New Option for Private Companies in Streamlined IFRS

Very interesting article in The Journal of Accountancy that might be a very attractive option for companies: use a slimmed down version of International Financial Reporting Standards ("IFRS") as the basis for accounting instead of US GAAP.

This would be very interesting. Many privately held companies continue to complain, rightfully so, about the complications of US GAAP. Much of the accounting pronouncements coming out these days seem pointed at larger, publicly held companies and can be very difficult and expensive to implement. Privately held companies have been asking for an alternative, essentially a GAAP Lite.

This might be it.

I encourage you to read the article. But I am going to copy one key paragraph:

Private companies in the United States can prepare their financial statements in accordance with U.S. GAAP, an “other comprehensive basis of accounting” (OCBOA), such as cash- or tax-basis; or full IFRS, among others. The governing Council of the AICPA recognizes the IASB as an accounting body for purposes of establishing international financial accounting and reporting principles. Full IFRS and IFRS for SMEs are generally accepted accounting principles.

"SME" stands for small- and medium-size entities.

I admit I have not read these standards yet, but on the surface I can see two potential problems:

1. Loan agreements often specify US GAAP be used in financial reports provided to the lender. It could take time for banks and other lenders to understand this different basis of accounting and accept it.
2. Accountants - both those in public accounting and those inside of small- and medium-sized entities don't know this basis of accounting and it will take time to learn how to use it.

That being said, I look forward to following this option.

Considering BusinessWeek's Article: How Good Is Your Audit Firm?

BusinessWeek recently published an article titled How Good is Your Audit Firm? The Public Company Accounting Oversight Board ("PCAOB"), at the request of the SEC, has been requested "to examine the feasibility of requiring audit firms to periodically report on key indicators of audit quality", and this article explores the subject.

One of the authors is a retired partner at KPMG, and is now, along with the other two authors, a college professor. This explains the looking at the world with rose colored glasses approach suggested in this article.

I agree 100% that audit quality is important. The suggestion to report on input and processes isn't going to change a thing.

The article suggests audit firms, which mind you in the US are privately held, report things like:

• Years of experience of professional staff by partner, manager and staff level
• Areas of expertise
• Relative time spent on client service, administration, training and nonchargeable time
• Number of public clients per partner
• Audit firm personnel-retention rates by professional level
• Specific types of industry relevant training

Most firms already disclose information such as years of experience and areas of expertise. I submit that years of experience is overrated. Yes, generally speaking someone with 20 years of experience knows a lot more than someone with 2 years of experience. But 20 years isn't necessarily better than 10. I have unfortunately seen people with far more experience than me not get it right.

I am very bothered by the notion of disclosing "relative time" because it suggests that hours are an important input in this equation. I don't track my hours. It is not relevant to my clients. My experience and ongoing growth and training is important to them.

The market place drives competition and audit quality. An artificial set of criteria imposed on audit firms isn't going to make things better.

Mark to Market Accounting - Did it Cause the Meltdown

I was involved in an interesting discussion last week on "mark to market" accounting. For those not up on the subject (at least 99% of the population falls in that category!), the mark to market rules required banks and other entities to adjust the carrying value of various assets to current market values. That is what they mean by mark to market - as in marking it down.

Most GAAP financial reporting is done on a historical cost basis. There has been an ongoing trend to more fair value reporting, especially as the US account principles start to converge with international standards. One area that has been switched to market value was investments in marketable securities - stocks, bonds, mutual funds, etc. Depending on how you classify these assets impacts how the gain or loss on them is recognized - unrealized gains and losses on securities held for trading purposes directly hit the income statement, while those on available for sale securities go through comprehensive income, a component of the equity section of the balance sheet.

The mark to market rules have gotten a lot of criticism and taken heat as being a cause of the financial market meltdown. Why? Because subprime loans and other financial assets had to be marked down to current value. And that made the companies holding these assets look bad! The argument was that if these rules were done away with then the companies would look better and none of this would have happened.

A large number of members of Congress have written the Securities and Exchange Commission asking that these rules be rescinded for public companies. That alone should tell you the rules are not the problem.

The truth here is that these companies were holding a lot of bad assets. The mark to market rules made this clear. Not having the rules in place would have hidden this information, but either way the companies were holding bad assets.

Did the mark to market rules create the financial meltdown? No. That was going to happen. Did it help accelerate it? Maybe, but that is ok.

Any contrary thoughts?

For All of the Trekkies Out There

I reserve the right to not always write about accounting, auditing, and so on. Especially if I didn't write the post.

Copying this from my friend Roy Richardson's blog:

Thanks to the Good Clean Funnies List for this next bit of Blog Fodder.

Things That Never Happened On Star Trek

1. The Enterprise runs into a mysterious energy field of a type it has encountered several times before.
2. The Enterprise visits a remote outpost of scientists, who are all perfectly all right.
3. Some of the crew visit the holodeck, and it works properly.
4. The crew of the Enterprise discover a totally new life-form, which later turns out to be a rather well-known old life form wearing a funny hat.
5. The crew of the Enterprise are struck by a mysterious plague, for which the only cure can be found in the well-stocked Enterprise sick-bay.
6. The Captain has to make a difficult decision about a less advanced people which is made a great deal easier by the Star Fleet Prime Directive.
7. The Enterprise successfully ferries an alien VIP from one place to another without serious incident.
8. An enigmatic being composed of pure energy attempts to interface to the Enterprise's computer, only to find out that it has forgotten to bring the right leads.
9. A power surge on the Bridge is rapidly and correctly diagnosed as a faulty capacitor by the highly-trained and competent engineering staff.
10. The Enterprise is captured by a vastly superior alien intelligence which does not put them on trial.
11. The Enterprise is captured by a vastly inferior alien intelligence which they easily pacify by offering it some chocolate.
12. The Enterprise visits an earth-type planet called "Paradise" where everyone is happy all of the time. However, everything is soon revealed to be exactly what it seems.
13. A major Star Fleet emergency breaks out near the Enterprise, but fortunately some other ships in the area are able to deal with it to everyone's satisfaction.
14. The Enterprise is involved in a bizarre time-warp experience which is in some way unconnected with the Late 20th Century.
15. Kirk (or Riker) falls in love with a woman on a planet he visits, and isn't tragically separated from her at the end of the episode.
16. Counselor Troi states something other than the blindingly obvious.
17. The warp engines start going haywire, but seem to sort themselves out after a while without any intervention from boy genius Wesley Crusher.
18. Spock (or Data) is fired from his high-ranking position for not being able to understand the most basic nuances of one in three sentences that anyone says to him.

Which got me thinking about doing this list for Gilligan's Island. But I didn't get past "Gilligan doesn't mess up the castaways plans for rescue."

Benchmarking: More Similar Between Industries Than I Realized

I attended Restaurant CFO Boot Camp in Las Vegas, sponsored by SS&G Financial Services, last week and learned a lot more about the restaurant industry. Glad I went.

SS&G does an annual benchmarking survey of the restaurant industry, and I was struck by how similar the issues they encountered were to the experiences I had in a past life. Prior to founding Maddox Ungar Silberstein, PLLC, I worked for 4 years in the ready-mixed concrete industry, and I still am a member of the National Ready Mixed Concrete Association. For several years, I was on the committee that did the annual benchmarking survey of concrete producers - financial results and various operating statistics.

The industries are very different, yet the issues were the same:

• How do you normalize for excess owner compensation in privately held industries?
• How do you make sure you are looking at apples and apples - in concrete where are the benefits for the loader operator going - variable or fixed costs? And in restaurants, where is all the expense for paper that touches the product going? Same, but different.
• And more.

Both industries are focused on controlling costs. Restaurants and concrete companies generally have fixed pricing for their products - restaurants sell based on menu price, and concrete generally sells based on fairly standard pricing for the different mixes. Keeping an eye on your costs is critical as improvements in costs essentially drop right to the bottom line.

Intuitively, I knew this, but it took this seminar to make it clear.

Audit Reveals 257 Ghosts On Detroit Public Schools Payroll

Robert Bobb, the emergency financial manager for Detroit Public Schools, is doing the job nobody, especially the School Board and its administrators, would do: routing out fraud and corruption.

The Detroit Free Press reports today that a payroll audit revealed 257 ghosts on the payroll. A ghost employee is what it sounds like - they are not a real person. They exist only for someone else to collect the paycheck. This is a routine procedure when payroll fraud is suspected in any business, and it looks like it succeeded spectacularly.

Can't wait to see what else comes out on this one.

The Main Reason My Kids Won't Go Into Accounting

I was doing a phone interview today for an accounting magazine. The interviewer was asking a wide variety of questions about the business of accounting - what were the biggest challenges, what would you differently, etc. At one point I stopped him and asked him if I could tell him what my biggest disappointment was. I don't know if he is going to use it, but this is what I told him:

"My kids will never consider going into public accounting. That is my biggest disappointment."

I don't think they would find the subject interesting. But that isn't the reason.

They don't see me from early January to about the middle of April. That's the reason.

I generally blame the U.S. Congress for this, but the accounting profession bears some blame too. I blame Congress because pretty much all S Corporations, Limited Liability Companies and partnerships have to have December 31 as their year end; C Corporations can have any year end but there aren't nearly as many C Corporations out there. This pushes vast amounts of work into a tiny window of time. I always joke that at least it happens during the winter but still.

The balance of the blame goes to the accounting profession. Many CPA Firms fan the flame of the fear of the extension. Or they will say "Why are you going on extension? I can do it on time." Sometimes it doesn't matter how good of a job you have done. They fear the extension raises their audit risk (it doesn't) and they jump ship.

I really enjoy the vast majority of the work I do; I'm aiming to get that percentage to 100%. There is a tremendous amount of mental stimulation in the work. I work with wonderful people, both in my Firm and at our wonderful clients.

It is just unfortunate that we don't get to see our families for about 3 1/2 months. And it is unfortunate to think of the all the people who never consider public accounting because of that.