Accounting for Public Companies

Posted on by

The drive to create a unified world-wide system for corporate accounting has stalled, perhaps permanently.

In March, 2009, my article in New England In-House noted the SECs then-proposed road map leading to mandatory adoption of International Financial Reporting Standards (“IFRS”) for all reporting United States issuers (’34 Act public companies).  At the time, there was talk of a several year timetable, and resolution of what was then perceived to be the knotty questions: would IFRS integrate with the SECs mandated XBRL language (requiring financial statements to format  consistently so that computerized comparisons could be achieved); resolving the tension created by United States regulatory  requirements for “GAAP” accounting; how to deal with LIFO accounting, which was not  permitted under IFRS; resolving differences in accounting for P&L, recognition of litigation liability, and the equity method of valuing investments.

Where are we today?  Bogged down.

Neither the United States Financial Accounting Standards Board (“FASB”) nor the board administering the international standards (“IASB”) is making much headway, nor are they talking about a program to resolve all inconsistencies between the systems.  IASB has stated that seeking “convergence” with US GAAP is no longer a priority.  Rather, the two organizations presently seem focused on resolving specific differences concerning income recognition, and  accounting for financial instruments and leaseholds; a joint standard on revenue recognition may well issue, according to Compliance Week, in early 2013.

In the meantime:

* FASB is moving forward at its own deliberate pace in an effort to address, without adopting international standards, some of the basic issues presented by the emerging world economy.

*The Committee of Sponsoring Organizations (“COSO”) has published an update to its long standing “framework” which establishes the methodology for companies creating internal controls over their financial reporting.  You may recall that the original COSO framework was in existence at the times Sarbanes-Oxley was adopted in 2002, SOX required reporting on the efficacy of internal financial controls by SEC-registered companies, and use of the COSO framework became normative.  The old COSO framework was a decade old at that time and is now, of course, 20 years old.  The revised COSO version is directed at solving issues that were difficult to resolve under the old framework, and is replete with illustrative tools to facilitate compliance.

*The Public Company Accounting Oversight Board (“PCAOB”), which controls the auditing of SEC registered companies, has announced that PCAOB and Chinese authorities will begin observing the audit oversight activities of each other, better to understand quality control; granular reviews of specific audits are not presently contemplated.  As more and more companies from China are coming onshore into the United States, some by generally disfavored “reverse mergers” into shells that are already publicly held, getting a better understanding of the accounting history of Chinese companies makes a lot of sense.

And as for convergence of GAAP and IFRS?  It always struck me that the commentators and magazine writers were more excited by the prospect of accounting convergence than were CFOs and CPAs.  In any event, at least for now American standards for accounting seem to be intact and without immediate prospect of substantial revision.

Things I do not Understand

Posted on by

Why US Ambassador to the UN Susan Rice was forced out of consideration for Secretary of State based on her conveying incorrect information given her by the administration about a matter that was trivial and highly politicized.

Why people are shocked that when we drop American citizens into incredibly hostile environments they sometimes get killed or attacked, as in  our embassies and consulates.

Why the United States is negotiating about keeping any troops at all in Afghanistan after 2014; or after say next Tuesday for that matter.

Why banks accept penalties in amounts that begin with the letter “B” unless they are clearly culpable (these numbers do not support the argument that it is cheaper to pay the future costs of a long fight with a present fine than to contest matters, divert resources, etc.).

Why virtually every major bank has been hit in the last year with huge penalties for an upsetting list of infractions, indicating a total moral decay at the highest levels of our business world, although at the same time every banker you meet (or at least I meet) has proven to be ethical and straightforward.

Why the SEC is just waking up to the porous protections inherent in 10b5-1 stock trading plans, which as a matter of simple analysis are subject to abuse by inherent design, allowing executives to alter plans at will although the plans are designed to make stock transactions automatic based on timing or market forces and thus deny the executive the temptation to use inside information in trading shares.

Why, if as rumored business has co-opted all politicians, and if business is demanding resolution of the cliff, the politicians cannot seem to solve the problem and thus deliver the result their owners have demanded.

Why Congress on its own does not solve the cliff, given that virtually every American wants it solved —  unless Congress knows it must increase taxes and cut spending and cynically believes that if those results occur “automatically” then their personal reelection will be eased by the argument that “I didn’t vote to increase taxes and cut your benefits, it just happened.”

Why the Red Sox are so enamored with spending $13 Million per year per player that they just did it again, committing that approximate sum to buy a 35 year old fifth starter.

Why the Red Sox think it is okay to spend my money that way (today being the day that season ticket payments are due, thus affording the Team free use of my money for about four months before they are obligated to start delivering product to me).

Bad News for Corporate Officers, Directors

Posted on by

There are culpable officers and directors who are escaping the consequences of their own evil-doing, while their corporations (and thus implicitly their shareholders) pay large penalties to the SEC.  Political pressure may or may not be involved, but the regulators are out to remedy that regulatory misdirection by pursuing individuals in addition to their companies.  This was the message at today’s Boston meeting of the National Association of Corporate Directors–New England.

Former SEC chair Christopher Cox was not clear as to what impact the recent election might have on SEC enforcement.  He was sure that Congress would press the SEC to finalize the long-overdue regulations under the JOBS Act to permit public advertising in private placements. [Retiring SEC Chair Mary Shapiro took big heat for allegedly delaying implementation of the regulations, mandated no later than July 4, 2012 by the Act, allegedly for fear that her legacy would be harmed by adopting such regulations on her watch notwithstanding required by (literally) an act of Congress.]

He did note that many in Congress were pressing for greater heat on individuals committing financial transgressions and contributing to the economic collapse, including heat on “gatekeepers” (code word for lawyers), but suggested this was unrelated to election results.

George Canellos, Deputy Director of Enforcement at the SEC, similarly noted that enforcement was not politically driven and, in fact, operated independently of the Commission in many ways, and that he personally did not think that enforcement should create policy; it should just enforce the law.  But having said that, Canelllos made clear that his idea of enforcement of existing laws meant greater heat on individuals:

*Under Dodd Frank, the SEC now has the power to bring civil suit internally before an SEC administrative judge (not in Federal Court) and assess penalties against individuals who violate the law in connection with disclosure, trading and the failure to supervise a corporation; previously SEC actions prosecuted internally only could be brought against individuals affiliated with regulated entities such a brokers and advisers.

*The SEC can pursue people who “cause” a violation of securities law by a company (the company itself typically is absolutely liable for many failures to comply).  That new standard for personal liability does not require someone to intend to do evil, either as an actor or as an aider and abetter.  It is now enough to incur SEC enforcement that an officer or director is negligent in supervising the affairs of a company, where the company fails to meet a performance standard mandated by law.  (At the surface, it is hard to parse this standard with the so-called business judgment rule that protects directors against liability if they are loyal to the corporation and use their best judgment; at the edge of each doctrine there is an overlap where someone does his/her best using best judgment but that judgment is so off-base that someone finds it to be negligent; in any event, the business judgment rule does not protect officers — SMH.)

*The speakers touched on the lead article in today’s Wall Street Journal, headlining investigations by the SEC into executive insider trading.  The regulators warned against: relying on blanket so-called 10b5-1 plans (self executing trading plans that are set in place and trade someone’s stock automatically based on certain criteria but without direction by the executive or director, thus avoiding claims of use of inside information in the trading decision) when those plans are set up at a time when the executive then had material inside information; reliance on expert networks (where experts for a fee discuss a company with paying investors, sometimes providing information not otherwise available); and, claiming the insider trading defense know as “mosaic” (traders claiming they did not acquire material inside information but just non-material tid-bits on which they did not improperly rely, but just used those tid-bits to create a “mosaic” of facts that became trade-able intelligence by reason of the intellect of the trader).

Lots is happening in the securities field, but one real development is a growing insistence on holding individuals accountable at least monetarily if not criminally where they participate in actions leading to great financial harm to others.  The populist plaint that the financial community got bailed out and paid bonuses when they caused the mess that impoverished so many innocents is getting  resonance in the regulatory community; whether or not this is related to the election and a subtle shift in the flavor of government seems irrelevant, as the trend seems well-established without regard to its genesis.

Private Equity Acquisitions Questioned

Posted on by

To hear the experts tell it, there is too much “dry powder” chasing too few truly worthy deals; private equity acquirors are duly warned.

At the December 4th Boston meeting of the Association for Corporate Growth, panelists drilled down on whether private equity really has opportunities in the acquisition of “family business.”  While some panelists were of the view that private equity can bring better management and the leveraging benefits of borrowed outside capital on top of an infusion of equity, perhaps the most challenging presentation was made by Richard Narva and Dirk Dreux, experienced counselors in the “family business” space, who were less optimistic.

Speaking to the PE community (the conference was attended both by private equity firms and a smattering of representatives of family run businesses), Narva and Dreux made the following points:

  • There may be 55,000 companies in the United States with revenues of $25,000,000 or more, the likely pool for qualified platform acquisitions, and 80% of them are privately owned, but a granular look at them is essential. Most are unworthy qualitatively. There is also a plethora of smaller companies some of which might qualify, but only as add-ons to a platform.
  • Perhaps the best way to determine if a target company is likely to prove worthy is to look at the quality of governance, the degree to which the private company operates along SOX principles.  Is the enterprise advised by a quality fiduciary board, or a non-fiduciary advisory board which is in fact followed?
  • With companies this size, value accretion is difficult.  A “buy and flip” model is not likely to work.  You have to buy, train and grow a company.
  • Finally, in ticking off the attributes of a family run enterprise, these commentators noted that sufficient cash flow to satisfy family needs “anesthetizes forethought;” once family goals are met, the drive for growth usually stops.

The suggestion that there was a dearth of PE-quality deals, butting up against an over-supply of capital, did not deter other presenters from discussing the ways in which private equity financing options did in fact help family businesses.  The bottom line of the conference for the private equity folks likely was a cautionary tale already known to them; the take-away for the family enterprise folks was likely to be a mixture of sobering reflection mixed with confusion.

Super-Storms, Logic and Impossible Solutions

Posted on by

When New Orleans found itself under water a couple of years ago, the legal community jumped forward to fulfill its social obligations by providing help of all kinds to the distressed New Orleans community.  Lawyers labored nobly and long to facilitate aid, solve real estate problems, provide legal services and provide the infra-structure necessary to rebuild the City and environs.

At the time I was very skeptical as to the direction of some of that effort.  The needs and sufferings of the people, and the impetus and desire to assist, could not be denied.  No one wants to see others in need, particularly through no fault of their own.  But the pledge to rebuild New Orleans to its former glory presented a logical problem:  a strong argument could be made that rebuilding that city was not very smart from a utilitarian standpoint.

At the time, some climatologists pointed out that the city was likely doomed in the not too distant future.  In a world of cold logic, it probably made sense to relocate the whole thing, including its people, somewhere else.

The undertaking of such a novel and in some ways cold-hearted program did not appeal to the government, nor to the lawyers either;  the American way is to rebuild, bigger and better, and to be optimistic and forceful, to conquer impediments.  Nor had our population fully integrated the reality of global warming, an issue tied up with what has proven to be unimportant ancillary issues such the relative role of human participation in the warming process.

Recent events have reoriented much of popular thinking.  The science tells us that human existence is speeding global warming.  But it also suggests that without human intervention we still will be in trouble.  Recent coverage in the New York Times is chilling: a modest rise in the ocean levels will flood out of existence a good deal of the United States, including but by no means only New Orleans.  The colored Times maps showing a nonexistent Florida and a vastly shrunken New York City have the makings of a sensationalistic movie, and I am willing to bet anyone that such a screen epic will follow shortly. The factoid that at one point in our world the oceans were hundreds of feet higher than today suggests that we should be building beach cabanas in Denver.

Conversations about installing flood gates along the lines of some in Europe seem surreal, and in any event scientists are sure that gates can be effective only in some, not all areas, particularly when one looks at the cost factor.  Burdened by the economy, the President a couple of days ago refused to take a leadership role in addressing the issue at an international conference on the subject, with its implicit subtext of curtailing the consumption of hydrocarbons.  As in the past, immediate presidential concerns are trumping the problem of the 900 pound elephant; it is easier to herd the ten pound cats.

The role of law in a logical world, faced with these issues, is clear; plan for a different coast line.  Congress needs to address this kind of law; you cannot bring a lawsuit and deal with this type or magnitude of problem.  Certainly unemployment would be cured for a century; the amount of labor of every sort, even unskilled, that it would take to move Manhattan (figuratively of course) to, say, a nice plot of open land just outside Pittsburgh is, at base, incomprehensible.

So the power of law and lawyers will again be directed, in New York and New Jersey and even inland in Northern New Hampshire, to rebuild what we had.  And to suggest otherwise is to seem both cold-hearted and hysterical. Hysterical even as we continue to pump water out of New York City basements.

One day, the cost to our society of flood insurance may well dwarf all the entitlement costs about which we are now squabbling.

Who would have thought that our future might be imperiled not by missiles, nor by nuclear bombs, nor by terrorists, nor by virus dumped into our drinking supply, but by salt water?

Foreign Corrupt Practices Act

Posted on by

This month the SEC and the Department of Justice published a remarkable work, although its title is uninspiring: “A Resource Guide to the U.S. Foreign Corrupt Practices Act.”

The FCPA makes it illegal to bribe government officials overseas in order to get business.  While there are the usual numerous legal issues, exceptions and confusions, the statute is really painfully simple in its intent, and it has been vigorously enforced of late by the SEC (civil fines) and by the DOJ (criminal fines, jail).  American businesses are now acutely aware of their risks; the statute applies to both public and private enterprises.

The Resource Guide can be downloaded for free and is essential reading for any business, and any individual, operating or shipping abroad, as American businesses can be liable even for the improper actions of their agents.  The Guide can be accessed by clicking here.

The Illegal Finder Problem

Posted on by

Many companies seeking to raise capital use finders as intermediaries to find investors.  Many business owners seeking to sell the stock of their company use business brokers.  These finders and business brokers of course want to be paid and they are entitled to be paid.  The problem is this: if they are not registered under the Securities Exchange Act of 1934 they are not legally permitted to perform these functions and cannot force the payment of their fees.  Further, the transaction may be overturned.

The need for capital formation, or for liquidity though sales of businesses, is so powerful and fundamental within our economy that for decades unregistered finders and brokers nonetheless have functioned with regularity and often with impunity.  But the window for these activities is closing; the details are available in my article that ran in New England In House this past month, which you can see by hitting this link.

Seems the SEC is too busy with Dodd Frank and JOBS Act regulatory burdens to address the simple issue of permitting finders to function legally, an easy fix that will go a long way towards spurring the economy.

A Fearful Step into Politics

Posted on by

Jobs is the mantra of this Presidential election.  What creates jobs?  I do not know.  There is likely an answer but each party has its own, and the electorate is ill-educated to judge.  I suggest that our own personal analysis is fundamentally flawed by this lack of data: we fill the absence of facts with intuitions informed by prior bias.

At the risk of wandering into a storm that this blog has until now avoided – avoided because I have a hard enough time writing about what I actually know or about which I have gathered reasonably solid facts  – I refer to a New York Times article from Sunday September 16 that asks, Do Tax Cuts Lead to Economic Growth?  Simply put, assuming the data is accurate (the article is written by the DC bureau chief of the Times), tax cuts since 1990 do not correlate with US economic growth.

The article goes on to interview “conservative economists” who are quoted as agreeing that tax cuts do not stimulate jobs in any significant degree, for a variety of reasons; the most interesting theory is that historically we were cutting taxes from 90% or 70%, but now the top rate is far more modest.  I discount these conclusions as hearsay and perhaps from a biased source; the Editorial content of the Times today is unabashedly liberal.

But what about the numbers?  It strikes me as unlikely that they are fudged.

Neither candidate has been clear about exactly what they will do with taxes; Romney to my mind is more opaque, and I heard him say that his selection of loop-holes to close is something “I will have to negotiate with Congress” which is of course no answer at all.  But I believe it is fair to say that Romney wants to cut the tax rate to spur job growth.  I do not think I am making a volatile political statement in saying that much.

Tax cuts tend to increase deficits.  In the political battle that would attend the proposed elimination of tax deductions, it is hard to believe that ANY president will be successful in eliminating many broadly based deductions.  For example, if housing is a problem and an indicator, what happens if we eliminate the tax deduction for interest paid on residential mortgages?  If the tax rate does not spur growth so as to increase tax revenues even with a lower rate after we in fact effect substantial tax cuts, but rather has the same effect it has had in the last 20-plus years of slowing growth, we are expanding the deficit even more.

I do not here attempt to make an argument for Obama on these points; but I am troubled by these pesky facts.  You need not be an economist to look at the Times chart: growth after the 1990 Bush tax increase in 1990 and the Clinton tax increase in 1993, and loss of jobs after the 2001 Bush tax cuts  were followed by further Bush cuts in 2003.

Neither candidate speaks with any credibility on jobs because as far as I can tell, the jobs gap is driven by forces not easily controlled by domestic US tax policy.  If economic contraction is mostly tied to lack of regulation, or cheap money, or poor credit practices, or world events, or a battle for the minds and hearts of European bankers, or hydrocarbon politics, or by some difficult-to-compute combination of these factors, then tax policy will likely have little impact.

My problem is not only that I do not know the answers.  My problem is this: I don’t think the candidates know the answers either.  I wonder what would happen in the voting if one of them said so….

The Jewish Vote and the Generational Divide

Posted on by

There is an old joke that if you have two Jews you will have three opinions.  Former US Congressman and New York Mayor Ed Koch this weekend added, “And also four different temples.”  This joke is not a joke but an indication of the fragmentation of what can no longer seriously be categorized as “Jewish political thought” when that category has been totally deconstructed.

This past weekend I chaired a conference in New York City on the Jewish Vote, the Holocaust and Israel.  Speakers included Mayor Koch, present Republican Congressman Bob Turner, famous talking heads Tevi Troy and Hank Sheinkopf and several academics and authors, all under the auspices of the Wyman Institute for Holocaust Studies.  The conference was excellent in substance, tracing Jewish voting trends from Hoover to the present from both academic and political perspectives.

As interesting were the reactions of attendees.  Much of the audience was older, conservative, angry with Obama, seeing the election in terms of support of Israel.  Younger attendees were almost bemused by what they considered to be a narrow view of the world and of the election, saying “this is not how the younger Jewish community views these issues,” suggesting that a focus on the Holocaust as informing current voting is old fashioned in style and irrelevant on the ground.

And after spending a whole day at the conference, locked in Fordham Law School, attendees stepped out into the bright Manhattan sunshine and confronted a demonstration by a couple of dozen Hasidic Jews, dressed in dark coats and with untrimmed hair, holding signs objecting to the conference itself as purporting to address the US elections from the standpoint of the Jewish community; these observant Jews thought that any involvement in politics as a group was wrong-minded (signs admonishing us not to address political issues “in my name”).

Whether there is a Jewish vote (which implies some sort of bloc) or just a set of statistics reflecting historical voting patterns in Jewish neighborhoods is much a matter of semantics.  How Jews voted historically (typically Democratic from at least the ‘20s onward, almost without regard to attractive Republican positions) or were likely to vote this year (among the aged attendees of the conference, I don’t think Obama could get elected dog-catcher) was explored but without likelihood that the conference would change anyone’s mind.

The more interesting issue is, what if anything can be said about Jewish political views with any confidence that one is speaking for more than a fragment of the alleged cohort.  There are numerous groups speaking (they say) for “the Jews.”  I conclude that we too, this weekend, even as a scholarly and open forum, were viewed as just another one of many fragments.  Is there merit in attempting to bond these fragments, or at least some of them?  Is there any prospect for doing so?

Important here is the gap in defining what is important for the Wyman Institute, or for many of the groups focused on the Holocaust.  A younger view wants relevance to the problems of today: current issues, current genocides not only focused on Jewish victims, issues currently presented to us by the world.  An older view says that yes, we can hear that, but there is another thread here, that Jews must be alert to their personal and special risks as historical punching bags over centuries and across continents.

It seems to me the older view has a fear in delivering overtly the message that Jews should beware of the world even today, even as assimilated peoples in settings where the illogic of societal prejudice actually running wild seems paranoid.  The older view is two fold I think: first, it is not paranoid when “they” are in fact talking about you; second, how many times do we have to replay the same conversation before it sinks in that today’s logical person is well advised to keep a weather eye peeled towards the almost inconceivably irrational beast?

I see a generational disconnect that must be overcome.  I see older elements of the Jewish community hesitant effectively to express the old fears, almost dismissing younger elements as so ill-educated as to be beyond reach.  I see younger elements appropriate offended that their eldest living forbears would so dismiss them after nurturing them and educating them and setting them loose to compete (and succeed) in the world at large.

There is both wisdom and lack of patience on both sides of the divide.  And there are so many ancillary divides, including but not limited to the guys across the street who invoke the Bible to criticize even holding the discussion.

It is not odd that voting, viewed by historians of democracy as the ultimate expression of political freedom, should highlight the schisms within our polity, and within its constituent elements.  But whoever wins the election this November, there is work to be done to bring together some of the older strands of Jewish political thinking with the J-Street crowd.

M&A, AOL StyleM&A, AOL Style

Posted on by

Last week AOL Chair and CEO Tim Armstrong, a young and fast-talking executive of the new media, addressed the season’s first meeting of the Boston Association for Corporate Growth.  He spread witty anecdotes and hints of his view of the electronic future (“every traditional media company is a turn-around, they just don’t know it yet; AOL wants to be the arms dealer to the internet [providing content]”), but also set forth four rules for an effective acquisition (AOL has “traded $3 billion of assets in the last 24 months”):

*Do the Target’s Work.  Find a way to articulate and communicate the value of a deal to the other side and its board.

*Don’t be Stupid.  (Not sure I would have thought of that one….)  Don’t let anyone tell you that “this is the way this kind of deal works.”  Look at the situation and adapt your strategy, even fundamental approaches.

*Show Up.  Be politely in front of your target at all times.  Even socially or, it seems based on anecdotes, by contrived accident.  Don’t go home if you think you have a lock on the deal, as someone else may be waiting to turn the tide.

*Every deal needs a Coach.  He moves people in and out of deals based on the needs of the play, the synergies or lack of synergies with the counter-party.  There needs to be someone like a coach of a team measuring this aspect and reacting as needed.  He also likes having a team with widely divergent viewpoints at first,  to force examination of every aspect of a deal including risks.

Armstrong also counseled against trying to get the last dime out of a deal, making the winning of small points the end-all of negotiation.  Deals should not be adversarial.  How does he contribute to that desired atmosphere?  “I always start in the middle of the field,” avoiding extreme starting positions.