Forbes Magazine: Lying With Numbers
Nice writeup on my Forbes piece by GMI Ratings.
For more go to the report.
Bogus Accounting Hides Real Risks
By James A. Kaplan and Lev Janashvili
“In the long run managements stressing accounting appearance over economic substance usually achieve little of either.” ― Warren Buffett
In the current issue of Forbes magazine, Francine McKenna’s thoughtful article (Lying with Numbers) provides a timely reminder that bogus accounting remains a widespread practice at public companies. Enabled in part by perennially resource-constrained regulators, aggressive accounting continues to distort underlying economic realities, often through perfectly legal and clever exploitations of accounting standards. Given the latest data on the incidence of earnings manipulation, McKenna raises the inescapable question: “Is another Enron brewing?”
In this context, McKenna briefly mentions recent research on earnings quality. This paper by a team of academics from Duke and Emory warrants a closer look because it paints a stark picture of the scope and severity of the problem based on the opinions of people who understand the problem well.
A very nice mention of the article by Kevin LaCroix at D & O Diary.
…McKenna’s article looks at whether the reduced accounting fraud enforcement activity in recent years is the result of decreased fraud or a reduced emphasis on the issue from the regulatory agency.In a concluding section that will be of interest to readers of this blog, McKenna’s article closes with a seven-point checklist to use to test for accounting risk at any particular company.
Check out Francine McKenna’s interesting piece in Forbes entitled “Is The SEC’s Ponzi Crusade Enabling Companies To Cook The Books, Enron-Style?“
Cloud computing is clearly changing the way the industry buys software, but it could also be tempting some SaaS companies to dupe investors.
The poster child for the situation could be SucessFactors, a cloud-based app company bought by SAP in February. The company was accused of misleading accounting procedures last year by a whistleblower who reported his misgivings to authorities, Francine McKenna of Forbes writes.
This wasn’t the first time the red flag was raised over SuccessFactors’s accounting. ZDNet’s Dennis Howlett had also documented weirdness in how SuccessFactors reported revenue to investors via SEC filings
…McKenna’s article looks at whether the reduced accounting fraud enforcement activity in recent years is the result of decreased fraud or a reduced emphasis on the issue from the regulatory agency.
The new feature article for Forbes magazine is called “Lying With Numbers”. It was on newsstands October 22 through November 5.
The article is also posted on my blog at Forbes.com.
The SEC is busy chasing Ponzi schemers and foreign bribers. But bogus accounting remains a bigger danger to the markets. Is another Enron brewing?
There’s some new insight into the ongoing accounting issues at Green Mountain Coffee Roasters. There’s also an account of a whistleblower’s complaint to the SEC about potential fraud at SAP via its recent HR cloud computing acquisition SuccessFactors.
If you like what I’m doing under the Forbes Investigations banner, please let them know. I’ve got two more features planned and hope to do more.
Main page art is Andy Warhol’s Dollar Sign, once owned by supermodel and Mick Jagger ex Jerry Hall.
Hope you included the totally understaffed Boards of Accountancy to explain the trashy auditor opinions by the Big Four and others. For instance, California with 85,000 CPA licensees has only 5 investigators. No surprise that the public keeps on losing. Time to fix this.
The SEC doesn’t think re-statements of materially false financial statements are important to investors. My petition to SEC to require companies to send re-statements to stockholders has gotten the cold shoulder from SEC for six months. See text below.
Carl Olson
Chairman, Fund for Stockowners Rights
P. O. Box 6102
Woodland Hills, California 91365
April 9, 2012
Secretary
U. S. Securities and Exchange Commission
100 F St. NE
Washington, D. C. 20549
Re: Petition for Rulemaking
Dear Sir:
This is a petition for rulemaking regarding re-statements of financial statements.
Our group is a 501(c)3 group with an abiding interest in the presentation of
reliable financial information available to the investing public. Millions and
billions of dollars can be affected by materially false and/or misleading
information in the financial statements. When an issuer with its independent
accountant/auditor determines that a materially false and/or misleading
presentation has been made in an already disclosed financial statement, there is
a requirement that a re-statement be made as quickly as possible. Over the past
10 years, there have been thousands of re-statements for publicly-traded
issuers. This persisting problem, which acts to the detriment of the investing
public, needs to have improvements so that the investing public is better
informed in a timely fashion.
This request for rulemaking is as follows:
1. For an issuer which has filed a 10-K form and at a later time determines
that the financial statements in the 10-K form have materially false and/or
misleading items such that a re-statement is required,
A. The re-statement shall as quickly as possible be reported in a 8-K form.
B. The 8-K form shall have a listing of each and every difference between the
10-K original financial statements and the re-statement.
C. The 8-K form shall, for each and every difference between the 10-K original
financial statements and the re-statement, provide the measure of materiality
used for the 10-K presentation and for the re-statement.
D. The 8-K form shall, for each and every difference between the 10-K original
financial statements and the re-statement, include a complete explanation of the
circumstances which led to the materially false and or misleading
representations in the 10-K original financial statements, and include a
complete explanation of the circumstances which led to the discovery of each and
every corrected items as presented in the re-statement. Such explanation shall
detail the roles of the issuer and the independent accountant/auditor.
2. For all re-statements that issuers report to the SEC, the SEC shall within
2 weeks of receipt thereof send a copy to each board of accountancy in the
United States.
3. The SEC shall, within 2 weeks following adoption of this rule, send a
recommendation to the governor and the legislative majority leaders and minority
leaders of each state to amend the corporation code so as to require that all
re-statements for publicly-traded issuers be distributed by the issuers to the
stockholders who received the previous materially false and/or misleading
financial statements.
Your kind consideration of these improvements will be greatly appreciated.
Sincerely,
Carl Olson
Great article, but I think it’s polyanish to think the SEC can fix this or that auditors will on their own do the right thing to the fullest extent. The answer is to first make the board of directors more responsible, the second is to more empower share-holders to bring votes and change management, and lastly and most importantly is to put the fear of lawsuit in the eyes of senior management if and when they “knowingly cook the books” or should have known the books were not properly prepared as defined by Sarbanes Oxley. SOX may not be perfect , but it contains some good provisions, unfortunately regulators including the DOJ refuse to enforce it.
@Conscience of a Conservative
We agree on all counts except the part about me being a Pollyanna. SEC is part of the enforcement scheme. DOJ and SEC both have provisions to enforce from SOx and from securities laws in general and they are not enforcing them swiftly and strongly. I count the PCAOB as part of SEC enforcement regime and it is too slow and too soft because SEC has to review and bless everything it does.
This may be a bit off the specific topic but it has to do with the culture of lying with numbers and the comfort and ease of doing so. The practice of lying with numbers exists at PwC even at the admin level. Team Assistants(TA’s) are routinely “encouraged” in a subtle like manner to “fill” up their time sheet, i.e., “it only took you .5 hr to complete that task”? Well the report indicates that you only worked for 5.5 hrs on “Thursday……..” Did you forget to include anything”? You need to fill up that day and show that you worked 7 hours that day and all other days that you were working. This conversation takes place in team meetings and 1 on 1 meetings. There have been incidences where EA & TA managers screamed at those admins that did not meet their utilization goals. Many TA’s are pressured and frustrated as a result of these utilization and productivity goals and have said they feel pressured to lie how long it actually took them to complete an assignment. It’s interesting that after these meetings the next utilization report indicates a huge increase in overall utilization and the EA TA managers are delighted. Now they can meet with their boss, Sharon Franklin to view the utilization report without fear and intimidation of being yelled because of low #’s. And the TA’s have the pleasure of receiving the “you did it, way to go, utilization is higher than ever” congratulatory, high-five emails.
All the TA level accomplishes is that the EA/TA Managers and their managers can keep their jobs through the extensive collection and slicing and dicing of meaningless data. S. Franklin is disliked by most because of her draconian and ruthless management style. She had one of the most professional, dedicated, motivated assistants who upon return from an approved LOA was informed on her first day back to work, she was being replaced. S.Franklin hired a friend. You know how something so unethical affects morale? Not that she cares!