Oh, Wells. Buddy. What’s going on? Can’t seem to keep your nose clean. Last week heralded another splashy headline in the WSJ: Wells Fargo Employees Altered Information on Business Customers’ Documents Even we’re getting sick of it! This time, WSJ reported that employees in the wholesale subunit cut corners with data collection — including personal […]
Cybersecurity experts and IT auditors better saddle up — the world just experienced its first successful digital bank robbery. The Tesco heist Last weekend cyber criminals executed a sophisticated attack on Tesco Bank (subsidiary of the British grocery chain) and successfully stole £2.5 million (~$3.1 million) from customer accounts. While the money was refunded quickly […]
Right now, the FASB and IASB are nowhere near agreeing on how loan loss accounting should be done and fifteen (!!!) banks including Bank of America, JPMorgan, Citigroup, Morgan Stanley, and Wells Fargo would like the rulemaking bods to get their act together: While we acknowledge the difficulty inherent in reconciling disparate points of view, we […]
The idea behind the FASB's credit loss proposal is that it would require banks to report the future losses they expect to incur on their loan portfolios. If you think that would require a lot of judgment — or maybe a Magic 8 Ball — you'd be right! The FASB proposal would allow banks to use their […]
Everybody's sick of banks being too big to fail. The only thing Americans ever liked that was too big to fail was Oprah Winfrey. Then she lost some weight, and then she started OWN. So for a while she wasn't too big, and now she clearly failed. Problem solved! For Oprah, not for banks. So […]
Southern National Bancorp is swapping out KPMG as its auditor for Dixon Goodman Hughes Goodman. Perhaps this development isn't surprising since the firm had, what some might call, a significant restatement last year. But if you were to ask the SNB's President Rod Porter, as one Washington Business Journal reporter did, this isn't about accounting […]
Banks really appreciate the effort to move away from the recognition of losses as they occur approach, FASB, but: The American Bankers Association has published a “frequently asked questions” document reacting to FASB's approach. The group sees FASB's proposal as an improvement over the existing requirement, but still has concerns. “While the incurred loss […]
Way back in April 2010, KPMG resigned as the auditor of TierOne Bank. You see, TierOne was in a bit of a mess with its regulator, the Office of Thrift Supervision; the House of Klynveld risk gurus finally had enough, pulled everyone out of there, withdrew their 2008 audit, and told everyone they wouldn't touch […]
You've got the 2,300-ish page law all wrong. It is not 2,300-ish pages of annoying encumbrances; it is 2,300-ish pages of OPPORTUNITY: Under Wall Street reform […] the largest banks are required to undergo “stress testing” to see how they would perform under potential duress. Deloitte argues there’s a business upside as well, encouraging […]
Wells Fargo analysts are raising estimates for some of the biggest players on Wall Street, but don't go thinking that business is going well: The increased earnings estimates on Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are not due to underlying business improvements. Wells Fargo remains convinced that the quarter will be […]
P. Dubs is taking the high road on this one. PricewaterhouseCoopers (PwC), which is responsible for auditing Barclays' accounts, is understood to have raised concerns with the bank over the structure of the schemes that would have saved it from paying hundreds of millions of pounds in tax. PwC was not responsible for providing specific advice […]
Chuck Noski was CFO of BofA for only one year and is still a vice chairman at the bank and is probably a very competent individual but Jesus, has the Financial Accounting Foundation no sense of the reputation of this particular bank? Further, have they heard nothing about the collective reputation of banks these days?
Mr. Noski’s appointment was announced by John J. Brennan, chairman of the Board of Trustees of the Financial Accounting Foundation (FAF). The FAF is responsible for the oversight, administration, and financing of the FASB and its counterpart for state and local governments, the Governmental Accounting Standards Board (GASB).
“With his breadth of experience in corporate finance across a range of industries, Chuck Noski will bring to the FASAC a deep understanding of the complex issues facing the FASB as it seeks to serve the best interests of all those who use, prepare, and audit financial statements,” Mr. Brennan said. “We are very pleased to welcome him as the new FASAC chairman.”
At least the ABA will have a direct line for their hate mail now.
“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. [FT]
I am a CPA with 5 years experience in a 2nd tier firm (i.e. BDO, Grant Thornton), with the first two years in the Financial Services audit group, and have spent the last three years in Financial Services tax group. All five years, I have pretty much been working on Hedge Funds, ��������������������, etc. Recently, I have come to the realization that I’m getting a little bored of accounting. I still have an interest in the financial markets, and would like to explore opportunities on the investment side, possibly as an analyst at either a fund or investment bank. I spoke to a buddy at one of the major investment banks who gave me some advice. He mentioned that my skills serving Financial Services clients as well as having an understanding of financial statements should translate well to an analyst type of role at a fund or investment bank. He also mentioned that to get my foot in the door, my choices are either to get an Ivy League MBA or take the CFA exam. With that said, I have the following questions: 1) Is it correct that a fund or investment bank would value my skills in terms of placing me in an analyst type of role? 2) What would be the better option, going for the MBA or studying for the CFA (keep in mind that I’d prefer studying for the CFA given the fact that tax season makes it difficult to attend class)? 3) Would I have to wait till I finish an MBA program or pass all 3 parts of the CFA exam or would I be able to make the change after say a couple of semesters into an MBA program or having passed one part of the CFA exam? I would appreciate your insight.
Bored of Accounting
Dear BoA (no, not the flailing AIG target),
Before I take my red pen to your hopeful ambitions of being an analyst, let’s take a few minutes to quickly set two things straight:
#1 – You should not be going to work at a bank – UBS. Credit Suisse. RBS. Goldman. Barclays. Morgan Stanley. No, not a list of places you’re qualified to work because you know how to read a cash flow and prep a K-1. Cuts. Firings. Shit bonuses (relative). SEC in your face. Why the hell would you want to work for a bank, regardless of your level of qualification? You haven’t been auditing banks. You’ve been working in asset management.
#2 I’m going to assume you’re referring to a real analyst position – Not a management company accountant job that the HR guru at RBS slapped a “financial analyst” title on to make the recruiting process easier (“oh, but you’ll have the chance to MOVE AROUND IN THE GROUP YAYYYY.”) That shit doesn’t happen. So, judging by your CFA and MBA speak, you’re referring to a real analyst position, right? Right. Good, now on to your questions.
Q: Is it correct that a fund or investment bank would value my skills in terms of placing me in an analyst type of role?
DWB: You can answer this yourself. Analyze your own experiences – what makes you qualified for such a position? With a little digging on LinkedIn and a basic understanding of your firm’s asset management clients, I can assume that most of your clients fall into the long/short strategy (maybe some bank debt, probably no high yield or event driven exposure). What are your “skills”? K-1 preparation? Washes? Auditing control testwork? Reviewing a waterfall calc? Accounting, accounting, accounting. “But I read the Journal every day.” – So do I, and I’m in HUMAN RESOURCES. I also read Bloomberg and comment regularly on ZeroHedge, but that doesn’t mean I should be calling the shots on a desk.
Q: What would be the better option, going for the MBA or studying for the CFA (keep in mind that I’d prefer studying for the CFA given the fact that tax season makes it difficult to attend class)?
DWB: If you’re going the MBA – and based on your current experience – you need a top 10 MBA program. Attending night school at CUNY Baruch for an MBA will not do the trick. With regards to the CFA – you need to get to level 2 at a minimum. Level 1 is pie.
Q: Would I have to wait till I finish an MBA program or pass all 3 parts of the CFA exam or would I be able to make the change after say a couple of semesters into an MBA program or having passed one part of the CFA exam?
DWB: You really want to make the move? Forget the CFA for now, get into a top 10 MBA program, drop out of work, and go fulltime. Seriously. This will give you the opportunity to network with your classmates, pursue summer internships and rotational programs, and get things done (meaning – move on from accounting) in an efficient manner.
Listen, I’m just trying to be honest. None of this is meant to pee in your Cheerios or diminish what you’ve done so far in your career (by all accounts, you’ve been very successful). But think about the greater picture – the banks are in the shitter, the economy is sloppy mess, and the market is flooded with Ivy grads coming off of fresh experience from the banks’ two year programs. Simply put – you’re not on the same playing level. If you know how to maximize the profitability in the futures market on tankers trekking through hurricane season while carrying retail goods from China to US ports, then maybe we should talk but until then…it will be easier to stick with what you’re good at. Try getting into a middle office role at a fund, or even a role working as the #2 to the CFO of a small fund. Sure, you’ll have to close the books at the end of the month, but you’ll also have exposure to investment meetings, investor relations duties, etc. over time.
From the mailbag:
Just thought I’d share some developments from the audit world. Some financial institutions which respond to our audit requests are adding disclaimers such as the following:
“…The recipient acknowledges that [the respondent] does not represent and warrant that the information is complete and accurate. The recipient further acknowledges that the information may not disclose the entire relationship between the customer and [the respondent]…”
Basically, this is making the confirmation process entirely pointless as banks are saying that even if they sign and respond to a confirmation, they aren’t guaranteeing that their response actually means that the balance is accurate. They are also doing this in the fine print attached to a lot of confirmations so it wasn’t entirely obvious until some people started actually reading that fine print. This is causing issues as we can no longer rely on these confirmations for our audit procedures if they contain such a disclaimer.
Because Jonathan Weil is wondering.
He noticed that Audit Analytics found that 699 SEC-registered companies filed restatements last year which was slightly higher than ’09. This was considerably less than the 1,566 restatements in ’06 but when it came to the number of banks that had restatements, he noticed something strange:
The figures for banks, in particular, look unnaturally low. Forty-four banks restated last year, one fewer than in 2009. Even more curious, there were 133 banks that issued corrections from 2008 through 2010. That was down from 169 banks during the previous three-year period, before the financial crisis took off in earnest, which makes no sense.
Here we had the greatest banking industry meltdown since the Great Depression. Hundreds of lenders failed. And yet the number of banks correcting accounting errors declined while the collapse was unfolding. There were no restatements by the likes of IndyMac, Washington Mutual or Lehman Brothers, for example. The obvious conclusion is the government has been giving lots of banks a free pass, as have their auditors.
Honesty for Banks Is Still Such a Lonely Word [Bloomberg]
“Zero Hedge kindly requests any and all Big 4 (and all other) accounting firm whistleblowers to please stand up and let us know of any and every case of improper accounting they are aware of (preferably with supporting documentation).”
“Citi still seems to have aggressiveness with financial targets (well above historical), accounting (tax credits) and corporate governance. Also, the strategy does not always seem in sync with execution and/or financial reporting.”
We hear a lot from small businesses about how hard it is to get a loan and a lot from bankers that demand from credit-worthy borrowers is down. Now a new study provides insights into the situation, by exploring the top reasons why banks are turning down applicants, along with plenty of other data. And because it includes asset-based lenders and other funding sources, it offers a wider view of just what’s going on in the financing landscape.
The study, from researchers at Pepperdine University, surveyed 1,430 borrowers, lenders and investors, looking at changes over the past six months. Since the most detailed analysis focused on banks and asset-based lenders, here’s a look at the most salient points:
Banks – Demand certainly does seem to be down, judging from responses from the 56 banks studied. About 11 percent reported an increase in applications over the past six months compared to 77.2 percent who had a decrease. But the quality of borrowers is up, according to 55.6 percent of those surveyed. That’s compared to 22 percent who reported a drop. And the number of approvals? That’s gone through the roof. About 76.5 percent reported an increase.
What are the reasons for turning down applicants? Top on the list is quality of cash flow. Almost 25 percent cited that as the reason. And 20.8 percent pointed to quality of earnings.
Asset-based lenders – The 52 asset-based lenders reported the mirror opposite, at least when it comes to demand. Sixty percent had an increase in applications vs. 8.7 percent who experienced a decline. Also while more lenders reported a drop in the credit quality of applicants, a majority saw an increase in the quality of borrowers who were approved.
As you might expect, the top reason for rejecting an application was insufficient collateral (30 percent). “In the weak economic environment, the valuation of collateral is going down,” John Paglia, an associate professor at Pepperdine and author of the study, said to me. Second on the list was quality of earnings (15.8 percent).
What’s it all mean? For one thing, asset-based lenders are attracting more interest from prospective borrowers, but the economy has done a number on their most important criteria, collateral. As for bankers, it seems they’re on the level when they say they want to make loans, but they can’t find suitable prospects.
Apparently when they do get a live one, bankers are more than ready to lend.
Just last week we mentioned the American Bankers Association and its efforts to undermine the FASB’s latest fair value proposal that, in the ABA’s mind, could bring down civilization as we know it.
Because of this danger, the ABA encouraged “investors” through email and on its website to write individual letters to the FASB, expressing their displeasure with the worst idea in the modern history of double-entry accounting. We say “investors” because the ABA not-so-subtly asked everyone (i.e. who felt the overwhelming urge to write Bob Herz & Co.) to refer to themselves as such.
Further, the ABA provided a template of a letter to send to the Board for the “investors,” however, it did warn to resist using the example as their own because A) this is far too important and telling the FASB that fair value pains you in the deepness of your soul and takes food out of your children’s mouths will be a far more effective narrative; and B) the FASB hates form letters. HATES. So much so that Bob Herz rips up all his gold stars that he gives for the constructive letters he receives and then your unoriginal ass gets negative points.
The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.”
Simple enough, right? Well, maybe. But In his column today, Jonathan Weil gives an example of one ABA soldier that wasn’t very good at following instructions:
Among the letter writers was Terry L. Stevens of Francesville, Indiana, who identified himself as a bank investor, as the ABA had suggested. He didn’t mention that he also is chief financial officer and executive vice president of Alliance Bank, a closely held lender in Francesville with $270 million of assets.
“As a bank investor, of utmost importance to me regarding the banks in which I own stock is their financial position, and transparent financial reporting is key in order for me to make investment decisions,” Stevens’ letter said. “With this in mind, I am writing to express my deep concerns and opposition to the portion of the proposal that requires all financial instruments to be marked to market.”
Stevens didn’t write those words himself. He copied them verbatim from a sample letter the ABA posted on its Web page. So, too, did a bunch of other bankers who submitted comment letters to the FASB opposing its proposal, notwithstanding the ABA’s warning that they shouldn’t do cut-and-paste jobs.
This had to be a mistake, right? This is far too important of an issue to the banks of this country that a mishap like this could just happen. Bankers are responsible people that take this stuff very seriously and would never risk going through the motions just to serve at the whims of their lobby’s voice…would they?
Stevens told me he didn’t have time to write his own letter from scratch. “The points that I grabbed out of their paragraphs did a good job of explaining how I felt about the situation,” he said.
Stealth Bankers Bomb as Anti-Reform Crusaders [Jonathan Weil/Bloomberg]
BP Mulls Selling Off Billions in Assets [WSJ]
“BP PLC is in talks with U.S. independent oil and gas pr on a deal worth as much as $10 billion that could include stakes in BP’s vast Alaska operations, according to people familiar with the matter.
A deal, which would go a long way to helping BP cope with the financial stress of paying for the clean-up of the Gulf oil spill, could be reached in the coming weeks, though there is no guarantee it will succeed, one of these people said.”
Bank Profits Depend on Debt-Writedown `Abomination’ [Bloomberg]
This abomination has an official name, SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
“Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.
Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote.”
Koss embezzlement ran in spurts, lawsuit says [Milwaukee Journal-Sentinel]
The most impressive “spurt?” $478,375 over three days in 2006. According to Koss’ lawsuit against S-squared and Grant Thornton, $145,000 also disappeared from the petty cash fund over the years, amongst other “unauthorized transactions.”
Bias At Work: To Sue or Not to Sue? [FINS]
Harassed? Discriminated against based on age, sexual orientation, race et al.? Of course suing your employer is an option. This is America after all, where the opportunity to slap someone with a lawsuit is your god-given right. But is it always the right move?
Bolt running from the taxman – Usain snub for British meeting [Daily Mail]
The fastest man in the world would prefer to keep a little money for himself, “Under present tax rules, if Bolt competes once in Britain and only five races elsewhere, the British taxman will demand one-sixth of everything he earns, whether in Britain or not. His taxable earnings would not only include his considerable appearance fees but also his hefty endorsement contracts.”
The Big Four’s UK Firms Pick Up Non-Executive Directors — And Then …? [Re:Balance]
Jim Peterson expands on his thoughts about the Big 4 non-executive directors in the UK, “Not only can good governance not be inflicted or imposed, in other words, because resistant leaders will find ways to disturb or subvert the purpose, but a virtuous culture will display its legitimacy without the need for pietistic overlays.”
Too Rich to Live? [WSJ]
The estate tax debate has gotten even more morbid than it would ordinarily be, ” ‘You don’t know whether to commit suicide or just go on living and working,’ says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year.”
Banks hate the FASB. This is understood. They’re especially bent out of shape these days because the Board recently put out its latest fair value proposal that requires them to carry their loans at fair value. Bob Herz knew that this was going to cause hella-belly aching although he may not have predicted the virtual assault that was coming.
Banking lobbyists have launched an e- mail and Web campaign to mobilize investors against a proposed expansion of fair-value accounting rules that may force banks such as Citigroup Inc. and Wells Fargo & Co. to write down billions of dollars of assets.
The American Bankers Association opposes the Financial Accounting Standards Board’s plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.
The association’s website, noting that FASB’s stated mission is to serve investors, provides a sample letter for people writing to the board and suggests they focus on why the proposal isn’t “useful for investors.”
As you can see, the banks are bringing out the big guns, although this not unfamiliar territory for the FASB. Lynn Turner, a Senior Advisor and Managing Director at LECG and former Chief Accountant SEC wrote in an email to GC, “This campaign is very similar to the efforts of the technology companies campaign against the FASB in 1993-95 to prevent rules that would have required those companies to expense the value of their stock options, something that ultimately led to investor losses and problems in the markets.”
The FASB prevailed in that particular battle but the ABA is wise to their ways, encouraging everyone to resist going through the motions on this one:
The association’s Web page, titled “Guidance for Investors Regarding FASB’s Mark-to-Market Proposal,” includes a sample letter to the board “for educational purposes only.” The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.” Those who comment should “let FASB know that you are an investor,” the ABA says.
U.S. Banks Recruit Investors to Kill FASB Fair-Value Proposal [Bloomberg BusinessWeek]
In the latest move by a big bank to make itself into a friend to small business, Chase recently announced a program to offer incentives to small companies for hiring. But the actual benefit to most small businesses is hard to see.
Specifically, the bank will lower its interest rate on new lines of credit by 0.5 percentage points for each new hire, up to three employees, for the life of the loan. The offer is available to business owners who are approved for a line of credit of up to $250,000 or existing business customers who increase their line of credit by at least $10,000. And if you open a business checking account, you get an additional half percent discount on your loan rate.
A typical interest rate on a line of credit is 6 percent. According to the bank, if you choose the whole ball of wax – take the discount for three hires and open a checking account – you’ll lower that to 4 percent. And counting the discount for a new checking account, small business owners can save about $4,000 over three years on an outstanding balance of about $65,000.
Trouble is, that’s an offer most businesses are likely to refuse. Those already planning to hire and that are in good health might take advantage of the deal. In fact, they’d be silly not to. But the offer is hardly enough to inspire a business to hire if it wasn’t going to do so already.
What the offer might accomplish is to help Chase seem like a nice institution, not the greedy enterprise that helped bring down the economy. And it’s hardly the only attempt by Chase, or other banks, to do something to lift their image, something I’ve written about before. For example, last year, Chase unveiled plans to increasing lending to small businesses by $4 billion to a total of $10 billion. Bank of America recently said it would buy more from small businesses. In May, Citicorp launched a $200 million fund to boost small-business lending in low-income communities. And of course, last year, Goldman Sachs announced its own $500 million small-business fund.
It’s also a way to attract healthy businesses at a time when loan demand is down.
So a win-win for Chase. Not so much for small businesses.
G-20 Agrees to Cut Debt [WSJ]
“The wealthiest of the Group of 20 countries said they would halve their government deficits by the year 2013 and ‘stabilize’ their debt loads by 2016, a signal to international markets and domestic political audiences they are taking seriously the need to wean themselves from stimulus spending.”
Once you catch your breath from laughing, the President also cited the tax code specifically and his threatening to put some (i.e. Congress) in a tight spot:
“They might have to make deeper cuts in deficits to comply with its pledge. A White House statement said that government debt in the fiscal year 15, would be at an “acceptable level.” President Obama said that next year he would present “very difficult choices” to the country in an effort to meet deficit goals.
The president cited his disappointment with the U.S. tax code. ‘Next year, when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, ’cause I’m calling their bluff,’ Mr. Obama said.”
Bank auditors eyed for whistleblower role [FT]
A paper from the UK’s Financial Services Authority puts forth the discussion of requiring auditors to work more closely with regulators on irregularities found during the bank’s audit engagement.
“Experts say bank executives are nervous about the prospect of increased bilateral discussions between regulators and auditors. Auditors have been fearful the paper could thrust the profession into a regulatory spotlight it has so far avoided.”
Koss Fraud: We didn’t bother to look at the endorsements on our own checks, but Grant Thornton should have! [Fraud Files Blog]
Fraud sage Tracy Coenen presents her latest view on the Koss fraud mish-mash and how Koss management has managed to make themselves “look like absolute morons.”
BP Loses $22 Billion in Legacy of Share Buybacks [Bloomberg]
“The sum represents the hole after the 52 percent plunge in BP shares since the Deepwater Horizon exploded and sank, resulting in the worst oil spill in U.S. history. BP bought back more than $37 billion of its stock in a bid to return money to investors between 2005 and 2008. Those shares are now worth $15 billion, excluding dividends.”
Martin Ginsburg, Noted Tax Lawyer and Husband of Justice Ginsburg, R.I.P. [ATL]
Mr Ginsburg was a tax law professor at Georgetown for many years and was known for his great sense of humor, as evidenced by his faculty bio, noted by our sister site, Above the Law:
Professor Ginsburg is co-author, with Jack S. Levin of Chicago, of Mergers, Acquisitions, and Buyouts, a semi-annually updated treatise which addresses tax and other aspects of this exciting subject. The portions of the treatise written by Professor Ginsburg are, he is certain, easily identified and quite superb.
Open Letter to the Securities and Exchange Commission Part 9: Overstock.com’s Excuses Simply Don’t Add Up [White Collar Fraud]
It appears Sam Antar has caught Overstock.com in another disclosure snafu but this time it isn’t really clear whether the company gave the wrong excuse, lied to the SEC or simply doesn’t know what they’re doing, “Overstock.com’s 2008 10-K report claimed that a reportable “gain contingency” existed as of November 7, 2008. However, the company contradicted itself and claimed to the SEC reviewers that reportable reportable ‘gain contingency’ did not exist on November 7, 2008.
If Overstock.com’s 10-K disclosure is true, the company’s explanation to the SEC Division of Corporation Finance can’t be true. Likewise, if Overstock.com’s explanation to the SEC Division of Corporation Finance is true, the company’s 2008 10-K disclosure can’t be true.”
Accounts bodies revise workplan [FT]
“Despite the reality of impending financial reform, banking and financial services executives are bullish about their business prospects in the current year and 2011, with many investing for long-term growth and specifically focused on traditional services, emerging technologies and M&A as a means to generate growth.” ~ Scott Marcello, deputy leader of KPMG LLP’s Financial Services practice.
“Despite the reality of impending financial reform, banking and financial services executives are bullish about their business prospects in the current year and 2011, with many investing for long-term growth and specifically focused on traditional services, emerging technologies and M&A as a means to generate growth.”
~ Scott Marcello, deputy leader of KPMG LLP’s Financial Services practice.
In anything is better than the shit BP has on its hands news, Reuters reports that creditors of PFF Bancorp Inc are requesting permission from a U.S. Bankruptcy Court in Delaware to snoop around “information in KPMG’s possession” to find out what the firm knew about PFF’s over-leveraged, under-capitalized, risk-loving ways.
The company’s committee of unsecured creditors wrote in their request that “Information in KPMG’s possession may support potential claims against third parties and against KPMG itself, if, for example, it becomes apparent that KPMG knew or should have known at an early date of any overly-aggressive or inadequately-controlled loan practices of the (company).”
So in other words, PFF would like to – pretty please – sue someone’s ass and they’d like to confirm whether or not KPMG will be a good candidate for said ass suing. So assuming the bankruptcy court gives them the thumbs-up, PFF will send in the hounds to find out what’s what. And they’ve covered themselves nicely by using the wonderfully subjective “knew or should have known” so KPMG’s only option will be to invoke the “we were duped” excuse, which isn’t such a flattering option.
KPMG didn’t respond to Reuters’ request for comment or our email but we’re guessing they’re less than enthused about sharing what is in their audit workpapers. Not necessarily because the documentation will have a smoking gun but more so because they might discover that the partner on the engagement has a bad habit of doodling and that’s just embarrassing.
The accounting change for reporting the value of banks’ loans, which got the New York Times all hot and bothered yesterday morning, really amounts to a hill of beans, once you take a closer look at it.
In fact, the description in the article left me scratching my head on a couple of counts. How, for example, do banks write down the value of non-performing loans, as accounting rules require them to do, if they don’t mark them to market?
And what’s up with the tortuous explanation of how the Financial Accounting Standards Board decided to have banks mark to market the loans for purposes of the balance sheet but not for earnings? While I’m as big a fan as anyone of Jack T. Ciesielski, the accounting expert who publishes the investment newsletter, the Analyst’s Accounting Observer, his quote calling the decision a “smorgasboard” doesn’t really mean anything without some sort of context.
That context is pretty easy to provide, at least in the eyes of Charles Mulford, a Georgia Tech accounting professor and advisor to CFOZone.
As Mulford sees it, FASB simply is bringing information that’s already contained in the footnotes onto the balance sheet, specifically into the line item on that statement known as “other comprehensive income.” And this quite naturally has no impact on the earnings bank report on their income statements.
Currently, banks’ balance sheets carry loans at historical cost, less an estimate of the portion that is uncollectible, with fair value information in the notes, the accounting professor explains. The proposal would move the fair value information to the balance sheet by reconciling the cost of the loan with its fair value, he continues. But Mulford adds that there would be no change in the income statement, since that already includes any loan impairments. Instead, adjustments to fair value would be accounted for as a component of other comprehensive income, which is reported on the balance sheet.
“I view it more of a change in presentation than a change in accounting,” says Mulford.
In other words, investors who pay attention already understand this, so any complaints on the parts of banks should be seen as just an attempt to continue to fool those that don’t.
Proposed Overhaul of Accounting Standards Contains Mark-to-Market Rule [NYT]
The FASB has rolled out MTM 2.0 and while the usual suspects have already started belly-aching, Bob Herz insisted that “The financial crisis reinforced the need for better accounting in this area.”
The new rule will require loans and loan-related instruments to be valued at their market value immediately, thus accelerating any losses that might occur. Losses will either be booked as a hit to earnings or as a reduction in the value of the asset. The Times quotes Jack T. Ciesielski of Accounting Analyst Observer, who reassures, “It will messier to read, but if you know what you are doing you can figure it out.”
The comment period (which should yield some interesting thoughts) will run through the end of September, after which the FASB will hold roundtables discussing the rule and then make any final changes. Institutions with greater than $1 billion in assets will be required to adopt the rule in 2013 while those with less than $1 billion will have until 2017.
The Property Tax: Unsung Hero [TaxVox]
States have their property tax revenues to thank for their budgets not being in an even bigger mess than they already are, according to TaxVox. “[P]roperty tax revenues have yet to fall both because the levy tends to be backward-looking (it takes a while for assessed values to catch up with reality on both the upside and the downside) and because local governments can raise rates. The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009.”
If states are lucky, by the time property tax rates adjust to the reduced home values, sales and income tax revenue may be on their way to recovery. However, it’s unlikely that tax revenues will return to their previous levels which means governments may have to continue (or maybe start?) to – God forbid – cut spending.
“I Didn’t Know What ‘$’ Means” Fails as Tax Defense [TaxProf Blog]
Who let this guy out of the lab? “I am unaware of the meaning of this symbol.”
Yahoo CFO Sees Annual Revenue Growth Of 7%-10% From 2011-2013 [WSJ]
Contrary to what some might believe, Yahoo is still in business and doing quite well, thankyouverymuch. CFO Tim Morse expects things to brighten up with revenue increasing 7-10% from 2011-2013, due mostly to increased advertising business. Yahoo’s partnership with Microsoft and Zynga (they make Farmville) are seen as key to the search engine competing with Google.
Survey finds tax departments more concerned with getting it right than aggressive tax planning [GT Press Release]
Grant Thornton’s latest CFO survey finds that they are more concerned with getting their taxes right than with paying less. Obviously the latter is a goal but considering the regulatory environment (i.e. Democrats are running things), it’s not the priority, despite what those people running for re-election might tell you.
In the first part of our conversation with Michael Krzus, co-author of One Report, Integrated Reporting for a Sustainable Strategy, we discussed the nature of integrated reporting, how it will change corporate reporting as it is commonly known and some of the benefits to both stakeholders and companies.
The second part of our discussion looks at how small and midsize entities will benefit from integrated reporting, the feedback received from clients, and what the future holds.
Going Concern: Do you see a point in time when companies sults for sustainability issues on a reoccurring basis similar to quarterly earnings reporting?
Michael Krzus: I know enough about this to be dangerous, so I’ll give you that caveat, but I am aware of the somewhat recent EPA rule making that is going to require companies to report emissions and things of that nature. There are some limitations, but there will be more frequent reporting for U.S. domiciled companies. I think some of it will depend on the technology available. I don’t know what it takes for a coal-fired electric plant to account for CO2 emissions. So I’m not really in a good position to tell you that in five years whether that will evolve into more regular reporting or not.
GC: What kind of companies will be able to utilize integrate reporting? Can any size company embrace it or will it start with the largest players and work its way down?
MK: As a practical matter, it will have to be large, public traded companies, particularly the global players. On the other hand, I think small and mid-cap companies, especially private ones, have as much or more skin in the game and a lot more upside than the big guys. And that’s because of the complexity of information and the complexity of accounting standards. If you’re Microsoft, you’ve got a lot of issues that can be addressed by your large accounting department but if you’re a $400 million manufacturer of widgets, you don’t have those kind of resources. But you do want to tell stakeholders your story clearly and succinctly. I think the idea of the integrated report gives them the opportunity to do that.
Additionally, in the last couple of years, I’ve developed a good working relationship with the Society of Investment Professionals in Germany and one of the things that group has done is build example reports of what an integrated report could look like for a small or mid-cap sized company. If you think about it from the German perspective, much of their market base is small and medium sized companies and analysts there are very interested in the benefits that an integrated reporting can provide. So, there’s a lot upside for companies that fall outside the Fortune 500.
GC: Do you see a point in time where banks start requesting more non-financial information (i.e. ESG information) in order to qualify for lending?
MK: The short answer is “Yes.” To me, sustainability really has to do with long term viability of an entity. I don’t think a company can be viable for the long term without understanding and managing their environmental, social and governance risks because those three risk types specifically translate to reputation.
To some degree a lender will have to start considering non-financial factors. The price of admission is opening your heart and soul, as a company, to the banker. A banker can ask all kinds of question whether its about CO2 emissions or manufacturing location in Thailand that may cause child labor problems because you’re running a sweat shop.
To parallel that, I recently attended a conference of institutional investors. I found it interesting that a group of people that wanted to know more about integrated reporting were private equity folks. These private equity people are in the same boat as the bankers. If they are going to make an investment, they will open up everything. It’s not just about getting the 10-K, it’s about understanding everything from financial projections and processes to social and environmental risks in China. So, the markets in general, not just bankers, but also private equity and traditional sources of capital have become more and more interested in a broad set of non-financial information.
GC: What has been the experience with clients?
MK: Clients have assisted us by presenting challenging questions to help us think more clearly about the situation. For example, some people have argued that we don’t need integrated reporting because the markets are efficient and already have all the information they need. I would argue that, even without the events of the last couple of years, markets aren’t efficient and don’t have all the information they need because we have so many firms employing armies of analysts, all of who are looking for that shred of information that will give their company an edge. There’s always something that the analysts don’t have.
Another argument is whether or not the integrated report somehow diminishes the corporate responsibility report. My response to that is that by not integrating the two types of reports, companies avoid an audit of non-financial information. In general, the companies that have an integrated report do have some assurance over the non-financial information; it’s not necessarily subject to the same standards as auditing standards but there is some kind of assurance. So I think some kind of audit over the information – and over time perhaps controls and processes – will elevate the quality of the reporting. So good questions from very sharp people like “Have you guys thought about this?” forces us to engage in some dialogue of our own so we do have a coherent responses.
GC: How does IFRS fit into integrated reporting?
MK: I’m one of those people who think that there should be one global set of accounting standards. To speculate just a little bit, I could envision a world that might have IFRS that govern the financial statements and perhaps an international non-financial reporting standard, because at some point we’re going to have to address that. I think the larger question of IFRS is to first, how do we develop a global standard of non-financial information? And secondly, can we develop some sort of benchmark for auditors? So, I remain optimistic that U.S. will eventually adopt IFRS and would hope in the next few years there would be some kind of move to adopt international standards for non-financial information.
GC: What’s next?
MK: There are a couple of major conferences coming up this year where integrated reporting will be a topic in several sessions. We use various conferences to spread the word and build some momentum behind the idea. The Harvard Business School and the Harvard University Center of the Environment are co-sponsoring an event on integrated reporting later this year. Two newspapers in Japan are hosting an event in November and the Prince of Wales Accounting for Sustainability has an annual event in December that hosts roundtables on various topics.
On the Accounting for Sustainability website, there are a number of press releases including a PDF on a governmental collaboration that calls for the establishing an international integrated reporting committee. I can tell you that the Accounting for Sustainability Group has the resources and, frankly, the brand name that could call for the IASB or some other group to undertake the idea of a global framework for reporting non-financial information. I could see us having this conversation a year from now and I’d be very disappointed if there was not some kind of formal announcement from an international integrated reporting committee.
So I’m cautiously optimistic about the future. The timing for this is right and integrated reporting is important when you believe in the concept of inter-generational responsibility. This is the only planet we’ve got and we should every intent to leave it in as good as condition as we found it.
But as a hard-headed capitalist I also think integrated reporting makes sense because you don’t want to invest in company that will go bust. A company simply cannot be viable for the long-term unless they are considering ESG issues.
Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Listen, we know the FDIC is broke, there’s no use pretending they aren’t. But apparently we’re going to keep doing it so let’s stop for a moment and analyze the FDIC’s latest crackpot scheme to keep bad banks afloat and their balance in the black, shall we?
The summation up to now — for those of you with short attention spans — is that the FDIC is looking to tax banks’ asses based on the risks they take. On the surface that doesn’t sound like a bad idea until you consider the fact that the FDIC, by its very nature as a “safety net”, encourages the exact behavior they’re looking to “penalize”. Keeping in mind also that the Obama administration is coming down on banks from the other end with some tax scheme, it makes you wonder why the hell we bailed them out in the first place.
Blame the academics and these brainiacs in Washington who believe there’s nothing wrong with the fundamental framework of American banking, least of all that any of it could possibly be attributed to the attitude that Uncle Sam will always come to banks’ rescue. Here’s hoping the bankers paid attention in Econ 101 when they went over that whole “no such thing as a free lunch” part.
FDIC Chairman Sheila Bair said there was “a broad consensus of academic studies,” that concluded “poorly designed compensation structures can misalign incentives and induce risk taking.”
Bair said called a study of “compensation structure, rather than levels of compensation,” a fair approach.
Maybe I just don’t have the auditor mind needed to wrap around a concept like this but WTF is that supposed to mean?! The FDIC epitomizes moral hazard so how in the hell is it that the FDIC is the one coming in to tap banks to cover said risks? I’m not rationalizing banks’ behavior (I remind dear reader here that the top 5 banks in America hold $275 trillion in notional derivative exposure) but, uh, just because Sheila needs to cover the next round of failed banks doesn’t make it appropriate to start regulating now.
Has she ever heard of too little too late? How about too much too late?
As I have already pointed out, we all know who is going to ultimately pay for this and it sure as hell isn’t the banks. Bend over, the next round is about to hit and it’ll hurt less if you’re prepared.
In case you haven’t heard, it’s go time for the Obama administration to cover its continually-growing deficit with no sign of increased foreign investor demand for unstable and uncertain US debt. What happened to passing a health care overhaul before Christmas? And what about those 140 failed banks in 2009? And hey! What became of that $700 billion in stimulus money that was supposed to save and create bazillions of jobs?
Here’s the solution. Tax their asses.
President Obama will try to recoup for taxpayers as much as $120 billion of the money spent to bail out the financial system, most likely through a tax on large banks, administration and Congressional officials said Monday.
In a desperate scramble to come up for cash, the administration has thrown out a couple of unpopular ideas (unpopular if you’re a banker, of course) including excessive taxes on bonuses and bizarre financial transaction taxes. Like squeezing blood from turnips, apparently these guys forget that it was less than a year and a half ago that Hank Paulson appeared on the Hill threatening full-on financial doomsday were TARP not instituted rightf*ckingnow. So much for pulling out the bazooka in his pocket.
And let us not forget that shit rolls down hill. Who do you think would ultimately be responsible for these additional monies? The banks or the idiot customers who continue to shovel out ever-increasing fees to said banks? Exactly.
Lobbyists for bankers, taken by surprise, immediately objected to any new tax. They said financial institutions had been repaying their portion of the bailout money in full, with interest. Losses from the $700 billion bailout fund — estimated to run as high as $120 billion — are expected to come from the automobile companies and their finance arms, the insurance giant American International Group and programs to avert home foreclosures, and the president is aiming to recoup that money.
I really, really hate to side with the bankers here but they are absolutely right. If retribution for the financial crisis is our goal, taxing them to death isn’t the way to achieve that. If paying our government’s bills is the goal, however, I could see how this could easily be spun into populist payback for the pain and suffering of the last 2 years.
Hate to break it to you, America, but any money potentially recouped by this genius scheme has already been spent and certainly wouldn’t result in any long term benefit to us as a country. I’d use the pay day loan analogy again but hell, isn’t it played out by now?
Bob Herz must be feeling a little blue now that his buddy Tweeds announced that he is hanging up his eyeshade.
This melancholic state has apparently led Herz to the conclusion that it’ll be okay to let banking regulators “use their own judgment” when it comes to letting banks stray from almighty GAAP:
“Handcuffing regula orting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.
“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”
Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.
Herz is calling it “decoupling” of the rules which sounds a hell of a lot like “the rules are the rules only when they don’t work out so well for banks.” Not sure about anyone else but it sounds like Herz is caving to political pressure after insisting that everyone butt out.
Because if we read that correctly, any time banking regulators are feeling sketchy about the market’s ability to put value on the banks’ assets, they’ll just call a time out on fair value with no ringing up the FASB, auditors, or anybody else to get a permission slip?
Will banking regulators even know when the market is being irrational? If you were to ask JDA, she’d probably say, “No fucking way.”
A less irreverent but similar point of view from Daniel Indiviglio at the Atlantic:
I worry that if regulators are provided this flexibility, then they will always suspend mark-to-market accounting when a crisis hits. But in cases where the market permanently corrects the value of assets downward, their values would remain elevated in the regulators’ eyes. Then, once the crisis appears to improve, banks will eventually cause a sort of secondary crisis when they are forced to begin realizing the decline in the value of those assets.
Moreover, I worry about how investors will react to this change. Imagine you’re an investor. A crisis hits, and regulators step in to suspend mark-to-market accounting for a bank you own equity in. Are you worried? I sure would be — regulators were so concerned about the bank’s assets that they felt forced to suspend mark-to-market accounting! As an investor, I’ll still do my own math to figure out what I think the bank’s assets are worth. So investors might dump the stock anyway, endangering the value of the institution despite this move by regulators.
So it’s fair value unless we’re in a potential shit + fan situation. In the off-chance that the regulators recognize the impending disaster, they’ll tell the banks to forget fair value for now. Then once everything is hunky dory, we go back to fair value. Whatever, we’re over it.
Board to Propose More Flexible Accounting Rules for Banks [Floyd Norris/NYT]
Should Regulators Be Able To Suspend Accounting Rules? [The Atlantic]
Also see: Decouple US accounting rules, bank regulation-FASB [Reuters]
This isn’t mathleticism, this is simply truth in numbers. With Colonial Bank officially R.I.P. and torn to shreds (North Carolina-based BB&T has picked up the branches, the garbage will likely be marked down and sold off to whichever sucker the FDIC can find) this past week, it might be a good idea to look at the mathematical reality of the situation.
Lately, bank failures seem to lead tangentially to accounting in that banks often point the finger at mark-to-market as the key piece which sent them hurtling toward doom. Sure, blame the accounting, that’s always a classy move. But all’s fair in love and value right?
In an era where the word “trillion” hardly raises an eyebrow, let’s put this into perspective and look at the 5 largest bank failures of all time (in terms of costs to FDIC):
More, after the jump
5. BankUnited, Coral Gables, FL: $4.9 Billion
4. American Savings and Loan, Stockton, CA: $5.7 billion – at the time, the amount to cover American S & L cost the FDIC 10% of its “fund” and was one of the largest failures of the savings and loan crisis.
3. Continental deserves its whole epic tale
2. Washington Mutual (we can’t discuss costs to the FDIC for this one since JP Morgan swooped in to get it and there are still active lawsuits around the deal)
1. IndyMac: $10.7 billion. That wasn’t too long ago so you should still remember the tale.
In one day (this past Friday), the FDIC found itself on the hook for an estimated $3.68 billion, and surely that’s a positively-doctored number. Move along now, nothing to see here.
Authorities on August 14 closed down five banks — Colonial Bank; Dwelling House Savings and Loan Association; Union Bank, National Association; Community Bank of Arizona and Community Bank of Nevada.
As per the Federal Deposit Insurance Corporation (FDIC), which is often appointed as the caretaker of failed entities, the collapse of these five banks would cost the agency a staggering USD 3.68 billion.
Apparently the wonks in Norwalk are girding up their loins to take on the banks again over fair value, described by FASB member Marc Siegel as a “religious war” (our pick would be The Crusades).
Under new preliminary proposals issued by the FASB last week, all financial assets, including loans would be marked to market every quarter and classifications like held to maturity, held for investment, and held for sale would go the way of the Dodo.
Jonathan Weil conceptulizes:
Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.
Got it? Well, banks are obviously not cool with this, as one lobbyist is quoted, “I guess the nicest thing I can say is it’s difficult to find the good in this.” I guess it’s on then bitches, as it sounds like the banks would much rather bleed out their orifices until the bitter, bitter end as opposed to report anything that is remotely transparent.
Accountants Gain Courage to Stand Up to Bankers: Jonathan Weil [Bloomberg]