Those cool tech tools we are all making such good use of, such as text messaging, tweets, DMs, and all other other tools I don’t even know about carry a hidden danger for CPAs.
The tools push us to have short, brief comments, that may or may not be retained.
Accounting work requires detail, precision, and full explanation along with documentation of the advice we give and positions we take.
Original finish is visible on mud wagon used by subcontractor to Wells Fargo on the San Diego-Julian run in 1870s. Lighter and cheaper than the Concord wagon, this was useful in desert and mountain areas. Wagon is housed at the Seeley Stable Museum in Old Town San Diego Historic Park. April 2012 photo by James Ulvog.
Here’s a few articles that were interesting to me in the last two days about the Wells Fargo fiasco, previously discussed here, here and here.
First, a digression into the ethics and audit issues of systemic faking of accounts and coding diesel engines to cheat.
Next, pondering whether there will be any clawback of the $124M bonuses from the senior executive who managed the retail banking area.
Finally, two articles describing the DoJ opening a preliminary investigation.
9/14 – Prof. Mike Shaub at Bottom Line Ethics – Plausible deniability and the insulation of upper management – Prof Shaub ponders two fiascos in the news for the deeper ethical issues. Both the Volkswagon diesel engine scheme and the Wells Fargo fake account fiasco reflect poorly not only on the companies and their culture, but the state of ethics in business and our society.
We, collectively, need to grapple with those issues.
The article raises unsettling issues for auditors. Let’s ponder for a moment…How can we detect corporate cultures and entity tone-at-the-top environments which allow building a cheating code into the core operation of a company’s software? How can we detect an environment that incentivizes staff to cheat customers or risk losing their jobs for not hitting sales targets? Those are sobering questions.
I stumbled across the website of the law firm that handled the lawsuit against PwC over their audit of Colonial Bank. The case has been settled for an undisclosed amount.
The firm has a section of their website that covers litigation news and settlements. The website is here, the news section is here.
Rare glimpse inside major audit
To put this into context, this is the biggest case against a CPA firm to actually get into court in a very long time. If I’m understanding the case correctly (a massive assumption!) after briefly browsing the articles, there were 12 days of testimony spread over either 3 or 4 weeks of in-court proceedings.
Phrased another way, this case provides lots of sworn testimony on the details of a major audit disaster. It is rare for outsiders to see the inner workings of an audit that did not go well.
Francine McKenna has repeatedly pointed out on Twitter that this is the first major case in a long time against an accounting firm which actually got into court. There are a few weeks of testimony which will likely be a good source for researchers and journalists wanting to understand how audits of large companies can go sour.
Amount of settlement is confidential. This settlement still leaves a $1B suit by the FDIC over the failed bank that was audited by PwC.
Let me give a thumbnail picture of this suit. My simplification will obviously show my confusion. Yeah, my bias will probably be visible too.
In the near term, your CPE options will include twelve-minute courses.
In the long-term, ponder how much of your audit work could be replaced by artificial intelligence. I can grasp the idea of automating a large portion of detail testing. I can’t see the possibility of replacing the entire audit function. Stretch your brain with two articles from Jim Peterson.
8/11 – Journal of Accountancy – CPE standards update accommodates new forms of learning – It will be a while before you see this in a CPE class, but the AICPA and NASBA changed the CPE rules to allow for nano-learning and blended learning.
Nano-learning is a short course, say 12 minutes that will allow CPE credit in 0.2 hour increments. Picture a 24 or 36 minute course on how to conduct an inventory observation. Or a 12 minute class on how to prepare the planning materiality worksheet.
Consider this idea: perhaps GAAP-based accounting numbers aren’t giving stock investors all the information they need.
What is wrong with this picture?
In April, Netflix announced their earnings fell short of analysts’ expectations. Usually that would drop the stock price. What happened?
Nexflix stock jumped 18%.
Huh?
What could cause that? The market supposedly has incorporated the consensus into the price. Missing the expectation should drop the price.
Consider this: At the same time, Netflix announced their new-subscribers were 4.9 million instead of the expectation of 4.0M.
That means they will have stronger earnings for the next several quarters than was expected the day before the announcement. Thus, the stock price rose.
Investors looked at the new subscriber tally as a better indicator of future earnings and thus future stock price than this quarter’s GAAP net income. New subscribers is more important than EPS.
If you wonder are wondering why GAAP EPS isn’t the driving force in that story, here is a brain stretcher for you:
You can find the book at Amazon here. It is a bit steep, $32 in hardback and $26 in Kindle format, which is really high for an e-book. I already have a copy on my e-reader. Started reading it yesterday.
The professors suggest that reported earnings under GAAP are losing relevance for investors as we move further and further away from an industrial economy. When know-how, processes, patents, using the internet, and other intangibles are the source of income, GAAP doesn’t report useful information for figuring out future earnings.
By the way, keep in mind that providing historical information to readers of the financial statements to allow them to make estimates of future earnings and cash flows of the company is, like, sorta’, kinda’, the purpose of GAAP financial statements.
The problem with GAAP
Some drawbacks in looking at GAAP numbers, according to the professors:
Actually, these warnings apply to everyone who is looking at flower petals instead of flower roots.
Here are some highlights of the points, along with my comments. (If you aren’t an entrepreneur or partner in a small CPA firm, focus on the numbered points and translate my comments to your situation.)
1 Seeking the approval of others
Hey, you’re running a small firm because you want to. It is astoundingly fun. You don’t need anyone else’s approval. You approve of yourself.
Tetradrachm from Alexander the Great. Image courtesy Adobe Stock.
My discussion continues of how much wealth Alexander the Great looted while on his rampage around the world. These calculations are based on two books I’ve really enjoyed:
Prof Holt provides a couple of ancient estimates of the total haul in Persia. Here is a recap:
?? Babylon
50k talents – Susa
120k – Persepolis
6k – Pasargadae
26k – Ecbatana
That gives a point estimate of 202k talents. Back out some poetic license exaggeration and add an amount at Babylon about equal to Susa (author’s estimate) gives me an estimate of about 225k talents, give or take. That is only the precious metals without art, statuary, spices, clothes, pottery, or gold inlaid stuff.
In addition, Darius fled with maybe 8,000 talents, Alexander paid bonuses of around 12,000 talents to his soldiers, with another 2,000 talents to Thessalain soldiers. There was enough stray coins found a century later to mint 4,000 talents of coins. That is around another 26,000 talents or so of additional bullion. Add in the unquantifiable amount soldiers looted and all the non-bullion treasures means there was an incalculable amount of wealth looted from the Persian empire.
I’ll work with 202K point estimate, plus 50K from Babylon, less 25K for poetic license, plus 26K sundry disposition. That gets to a point estimate of 253K, with my very wild guess of a margin of error of minus 50K to plus 100K. Let’s work with a 250,000 Talent estimate. That means I’ll roughly estimate Alexander looted 250,000 talents of silver-equivalent from Persia.
Total haul during Alexander’s extended raid around the world
The total haul from looting is estimated by the Prof. Holt as 69( X) + 216,820 talents, where X is an unknown amount from one raid or battle. The total is unknown and unknowable.
Shortly after that estimate the author adds in tribute from conquered areas that were not looted in return for payments and loyalty.
Total proceeds from the wars is then estimated in a formula expressed as 81.67( X) +311,761.
Image courtesy of DollarPhotoClub.com before they closed their doors.
The massive volumes of change you see surrounding you everywhere you look isn’t going to stop. In fact the pace of change is going to increase.
Each of us have a choice. Either figure out how to cope with and embrace the change or ignore it.
The cost of ignoring massive change is that you and your organization will get left behind. That doesn’t just mean you will be a laggard as you continue doing next month what you did last year. Instead that means your organization will radically shrink and before you know it, will disappear.
The downsides are serious. There is an upside and it is exciting.
Four articles I’ve seen lately focus the mind. While these articles are written in either the accounting or church context, they also fully apply in the church and accounting context. They also apply to every individual and organization.
This article will be posted across all my blogs because it applies to all of them.
The odds are really high that tax preparation will be completely automated in the next two decades. Estimated odds are almost as high that both accounting and auditing will be fully automated.
Consider my business and my core tasks of auditing charities. There is a real possibility those types of audits could be heavily automated in 10 or 15 or 20 years. I am not old enough to bank on retiring before that massive change starts eating away the entire audit profession.
Automation will take over an increasing number of tasks. The world of tax, accounting, and audit will be affected. Mr. Sheridan explains the shelf life of education and experience we have is shrinking.
As the Maryland Association of CPAs routinely points out our learning needs to be greater than the rate of change; L>C is their formula.
My fellow CPAs who are members of the AICPA voted overwhelmingly to approve the operating agreement or joint venture or merger (however you choose to describe the combination of operations) between the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA), producing a new Association of International Certified Professional Accountants (AICPA).
Tools used by heavy equipment operators. Photo courtesy of Adobe Stock.
The description of how much a drachma or Athenian Talent is worth is best considered by converting it to how many days labor could be purchased. Determining the silver content and converting that weight of silver to current dollars based on current silver values produces nonsensical answers. So I will try to adjust from a day’s wage 2000 years ago to a day’s wage today.
How to do that? Here is my feeble effort.
By the way, this post is one part of my learning about ancient finances.
The data for Construction and Extraction Occupations category contains a reasonable frame of reference for skilled workers. The BLS data is organized into ‘detail’ categories with a few of those detail level job classifications rolled into a ‘broad’ subtotal, with a group of broad categories rolled into a ‘minor’ and those rolled up into a ‘major’ category.
Construction and Extraction Occupations is a broad category. Construction Trade workers in a minor category. Brickmasons, Blockmasons, and Stonemasons and Construction Equipment Operators within that grouping are broad categories. Carpenters are a detail category.
Why was he fired? He merely cost the bank €4.9B back in 2008 after they unwound his unauthorized trades. That is only $5,530,000,000 at today’s exchange rate.
Would you trade your place in life today for life occupying the Gould-Guggenheim mansion when it was completed in 1912? Even if a billion dollars was tossed in to sweeten the swap? I would not make the trade. Photo by Adobe Stock.
I suggest you are in fact richer today than John Rockefeller was 100 years ago. If it were possible for Prof. Don Boudreaux to switch places with John Rockefeller’s life and even if he could have a billion dollars after he arrived back in 1916, he would not make the switch. He would rather live as a comfortable professor today than be a billionaire 100 years ago.
I agree.
Here are three posts to explain this strange idea: first, what life was like 100 years ago, why Prof Boudreaux would not make the switch, and then why Coyote Blog wouldn’t either.
(This post may seem to be out-of-place on my blog discussing accounting and auditing topics. This discussion is part of my enjoyable research on ancient finances and a related thread of how much life has improved over the last 200 years. Since I discuss finance at this blog, it actually fits.)
I will update a few of the stats in the Atlantic article where the author took a shortcut. When I browsed through the BLS report, I noticed some sentences which were repeated nearly verbatim in the article, which is okay since the report is a public document.
A few highlights:
Workers in factories averaged 55 hours a week. The fatality rate across the economy was 61 deaths per 100,000 compared to about 3.3 per 100,000 today.
