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)

Nobody pays that! – Advantage and avoidance

The debate over whether to reduce tax shelters and preferences for the rich is one of the most volatile in Washington and will move to the presidential campaign, now that repeated attempts in Congress to strike a grand bargain over spending cuts and an overhaul of the tax code have failed. This article by David Kocieniewski details some of the tax loopholes used by Ronald Lauder, an heir to the Estée Lauder fortune, who is worth about $3.1 Billion. From offshore havens to a tax-sheltering stock deal, so audacious that Congress later enacted a law forbidding the tactic, Mr. Lauder has pursued aggressive tax break advantages.

Questions:

1. Find an article on “shorting against the box.” In a short paragraph, explain what this is. How did Ronald Lauder and his mother use this technique in 1995 when the company, Estée Lauder, when public?
2. According to the article, what was the effective federal income tax rate for the 400 wealthiest taxpayers in 2008? How much lower is this than the 1995 tax rate for the same group?
3. In three sentences, how would you summarize the main point(s) of this article?
4. What is the difference between tax evasion and tax avoidance?

Source:
Kocieniewski, D. (2011). A Family’s Billions, Artfully Sheltered. The New York Times, Nov. 26 (Retrievable online at http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?pagewanted=4&_r=1&hp)

PPM: What does it stand for when funding is involved?

The abbreviation PPM stands for many things, including parts per million. But what does PPM stand for if you are an entrepeneur that is interested gaining funding for your business? When a company is looking to raise funds without an initial public offering, a private placement memorandum (PPM) is one of the best ways to raise capital. A company must have the consent of the Securities Exchange Commission (SEC) before this can be done, and will need an information memorandum along with the PPM. Because of the complexity of SEC rules and documentation, it is highly advised to seek a knowledgeable attorney to help throughout this process.

Questions:

1.  What are the sections in a PPM?

2.  What should be the length of a PPM?

3. When Mike on the video talks about the internal route of raising funds, from an accounting standpoint, what is comparable to the Use of Funds table that he presents? Do you agree or disagree that all new companies can follow the model that Mike presents using Dell as an example?

4. If you presell like the Dell example in the video, how would you make the journal entries for the products that you sell? Give an example problem.

Sources:

Spotora, A. (2011). Los Angeles Business Attorney Emphasizes the Importance of Private Placement Memorandums, Spotora Blog (Retrievable online at http://www.spotoralaw.com/2011/11/los-angeles-business-attorney-emphasizes-the-importance-of-private-placement-memorandums/)

Michalowisc, M. (2011) Video: On A Roll- Raising Funds For Your Business (Retrievable online at http://www.toiletpaperentrepreneur.com/videos?tubepress_page=15)

Geonzon, M. (2011) Private Funding Technique And Practical Information On Small Enterprises. Articles Corp., Nov. 24 (Retrievable online at http://articlescorp.com/business/venture-capital/private-funding-technique-and-practical-information-on-small-enterprises)

On A Roll- Raising Funds For Your Business from Obsidian on Vimeo.

Is the SEC Going to Get Tough On Compliance with Executive Pay Disclosures?

The SEC revised its disclosure guidelines for executive pay in late 2006. Since that time the regulator has been sending out letters to violator companies with insufficient disclosures, but has seen little compliance. Now the commission indicates that reviews will be tighter and there’s no room for a “Mister Nice Guy” approach. In fact, its deputy director, Shelley Parratt, threatened (in a recent speech) that companies who wait until receiving staff letters faulting material noncompliance with disclosure guidelines will face the arduous task of amending filings.

QUESTIONS:

1. According to the article, what is it that the companies are not providing the SEC in these disclosures?
2. According to the article, what are some of the other kinds of disclosures that the SEC is thinking about for the coming year?
3. Explain the relationship between the proxy statement and the CD&A, including the type of information contained within each.

SOURCE:

Johnson, S. (2009). “No More Lenience on Pay Disclosure: SEC,” CFO (Retrievable online at: http://www.cfo.com/article.cfm/14454811/c_2984410/?f=archives)