Niblets

• Had lunch yesterday with @rebalancejim, Jim Peterson, and a local CPA who shall not be named and we came up with another reason why the Big Four firms may not want the PCAOB to mandate disclosure of all participating firms and experts in a multinational audit. Given uneven geographic coverage and other political issues the US firm may have with its worldwide member firms, it’s quite likely resources for audits may be obtained in some countries from competing firms. The audited company may not even know! That could present an independence problem later. Yes, it does happen.

• That same CPA, who shall not be named, also warned me on the recent announcement of EY’s acquisition of Thomson Reuters U.S. tax preparation and court accounting outsourcing businesses, which includes approximately 175 employees. This is a sub-segment of the Thomson Reuters OneSource tax software and services business, originally acquired from Deloitte. I wrote about Thomson Reuters auditor PwC, in a “business alliance” with its audit client to provide this software to its tax clients in UK and China. Warning from the CPA who shall not be named: “This appears to put E&Y onto turf usually served by small and medium sized accounting firms. The unit E&Y bought has only 175 people, but they could easily grow this. A Big 4 firm getting into what appears to be write-up and tax preparation work is very surprising. The rates for this work are usually relatively low. Also, many law firms have hired accountants/bookkeepers to do this work and keep the fees in house.”

• The SEC issued its 2013 Enforcement statistics and they look lousy for accounting fraud and disclosure. The number of actions for this category is down again, for the twelfth year in a row. I wrote about this—and restatements, see below— in Forbes magazine in 2012 and again when the 2012 numbers came out, finally, too late for my piece. Notwithstanding all the bluster about the new Financial Reporting and Fraud (FRaud) Task Force, aka the FRAT Force, and a new initiative “Operation Broken Gate”, the proof of renewed emphasis by the SEC is not yet in the pudding. (Was there accounting and disclosure fraud during the crisis? Judge Rakoff says maybe trust the Financial Crisis Inquiry Commission on that.)

• Was the Herbalife restatement included in the re-audited financials a “formal” restatement, a “stealth” restatement or a “revision restatement”? Jonathan Weil in Bloomberg says, “One of the most significant revisions was to the company’s shareholder equity as of the end of 2012, which fell 6 percent to $395.5 million from $420.8 million. I would have thought an adjustment of that size would be deemed material, thus requiring a formal restatement.” Herbalife did previously issue an 8K saying its 2010, 2011 and 2012 financial statements could no longer be relied upon because of the KPMG inside trading scandal and would be re–audited by PwC but never acknowledged there would be a restatement, a requirement for a “formal” restatement. Prior periods were adjusted, another criteria for a “formal” restatement, but the errors corrected were deemed “non-material” which makes it more like an Audit Analytics defined “revision restatement”. I have to agree with Jonathan, though, that the whole show was pretty stealth, playing to the markets more than to discerning viewers:

What was unnecessary (and annoying) was for Herbalife to describe the results incompletely in its news release. Rather than saying there were “no material changes,” it would have been better to say what the changes were and that the company considered them to be minor. Instead, the company included a footnote in its news release that mentioned in passing that its amended filings included some changes, without saying what those changes were. There was a 23-minute lag between the time Herbalife issued its news release and the time when the first of its amended reports showed up in the Securities and Exchange Commission’s filing system, during which time the share price rose.