In Accounting, Rothstein Kass & Co. is the clear favorite among both small and large hedge fund firms. Part of the reason is the firm’s aggressive move to help clients interpret Financial Accounting Standards Board Statement No. 157, or FAS No. 157, the new accounting rule that sets more stringent standards for valuing assets.
BDO Seidman drops one place this year to No.2.
Deloitte Touche Tohmatsu, No. 3 is the highest ranked of the Big Four firms.
For the second time in as many weeks, Citadel Investment Group (Note from fm: Not confirmed, but I believe they use PwC) has been forced to deny rumors that it is in serious trouble.
The hedge fund giant, whose flagship fund is down almost 40% this year, denied a Wall Street Journal report that banks were demanding increased collateral as its losses mounted. Gerald Beeson, the firm’s chief operating officer, said Friday that it was meeting its daily collateral requirements with Goldman Sachs, Deutsche Bank, Merrill Lynch and others without being forced to sell its assets to cover the margin calls.
“We will continue to have sufficient capacity to meet our funding needs over the course of the short and medium term,” he said.
Hedge funds lost an average 5.52 percent in October, marking their fifth consecutive monthly drop as managers faced sharp stock market swings and angry clients who demanded their money back, new data shows.
The average hedge fund has now lost 15.30 percent in the first 10 months of 2008, putting it in line to post its worst year ever,
Hedge fund managers are sometimes vilified as “shorts. ” Some commentators have turned the words “activist investor” into dirty ones, based on the most active CEOs’ outspoken, blunt assessments of specific company and general economic conditions.
“…Forget about a government bailout—General Motors Corp. would be better off going bankrupt,” according to William Ackman.
During a discussion about the automaker on Charlie Rose Tuesday, Ackman said a “prepackaged bankruptcy” was the best move to get its struggling business back on track.
“The word ‘bankruptcy’ is scary for people, but it is simply a system,” Ackman, head of Pershing Square Capital Management (Note from fm: Uses EY as auditor), said…
In the hedge fund business, you win some and you lose some, as David Einhorn of Greenlight Capital (Note from fm: Uses BDO as auditor) will tell you. It’s just important to win more than you lose over time, as long as it’s not too long a time.
As John Maynard Keynes , the original market interventionist said:“In the long run, we’re all dead.”
“It is very easy for hedge funds to shop around to find valuations (FM note: And accountants that bless them?) that suit them best and then book their assets at that,” says one banker who advises hedge funds. “Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture.”
Back to the Journal. The story goes on to note, quel surprise, that the hedge fund engage in this sort of behavior to boost performance.
However, caviling aside, there is some new information in the piece, namely, that funds that hold a fair number of positions in illiquid securities appear to seek out favorable valuations to turn months with negative returns into positive results:
Investors should take heed because this massaging can help make the difference between a winning or losing month, the research found…..
So far, investors, auditors and regulators have focused on the way banks and brokers value these securities. But the new research suggests hedge funds may be an even bigger area of concern.
Forgive me for interrupting. The reason regulators haven’t focused on hedge funds is they have no jurisdiction over them…
“We’ve recognized — and have for months — that we need to proactively communicate with our clients about [FAS 157],” Howard Altman, co–managing principal in charge of financial services says. “We’re doing that literally every day, to make sure their questions are being answered.”
Section 102 of the Sarbanes-Oxley Act of 2002 prohibits accounting firms that are not registered with the PCOAB from preparing or issuing audit reports on U.S. public companies and from participating in such audits. With registration comes inspections. It would be helpful to know if Rothstein Kass has been inspected by the PCAOB and if their audit quality, especially with regard to issues related to their hedge fund clients such as FAS 157 valuations, has passed muster with the PCAOB.
Unfortunately, although the Rothstein Kass spokesperson claims that they were inspected by the PCAOB in 2006, there is no inspection report available yet on the PCAOB site. The PCAOB would not confirm that an inspection had ever been performed on Rothstein Kass, since they do not make any information about inspections public until the report is final. Rothstein Kass would not confirm whether their PCAOB inspection report was still in draft, whether it was being reviewed by the firm, or was still in the hands of the PCAOB.
2) The report was completed by Richard A. Stalvey, an accountant who is a partner with the firm Fowler, Holley, Rambo, and Stalvey PC , a member firm of AGN International, a network of separate and independent accounting and consulting firms. Fowler, Holley, Rambo, and Stalvey PC is also registered with the PCAOB.
3) Rothstein Kass is also a member of the AGN International Network.
As such, I do not consider this Peer Review to be truly independent or helpful given its limited scope in ascertaining whether Rothstein Kass consistently demonstrates the accounting and auditing practice quality required for being the #1 choice of hedge firms, large and small, public and private.
In addition to BDO Seidman’s issues with regard to their appeal of a judgment in the case of Banco Espiritu Santo which threatens their demise, their most recent PCAOB inspection report had several exceptions noted related to asset valuation and asset impairment decisions. BDO, like Rothsten Kass, is clearly very service oriented to their hedge fund clients and full of folks who’ve gravitated there because they want to work on these specialized topics. Their expertise and influence gets diluted and brushed off in the Big 4. But I think the risks of BDO going under make it a risky choice for hedge funds that are already operating in the risk stratosphere.
Deloitte seems to think they are actually hedge funds’ # 1 choice, based on a read of their press release for the Alpha Awards. I guess, in their mind, the only competition that matters is the rest of the Big 4.
Deloitte today announced it was selected as the top accounting firm in the Alpha Magazine 2008 Alpha AwardsTM by the Hedge Fund 100, Alpha’s most exclusive ranking of the world’s largest single-manager hedge funds. Hedge Fund 100 voters have consistently rated Deloitte as the pre-eminent accounting firm for four consecutive years.
They also tout their expertise in valuation and their consulting practice as a distinct advantage for their clients, even though auditors are not supposed to consult on the valuation and accounting policy decisions of their clients nor supplement accounting expertise that their clients are short of. They are only allowed to audit their client’s assertions.
Deloitte Touche Tohmatsu, No. 3, is the highest ranked of the Big Four firms (Deloitte, KPMG, Ernst & Young and Pricewaterhouse Coopers). New York–based Cary Stier, head of Deloitte’s U.S. asset management services, says FAS No. 157 places a greater onus on hedge funds to produce accurate valuations, a circumstance that puts Deloitte at an advantage over competitors because the firm hasn’t spun off its specialized consulting business, as have some other big firms, Stier believes. “We’ve got a deep capital markets group,” he says. “It also means we have a very extensive financial advisory services group, and they have deep expertise around valuation.”
In Deloitte’s most recent PCAOB inspection report, errors in judgement and lapses in quality around valuations also appear a several times, including multiple instances of incorrect accounting treatment for interest rate swaps.
So why would any firm choose Rothstein Kass, BDO, or Deloitte, for example, as their top choice? Well, I think we already know.
Here’s another perspective in the words of an attorney who works with hedge funds as an advocate:
“…specialized accounting boutiques have exploited the opportunity to service hedge funds. The Big 4 have significant depth in all that they do (at some level) and they certainly have experience in analyzing complex securities. HOWEVER, their clients are going to be more institutional and less the hedge funds — again because of scale, cost, nimbleness, potential independence conflicts, etc. Hedge funds want aggressive — in everything.”
And from a famous hedge fund executive:
“Historically funds did not use Big-4 because they did not get service and cost twice as much – easier going to a lower-tier audit firm that cared more about you. Because of this, a whole slew of firms became “experts” on auditing funds – BDO, RK and GGK amongst others. This was way before the days of FAS157…”