Pension Accounting – trick or treat!

Oct 21, 2010

We all knew that the pension funds of most of the cities is underfunded, but a recent research showed an even bleaker picture. The reesearch by Robert Novy-Marx and Joshua Rauh projects a nearly 50% higher level of unfunded pension liabilities than most cities acknowledge.

Presently the cities use the Entry Age Normal accounting that assumes that employees will retire at a normal age and NOT receive any increases in benefits thereby stating the lower pension liability. What makes the cities believe that employees will work without any benefit increases? The logic is completely flawed to begin with. It seems that the accounting method is chosen just to show a lower pension liability on the books and show a rosier picture to employees than the truth.

A much accurate system is the Present Value of Benefits accounting system, which assumes employees will retire at a normal age after receiving typical salary and benefit increases. Obviously using a more real assumption will lead to a higher pension liability but this would be closer to the true picture.

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IFRS a bane for Real Estate Companies in India

Oct 21, 2010

The Indian government is all set to drop the new rule from International Financial Reporting Standards (or as the accountants call it IFRS) that allows property developers to book sales only when the project is complete. In the present real estate market where the developers are already struggling to make ends meet, this new rule will push their income statement even further down.  The government has decided to allow the developers to follow the percent completion method, whereby the developers record revenue as they build the property, thereby showing a much healthier income statement.
 
Though the Indian government like many other country governments is trying to merge their rules to the IFRS, this departure from the international standards will definitely come as a relief for the local real estate organizations, especially in trying times like these.
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Whistleblower auditor being harrased!

Oct 13, 2010

After auditing the books of Reliance Communications ( for those not aware of Reliance, it is the GE of India; a big company diversified into a lot of industries) a Indian government appointed accounting firm , Parakh & Co got a shocking response. The company has sought protection from the Indian Government against a criminal case filed by the Communications Industry Giant.

The firm stated that they received a notice from the police to surrender the audit paperwork related to their audit of Reliance.

Reliance’s story is that they had written in 2009 to the Telecoms Ministry and the Institute of Chartered Accountants of India regarding the auditor’s report. They had asked the communications ministry to reject the special audit on it by Parakh & Co and alleged that the report ‘was issued for malafide purpose, based on uncorroborated facts and done without any discussions with it (RCOM)’. The telco also stated that ‘the entire report was drafted for the purpose on sensationalising irrelevant matters’.

Whether the allegation of the auditor is true or not one cannot ignore the findings of the audit report. The audit report found that Reliance Communications had under reported revenue for two years, causing huge losses to the government in terms of license and spectrum fees and also corporate taxes. Based on the finding the government might fine the behemoth for evading those fees.

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Settlement with Delphi Corp’s former treasurer

Oct 8, 2010

The complaint against John Blahnik, the former treasurer and vice president of treasury, mergers and acquisitions at  Delphi Corp. was that he had participated in 3 fraudulent schemes, filing materially false and misleading financial statements on the company’s Forms 10-K for 2000 and 2003, and Forms 8-K for 2001 and 2003-2005.

The SEC alleged that Blahnik participated in fraudulent schemes at Delphi that led to filing materially false and misleading financial statements on the company’s filings for 2000 and 2003.  The complaint stated that Delphi improperly accounted for two round trip transactions as sales rather than as financing transactions leading to materially overstating their net income for Q4 2000, with the ripple effect of overstating their EPS and cash flows from operations, some of the key numbers that investors rely on to judge the strength of a company. Thats not the end of it, from 2003 to 2004, Delphi intentionally failed to disclose material sales of accounts receivable, or factoring.

To settle the case, Blahnik agreed to pay $100,000 to settle accounting fraud charges with the Securities and Exchange Commission.He was also prohibited Blahnik from serving as an officer or director of a public company for five years. What bothers me is the amount of settlement, $100,000 doesnt sound like an amount to deter senior executives from getting involved with cooking the books!

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$2.5M for the Whistleblower

Oct 8, 2010

Metropolitan Life Insurance Co. (MetLife) has been ordered to pay a whistle-blowing former broker, Ronald Roganti about $2.5 million in damages. The ruling states that after the broker had raised concerns about shoddy business pracitices he was mistreated. 

Roganti’s claim states that in 1999 he started to become aware of unethical practices and reported them to various executives as well as regulatory agencies. But instead of an inquiry being set up into these practices, his compensation was reduced as well as he was threatened to be terminated.

The case definitely is a step in the right direction. And with the Dodd-Frank Act having passed, which provides even stronger support to whistle blower protections, I wouldnt be surprised to see more of such cases in the future.

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No more window dressing for banks

Oct 7, 2010

The recent financial meltdown driven primarily by the financial institutions has made the finance community and the standard setting authorities jittery. Lots of small banks and financial institutions were wiped out, but the one that raised a lot of eyebrows was the demise of the Lehman Brothers. The financial institution used the “Repo 105″ accounting trick to dress up their balance sheet and show a better leverage ratio. The company survived till the market crashed and then all these tricks slowly starting coming to light leading to eventually the organization closing its doors for ever.

On October 7, the International Accounting Standards Board (whose rules are used in 100 countries) said that there will be much more stringent disclosure requirements for banks that transfer financial assets. These disclosures will be helpful for investors to better understand off-balance sheet risks and will alert them of any window dressing transactions at the end of the reporting period.  The change will be effective from July 1, 2011 but companies can apply them earlier.

Does this mean that there will be no more cases like the death of Lehman Brothers in the future, well that in opinion wont happen, but definitely we are moving in the right direction.I

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SOX- Finally some cost savings for smaller companies

Oct 7, 2010

In this economy where companies are cutting costs left and right, the SEC’s final rulemaking release on September 15, 2010 was a relief. The release eliminates the requirement for newly public companies and smaller public companies (i.e., non-accelerated filers – Exchange Act reporting company that has a public float under $75 million or that fails to meet other criteria for an “accelerated filer”) to include auditor attestation reports with respect to internal control over financial reporting in their annual reports.

Non-accelerated filers will remain subject to the requirements of Section 404(a) of Sarbanes Oxley and related rules that require a management report on internal control over financial reporting in annual reports filed with the SEC. The new rules will take effect upon publication in the Federal Register.

The change is thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Not only does this change reduce the stress factor but also saves smaller organizations some money, we all know that audit fees are not cheap!

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XBRL Costs

Sep 27, 2010

A very interesting survey that I found today was the SEC survey related to XBRL. What intrigued me was the cost structure of the XBRL filing. The survey states that the first time filers with block text footnotes and schedules on an average require 125 hours, assuming a $250/hr charge the cost is $31K + footnotes and website posting and software the amount is around $40K. This is the lower bound. To mainitain that the SEC states will be less time comsuming, the survey puts the number of hours for future face of the financials filing to be 17, a reduction of 85%.

Once the first hurdle is taken care of, then comes the more detailed footnote filing and that would be another 70 hours leading to $18K. So in total the companies are looking at a total cost of $75-80K considering their footnotes and financials are comparitively straightforward.

Hopefully the costs associated with the charges of XBRL will be overshadowed by the benefits the process will lead to.

http://www.sec.gov/rules/final/2009/33-9002fr.pdf

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KB Homes comes home happy

Sep 2, 2010

Finally an SEC investigation that did not lead to any enforcement action. After completing their investigation the SEC did not recommend any enforcement action for KB Homes.

The SEC had launched a probe last year into possible accounting and disclosure violations by the company. But apparently did not find anything wrong. Well thats definitely good news for the homebuilder, considering the economy isn’t providing any relief to them. Had to write about this as this is a ray of hope that not all accounting investigations end up exposing fraud!

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How to live lavishly on company funds!

Aug 31, 2010

What would you do with $30 million? Well Sujata Sachdeva, the VP of Finance and Principal Accounting Officer at Koss Corporation bought  designer clothes, furs, purses, shoes, jewelry, household furnishings, cars, did home improvement and renovations. The only difference is it wasnt her money, it was funds that belonged to the company, Koss Corpration. She had support from the senior accountant, Julie Mulvanev, together they concealed the fraud by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.

On August 31, 2010, the Securities and Exchange Commission charged two former senior accounting professionals at Koss Corporation with accounting fraud, violation of book and record keeping and other related misconduct arising from the embezzlement of more than $30 million from the company. According to the complaint, the scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.

Sachdeva embezzled funds from company accounts through different means, including cashier’s checks, unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She used them to make approximately $10 million in payments to American Express for her personal credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M. Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue. Well thats what I call creative accounting!

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