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Congress in session as it passes ‘No Forced Auditor Rotation’ act.

I just received word that the U.S. House of Representatives (Congress) has passed a bill banning mandatory auditor rotation.  Before you start to think that perhaps Congress has done something great and wonderful, a few words of wisdom should be remembered.  I’m posting some of the more accurate descriptions of Congress penned throughout the centuries:

  • Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself. –Mark Twain
  • You can lead a man to Congress, but you can’t make him think. –Milton Berle
  • We have the power to do any damn fool thing we want to do, and we seem to do it about every ten minutes.” –J. William Fulbright
  • There is no distinctly American criminal class – except Congress.
    –Mark Twain
  • Being elected to Congress is regarded as being sent on a looting raid for one’s friends. –George Will
  • There is more selfishness and less principle among members of Congress than I had any conception of, before I became President of the U.S. –James K. Polk
  • When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. –P.J. O’Rourke
  • With Congress, every time they make a joke it’s a law, and every time they make a law it’s a joke. –Will Rogers
  • I don’t mind what Congress does, as long as they don’t do it in the streets and frighten the horses. –Victor Hugo
  • I have come to the conclusion that one useless man is called a disgrace, that two are called a law firm, and that three or more become a congress. –Peter Stone
  • This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.
    –Will Rogers

My generation uses a rhetorical question whenever we spot something particularly loony, “What were you smoking?”  Well, Congress, what were you smoking when you banned auditor rotation?

Debit and credit – – David Albrecht


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In the United States, today is election day.  In the last presidential election, the candidates were clearly divided on accounting issues.  But what about 2012?

In 2008, Barak Obama was solidly behind moving the U.S. to IFRS.  During his first term he was unsuccessful, and earlier this year the SEC waved the white flag on moving the country to IFRS.  So far in this campaign, Obama has not signaled his intentions with respect to future actions on the issue.

In 2008, John McCain emphatically endorsed American control of its own accounting standards.  However, this appeared to be a personal stance as opposed to a Republican political position.

I have not been able to uncover any statement by Mitt Romney revealing his position on global accounting standards.

Most Washington observers expect SEC Chair Mary Schapiro to step down shortly after today’s election.  The appointment of her successor (and we have had no clues) would say a lot about future U.S. government intentions on who is to set American accounting standards.

With respect to auditor rotation, both candidates are mum. Although it is true that several Democrats threatened legislation banning a PCAOB rule requiring auditor rotation, President Obama has not commented on the issue.  Mitt Romney is a client of PriceWaterhouseCoopers.  In 2008, the large auditing firms heavily favored Obama with political contributions.

There appears to be no desire from either candidate about changing the status quo on the position of audit firms in the American capital markets.  Sigh.

Both candidates have been active in discussing tax policy, but that is not the focus of The Summa.

Debit and credit – – David Albrecht

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Sarah N. Lynch is a young business reporter for Reuters.  She has previously published such good work that I’ve started looking for her by-line.  Her story on Friday, June 29, 2012 alerts us to an important auditing issue.

Lynch’s story is “SEC official backs shareholders on auditor independence.”  In this story, she reports on a speech by SEC Commissioner Louis A Aguilar (Democrat) to the NAPPA 2012 Legal Education Conference in Philadelphia, PA, on June 27, 2012.

Aguilar’s speech is noteworthy for two reasons.  First, it was one of two speeches last week by SEC Commissioners in which it was emphasized that audit quality is deteriorating and investor confidence in securities markets is waning.  Second, Commissioner Aguilar disagrees with SEC staffers who have blocked shareholder proposals to rotate auditors at their company or to promote other forms of improving auditor quality.

Really?  Companies have received at least two dozen shareholder proposals to vote on auditor rotation and increased auditor disclosure, and the SEC’s Division of Corporation Finance let companies block them from shareholder vote?  Aguilar’s comments on this are highlighted below.

It is apparent that pressure is being directed at the PCAOB from the lofty heights of the Commissioners of the SEC.

Aguilar’s speech is important.  To promote your reading of relevant portions, I’m publishing them in this blog post.

(more…)

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I’ve been writing about the Spanish bank crisis (“Spanish Non Sequitur” and “Followup to the Spanish Non Sequitur“) because it is related to mainstream financial reporting and auditing.  How so?

The Spanish government recently hired all of the Big 4 (still don’t know from which countries) to tidy up the financial statements from many banks in the industry.  I’ve written about how this is a novel strategy to cleaning up faulty financial statements.

In addition, this is related to the push for global accounting standards.  If IFRS doesn’t work well in a mid-size European country, then how can it work as the primary tool for regulating banks world wide?

Nathalie Tadena, of the Wall Street Journal, wrote yesterday on “Moody’s Cuts Ratings on 28 Spanish Banks.”  Moody’s has downgraded bank ratings to one notch above junk.  Ouch.  In part, this is because of Spain’s sovereign debt crisis, and in part this is because “banks … have been hollowed out by a five-year property slump that has left them exposed to hundreds of billions of dollars in loans to builders and developers.”

The U.S. has experience in dealing with bank difficulties caused by economy shaking issues in real estate. The 1980s Savings & Loan Crisis and 2008 Subprime Financial Securities Crisis come to mind.  Both American crises showed that banks easily succumb to temptation in hiding losses from investors, and that auditors are loathe to alert investors to going concern difficulties.

Spain, welcome to the club.  It is dealing with its bank crisis by hiring Big 4 audit firms to clean up the financial statements of larger banks in its banking industry.  Undiscussed, though, is why Spain is hiring the same audit firms which previously had been a party to issuing unflagged misleading financial statements.

I’m glued to the newswire looking for the next development in this story.

Debit and credit – – David Albrecht


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James Kroeker

An hour ago, the SEC announced that James Kroeker, Chief Accoiuntant of the SEC, is stepping down.  Here is the complete text of the announcement.

06/20/2012 03:43 PM EDT

FOR IMMEDIATE RELEASE
2012-116

Washington, D.C., June 20, 2012 — The Securities and Exchange Commission today announced that Chief Accountant James L. Kroeker will leave the SEC in July to enter the private sector.

Mr. Kroeker came to the SEC in 2007 as Deputy Chief Accountant and has been the agency’s Chief Accountant since January 2009. In that role, he has guided the operations of the SEC’s Office of the Chief Accountant and counseled the Commission on a wide range of accounting and auditing issues.

“Jim has provided superb counsel on a range of accounting and auditing related matters and has always stressed the importance of accounting to our investor protection mission,” said Chairman Mary L. Schapiro.

Mr. Kroeker said, “It has been a unique privilege to be a member of the Commission’s staff during this truly unprecedented time and to have had the opportunity to work alongside the talented and dedicated individuals in the SEC’s Office of the Chief Accountant and across the Commission.”

At the SEC, Mr. Kroeker served as staff director of the agency’s study of fair value accounting standards, which was mandated by Congress in 2008, and led the efforts of the Office of the Chief Accountant to improve off-balance sheet accounting standards. He also guided the Commission’s efforts as it continues to consider convergence of U.S. and international accounting standards.

Before joining the SEC staff, Mr. Kroeker was partner at Deloitte & Touche LLP, most recently serving in the firm’s National Office Accounting Services Group. From 1999 to 2001, Mr. Kroeker served as a Practice Fellow at the Financial Accounting Standards Board.

Debit and credit – – David Albrecht

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Earlier this month I wrote, “Spanish Non Sequitur.”  Non sequitur is Latin for, “it does not follow.”

As is commonly reported, Spain is experiencing a sovereign debt crisis.  Sovereign debt is when a government borrows to finance spending in excess of tax collections.  A sovereign debt crisis comes about when said government cannot make timely payments to those from whom it has borrowed.

As Spanish banks have invested in Spanish sovereign debt, and Spanish banks are still not fully recovered from the financial crisis of the past few years, it is widely thought that many are in extreme financial distress.  How much financial distress is unknown, because it is widely thought that Spanish banks have been less than candid when issuing financial statements.

Earlier this month I wrote about a Spanish government announcement (actually, an authorized leak) about the first two parts of a three part plan to deal with the sovereign debt crisis.  First, two consultants had been hired to evaluate how close to insolvency are the banks.  Second, all of the Big 4 audit firms had been hired to perform audits to clean up the bank financial statements so that the government would have accurate information.  The third part of the plan was unveiled a few days later when Spain appealed for a large bailout to pay off debt about to come due.

The second part of the plan is a non sequitur because the large audit firms are part of the problem.  Previously, they had issued clean audit opinions for bank financial statements that didn’t deserve them.  There is no way for government officials to know for certain that the information provided this time by the audit firms is any better than their earlier audit opinions.  Unless, of course, the audit firms have been threatened with a return of the Spanish inquisition.

Earlier today two conflicting reports have appeared in the press.  First, David Roman of The Wall Street Journal writes in,Spain Delays Full Bank Audit Amid Rise in Yields, that, “The deadline for a group of auditors to present full reports on the capital needs of Spain’s financial sector has been postponed to September from July 31, a person close to the situation said Tuesday.”

Second, a Reuters report says,

A [Big 4] detailed audit of Spanish banks will remain on schedule and release its findings on July 31, a spokesman for Spain’s economy ministry said on Tuesday, denying an early report the assessment would be pushed back to September.

“There won’t be any delay in completing the audit of Spain’s banks,” the spokesman said.

Earlier, a source at the Bank of Spain had told Reuters the second audit would be delayed to September to give organizers more time to gather information on each bank’s loan books.

I don’t know for sure what is happening in Spain, because insufficient disclosures have been made public.  Therefore everything I say is a guess.  However, I think it is the most interesting development in years to arise in the accounting/auditing world.

Debit and credit – – David Albrecht


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Shyam Sunder is James L. Frank Professor of Accounting, Economics, and Finance at Yale School of Management in New Haven, Connecticut.  He has long opposed a single set of global accounting standards.  So to has Stella Fearnley, professor of accounting at Bournemouth University, Bournemouth, United Kingdom.

Their recent op-ed piece, “Global Accounting Rules — An Unfeasible Aim,” appeared in the June 3, 2012 edition of the Financial Times.  I have asked for, and been granted, permission to republish it here.


Global Accounting Rules
– An Unfeasible Aim

By Stella Fearnley and Shyam Sunder

The introduction of the euro and the adoption of International Financial Reporting Standards (IFRS) in the EU and other countries were promoted by aspirational rhetoric about gains from uniformity. Applying uniform process or rule in diverse societies does not yield uniform outcomes. Effective oversight and control of the process and rule-making can become impossible and unbalanced with so many players involved. Failure to recognise and manage the risks associated with uniformity has driven the European Monetary Union to a critical precipice. Similar risks apply to the efforts of the International Accounting Standards Board (IASB), the accountancy profession and some international regulators to bring about adoption of IFRS for global use.

The IASB and US Financial Accounting Standards Board have committed significant resources since 2002 trying to agree on common accounting standards. Despite their efforts, IFRS have not been approved by the Securities and Exchange Commission for US adoption. The SEC may never risk the political backlash from ceding control of its accounting to a non-US body. We can learn from the euro debacle and assess not only if the vision of one set of global accounting standards is achievable but also if it is desirable.

Accounting standards interact with law, commercial codes, and social norms in different countries in many ways. The IASB has pushed its agenda ahead taking no responsibility for recurrent unintended consequences. The disaster of some banks depleting their capital by paying bonuses and dividends out of false profits, generated under IFRS’s defective mark-to-market and loan-loss provision standards, is a good example.

Abandonment of judgmental true-and-fair standards in favour of written rules make accounting vulnerable to mis-statements through complexity beyond the grasp of users and directors.

China, Japan, and India have yet to be persuaded to adopt IFRS and watch from the sidelines. Within Europe, some countries view IFRS as an Anglo-American invention, and remain sceptical of its suitability for their own needs.

Complexity and interactivity of social systems and markets make it all but impossible for a group of experts to divine the “best” accounting solution that will serve divergent economies. Even if it were feasible, it can only be developed through bottom-up evolution of accounting and not through top-down imposition of a single method selected by a board of “experts” with limited accountability.

The IASB’s persistent denial that the procyclical and complex accounting model played a part in the banking crisis by inflating profits undermines trust in its competence and intent.

The euro debacle points to prudent wariness of Icarus-like overreaching ambition that is not underpinned in theory or experience. Common standards, such as common currency, may appear a good idea, particularly for international companies, regulators and audit firms. But what did we get? A Board that issues standards that can induce false profits in reports and drown users in complexity; that has not accepted responsibility for the dysfunctional consequences of its standards; and has no effective mechanisms for timely correction of defects.

Although the big players get economies of scale from applying IFRS across their international activities, shareholders and other stakeholders, particularly in the banking sector, have not been well served by the outcomes of IFRS standards.

We therefore urge the SEC not to proceed with IFRS in the US. Directors and auditors in the EU and other countries applying IFRS could lead by insisting on a true-and-fair override to cut complexity in IFRS based accounts.

We suggest the G20 drop its support for global accounting standards. Instead, they could recommend that accounting reports reflect the economic substance of businesses based on professional judgments and sound, prudent principles, and recognise that Anglo-American based accounting standards are not necessarily appropriate for the whole world.


Debit and credit – – David Albrecht


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