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Archive for January, 2011

Over on the the AECM listserv, several of us are fans of Ed Ketz (Penn State prof) and his Accounting Cycle column at SmartPros.  For example, when Bob Jensen passes along the link to Ketz’s latest editorial, he always labels it “Ketz Me If You Can.”  Tom Selling (Accounting Onion), sometimes calls his editorials, “The Betz From Ketz.”  For my part, I occasionally feature Ketz on these pages, saying to myself, “Letz Getz Ketz on this.”

Today, Ed Ketz published an absolute must read editorial on his Accounting Cycle, “NY v. Ernst & Young: Who Cares Whether Lehman Brothers Followed GAAP?

Ketz starts off by saying that Ernst & Young intends to fight the civil lawsuit alleging fraud in the Lehman Brothers case.  I’ve noticed the same thing.  In anticipation of a trial, E&Y has petitioned to have the case heard in federal district court instead of a New York state court.  Based on pretrial statements, E&Y has repeatedly mentioned that Lehman Brothers was following GAAP, so technically no rules were broken.

Ketz notes that the current case is very similar to the 1960s Continental Vending case (US v Simon 425 F.2d 796).  In this case three auditors from Lybrand, Ross Brothers, and Montgomery were charged with criminal fraud.  Ketz writes:

While agreeing with the facts presented by the federal prosecutors, the defendants relied on a number of expert witnesses, all of whom stated that the deficiencies mentioned above were not part of generally accepted accounting principles.  The trial judge issued directions to the jury that negated this perspective by maintaining that “the ‘critical test’ was whether the financial statements as a whole ‘fairly presented the financial position of Continental as of September 30, 1962, and whether it accurately reported the operations for fiscal 1962.”  The jury found the defendants (auditors)  guilty.  The auditors appealed, but the circuit court affirmed the decision.  The auditors then appealed to the Supreme Court, but it denied certiorari. [emphasis mine]

I think Ed Ketz’s analysis is sound.  Although we can’t foresee the judge’s rulings in this case, E&Y is at risk here.   Based on what I have read in the the Valukas report and the NY court complaint, it is my opinion that Lehman Brothers adopted its accounting practices with the intention to deceive investors and regulators.  As such, their accounting shenanigans are absolutely repugnant to me.  What’s more, I believe that E&Y auditors were aware of this motive, and blessed the accounting anyway.  Technically correct or not, Lehman Brothers intended for its financial statements to not fairly present the results of operations.  And E&Y opined that they did fairly present.

Will the jury be allowed to base its decision on the fairly presented issue?  Tune in later.

Debit and credit – – David Albrecht

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Audit Credibility

Credibility is based on trust

Bob Jensen poses a question on AECM (listserv for accounting professors), “Credibility? Do credible CPA audit firms add benefits to clients that exceed the audit costs?”

It’s an interesting question, I suppose, to narcissists (Big 4 auditors, government regulators and accounting professors) who believe that the world revolves around the audit function.  It isn’t a question that floats my boat, for I’m concerned with a different question, “Credibility?  Do credible CPA audit firms add net benefits to investors?”

(more…)

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The David Albrecht Daily

Like so many on the cutting edge, I have been dabbling in social media.  IMO, it absolutely essential that all accounting and finance professionals (as well as professors, students, journalists and everyone else) hop on the wagon and start using social media to stay informed.

Trying to practice what I preach (always a good idea for professors), I use LinkedIn (won’t you be part of my business network), Twitter (won’t you please follow me?), texting, blogging (two of these), Youtube, and (gasp) Facebook.(don’t follow me here).  During the fall semester, 2010, Concordia College offered my class Social Media, Blogging and Business.

The David Albrecht Daily

Thanks to a tip from Steve Hornik, I now have added something super cool.  It is The David Albrecht Daily.  It shows all links suggested in tweets by the financial experts I follow on Twitter.

Twitter is used by many for three purposes:

  1. Stay informed.  Therefore I carefully select those whom I follow.
  2. To inform.  I post occasionally to alert The Summa readers about key news of the day, as well as new posts I’ve put up on The Summa and Pondering the Classroom.
  3. Social interaction.  To banter back and forth with my buds.

The David Albrecht Daily is perfectly consistent with the first reason listed above, staying informed.  Skimming the daily is much easier to do than skimming hundreds of incoming daily tweets.

Paper.li is a free application for Twitter and Facebook users. Its header says it all:

Hosting The David Albrecht Daily

Debit and credit – – David Albrecht

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Steve Beguhn, a Senior Associate in the Milwaukee office of PwC, had a successful audition and has earned a gig on American Idol.

No, it isn’t to count and certify the votes.

 

Steve Beguhn, PwC Auditor out of Milwaukee office

Beguhn does not sing professionally.  Nor does he perform as an amateur for small audiences.  When asked why he doesn’t perform, he says, “”I’m an auditor — so I really don’t have all that many friends.”  He does now.  Steve, you’re now the singing hope of the accounting world.

Click on the following link for the video story.

Good luck.

Thanks to Caleb Newquist at Going Concern for initially posting this story.

Debit and credit – – David Albrecht

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Senator Joe Lieberman has announced his plans not to seek re-election.  This means that January 3, 2013 will be his last day to serve as the 112th Congress is replaced by the 113th.  Gail Collins, Op-Ed columnist for the New York Times is thrilled, announcing tongue-in-cheek plans for a new book, “Everything Bad Is Joe Lieberman’s Fault.”

Floyd Norris

Piling on, respected New York Times business columnist Floyd Norris suggests that Collins include a chapter on Joe Lieberman’s opposition to an accounting rule on executive stock options.  Norris says that not having a rule to expense executive stock options caused the stock market bubble of the late 1990s.  Floyd, I love you, but you should check with me before you write your next piece on accounting.

Surely Lieberman was promoting his personal interests in fighting the rule, and had no altruistic purpose in mind such as improving the world of accounting.  However, he was correct on this one issue.

Adding the value of executive stock options as an expense on the income statement was a bad idea in the 1990s when Lieberman fought it, it was still a bad idea in 2005 when the FASB adopted it, and it will continue to be a bad idea for as long as the rule is on the books.

Here’s why Norris and the FASB are wrong about expensing stock options.  Traditionally, the income statement has been reserved for (1) the value received from selling products and services, and (2) the money spent (costs) to generate these revenues.  An executive stock option causes no money to be spent by the company.  It is merely a vehicle to increase (potentially) the wealth of the receiving executive by a grant of ownership from the company’s owners.  The current owners take a hit, but that hit has nothing to do with the profit from company operations.  No money is being spent by the company on the executives, and no money will ever be spent by the company on the executives.

The expensing rule is but one example of the the use of accounting rules to accomplish societal objectives.  When executives are granted stock options, the current group of stockholders have been robbed by the company’s board of directors, with the receiving executives as willing co-conspirators.  Crying foul, investors have looked for a way to curb this practice.  Their solution is to add a charge to current earnings, thereby making it more difficult for executives to qualify for their annual bonus.  Unfortunately, the only result accomplished is to diminish the importance of the income statement.

It would be so much more powerful to simply vote out the directors who voted in the executive stock option.  If a few boards were voted out because of granting these options, the practice would dry up in a hurry, I assure you.

Mr. Norris, thanks for writing about accounting.  This time, though, you got it wrong.

Debit and credit – – David Albrecht

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Al Rosen, noted Canadian forensic accountant and IFRS opponent, has written Swindlers: Cons & Cheats and How to Protect Your Investment From Them.

I have not read the book, but I have viewed a promotional video in which Rosen hits on some of the unanswerable criticism of IFRS.  He lost the battle in Canada, but he has sage advice for Americans.

Everything points to a train wreck with U.S. adoption of IFRS.  But who knows, the special interests pushing it might be doing us a favor.

Debit and credit – – David Albrecht

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