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Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985.  Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand (which is now part of PricewaterhouseCoopers).  She attended the University of Michigan and Wayne State University.

  • IRS says Bitcoin is not currency, it is "property"

    [View: :550:0] video from BizJournals Bloomberg Even though Bitcoin has an internet presence as a currency, the Internal Revenue Service sees it differently. This means that transactions in Bitcoin have to be reported on tax returns in a way similar to a stock investment. The plus side is that the ruling by the IRS gives Bitcoin more legitimacy. The downside is that tax consequences have to be a consideration in all Bitcoin transactions. The rationale used by the IRS in its determination was that Bitcoin "does not have legal tender status in any jurisdiction." What this means to an individual possessing Bitcoin is that a gain or loss between the date acquired and the date spent now has tax consequences...and there are vastly different consequences for short term transactions (taxed at "ordinary rates"--up to 39.6%) and long term transactions (taxed at "capital gains" rates, which are far less--20%). This may cause a slowdown on transactions in Bitcoin, as holders might "hoard" the currency to achieve "capital gains" rate status. The ruling by the IRS has shifted Bitcoin from an unregulated status to a traditional investment asset, at least for US taxpayers. For some Bitcoin enthusiasts, this is definitely unfavorable. Source: " I.R.S. Takes A Position On Bitcoin: It's Property ," by Rachel Abrams, New York Times , March 26, 2014. Follow up: What do you think the IRS ruling will have on the use of Bitcoin as an intermediate or virtual currency? Do you see the ruling as a positive or negative event for Bitcoin? If you were (or are) a Bitcoin enthusiast, what actions would you take with respect to the status of your investment as it now stands?
  • Walmart's tax subsidies hurt taxpayers

    When a corporation publishes its annual financial report, they include income statements, balance sheets, statements of cash flow, other financial statement data, and footnotes to the financial statements. The footnotes are part of what used to be called "full disclosure," but is now referred to as "adequate disclosure." Wal-Mart's annual report for 2013 was forced to disclose factors beyond their control that could "materially affect financial performance." These included, " changes in the amount of payment made under the Supplemental Nutrition Assistance Plan (SNAP) and other public assistance plans (and) changes in the eligibility requirements of public assistance plans ." In other words, if public assistance plans to its employees were to be eliminated, Wal-Mart would either lose those employees, or have to pay them more to be able to afford food and housing without government assistance. This would decrease Wal-Mart profits. In other words, the American taxpayer is subsidizing Wal-Mart stockholders. "SNAP" is known in casual language as "food stamps," and the program has recently been reduced by Congress. $90 per month per family was cut in January...and $29 per month had already been cut in November 2013. Not only are many Wal-Mart employees subsidized by food stamp programs, many Wal-Mart shoppers get food stamps, so this cut in food stamps could mean a cut in revenue from this population. It is interesting to note that these cuts are so large that they might "materially" affect net revenues for Wal-Mart. How much has the American taxpayer been subsidizing Wal-Mart? / Source: " How Walmart Exploits Taxpayers ," by Michael Hiltzik, Los Angeles Times , March 26, 2014. Follow up: Research what income levels make an individual, and a family of four, eligible for food stamps.
  • Corporations push 401(k) benefit toward a slippery slope

    image from Vanguard The slippery slope of pension benefit "norms" we go again. Forty, thirty, twenty--even ten years ago in many industries, the standard for pension benefits was a "Defined Benefit" plan. Corporations would set up plans to fund retirement benefits that were usually based on a formula valuing time-on-the-job and salary. For example, a typical benefit might be 2% of final salary x the number of years employed. Someone who had worked at one company for 30 years, and who retired with a salary of $100,000 would get 100,000 x 2% x 30 or $60,000 per year as a defined benefit pension. Now the standard has moved to the "Defined Contribution" plan, exemplified by the 401(k). In a typical scenario with a 401(k), the employee contributes a a pre-determined "defined" amount out of each paycheck and the employer matches that amount, or a percentage of that amount. The contributions are invested until the employee retires, and the benefit received in retirement is dependent on the success of the investments over time. (No guarantee.) But with all pension plans, a key factor is "the time value of money." Most employers contribute their portion at the same time the employee contributes: at each payday: However, lately, big employers have been shifting their policy to a "lump-sum" contribution. AOL was making this this shift during its recent privacy kerfuffle. As you can see from the graph above, waiting till the end of the year to make the payments means that the company has the use of the money for longer...and employees lose out on investment earnings. In addition, if employees change jobs mid-year, they lose the employer side of the contribution entirely--again saving the employer money. Employee compensation is a combination of salary, paid time off, reimbursed expenses, health benefits, retirement benefits, and other factors. Although it may be easiest to focus only on salary, all factors must be evaluated over the long term to really know what an individual employee is being paid. Sources: " Beware the End-of-Year 401(k) Match ," by Ron Lieber, New York Times, February 14, 2014. " Making Retirements Less Secure ," by the NYT Editorial Board, New York Times, February 14, 2014 Follow up: Read the article. What is the lifetime differential mentioned in the Vanguard analysis presented therein, based on typical job-changing events that would be likely to occur over an individual's working life? If you were looking for a job, what type of pension benefit would you look for? Would this be a major or minor factor in your job decision, assuming you had multiple offers? How might your decision change if you were in your 40's or 50's?
  • How 1040 tax-return filing could be a "game" gone viral

    image drawn by Glynis Sweeny, and published with the article linked below An ad campaign from Jackson Hewitt , a tax preparing firm, claims, “Taxes are Fun!” The Jackson Hewitt folks might be onto something if they combine forces with the folks like Gabe Zicherman , who understand how to "gamify" processes. Some aspects of gamification include: Introducing competition into the process so there is a way to "win." Rewarding folks for participating when times are slack, but charging more ("surge pricing"), when times are slow. Creating marketing events to encourage participation. Zicherman doesn't think the I.R.S. is currently a good "game" at all. " If you file your taxes on time, every single year you don’t get anything from that.” he said. Some of Zicherman's suggestions include: Lower taxes for those who file and pay close to January 1. Create luxury services and conveniences to help people file (don't call them higher taxes!)...and charge them more for them. Let market forces set the higher rates. Add interim deadlines to build "adrenaline-pumping addictiveness." Create surge pricing for returns filed on the deadline of April 15, to pay for the work crunches experienced by the post office and the IRS employees. Big random prizes--1 in 10,000 gets a big discount or even let winners pay no taxes. Tax lottery tickets. I also think a good prize would be a "get out of audit free" card. Source: " Try Your Luck, at the I.R.S. Wheel ," by John Schwartz, the New York Times, February 7, 2014. Follow up: Read the essay linked above. Do you think it is a satiric essay, much like an article in The Onion ? Or do you think it proposes a business idea whose time has come? [suggestion: Do a search for a "modest proposal."] What is "surge" pricing? What are the pros and cons of using surge pricing?
  • Clawbacks: should individuals have to pay for financial wrongdoing?

    image from The SEC filed a case again Cincinnati's Fifth Third Bank and its former CFO, Daniel T. Poston early in December 2013. The SEC asserted that Poston delayed the write-off of $1.5 billion in bad loans in 2008, violating generally accepted accounting principles (GAAP). Both the bank and Poston settled the case straightaway (without admitting guilt). The bank paid $6.5 million and Poston paid $100,000 out of his own pocket. The fact that the SEC got Poston to pay out of his own pocket is significant in terms of enforcement options. However...the fine was far short of the "executive pay clawback" provisions of the Sarbanes-Oxley Act (SOX). The SEC's unwillingness to pursue the additional penalty is indicative of the difficulties of that level of prosecution and punishment. SOX section 304 delineated a reasonable penalty: if there were earnings misrepresentations that resulted in stock, bonus and other compensation to a responsible executive, then the executive should have to pay that compensation back. Easier said than done. In the Fifth Third Bank case, there was a misstatement that led to about $350,000 in extra compensation to Poston. But there was a technicality--the timing of the compensation determination vis-a-vis the write-off. In fact, there are three requirements that must be met to bring forward a successful suit under SOX: there must be a restatement of earnings due to accounting errors the errors must have been reckless or intentional there must be "recoverable executive compensation" earned within the next year Management can claim that the inflated values were appropriate, delaying or avoiding an official write-down, and making clawback prosecution impossible. However, the SEC received 557 whistle-blower complaints in 2013...and some of these might force more timely write-offs, which then might lead to clawback prosecutions. Source: " Clawbacks? They’re Still a Rare Breed ," by Gretchen Morgenson, New York Times, December 28, 2013. Follow up: What was the purpose of SOX (the Sarbanes-Oxley Act)? Do you think the clawback provision of SOX is fair? Why or why not?
  • Bitcoin Explained

    The five-year birthday for Bitcoin is January 3rd, 2014. Bitcoin's "daddy" is a group of hackers named "Satoshi Nakamoto." Five years ago "Nakamoto" set up the currency to be outside of any government's control. Bitcoin's software is set up to allow anonymous currency transactions. According to the explanatory essay that accompanied the currency's launch, bitcoin's purposes included: a protest against the government-controlled currency values that could be undercut by the issuance of an unlimited number of currency units easing the transfer of funds globally, directly from individual to individual empowering smaller economies avoiding transfer fees from near-monopolies like Western Union, or bank wire transfer fees allowing private transactions--sometimes involving products that are normally regulated by governments, such as weapons and drugs. Many libertarians were attracted to the independent-of-government aspects of bitcoin. And some financiers have invested in bitcoin as they might hedge investments in any "foreign" currency. But to bitcoin enthusiasts, such as Elizabeth Ploshay, bitcoin not just money, it's "a movement." Tradehill co-founder Ryan Singer has opined that just as email supplanted snail-mail...bitcoin will supplant traditional banking. One source of information for those wishing to keep up with this rapidly changing currency platform is Bitcoin magazine, which has the stated mission to be “the most accurate and up-to-date source of information, news and commentary about bitcoin.” Source: " The Bitcoin Ideology, " by Alan Feuer, the New York Times, December 14, 2013. Follow up: Have you been involved in a bitcoin transaction? Do you have an account? What do you see as the plusses and minuses of this online currency? Would you consider "investing" in bitcoin? Why or why not? What does "P2P" mean?
  • What professions are perceived as honest?

    image from According to a recent Gallup poll , advertising professionals and stockbrokers are thought to be just slightly more honest than politicians and car salespersons. One probably wouldn't expect that businesspeople of any type would be ranked very highly. At best, a business transaction is " quid pro quo ." There is what is perceived to be an equal exchange of value: $130 to a retailer in exchange for a cashmere sweater, for example. There is no altruism or charity involved--it is an even trade. In accounting terms, debits = credits. If one side of the business transaction decides to misrepresent things--with a phony $20 as part of the cash tendered--or a 30% orlon sweater sold as 100% cashmere--then we are in the realm of dishonesty. And some businesspeople seem to be in the business of misrepresenting their products. Here are the results of the survey: What would it take for advertisers and car salespeople to be perceived as more honest? Source: " Congress Retains Low Honesty Rating ," by Frank Newport, Gallup Politics, December 3, 2013. Follow up: How would you rate Medical Doctors, Engineers, College teachers, Business executives, Stockbrokers, Advertising practitioners and Lawyers? Give your reasons for your rankings. What would it take for advertisers and car salespeople to be perceived as more honest? What does "quid pro quo" mean?
  • Cooking the books, management-style

    image: Comtech GAAP net income vs management restatement, ...courtesy of Forget about GAAP (generally accepted accounting principles). Prepare those financial statements the way that management wants you to. To no surprise, the management-spun financial statements show company financial position in a much rosier light...without all those " pesky costs of doing business, " according to columnist Gretchen Morgenson of the New York Times . To put this in perspective, showing "earnings without the bad stuff" helped Internet stocks look good in the 1990's before the bubble burst. One example of the kinds of costs that managers think they should exclude are stock-based compensation, since they are not cash costs. Long term, however, stock compensation does deprive the company of cash they could have raised by selling the stock at market rates. Twitter provides a real-life current example in their IPO prospectus. For the first nine months of 2013, Twitter shows a loss (according to GAAP) of $134 million. Management says the loss is "really" only $44 million. Management doesn't want to include $79 million in stock compensation or $11 million in write-offs of intangible assets (amortization). Jack T. Ciesielski, publisher of The Analyst's Accounting Observer and an accounting expert at R.G. Associates , has a different opinion. " When they back out stock-based compensation they're basically saying that management is working for free ," he said. Further, " To back out those intangibles is bogus ." The rationalization for restating the earnings follows from application of the Securities and Exchange Commission's " Regulation G ." This rule allows companies to show income in "non-traditional ways," if they also report income according to GAAP. The 2002 rule may not have had the effect intended by the SEC, however. Ciesielski's research found that out of 69 technology companies in Standard & Poor's 500-stock index, 56 (81%) used non-GAAP presentations. And in among health care companies, 83% (45 out of 54) used non-GAAP earnings presentation. To no surprise, the non-GAAP methods produced earnings that were higher than GAAP--in 2011 earnings were 19.5% higher and in 2012 earnings were 36% higher than earnings calculated using GAAP. Here are some details from several technology companies: from Forbes article cited below I wonder if the managers are also persuading their Boards of Directors to base management bonuses on the non-GAAP measures as well... Sources: " Earnings, but Without the Bad Stuff " by Gretchen Morgenson, New York Times, November 7, 2013. " These 20 Tech Firms Report The Most Fictionalized Earnings ," by Jeff Bercovici, Forbes , November 11, 2013. Follow up: What message do you think the SEC is sending with Regulation G? Do you think it is useful or harmful for financial analysis?
  • Accountants voice contempt for regulation

    image from " The accounting business has sometimes had an attitude of — how shall I put it? — contempt for those who would regulate it. The people who run the major firms know best, and regulators should yield to their superior judgment." ---Floyd Norris, in the article linked below Robert Kutsenda , while he was banned from practicing public accounting at Arthur Andersen for his involvement in Waste Management 's financial fraud (2001), was put in charge of "document retention." Not surprisingly, the newly developed document retention policies required the destruction of exactly the documents that were used to bring Mr. Kutsenda to justice. The "unintended consequences" of these actions led to the destruction of Arthur Andersen and the passage of the Sarbanes-Oxley bill, requiring an increase in government oversight. I find this fascinating. From 1978-1981, I worked for what was then a "Big Eight" accounting firm ( C&L ). At that point, consultants were not allowed to become partners, and the working papers of every audit were initialed and signed off on by a partner. Everyone had their own recognizable signature in both "initial form" ( TB ) and full signature ( Teri Bernstein ) and everyone was required to stand behind every piece of paper that they prepared, reviewed, or authorized. I guess that things changed in the intervening years. At any rate, it doesn't seem as though the accounting industry has actually learned anything from Arthur Andersen's humiliation and subsequent liquidation in 2001. Deloitte & Touche has just been fined for similar disregard for auditing standards. This story started in 2008. Deloitte was cited for not using properly "auditing the use of specialists" to properly analyze the fair value of assets (the primary issue in the mortgage debacle and subsequent recession). Regulators found Deloitte to have “ a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations .” Deloitte said " we strongly take exception " to the criticism, saying it did not like the " second guessing " of the regulators. By 2011, it was clear that Deloitte totally disregarded the criticism, and made none of the recommended changes to its auditing policies. Moreover, Deloitte used an auditor who had been banned from practice as an expert. Of course, he was never required to sign off on the items audited. The firm kept the experts anonymous behind the firm's name. Deloitte and Touche were recently fined $2 million because of violations relating to this episode. Interestingly, a study done in England found that “ requiring an individual audit partner to sign a report improves audit quality by increasing the partner’s accountability and transparency of audit reporting. ” Moreover, a study found also that investors also reward integrity: " Even more interesting is their finding that investors notice. Companies with more lenient auditors have to pay more to borrow money, and public companies with such auditors trade at lower valuations than do companies whose auditors have earned better reputations. " ---from a paper by W. Robert Knechel of the University of Florida, Ann Vanstraelen of Maastricht University, and Mikko Zerni of the University of Vaasa It doesn't seem to matter to American auditing firms, however. Nevertheless, the PCAOB (Public Company Accounting Oversight Board) is expected to issue a regulation in December to require that auditing partners identify themselves as responsible for audit opinions, even if they are not required to sign them. Source: " Accounting World, Still Resisting Sunlight " by Floyd Norris, New York Times, October 24, 2013. Follow up: Do you think that the partners of public accounting firms should take personal responsibility for signing off on the audits of publicly regulated companies? Why or why not? If you think that partners should not sign off, what would you suggest would be offered to the public instead as assurance that the audit of the company in question is legitimate, to the best of anyone's ability? If you are interested in this issue read the PCAOB take on it the auditing standards surrounding it.
  • Business, government and food dollars

    [View: :550:0] Jackie Speier makes the case in the video above for leveling the playing field with respect to government food payments. Her speech was in anticipation of a House of Representative vote to cut the food stamp program, which provides less than $5 per day to the hungry poor--many of whom are from families where adults are working at minimum wage. Meanwhile, notes Representative Speier, the government's 2013 "per diem" allowances for meal spending while on business travel (without requiring detailed receipts) ranges from $46 to $75 in California, depending on the city. These are considered the reasonable and necessary expenses. At the higher end, Speier notes more extravagant meals reimbursed in full for House of Representatives Members traveling internationally. This funding for business-people's food, while many times higher than that allotted to the poor, pales in comparison to the government subsidizing of corporate farmers. According the the Environmental Working Group , " The farm subsidy database tracks $256 billion in farm income support through commodity, crop insurance, and disaster programs and $39 billion in conservation support paid to farmers and landowners from 1995 through 2012 ." [The total cost of the food stamp program, according to government records , was under $75 billion last year.] An article in The Week notes: " About 75 percent of total subsidies go to the biggest 10 percent of farming companies, including Riceland Foods Inc., Pilgrims Pride Corp., and Archer Daniels Midland. Among the 'farmers' who get federal subsidies are Bruce Springsteen (who leases land to an organic farmer), Jon Bon Jovi (who owns bee colonies), former President Jimmy Carter, and billionaire media mogul Ted Turner. " I was also surprised to find out that 10 Members of Congress who voted to reduce the food stamp program were recipients of agricultural subsidies themselves. One has received over $5 million over the years. From a business and sustainability standpoint, what makes sense? Should what is "necessary and reasonable" for the middle class business traveler be the standard? Is there any analogy that could help us understand the place of farm subsidies in our economic system? In theory, rational revenue and expense streams are what we strive for in accounting for business. We may be off track in accounting for our food systems. Sources: " Food spending by government, " speech from the House of Representatives floor by Jackie Speier, 14th District CA Congressperson, via CSPAN and YouTube , September 2013. " The U.S. has few farmers. So why does Congress love farm subsidies? " by Brad Plumer, The Washington Post , July 12, 2013. " 10 Members of Congress who Receive Farm Subsidies Voted to Cut Food Stamps ," by Noel Brinkerhoff,, from an article by Derek Pugh , September 24, 2013. Follow up: What is a " per diem "? What purpose does it serve for businesses? How does it relate to how income and deductions are reported on a tax return? How do you feel about the food stamp program? If you oppose it, who should be allowed to go hungry? Is there any group that should be given food aid? How do you feel about the farm subsidy program?
  • Severe ethics reprimand for Big 4 public accounting firm

    image from daily mail The British take the ethical responsibilities of their public accountants seriously. Deloitte LLP , one of the four largest international public accounting firms, was issued a severe reprimand and were fined the equivalent of $22 million for putting its own interests ahead of the public interest in the consulting work done for MG Rover. A retired Deloitte partner was also fined £250,000 and is not allowed to practice accountancy or financial consultancy for three years. According to the Financial Reporting Council tribunal that issued the penalties: " It has been put to us that in corporate finance work and tax work the only duty that a member owes is to his client, provided that he acts with integrity, and that the public interest is not a matter that needs to concern him. We do not accept this....They [Deloitte] placed their own interests ahead of that of the public and compromised their own objectivity. This was a flagrant disregard of the professional standards expected and required.” The debacle arose from the period of time when the "Phoenix Four," who were running MG Rover, were being given financial advice by Maghsoud Einollahi in his capacity as a partner at Deloitte. This financial consulting role was at odds with the auditing role of Deloitte. The "consulting" arm of Deloitte only saw its responsibility to its client--the managers who were part of the "Phoenix Four." The "auditing" arm of Deloitte, in certifying the financial statements, had a responsibility to the general public. The Financial Reporting Council tribunal cited Deloitte because the ethical responsibility should have extended to both arms of Deloitte. A historical note: When I was working for what was then Coopers & Lybrand, in the late 1970's and early 1980's, there were only 3 "principals" in the consultancy division of the Detroit office, whereas there were about 25 tax and audit full-status partners. At that time, the consultants were not permitted to have full partnership status. Sometime in the intervening years, however, the consultancy arms of all public accounting firms grew--and became a larger percentage of their "revenue stream." Firms began admitting consultant professionals to full partnership status. Several legal issues have arisen as a result of the different goals of consultants and auditors within accounting firms--particularly with the former accounting firm of Arthur Andersen and its relationship with Enron . Probably more regulatory and punitive action will have to occur before the former ethical boundaries are clearly re-established. Source: " When Accountants Play Role of Bankers ," by Floyd Norris, New York Times Economix, September 13, 2013. Follow up: In your opinion, does an audited financial statement indicate that everything in a set of financial statements is true and accurate? What actually does a "perfect" audit report really mean? Do you think that a CPA only has a duty to serve his or her client, or should the British ethical standard of protecting the public's interest also be a primary duty? Please explain the reasons behind your opinion.
  • Sustainable Accounting: the cost of "fixing" the future

    image from the sustainability accounting standards board "Sustainable Accounting" is a concept that includes all of the costs of any venture, in perpetuity. This is not the usual way that businesses cost-out projects. Imagining and projecting all of the environmental, social and corporate costs are all a part of what would be considered "sustainable" accounting. All--and that means all of the costs--not only to the corporation but to the environment and to the users of the product--all must be considered in "sustainable accounting." The Obama administration has recently published the " Costs of Carbon ." This report delineates the future damage to the land and agriculture of using carbon-dioxide-forming products that contribute to global warming. So, what exactly IS the cost of using carbon-based fuels? The answer depends on who you ask. The corporate answer is "$13.50 per ton," which is the same cost associated with other capital investments costs, on average. The government analysts who calculate the costs include all of the costs, including costs related to future damage (floods and related environmental destruction)...and their figure is $65 per ton of carbon dioxide (CO2) output. This is 1.5 times the cost that was estimated three years ago. So, if there was a gas tax added so the the users of fuel would be paying for the costs of CO2 related damage (rather than coming out of the general taxes paid by everyone), the rate based on the corporate assumptions would be $0.12 per gallon of gas...and the rate based on the environmentalists' assumptions would be $0.59 per gallon. This could really add up. According to the article, " The typical passenger car emits a ton of CO2 in about two and a half months of driving." Professor William Nordhaus, an economist from Yale University, writes in his 2008 book, " A Question of Balance ," that the investments in CO2 abatement have to be "competitive" with other high yield investments. If they aren't competitive, he advises investing in other high-yield investments instead and using the proceeds to pay for global warming damage (coastal flooding, etc.). His approach takes a purely economic view, not valuing the less tangible human costs of displacement or coastal beauty, which would be at least partially addressed in the environmental model. Source: " Counting the Cost of Fixing the Future ," by Eduardo Porto, New York Times, September 10, 2013. Follow up: Think about the concept of "Sustainable Accounting." Do you think that business decisions are based on the total costs in perpetuity of a decision? Or are they usually based on the immediate costs and consequences that are measurable and actionable? If "sustainable accounting" included all the costs in perpetuity of any business venture, do you think that the outcome of , say, a nuclear power plant, would include all of the costs that may be borne in the future? How about a high-rise hotel on the ocean? Or a football arena? Who do you think should "pay" the costs of these ventures? The potential users? The corporations? The corporate stockholders? Are you willing to pay an extra gas tax to cover the costs of future problems? Please delineate the pros and cons.
  • "Bad" audits of brokerages found by PCAOB

    image from The Public Company Accounting Oversight Board (PCAOB) found that only 3 of the 60 audits they performed of brokerage firms' reviews in the last year were acceptable and correct. The good that this is an improvement , as NONE of the previous year's audits were deemed correct. Primarily, the problems stemmed from conflicts of interest between clients and audits. In addition, in 37 of the 60 audits reviewed, " the auditors failed to do enough work to assess the risk of material misstatement due to fraud. " Moreover, in several cases, " auditors made no effort to verify entire revenue streams received by the firms ." These findings do show that the auditors of the brokerage firms did not follow Generally Accepted Auditing Standards (GAAS). One other aspect of auditing standards that was not met in many cases was that the auditor did not know enough about the brokerage business to be qualified to perform the audit. According the the article: " The statistics indicate that many firms auditing brokerage firms may know little about the industry and may not have made the effort to keep up with all the rules pertaining to broker-dealers. " If brokerage houses are not being audited properly, the public has no assurance that they are following the rules. Since investment banking and brokerage firms influence the highest levels of international finance, as well as take actions that have long term effects on the global economy, it is probably a good thing that the PCAOB is requiring their operations to be more transparent. Source: " Oversight Board Faults Broker/Dealer Audits ," by Floyd Norris, The New York Times Dealbook, August 19, 2013. Follow up: Why was the PCAOB formed? What is its history and purpose?
  • The entrepreneur who's "not a numbers person"

    Many entrepreneurs are good at certain business skills, but avoid dealing with the numbers that describe their business performance. Since accounting is basically arithmetic, this avoidance often stems from old fears of math class. Accounting reports can sometimes produce additional anxiety for entrepreneurs, because the numbers that result in "net income" or profit, are NOT the same numbers that produce "cash flow." Net income does NOT equal the cash you have in the bank. This seems counter-intuitive to many small business owners. "Cash flow" is often more closely aligned with what entreprenuers experience on a "gut feel" level regarding their business performance. image from Jay Goltz recently interviewed Michelle VanAllsberg, owner of The Hair Company --a salon in Michigan. Although she claimed to "have no money," the salon was earning a profit of $32,000. She had not poured the cash into increasing inventory, but it turned out she had used some of the money to pay down her debt. Significantly, however, Michelle had no idea if she was making tax payments--which she owed because she was turning a profit. As Jay points out, " Entrepreneurship, first and foremost, is about accepting responsibility. " One of those responsibilities is learning about accounting, "the language of business." Source: " Help! I'm not a numbers person! (Part 2) ," by Jay Goltz, New York Times Small Business , August 1, 2013. Follow up: Are you a "numbers person"? What does that mean? If you are NOT a numbers person, what efforts have you taken to overcome this obstacle to being a good businessperson? If numbers are your thing, what advice can you offer your colleagues in terms of ways to manage personal finance and business accounting tasks? What, specifically, creates the numeric differences between net income and cash flow?
  • Detroit bankruptcy and pension math

    Image from The city of Detroit, Michigan declared bankruptcy this week. I was on the Michigander bike tour when the bankruptcy became public, so I was surrounded by "locals," many of whom had an opinion about what happened. The knee-jerk reaction was to blame corrupt government officials, but the underlying reality seems to be pension management. In the growth economy of the 1960's, the most equitable benefits to negotiate for labor were pension benefits. Pensions would allow even low-skilled workers who worked their entire lifetimes to retire in their old age and not fear homelessness or poverty. In the post WW II economic boom, this seemed (even to the most conservative managers) to be humane and fair. So, workers, traded off their wage increases, to get pension benefits instead . Even when the economy stopped booming, pension benefits continued to be negotiated for workers, but for different reasons. The "short-term planning focus" that increased in popularity for both business and government management from the 1970's through the present saw pension benefits as a cheaper benefit that increased wages, so pension benefits were maintained and increased, in lieu of wage increases in many years. That would not have been a problem leading to bankruptcy if the pensions had been adequately funded. But funding for future retirement is a very complicated process. Actuaries calculate the amounts to be contributed each year--based on complicated calculus problems involving worker demographics, current and anticipated returns on investment and fund balance variables. The calculations have to satisfy GAAP (generally accepted accounting principles) established by the FASB. The problem, it seems, is that the standards established allowed underfunding to continue from year to year without detection--on Detroit's books, and probably for many other entities. Part of the problem has to do with the changes in market rates of return...the "boom" years in the stock market allow companies and government entities to contribute less to pensions--and the rules allow for "smoothing" so that huge contributions are not required in the "bust" years. One expert within the actuarial industry, Jeremy Gold, has been very vocal about correcting these rules. A Blue Ribbon Panel of actuaries and public officials has also called for changes in the rules, but city managers and corporations have lobbied against rule changes that would require higher contributions. Corporations and government entities whine that changing the rules would create instability. Will the rules change, or will there be more government entities filing for bankruptcy like Detroit? Source: " Detroit Gap Reveals Industry Dispute On Pension Math ," by Mary Williams Walsh, New York Times Dealbook, July 19, 2013. Follow up: Who is at fault in this situation? The actuaries? The auditors? The FASB? The city managers? The unions? The employees? Describe two or more scenarios delineating who should bear the cost of this problem. Where does the ethical responsibility lie, and where does the legal responsibility lie? Why might there be a difference? A government entity--the city of Detroit--couldn't adequately calculate and fund retirement benefits. Several states and other cities and counties are also having trouble. Given those facts, do you think that it is reasonable to expect individuals to fund their own retirements with IRA's and 401K's? Why or why not? What is the FASB and why is it important? How and why might it have been complicit in allowing the underfunding of pensions?
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