choice. There will be no shortage of celebrations anyway – clients, team members and if you’re lucky, a firm-wide celebration after the tax trolls cross their finish line.
This also means that the talk of merit increases, promotions and layoffs will start swirling. PwC and E&Y have already re-reassured their troops that raises are coming this year. Some offices have seen the exodus begin so things will remain interesting and we definitely want to know about it.
Not everyone will be raging however. The aforementioned tax return jockeys still have two weeks of listening to ball-baby clients. For those that are still chasing their CPA, maybe you take a breather or maybe you just keep killing yourself and granted, some audit teams (e.g. Overstock.com) are still working but if you passed the finish line today, congrats, well done, yada yada yada.
Dear CFO, Tell Us Everything We Want to Know About Your Repos or We’re Coming in with Guns Blazing. Sincerely, the SEC
As we mentioned this morning, t wn to brass tacks on these repurchase agreements that have captivated the entire financial world. Maybe “captivated” is overstating it but there’s been no shortage of commentary out there blaming Lehman’s shifty accounting ways for nearly ending the entire world as we know it.
The SEC let Lehman Brothers and Ernst & Young take their public beatings but now they’re moving on. The Commish’s Division of Corporation Finance sent out the following letter to “certain public companies” (aka banks) this month in order to get the scoop on their repos.
Furthermore, you should probably take this letter as a good indication of how the SEC feels about them in general, sayeth Edith Orenstein, ” would suggest companies, auditors, legal counsel, and audit committees consider such “Dear CFO” letters as illustrative of the SEC’s general view on accounting and disclosure matters for the issue(s) addressed in the letter.”
Oh yeah, about that letter. It’s long and has plenty of standard SEC vernacular so we’ll give you the abbreviated version (although the full thing appears below for you sickos).
“For those repurchase agreements you account for as collateralized financings, please quantify the average quarterly balance for each of the past three years. In addition, quantify the period end balance for each of those quarters and the maximum balance at any month-end. Explain the causes and business reasons for significant variances among these amounts.”
Translation: “Listen you shifty bastards, we know you move that sh*t off the books right before the end of the quarter. You won’t be able to hide it when we ask you for the averages.”
“[I]f you accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and did not provide disclosure of those transactions in your Management’s Discussion and Analysis, please advise us of the basis for your conclusion that disclosure was not necessary and describe the process you undertook to reach that conclusion.”
Translation: “We’re guessing you didn’t tell anyone that you were parking a bunch of capital sucking crap off your books in your MD&A. If that’s the case, you get to explain to us, in excruciating detail, how you came to that asinine conclusion.”
If the Commission isn’t satisfied, it’s likely that the next step will be an interrogation in a poorly lit room. When your handlers leave, an incessant buzzing sound will commence until you soil yourself. Then they’ll try asking you again. Keep your fingers crossed that you don’t get a letter.
Dear Chief Financial Officer:
We are currently reviewing your Form 10-K for fiscal year ended ______. In our effort to better understand the decisions you made in determining the accounting for certain of your repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets, we ask that you provide us with information relating to those decisions and your disclosure.
With regard to your repurchase agreements, please tell us whether you account for any of those agreements as sales for accounting purposes in your financial statements. If you do, we ask that you:
• Quantify the amount of repurchase agreements qualifying for sales accounting at each quarterly balance sheet date for each of the past three years.
• Quantify the average quarterly balance of repurchase agreements qualifying for sales accounting for each of the past three years.
•Describe all the differences in transaction terms that result in certain of your repurchase agreements qualifying as sales versus collateralized financings.
•Provide a detailed analysis supporting your use of sales accounting for your repurchase agreements.
• Describe the business reasons for structuring the repurchase agreements as sales transactions versus collateralized financings. To the extent the amounts accounted for as sales transactions have varied over the past three years, discuss the reasons for quarterly changes in the amounts qualifying for sales accounting.
• Describe how your use of sales accounting for certain of your repurchase agreements impacts any ratios or metrics you use publicly, provide to analysts and credit rating agencies, disclose in your filings with the SEC, or provide to other regulatory agencies.
• Tell us whether the repurchase agreements qualifying for sales accounting are concentrated with certain counterparties and/or concentrated within certain countries. If you have any such concentrations, please discuss the reasons for them.
• Tell us whether you have changed your original accounting on any repurchase agreements during the last three years. If you have, explain specifically how you determined the original accounting as either a sales transaction or as a collateralized financing transaction noting the specific facts and circumstances leading to this determination. Describe the factors, events or changes which resulted in your changing your accounting and describe how the change impacted your financial statements.
• For those repurchase agreements you account for as collateralized financings, please quantify the average quarterly balance for each of the past three years. In addition, quantify the period end balance for each of those quarters and the maximum balance at any month-end. Explain the causes and business reasons for significant variances among these amounts.
In addition, please tell us:
• Whether you have any securities lending transactions that you account for as sales pursuant to the guidance in ASC 860-10. If you do, quantify the amount of these transactions at each quarterly balance sheet date for each of the past three years. Provide a detailed analysis supporting your decision to account for these securities lending transactions as sales.
• Whether you have any other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets, similar to repurchase or securities lending transactions that you account for as sales pursuant to the guidance in ASC 860. If you do, describe the key terms and nature of these transactions and quantify the amount of the transactions at each quarterly balance sheet date for the past three years.
• Whether you have offset financial assets and financial liabilities in the balance sheet where a right of setoff — the general principle for offsetting — does not exist. If you have offset financial assets and financial liabilities in the balance sheet where a right of setoff does not exist, please identify those circumstances, explain the basis for your presentation policy, and quantify the gross amount of the financial assets and financial liabilities that are offset in the balance sheet. For example, please tell us whether you have offset securities owned (long positions) with securities sold, but not yet purchased (short positions), along with any basis for your presentation policy and the related gross amounts that are offset.
Finally, if you accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and did not provide disclosure of those transactions in your Management’s Discussion and Analysis, please advise us of the basis for your conclusion that disclosure was not necessary and describe the process you undertook to reach that conclusion. We refer you to paragraphs (a)(1) and (a)(4) of Item 303 of Regulation S-K.
As noted above, we seek to better understand the basis for your decisions and your disclosure. Please provide us with a written response to these questions within ten business days from the date of this letter or tell us when you will respond. Upon our review of your response to these questions, we may have additional comments that we will provide to you with any other comments we may have on your Form 10-K.
Please contact me if you have any questions.
Sincerely,
Senior Assistant Chief Accountant
Accounting News Roundup: Treasurer Is Not a Disclosure-Worthy Position at Overstock.com; SEC Investigating Repurchase Accounting; Deloitte Considers Camping at World Financial Center | 03.30.10
• Another Key Departure at Overstock.com: It Went Unreported, Too [White Collar Fraud]
Criminal-turned-forensic sleuth Sam Antar is reporting on his blog that SEC problem child Overstock.com had another key employee depart the company but this time, the Company failed to report it publicly. Gary Weiss was tipped off about the departure of Richard Paongo, the former Treasurer at OSTK, in an anonymous post that was confirmed on Mr Paongo’s LinkedIn profile.
It appears that Mr Paongo’s departure occurred around the same time as ex-CFO David Chidester’s which was reported to the SEC.
Sam notes the requirements of an 8-K disclosure:
If the registrant’s principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions, or any named executive officer, retires, resigns or is terminated from that position, or if a director retires, resigns, is removed, or refuses to stand for re-election (except in circumstances described in paragraph (a) of this Item 5.02), disclose the fact that the event has occurred and the date of the event.
So maybe OSTK figured that Paongo’s was worth sharing with investors? Sam says, “Apparently, it’s Overstock.com’s position that none of the above applies to Rich Paongo. However, Paongo’s departure from Overstock.con [sic or maybe not?] can be viewed as a material event requiring disclosure amid an expanding SEC investigation and given Paongo’s role at the company.”
Whether or not Paongo’s departure qualifies as a disclosable event might be arguable but the timing of his departure is certainly noted. In semi-related news, Overstock still has a couple of days before the 10-K extension runs out, so we’re likely to hear more out of SLC.
• S.E.C. Looks at Wall St. Accounting [NYT]
With Repo 105 on everyone’s brain, the SEC figured it should snoop around and see who else is using the repurchase agreements. Bank of America and JP Morgan have already admitted that they use repurchase agreements but Mary Schapiro remains coy about what companies are getting the crook-eye.
• Deloitte eyes sticking with World Financial Center [Crain’s New York]
Deloitte is in the market for about 600,000 square feet to house some its New York employees and one possibility is that the firm will set up camp at World Financial Center where it is currently the largest tenant. The firm is also reportedly considering 825 Eighth Ave.
Crain’s reports that Casa de Salzberg was looking for 1 million square feet last year, considering possible locales at 11 Times Square and 277 Park Ave. Deloitte insists that it was never looking for 1 million square feet and will be perfectly happy to cram the employees from the current two non-WFC locations into one place.
PwC Had Enough with Old Republic’s Sketchy Accounting
Accounting firms take a lot of grief for bending over backwards for their clients. They’re in the client service business after all and keeping them as happy as possible is priority numero uno (despite what you might hear). Considering this factoid, when an accounting firm decides to cut a client loose for a “disagreement” over an accounting practice, we feel that’s a pretty good reason for any future accounting firm to think long and hard before taking on said client (case in point: KPMG taking the Overstock.com audit).
PricewaterhouseCoopers notified Old Republic International Corp. on March 19th that they would be “declining to stand for re-election as Old Republic’s independent registered public accounting firm for 2010.” That’s nice SEC filing language for “We’re so grossed out by you that we refuse to audit you any more.”
The two firms disagreed about the accounting treatment of “certain mortgage guaranty reinsurance commutation transactions with captive reinsurers owned by lending institutions.” That description alone makes us nauseous. The gist from Old Republic’s 8-K filing:
Old Republic had concluded that, in accordance with traditional reinsurance accounting practices, funds received ($82.5 million) in excess of amounts owed to it by the captive reinsurers should be deferred and recognized in the income statements of the future periods during which the related claim costs were expected to occur. PwC believed that generally accepted accounting principles (“GAAP”) required that the $82.5 million be recognized immediately as income from a contract termination.
So you have “traditional accounting practices” versus almighty GAAP. The tradish accounting wasn’t good enough for PwC, so they brought the probelme to the attention of the audit committee. The AC ultimately decided…wait…that management was correct. Shocked? Us too. The disagreement was brought to light back in November and in a press release when the company said that the transactions in question “which resulted in little consequential effect on the pretax loss.”
Apparently PwC wouldn’t let it go and the Company called in the SEC to get their $0.02 on the matter. Lo and behold, the Commission sided with PwC. After a lot profanity-laced belly aching (that’s what we imagine, anyway) and sleepless nights for both OR’s accounting department and the PwC audit team (that’s not debatable), Old Republic filed the delayed 10-Q last month with restated financial statements.
After what was surely 5 or so months of pure hell, PwC figured that this was an awkward enough situation that a break up was warranted. This was probably the perfect opportunity for PwC to get out of this engagement. They figured Old Republic wasn’t going to change their less-than GAAP-y ways, the audit committee is obviously no help, and God knows you don’t want to get the SEC involved every single time there’s a disagreement. If you were to ask us, its seems like a pretty logical reaction.
Now the only question is, which audit firm picks up Old Republic? PwC will certainly have some interesting things to share with the firm that decides they’re up for this particular headache.
PricewaterhouseCoopers drops Old Republic [Chicago Breaking News/CT]
8-K [SEC.gov]
Eight Accountants Opt to Risk Their Professional Reputations
We kid! We’re sure it it’ll be a rocking time being a Professional Accounting Fellow with the Office of the Chief Accountant and it will get them all into their respective partnerships with no problem.
The OCA hasn’t been overtly chastised by anyone to our knowledge so maybe this wing of the Commission is idiot and porn free.
• Jouky Chang, currently a director in Duff & Phelps LLC’s Valuation Advisory Services group based in Detroit, Mich.
• John M. Donohue, currently a senior manager in Moss Adams LLP’s audit practice based in Portland, Ore.
• Rachel M. Eckstein, currently a senior manager in Ernst & Young LLP’s National Professional Practice Group based in New York, N.Y.
• Michael Keehlwetter, currently a senior manager in KPMG LLP’s Department of Professional Practice based in New York, N.Y.
• Neil J. Laverty, currently a senior manager in Deloitte & Touche LLP’s Global IFRS and Offerings Services Group based in New York, N.Y.
• Josh D. Paul, currently a senior manager in PricewaterhouseCoopers LLP’s assurance practice based in San Jose, Calif.
• Christian J. Peo, currently a senior manager in KPMG LLP’s Department of Professional Practice based in New York, N.Y.
• Jason K. Plourde, currently a senior manager in Grant Thornton LLP’s audit practice based in Chicago, Ill.
Congrats to all honored. Try to stay out of trouble.
Office of the Chief Accountant Selects Eight Professional Accounting Fellows [SEC.gov]
Can the SEC’s New Chief Accountant of Enforcement Division Stay Focused?
Howard Scheck is newest member of the SEC Dream Team, joining the Commission after leaving the Forensic & Dispute Consulting Practice of Deloitte Financial Advisory Services. Mr Scheck will serve as the Chief Accountant in the Enforcement Division, working for Robert Khuzhami.
Khuzhami is thrilled to have Howie on board, saying in the Commission’s press release, “Financial statement and accounting fraud are high enforcement priorities for the SEC, and Howard is highly qualified to lead our accounting staff in its relentless pursuit of these wrongful practices that are so harmful to investors.”
Sounds like Scheck is the man for the job, having been an forensic expert at Deloitte and working in the Enforcement Division for ten years as well but the question that really needs to be asked is, can he exert some self-control while on the job and avoid ladyboyx.com?
Not only has the SEC proven time and again that they aren’t the brightest group but that viewing porn on the job to cope with the stress is a-okay.
While other protectors of the markets are perusing the web for the best tranny-porn that can be seen for free, will Scheck be able to focus on slapping accountants on the wrist? Khuzhami seems like the no-nonsense sort but the herd mentality at the Commission may be too much to bear.
Howard A. Scheck Named Chief Accountant in SEC Enforcement Division [SEC.gov]
Accounting News Roundup: The SEC’s Porn Problems Somehow Get Worse; The Daily News Offers Free Tax Help While the Sun-Times Has More Obvious Tax Advice | 03.24.10
• SEC Employees Were Masturbating to Kiddie Porn While Your Economy Tanked [Gawker]
So this whole SEC/Porn fiasco has taken an unsuspecting and disturbing turn for the worse. Gawker has obtained documents that show that there have been sixteen investigations of SEC employees surfing the web for the likes of ladyboyjuice.com, kinkycomments.com, sexyavatars.net, cafebuckskin.blogspot.com and the list goes on and on and on and on.
Even more awkward is that it was discovered that one of the Commission’s porn connoisseurs computers contained videos that “potentially contained child pornography” and was referred to the FBI. Protecting our markets, people. Protecting our markets.
• Readers turn to Daily News Tax Hotline for free help filing tax returns [NYDN]
Can’t afford a CPA? NBD. Just call up the Daily News. Their annual tax assistance hotline runs today and tomorrow from 10 am to 4 pm. The DN partners with the NY State Society of CPAs so you can rest easy that it won’t be Rush & Malloy.
• Don’t pay taxes with credit card [Chicago Sun-Times]
Not such a good idea.
CPAs Spanked by SEC for Porn Site Audit
Let it be known that if you are peddling porn and engaged in online pimping, you do not want the SEC on your back.
WebCPA reports that Stephen Corso of Las Vegas and Brian Rabinovitz of Oak Park, CA got the SEC smack down in a Nevada federal court for filing materially false and misleading financial statements from 1999 – 2002 (that’s quite a backlog) and that audit staff – under the boys’ supervision – omitted important info and violated the sanctity of auditor independence during audits of Exotics.com
While the enforcement doesn’t go into specifics, we’re happy to. Exotics.com bills itself as the world’s premiere source for – wait for it – beautiful female adult entertainers. Not to be outdone, Exotics also boasts a veritable cornucopia of escort options including “BDSM & fetish providers, exotic dancers, strippers, sensual and erotic massage specialists, TSTV and other adult entertainment.” It’s that “other that really scares me. Self-billed as the Quicker Pecker Upper (kid you not), the site headline right around the time the SEC brought the heat was “Better than Wives, Girlfriends, and Porn” – and apparently above performing audits according to GAAS?
So, who wants to wildly speculate as to how audit staff violated auditor independence?
Here’s the 2005 release from our friends at the SEC:
[T]he accountants fraudulently participated in audits of Exotics-Nevada’s year-end financial statements and in a review of its quarterly financial statements and failed to conduct those engagements in accordance with GAAS, as required. The Commission also alleges in its complaint that, among other things, the accountants prepared or created many of Exotics-Nevada’s books and records and then audited the financial statements they created. According to the complaint, they also caused their firms to issue false audit reports which, together with the underlying financial statements, were incorporated in Exotics-Nevada’s public filings with the Commission.
Now listen, little auditors, you don’t shit where you live and you don’t audit your own statements. Audit sampling? I could see how it would be hard to resist in this particular instance.
CPAs Disciplined for Porn Site Accounting Fraud [Web CPA]
SEC Complaint
There’s a Very Good Reason Why Harry Markopolos Shouldn’t Be SEC Chairman
The man is a forensic sleuth, no question. Is he a hero? What’s a hero? Could he train young SEC grasshoppers to be fraud detecting machines like him? Probably. David Weidner — among others — isn’t enthused, especially with Harry’s idea about who should play him in a movie (Hanks, Damon, Cage).
And we’ll just go on record to say that we aren’t on board for Marks to take over either. Forget about our constant griping about the pipe dream that is accounting rule convergence and how HM’s input won’t likely amount to squat. That’s not what’s important.
What’s important to remember is that the man cannot control his bodily functions. As you may recall, the ACFE named Markopolos as their Fraud Examiner of the year and he spoke at their big to-do in Vegas where he admitted that he regularly soiled himself while investigating Bernie Madoff. This is unacceptable.
Look, maybe this isn’t a big deal for some of you but if the man wants to be in the big chair he can’t be changing his undies every couple of hours when he’s trying to crack a big case. Do you think Mary Schapiro has drawer full of extra VS? NO. WAY. So before you jump on the Marks bandwagon for the next Chair of Enforcing the Financial Universe, let’s not forget that when he gets nervous, he’ll be extra unpleasant to be around.
Three Ways That Patrick Byrne Can Apologize to Sam Antar
As you’re probably aware (if not, check the links below), it hasn’t been the friendliest of exchanges between criminal CFO/forensic accounting sleuth Sam Antar and Overstock.com CEO Patrick Byrne. Sam being Sam, he recently reached out to Patrick Byrne to see if he would be interested in a mea culpa:
From: Sam E. Antar
Sent: Monday, March 08, 2010 11:02 PM
To: Patrick M. Byrne
Subject: Overstock.com Restatement
Importance: HighHi Patrick:
Will you finally admit that I was correct when I reported in my blog that Overstock.com violated GAAP by using a phony gain contingency in light of the company’s recently announced restatement?
You owe me a public apology.
Regards,
Sam
Our understanding is that Pat hasn’t responded to Sam’s request for an apology yet (we’re hopeful!) so Team GC thought we’d offer some suggestions to Dr Byrne should he decide to take the high road and apologize to Sam. Having been in this situation more than once myself, I can honestly say sometimes you’ve just got to suck it up, buy some flowers, and admit that you’re an ass but totally repentant.
Overstock.com gift cards – Nothing says I’m sorry like free stuff that the aggrieved party can pick themselves. Bonus, the overhead on Byrne’s own inventory must be low. You know, because it’s his, not because there is any monkey business going down on OSTK’s financials.
An SEC Gift Shop Goodie Basket – I busted Sam in an SEC baseball hat at Stanford last week so wouldn’t it be cute if Byrne got him a whole basket full of fun regulatory shwag? Awww, what a precious moment it would be watching Sam pull out DoJ beer cozies and a color-changing SIGTARP coffee mug. Who doesn’t love tchotchkes? PB can’t go wrong! I’d even throw in a pair of NY Fed Pistol Team patches for that added touch of flair.
Cupcakes – Come on, no one can resist cupcakes, not even Sam E. Antar’s hardened criminal ass. You know, might as well send some to the GCHQ while he’s at it, we’ve been putting up with this Overstock shit for months too. Hopefully even Patrick Byrne knows when it comes to cupcakes, it’s best to invest in high quality, over-priced boutique cupcakes. Even my cheap ass knows that.
Earlier:
Winners and Losers in the Overstock Restatement
Even Earlier:
Is Patrick Byrne’s Facebook Friends List Motivated by a Farmville Obsession?
Accounting News Roundup: KPMG Survey: Half of Execs Want Option to Adopt IFRS Early; PW India Plea Rejected on Satyam; Two-thirds of States Have Raised Taxes Since Recession Began | 03.09.10
• Half of US execs want to use IFRS early-survey [Reuters]
KPMG surveyed some shot-callers and lo and behold, half of them are ready to get down with International Financial Reporting Standards before the SEC’s target date of 2015. That’s if the SEC is even down with the whole idea.
KPMG’s surveyed also discovered that executives would like the SEC to be a little more transparent with their plans re: IFRS. You know, other than more meetings.
“Many U.S. companies with subsidiaries around the world are already using IFRS for statutory reporting,” said Janice Patrisso, partner and national IFRS leader at KPMG. “For them, having the option to synchronize it all up front at the U.S. company is a positive.”
…
Patrisso said companies with international subsidiaries that have already made conversions to IFRS were looking at the way those units had chosen to use the rules. They are also preparing for changes U.S. and international accounting rulemakers are making to converge the two sets of rules.
It’s nice to see some pushback to the SEC’s waffling. Despite where you fall on the IFRS debate, most people would agree that allowing businesses to make their own decisions about what financial reporting method to use (as long as it is consistent and high quality). Especially since the AICPA recognized the IASB as an official standard setter, thus giving private companies the go-ahead on IFRS, shouldn’t public companies be allowed the same freedom?
While the SEC spends the next five years trying to figure out what all this means, some businesses already see where this is going and don’t want to waste time. The SEC isn’t so enthused.
• PW plea on Satyam probe rejected [Business Standard]
Pricewatherhouse India really wants everyone to forget about Satyam. Their latest plea to the Securities regulator in India, the Securities and Exchanges Board of India (SEBI) has been rejected BUT apparently the firm is going to try making their case again. Sigh.
Don’t get any illusions about this case making any progress, “The next step is for ICAI’s disciplinary committee to send notices to the PW auditors charged by law enforcement agencies in the fraud case…this could happen only after the auditors, under judicial remand, are in a position to argue their case before the committee.” And we complain about the bureaucracy here.
• CBPP: 33 States Have Raised Taxes by $32 Billion/Year [TaxProf Blog]
You may have noticed a state fiscal crises here or there in the last couple of years and by God, they’re trying to do something about it. Unfortunately, the most common solution, according to the Center on Budget and Policy Priorities, is the raising of taxes. Thirty-three out of 50 states have taken a number of measures from eliminating tax exemptions and broadening tax bases to good old fashioned higher sales, income, or property tax rates.
Accounting News Roundup: Japan Adopting International Fair Value; GAO Not Down with PCOAB Risk Standards; Oscar Gift Bags = $91k Income | 03.08.10
• Japan embraces new fair value rule [Financial Times via Accountancy Age]
Here’s a novel idea: making a decision on IFRS! Japan’s Financial Services Agency will be allowing companies to adopt the international version of the new fair value rule developed by the IASB, starting Wednesday. Since the world’s second largest economy is opting to pull the trigger on IFRS it may throw the G20’s request/demand for the world to get all kumbaya when it comes to accounting rules.
“Fair value accounting…as unleashed one of the most divisive debates to have emerged from the credit crisis, threatening to disrupt a pledge by the G20 group of leading economies to create a single, global accounting system by mid next year,” reports the FT and judging by the SEC’s indecisiveness, they may be right. With this latest development, now leaders will be able to blame each other’s securities agencies for their particular actions that will likely lead to divergence.
The allowance of Japanese companies to adopt IFRS 9 could also give Knight of the Accounting Roundtable, Sir David Tweedie, even more leverage when dealing with countries around the world to adopt the IFRS.
Right or wrong, the Japanese are sending a signal that they are prepared to move forward while the SEC prepares to have more meetings.
• GAO Criticizes PCAOB Approach to Audit Risk [Web CPA]
The General Accountability Office, never shy to point out the faults of others (that’s kind of what they do, after all), isn’t so keen on the PCAOB’s latest “risk assessment” audit standards. This after the PCAOB originally proposed standards in 2008 and then revised and re-released them late last year.
The GAO feels that the ‘duplication and inconsistencies’ created by the PCAOB’s new standards would likely lead to…more billable hours! So, as you might imagine, some firms are on board:
PricewaterhouseCoopers told the PCAOB, “We fully support the board’s objective to update interim standards regarding risk assessment,”
And some, not so much:
McGladrey & Pullen…warned that “unnecessary differences between the board’s standards and those of other standard-setters increase the costs of performing all audits because firms must develop and maintain two, and even three, audit methodologies and training programs, with no corresponding benefit to audit quality.”
Personally, we’re skeptical of anything that has the unmitigated support of the biggest players in the industry but from a more practical standpoint, do auditors really need more rules to follow? And now this could add to the workload? Is that really necessary?
• Oscar Swag Bags to Result in $91k Income to Celebrity Presenters [TaxProf Blog]
Celebrities have enough tax trouble the way it is, how is giving them gifts going to make their tax returns easier? We’re guessing most of them have smart CPAs working for them that will suggest that they give it all to charity but we may be underestimating the temptation of free luxury swag.
Accounting News Roundup: SEC Official Explains His Porn Habits; Private Companies May Embrace IFRS Quicker; New Bill Would Ax Tax Tardy Fed Employees | 03.04.10
• Porn Nightmare Never Ends for SEC Official [FINS]
Whatever your porn preferences, you’re probably not sharing them with complete strangers. If you are, the cloud of awkward around you has got to be so thick that you may as well have leprosy. However, if you have the unfortunate luck of getting caught viewing this art form at work, then you might be forced to discuss your preferences, how often you’re engaging in the activity, among other things:
[T]he really juicy stuff begins when he’s asked about accessing Web sites like tgirlhotspot.com and ladyboyx.com (warning, very NSFW) : “Our records show that on Wednesday, August 13, 2008, beginning at 1:57 p.m., you made approximately 85 attempts…to access a Web site called tgirlhotspot.com. Do you have any recollection of attempting to access this site?”
The employee answers: “I do not personally have recollection of it, but it would not surprise me.” To which the inspector — and the reader — responds: “Okay. That’s fair.”
Seriously, who can remember every instance that they’ve visited ladyboyx.com? Does the guy have a photographic memory? Maybe on certain images but date, time, and spreadsheet you had open that you could quickly jump to in case someone came to close? That’s asking a little much.
• Should the U.S. Forget about Private-Company GAAP? [CFO Blog]
Now that the Blue Ribbon Panel for private company GAAP has been announced, it makes some people wonder if the non-SEC types will just ignore this whole song and dance the Commission is doing get with the IFRS program ASAP. Ahh, the advantages of being a private company…
Even though both the BRP and the SEC will release their musings on their respective topics in 2011, private companies already have options, “[T]he U.S. private sector has already set some IFRS wheels in motion. In 2008, AICPA recognized the IASB as an official standard-setter, which means U.S. auditors are allowed to issue opinions on private-company financial results filed using IFRS.”
It’s doubtful that IFRS reporting will spread like H1N1 among private companies but while the SEC twiddles the private sector seems to recognize where all this is ultimately going.
• Jason Chaffetz: Ax Hill staff tax cheats [Politico]
Since all the members of the House are up for reelection this year, everyone needs something solid to campaign on and apparently Jason Chaffetz (R-UT) has found his stump.
Chaffetz is introducing legislation that would extend an IRS policy — termination employees that haven’t paid their federal taxes — to all federal departments and agencies.
In 2008 alone, 447 House employees and 231 Senate workers didn’t pay their taxes, according to figures from the IRS, Office of Personnel Management and Department of Defense.
“We have over 600 staffers on Capitol Hill not paying their taxes. That’s just not acceptable,” Chaffetz said in an interview with POLITICO. “It’s disingenuous to take federal taxpayer dollars and not pay your full share of taxes. It’s wrong.”
Between to the two bodies in Congress, over $8 million are owed in taxes. We don’t have to remind anyone how little money this is grand scope of the federal government. But hey! Rep. Chaffetz has an election to win and by God, this could be the ticket. Some other notable delinquent federal employees include the Postal Service at $257 million; Dept. of Veteran Affairs at $131 million; Army and Navy owe $81 million and $61 million respectively.
But pointing out those people wouldn’t make for very good press.
(UPDATE) Accounting News Roundup: Rangel Says He’s Not Quitting as Ways & Means Chair; IRS Is Sitting on $1.3 Billion in Unclaimed Refunds; SEC Adding Muscle in New York | 03.03.10
• Rangel Loses Support in House [WSJ]
You can ignore what’s written below, except the part about rent-controlled apartments.
Charlie Rangel will not be quitting (temporarily sayeth Charlie Rangel) as the Chairman of the House Ways & Means Committee. If you (read: Republicans) want him out, you’ll have to vote him out. Bad news for Chuck is that the Republicans in the House and several of his fellow Democrats are poised to do just that, “As many as 30 House Democrats could join 178 House Republicans in voting to oust Mr. Rangel as head of the Ways and Means Committee…a substantially higher number than in previous votes on his removal.”
Never mess with people when it comes to rent-controlled apartments. They’ll turn on you like Judas.
In the meeting, Mr. Rangel refused to quit as chairman of the Ways and Means Committee and instead said he’d think overnight about the matter before deciding whether to step down or face an uncertain vote.
After the one-hour meeting broke, Mr. Rangel told reporters he would stay on.
“You bet your life,” he said. Pressed further, Mr. Rangel, raising his voice, said emphatically: “Yes, and I don’t lie to the press.”
There you have it. You want Rangs out? It’ll be over his dead body. Since he’s 79, it might just come to that.
• Taxpayers Have $1.3 Billion in Unclaimed Refunds [TaxProf Blog]
That’s just for 2006. California leads the charge with over $150 million, followed by Texas with $114 million, and Florida with $110 million. 1.4 million tax-hating Americans have until April 15th of this year to claim and then the money goes straight to Goldman Sachs.
• SEC to beef up its NYC office in 2010 [Reuters]
Here’s a possible gig for those of you that are still looking for work. The not-so-new but constantly improving (?!?) SEC is looking to hire a few good men and women for its New York office. Having got the scratch to put a few more hands on deck, the Commission is looking for 18 people for its enforcement team and 15 for its examination staff. There’s no indication that this will solve the SEC’s “idiots” problem but maybe you can at least land a job.
Convergence of Accounting Rules Is Still a Pipe Dream
God forbid I go so far as to say this whole convergence thing is a conspiracy but it’s starting to reek like a bad Saturday morning cartoon plot. First the evil leaders start scamming for world domination, then they form shady alliances in darkened lairs and eventually the population gets sold into slavery until the hero comes and drops the villains in a vat of acid. Or something like that. If global financial “reform” were a Saturday morning cartoon, we’d be horribly overrun with villains and in desperate need of a hero.
Since it’s real life, all we can do is watch.
A spokesman for IASB said the two boards are expected to issue their first joint quarterly progress report very soon. A spokesman for FASB said the various project updates posted by the two boards demonstrates “quite a bit of progress” in recent months.
“We remain committed to working with IASB,” said spokesman Chris Klimek. “(We) appreciate the SEC’s leadership and additional guidance on this important matter, and like everyone, we will be studying the work plan carefully in the days ahead and discussing what it means for us.”
It’s cool! There’s a plan for convergence and here it goes: the SEC waits around for the FASB and IASB to figure out how to convert GAAP statement to IFRS without costing American companies billions ($35 million/year x companies converting = well you get it). Eventually, they might just figure this out. In the meantime, kick back and don’t get too worked up over it, the two bodies are still battling it out because of the same cultural barriers that have always stood in the way of a true marriage of FASB/IASB positions.
As Number Insights pointed out in 2007 (see how long we’ve been trying to do this? And what do we have to show for it?), a single set of principles might not be the bad part of this entire plan. GAAP is notoriously constrictive but principles-based accounting requires qualified accountants and I’m not sure our accountants are quite ready either, ignoring the costs associated. And a world without FASB? I can’t imagine it.
It doesn’t look like I’ll have to any time soon.
SEC Reminds Us of Past Mistakes; Arrests Madoff Associate
One day after it was reported that fraud detecting superman Harry Markopolos called the Commissioners “idiots” and Mary Schapiro “coldly polite” (that’s a compliment, isn’t it?) the SEC is charging another Madoff associate.
Today the Commission brought charges of “conspiracy, securities fraud, falsifying books and records of a broker-dealer, false filings with the U.S. Securities and Exchange Commission and filing false federal tax returns,” against Daniel Bonventre, according to several reports.
Bonventre was the master of making the internal accounting look legit, as opposed to lying to peoples’ faces directly. He was responsible for accounting entries that “[hid] the scope of the investment advisory operations and understating Madoff liabilities by billions of dollars.”
The Commission also brought civil charges against Bonventre, “alleging he helped disguise Madoff’s fraud and financial losses at Madoff’s firm by misusing and improperly recording investor money to create the false appearance of legitimate income.”
While the rest of the media focuses on the who, the what and the how long will that person be spending in FPMITA prison, “Dirty Diapers” Markopolos probably just wanted remind everyone that A) the SEC missed this by ignoring him several times and B) he still doesn’t think too highly of them. Oh, and he has a book coming out.
DOJ, SEC Announce Charges Against Madoff Exec Bonventre [Dow Jones via WSJ]
Madoff Aide Bonventre Becomes Sixth Charged in Fraud [Bloomberg BusinessWeek]
Madoff Whistleblower Slams Obama’s SEC: ‘They’re A Bunch Of Idiots There’ [HuffPo]
Accounting News Roundup: SEC Delay on IFRS Irks Some; Client Opinions of Big 4 Audits Not So Hot in UK; IRS Asks for $21M to Answer More Phones | 02.25.10
• U.S. delay on global accounting leaves world waiting [Reuters]
The head of financial reporting at the ICAEW is not impressed with the SEC’s plan to string everyone along on IFRS. Although we’re sure Dr. Nigel Sleigh-Johnson is bright guy, we’re not sure what the good doctor was expecting from, you know, the SEC.
Dr. Johnson complains that ‘the world [has] been awaiting clear signals from the Securities and Exchange Commission as to how and when it is going to start the process of completing the convergence to International Financial Reporting Standards,’ which is probably true. Think about it. If 110 countries have jumped on the IFRS ship, they sure as hell would want the US of A on that ship too because that way, if this turns out to be the worst idea in the history of double-entry accounting, then at least the U.S. went along with it too.
• Big Four audits are off the pace [Accountancy Age]
As a group, the Big 4 didn’t fare to well in the inaugural “Accountancy Age Finance 360 survey of client opinions” which asked participants to give their “views on the service they received from their last audit provider”.
Out of twelve firms, PricewaterhouseCoopers ranked the highest at #5, KPMG #9, Deloitte #10, and Ernst & Young brought up the rear at #12. The Age reports that “[E&Y] Staff were described as ‘pretty dire’, short on technical knowledge, confidence and even decent written English. Negative comments outnumbered the positive two to one.” Comments on KPMG and Deloitte were a little better:
While KPMG won plaudits for technical skills, it was let down by perception of its added value, with one FD claiming “very little feedback on potential improvements” their money.
Deloitte also struggled to prove it added value, while clients felt the firm’s audits were “mechanical” and an exercise in “box-ticking”.
One FD felt Deloitte was “more concerned with gathering enough evidence to stand up in court with a defence if there were ever a negligence case”.
All the firms not happy with their ranking essentially said that they were “committed to the highest standards of work” or something like that. You know the drill.
The tops firms in the survey were all included two Global 6 candidates: Mazars at #1 and Grant Thornton at #3 with Horwath Clark Whitehill taking the silver.
• IRS Commissioner Requests Additional $21m So IRS Will Not Answer Taxpayer Phone Calls 25% of the Time [TaxProf Blog]
Doug Shulman asked the House Appropriations Subcommittee on Financial Services and General Government for $21 million to improve the customer service. Apparently this would result in a 4% jump in calls answered. That sounds like magical government math if we have ever heard it.
SEC Meeting on Roadmap Will Likely Lead to More Meetings on Roadmap
We hope! Remember how James Kroeker said how the Commission was “turning our focus back to the proposed roadmap”? No? Well, he did. And apparently he was serious because the SEC is having a meeting tomorrow about said roadmap. The whole time we’ve been reading about this map to godknowswhere, we just figured it was a figment of our imagination.
But a meeting! A meeting to decide whether or not the SEC will publish a statement! That’s somewhat encouraging, isn’t it? Here’s exactly what’s on the docket for the Sunshine Act Meeting:
“The Commission will consider whether to publish a statement regarding its continued support for a single-set of high-quality globally accepted accounting standards and its ongoing consideration of incorporating International Financial Reporting Standards into the financial reporting system for U.S. issuers.”
Okay, so if we’re reading this right, this particular sit-down will be to decide whether or not the Commission will put out an official statement regarding global accounting standards and if IFRS is good enough for us here in the US of A. Since everyone seems to be doubting the SEC’s ability to play nice with the rest of the world on the whole issue, they figured a hippie-ish sounding meeting should help calm everybody down.
We can only foresee two outcomes from this meeting: 1) the SEC decides that they will publish a statement (after more meetings) and give an approximate date that the statement will be released and it will be delayed for an indeterminable amount of time, or 2) the Commission decides it will not publish a statement that the IASB can take its self-righteous double-entry accounting attitude back to London-town and we’ll just do whatever the hell we want. THE END.
SEC to Meet Wednesday on IFRS Roadmap [Web CPA]
SEC considers reaffirming commitment to global standards [Accountancy Age]
SEC Deadline Watch: One Week to Go For Large Accelerated Filers; Is It Really the End?
Not that we need to tell any of you working on a LAF but marking the occasion seems appropriate. For those of you would like to know just what the hell it is we’re talking about, March 1st is the 10-K deadline for large accelerated filers (market cap of $700 million or more and few other conditions).
The sleepovers and MSG overdoses are almost over! Plus, now you can dump your busy season bitch. Rejoice!
Actually, not so fast. Whether or not next Monday’s deadline brings an end to your busy season is another story. Some of you may be lucky enough to coast for the next month or so but since staffing was an issue for more teams than usual this year, we’re guessing most of you will get to hop on another team to help them cross the finish line.
For those of you not on an LAF, you’re probably relieved if you happen to be getting an extra set of hands in the coming weeks. And then there are those of you that don’t work on public clients at all that probably need the help but won’t be getting it for another two weeks when the next deadline passes. Even then you might not get the extra help you need.
Well, shit. Maybe we shouldn’t have brought it up.
Winners and Losers in the Overstock Restatement
With Overstock.com announcing last week that they would be restating their financial statements for the the last three quarters and their 2008 consolidated financial statements, it marked another open-mouth-insert-foot moment for Patrick Byrne and his Company.
This will be the third restatement in the last three years. We understand that financial reporting can be tricky but this doesn’t make for a very good pattern.
Winners:
• Steve Cohen, Michael Milliken, Sam Antar, Joe Nocera, Gary Weiss, Roddy Boyd, Barry Ritholtz, Felix Salmon, Henry Blodget, John Carney, Joe Wisenthal, et al. – Anyone and everyone vilified by Patrick Byrne because they questioned either him, his Company, or both. Patrick Byrne has always maintained that these people were part of large conspiracy of short sellers and financial bloggers and journalists. The restatement simply proves that whatever suspicions they had about Overstock, they were right. Plus all their friends and family on Facebook were violated by creepazoid and Deep Capture hatchet-man, Judd Bagley. That’s just not cool.
• Grant Thornton – Not sure if GT realized it at the time, but getting fired by Overstock is looking pretty good right now. So they changed their minds on the accounting; BFD, right? It happens and clients typically get over it. Pat Byrne decided that it was unacceptable and that LOUDLY crucifying GT in SEC filings, the press, and on conference calls would convince everyone that the auditors were idiots and Overstock and he would triumph over this injustice. Grant Thornton did not hesitate in chanting “liar, liar pants on fire” to Patsy’s face (nothing to lose, they were already fired) and now they’re clear of this three ring circus.
Losers:
PricewaterhouseCoopers – PwC was the auditor for Overstoc prior to Grant Thornton and had always signed off on the company’s financial statements (excellent service in PB’s mind). Now that the restatement has occurred, PwC gets dragged back into the fray to explain what they did, why they did it, and how they got it wrong. A) That just sucks and B) who the hell is going to remember what the hell they did four years ago?
Overstock shareholders – Any Company that restates their financial statements with any regularity whatsoever should be avoided like a group of lepers. If you’re still currently long in Overstock, you have the chance to make the right the decision: sell while the shares are worth something. Your humble servant Patrick Byrne has failed you.
Jury is out:
KPMG: For some reason, Klyneveld Salt Lake City decided that despite Overstock’s dubious past, they were willing to roll the dice. The firm now has the pleasure of guiding the firm through this restatement and somehow pulling the audit for fiscal year 2009 together. The whole exercise reeks of futility. Anyone that happened to be assigned to this engagement and a shred of sanity would have given their notice on the spot. For the time being, the firm seems to be sticking it out but time will tell if the firm changes their mind about their risky new client.
SEC: Everyone knows that the Commission doesn’t have the best track record of late. They have managed to be the laughingstock of the entire bureaucracy and despite a lot of huffing and puffing about new divisions and putting together a dream team of enforcement and financial experts, we haven’t seen much for results. Overstock may be a chance to show everyone that they’re done taking shit and that they are going to start smacking companies around.
Grant Thornton Loses Its Fire in Letter to the SEC
Despite getting all bent out of shape in their earlier statement:
“The fraud was apparently conducted by a longtime, trusted senior financial executive who was hired and supervised by senior management,” a Grant Thornton spokeswoman said Tuesday. “The company (Koss) did not engage Grant Thornton LLP to conduct an audit or evaluation of internal controls over financial reporting. Establishing and maintaining effective internal control is management’s and the board’s responsibility.”
Grant Thornton is less enthused in their letter to the SEC:
We have read Item 4.01 of Form 8-K of Koss Corporation dated January 4, 2010, and agree with the statements concerning our Firm contained therein. We have no basis to agree or disagree with the statements and conclusions in Item 4.02(a), some of which were not disclosed to Grant Thornton LLP prior to receipt of this filing.
The only thing we read here that might be a dig at Koss is “some of which were not disclosed to Grant Thornton LLP prior to receipt of this filing.” If this is intended to be the firm’s version of the finger — straight up, at you Koss — the passive-aggressiveness is at a level that even impresses us.
At least in the Overstock letter the firm flat out called Pat Byrne and his company liars. This latest opportunity to lay the smackdown on a client in a regulatory filing seems to have been squandered.
The New Inspections Director at the SEC Will Enjoy Low Expectations
A little afterthought on Carlo di Florio’s new gig as the director of the Office of Compliance and Inspections and Examinations (“OCIE”). And no, we’re not caving to the request of some to go ape over the revolving door that is every financial regulatory agency.
Our thought is this man has absolutely no pressure heading into his new job. None. Look at the track record of his predecessor:
Lori Richards, who had headed OCIE since its creation in 1995, left the SEC last August. She was one of several high-level officials, including the enforcement director, who departed the agency after Schapiro took the helm in January 2009.
…
Kotz has detailed how the SEC bungled five investigations of Madoff’s brokerage business between June 1992 and December 2008, when the financier confessed to his sons that he was operating a fraudulent scheme. Top SEC officials have pledged to fix the problems and said they have made major changes.
So essentially he’s following 13 years of utter incompetence.
Plus, according to the Commission, Carlo was a dynamo at P. Dubs helping them build their “corporate governance, risk management and regulatory compliance practice[s]” and was a top dog for “[investigating] corporate fraud, corruption, conflicts of interest and money laundering.” So if he’s the jim-dandy they say he is, he’ll be finding fraud in his sleep. The SEC is in total rebuilding mode and he’s following over a decade of failure so is there anything he could possibly do to screw this up? A few decent busts a year and this guy will go down in history like Eliot Ness.
Well played, Carlo. Well played indeed.
Head of SEC Inspections Office Named [AP via NYT]
Ernst & Young Pays $8.5 Million to Settle Charges with SEC Over Bally Fraud
Six current and former partners at Ernst & Young were charged, along with the firm, by the SEC late yesterday in relation to the audits the firm performed of Bally Total Fitness’ financial statements from 2001 to 2003.
Bally settled accounting fraud charges with the SEC in 2008 that were related to its financial statements from 1997 to 2003.
Because everyone and their dog was freaking out over Enron in screws to their clients to follow GAAP, E&Y had identified Bally as “one of E&Y’s riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.”
Floyd Norris:
The firm forced Bally to stop recording revenue in an improper manner that allowed it to claim earnings earlier than was allowed by accounting rules.
But in doing that, the firm allowed Bally to not admit to having violated the rules in the past, an action that would have forced it to restate its accounts and admit that losses in previous years had been much larger.
Mr. Norris also reported that a source of his at the SEC has stated that “he knew of no previous enforcement cases in which a partner of a major firm was cited for his actions as head of a national office.”
The partner in this case is Randy G. Fletchall, the partner in charge of E&Y’s National Office. He along with Mark V. Sever, E&Y’s National Director of Area Professional Practice, and Kenneth W. Peterson, the Professional Practice Director for the Lake Michigan Area office are the current E&Y partners who settled the charges with the SEC.
The former partners include: Thomas D. Vogelsinger, the Area Managing Partner for E&Y’s Lake Michigan Area through October 2003, William J. Carpenter, the E&Y engagement partner for the 2003 audit, and John M. Kiss, the E&Y engagement partner for the 2001 and 2002 audits.
While the news of a current partner of such lofty heights is notable, an extra twist that isn’t being reported in the MSM comes from GC contributor, Francine McKenna, who tells us that Mr. Fletchall served as the former AICPA Chairman from 2007-2008 and Mr. Sever, a former chairman of the Accounting Standards Executive Committee:
What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.
…
Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.
These are interesting questions that the SEC probably doesn’t want to address. The connection, in appearance, is shady and we can only speculate as to what happened during the negotiations of the settlement.
The Commission, remaining stoic, gave a standard issue boilerplate statement, saying:
“It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
So it appears E&Y is getting sent to their room here, despite the $8.5 million fine being “one of the highest ever paid by an accounting firm.”
The firm also agreed “to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.”
Were the AICPA connections enough to keep them out of really hot water? At the very least, it didn’t hurt anything. If you have any information regarding this story, get in touch with us, and we will update you with any developments.
SEC Charges Ernst & Young and Six Partners for Roles in Accounting Violations at Bally Total Fitness [SEC Press Release]
EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day [Re: The Auditors]
Ernst to Pay the S.E.C. $8.5 Million [Floyd Norris/NYT]
Preliminary Analytics | 12.10.09
• SEC’s Khuzami ‘Skeptical’ of Auditors’ Claims on Privilege – Privlege shmivlege. [FEI Financial Reporting Blog]
• Obama Proposes $12,000 “Cash for Caulkers” Program – Including the most immature montage ever. [TaxProf Blog]
• Overstock.com and Patrick Byrne Have an Enemies List That Includes Friends and Family Members of Critics – Using Facebook no less. Anyone surprised? [Sam Antar/White Collar Fraud]
• Madoff Auditor Plea May Signal Other Probe – Tax charges thrown in with David Friehling’s guilty plea may indicate that prosecutors may be building a case against other Friehling clients including the Madoff sons. [WSJ]
• Broadcom Co-Founder Cleared in Backdating Probe – “U.S. District Judge Cormac J. Carney made the announcement after Samueli, owner of the NHL’s Anaheim Ducks, spent two days testifying for the defense in the fraud trial of a former executive for the telecommunications chip maker. ”You have restored my faith in the criminal justice system,” an exhilarated Samueli told the judge in federal court in Santa Ana.” Avoiding prison will do that. [AP via NYT]
Grant Thornton: Patrick Byrne’s Pants Are on Fire
Want more twists out of the asylum known as Overstock.com? You got it.
Overstock.com filed an amended 8-K yesterday — after the markets closed — that included a letter from GT to the SEC. The letter, in so many words, says that OSTK lied about GT’s knowledge about the hocus-pocus accounting i rdinary, every day case of client and auditor going their separate ways, the auditors letter would basically say, “Yeah, we’re cool and we’re moving on.”
But in this case, since we’re dealing with Patrick “I’ll open this letter with Nietzsche” Byrne, we’ve got an auditor saying, “Um, yes, this is what happened. In CRAZY TOWN.”
To wit (our emphasis):
We disagree with the Company’s statement in paragraph 7 “that upon further consultation and review within the firm, Grant Thornton revised its earlier position” regarding the previously filed 2009 interim financial statements. This statement is not accurate. The Company brought the overpayment to a fulfillment partner to Grant Thornton’s attention in October. After additional discussions with the Company, the predecessor auditor and receipt of additional documentation from the Company we determined that the Company’s position as to the accounting treatment for the overpayment to a fulfillment partner was in error. Further the Company’s statement does not address the fact that the consultation noted in paragraph 5 was in relation to the ongoing incomplete review of the September 30, 2009 interim financial statements.
Hang in there, GT isn’t done:
We have also read Item 4.02 of Form 8-K of Overstock.com, Inc. (“the Company”) dated November 16, 2009 and disagree with the statements concerning our Firm contained therein. During the course of our incomplete review of the Company’s September 30, 2009 financial statements, we advised the Company that disclosure should be made to prevent future reliance on its March 31, 2009 and June 30, 2009 financial statements. We advised the company to make the disclosure because we became aware that material modifications should be made to the previously filed 2009 interim financial statements to conform with US GAAP. Such modifications are necessary due to the Company having reduced its cost of goods sold in the first quarter of 2009 by receipt of a refund of an overpayment to a fulfillment partner.
There you have it. Grant Thornton, in extremely diplomatic manner, is calling Patrick Byrne and Overstock.com liars.
Now after considering both the humble servant’s story and GT’s letter, our instinct tells us to go with GT. Obviously we’re partial to the servants of the capital markets but the other mitigating factor is, let’s see, Patrick Byrne is off his rocker.
Undiagnosed mental conditions aside, we wish we could give GT more credit for calling BS on a slimy client. Fact of the matter is, they were warned by Sam Antar back in March — when they took OSTK on as a client — that they were in for trouble:
I wish that I can wish you luck with your new client. However, I cannot wish you luck because you apparently ignored the basic “smell test” in evaluating Overstock.com as a potential client.
…
Apparently Grant Thornton, like your predecessor, PricewaterhouseCoopers, did not carefully examine false claims about Overstock.com’s financial performance, dating back almost ten years by CEO Patrick Byrne. You would have discovered that Byrne has no problem habitually lying to the investors, the news media and the public.
So as you can see, this is all very awk. In GT’s case, they were explicitly warned to stay the hell away from OSTK. And any auditor worth their salt would take one look at this company and get a feeling like their body was covered in centipedes.
As for Patsy and OSTK, well, as Gary Weiss notes, “Overstock will be tossed onto the pink sheet ant hill where it really, seriously folks, really belongs.” Indeed.
We asked for a show of hands yesterday on who you thought would roll the dice with Pat and Co. and so far KPMG has the lead which seems a tad ludicrous. But hey! We’re not one to argue with the voice of the people.
Voting remains open until the end of today, so check out the latest tally and throw support behind the next firm to get tangled in the Patrick Byrne web. We’ll continue to update you on this horror show as it develops.
Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error [White Collar Fraud/Sam Antar]
Grant Thornton to SEC: Overstock.com Lied [Gary Weiss]
Also see: The Auditor Disagrees With Overstock.com [Floyd Norris/NYT]
Overstock’s Fired Accounting Firm Says Overstock Is Lying [Silicon Alley Insider]
Bob Herz and Jim Kroeker Are Avoiding the Convergence Dance
For the love of everything that is good and holy, would someone like to be the FASB Chairman? Or the Chief Accountant of the SEC?
We realize that they’re both thankless jobs but we need people in there that are going to make some things happen.
After Jim Kroeker said this:
“[T]he boards have agreed that the projects that they’re working on are areas that need improvement, not just under U.S. GAAP but under IFRS, then I think convergence efforts should continue or would continue without an SEC finalization of the roadmap,”
Bob Herz is now saying this:
“[T]he ball is mostly with the [SEC] at this point” … Herz noted the SEC has yet to rule on the “roadmap” for U.S. compliance with IFRS it proposed a year ago.
So, let’s get this straight: JK is said, “You go first.” Now Bob Herz is saying, “No, you go first.” Does anyone want to introduce these two clowns? Are they waiting for knighthood before they move on this?
We suggest that somebody toss Mary Schapiro in there to A) complete the trilogy of stooges and B) so she can bonk their heads together. That might get them motivated.
Herz: U.S. Convergence Ball Is in SEC’s Court [CFO]
Overstock.com Fires Grant Thornton, Files Unreviewed 10-Q, CEO Remains Humble
There’s really nothing better than an eccentric CEO throwing caution to the wind, consequences be damned.
Insert Patrick Byrne, CEO of Overstock.com (“OSTK”). He issued a letter via press release yesterday that has many people’s attention.
Byrne opens the letter by quoting Nietzsche:
“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.”
Tragic enough but then Byrne really amps it up, droning on for eleven points about his company’s dire situation. Here’s the gist*:
• The difficult accounting treatment of an overpayment received by OSTK from a “partner”.
• Putting the audit out to bid after “eight years of fine service” from P. Dubs, and hiring GT because “my belief that changing auditors every decade or so might be healthy.”
• SEC inquiries into the accounting treatment of the overpayment.
• GT changing their minds on the accounting treament after said inquiries.
• We’re filing an unreviewed 10-Q, P. Dubs is on board for our treatment, GT is fired, anyone (and I mean anyone) want to audit us?
Byrne spends no less than six paragraphs/points explaining GT’s wishy-washy, bending-over-for-the-SEC ways. The man is nothing if not thorough.
Spineless auditors notwithstanding, Byrne will press on, the company will overcome, and he will remain committed to you, Overstock.com shareholder:
I will hold a conference call to further explain and answer questions regarding this matter on Wednesday afternoon at 5:00 p.m. EST (details below). Until then, I remain,
Your humble servant,
Patrick M. Byrne
10-Q [SEC.gov]
8-K: Dismissal of Grant Thornton [SEC.gov]
Press Release [SEC.gov]
*If you want to debate the particulars, be my guest but this isn’t the Journal of Accountancy, feel me?
Deadline Watch: 3rd Quarter 10-Qs
Now that you’ve enjoyed the extra hour of tomfoolery thanks to the time machine known as daylight savings time, it’s back to reality.
For auditors working on SEC filers, this means seeing less daylight from now until…well, yeah. The good news is that there’s only one week until the filing deadline for accelerated filers’ 3rd Quarter 10-Qs. For those of you on the non-accelerated types, you’ve got an extra week which could be a lifesaver or just a way to prolong…the…agony.
The bitch of the thing is that for those of you that are/will be going down to the wire, the deadlines fall on Mondays which means your weekend will likely consist of a slumber party at the client’s digs.
So for those of you that live and die by the calendar year SEC deadlines, discuss your Q3 and if it’s business as usual or if your engaging in the standard quarterly rhetoric about how you’re finding a new job right after the Q is filed.
Gun to Head, Dell Implements an ‘Accounting Code of Conduct’
Whatever the hell that is. What we’re sure of is that Dell would have never implemented such a code had they not been investigated by the SEC, starting in 2006.
Along with the code to help force the accounting policies grab-ass hands to themselves, Dell also now has a “global team of accountants to focus on revenue recognition issues”.
Again, not too familiar with this, but at most companies, this is typically known as the “accounting department.”
PCAOB Appears to Be Taking After Big Brother
The SEC has been setting a bad example for everyone. Now the Commission’s sloth-like urgency to appoint a chief accountant seems to have led the PCAOB to think that finding new board members really isn’t a big deal.
Chuck Niemeier announced that he will be leaving his position as a board member of the P very soon, even though his term ended almost a year ago. The PCAOB’s board members are allowed to stay on the board after their terms have ended until a replacement is found.
We suppose that you could give the P credit for having the foresight to write this rule in, as it’s pretty obv that no one really wants this job. Doesn’t make much difference anyway, as it’s not really clear just what the hell they’re doing over there, except making auditors’ lives more difficult and possibly ignoring independence violations.
IFRS Critic to Leave Accounting Firm Regulator [CFO]
SEC Would Like the Stanford Receiver to Relax a Little
Ralph Janvey, the court appointed receiver in the Allen Stanford “where’s the f’n money Lebowski” case is what some people might call, shrewd.
Janvey is fighting to have certain brokerage accounts held by investors frozen because the holders of said accounts made principal withdrawals prior to the uncovering of the fraud.
The SEC kinda, maybe thinks that this is a little overboard and filed papers opposing Janvey’s suing of what the Commission calls “innocent fraud victims”.
We’re thinking that since Janvey is on the wildest of wild goose chases, he has had to resort to suing regular people that had the fortunate dumb luck to pull their money out of a Stanford Bank Institution garbage bag prior to the poop + fan.
SEC Opposes Motions in Stanford Case [WSJ]
IASB Chairman Would Like the SEC to Get With It
Sir David Tweedie, IASB Chairman, would sure appreciate it if the SEC would make up its damn mind about whether or not to commit to converging U.S. GAAP with IFRS. He spoke at the American Association of Accountants (AAA) annual meeting in New York yesterday and figured he might as well call out the SEC, who seems to be stonewalling him. He’s giving them until 2011 to figure it out.
Tweedie has been making like some kind of financial reporting missionary, going all around the world preaching the good word of IFRS. He’s said he’ll have 150 believers by 2011. But everywhere he goes, all anyone can talk about is whether the U.S. is converted yet.
More, after the jump
“That is a question I am asked all around the world. The convergence program is designed to reduce the cost of transition. FASB is riding two horses: US GAAP and trying to converge at the same time, but so are we.”…If you’re going to have global standards, we need the US, but it can’t go on indefinitely,” he said
We’re impressed that the knighted bean counter is putting his foot down here. We figured the SEC and the FASB could just continue doing whatever it is they do and Tweedie would just keeping asking them about it every month or so like they owed him fifty bucks.
Tweedie Warns of 2011 Deadline for IFRS Choice [Web CPA via Accountancy Age]
The SEC Takes a Trip to India
The SEC sent a team to India in order to make sure that everything was hunky-dory re: Satyam. The three-member team met with Ashwani Kumar, the Central Bureau of Investigation (CBI) Director, and the Securities and Exchange Board of India (SEBI). The SEC also met with the KPMG team that is responsible for restating Satyam’s balance sheet.
No details were given on any of the meetings but we imagine that the SEC/KPMG meeting went something like this:
SEC Bureaucrat: Hello KPMG India.
KPMG Paper Pusher: Hello SEC America.
SEC: How are things progressing?
KPMG: Oh this is a blast. Restating balance sheets is a dream job. We were just talking about how we wish we could work in the States so we could do stuff like this all the time.
SEC: What do you mean?
KPMG: Well, there seems to be much more fraud and other problems in the United States than here in India so the need for forensic accountants would be extremely high.
SEC: Are you insinuating that the Commission is unable to detect fraud?
KPMG: Well there have been some signficant fraud over there lately that you guys pretty much ignored or missed. Either way, it makes for a high demand for forensic accountants. Plus, we hear that the guy who tried warning you about the Madoff fraud has issues but still won an award.
SEC: This meeting is over. Keep us informed.
Satyam scam: SEC team meets CBI, SEBI, KPMG officials [The Hindu Business Line]
Figuring it was About Time, the SEC Closes Tyco Case
Invoking their continuing motto of “Better Late Than Never”, the SEC closed the Tyco case today as Dennis Kozlowski and Mark Swartz agreed to be banned from serving as directors or officers of a public company. The timing of this ban comes as a bit of surprise since these guys have been in jail since 2005 but we are talking about the SEC.
Since Bernie Madoff has a much longer sentence than the Tyco twins, the Commission will figure there’s no rush and he’ll retain his rights to serve as a director/officer until around 2020.
Settlement Ends S.E.C. Case Two From Tyco [DealBook/NYT]
SEC Promises to Suck Less Post-Madoff
It what amounts to a serious case of too little, too late, the SEC says that it will do more to protect investors in the wake of the Madoff scandal.
M. Schape and Co. would like you all (House Financial Services Committee) to know that they have been busy though. Working late. Working weekends. Working hard:
regulatory proposals include restricting short-selling in down markets, strengthening oversight of mutual funds, tightening scrutiny of investment advisers and making it easier for shareholders to seat directors on company boards. The S.E.C. is also working to identify emerging risks to investors, including so-called dark pools, or automated trading systems that do not publicly provide price quotes, Ms. Schapiro said.
See? Doesn’t that make you feel better? We’re the SEC, getting better at being less clueless since 2009.
S.E.C. Plans to Protect Investors More Post-Madoff [DealBook/NYT]
The SEC Has Now Mastered the Art of Stating the Obvious
Another press release from the SEC today stating how they’ve thwarted yet another Ponzi scheme.
Ponzis being the norm lately we’re not terribly impressed by this but what we did find surprising was the title of the Commission’s press release: “SEC Freezes Assets of Florida Resident Stealing Investor Funds for Luxury Purchases” (that’s our emphasis).
Is the Commission making the assumption that those individuals that are actually reading the press releases need informed about what the money stolen is actually used for? Seriously, Bernie and Big Al don’t strike us Robin Hood types, even before indictments were handed out. No where in Bern’s statement at sentencing did he state:
Your honor, I’ve become increasingly despondent about the wealth gap in this country. I stole from the wealthiest individuals, investment companies, and charities possible in order to help the people that couldn’t help themselves. It was not my intention to take all my clients’ money. I merely wanted to level the playing field. I thought this method would be most effective as opposed to raising tax rates on the rich, which I’m personally opposed to.
Didn’t hear that did you? Let’s break this down: Bernie liked handjobs(and God knows what else, shudder) and Aston Martins. Stan liked doing bumps off hookers’ asses (we’re guessing here) and buying cricket teams (this is documented).
We will give the credit to the Commission for busting another scofflaw but we would now advise that knowing your reading audience is equally important.
SEC Freezes Assets of Florida Resident Stealing Investor Funds for Luxury Purchases [SEC.gov]
SEC to Try and Get Less Bureaucratic, Miss Less Fraud
Deciding that it was about time they got their shit together, the SEC announced today that it is reorganizing its enforcement division. The reorganization will eliminate supervisory positions in order to reduce bureaucracy and help speed up response to potential fraud.
Before the proposed changes, the Commission had been utilizing the opposite approach.
A few details because we know you’re craving them:
The overhaul unveiled this week dissolves the division’s lowest and largest tier of supervisors, the branch managers who oversee small teams of attorneys, the people said. Some may become front-line investigators; others may be elevated to assistant directors. Assistants, who currently supervise about 18 people each, would instead oversee only six. A plan to create specialist teams, using a similar management structure, is still being refined, [sources] said.
We’ll also note that the new Enforcement Director, Robert Khuzami, said the new “specialist teams” will help detect “patterns” more easily. Khuzami also noted that this brilliant plan was being kicked around before the whole Madoff thing, thankyouverymuch.
SEC Said to Reorganize Enforcement Unit, Trim Management Ranks [Bloomberg]
SEC Still Stonewalling, Considering Slowing Down the PCAOB Even More
The SEC gave Congress a little tease about what happened at the Commission re: totally missing the boat on this Madoff thing. But then again, not really.
Inspector General David Kotz made recommendations about ways that the Commission could improve its oversight over the financial industry because, obv, it had nothing to do with the fact that no one there had the background to detect classic Ponzi schemes.
Some recommendations that Kotz made included giving the PCAOB more oversight including jurisdiction over accounting firms that audit investment advisors and broker-dealers. That’s just what the PCAOB needs, more on its docket because it gets things done so quickly.
Kotz would also like to see an amendment to the Securities Act of 1940 that would require investment managers, including hedge funds, to place their securities with custodians that are registered with a national exchange. Kotz claims that this would prevent investment advisers from fraudulently using the proceeds received from new investors to pay old investors (a la Ponzi).
That’s all fine and dandy but Rep. Paul Kanjorski, of Pennsylvania has been asking for details on the Madoff ball dropping for the last two weeks and the Commission has been stalling. Kotz could only state that the Commission is “proceeding ‘in an expeditious manner.'”
Translation: We don’t have any idea how we missed the biggest Ponzi scheme in history.
Best we can expect, Kotz says, is that the report to be issued by the end of August. Which might be enough time to get Kanjorski involved in a sex scandal and maybe this will all just go away for the Commission.
S.E.C. Previews Its Madoff Report [DealBook/NYT]
SEC Rule Would Crack Down on Celebrity Board Members
Now that the SEC has got this Ponzi thing under control, it can focus on more important matters like getting famous people off companies’ board of directors because, you know, they don’t really know shit about the companies they serve.
Perfect example: Tommy Franks, former commander of forces in Iraq, who resigned his seat on Bank of America’s board last week, was on the audit committee. The AUDIT COMMITTEE.
That’s actually not even the best example. According to Bloomberg, everyone’s favorite acquitted killer, O.J. Simpson was on the audit committee of Infinity Broadcasting Corporation before he was charged with murder in 1994. O.J. Simpson. Audit committee. Yes.
We could go on to tell you about Lance Armstrong missing 11 board meetings but still getting paid over $70,000 by Morgans Hotel Group or Gerald Ford sitting on the Board of Traveler’s Insurance (owned by Citi) until he was 85 years old but you get the picture.
This is your SEC, citizens of America, getting their shit together since 1934.
Armstrong, ‘Celebrity’ Directors Targeted in SEC Rule [Bloomberg]
Madoff Feeders Getting Some Unwanted Attention
The SEC, feeling confident these days, has filed a complaint against Cohmad Securities Corporation and its Chairman, Chief Operating Officer, and one of the brokers, saying they “actively marketed Madoff investments while ‘knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud.'”
Call us Captain Obv but that sounds like they were either dumb or in on the scam. Either way, they can’t be too psyched about it.
An additional complaint has been filed by the SEC against Stanley Chais, an investment adviser who put all of the assets he oversaw into casa de Madoff.
Irving Picard, who might have the most thankless job in America, also sued both Cohmad and Chais, because, you know, a few people want their money back. The trustee’s complaint against Cohmad spells it out:
The trustee’s lawsuit asserted that fees paid to Cohmad by Mr. Madoff were based on records showing the actual cash status of customer accounts — the amounts invested and withdrawn — without including the fictional profits shown in the statements provided to customers. When a customer’s withdrawals exceeded the cash invested, Cohmad’s employees no longer earned fees from that account — even though the customer’s statements still showed a substantial balance, according to the lawsuit.
This arrangement indicated that Cohmad and its representatives knew about the Ponzi scheme and knew that the profits investors were allegedly earning were bogus, according to the trustee’s complaint.
Good luck explaining that.
Brokerage Firm and 4 Others Sued in Madoff Case [New York Times]
Review Comments | 12.07.09
• Ohio school will return Petters’ scholarship donations – Miami of Ohio is giving back $5 million that was gifted to establish the John T. Petters Center for Leadership, Ethics and Skills Development. [Pioneer Press]
• Doesn’t Sound V-Shaped to Me – The recovery that is. [Financial Armageddon]
• Fixed assets and year-end planning – Joe Kristan is getting you ready for the upcoming tax prep season. [Tax Update Blog]
• Nonprofit Executive Compensation Changes in 2009 – Charity doesn’t pay like it used to. [Mission Accountable]