Friday, August 31, 2007

Exciting News From The FASB

The Financial Accounting Standards Board agreed at its August 29, 2007, meeting to advance several staff-backed portions of the first chapter of its Discussion Paper (DP), Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information ( No. 1260-001 ). In particular, the FASB agreed to revise the objective of financial reporting as outlined in the DP to broaden its scope, and to reorganize the chapter to logically flow from the perspective of the entity that is reporting on its resources and the claims to those resources.

I've been a licensed CPA in the state of Michigan for almost 21 years now. I had to read this three times to even get an understanding.

So here goes: The FASB is best known for issuing difficult to understand and difficult to implement accounting standards. But it also does research, which in theory at least is a good thing. One long standing project has been to get a better understanding of what are the objectives of financial reporting.

Let's hope that when they figure that out they can communicate it in a way that is not difficult to understand or difficult to implement.

Thursday, August 30, 2007

Army To Examine Iraq Contracts

Saw the following on the Huffington Post this morning:

WASHINGTON — The Army will examine as many as 18,000 contracts awarded over the past four years to support U.S. forces in Iraq to determine how many are tainted by waste, fraud and abuse, service officials said Wednesday.

Overall, the contracts are worth close to $3 billion and represent every transaction made between 2003 and 2007 by a contracting office in Kuwait, which the Army has identified as a significant trouble spot.

In a separate probe, a high-level team led by Pentagon Inspector General Claude Kicklighter will travel to Iraq next week to investigate how U.S. weapons intended for Iraqi security forces ended up being used for murders and other violent crimes in Turkey.

Among the contracts to be reviewed by the Army are awards to former Halliburton subsidiary KBR, which has received billions of dollars since 2001 to be a major provider of food and shelter services to U.S. forces in Iraq and Afghanistan.Democrats in Congress have claimed that KBR, formerly known as Kellogg, Brown and Root, benefited from ties to Vice President Dick Cheney, who once led Halliburton Co., the Houston-based oil services conglomerate, and congressional Republicans.

The officials did not specify which KBR contracts would be examined or their value.

The announcement, made by Army Secretary Pete Geren, comes as the number of criminal cases related to the acquisition of weapons and other supplies for forces in Iraq and Afghanistan has grown to 76. So far, 20 military and civilian Army employees have been indicted on charges of contract fraud.

"There have been reported cases of fraud, waste and abuse of contracting operations, with many of the worst cases originating out of Kuwait," Geren said.

Geren said the Army has been auditing the contracting operation in Kuwait for more than a year. He acknowledged the expanding list of criminal investigations was a factor in appointing a special task force headed by a three-star Army general.

"There is fraud," Geren said. "We have seen more cases lately and that's cause for concern."
Lt. Gen. N. Ross Thompson has been empowered to take whatever corrective actions he determines are necessary "to prevent any further abuse, fraud or waste," Geren said.
Thompson, the military deputy to the Army's top civilian acquisition official, said his task force will "make sure that we've identified anything that needs to be looked at that hasn't been already been picked up by an ongoing investigation."
By Sept. 30, Thompson plans to boost the number of personnel in the Kuwait office by 35, giving it a staff of 90.

"We already know from our internal looks over the last few months in Kuwait that the experience level of some of the people - not all of the people that we had in Kuwait - wasn't up to the challenge or the complexity of the contracts," Thompson said.

By Jan. 1, contracts worth more than $1 million will be handled by the Army Materiel Command at Fort Belvoir, Va., which has more staff able to deal with larger, more complex procurements, Thompson said.

In late 2005, the Army began audits and its Criminal Investigation Command accelerated its inquiries into contract fraud in Kuwait, according to an Army news release. The command first established an Iraq Fraud Detachment and then a Kuwait Fraud Office, both staffed with specially trained agents.

By early 2007, the Army had reorganized the Kuwait office, provided ethics training for employees and added a legal team.

Geren has also formed a special commission to examine long-term solutions to improve the Army's weapons and supply contracting process. That team will be headed by Jacques Gansler, a former under secretary of defense for acquisition, and its report is due in 45 days.

The investigation into U.S. weapons in Turkey was sparked in May when Pentagon officials learned that the Turks were concerned about American-issued weapons being involved in crimes in their country, Pentagon spokesman Geoff Morrell said.

Last month, Defense Secretary Robert Gates sent the Pentagon's top lawyer, William Haynes, to Turkey to meet with Turkish officials, Morrell said. The officials told Haynes that American-supplied weapons were ending up in the wrong hands, possibly including Kurdish militants, a group known as the PKK that the Turkish military has been fighting on the Iraq border.

The situation has raised tensions between Ankara and Washington, and left open the possibility Turkey may conduct military operations in northern Iraq if the situation continue.

"We don't deal with terrorists, Morrell said. "We don't deal with the PKK. And we certainly don't arm the PKK. So if American-issued weapons have ended up in the hands of criminals in Turkey or terrorists in Turkey, that is not based upon the policy of this department or this government."

Tuesday, August 28, 2007

More On "Feed The Pig"

I was reading the August 2007 issue of the Journal of Accountancy yesterday and noticed the following letter to the editor:

As a dues paying member of the AICPA, the New York State and Louisiana societies of CPAs, I am writing to express my total disgust with the “Feed the Pig” program for retirement planning (“Inside AICPA,” May 07, page 102). I have never found it to be appropriate, and after yesterday that has become completely clear.

Imagine my horror while watching TV with my wife and the following commercial came on. It showed a man in a suit with a pig head, seeming to shake down small businesses and individuals for money.

How in anyone’s imagination could an ad such as this ever have been approved by the Board of Trustees of the AICPA. The last time I saw a character with a pig head was on a recent “Dr. Who” episode. What does this ad do for the image of the AICPA?

The ad, along with the program, should be immediately withdrawn from promotion by the AICPA. It would seem that an organization such as ours could find a more appropriate mascot for the program.

In considering a replacement for “Feed the Pig,” perhaps a frog turning into a prince with a tag line: “You can create a princely sum by saving toward your retirement on a monthly basis.” It might become as popular as the GEICO ads and be a whole lot more appropriate for our organization.

I believe it is time for the AICPA to consider its true purpose.

What was more incredible was the AICPA's defense. It was about 4 times as long as the above letter. You can see it here.

I'm with the writer of this letter. What a horrible name for a campaign.

Thursday, August 23, 2007

Is GAAP really POOP?

Sorry I am not reverting to being a 3 year old.

I recently saw a column that said GAAP - Generally Accepted Accounting Principles - should really be thought of as POOP - Pitifully Old and Obsolete Principles. The column makes a good point.

Consider the age of the following standards:
  • Long-term contracts - ARB 45 - 1955
  • Inventory and cost of goods sold - ARB 29 - 1947
  • Treasury stock - ARB 1 - 1939
  • Research and development - SFAS 2 - 1974

Think about the changes in the business world since just 1974. The PC revolution and the Internet have dramatically changed business processes. All sorts of technologies have emerged and changed the ways of business.

But many accounting principles are stuck in another age.

The Financial Accounting Standards Board is aware of this. Whether or not movement in improving financial reporting actually occurs is another story.

Wednesday, August 22, 2007

SOX at 5 - Reflecting on an Unintended Consequence

The lead article in the August 20 - September 9, 2007 issue of Accounting Today is called SOX at 5 - The profession reflects on a milestone. It is frankly hard to believe that this legislation is already 5 years old.

Issued on the heels of the Enron, Worldcom and other frauds, Sarbanes-Oxley was intended to restore investor confidence in the financial reporting. Many believe it has done that, and it has done a lot more.

For one thing, the largest accounting firms are busier and bigger than ever. When I started at the Detroit office of what was then Deloitte Haskins + Sells in September 1984, there were of course large multinationals like General Motors. But there also was an entire department focused on serving "small" businesses - $5 million to $100 million. I was the senior on the audit of a publicly held company that did about $100 million in revenue.

Now, businesses like that are too small for the "Final 4" accounting firms. Those businesses have been snapped up by the second tier of firms - Grant Thornton, BDO Seidman and others. The second tier have moved up the chain, and what used to be their bread and butter, the "small" business has been left behind.

That has been good for our firm, of course.

Back in my Deloitte days, we used to joke that the 1986 Tax Reform Act was an "Accountants Full Employment Act." It may or may not have been, but Sarbanes-Oxley is definitely The Accountants Full Employment Act. There is greater demand for accountants and, especially, auditors, than ever before.

I go back and forth on this. As someone who has done and still does a lot of financial statement auditing, it is nice to have what I do be in demand. But it bothers me that it took catastrophic audit failures and the collapse of Arthur Andersen to make this happen.

Like I said in the title, I think this is an unintended consequence of SOX.

Tuesday, August 21, 2007

A Comment on Hourly Billing

I've done some reading over the last couple of years on hourly billing. I'm not a big fan of it because I don't think it fairly reflects value. I'm working to change from hourly billing to quoted prices; that will take some time to achieve.

Anyway, I was reading the comics with breakfast this morning, and saw today's Pearls Before Swine. The background is that the crocodile is suing his neighbors the zebras because the zebras won't allow the crocodile to make a meal out of them. Crocodile is represented by the rat, and crocodile doesn't like the fee.

Makes a pretty good argument.

Monday, August 20, 2007

AICPA Proposes Ethics Guidance For Network Firms

The American Institute of Certified Public Accountants has proposed new ethics guidance for CPA Firms that are members of networks that seek to extend their capabilities. Essentially, the proposal says that firms that are members of such networks must still maintain their independence of certain attest clients and other network firms.

Why is this an issue? These networks are growing and having a bigger impact on the marketplace. We at Maddox Ungar Silberstein, PLLC have taken note of that and are proud members of msi, a London based network of legal and accounting firms.

On the surface, this ethics guidance sounds like a good idea. I reserve the right to study this one further.

Sunday, August 19, 2007

Feed The Pig - AICPA Comes Up With Another Great Slogan...Not

I faithfully pay my dues to the American Institute of Certified Public Accountants (AICPA) every year. The AICPA does a lot of things to help promote the profession.

Like when they came out with a logo sometime in the mid 90s - you can see it on the AICPA home page. At the same time, they came out with a slogan:

The CPA - Never Underestimate The Value
Bravo. A slogan with not one but two negative words!
A few months ago, the AICPA announced they were starting a campaign to encourage youth to develop good savings habits. That is what I would call a very good idea. They hired the Ad Council (who gave us Smoky the Bear amongst other successful campaigns) to help develop and market the idea. What did they come up:
Feed The Pig
I'm reminded of the Pontiac Aztek. That vehicle was developed by committee and nobody had the good sense to look at it and think about the actual product.
Here the AICPA does it again. Feed The Pig. They couldn't come up with anything better? That being said, the web site is up. I mean, it's a good idea. I'm still embarrassed that this is what my dues dollars are doing.

Thursday, August 16, 2007

Reflecting on 23 years of auditing

Ok, the title is a bit of a misnomer. I started at Deloitte in September 1984, and that is almost 23 years ago. But then I spent 6 years out public accounting, so maybe 17 years is more appropriate.

I am the lucky beneficiary of some friends of are partners in another Detroit area firm. They found themselves "not independent" on one of their audit clients and asked me to do the audit. The audit right now is in process and the people are nice.

A bonus of this situation is that the staff person from my friend's firm is someone I worked with at a previous firm. We were comparing notes about how much audits have changed.

I remember the first time I wrote an audit planning memo - it was 1 1/2 pages long. The next year it was 4 pages. And this was on a $100 million revenue publicly traded company. I bet that when I count the pages related to planning this new audit, which is a considerably smaller company, that it is in excess of 50 - checklists, forms, processing descriptions.

In early October, I will be going to a two-day conference in Las Vegas for training on the a series of new auditing standards that dramatically changes the planning and performance of an audit. I'm betting that if I do this same audit again next year, that the planning section will be even longer.

Wednesday, August 15, 2007

Accounting while standing on one foot

There is a story told of a man who went up to one of the great historical Rabbis and said "Teach me everything there is to know of the Torah while standing on one foot." The Rabbi then stood on one foot and said "That which is hateful to you do not do unto others. All the rest is commentary. Now, go forth and learn."

Accounting can also be summarized while standing on one foot:

"The left side of the balance sheet shows what the company owns, and the right hand side shows who has a claim on it. All the rest is commentary."


Sunday, August 12, 2007

New Found Respect for the Statement of Cash Flows

The Statement of Cash Flows, mandated by SFAS No. 95, is often maligned. Granted, it isn't perfect. But then the accounting standards rule setters haven't come up with anything better since it was issued in November 1987.

I recently developed a new found respect for the statement of cash flows. Perhaps it was a client telling me it was a meaningless statement that didn't accurately portray their cash flows. But it did, and I learned a thing or two in the process.

First, some background. Cash flow statements are pretty easy to do (despite what young staff accountants think). Say cash was $250,000 last year, and this year it is $150,000. Cash decreased $100,000. Since this statement is driven by the balance sheet, if cash decreased $100,000, all other accounts have increased by $100,000. That is what keeps everything in balance. Figure out the change in each other line item in the balance sheet, and you can explain how your cash decreased by $100,000.

Cash flow statements are divided into three sections:
  1. Cash flows from operating activities
  2. Cash flows from investing activities
  3. Cash flows from financing activities

SFAS No. 95 specifically defines what items go into investing and financing activities. Investing activities are from the asset side of the balance sheet, and generally involve cash flows from property and equipment, investments, and loans. Cash flows from financing activities involve liabilities and equity, and generally involve cash flows from debt borrowings and repayments, equity investment by owners and distributions to owners. That's it. Everything else goes in operating activities.

Practically speaking, cash flows from investing and financing activities are very quickly determined - there are only a few things that get reported there.

So, let's return to our earlier example where cash decreased $100,000. We have further determined that cash flows from investing activities was a negative $30,000 - as in the Company spent $30,000 to buy more property and equipment. Cash flows from financing activities are a positive $50,000 - the Company borrowed $90,000 on a bank note and repaid $40,000.

We now know what cash flows from operating activities must be: -$100,000 (our total negative cash flow) = x (operating cash flow) - $30,000 (investing) + $50,000 (financing). Solve for x and you see that cash flow from operating activities was a negative $20,000. A whole bunch of items make up cash flow from operating activities, but they add to a negative $20,000.

I started by saying that I have a new found respect for the statement of cash flows. In this situation, the reporting company felt there were expense items that belong in a prior year, and as a result their current year would look better. I disagreed. I also realized that even if a prior year adjustment was right, the subtotals would still be the same - cash flows from financing activities wouldn't change, cash flows from investing activities wouldn't change, and for that matter neither would beginning or ending cash. All the adjustment would do was change the makeup of the items that you added together to get operating cash.

In this case, the cash flows statement showed a true story - the company was not generating cash from operations. This was not something that could be fixed by pushing what I believed where current year expenses into a prior year.

Moral of the story: Cash is king, and the statement of cash flows can actually tell you a story about the king.