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Posts Tagged ‘Mary Schapiro’

Mary Schapiro is the Chairman of the SEC. Richard Fuld is the ex-CEO of bankrupt Lehman Brothers

Classify this under speculative rumor, I suppose.  In a story by Jean Eaglesham and Lis Rappaport, “Lehman Probe Stalls; Chance of No Charges,” it is reported that SEC officials are considering dropping thoughts of filing charges against former Lehman Brothers executives.

The U.S. government’s investigation into the collapse of Lehman Brothers Holdings Inc. has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives, people familiar with the situation said.

In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels.

SEC officials also aren’t confident they could win any lawsuit …

Qué lástima! (What a pity!)  Qué pena! (What a shame!) Eso apesta! (That sucks!)

I don’t care if the case can’t be won.  Bringing them to trial for Repo 105 schenanigans is a symbolic act that will cheer investors.  Sometimes in war it is appropriate to fight to the death.

This is the porn viewing SEC, the Madoff enabling SEC.  Does it also want to be known as the federal agency that let Lehman Brothers off the hook?

Better go after Ernst & Young, a seemingly more winnable case.

Debit and credit – – David Albrecht

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Thanks to Rick Telberg at CPATrendlines, I am now aware of Mary Schapiro’s latest comments on accounting (to the CFA Institute 2010 Annual Conference in Boston, Mass.).  We now have proof that the spirit of Professor Philip Barbay is alive and well inside the beltway.  You don’t remember Professor Philip Barbay?  He was the fool to Thornton Melon (played by Rodney Dangerfield) in the 1986 classic, Back to School.  Here’s the scene I best remember:

  • Dr. Phillip Barbay: …now, not withstanding Mr. Mellon’s input. The next question for us is where to build our factory?
  • Thornton Melon: how ’bout fantasyland?

The Rodney Dangerfield (I don’t get no respect) character got no respect from Professor Barbay, and we in the accounting world get no respect from SEC Chair Mary Schapiro.

Let’s take a close look at Schapiro’s remarks.

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How well does the average person understand financial statement manipulation?  Sometimes the numbers are gimmicked up because of odd nonsensical transactions, ala Lehman Brothers.  Sometimes the numbers are out and out fictionalized.  Sometimes investor attention is simply distracted away.

Bob Jensen passed along a post over at the AECM listserv, in which he used a few Barbie dolls to make a point.  Sprucing it up just a bit, here’s the story. [Disclaimer: I do not support the “culture of thinness” promoted by Barbie Dolls.]

Lehman Brothers Balance Sheet “Before”

Lehman Brothers balance sheet bloated with too many financial liabilities

Lehman Brothers Balance Sheet “After”

The balance sheet after cash from Repo 105/108 has paid down financial liabilities

SEC’s Mary Schapiro Called to the Rescue

There were no pictures of Barbie as a white knight in shining armor


Switching the subject, just a bit.  Over the years, Mattel (producer of Barbie dolls) has used child actors to promote its toys.  Recently, it used two of the cutest to present a disclaimer that precedes an interactive edition of its annual report.  I can’t embed the video (as much as I’d like to), so click on the following link and press the start button.  In my opinion, this is inappropriate.  Financial reporting is serious business for serious people.  It shouldn’t be made light of.  And, after watching this “kid” disclaimer, I think the viewer is happy enough to cut Mattel some slack for whatever follows.

http://corporate.mattel.com


My apologies to the copyright owners of these images.  I’ve borrowed without permission.  If you come across this page, would you grant me permission to use these images?

Debit and credit – – David Albrecht

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A single set of global accounting standards, rules to be followed by any public company as it reports annual operating results, has become the  Holy Grail of Accounting.  In today’s world, these rules are embodied in International Financial Reporting Standards. Unfortunately for many good but unwitting people, advocating the U.S. adoption of IFRS is a fool’s errand.   To more fully understand the ramifications of this statement let’s turn to the dictionary for a basic frame of reference.

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[Postscript:  a well placed observer has questioned the wisdom of my claiming that certain SEC commissioners are ignorant.  Upon glancing through transcripts of the commissioners’ remarks (released after the publication of this essay), I can understand now how “ignorant” was a poor choice of wording, and I apologize to the Commissioners for that word usage.  At the time I wrote the essay, I was grasping for some reason why certain commissioners continue to spout sophistry (false reasoning).   I chalked it up to ignorance.  I now realize that I might never know the reason for the sophistry, as the SEC principals refuse to discuss the assumptions and conceptual foundations of their sophistry.   Never-the-less, sophistry it is, and that’s what I was reacting to.  Were I to write the article today, I would title it either:  SEC Sophistry To Lead to Folly, or, SEC Errant Views To Lead to Folly.  Profalbrecht, 11/27/09]


Yesterday, a third Commissioner of the Securities and Exchange Commission spoke out, (1) decrying the politicization of the accounting standard setting process, and (2) advocating the need for a single set of global accounting standards.  By so speaking she aired her ignorance for all to see. [Sentence removed 11/27/09]

 

As reported in a Reuters update, “SEC’s Casey: Accounting Convergence Must Continue,” Kathleen Casey “warned against the over politicization of accounting rules, or attempts to pressure accounting rule makers to write rules that would favor a specific goal sought by a particular industry.”  Earlier this week, another SEC Commissioner, Elisse Walter, said the same thing.  SEC chair Mary Schapiro has been saying it since her confirmation hearings   Not to be left in the cold, FASB Chair Robert Herz chimed in with a similar sentiment.  Of course, they all chant the mantra of global accounting standards.

They are wrong.  I hope everyone in the world knows it. [Sentence deleted 11/27/09]

Here’s why they are wrong.

There is no such thing as universal accounting truth. Accounting rules spring from the reason of human beings.  The rules and principles that guide today’s capital markets are recent inventions.  The most cherished accounting axiom–assets equal liabilities plus owners equity–has been around less than six hundred years.  Before that there was simply no need for it, therefore it wasn’t yet invented.  Here’s a news flash:  that accounting axiom is obsolete and no longer works in today’s world (we’ve piled so much on it, it no longer balances).

Accounting rules that govern the formation of corporate financial statements all have economic consequences.  It has always been this way.  Every rule puts some interest group at an advantage over another.  From the start, investors have clamored for more disclosure than the executives running corporations have wanted to supply.  This tension is natural.  There is no right or wrong in an absolute accounting sense, God has no such commandment.

It is any (or every) government’s domain is to adjudicate between competing economic interests.  That is what government does.  For example, governments are good at levying and collecting taxes.  This has been going on since the beginning of human history.  And what is tax but one group being forced to transfer it’s money to another group.

How does a government decide between competing interests?  By politics.

It is foolish for anyone to abdicate his/her right to seek a political solution to any political, economic, social or military issue.   Why would anyone want to do that?  It is tantamount to denying the person’s free will, “No, I’m too stupid to decide for myself, you do it for me.  Really, I insist.”

We have not always realized the political nature of standard setting in the U.S.  However, since the formation of the FASB every potential accounting standard has had to go through a political process:  discussion memorandum, then exposure draft.  And the SEC always  has the ability to override (which it has upon occasion).

Why then, are these people decrying the current politicization of accounting standards? It is because they don’t want to get trumped by someone else’s politics.

They are using a time-tested tactic:  state a fallacy long enough and long enough and pretty soon it is accepted as verdad!

Please realize that no SEC commissioner has taken advanced education in accounting.  Nor has the chief accountant.  Nor has the current chair of the FASB. [Sentence removed 11/27] I put forth the notion that possibly, just possibly, they have missed out on something that the rest of us have known for a long time.  It is the way of human beings that accounting standard setting is a political process.

If you can buy into that, then here’s the rest of the truth.  Political factors, and the governmental processes that adjudicate between them, are not the same all over the world.  They are different in parts of Europe and Asia than they are in the U.S.  As a result, the League of Nations could not function as envisioned, neither could the United Nations.

Similar political processes affect accounting standard setting.  Surprise!  How reasonable is it to think that global accounting standard setters are going to be responsive to economic interests in your part of the world?  France is already discovering that the IASB’s IFRS are not responsive to certain French economic interests.  So France is balking.  As it should.  Ceding control of French economic interests over to the IASB was a stupid thing to do.  It was incredibly stupid.  And so it will be if the U.S. does likewise.

Unfortunately, the SEC commissioners are ignorant of all things accounting.  It’s ignorance is leading it to adopt IFRS.  And that, my friends, is pure folly. do not understand that they are sophist in the ways of accounting,   Sophistry acted on is folly. [remarks edited 11/27/09]  A folly that will cost of us trillions.

The SEC's sophistry is a crying shame! (edited)

As has been chronicled in this blog, the smartest and wisest accounting professors (the nerds who study accounting for a living) have carefully explained why there should be no single set of global accounting standards.  The SEC, though, is ignorant. That, or its commissioners are not educated enough to understand.sophist [edited 11/27/09].  Sob, that’s a crying shame.

Debit and credit – – David Albrecht

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Finally, some hard hitting rumor reported as news on Thursday, July 30.  According to Jesse Westbrook and Ian Katz of Bloomberg, Mary Schapiro has narrowed down Chief Accountant finalists to two:  James Kroeker (accounting firm candidate with ties to Clifford Cox and Robert Herz) and independent Jack Ciesielski.

I’ve talked with Westbrook before, and he has been following the chief accountant for many months. Westbrook also reported Niemeier’s candidacy.  I suspect that these rumors are fairly square on.

This is an interesting development from early June when I reported on leaks that there were five finalists.  On June 4, I supplied more information about each candidate in Thoughts About Candidates For Chief Accountant.

James Kroeker, acting Chief Accountant, and Wayne Carnall, chief accountant of the SEC’s Division of Corporation Finance, are both in-house candidates and IFRS proponents, the issue of the day, year and decade.  That Kroeker remains as finalist is an endorsement of his performance as acting chief.   He seems to have done well in discussions with Congress as he defended fair value.  He was chief architect of an SEC report that concludes fair value accounting did not cause the recent financial mess.

Jack Ciesielski, candidate for SEC's chief accountant

Jack Ciesielski, candidate for SEC's chief accountant

Jack Ciesielski beat out Charles Niemeier as the anti-IFRS candidates (that is, U.S. should not adopt IFRS).  Both have impressed with the quality of their research on IFRS and other issues.   I suppose Jack’s ascendancy is not surprising given that Charley has been a lightening rod, but I still love Charley.  We owe him much gratitude for his 2008 speech that enticed hundreds of thousands of U.S. accountants to come out of the woodwork and declare their opposition views to IFRS.

Jack Ciesielski has written at length about the perils of U.S. adoption of IFRS, at least as currently formulated and with its current structure.  His Analyst’s Accounting Observer is a great resource.

Both remaining candidates are fair value proponents.

Who will win out?  I don’t really know Mary Schapiro, and it’s her call.  She faces a great deal of pressure from Barak Obama and Paul Volcker to appoint someone who will implement G-8 recommendations.  Kroeker is this person.  On the other hand, she seems to have an independent streak and a mind of her own.   Both qualities could lead her to support the anti-IFRS candidate.

The country does not need a big four Chief Accountant.  Kroecker would triumph the preparers of accounting information over the users.  He has ties to the foul Christopher Cox.    Foxy John Kroecker will eat us all hens for supper.

If Mary Schapiro is true to her stated prinicples, she will act to protect investors and appoint Jack Ciesielski.

Why has this taken so long?  Schapiro has been under intense pressure not to appoint an anti-IFRS person.  But, she has resisted, because the U.S. adoption of IFRS is clearly the wrong thing to do.  Had Kroeker not done such a fine job in the fair value defense, I suspect that Ciesielski would already have been appointed.

Over and out – – David Albrecht

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I’ve done a little research on the final candidates for Chief Accountant at the SEC.  Tom Selling of the Accounting Onion has handicapped the candidates in yesterday’s post, Handicapping the Chief Accountant Contest.  It is worth a look.  I lack enough inside contacts to be able to offer an opinion as to each candidate’s chances. However, I can rate each candidate on the major issue confronting U.S. accounting–whether or not to switch to IFRS.

Jane B. Adams, labeled the front runner by accounting pundant Tom Selling she is rated as having a 50% probability of being chosen), has some, but not a lot of, prior SEC experience.  She served as Deputy Chief Accountant in the U.S. Securities and Exchange Commission’s Office of the C hief Accountant from 1997 to 2000.  She was also Director of Accounting Standards at the AICPA from 1996 to 1997 and a Project Manager at the Financial Accounting Standards Board from 1987 to 1996. Recently, she has been a member of the user community as an analyst in equity research: 2 years in sell-side equity research at CSFB as Director of Accounting and Tax Policy and the last 6 years on the buy-side at Maverick Capital.  Maverick invests globally in liquid, primarily larger cap, equity securities based on in-depth fundamental research.  She was contributed less than $2,000 to President Obama’s campaign.

In a brief 2001 paper, Identical Companies, Different Financial Statements, she comments about a proposed accounting standard on derivitives, “Such changes do not improve the quality of earnings if they provide substantively different accounting results for the same instrument and exposure.”  From this statement, it is possible to project that because of IFRS flexibility in accounting standards she might oppose their adoption in the U.S.  However, she has made no public comments in the past eight years, so far as I can see.  Although I have no proof, my inclination is to rate her as IFRS friendly, given she has worked on analyzing global companies trading in numerous international markets.

Wayne Carnall, currently chief accountant of the SEC’s Division of Corporation Finance and a former partner at PricewaterhouseCoopers, is touted by Selling as having a 40% chance of being selected.  Carnall, given his lengthy association, is thought to be  big firm candidate.  He has been assigned on numerous occasions to explain the proposed SEC roadmap.   Supporting IFRS and moving toward a single global accounting language seems consistent with his background and public comments.

James Kroeker is acting SEC chief accountant and a former partner at Deloitte & Touche.  After reading numerous comments and reviews of his speeches, it seems clear to me that he is an IFRS advocate.  Although he seems to prefer a complete turnover to IFRS, he has suggested that adopting some, but not all, of IFRS would be a plausible first move.  Selling rates him as having an 8% chance of being named.

Jack Ciesielski and Charley Niemeier are definitely not IFRS proponents.  I cannot find evidence that either will support a single world standard, let alone a move to IFRS.  Both favor strong accounting standards, tight regulation and vigilent enforcement.

SEC Chair Mary Schapiro certainly has choices.  On one end of the continuum would be Ciesielski and Niemeier, who favor tight regulation, U.S. tailored accounting standards and protection of investors.  On the other end are Kroker and Carnall, who have strong ties to the traditional big firm establishment.  They seem willing to promote the big firm party line on IFRS and other issues.  Adams seems to be the compromise candidate but is inexperienced.

Debit and credit – – David Albrecht

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