KPMG to Pay $10 Million to Settle Charges Over Gemstar Audits

Regulators said that from September 1999 through March 2002, KPMG and its auditors should have known that Gemstar was improperly booking $152 million in licensing revenue and $60 million in ad revenue. Gemstar, which publishes TV Guide magazine, also sells ads on an 'interactive program guide' that allows TV viewers to navigate and select programs to watch.

The SEC alleged that the KPMG auditors shied away from questioning corporate management and did not seek enough evidence to back up what turned out to be inaccurate conclusions.

'KPMG's auditors repeatedly relied on Gemstar management's representations even when those representations were contradicted by their audit work,' said Randall R. Lee, director of the SEC's Pacific regional office. 'The auditors thus failed to abide by one of the core principles of public accounting -- to exercise professional skepticism and care.'

Confirmation Letters. Part of a standard audit is to have the client's banks send letters directly to the auditor confirming the existence and amounts of client's bank accounts. I haven't followed the Parmalat scandal so this is likely old news but this article states that auditors of Parmalat were fooled by a phony bank confirmation letter. The author of the article questions "Is it too much to ask that the auditing firms come up with a foolproof way to assure that bank accounts are real?"

I've googled this topic and can't find a consistent story about the confirmation letters. One site said that a Parmalat employee gained access to the letter before it was mailed and flew to New York to mail the letter (I guess so it would have a New York post stamp).

But this opinion piece at Accountants World asks

How gullible is an auditor when no one thinks to ask why a company needs to sell bonds if it has 5 billion euros in the bank? How dumb (or duplicitous) is the auditor who accepts a smudged fax copy of a bank letter as confirmation of a 5 billion euro bank balance without some sort of secondary confirmation?

Stock Options. FASB voted to delay by six months the new rule for expensing stock options. Business Week thinks this delay may give opponents of the rule time to regroup.

In FASB's defense, Chairman Robert Herz says the delay was strictly practical, since many companies were unprepared to tackle another major regulatory change. Says Herz: "We have clearly heard from preparers, auditors, and the SEC staff that the first quarter of 2005 is crunch time."

In an attempt to appear responsive to the needs of Corporate America, FASB may have laid the groundwork for an even bigger expensing battle next year, when the make-up of Congress, the SEC, and FASB itself might be more conducive to anti-expensing arguments.

The move gives politically powerful opponents a chance to regroup and mount an even more vigorous post-election charge in Congress, where the House has already passed an anti-expensing bill and more than half the Senate wants the Securities & Exchange Commission to intervene on the valuation issue. In fact, the chief obstacle to a Senate vote on expensing is Richard Shelby, R-Ala., chairman of the Senate Committee on Banking, Housing & Urban Affairs.

Does dollar-cost averaging work for bonds? I came across this 1997 paper that provides some evidence on the question. The idea with dollar-cost averaging is that you invest a set dollar amount into your investment each period. That way, when prices fall you'll buy more units (e.g. shares) of the investment and fewer units when the price rises.

Based on historical evidence, the major conclusion of our study is that an investor is better off, in terms of return and risk-adjusted performance, investing the lump sum immediately. Even investors who have a high degree of risk aversion would find that a simple buy-and-hold strategy allocating 50 percent to T-bills and 50 percent to bonds produces approximately the same return with lower risk than a 12-month DCA strategy.

How do we account for these results? The primary explanation seems to revolve around the positive risk premiums that existed in the great majority of time periods. From 1926 to 1995, T-bills produced an average return of approximately 3.7 percent, while corporates and Treasuries produced returns of approximately 5.9 percent and 5.4 percent, respectively. Thus, there was a relatively high opportunity cost associated with holding the uninvested portion of the fund in a risk-free asset.