Posted on March 15th, 2008 by Priya Ramesh »Permalink
On Friday, the U.S. Securities and Exchange Commission announced that it is crafting tips for Wall Street firms that use “fair value” accounting methods to value hard-to-price assets such as mortgage-backed securities. What does this mean? According to BloggingStocks, it means that companies closing their Q1 books can paint a rosier picture for investors. In other more bizarre and somewhat alarming news, a Bin Ladin follower recently declared Jihad on all accountants — just in time for tax season. Malcom Hodges, a UK-based Bin Ladin follower, was given a two-year jail sentence last month for sending dozens of letters to mosques around the U.K. urging Muslims to launch terror attacks on accountants. Why target accountants? Hodges was a wannabe accountant, who after failing his accreditation exam, held a “festering grudge.” Rather extreme - don’t you think?
Fair Value Accounting, SEC, Jihad on Accountants
Posted on March 7th, 2008 by Priya Ramesh »Permalink
Ladies and Gentlemen, our very special guest blogger is here — none other than Corporate Library co-founder and “Corporate Governance Queen” Nell Minow. Nell has been kind enough to join us fresh from her testimony today at the U.S. House of Representatives, and she offers a great window in to just what went on. Without further adieu, we’ll turn things over to Nell.
This morning, I testified before the United States House of Representatives Committee on Oversight and Government Reform, chaired by Henry Waxman (D-California). I have appeared before Congressional and Senate committees many times, frequently about executive compensation issues, but this one was the wildest, the most high-profile, and the most fun. It wasn’t because of my panel, two quiet economists, a state official, a mayor, and me. It was that second panel, the one I refer to as the three tenors of the subprime opera: Charles Prince, Former Chairman and CEO, Citigroup, E. Stanley O’Neal, Former Chairman and CEO, Merrill Lynch, and Angelo R. Mozilo, Founder and CEO, Countrywide Financial Corporation. All are out or soon to be out of their jobs due to massive misjudgments on subprime loans and the resulting massive losses and write-downs.
What made the hearing especially meaningful was that for the first time in my memory it included not just the CEOs but the real culprits, the compensation committee chairs from their boards: Richard D. Parsons, Chair, Personnel and Compensation Committee, Citigroup (and former CEO of Time Warner), John D. Finnegan, Chair, Management Development & Compensation Committee, Merrill Lynch (and CEO of Chubb), and Harley W. Snyder, Chair, Compensation Committee, Countrywide Financial Corporation (and President of HSC, Inc., a real estate development company).
It was more partisan than I expected, with the ranking minority member, Tom Davis (R-Virginia) leading off by comparing the hearing not just to scapegoating but to the sacrifice of virgins(!). Several of the Congressional representatives, mostly Republicans but some Democrats, too, all but fell over themselves congratulating the CEOs on their fabulous American dream success stories and reassuring them that they did not mean to imply that they had done anything wrong.
I had no such compunction.
I cautioned the committee not to be persuaded or distracted by the claims by the executives and their board members that CEO pay is set by the market. Compensation consultants have lots of pie charts and bar charts and comparables, but the question (as I explained many times to my children when they were in middle school) is not what everyone else is getting but what works the best. CEO pay is like any other asset allocation made by the board. It must be evaluated in terms of return on investment. The return on investment of the tens and even hundreds of millions of dollars paid to these three CEOs was less than a piggy bank.
My long-time colleague Robert A.G. Monks says in his new book, Corpocracy:
“The simple fact is that the CEO market that the business Roundtable loves to cite was contrived by the chief executive officers operating through their lobbying wing. It is a market that has been polluted by the secrecy that surrounds the cost of option grants, the lack of any disclosure of even the most enormous retirement benefits, and, recently, the obfuscation of the date when options were granted and became effective so as to fix a price.”
Our shareholders, our employees, our communities, and the working people of this country deserve better. In our increasingly global markets, if they do not find credible business leadership here, they will send their capital elsewhere. If we want our capital markets to be credible and competitive, we must stop over-compensating executives who destroy shareholder value.
Tags: executive compensation, Congressman Waxman, subprime mortgages
Nell Minow
– Nell Minow, Editor and Co-Founder, The Corporate Library
Ms. Minow was named one of the 20 most influential people in corporate governance by Directorship magazine in 2007 and was dubbed “the queen of good corporate governance” by BusinessWeek Online in 2003. Prior to co-founding The Corporate Library, Ms. Minow was a Principal of Lens, a $100 million investment firm that took positions in underperforming companies and used shareholder activism to increase their value. Her other professional experience includes serving as President of Institutional Shareholder Services, Inc. and as an attorney at the U.S. Environmental Protection Agency, the Office of Management and Budget, and the Department of Justice. She has authored more than 200 articles and co-authored three books with Robert A.G. Monks, most recently the 4th edition of an MBA textbook called Corporate Governance, published in 2008. Ms. Minow is a graduate of Sarah Lawrence College and the University of Chicago Law School.
Posted on February 29th, 2008 by Priya Ramesh »Permalink
When it comes to financial scandals, all roads lead to bad accounting. During the peak of the post-Enron era in 2002, all fingers were rightly pointed at bad accounting as the culprit. In today’s most recent financial scandal – the subprime mortgage debacle – we have not seen much coverage tying this major problem back to bad accounting. Until now…check out this post from Jim Peterson’s blog that provides an in-depth look at this issue.
The most illuminating quote from Jim is this one: “So viewed, subprime and the credit market turmoil are all about the accounting, and nothing else. Fundamentally flawed assessments were made – whether out of venality or ignorance – about the quantification, timing and transferability of the risks associated with uniquely complex financial derivatives, and the collapse in their values as knowledge and experience eventually caught up.”
We welcome all thoughts, comments and feedback from Audit Trail readers on the topic of bad accounting and the subprime mortgage mess. And, happy Friday.
subprime mortgages, accounting
Posted on February 8th, 2008 by Priya Ramesh »Permalink
Things are not looking up for Jérôme Kerviel, the rogue French trader making international headlines these days. Today, he was sentenced to prison for the duration of his investigation. See our previous post about this shocking, like $7 billion shocking, story. On a separate note, he is also making waves in the Social Media world — check out his Wikipedia page. In other money trouble news, Hillary Clinton needed to infuse her campaign with $5 million of her own cash. Finally, on a more positive note, perhaps we aren’t headed for a recession?
- Priya Ramesh
Jérôme Kerviel, Hillary Clinton, Recession
Posted on January 16th, 2008 by Priya Ramesh »Permalink
Perception versus reality is often a challenge in any industry — or for any human experience for that matter. For years, large publicly traded companies have perceived a pinch from the “big four” in terms of audit costs. Here’s the reality: the Government Accountability Office (GAO) just published a report that disputes this, but acknowledges the lack of choice among auditing firms. Here’s an in-depth article from CFO.com on this report. The blogoshere has also been abuzz with this report. Check out these postings from the Big Four Blog and Tick Marks.
- Priya Ramesh
GAO, Big Four
Posted on November 8th, 2007 by Audit Trail »Permalink
Washington D.C. is abuzz with shock as two employees of the District’s Office of Tax and Revenue have been charged with creating phony tax refunds and depositing them into fake business accounts, according to today’s Washington Post. The damage to the city? A whopping $16 Million. Since there seems to be a theme here on Audit Trail lately of ‘What would you do with $X Million?’ - the two ladies went straight for pure luxury and purchased a $160,000 Bentley, homes, furs, a $26,000 hand bag, designer shoes and clothing, and of course, precious jewelry. The two were in jail over night pending a hearing today, and five senior officials have given their resignation for failing to spot the problem sooner - as evidence of their laundering could go back as long ago as 2000. Internal controls anyone?
Tags: DC Tax Scam, Tax Embezzlement, Internal Controls
Posted on July 12th, 2007 by Michael Evans »Permalink
A week into our SOX 5th Anniversary Celebration, we thought we would take a break from the celebrations and focus on more serious matters – namely, the opinions of over 245 public company executives who responded to Approva’s Compliance Survey: Sarbanes-Oxley Five Years Later.
Despite widespread media coverage that public companies are begging for a reprieve from SOX, Approva’s survey found that 83 percent believe the Sarbanes-Oxley Act has had an overall positive impact on their companies. And 63 percent believe SOX has been successful in preventing corporate fraud. Seventy percent of respondents believe that investments in SOX compliance will provide benefits beyond compliance alone. Now, that is some serious ROI.
What other interesting statistics emerged from the survey? Check out the complete survey findings.
Don’t forget to post your comments on the survey findings, as we’d love to hear what you think.
Tags: Approva, SOX Survey, Sarbanes-Oxley, ROI
Posted on May 23rd, 2007 by Audit Trail »Permalink
At its open commission meeting today, the SEC Commissioners voted unanimously in favor of issuing final interpretive guidance for management to provide its assessment and report on internal control over financial reporting under Sarbanes-Oxley Section 404. Related final and proposed rules were approved as detailed below.
The related final rulemaking includes removing the second audit opinion on management’s assessment, and retaining just one audit opinion under SOX 404 directly on internal control. Further, a rule will state that management assessment conducted in accordance with SEC’s interpretive guidance will satisfy the SEC’s rule that required management report under SOX 404. Additionally, a new rule will include the definition of material weakness (MW) directly in SEC rules (rather than by reference to auditing literature). SEC staff said their definition is in synch with what PCAOB staff will present when it votes tomorrow on issuing AS5 (replacing AS2). The definition of MW in the final interpretive guidance will be: “A deficiency or combination of deficiencies in ICFR such that there is a reasonable possibility a material weakness in company’s annual or interim financial statements will not be prevented or detected on a timely basis.”
Separately, SEC will issue a proposed rule for public comment, containing a proposed definition of Significant Deficiency (SD). As described verbally by Deputy Chief Accountant Zoe-Vonna Palmrose to the commissioners, the proposed definition of SD will be: “A deficiency that is less severe than material, but nevertheless should be brought to the attention of the audit committee.”
Posted on February 22nd, 2007 by Audit Trail »Permalink
Today, the PCAOB will be discussing its recently proposed audit standard, to replace its existing standard on auditing internal controls over financial reporting, at its Standing Advisory Group meeting. A hot topic of the meeting will surely by forensic audit procedures. The meeting is open to the public and can be viewed via webcast - check out the meeting agenda. Be sure to stay tuned, as Audit Trail will be reporting any breaking developments from the meeting as well.
PCAOB, Audit
Posted on February 13th, 2007 by Audit Trail »Permalink
The Associated Press is reporting a bookeeper pleaded guilty today for embezzling $6.9 million from J&J Materials Corp. in Rehobeth, Mass. We’re guessing the company isn’t running continuous audit and compliance software. So what did she do with the money? The AP wire story reports “purchases included six talking trees modeled after the ‘Wizard of Oz’ characters; a 20-foot-tall smoke-breathing dragon; a four-bedroom house in Rhode Island; more than 35 vehicles; and a replica of a Ford Model T customized to look like a green goblin.” Audit Trail is laughing but reminds you that stealing isn’t funny.
Tags: Audit, Compliance, Fraud
