Friday, April 30, 2010

Kill the PCAOB

The PCAOB "inspected" the CPA firm I work with in November. The "inspectors" were two "former" Big 87654 operatives. My opinion: they are functionally Big 87654 seniors. Neither understood discounted cash flow analysis. I had to tell them if you have a series of cash flows, you can specify the interest rate or the present value (PV), not both. As the PV increases, future interest income decreases. Where did this "issue" arise? In sales-type lease accounting under "old" SFAS 13. These two didn't understand "incremental borrowing rate", a lessee SFAS 13 concept, paragraph, 5l. Don't raise the substance over form concept to these two. They only me-chan-i-cal-ly follow "the rules". Imagine what would happen if we were under IFRS. Rules are a GAAP problem. If you only follow the rules, you can't figure out when they lead to absurdities or when a transaction was concocted to evade the rules. I say shut the PCAOB. In the alternative, have it sign opinions and be liable to suit. It also should be liable for suit for passing a CPA firm which has clients with "cooked books" like: KPMG at Citigroup and GE, or PWC at AIG or Goldman, or D&T at GM, etc., etc. What do the PCAOB people think bank "structured finance" departments do if not design transactions with differing form and substance?

Let "saw off", also called "reductio ad absurdum". Suppose a company issues a $1 million note paid in a year for $2 million. What's this note's interest rate? I say 100%. What say you? If the note is paid in six months, I say 300%. Why? It doubled in six months and I assume would double six months later. 2 x 2 = 4; 4 -1 = 3; hence 300%. If it doubles in three months, we get 2 x 2 x 2 x 2 = 16, 16 - 1 = 15; hence 1,500%. If it doubles in a month, we get 2*12 = 4,196; 4,196 - 1 = 4,195; hence 419,500%. Now a week, we get 2*52 = 4.5036 x 10*15, or 4.5036 quadrillion. A big number. Now if you have a $1 million note which the buyer can immediately sell for $2 million, I say the interest rate is infinite because it has no time dimension. I explained this to the Big 87654 partner who hired the PhD consultant I mentioned in my 16 August 2009 post: The PCAOB "inspectors" believe the consultants cost of capital (COC) study has significance and should be used to value a lessor's sales-type lease. Doesn't this give you "warm and cuddlies" with respect to Big 87654 partners, PCAOB apparachiks and PhD consultant's skills? The PhD consultant thought my client's COC was 13%. The Big 87654 partner had no idea how the consultant derived 13% but he knew: the consultant had an MIT PhD. The PCAOB people don't know anything except a Big 87654 firm accepted the consultant's report so it must be right. I add, the consultant is also an audit client of the Big 87654 firm in question. Did a Big 87654 firm bring him in to "further client relations" with its auditee? Never.

Absurdities? Like me-chan-i-cal-ly applying paragraphs 55-57 of SFAS 123(R). You can get stock option expense for an employee who leaves a company then returns, exceeding that if he was continuously employed. Dealing with PCAOB "inspectors" reminded me of Supreme Court case Graffam v. Burgess, my 24 October 2007 post:

Could the PCAOB help investors? Maybe? It could stop "inspecting" CPA firms and "inspect" audits. With a $15 trillion US stock market capitalization (MC), let the PCAOB inspect 500 audits a year, one per $30 billion. Thus XOM, WMT, MSFT, APPL and other "large caps" audits will be inspected annually. So? Of 500 audits inspected, 494 will be by the Big 87654, four by the "little three" and two by 1,790 other firms. Think of the time the PCAOB could spend with Vampire Squid, GS-NYSE, current $86 billion MC instead of micro caps. If the PCAOB inspects two audits for each of the 1,790 small firms, that's 3,580 audits. With total MC audited of $60 billion, that's a $17 million average auditee size, or 25% of Lloyd Antoinette Blankfein's 2007 year end $68 million bonus! What gives? The PCAOB is a scam. Kill it Supremes! Please. If every audit by the 1,790 small firms is defective, how much can that reduce investors' returns? Not much. Every hour the PCAOB spends with micro caps is one less hour it spends at: GS, C, FNM and other members of my "rogues gallery". Ladies and gentlemen of the blogosphere, why do you think the Big 87654-controlled PCAOB spends as much time as it does on the 1,790 small CPA firms in question? What say you?


Robyn said...

why does it spend as much time as it does on small potatoes?
not capable of understanding anything grande, creative, intriguing, out of their depth. easier to hassle lots of itty bitties than take on something truly huge and possibly frightening.

Anonymous said...

I'll only say...

The POAOB is merely "form over substance".

It has the experience of doing right but supports a rigged corporatist game. And that game needs to end.

profalbrecht said...

I like your suggestion of inspecting audits. Good idea.

Independent Accountant said...

I first suggested this about 25 years ago. The thought has gone nowhere. So far.


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