Sunshine is the best disinfectant.

                                      - Justice Louis Brandeis

And it’s on that note that Pershing Square Capital Management ended its presentation on why Herbalife is a pyramid scheme titled “Who Wants to Be a Millionaire?”  Given this forum’s devotion to financial reporting transparency and ethical reporting, how could you expect me NOT to weigh in on Herbalife’s disclosures, particularly given the recent televised fight between Bill Ackman and Carl Icahn.  So, exactly what do the Company’s financial statements tell us?  

Incentives and Reporting

My review of Herbalife’s most recently audited 10-K (fiscal year ended December 31, 2011) yielded some interesting points both positive and negative in terms of openness and transparency. As usual, I began by evaluating the Company’s possible incentives to misreport (e.g., overstate operating performance).  Yes, Herbalife suffers from the usual performance pressures to meet operating targets imposed by debt contracts (see covenants in 2011 10-K, page 40). And the fact that the Company’s five year total return has greatly exceeded that of its peer group and the S&P 500 index the past several years no doubt creates market expectations and performance pressures.  Yet, Herbalife didn’t play any of the traditional pro-forma reporting games (i.e., adjusted EBITDA) in its 2011 10-K. It didn’t need to given its steadily improving gross profits, contribution margins, operating and net income (10-K, page 57).  However, the Company does report extensively using a non-GAAP “retail sales” metric which it touts as playing a “fundamental role in our compensations systems, internal controls and operations (10-K, page 55).” In short, there do not appear to be significant performance pressures which might prompt aggressive financial reporting behaviors.

Next, I read the 10-K looking for any management and control red flags that might suggest an environment ripe for aggressive reporting.  Yes, management wealth is tied to company performance via stock-based compensation, but the amounts are not deemed excessive.  Also, according to Audit Analytics, an independent research provider, Herbalife’s internal controls over financial reporting were considered effective each year from 2004 through 2011. Moreover, the Company did not restate its financial statements to correct any reporting errors during the same time period.  On a totally unrelated note, it was quite refreshing to see Herbalife actually admit that debt is being used to fund share repurchases and dividends (10-K, page 71).  While often true, most companies do not put this in print.  So, there is little to suggest that management and internal control factors might promote aggressive reporting.

Finally, I searched the 2011 10-K for any industry or market structure factors that might affect the quality of Herbalife’s financial reporting.  But frankly, there just weren’t any of the usual suspects (e.g., rapid or declining industry changes, new technologies or accounting, etc.).  The only industry factor of any consequence noted was not a surprise.  Herbalife disclosed its regulatory risks associated with running a network marketing program, specifically mentioning “pyramid” or “chain sale” schemes (10-K, page 32).  It just doesn’t get any clearer than this:

The failure of our network marketing program to comply with current or newly adopted regulations could negatively impact our business in a particular market or in general.  

In summary, I just didn’t find that many performance, management control, or industry pressures that might prompt the Company to misreport.  That being said, I actually started to crunch a few numbers to validate my observations.

Risk Model Analysis

I began with an old grumpy favorite, the Beneish Model, to detect any signs of possible earnings manipulation.  Despite the Company’s asset and sales growth, the model did not signal earnings manipulation, yielding probabilities of less than two percent for financial statement years 2008 through 2011.

Next, I ran a panel of five other tests (the quality of earnings and revenues ratios, the Sloan accrual measure, the excess cash margin metric, and the conservatism ratio) in a search for possible red flags.  Again, the tests proved negative.  Simply put, the financial statements do not signal accounting problems related to revenue recognition (e.g., accruals, etc.), nor do they suggest any cash reporting issues.  And while I’m on the topic of cash, I was pleasantly surprised by Herbalife’s cash disclosures (10-K, page 101).  Herbalife gets a star in my book for reporting credit card receivables as actual receivables, and NOT as cash, like so many other companies are doing today (see What’s Up With Cash Balances).  Also, the Company should be commended for reporting any cash overdrafts as financing activities, rather than operating activities.  But enough with the complements, nobody is perfect!

Financial Statement Issues

With almost three weeks left until Herbalife reports its full-year, audited results for FYE 2012 (see press release dated January 17, 2013), here are a few things the Company and its auditors might want to consider.

First, the percentage of the allowance for bad debts to gross receivables has declined from almost 5 percent in 2009 to 2.45 percent in 2011.  Although I am not particularly happy about this, it could be due to the percentage of credit card receivables increasing from 53.62 to 70.83 percent during the same period.  Then, there is inventory which grew significantly in 2011 by 35.7 percent.  Unfortunately, inventory turnover slowed from 9.173 in 2008 to 8.117 in 2011.  Complicating the analysis is that Herbalife for some reason stopped reporting data on reserves for inventory obsolescence in 2011, as it did in prior years (see 10-K’s for FYE 2007 and FYE 2010).

The assets causing me most concern are Herbalife’s intangibles: goodwill and marketing related intangibles.  These assets in total comprise almost 29 percent of the Company’s balance sheet at FYE 2011.  It is noteworthy that the reported asset values have remained relatively unchanged since they were first reported in FYE 2004.  FYE 2011 disclosures provide absolutely no insight as to what these assets represent, or when these intangibles originated.  Only a review of the FYE 2004 10-K tells us that the bulk of the intangibles originated with the 2002 merger of WH Acquisition into Herbalife International.  But still, there is no information on exactly what the sizable marketing intangible represents.  Also, in its FYE 2011 10-0K, the Company doesn’t even bother with a specific intangible asset note, preferring instead to discuss intangibles within its accounting policy notes…interesting.  Why do I care about this?  Intangible impairment may be lurking.

Some of you will no doubt argue that net earnings and operating cash flows are strong and increasing, as are market capitalization, and the related market to book ratios.  Nothing there signals impairment, right?  Well, here are a few things to consider.  First, Herbalife freely acknowledges a relatively high turnover in its distributor customers (e.g., sale leader retention rates of approximately 50 percent, FYE 2011 10-K, page 54).  Additionally, and more problematic, is what the Company’s “pop and drop” business model might tell us about the value of reported intangibles.  Slides 251 through 256, as well as slide 260 of the “Who Wants to Be a Millionaire?” presentation appear to confirm a lack of customer loyalty and/or marketing effectiveness in mature markets.  So, given the documented “pop and drop” cycles of Herbalife’s business model, isn’t it likely that the intangible assets recorded in 2004 should have been written off in the subsequent three to five year period? Recent earnings and cash flows might simply reflect the “pop” provided by new markets, rather than revenue and cash streams related to the 2004 intangibles. This grumpy old accountant sees a problem here, and the paucity of intangible asset disclosures raises some red flags in my book.

And then there are the leases…the off-balance sheet financing!  Herbalife reports that it leases ALL physical properties on page 45 of the FYE 2011 10-K.  Of course you remember how the grumpies feel about lease accounting.  See CVS Caremark:  Why Operating Leases Must Be Capitalized.  So, using the data in note 5 of the FYE 2011 10K, I made the following assumptions to estimate Herbalife’s off-balance sheet lease liability: 

  • Discount rate of 5 percent based on an approximation of Herbalife’s borrowing cost.
  • Thereafter lease obligations occur equally over the remaining 5 years.  
  • Tax effects are ignored.

Even with these “crude” assumptions, the Company’s estimated unrecorded lease liability approximates $140 million, which represents 9.7 percent of total assets at FYE 2011.  And the liability to assets ratio jumps from 61.3 to 70.9 percent when the unrecorded lease obligations are considered.  But GAAP is what it is…and, if anything,  Herbalife is GAAP compliant when it comes to leases.  

Finally, I do have a couple of complaints about Herbalife’s income statement presentations.  Yes, I have the usual issues about “cash flow hedge” accounting and other comprehensive income reporting.  But what troubles me more is the Company’s highly aggregated income statement.  Financial reporting transparency would be improved if revenues were disaggregated to highlight product returns, distributor allowances, shipping and handling revenues, and product returns and allowances.  Additionally, there is little or no detail on Selling, General, and Administrative expenses in the income statement or notes.  And as pointed out by Pershing Square Capital Management on slide 301 of its presentation, the Company no longer reports shipping and handling costs (in FYE 2011), despite reporting them for 2008 through 2010.

So, is Herbalife a pyramid scheme?   Well, if it is, the GAAP financials don’t really appear to signal it, nor does the auditor.  This suggests to me that the recent uproar in the markets may be less about the Company’s financial condition, and more about Herbalife’s business model, not to mention the ego.  If I were the Company’s financial physician, I would tell it:

You look healthy, but I don’t necessarily agree with your life style.

And by the way, In Herbalife’s case, the financial statements may be masking some longer-term health risks, particularly if regulatory authorities make the Company re-engineer its way of doing business.

This essay reflects the opinion of the author and not necessarily that of The American College, or Villanova University.

AuthorAnthony Catanach
6 CommentsPost a comment

"It’s déjà vu all over again."  - Yogi Berra

Well, it’s been a week since the U.S. Securities and Exchange Commission (SEC) announced that it was charging a KPMG partner and senior manager with failing to properly audit a bank’s allowance for loan losses.  I share Jon Weil’s frustration with the SEC’s failure to pursue the large accounting firms for their shoddy audit work during the recent global financial crisis.  Why you ask?  It just so happens that back in the day, I actually audited financial institutions for KPMG’s predecessor firm, Peat Marwick, during the S&L crisis.  I remember well how regulators and markets “punished” big accounting firms who failed to exercise professional skepticism in their reviews of land development and construction loans, equity participations, and yes, even reverse repurchase agreements.  Despite all the angst that the S&L litigation created among auditors, it actually did make auditors think more about what they were doing.  In short, litigation losses are one way to make sure that auditors have “skin in the game.”  But I digress…

So what’s my beef this time?  Well, I am not going to pile on after Jon Weil’s and Tom Selling’s pointed comments concerning the lack of auditor enforcement actions.  After all you know how the grumpies feel about enforcement.  See PCAOB is Too Soft on Auditors, Accountants Behaving Badly, and The Auditor’s Expectation Gap for a trip down memory lane.

Instead, I am just going to reminisce (and vent) about the “golden days of auditing” (when I practiced) to highlight what I consider to be the folly of the Financial Accounting Standard Board’s (FASB) recent exposure draft (ED) on Financial Instruments – Credit Losses.  In fact, the very existence of this FASB proposal may help explain why KPMG couldn’t audit the loss allowance of TierOne Bank.

Immediately after reading page 2 of the exposure draft, I began to feel uneasy.  The FASB tells us that the proposed amendments would require:  

  • An entity to impair its existing financial assets on the basis of the current estimate of contractual cash flows not expected to be collected on financial assets held at the reporting date. 
  • That the impairment would be reflected as an allowance for expected credit losses. 
  • The estimate of expected credit losses would be based on relevant information about past events, historical loss experiences, current conditions, etc.

So what’s so unreasonable about these proposals…absolutely nothing.  This is what we were supposed to do 30 years ago!  From intermediate accounting, through bank level I and II firm training, we learned that the allowance for credit losses (whether they be for accounts receivable or loans) should be based on exactly such criteria.  So when did generally accepted accounting principles (GAAP) abandon this “old” approach, and what has been used since?

Well, page 3 of the FASB ED provides some clues.  It indicates that current GAAP delays the recording of credit losses until they are “probable.” So, apparently corporate accountants and their auditors have adopted a strict interpretation of ASC 450 which requires that a loss contingency (a loss reserve) be accrued only if asset impairment is probable and estimable. Also troubling is that entities currently can limit the information they use to measure an incurred loss to “past events and current conditions,” ignoring a wealth of quantitative and qualitative factors specific to borrowers.  

Apparently, today’s accountants believe that FASB’s pronouncements are the only thing that constitutes GAAP, choosing to ignore such tried and tested estimation techniques such as aging of accounts and percentage-of-sales methods.  By the way, both tools are acceptable under GAAP, but neither apparently meets ASC 450’s level of “sophistication.”  Back in the day, we acquired all the relevant information that we could to address the uncertainties associated with a loan receivable’s ultimate collectability.

With today’s high standard for recording a loan loss, it’s no wonder that loss allowances are being under accrued, particularly given bank management’s incentives to prop up capital levels at all costs.   So, at some point, today’s accountants opted for a strict adherence to ASC 450’s criteria when creating and auditing loss reserves, ignoring other relevant GAAP, and abandoning common sense and skepticism, as well. And the result?  A new FASB ED on credit losses (with implementation guidance) that simply confirms what we old auditors have known for decades.  Wow, how did accounting for credit losses get so far off track? 

A “war story” from my loan review days will hopefully illustrate why I am upset.  One of my all time favorite loans was a $500,000 commercial real estate credit on a car wash in a small town. The loan was over 9 months delinquent, the bank had no recent communication with the borrower, but there was a stale property appraisal from when the loan was originally approved.  The prior year bank examiner report had classified the loan as substandard, and the bank’s credit analysis department had currently evaluated the loan as doubtful.

Our concern back in those days was whether the reported loan amount (i.e., the contractual cash flows) was impaired.  Given the information provided to us, it became apparent that we had to determine and evaluate the source of repayment. I gathered up my audit team at lunch and suggested we swing by the car wash for fun to check out the loan’s collateral.  Yes, we actually conducted a visual inspection of the collateral…what a novel idea!  And what did we find?  A roofless, abandoned aluminum shell, totally stripped of machinery, laying dormant in a weed infested lot.  Yes, this was an easy one…a complete loss with a 100 percent required reserve, not even any value for the land due to environmental hazard issues. Note the similarities of this situation with that summarized in the SEC’s action against the KPMG auditors at TierOne Bank: reliance on stale appraisals and management’s uncorroborated representations.

By the way, further investigation back at the bank revealed that the aging schedule for the car wash loan had been falsified, and that relevant borrower correspondence had been removed from the loan file. Yes, my little lunchtime adventure had uncovered a bit of a fraud! You can be assured that such little trips became standard for troubled loans in my future audit engagements.  So what’s the moral of this story? You can’t audit from your cubicle…you can’t rely solely on management assertions…you can’t cut corners!  And again, this grumpy old former Peat Marwick trained bank auditor was using FASB’s newly (and recently) proposed rules, over 30 years ago. I must confess that ASC 450 (SFAS No. 5, Accounting for Contingencies) never even entered my mind during the loan review process, nor did such terms as “probable” and “estimable.”  

So what really went wrong with the KPMG audit at TierOne Bank?  If we discount auditor fraud and gross negligence entirely, potential causes fall into one of two categories neither of which is likely to lead to a “conviction.”  First, there is education…the “I didn’t know what I was doing” defense.  This might work for a newly hired auditor on up to senior, but not for a manager or partner.  They clearly had the education, specialized industry training, and years of experience necessary to plan, organize, and conduct substantive and control focused audit testing.  Unless, of course, both the partner and manager argue that they were unsure how to apply current GAAP as it relates to credit losses.

The other, and more likely, explanation for blowing the audit of the loss allowance is poor process execution.  Something undoubtedly happened during the engagement that resulted in a process breakdown.  The usual suspects are time and client fee pressures which result in judgment, organization, planning, review, staffing and/or supervision failures during the audit process.  I’d bet on this given all of the audit model failures recently witnessed, and the PCAOB’s continuing exception reports.

Oh, and don’t look to new accounting and auditing standards to fix the problem with loan loss reserves.  I agree completely with Tom Selling’s recent statement that: 

"The facts are that holding management ultimately accountable for the accuracy of financial statements doesn't work anymore (if it ever did). Different auditing standards won't make the audit more reliable as a deterrent to financial manipulation, so long as management has the license to do the estimating – and to hire and fire the auditors."

So what do I hope you take away from my ramblings about yesteryear?  First, there’s nothing really new about FASB’s Financial Instrument – Credit Losses exposure draft. I support it! However, we all should be very concerned that FASB thinks that considering contractual cash flows and all relevant information in credit loss estimation and recognition is something new!  Apparently, the FASB has no historical perspective or institutional memory…very sad, indeed.  After all, even Jerry Maguire got it back in 1996 when he screamed "show me the money!" It was true then, it’s true today, and will be for the foreseeable future when it comes to valuing assets.  And the FASB staff really ought to check out the wealth of published regulatory guidance if they want to craft a credible credit loss standard (e.g., OTS Asset Quality, Section 260 for one).

Lastly, in this grumpy old accountant’s opinion, quality accounting and auditing is less about financial measurement models and internal controls, which are valueless without the individual accountant’s commitment to common sense, sound judgment, and professionalism.  Think of me the next time you take a drive at lunch to check out that non-performing strip center commercial real estate loan…yes, the one with the nail salon anchor tenant…

This essay reflects the opinion solely of the author.

AuthorAnthony Catanach
4 CommentsPost a comment

I just couldn’t help myself.  When the WSJ’s Rolfe Winkler mentioned cash-flow in the first sentence of his article titled Questioning Receivable Wisdom at H-P, I just had to take a look.  And I was not disappointed.  Yes, there is the “quality of operating cash flow” issue, of course, but there also is a problem with H-P’s income tax note. Yes, it is quite a stretch from cash flow to taxes, but that’s why I’m grumpy.

As for cash flows, Rolfe Winker is right on point to question the “quality” of the cash flows reported by H-P in its most recent 10K (page 81). It appears that the sale of trade receivables is a relatively recent phenomenon having begun in 2011 (see note 4 on 10K page 101).  The billion dollar question is whether such receivable sales reflect “business as usual” going into the future (will they persist), or are they are temporary liquidity enhancing measures.  One clue is provided by the statement of cash flows itself, where we see a cash inflow from accounts and financing receivables of $1.269 billion.  This represents an actual liquidation (or shrinkage) of receivables which generally is not a positive thing in healthy, growing companies.  

It is also interesting to note that H-P’s discussion of liquidity and cash flows for 2012 (pages 66 and 67 of the 10K) do not discuss receivable sales at all, instead explaining cash generation as coming from simply “collections of accounts and financing receivables.” Don’t collections imply cash receipts from customers?  Should proceeds from receivable sales really be labeled “collections” in the traditional sense?

And while I’m being picky, let me tell you why I don’t consider these receivable sales to be “persistent,” and why I would exclude them from operating cash flows altogether.  H-P describes the receivable sales as being part of a third-party financing arrangement which “qualifies as true sales” (note 4 on page 101).  Call me old fashioned, but any time something has to “qualify” as a sale, I become suspicious!  Despite all of the FASB’s rules and criteria in ASC 860-10, what you really have is an H-P borrowing, collateralized by receivables (remember substance over form)…and after all, if the collateral is insufficient, H-P recognizes a current liability. So, from an analyst, creditor, or investor perspective, I think the proceeds would have been more appropriately reflected as cash proceeds from financing activities.

Oh, and the fact that the amount of receivables “sold” “approximates the amount of cash received,” provides another clue that this is indeed really a short-term borrowing arrangement.  A traditional sale or factoring arrangement would generally include some type of discount or “haircut.”

So, what do I think H-P’s operating cash flows really are?  Take a look at the following schedule.  Simply reduce reported operating cash flows by the proceeds received from the securitized borrowings (“sales”) each year.

H-P OCF file.jpg

As you can see, my adjusted operating cash flow number is significantly lower than that reported.  I also have included a comparative ratio analysis (OCF to current liabilities) to illustrate the impact of the potential overstatement on at least one liquidity ratio, not to mention H-P’s cash conversion cycle.

But enough on cash flows!  What really troubles me is what I found buried in  H-P’s tax note (note 14, page 132).  The Company’s statutory to effective tax rate (ETR) reconciliation, while mathematically correct, is totally misleading.  Why you ask?  Take a look at the reconciliation reported by H-P below:

H-P Tax Rate Reconciliation.jpg

The reconciling amounts reported for 2010 and 2011 are not a problem, but do provide a hint that something is amiss in 2012.  First of all, H-P reported earnings from operations in 2010 and 2011, but losses in 2012.  So how can the Company start its reconciliation with a positive percentage in 2012?  The answer is that it can’t!  Second, H-P incurred and reported provisions for taxes (income tax expense) in all three years.  So, why is the ETR negative for 2012?  Shouldn’t it be positive?  Absolutely!  And you no doubt noticed that an increase in the deferred tax asset valuation allowance for 2012 decreased the ETR, as did non-deductible goodwill…both of these should increase the ETR.

So what’s the impact?  Basicly, all of the signs on the 2012 reconciliation column must be reversed for comparability purposes.  They just make no sense when compared to 2010 and 2011!  H-P’s 2012 reconciliation should have looked like that provided by Kenexa for 2009 and 2010 (note 14, 2011 10K). The statutory federal tax rate should have been reported as negative and the income tax expense as positive!

Kenexa Tax Rate Reconciliation.jpg

It is just unbelievable that with all of H-P’s accounting expertise, as well as that of its auditor E&Y, this sloppy reporting error was not picked up.  Back when this grumpy old accountant was a Big Eight auditor, allowing such an erroneous disclosure to go undetected would have ended one’s career.  My how times have changed…

What’s next?  Well, the SEC needs to add this tax note to its list of restatement issues (accounting errors) for H-P (remember the Autonomy write-offs?).  And of course, there remains E&Y’s obligation to question the adequacy of the Company’s internal controls over financial reporting.  

This essay reflects the opinion solely of the author.

AuthorAnthony Catanach

Honesty is the first chapter in the book of wisdom.

                                             - Thomas Jefferson

Well, it’s a New Year!  Ed’s and my letter to Santa last year was ignored again this year, so I’m taking another angle and bypassing Mr. Claus entirely.  In the hopes of restoring the glory of my beloved accounting profession, I am proposing some New Year’s resolutions for the “major players” and “heavy hitters” in accounting.

The Securities and Exchange Commission (SEC)

Those of you who have been following the Grumpies know how we feel about IFRS…no we are not wild about them.  However, the SEC did do a great job on its Final Staff Report summarizing its work plan for global accounting standards.  However, it apparently missed one big point.  Increasingly, accounting research from across the pond shows that that IFRS has failed to deliver on its promise for one set of accounting standards. Several recent studies (Kvaal and Nobes 2010 in Accounting and Business Research, Vol 40. No. 2 pp. 173-187; and Wehrfritz and Haller, forthcoming in the Journal of International Accounting Auditing and Taxation) report that different national versions of IFRS currently exist which reflect pre-IFRS country-specific national GAAP.  What does that mean?  It means that in Australia, France, Germany, Spain, and the UK, companies that are now using IFRS, continue to use the same accounting policies they used before “adopting” IFRS which were either permitted or required by their own unique national GAAP. So much for the touted benefits of achieving comparability with a single set of global standards.  Instead, the real possibility exists that investors might be misled by the “apparent” uniformity implied by IFRS, when no real comparability exists.  So, SEC…your resolution for 2013 should be not to succumb to the political pressure of those IFRS proponents…those promoting IFRS likely do so for their own monetary gain.  If you don’t believe that, just check out the AICPA’s IFRS website and note all the training and publication opportunities promoted. Please give up on IFRS once and for all.  

The Public Company Accounting Oversight Board (PCAOB)

In a December 2012 speech at the AICPA National Conference, PCAOB Chairman James R. Doty made two huge points with which most of us would agree.  First, “high quality, independent auditing is critical to our economic success” and second, “audit firm culture must support auditors’ work.”  My hope is that the PCAOB’s New Year’s resolution will be to focus its 2013 efforts on three points: promoting high quality audit work, monitoring “real” auditor independence, and incentivizing the development of appropriate firm cultures, but with a more aggressive approach.  What do I mean by aggressive?  Check out the Grumpies’ prior rants in The Auditor’s Expectations Gap where we called for a clearer description of the “audit product” that the Big Four firms currently deliver. Ed and I also provided some clues in Who Really Cares About Auditor Rotation where we outlined some ideas on how to detect audit quality.  Another good start to the New Year would be to release all (both parts I and II) of the PCAOB’s firm inspection reports.  As Chairman Doty indicated, auditors have been inspected by the PCAOB for a decade now.  Time is up for big firm auditors…PCAOB it’s time to play hardball.

The Financial Accounting Standards Board (FASB)

The FASB’s resolution for the New Year should be not to squander their opportunity to improve the effectiveness of financial statement note disclosures via its Disclosure Framework project.  Not surprisingly, the AICPA’s Financial Reporting Executive Committee recently has raised “significant concerns” about the framework, a possible delaying tactic to preserve the status quo for the largest accounting firms and their clients.  As you may recall, the Grumpies worried about whether or not the FASB could “make the ‘hard’ decisions” in Improving Transparency in Note Disclosures.  We actually proposed a few very simple ways to improve the organization and understandability of note disclosures.  Yet, the “gurus” at the AICPA continue to be focused on form and process, rather than substance…no wonder the profession is in decline…

The Center for Audit Quality (CAQ)

This organization’s resolution for the New Year is relatively simple and straightforward: it should dissolve itself! It is no surprise that the so-called  Center for Audit Quality (CAQ) is headquartered in Washington, D.C., after all it is little more than a formal lobbying and/or marketing group for the largest public accounting firms and the American Institute of CPAs (AICPA). Interestingly, the CAQ is “affiliated with the AICPA.”  One wonders why the CAQ’s membership can’t work through the AICPA, and one of its sections or committees…why is the CAQ necessary?  If you think I am being too hard on the CAQ, just check out the “rigor” in its publications…my personal favorite is “Deterring and Detecting Financial Reporting Fraud”…long on concepts, short on detail. Maybe this is why the PCAOB is finding so many errors in its public company auditor inspections…

The Big Accounting Firms

The big accounting firms should resolve to redo their budgets for 2013.  Here are a couple of recommendations:

  • Plow the money you save from dissolving the CAQ into creating a new audit model that works.
  • Don’t build brand awareness through professional golf tournament sponsorships.  Use the monies you save to create a new audit model that works…now that would build brand awareness!
  • Stop contributing money to academic organizations and universities and invest it in something with a real payoff…the academics will continue to send you their students regardless of your funding.  Use the monies you save to create a new audit model that works.
  • Stop wasting your limited funds on student recruiting. Students will continue to seek you out for jobs because you offer the best prospect for their actually paying off their outrageous student loans.  Use the monies you save on recruiting to create a new audit model that works.

Do you sense a common theme here?

National and State Accounting Societies

Yes, this is the first time that one of the grumpies has actually picked on this poor group of accountants which includes the AICPA, Institute of Management Accountants (IMA), American Accounting Association (AAA), and a host of state CPA societies.  That’s because their situation is just so dire.  These organizations are finding it increasingly difficult to justify their existence in the face of rising costs (and dues) and increased competition for services they once exclusively offered to their members.  In short, it is unclear what the value proposition of these organizations is in today’s society.  Take the case of the AICPA.  The organization has largely been relieved of its rule-making authority by the FASB and PCAOB.  More troubling is its recent desperate attempt to poach IMA membership through its introduction of the Chartered Global Management Accountant designation.  And a quick review of its website (as well of those of most state CPA societies) reveals that this organization is mostly about publications and professional development…not even insurance sales make the homepage anymore. And membership pressures plague state accounting organizations as well, prompting them to search for ways to broaden their bases, including eliminating experience requirements to become licensed CPAs.  While this might bring industry, governmental, and academic accountants into their societies, have these organizations considered the “unintended consequences?” Most of these organizations will NOT be around in 20 years (by then the old guys in my generation will be long gone having dramatically shrunk their membership rolls).  So, in 2013 this segment of the profession should resolve to figure out how they will add long-term value to their members (which by the way overlap SIGNIFICANTLY, if not entirely).

Well, not a chance you say?  I remain hopeful for these resolutions.  After all they don’t appear on the top 10 commonly broken New Year’s Resolution list…unless you consider a “new audit model” learning something new.

This essay reflects solely the opinion of the author.

AuthorAnthony Catanach
2 CommentsPost a comment