Financial Accounting Blog

Sunday, August 31, 2003

Very strong comment on the state of the industry & litigation. Enron & WorldCom's fallout continues! Also relates directly to discussions re: ethics, assurance services and how stakeholders need to trust not just the statements but the auditing firms that stamp their approval on the statements - largely by name alone.

Friday, August 29, 2003 Investors - P&G 2003 Annual Report

I thought everyone might like to see an annual report from a local company.

Wednesday, August 27, 2003

Freddie Holders Bolted at First Sign of Trouble: "Shenanigans The Street.Com, Jim Cramer's website, continues its ongoing discussion on Freddie Mac's accounting "shenanigans". The rest of the article discusses the number of institutional investors that have been dropping shares of Freddie Mac.

Most of the accounting games at Freddie stemmed from an attempt by management to limit the impact of its large derivatives portfolio on its earnings. Rather than record large gains on those derivatives transactions in a short time frame, Freddie's managers tried to spread out those revenue gains over several years. "

The New York Times reports that SureBeam Corporation's auditor had recently questioned its method of recognizing revenues.
"SureBeam said Deloitte had questioned the accounting for the sale of equipment to a Brazilian company in 2000, in which the company recognized millions in revenue that was ultimately not recovered. It also questioned the reporting of millions in revenue from the sale of equipment to Texas A&M University, which is not paying for the equipment but is performing research services for the company."

Tuesday, August 26, 2003

AccountingWeb reports that corporate directors are getting additional pay to compensate for additional responsibility (and risk of being sued).
"Experts estimate that the time commitment from corporate directors to fulfill their duties has increased about a third, up from 180 hours per year to about 240 hours a year. These extra time commitments stem from both additional Sarbanes-Oxley requirements as well as increased levels of decisionmaking and monitoring of their companies activities as a result of the increased expectations of the investing public."

The Economist magazine has a story about the turmoil in the world of accounting standards. Near the end of the article it has the following quote
"None of this, however, will address the deepest flaw in accounts, says Baruch Lev, a professor of accounting and finance at the New York University Stern School of Business. This is the reality that most of the numbers in accounts are not facts but estimates. People are not good at estimating things, he says, and no amount of new accounting rules and auditing will change the fact that estimates are fragile and easy to manipulate. "

Monday, August 25, 2003

New York Post reports that the SEC enforcement chief, Stephen Cutler, has said that that the SEC is cracking down on all parties involved in corporate fraud----including outside directors of corporations.
"In a case brought against Boston-based transportation equipment company Chancellor Corp., the SEC alleged that Rudolph Peselman, an outside director who also sat on the audit committee, ignored 'clear warning signs that financial improprieties were ongoing.

'It's an important case because there have not been very many cases involving outside directors, and in particular outside directors who weren't themselves actively involved in a fraud,' Cutler told The Post.

In cases of corporate fraud, the SEC will look at what information directors had. 'You look at what info was brought to the attention of the outside director and how much of a red flag that information was or should have been,' said Cutler. "

Friday, August 22, 2003

MSN Money - The Speculator writes about companies announcing stock buybacks.
As we pointed out in our column of April 18, 2002, our own study of 224 companies that announced buybacks in 2000 and the first three months of 2001 had superior performance of 30 percentage points a year. We have updated our study again for all the companies that announced buybacks in 2002, and find that these companies outperformed the S&P 500 by 6 percentage points.

Monday, August 18, 2003

Letter from Acting SEC Chief Accountant to the AICPA

Until recently, the American Institute of Certified Public Accountants (AICPA) has promulgated rules for conducting audits. The Sarbanes-Oxley Act, however, gave that power to a new organization. This letter from the SEC to the AICPA indicates that there's already bad blood between these two groups.
"The Commission staff is concerned that these quotes create the misleading impression that the ASB will adopt final standards in this area that will be applicable to the audits of public companies' financial statements. As you know, the Sarbanes-Oxley Act grants the Public Company Accounting Oversight Board ("PCAOB") the authority to set auditing standards to be used by registered public accounting firms in the preparation and issuance of audit reports required by that Act or by the rules of the Commission.

I hope this letter clarifies the Commission staff's position regarding the PCAOB's standards-setting authority and the potential impact of the ASB's efforts. " - Enron Banks Dodge a Bullet
"One problem the government faced is that the banks are so big and important that the feds didn't want to risk the serious damage that a criminal prosecution would do to innocent employees and shareholders (think Arthur Andersen). And only a handful of employees at each bank worked on Enron. Prosecuting individual bankers would be a difficult task too. Like many of Enron's other financial tricks, the prepays were clearly deceptive in commonsense terms. Yet in technical terms, thanks to clever contortions of accounting and legal requirements, they passed muster with the experts. How do you prosecute individual bankers when accountants and lawyers gave their consent?

It's this rules-based, rather than ethically grounded, way of thinking that regulators hope to change. As part of the settlement, both Chase and Citi have agreed to modify their business practices in ways that should prevent them from engaging in transactions like the prepays-transactions that help a company like Enron disguise its true financial condition to investors. "

BW Online | August 13, 2003 | Will Debt Weigh Down the Recovery?
"TROUBLED BORROWERS....many companies are now devoting a bigger chunk of their operating profits just to servicing their debt. A recent study by Merrill Lynch reveals that the 'interest coverage ratio' for the S&P nonfinancial companies has declined steadily since 2000. The ratio, which measures a company's ability to pay its debt service out of operating profits, has seen operating profits slip from 6.3 to 5.3 times debt since 2000, the lowest level since 1995. " SEC Bars PricewaterhouseCoopers Partner
...Regulators said they barred the former outside auditor of Tyco International (TYC), saying he was "reckless." The Securities and Exchange Commission also said Richard Scalzo failed to act despite clear indications that the company's former senior management lacked integrity. Scalzo, a PricewaterhouseCoopers partner, is barred from ever again preparing financial statements of publicly traded companies. Such a punishment is considered rare. Scalzo did not admit or deny the SEC's findings.