Breaking News: James Kroeker to Leave SEC

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.

SEC Chief Accountant James Kroeker to Leave the Commission

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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Anton Valukas on 60 Minutes

Anton Valukas is a Chicago attorney who as alternated stints as a federal attorney with the Justice Department prosecuting white collar criminals, with a law practice defending white collar criminals.  He is well known for serving as court appointed bankruptcy examiner in the bankruptcy of Lehman Brothers.  After an 18 month investigation, his team published a nine volume, 2200 page report.

Valukas carefully documents how Lehman Brothers engaged in Repo 105 & 108 transactions to improve the appearance of the company’s liquidity on its balance sheets.  Valukas concludes that there are reasonable grounds for the government to purse litigation against Lehman Brothers executives.  The State of New York has already filed a civil fraud lawsuit against Ernst & Young for its part in what is alleged as accounting fraud.

On Sunday, April 22, 2012,  Steve Kroft interviewed Valukas on the popular CBS show, 60 Minutes. The following clip from the interview is a CBS teaser or advertisement for the show.

In the short clip, Valukas says the only reason for Lehman Brothers to engage in Repo 105 transactions was to impact the leverage numbers on the company’s balance sheet.

The entire 60 Minutes segment, “The Case Against Lehman Brothers,” can be viewed by clicking on the following link:

http://www.cbsnews.com/video/watch/?id=7406224n 

The transcript of the segment is available at the 60 Minutes site.

A key exchange between Kroft and Valukas is,

Steve Kroft: Did these quarterly reports represent to investors a fair, accurate picture of the company’s financial condition?

Anton Valukas: In our opinion, they did not.

Steve Kroft: And isn’t that against the law?

Anton Valukas: It certainly, in our opinion, was against civil law if you will. There were colorable claims that this was a fraud, yes.

By colorable claims Valukus means there is sufficient evidence for the Justice Department or the Securities and Exchange Commission to bring charges against top Lehman executives, including CEO Richard Fuld, for overseeing and certifying misleading financial statements, and against Lehman’s accountant, Ernst and Young, for failing to challenge Lehman’s numbers.

Anton Valukas: They’d fudged the numbers.

At the end of the segment, Kroft speculates that the reason the SEC has not filed any suits is because it does not have a winnable case, given that it had personnel on premise3s at Lehman, and these personnel were aware that Repo transactions were going on.  Valukis wonders if the personnel had the expertise to fully comprehend what was going on.

Debit and credit- – David Albrecht

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PCAOB’s Doty to Present Budget Before SEC

Sarah N. Lynch has a nicely written article up today at Reuters Canadian.  It’s nice to see her by-line again.  She has always written competently about accounting.

PCAOB Chair James Doty

In “SEC to Put U.S. Audit Watchdog Under Microscope,” January 12, 2012, Lynch reports that PCAOB chair James Doty will be presenting the PCAOB budget request of $227 million before the SEC in an opening meeting tomorrow.

She reports that this is the first open meeting on a PCAOB budget since 2008.  She then goes on to identify several related issues before leaving the reader to conclude that this budget review shouldn’t be a big deal.

First, she reports on the context of the budget review.  At this time the PCAOB is working on several high profile and controversial issues:  auditor rotation, audit partner name on auditor opinion, inspection of U.S. firms, and attempted inspection of foreign firms.  Questions on any of these issues might be asked of Doty.  In addition, salaries at the PCAOB are high for government work, with Doty making four times what boss Mary Schapiro receives.

Then, she reports that Doty commands “respect from both sides of the aisle,” and should represent well both himself and the PCAOB.

Then, she reports that the SEC publicly reviewed the PCAOB budget last in 2008, when Republican Commissioners  Cynthia Glassman and Paul Atkin were critical of the Board.  The current hearing has been called at the request of new Republican Commissioner Dan Gallagher.

Due to scheduling issues, I will not be able to watch the meeting.  It should be interesting to see if political interests will use any SEC commissioners to bring pressure on the PCAOB as it considers its controversial issues.

Debit and credit – – David Albrecht

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Miscellany

Miscellany — interesting items that caught my eye during the week.

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Jonathan Weil shows why he is one of the premier journalists writing about accounting in, “Goldman Sachs Envy Gains New Meaning at Big Four.”  Weil shows several examples of the revolving door between the large accounting firms and their regulators on the PCAOB.  There are stinky conflicts of interest.

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Adam Jones, accountancy correspondent for the Financial Times, writes about new KPMG International chairman Michael Andrew in “KPMG vows to remain a multi-disciplinary firm.”  In this interview, Andrew ridicules all non-Big 4 accounting firms,

He also lashed out at a Commission proposal to force the Big Four to share some audits with smaller rivals. “Can you imagine a second-tier firm auditing a global bank at a time when there is already a lack of confidence in the marketplace?”

He added: “They simply don’t have the skills or the market expertise.”

He also accused some smaller rivals of being “quite lazy” about investing in their businesses.

Mr. Andrew is a jerk.  But Steve Martin was funnier at it.

Jones has another story on the issue, “Auditing has moved into the realms of sitcom.”  It’s worth a read.

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Stephanie Sammons, of Social Media Examiner, writes about, “5 Simple Steps for Improving Your LinkedIn Visibility.”  Read it.  Do it.

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Tom Selling is terrific when he writes about IFRS adoption issues, as he does in, “Will the SEC Sneak IFRS in Through the Back Door?”  Selling is sounding more pessimistic about how the nefarious SEC might sneak in IFRS, despite all reason and common sense (as well as almost every accountant and investor) being against it.

I have little faith.  The commissioners of the SEC are political appointees, and Mary Schapiro has been a willing accomplice to Obama administration policy.  She has her marching orders to install IFRS, and she is loyal to the hand that feeds her.

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Mark Schaefer of {Grow} has another post out on Klout, “Kould Kare Less.”

His Klout score is high, but he doesn’t care.  Mine isn’t, and I don’t care either.  Yet, many do.

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Debit and credit – – David Albrecht

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SEC Morale Bad and Getting Worse

SEC morale is color coded yellow -- bad mood alert.

Biannually (once every two years), the federal government conducts a survey of federal employees with respect to job satisfaction and working conditions.  I always look for the Securities and Exchange Commission (SEC) results, because the SEC is the government agency charged with regulating accounting (establishing accounting standards) and auditing (PCAOB).

The results of the 2010 survey are out (here).  The image at right says it all.  Warning:  morale at the SEC is bad and getting worse.

Does it matter to us?  I think so.  The SEC is in charge of protecting investors.  It’s employee morale is a clear gauge as to how the war is going.

When Mary Schapiro was appointed chair by new president Obama, morale at the SEC was at an all-time low.  The worst chairman in SEC history, Christopher Cox, had done a number on the agency’s effectiveness against big business.  Jobs were not being performed efficiently or well.  A ‘circle the wagons’ mentality had set in.

After two years of Schapiro’s leadership, we can now see that morale is getting worse.  Employee job satisfaction is 35th out of 37 federal agencies.  Of 46 individual rating items, there were 5% declines in 25 items for SEC employees.  SEC employee responses were significantly below federal average for 39 of the 46 items.

When “circle the wagons” fails to provide protection, employees can only play dead and pray not to get scalped.

Thanks to Broc Romanek for the tip.

Debit and credit – – David Albrecht

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High Stakes Staredown

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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SEC Self-Funding Is A Mistake!

What kind of mess will this legislative provision give us?

No clever titles this time.  I’m putting my message into this post’s title.  A soon to be enacted congressional provision is a big mistake!

According to “House Agrees with Senate on SEC Self-Funding” at Jim Hamilton’s World of Securities Regulation,  Congress has added a provision to the financial reform bill (currently in committee to iron out differences between the House and Senate versions) that removes the SEC from the federal budget.  Presumably, the SEC will levy a tax on SEC registrants.

In support of SEC self-funding, SEC chairs always argue in public that they lack sufficient and consistent funding to enforce securities laws and regulations.  As proof, they point out that Congress occasionally cuts back on SEC funding.

What they don’t mention is that the budgetary review process provides an opportunity for Congressional oversight of the SEC.  When the SEC is performing poorly, say due to the poor leadership of the Chairs (i.e., Cox and Schapiro), a Congressional budget cut is a natural and effective response.  Of course SEC chairs want self-funding, it gives them a pass from oversight.  Who wouldn’t want that?

Moreover, giving a governmental agency a free hand in levying taxes (or fees) leads inescapably to exorbitant rates and inefficient service.  A great example of this is the Ohio Turnpike Commission which manages the I-80 toll road across northern Ohio.  When faced with no further need for its existence, it instead raised rates several times and spent money on projects unrelated to the toll road.  Need I say that the commissioners are paid exorbitantly?

The SEC should not be rewarded after several recent failures.  Its staff has failed to investigate tips of historic frauds (e.g., Madoff).  Moreover, its oversight of the FASB has been non-existent.  I think we need to disband the SEC and start over from scratch.  Providing permanent funding is as wrong as it gets.

Unfortunately, I am writing in hindsight.  The Conference Committee hammering out compromise legislation between the House and Senate versions has already agreed to the self-funding.  Democrats control both chambers of Congress and eventual passage is assured.  Please recall my earlier comments that Congress should not be permitted, under any circumstances, to create financial regulation legislation.

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P.S.  Victory!  SEC self-funding was dropped from the final version of the bill.

Debit and credit – – David Albrecht

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SEC’s Schapiro on Accounting

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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Thoughts About SEC’s IFRS Policy

J. Edward Ketz is my round tuit.  ???  A round tuit is anything that unlocks your sense of inertia, allowing you to start working on some task that has been delayed far too long.

An example helps.  Have you, like me, ever been nailed for procrastinating?  All the time.  It probably followed this thought, “I’ll get a round tuit when there’s a free moment.”  But everything else doesn’t get done and there’s no free time, so you never get a round to it.

Ed is my round tuit.

On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Yesterday (March 29, 2010), Ed Ketz published his reaction, “The Iffiness of IFRS“.  It’s better than anything I can  write (anything Ed writes is always better than anything I can ever write, just take it for truth).  Better late than ever, here are my personal reactions.

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Ed Ketz – A Beacon Of Sound Reason About IFRS

On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Today (March 29, 2010), Ed Ketz publishes his reaction, “The Iffiness of IFRS” at SmartPros.   It’s better than anything I can write (anything Ed writes is always going to be better than anything I can ever write, just take it for truth).  For those of you new to The Summa, Professor Ketz is a charter member of the group of IFRS critics.

For years, Ketz has railed (Merriam-Webster: to revile or scold in harsh, insolent, or abusive language) at the corporate practice of financial reporting.  He has repeatedly said that the number one problem is that corporations simply don’t follow the rules.  If ever they were all to be in a general state of compliance, then we could talk about about the structure of accounting standards.  But first, we need compliance.  Generally speaking, he favors specific accounting rules that permit no wiggle room.  Such rules make it easier to crack down on wrong-doers.

Professor Ketz’s latest editorial is “The Iffiness of IFRS.”  He responds to the SEC and suggests several issues that still need to be worked out before IFRS adoption.  Although the context for his remarks is opposing IFRS adoption, he believes the biggest problem with the proposed transition is:

… whether IFRS statements can be audited and what will happen in the courtroom after a firm experiences severe declines in its stock price.

Ketz concludes with:

… I again marvel at the rush to IFRS. The benefits do not appear to match or exceed the costs of the adoption.

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The Holy Grail of Accounting Is a Fool’s Errand

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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The SEC and Some Sort of Ostrich Syndrome

The U.S. government bears the societal responsibility for establishing accounting standards.  In its structure of economic regulation, the task for creating accounting standards is fixed on the Securities and Exchange Commission.  For seventy years the SEC has passed on its responsibilities, instead relying upon private U.S. organizations.   This has been called the Ostrich Syndrome (aka Head-in-Sand).  Now, the SEC proposes to rely upon a private international organization (IASB).  I call this the Some Sort of Ostrich Syndrome (aka Head-Where-It-Doesn’t-Need-to-Be).

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