Audit Firm Rotation – Coming to a Theater Near You?

On Wednesday, November 30, the Internal Market Commissioner, Michel Barnier, suggested that radical changes are needed for auditing firms. Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus “would strongly suggest that audit is not working as it should”. Under Barnier’s plan, the four top firms will have to separate audit activities from non-audit activities, such as tax and other advisory services — “to avoid all risks of conflict of interest”. It appears that the world’s top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.

Questions:
1. Just four audit firms — Ernst & Young ERNY.UL, Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL — check the books of 85 percent of blue-chip companies in most EU states, a situation the Commission said was “in essence an oligopoly”. What is an oligopoly?
2. What does the EU plan propose to ban in relationship to loans? Explain.
3. Barnier, under pressure from some fellow commissioners, has decided to drop which part of the plan? What is the reaction by some, including BDO, an audit firm in the second tier firms?
4. What is your reaction to the proposal and the move by regulators in the U.S. to consider more auditor rotation regulations?

Source:
Jones, H. (2011). Big Four Auditors Face Breakup to Restore Trust, Reuters, Nov. 30 (Retrievable online at http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130)

Financial Crisis in Greece

While banks and European leaders hold abstract talks in foreign capitals about the impact of a potential Greek default on the euro and the world economy, something frighteningly concrete is under way in Greece: the dismantling of a middle-class welfare state in real time — with nothing to replace it.

Since 2010, the government has raised taxes and slashed pensions and state salaries across the board, in an effort to rein in the bloated public sector that today employs one in five Greeks. Last week, the government announced it would put 30,000 workers on reduced pay as a precursor to possible termination and would cut pensions again for nearly half a million public-sector retirees.

Questions:
1. The article mentions raising the value-added tax.  What is a value-added tax?  Does the U.S. have such a tax? Should they?  Discuss.

2. Ms. Firigou received a pay cut last year.  What percentage pay cut was it?

3. How does this financial crisis impact the U.S.?  What is at the heart of this crisis?

Source:

Donadio, R. (2011) Worried Greeks Fear Collapse of Middle Class Welfare State. The New York Times, September 24 (Retrievable online at http://www.nytimes.com/2011/09/25/world/europe/as-welfare-state-collapses-greeks-suffer-and-fear-future.html?pagewanted=1&_r=3&hp)

What good is a logo?

Australia, which has already banned the public display of tobacco products in retail outlets, wants to outlaw logos on cigarette packs and force them to be sold in plain dark-olive packaging, carrying health warnings instead of company logos. Cigarette brand names will appear on the packages in the same size and style of printing. The legislation, if passed by Parliament, would come into force in 2012.

“The forced removal of trade marks and other valuable intellectual property is a clear violation of the terms of the bilateral investment treaty between Australia and Hong Kong,” Anne Edwards, a spokeswoman for Philip Morris Asia, said in the statement. “We believe we have a very strong legal case and will be seeking significant financial compensation for the damage to our business.”

Questions:

1. How are trademarks valued?

2. Where do trademarks appear on the financial statements? Where will costs regarding this litigation be reported in the financial statements of Philip Morris?

3. Do you agree or disagree with Australia’s approach? Discuss.

Source:

Bloomberg News Staff. (2011). Philip Morris Sues Australia Over Cigarette Packaging. The New York Times, June 26 (Retrievable online at http://www.nytimes.com/2011/06/27/business/27tobacco.html?ref=business)

The Aftermath in Japan

The Tokyo Electric Power Co. on Friday reported a net loss of 1.2 trillion yen ($15.4 billion) for the fiscal year that ended March 31. Tokyo Electric also announced it will decommission reactors Nos. 1-4 at Fukushima Daiichi and has also canceled plans to build two other reactors at the site. In addition to the company’s earnings, Tokyo Electric president Masataka Shimizu announced his resignation Friday, which must be approved by the board of directors at a June meeting.

A restructuring plan was announced to boost company finances and help create more than a trillion yen in savings. The Fukushima Daiichi plant has faced a series of setbacks since a magnitude 9.0 earthquake and tsunami struck on March 11. The disasters triggered a glitch in the plant’s cooling system, and caused radiation to leak.

Questions:

1. Based on the video and the article, how much compensation is being made to some of the families directly affected by the tragedy?
2. Under IFRS, how would these payments be accounted for?
3. What is the anticipated total compensation projected?
4. What measures is the company taking to make up losses?

Source:
Lah, K. and Wakatsuki, Y. (2011). Tokyo Electric reports $15 billion net loss after earthquake, tsunami, CNN.com (Retrievable online at http://www.cnn.com/2011/BUSINESS/05/20/japan.tokyo.electric.earnings/index.html)
CNN.com Video (2011)., TEPCO Reports Massive Losses, May 20. (Retrievable online at www.cnn.com/videos)

Put Me First In Line

Former Denver Broncos quarterback John Elway and his business partner gave $15 million to a hedge-fund manager now accused of running a Ponzi scheme.  In court papers filed by Elway and Mitch Pierce the two claim that their investment was supposed to be kept in a separate account from Mueller’s Over Under Fund. Therefore, the Denver Broncos legend is seeking a declaratory judgment for the return of their money, ahead of other investors. Mueller Capital Management has just $9.5 million left to cover liabilities of $140 million.

Questions:

1.  What is a hedge fund?

2.  What accounting guidance for hedge accounting is available under International Financial Reporting Standards (IFRS)?

3.   What accounting guidance for hedge accounting is available from the Financial Accounting Standards Board (FASB)?

4.  As one accountant said of this story: “It’s hard to feel sorry for rich people who play in games without rules (hedge funds).” Do you agree or disagree? Explain.

 

Source:

Staff. (2010) Hall of Famer Elway Seeks Mueller Money Now. FINAlternatives, October 19 (Retrievable online at http://www.finalternatives.com/node/14212).

Interesting News for IFRS Nay-sayers

While reviewing the proposed expansion of the International Financial Reporting Standards for accounting, Tim Bush, a member of the “Urgent Issues Task Force” that scrutinises the work of the Accounting Standards Board (ASB), claims to have uncovered “fatal” and “dangerous” flaws in the system.  Mr. Bush alleges the regulations, and specifically the way they have been implemented in the U.K. and Ireland, have led to “mistakes [that are so severe] that it is difficult to overstate”.

Questions:

1.  What severe mistakes does Mr. Bush allege?

2. What does he propose would fix these problems?

3. Who does Mr. Bush claim are the first victims of IFRS standards and who will be the secondary victims?  Based on your understanding of the issues, do you agree or disagree?  Why?  

Source:

Armistead, Louise. (2010). UK Bank Accounting “Fatally Flawed” Warns Influential Watchdog, Telegraph.co.uk, August 26 (Retrievable online at http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7964816/UK-bank-accounting-rules-fatally-flawed-warns-influential-watchdog.html)

Changes are coming in the CPA exam

According to Adrienne Gonzalez, you need to avoid the hype surrounding upcoming changes in the CPA exam and map out a strategy that uses your strengths.  One change that is occurring is the format of simulations, which will be trimmed down to “simlets.” Instead of getting one topic, you have a better chance of doing well because they will be smaller and consist of several different topics. One thing that will not change is the rolling 18 month period which allows you to keep credit for whatever you have passed in the last 18 months. Another thing that will not change is that the exam changes twice a year. As the AICPA continues to adjust the format, remember that a focus on planned study schedules  and debits on the left and credits on the right are the key to passing the exam.

Questions:

1.  What are the two biggest changes for the CPA exam that Gonzalez sees for 2011?

2.  Based on these changes, what strategy does Gonzalez suggest?

3.  What hypes does Gonzalez say to avoid?

Source:

Gonzalez, Adrienne. (2010). If I Pass CPA Exam Parts in 2010, Will I Have to Pass Them Again in 2011?  Going Concern, June 18. (Retrievable online at http://goingconcern.com/2010/06/if-i-pass-cpa-exam-parts-in-2010-will-i-have-to-pass-them-again-in-2011/#more-12870)

Research and Development (R & D): Does This Indicate a Crack in the Foundation of IFRS Convergence?

When the IASB and FASB began the convergence process in 2002, they considered R & D as a high-priority project, where differences between US GAAP and IFRS were seen as particularly straightforward. However, as this article notes, still no consensus has been reached because IASB’s R&D treatment  appears to defeat comparability in the eyes of the FASB.

Questions:

1. The author refers to SFAS 2 as support for R & D reporting under U.S. GAAP.  What is SFAS 2?

2.  What are the capitalization criteria from IAS 9 that became part of IAS 38 to distinguish research costs from development costs?

3.   Briefly summarize the article’s presentation of why FASB ruled  in the 1970’s that all R&D expenditures must go straight to the income statement.

Source:

Selling, Tom (2010). Failed Convergence of R & D Accounting: Only Politicians and Opportunists Would Have Downplayed the Implications, The Accounting Onion, June 5 (Retrievable online at http://accountingonion.typepad.com/theaccountingonion/2010/06/failed-convergence-of-rd-accounting-only-politicians-and-opportunists-would-have-downplayed-the-implications.html)

Convergence Delayed

The head of the Financial Accounting Standards Board, which sets U.S. accounting rules, said June 1, 2010, that he does not expect FASB to meet a June 30, 2011 deadline for convergence with international accounting rules, as requested by the G20 group of industrial and emerging countries. According to FASB chairman, Robert Herz, changes that delay the completion date by about six months will soon be announced to allow for greater public comment on the boards’ proposals.

Questions:

1. According to the article, what controversial proposal was released during the last week of May?

2. According to the article, how long would the boards have had available to release 10 standards and still meet a June 2011 deadline with final standards, given the due process typically followed?

3. According to the FEI, what is the maximum number of proposals that the FASB has ever released at one time for public comment?

Source:

Chasan, Emily. (2010) Accounting Rulemakers to Delay Convergence, Reuters, U.S., June 1 (Retrievable online at http://www.reuters.com/article/idUSTRE6505KE20100601)

The Costs and Benefits of Simultaneous Audits for Multinational Companies

Simultaneous audits mean two separate exams, conducted by different governments, in which those governments share with each other some of the taxpayer’s information.  Even though you may not have heard of them, they have existed since the 1970s, but are becoming more common today as government tax agencies race to match the level of global coordination practiced by multinational companies and their tax advisers.

Questions:

1. What does the article point to as “the biggest downside to an unplanned simultaneous audit?”

2. What is the most common reason(s) for countries to exchange corporate tax information?

3. Explain the statement “firms would do well to understand the difference between the collaborative modes — enforcement and service — in which tax authorities operate.” Briefly explain the difference between the two and why it benefits firms.

Source:
Leone, M. (2010). Double Trouble? Maybe Not. CFO Magazine, May 1 (Retrievable online at http://www.cfo.com/article.cfm/14493124″>http://www.cfo.com/article.cfm/14493124)

Next Page »