Posts Tagged ‘Accounting’
Tuesday, November 1st, 2011
When Groupon submitted financial reports in July to the Securities and Exchange Commission in advance of its initial public offering, Smeal’s Ed Ketz and his Grumpy Old Accountants co-blogger Anthony Catanach of Villanova noticed that the online coupon seller wasn’t following generally accepted accounting principles. Besides writing about it on their blog, the two professors submitted a tip to the SEC via its whistleblower program. Maybe it was a coincidence, or maybe not, but Groupon issued an amended financial report in September, and now the company has hit the road, taking its IPO case across the country (and online).
But, can the Groupon IPO be saved? That’s precisely the question that Ketz and Catanach answer today on The New York Times‘ blog Dealbook. An excerpt:
When we listen to Andrew Mason, Groupon’s chief executive, sell his powerful model of merchant and consumer value, we are left wondering whether Groupon’s “business model” is really anything more than a half-baked plan. While he makes a compelling argument for how the company delivers customer and merchant value, he is less convincing as to how Groupon will deliver value at an appropriate cost, and actually make money.
For example, Mr. Mason readily admits that low barriers to entry pose a significant challenge to Groupon’s ability to successfully execute its strategy. He acknowledges the thousands of competitors that currently deliver similar products, but calmly dismisses the issue by saying “the proof is in the numbers.” Precisely, and therein lies the problem.
You can find their complete Dealbook blog entry here.
Wednesday, August 31st, 2011
“In an age of lightning-fast stock trades and instant communications, yearly and quarterly financial reports seem stuck on an industrial-era pace that some say was obsolete decades ago,” Reuters reports. “Accounting experts have long called for a move to real-time, online reports in lieu of quarterly earnings statements that investors now use to decide whether to buy stocks.”
Well, not all accounting experts. Smeal’s own J. Edward Ketz and his colleague Anthony Catanach of Villanova University have serious doubts that society would be better off with this constant barrage of financials. They covered the topic recently on their blog, Grumpy Old Accountants:
Even if one could produce daily financial statements, there remains the problem of comparability. It is hard enough now to compare quarterly statements of different firms whose seasonal effects vary, but now let’s try to compare daily financial statements of CBS with Ford. This is nonsense. Even restricting such analysis to firms in the same industry will not guarantee comparability as there is too much daily variability.
Let’s now consider auditing this “moment-by-moment” report generating machine. It isn’t clear to us that the reports are auditable, except for the cash flows. Worse, how does a business concern construct viable internal controls to handle the transactions and events in such an environment? Given the pitiful state of some firms’ internal control systems, the extra strain would make a mockery of the audit process.
Having the technical skills and the technical machinery to allow daily or hourly financial reports is not sufficient for enabling continuous financial statements. No, either the accounting reports become dumbed-down or we toss accrual accounting out of the window. And audit firms have too much trouble auditing corporations now—witness the scores of restatements and accounting scandals—that they would have no chance of ever doing it right in a continuous reporting environment.
We pity the SEC if this day ever comes.
There’s more on their blog.
Thursday, July 28th, 2011
Smeal’s Ed Ketz and co-blogger Anthony Catanach weigh in on their blog on the threats and rhetoric swirling in the debt ceiling debate. In particular, they question the August 2 deadline and President Obama’s assertion that Social Security payments may be delayed:
First, Geithner’s August 2 date is artificial. We see this in part because he set one date and then he switched to a later date, seemingly to give his side more heft in the debate. The problem with either date is that the U.S. government has almost $2 trillion in discretionary spending. As discretionary means “optional, not obligatory, non-compulsory,” if no agreement is achieved by August 2, the Obama administration will not have to default on its bills. Instead, it can reduce the discretionary spending, just as ordinary families with strained budgets may have to forego eating out or going to the theater. Indeed, if the Treasury Department defaults, it will be due to a political calculation and a stubborn unwillingness to reduce discretionary spending.
President Obama recently stated that Social Security checks might not be sent out in August if the debt ceiling is not raised. This Social Security scare is artificial and part of the political rhetoric. Again, there is almost $2 trillion in discretionary spending and the White House merely needs to decide which things get paid and which things are delayed. We assume he thinks Social Security is a priority.
There’s more on their blog, Grumpy Old Accountants.
Wednesday, July 13th, 2011
“Facebook, Groupon and Zynga are creating an investor frenzy around high-growth Internet companies while commanding sky-rocketing valuations. But are the valuations for these pre-IPO companies justified?” asks TheStreet.com. At least in the case of Groupon, Smeal’s Ed Ketz says, “No.”
On their blog, Grumpy Old Accountants, Ketz and Anthony H. Catanach Jr., associate professor of business at Villanova University, take a look Groupon’s S-1 filing with the Securities and Exchange Commission and conclude that they would rather buy lottery tickets than participate in its IPO:
Let’s begin with the income statement. Sales exploded from $30 (all account balances are in millions of dollars) in 2009 to $713 in 2010, an almost unheard of 23-fold growth. Unfortunately, expenses had an even greater astronomical growth, going from $37 in 2009 to $1,170 in 2010 for net losses of $(7) and $(456), respectively. The biggest expense accretion resides in acquisition-related expenses of $203; however, even if we remove this item from consideration, expenses are still $967 and they still swamp revenues. Persistent earnings are clearly negative and serve as one huge red flag.
The balance sheet also displays repugnance. Current assets are $174 while current liabilities equal $370. Any business sophomore knows that isn’t good. Total assets equal $382 and total liabilities $372, so total stockholders’ equity is a mere $10. Having only 3% equity isn’t good for banks, much less anybody else; the financial leverage risk is huge.
There’s more, too. Read on on Grumpy Old Accountants.
Wednesday, March 2nd, 2011
In today’s Philadelphia Inquirer, Smeal’s J. Edward Ketz and Anthony H. Catanach Jr. of Villanova argue that there are too many banks in the United States offering indistinguishable products to their customers. These banks, they say, are under enormous pressure to raise their margins, which eventually leads many of them down the road of questionable loan activities. Their solution:
First, reduce the number of financial institutions: 15,000 institutions simply cannot all make money by making loans funded by deposits to customers who tolerate them simply because they need check and processing services. Is a bank on every corner really necessary? As these regulated institutions struggle to meet performance targets in a talent-poor, over-banked industry, is it any wonder that they often turn to questionable, high-yield investments fueled by volatile, unstable funding sources? A banking glut forces institutions to compete aggressively for a fixed pool of high-quality investments, loans, and talent, meaning some banks will be forced to accept lower quality assets and personnel to operate.
Banking regulators can initiate this industry contraction by denying new charters for federally-insured financial institutions. Next, they should set a ceiling on the number of financial institutions significantly below current levels. This target should be aggressively pursued by closing and/or merging institutions that have historically been marginal performers. Finally, imposing a federal income tax on credit unions also will eliminate many poorly performing institutions that exist only because of their federally subsidized cost advantage.
Second, those who monitor financial institutions (accountants, auditors, and regulators) must reaffirm their responsibility to the investing public. Financial watchdogs must think more strategically and recognize that an over-banked industry leads to poor banking decisions and greater risks.
Wednesday, November 10th, 2010
From the Los Angeles Times: “House Republican leader John Boehner signaled Wednesday that he was unwilling to compromise on a permanent extension of the so-called Bush tax cuts, saying preserving current rates is ‘the most important thing we can do to create jobs.’”
If we allow the tax cuts to expire and the tax rates go up, this could mean trouble for the economic recovery. Right now, you have some policy-makers declaring the recession is over, but try telling that to someone who’s out of work. That’s the problem—jobs. You can say the recession is over but that doesn’t help all those people who are out of work. Will higher tax rates hinder these people from getting back into the workforce? Possibly.
On the other hand, there are those who want to let the tax rates increase. We have a huge budget deficit. We need the tax dollars to pay down the deficit. There are a lot of people arguing that the Bush tax cuts favor the wealthy and that it’s really not a fair distribution of the tax burden.
By making the tax cuts expire, you may create a perception that the tax code is fair and may get additional revenues to pay down the deficit. On the other hand, by keeping the tax cuts, you may be able to have a quicker economic growth and be able to get people back to work.
Regardless of whether the tax cuts are extended or not, Enis says lawmakers should take the opportunity to simplify the tax code:
Congress has a good opportunity here to improve the transparency of the tax codes. For example, if they let the tax cuts expire for the upper income categories, the maximum statutory rate will rise from 35 percent to 39.6 percent. I would say let that happen, but to counter that, fix permanently or get rid of the alternative minimum tax (AMT).
Additionally, part of the Bush tax cuts was to repeal Section 68 of the code, in which high-income taxpayers lose a certain portion of their itemized deductions. This is, in effect, a tax. When you take away deductions, it detracts from the transparency of the code. It was repealed gradually and done away with finally in 2010, but the phase out of itemized deductions and exemption allowances comes back full force in 2011 if the Bush tax cuts are not extended.
The phasing out of itemized deductions and exemption allowances let that go away. They should extend the repeal advantage. In other words, you’re going to have a higher marginal tax rate, but you’re going to do away with a lot of these unobtrusive hidden-type taxes, which I think would be a great opportunity.
If you’re going to go and say to the wealthy people, we’re going to let your tax rates go up as high as 39.6 percent, then I think you should also tell these people that they no longer have to worry about their itemized deductions, exemption allowances, and the AMT.
Monday, October 4th, 2010
The Economist recently reported on a proposal introduced by the Financial Accounting Standards Board, which requires firms to publish information on reasons they might be sued and how much it would cost them. The Economist argues “this would provide a how-to guide for lawyers looking for targets.”
“Firms would have to disclose any money set aside for potential settlements,” they write. “This would reveal to tort lawyers the general area where the richest pickings might be.”
These new rules, which are scheduled to go into effect on Dec. 15, force firms to highlight their own vulnerabilities by regularly updating this disclosed information.
Smeal’s Ed Ketz believes this proposal goes too far and won’t help the investment community.
While I generally support more disclosure over less disclosure so that investors and creditors have more information about a business enterprise, the FASB proposal for greater disclosures on litigation goes too far. It likely won’t help the investment community because the estimates of payouts are not reliable; worse, the plaintiffs’ bar might use the estimated damages as a floor for lawsuits against corporate America. This would have the unintended effect of magnifying losses beyond reasonable amounts.
Friday, September 10th, 2010
When FASB chair Robert Herz announced that he’s stepping down at the end of this month, the Financial Times reported that his retirement decision was “greeted with dismay by the accounting profession.” Perhaps so, but Smeal’s Ed Ketz is not among the dismayed.
In April 2009, when FASB eased mark-to-market accounting rules under pressure from banks and Congress, Ketz wrote a column entitled “Herz Should Resign.” An excerpt:
I have found Mr. Herz quite intelligent, filled with much knowledge about accounting and finance, well-mannered, articulate, and an avid defender of the accounting profession. Unfortunately, I also find Herz lacking in courage and moral fortitude. Whenever some bully comes on the scene and challenges him and the FASB to a fight, he runs away. When accounting truth is at stake, he compromises and enables corporate managers to use methods and vehicles by which they can cook the books. Shame!
In his latest column, Ketz offers some suggestions to replace Herz:
To begin, I think the appointment of Leslie Seidman as interim chair is a mistake, and I certainly would not make this interim appointment permanent. Even if she is highly credentialed and capable, she is a banker, having worked for JP Morgan. The guilt-by-association eliminates her from consideration.
The [Financial Accounting Foundation] needs to appoint someone who has the necessary accounting and political skills to be chairman. He or she also needs the courage to confront the primary enemies of good financial reporting.
I would also like to see the FAF appoint somebody from the user community, somebody who deeply understands the needs and the recent frustrations of investors and creditors. Names like Jim Chanos and David Einhorn come to mind. They understand accounting thoroughly, having penetrated the deceits foisted upon them. And they won’t take any crap from Wall Street or from Congress.
Considering the composition of the FAF, I expect them to give us the same old same old. But I can dream, can’t I?
Monday, July 26th, 2010
A recent article in the Wall Street Journal discusses the current back-and-forth between Democrats and Republicans on whether or not to extend the Bush-era tax cuts.
Smeal’s Charles Enis takes it one step further to address the alternative minimum tax (AMT), which has already expired. He warns that, whether the Bush tax cuts stay or go, taxpayers will see a huge increase in rates.
To express my knee-jerk reaction to the confusion and uncertainty over tax provisions that are set to go away in about five months; I must borrow from the style of Coach Mora. Expiring tax cuts! Expiring tax cuts! Don’t talk about expiring tax cuts! The Alternative Minimum Tax (AMT) is the 800 lb. yeti. True, a non-act of Congress will usher in one of the greatest tax increases in history. Gone will be lower tax rates on wages, capital gains and dividends, enhanced tax credits, as well as marriage penalty relief, repeal of deduction phase-outs and estate taxes. However, these tax breaks vanish at the end of 2010. AMT relief expired seven months ago. If the annual AMT patch is a victim of Congressional inertia, AMT exemptions revert to year 2000 amounts, a decline from $74,600 to $45,000 for joint return filers, and from $46,700 to $33,750 for unmarried individuals.
As an example to illustrate this problem I use joint filers with salaries of $200,000, two dependents, and $20,000 in itemized deductions ($16,000 of which are disallowed for the AMT). Assume AMT exemptions are increased for 2010 but not for 2011. Their tax from 2010 to 2011 will increase from $34,556 to $42,250 (an increase of $7,684, or 22.24 percent), regardless of whether the Bush tax cuts are left intact or completely expire. This occurs because taxpayers pay the greater of the regular tax or the tentative minimum tax. The latter will exceed the former whether the tax cuts expire or not. However, if the AMT is fixed for 2010 and 2011, and all of the tax cuts expire, their tax will increase to $39,562 (an increase of $5,006, or 14.49 percent). In short, whether the Bush tax cuts are extended partially or in full, temporarily, or permanently, will not matter to the many taxpayers that will be caught in the AMT net unless it is fixed.
Because AMT relief must be enacted yearly, taxpayers are uncertain as to the extent a Congressional fix is forthcoming. For example, the AMT exemptions for 2007 were not passed until December 26, 2007. Forcing Americans to wait so long for Congress to act to temporarily delay a looming tax disaster cries out for a permanent resolution to the AMT issue. Solving the AMT problem should be a major topic included in debates about extending the tax cuts.
Tuesday, July 20th, 2010
Smeal’s J. Edward Ketz, associate professor of accounting, and other accounting experts recently submitted an amicus brief with the California Court of Appeal for the Second District in a pension case between Orange County and county employees.
In 2001, Orange County Supervisors voted to increase the multiplier used to calculate the retirement benefits of county employees from 2 percent to 3 percent, applying the change retroactively to all years of service. Years later, the current board of supervisors sued to overturn this increase on the grounds that it creates an unconstitutional liability on future tax revenues. The county lost the initial trial and is appealing.
In an op-ed in today’s Orange County Register, Ketz argues that the new benefits do indeed create liabilities that must be paid out of future years’ taxes:
Our brief begins by recalling the definition of a liability. Definitions by accounting standard-setters indicate that a liability is a probable future sacrifice that arises from a present obligation of a particular entity to supply assets or services to another entity sometime in the future because of a past transaction. A pension enhancement meets this definition.
- It is a present obligation of Orange County because the employees who stand to reap the benefits do not have to do anything else to receive them.
- Orange County has little ability to avoid having to sacrifice resources in the future unless some extraordinary event occurs, such as a court’s overturning the legality of the pension obligation.
- The obligating event has occurred; the former Board of Supervisors already agreed to the transaction.
… The Orange County case is both simple and exasperating. It is simple because the economics unmistakably demonstrates the creation of a financial liability that must be borne by the county. It is disturbing because some court cases have altered economic reality by politicizing the issues and allowing irresponsible politicians to create huge liabilities that possess the potential to destroy state and county economies.