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Archive for April, 2011

The last two days have been busy, fielding calls from reporters.  One called asking my thoughts on convergence, the other asked about my thoughts on whether accounting can forestall the next financial crisis.

Long time readers know what I said.

Convergence of accounting standards is a bad idea.  The academic theory is that market participants benefit from detailed information tailored to that specific market.  Given that capital markets are local (but are linked around the world) it makes sense that local accounting standards (that force companies to disclose as much detail as possible) would provide the greatest value.

What is the impact of accounting rules and auditors on the next financial crisis?  Because auditors don’t do the job that investors wish they would do, the accounting rules hardly matter.  The academic theory is that if companies are not required to secure an audit opinion, then the act of hiring an auditor signals a company’s intention to obey the accounting rules.  However, if companies are required by law to secure an audit opinion, there is no theory that these audits provide value.  There is a theory paying more signals intent to follow the accounting rules, but then paying more might mean that the company wants to get away with more.  Therefore we are in uncharted waters.  There is no theory to suggest that audit opinions will be trustworthy.  If audit opinions aren’t trustworthy, then there is no effective check on the numbers reported by companies in their financial statemeents.

The two work together.  If converged accounting standards are company friendly, and auditors are paid to be company friendly, then it is likely that accounting and auditors will not delay, by even a day, the next financial crisis.

I hope the reporters heard my message.

Debit and credit – – David Albrecht

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Please Pick Me!

The SEC announced today a July 7 roundtable on International Financial Reporting Standards, “to discuss benefits or challenges in potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers.”  The complete text of the announcement is here.

There will be three panels: investors, small businesses, regulators.  They will not have a panel for opponents of IFRS adoption.

Here’s a suggestion for the SEC–please pick me!  I’ll be glad to represent investors.  I also recommend Tom Selling and Charley Niemeier.

Please pick professor David Albrecht for the July 7 Roundtable on IFRS

The SEC has not welcomed viewpoints opposing IFRS adoption.  Presumably it thinks that if we are not given a voice, then that voice doesn’t exist.  SEC Chief Accountant James Kroeker has repeated said that incorporation of IFRS into American rules for financial reporting is a must.  Perhaps he is just going through the motions by scheduling this roudtable.  I don’t care.  Please pick me!  I would love to participate.

Here’s another idea.  Schedule a roundtable panel discussion of IFRS opponents, so opposing viewpoints can be presented to the SEC.

Debit and credit – – David Albrecht

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How is a mugger different from an IRS agent?  Both take your money, but the mugger doesn’t make you fill out forms.

It is April 18, 2011, tax forms must be filed no later than today.  Of course, it is easy to get a six month extension.  Come October 17, 2011, there will be a line of taxpayers at the post office filing for an additional extension.

Actually not. Not in the age of e-filing.  That’s a shame. Back in the mid-70s I was a clerk at the U.S. Post Office in Iowa City, working the 11 p.m. to 7 a.m. shift (ugh!).  One year I was sent outside to empty the mail box at 11:59 p.m.  There were six cars backed up.  I had instructions to accept mail from anyone in line when the clock struck midnight.  I miss those days.

Tax is a day of accountability, but not accounting.  I’ve always viewed taxes as the practice of law, not the practice of accounting.

I haven’t seen many good cartoons this year, so I’m going to recycle a classic.

And now, for a really clever cartoon about the complicated tax code.

Debit and credit – – David Albrecht

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David Letterman has produced a Top 10 list nightly for years.  Every year, around tax time, there’s one devoted to federal income taxes and the Internal Revenue Service.  This year’s tax list aired on Thursday, April 14, 2011.  I like it, because area accountants were brought in to read each item. There are several repeat accountants from the last two years.  Richard Cohen (“Women want me, men want to be me.”), who usually bats clean up, was noticeably absent.  Doug Cohen did a great job filling in as his replacement.  [Thanks to Kay Bell of Don't Mess With Taxes for the tip.]

My all time favorites is “Women want me …” from 2009:

There have been other taxing Top 10 lists over the years.  From several years ago, here’s “1040, Good Buddy.”

And just for the record, here’s 2010:

Keep up the good work, Dave.

Have a happy April 18th!

Debit and credit – – David Albrecht

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If you missed this NOVA special, please watch it now.  Thanks to Bob Jensen on the tip to this video.

Debit and credit – – David Albrecht

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The annual conference of the Ohio Region of the American Accounting Association is hosting a debate between Francine McKenna (journalist/commentator on the audit industry) and Andy Bailey (Grant Thornton).  It is scheduled for Friday, May 13, 2011, in Dublin (Columbus), Ohio.  Conference registration is $180 on site.

The topic of the debate is, “An Examination of the Audit Business Model.  Presumably, McKenna will talk about the flaws in the current audit model and the many problems that result, and Bailey will talk about the importance of the model and how audit forms function smoothly and effectively.

4:30 PM – 5:45 PM Concurrent Session
Panel 5 – An Examination of the Audit Business Model
A critical examination of the function of the public accounting based audit model.

Francine McKenna, Litigation Consultant
Andy Bailey, Grant Thornton

As my readers know, I have been studying this topic for 25 years.  There is no theory in the accounting field that predicts that audits and auditors will serve the public interest IF companies are required to secure audits (whether they want them or not), are free to select the auditor they want, pay them for their opinion, and audit firms are large, can restrict competition and shareholder litigation.

Many industry observers have noticed the many instances when audit firms did not act in the public interest, and are asking what can be done to fix the audit model.  My response is that a new audit model needs to be developed.

But what will McKenna and Bailey say?  Presumably McKenna will say that the current model is seriously flawed (if not fatally), and has resulted in the current environment of auditors not serving the public interest.  Presumably Bailey will say that all is well in the auditing world, but can be even better if a few small tweaks are made.

I’ll be there, hanging on every word.  I hope to see you all there.


Francine McKenna

Francine McKenna is a freelance writer with credits in the Financial Times, Accountancy Age, Accountancy Magazine, the FEI Blog, and various financial, media, and technology blogs. She also blogs at Forbes.com under the heading “Accounting Watchdog.” Her blog is occasionally reposted at the The Huffington Post and she had a weekly column at GoingConcern.com

Ms. McKenna has more than twenty-five years of experience in a range of industries in the consulting and professional services environment. McKenna directed the Y2K PMO for JP Morgan in Latin America and was the first female Managing Director for BearingPoint in Latin America, responsible for the Industrial, Automotive and Transportation practice. She was a RVP for Jefferson Wells/Manpower and a Director for PricewaterhouseCoopers LLC, auditing the PwC the firm itself. She held various positions in accounting and financial management prior to her career in professional

Ms. McKenna was recently named a finalist for the Gerald Loeb Award for Distinguished Financial and Business Journalism in the online commentary and blogging category.

Francine has been quoted in the New York Times, Wall Street Journal, Chicago Tribune, Financial Times, Forbes, BusinessWeek, The Deal, The Times of London, the Guardian, and the Financial Chronicle (India) amongst many others. She has been profiled by accounting and social marketing/media sites. Her public speaking credits include private training, university teaching, and speeches for the Institute of Internal Auditors, the Information Systems Audit and Control Association, and the Maryland Association of CPAs.


Andrew Bailey

Andrew D. Bailey was appointed Senior Policy Advisor to the Grant Thornton National Public Policy and Strategy Group in September 2006.

From January 2004 to December 2005, Dr. Bailey was a Senior Officer of the United States Securities and Exchange Commission (SEC), serving as the Deputy Chief Accountant in the Commission’s Office of the Chief Accountant. In this capacity, Dr. Bailey managed the day-to-day operations of the office, overseeing the accounting aspects of the resolution of registrant issues, rulemaking projects and private sector standard-setting efforts. Earlier, from August 2000 to July 2001, Dr. Bailey had served as an Academic Accounting Fellow in the SEC Office of the Chief Accountant.

Professor Bailey spent a long and distinguished career in academia, with numerous visiting professorships abroad, and culminating with his being named Emeritus Professor of Accountancy at the University of Illinois at Urbana-Champaign.

Debit and credit – – David Albrecht

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Social Media Strategies for Professionals and Their Firms, by Michelle Golden, is an excellent book to study from if you are thinking about doing more with social media.  And why should you do more with social media?  You will enhance your productivity, your career, and your life!  All professors, professional accountants, finance professionals and business students should do more with social media from a professional perspective.

I’ve had the book for three months now, and have settled into using it as a reference.  It’s so useful, I have one copy for my home office, and one for my university office.  It is a great book, and should I ever get a chance to teach a course in Social Media Marketing (e-mail if you want me to teach such a course at your school), this will be one of the assigned books.

Michelle Golden is the marketing guru to accounting and law firms.  You might be a reader of her Golden Practices Blog. Make every effort to hear her speak in person.

I’m bringing reviews of her book to you through the voices of other readers.

The first is by Professor Gary Schirr (Radford University, Virginia).  Schirr blogs at Service Co-Creation.  His review comes via video:

The other reviews are customer reviews at Amazon (here).  They are uniformly positive.

Please buy her book and read it!

Debit and credit – – David Albrecht

P.S.  Another good review is here.

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9:22 a.m.  The excitement builds as we accounting junkies gather around our internet feeds.  Today the U.S. Senate Committee on Banking & Urban affairs meets to interview “expert” witnesses about the role of auditors.  I’m still trying to get a good link to the webcast.  We will be tweeting under #SenateRAP.

Read on for my log and responses to today’s meeting.

9:33 a.m.  Senator Reed opens session, wonders if companies are too big to be audited.  $11 trillion was lost in last crisis.  Auditors gave no warning.  Auditors have a special calling.  The hearing is not about fixing blame for the crisis, but “This is more about what we need to do now to protect ourselves in the future.”

James Doty

9:39 a.m.  James Doty (chair, PCAOB).  JDA has high hopes for him.  He says that secrecy related to PCAOB inspections is a problem and only Congress can remove this provision.

9:45 a.m.  Leslie Seidman (chair, FASB).  Will she shill for IFRS?  Yes!  She sys the FASB is ready and standing by.

9:49 a.m.  James Kroeker (chief accountant, SEC).  He’s a shill for the Big 4.  He will absolutely get in the way of any meaningful improvements.  Oh, he acknowledges that some critics are questioning the value of the audit opinion.  He supports efforts to add to the audit report.  And he’s in favor of convergence with IFRS.

9:55 a.m.  Reed:  why were there no timely auditor warnings?  Doty, this is an enduring problem, as noted in audit inspections.  The PCAOB is looking into whether the firms are doing anything about it.  Reed:  what are incentives/disincentives that kept audit firms from doing anything about it?  Doty:  momentum, habit.  As to the prospect of meaningful change?  “The audit profession know it is standing on the edge of change”  Seidman:  We are making changes to the accounting rules as we become aware of issues.  Was there adequacy of guidance about fair value and impairment rules?  “We are working on it.” Reed:  Off-balance sheet financing provoked Sarbanes Oxley.  Now, Seidman says by May 2011 it will be taken care of.  Why is it taking so long to fix something that was identified long ago as being central to reporting problems?  Seidman says that several changes have been made, including a more principles-based standard (IFRS).  She is most definitely holding hands with the IASB.  Kroeker:  We have been, and are taking significant enforcement actions.  Really?  Why weren’t there more going concern warnings?  It might not be a binary issue. We’re looking at it.

Leslie Seidman

10:13 a.m.  Senator Hagen:  to what extent were the accounting standard setters gamed by the international companies?  Was using GAAP a deficiency?  Seidman:  the REPO 105 issue relates to a 1996 accounting rule.  The FASB wasn’t even aware of a problem with the rule, until the Valukis report on Lehman Bankruptcy.  An examination resulted in a review of the related accounting standard.  Now the rules clearly state that the determination of control must take place at the consolidated level (not the subsidiary level).  This should fix the problem with REPO 105.  Hagen to Kroeker, what is SEC doing to reduce multiple sets of accounting rules?  Kroeker:  we’ve been moving toward a single set of high quality accounting standards for use around the world (for three decades!).  It is imperative that the FASB and IASB continue to work together.  Yikes!

10:23 a.m.  Senator Merkley.  Why have so few executives been prosecuted?  Kroeker?  That’s not correct.  We’ve taken a number of actions.  We’ve taken the Valukis report very seriously.  The SEC took immediate action to stop REPO 105 transactions (what an overstatement).  We’re continuing enforcement actions.  Merkley:  why is no one in jail?  Kroeker, we only have civil authority, not criminal.  (While technically correct, the SEC can work with agencies that can file criminal charges.  Why have none been files?) Merkley:  was it deregulation that created conditions favorable to causing a crash.  Or was it integrity?

10:29 a.m.  Senator Reed:  Is auditing a loss leader?  (Great question.)  Actually, the Senator questions today have been very good.  Doty:  the issue is to create a counterweight to corporate management.  Doty thinks that the firms are large enough, size is not the problem.  We need auditors that will challenge management.  There is a project underway.  Seidman says this is not her area.  Kroker:  I hope that audits are not a loss leader.  It used to be, but that has been addressed by new independence rules.  Are auditors being selected on quality or low rates?  Working with audit committees that they shouldn’t select auditors on price.  The GAO has studied whether or not the Big 4 concentration is a problem, and they haven’t found it to be a problem.

Reed:  did fair value accounting over value bank assets?  Kroeker says that most assets aren’t carried at fair value, they aren’t marked down.  Was waiting for determination of credit loss contributing to marking them down too late?  Seidman weighs in.  She’s working with IASB again.  (Perhaps we need more items to be carried at fair value.)

James Kroeker

Reed  10:39.  Do reverse mergers create a problem?  Doty:  it is a priority to inspect Chinese auditors.  If Chinese auditors are auditing companies that become U.S. companies via reverse merger, then this is a serious issue.  Developments will come out in summer and fall.  Kroeker:  that this is a public issue is because the SEC is working on it.

10:44 a.m. Reed:  now onto the second panel.

OK, after the first hour, what have we learned.  Seidman (FASB) is married to the IASB.  Doty shows that he knows his stuff.  Kroeker, taking credit for everything good that has happened, although not much good has happened.  I don’t think this current group of regulators (Doty, Seidman, Kroeker) offers much hope for fixing the broken system.  Although Doty might guide the PCAOB to make meaningful proposals, every worthwhile improvement will be blocked by the others.

10:46 a.m.  Second panel is seated and introduced.

Anton Valukas

10:48 a.m.  Valukas:  Auditors did not cause Lehman to fail.  However, they played a role.  Investors have a right to expect that a clean audit opinion means no disclosure problems.  But Lehman had liquidity problems and its use of REPO 105 limited the public perception that liquidity was a problem.  Lehman’s auditors were aware that these transactions had no business purpose, and the auditors did not object to Lehman removing the liabilities from its balance sheet.  Both the SEC and the Fed (both of whom were aware, and said nothing about it. Then the auditors took no responsibility.  This is the problem, no one took responsibility.

Cynthia Fornelli

10:53 a.m.  Fornelli.  Crisis not caused by either accountants or auditors.  Auditors can and do provide warning signs.  What do you expect?  Her CAQ is a shill for the Big 4.  “Investors greatly value the audit report”  No they don’t!

10:58 a.m.  Thomas Quaadman.  Strong supporter of convergence of accounting standards.  Has a 10 point plan.  The problem was not corporate reporting practices, but the rules.

Lynn Turner

11:03 a.m. Turner.  The questions asked today have been asked for 25 years.  Why haven’t the problems been fixed?  There has been a failure to go back and do some reflective thinking to go back on what caused the problems.  He disagrees with just about everything that Quaadman advocates (hooray).  The fairvalue problem wasn’t flawed, it was the people implementing it.  The FASB hasn’t been issuing standards that work on a timely basis.  The SEC hasn’t done a good job of oversight.  The SEC needs to get serious about enforcement. This is the key.  There has been no prosecution from Valukas, about Merrill, about Bear Sterns.  SEC has been underfunded for two decades.  “People in America are asking where are our watchdogs? Is the SEC a watchdog or a lap dog?

11:12 am.  Reed to Valukis.  Why were their no warnings?  Valukas, if the auditors had gone to the audit committee, those practices would have ended immediately.  So, an auditor threatening a public company has tremendous power.  In Lehman’s case, the auditors too the view that it was not its responsibility to audit the practice.  The default should be transparency instead of materiality.  Fornelli:  efforts to improve transparency are under way.  Quaadman:  (why is it he says nothing?)  Turner:  If the auditor says the accounting is correct, they we have a serious problem with the accounting standard.  Valukas is very correct, materiality is not a shield.

11:21 a.m.  Reed.  A lot of helpful hints to management (resulting from audit) are not being followed through.  Fornelli is evasive about increased disclosure.  She’s very protective of audit firms.  The current system is the solution!  Quaadman.  Too many SEC investigations without charges is detrimental to investors.  Turner:  Keeping enforcement actions under wraps is a problem.  The SEC has public hearings when charges are being debated, and that has worked well.  If the PCAOB determines that an audit hasn’t been done well, and keeps that from us, then that is wrong!  Fornelli disagrees with Turner, she says that the disclosure mechanisms are adequate.  The public is made aware of some inspection results.

Hearing is over.  Absent senators will submit questions by Friday, and these will be passed along to the panelists for their speedy responses.

Thomas Quaadman

There were some interesting dynamics in the second panel.  The Chamber of Commerce representative, Quaadman, was there to speak for corporations.  The Center for Audit Quality representative, Fornelli, was there to speak for the audit firms.  Both were interesting.  Quaadman moved his lips, but never really said very much.  Fornelli was the most objectionable.  She says that the auditing system is functioning well under PCAOB and Sarbanes-Oxley.  Of course, Valukas and Turner (who speak for the public) disagree.

Today, I’m more a fan of Turner than ever before.

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United States Committee on Banking, Housing & Urban Affairs

The Role of the Accounting Profession in Preventing Another Financial Crisis

Securities, Insurance, and Investment

Wednesday, April 6, 2011
09:30 AM – 12:00 PM eastern
538 Dirksen Senate Office Building

Witnesses

Panel 1

  • Mr. James R. Doty
    Chairman
    Public Company Accounting Oversight Board
  • Ms. Leslie F. Seidman
    Chairman
    Financial Accounting Standards Board
  • Mr. James L. Kroeker
    Chief Accountant
    U.S. Securities and Exchange Commission

Panel 2

  • Mr. Anton R. Valukas
    Chairman
    Jenner & Block LLP
  • Ms. Cynthia M. Fornelli
    Executive Director
    Center for Audit Quality
  • Mr. Thomas Quaadman
    Vice President, Center for Capital Markets Competitiveness
    U.S. Chamber of Commerce
  • Mr. Lynn E. Turner
    Former Chief Accountant
    U.S. Securities and Exchange Commission

I will be live blogging the web cast (here).  The Jr. Deputy Accountant will be live blogging as well as live tweeting.  The hash tag is #SenateRAP.

Debit and credit – – David Albrecht

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[April 1, 2011 special edition]  In a surprise move, SEC Chair Mary Schapirouette announced that she has directed Leslie Sidewoman (Financial Accounting Standards Board) and Sir David Tweetybird (International Accounting Standards Board) to start work on converging to Cash Basis Accounting.

Schapirouette told The Summa, “Last night I was watching a fascinating History Channel special on accrual accounting.  Cruel accounting has been a fail because it’s a lot easier to manipulate financial statements by making up fake adjusting journal entries than to have real cash transactions.”  She added, “Hey.  It almost worked for Lehman Brothers and we think it will almost work for us.”

Personally, I like the move.  I’ve started designing a new course titled REPO 101.

Green cash basis accounting

Leslie Sidewoman said, “The new rules will be called Greenbacks, because going green is so trendy these days.”

Sir David Tweetybird wondered if the move would get bogged down in controversy, “This could be another attempt by the Americans to take over international accounting.  The SEC proposal is conditioned on U.S. Dollar Cash Basis Accounting.  We think there should be a place for European cash equivalents.”

Debit and credit – – David Albrecht

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