December 15, 2008

OCA Remarks at Last Week’s AICPA Conference

The SEC has posted speeches made by the Office of Chief Accountant’s Staff at last week’s AICPA National Conference on Current SEC and PCAOB Developments (the Corp Fin Staff speeches have not yet been posted). OCA’s remarks cover a wide range of current accounting topics, including materiality, judgment, risk assessment, IFRS, impairment and, of course, fair value. In one of the speeches, Marc Panucci, Associate Chief Accountant in OCA, provided an interesting (and timely) discussion of how the current economic environment may impact management’s annual assessment and the external audit of the effectiveness of internal control over financial reporting, as well as management’s quarterly evaluation of disclosure controls and procedures. Here is the list of the speeches from the AICPA Conference posted so far:

Adam Brown, Professional Accounting Fellow
Muneera Carr, Professional Accounting Fellow
Jeff Ellis, Professional Accounting Fellow
Julie A. Erhardt, Deputy Chief Accountant
Robert G. Fox III, Professional Accounting Fellow
James L. Kroeker, Deputy Chief Accountant
Mark Mahar, Associate Chief Accountant
Robert B. Malhotra, Professional Accounting Fellow
Liza McAndrew Moberg, Professional Accounting Fellow
Marc Panucci, Associate Chief Accountant

Looking for an Exit

It is tough to argue with the sentiment expressed by SEC Chairman Cox in an op-ed piece that appeared in the Wall Street Journal last week (and by my count the sixth op-ed piece this year by Chairman Cox posted on He emphasized that now is the time to ponder exit strategies for the government’s investment in private enterprise, in order to ensure that, e.g., our newly nationalized banking system does not live forever in its current incarnation. In this regard, Cox notes “it is incumbent upon federal policy makers to ensure that the extraordinary actions of the past months are understood to be temporary, and constructed so that they are self-liquidating. Since government programs do not on their own go away, there has to be a deliberate design to eliminate them, and a relentless adherence to execution of that plan. Anything short of this will almost certainly guarantee eternal life for these vast new federal roles.”

Cox’s piece doesn’t actually make any suggestions as to how this suggested policy is to be implemented and ultimately accomplished. For the TARP/CPP money, there really doesn’t seem to be an exit strategy in place, other than a vague hope that values will stabilize and ultimately go up in order to provide the US Treasury with a decent return on its investment. There is no doubt that in the rush of getting money into the hands of the automakers (now apparently a task of the White House alone), a focus on the exits will not necessarily be among the highest of priorities.

Perhaps it is a good sign that the dialogue is beginning to focus on how to get out, as opposed to any more on rushing in. It definitely seems like time to stop violating the first law of holes – once you get in one, stop digging.

The Mother of All Ponzi Schemes: Another Bailout Candidate?

The extraordinary story of the alleged multi-billion dollar Ponzi scheme run by Bernard Madoff is fascinating to me – how could so many “sophisticated” investors be misled for so long and with respect to so much money? Well, the obvious answer is a lack of disclosure and oversight, coupled with the inevitable predisposition to not ask questions when returns are positive. Hopefully, Madoff won’t be the tip of an iceberg – I doubt that the economy could stand more well-heeled institutional and individual investors getting wiped out by other funds that they didn’t understand or ask the tough questions about. And there is probably not going to be any sympathy out there for a bailout of institutions that lost large sums of money in the scheme.

And of course the blame game begins – a Bloomberg story over the weekend noted that Madoff’s operation had not been inspected by the SEC, even though Madoff had subjected his business to SEC oversight two years ago. But the SEC is all over Madoff now, and has directed all investor inquiries to the receiver appointed in this case, Lee Richards of Richards Kibbe & Orbe LLP.

Apparently the apparel choices of Madoff’s auditor are to be construed (in retrospect) as a possible red flag. This Bloomberg story reports that the man who frequents the offices of Friehling & Horowitz, Madoff’s auditor, “wears tight pants and tie-dyed shirts.” Perhaps the person observing the Friehling & Horowitz office has never heard of “casual Friday?”

– Dave Lynn