UBS Goes Rogue: What Else Are Bankers Hiding In Their Drawers?
Green's Forbes blog. December 23, 2010
Auditors share some blame for the meltdown
This week, New York Attorney General Andrew Cuomo has filed a law suit against Ernst & Young, accusing the accounting firm of allowing Lehman's use of "Repo 105." This accounting scheme allegedly moved assets off Lehman's balance sheet temporarily, masking its poor financial situation. These accusations aren’t surprising, in my opinion. I left that firm decades ago because it wanted me to sign off on an audit item that I thought was wrong.
With Lehman, either E&Y was pretty lame, or it pushed the envelope of interpretation, or it held its thumbs up to save Lehman. Auditors face a difficult decision when the going gets tough, with the “going concern opinion.” If they issue the thumbs-down going concern opinion, it’s often lights out. Who wants that responsibility? But that’s how auditors earn their salt, so they need to man up.
The big four accounting firms have grown to be like big, bad global corporations dominating too much. They are “too big to fail” in a sense too. After the demise of Arthur Anderson over the Enron saga, if E&Y goes away too, who is left to audit the world? These big firms know they’re needed and play fast and loose at times with going concern opinions and accounting standards and rules. They figure they can handle the fines just as the big banks do.
How could Dodd-Frank think it was addressing Fin Reg without addressing too-big-to-fail in accounting firms too?
Repo “sales” – blatantly hiding debt off the balance sheet – kept Bear Stearns, Lehman and Greece, among others, afloat for a long time before failure or meltdown. Banks use phony repos for financial reporting “window dressing” which implies it’s just a little lie. The reality is, it’s anything but that.
It’s very easy for banks, financial companies and governments to use phony repos along with real repos. Simply find another bank to offload some debt and claim it’s a repo sale. It appears to be normal banking, whereas it would stick out like a sore thumb for non-financial companies.
Daily significant repo financing was the life-blood of Bear Stearns, as explained by William Cohan in his fascinating book on Bear Stearns, House of Cards. Every day, the Bear repo desk had to keep the firm alive with new overnight repo financing, or it was out of business so to speak. Whoever understood that Bear’s finances were so precarious? And those were the real repos, not including the phony repos used to hide debt.
For auditors to say they did not focus on repos would mean they didn’t understand how banks live – relying on daily financing – and how they use repos for window dressing and to cheat financial statement users by hiding debt.
Cuomo’s complaint against E&Y is very telling. The complaint alleges E&Y knew full well what was going on with the repos and insisted on covering itself by having Lehman obtain a shady legal opinion letter. The UK legal opinion was only for UK repos, yet E&Y apparently used the opinion for U.S. repos, too. Shopping for shady legal opinions was at the epicenter of the tax shelter calamity on “financial products.” The verdicts in those older tax shelter cases came down this past year.
There are no excuses here. Auditors helped the financial companies forestall reporting problems, which led to a bigger meltdown later on. The auditors and investment banks (like Goldman) did the same in Europe, helping Greece and other PIIGS. The ECB made this claim early on but won’t reveal more, hiding it from the fragile European debt markets. That’s why Bloomberg News recently sued the ECB to uncover the Greece repo and swap story.
U.S. and UK governments know about the repo abuses, but they don’t want to bring legal action against auditors and investment banks until the fragile markets recover. That’s why the E&Y case is just surfacing now, after Wall Street recovered somewhat. Greece and the European debt markets have not recovered so they will probably keep it under wraps longer. Germans will tar and feather these abusers later on.
As a CPA, I can tell you this repo/debt hiding stuff is outrageous and offenders need to go to jail. Audit firms need to be disbanded and downsized. Auditors can’t be paid by management and report to boards. We need a public trust and new system of audit engagement.
Accounting should not be a game of trickery and deception; it should consist of good old-fashioned honesty and accurate reporting. We need more bean counters and fewer accountant tricksters acting like investment bankers and financial engineers.
December 20, 2010
The value of a good CPA firm
This tax season, consider using a CPA firm, knowledgeable in trader tax. A tax storefront doesn’t know trader tax, and other firms on the trader tax circuit may not always be CPAs and may act contrary to the professional and ethical standards applicable to CPAs. Commercial providers promising tax relief on TV may not always deliver what they promise. Don’t fall for deceptive marketing statements and listen to slanderous statements about good providers.
CPAs are bound by a code of ethics. They can’t make improper marketing statements; they must disclose commissions and other relationships to their clients. There are others on the trader tax circuit who are not CPA firms and who make outlandish, untrue statements. They pay universities and schools commissions for services from their clients without disclosing it. If you’re a trader, you need the right advice from a trusted provider so you can be sure you’re not going to leave any money on the table this tax season or get into trouble with the IRS.
If you find a CPA who knows trader tax, make sure he or she is dedicated to trader tax services rather than trading for his or her own account and preparing tax returns as a side business. It's a disadvantage to engage a CPA sole practitioner more focused on day trading than your tax needs. If you have trouble reaching these CPAs during trading market hours, you might be dealing with a part-time CPA, so think twice about entrusting your taxes with this person. Just because they understand how to day trade doesn't necessarily mean they're a better trader tax preparer -- it just means they have more distractions.
Another important advantage of using an established, trader tax CPA firm like ours is that all of our tax returns are reviewed by another CPA to give you the best possible advantages. A CPA sole practitioner's work is rarely reviewed by another CPA, so you're dependent on their expertise alone.
You deserve better customer service and more accurate tax preparation and planning results than you can get from either of the scenarios above.
Dangers of non-CPA firms
For example, some non-CPA firms promise education deductions 18 months before the start of business — which is improper. They promise business deductions when you don’t have trader tax status. They say you can’t use trader tax status after the fact as an individual — that’s wrong. Their non-CPA salesmen make wild statements about the law and what they can do for you. They might have one or more CPAs on their roster, but the owners of the firm and salesmen are not CPAs and are not bound by a code of ethics. You’re comparing apples to oranges when you compare those types of providers to a good CPA firm qualified in trader tax. One firm respects a CPA code of ethics, which is a good thing. And the others can make wild statements, so you need to choose accordingly.
Again, these storefront providers don’t know trader tax, and rarely work with a CPA. Software can be good, but it doesn’t have guidance on trader tax — software has trouble with forex, futures, short sales, and more. We do offer tax guides for people who prefer self-preparation, and our trader tax prep service we believe is the best around. We have competent, highly trained CPAs on our roster and ownership, and we’ve been leading the industry in trader tax content, knowledge and track record. We don’t engage salesmen, and we don’t sell you stuff you don’t need. When we say we have had very few trader tax exams, you can count on that statement. When another firm says it has had zero exams and lies about our record, don’t believe it. Choose right, because it’s not just tax savings at stake — there could be tax trouble ahead. You don’t want to go into an exam with incorrect law applied and face potentially large problems with the IRS. That’s the value of a good CPA firm. If you go to a doctor, you go to one that has a license. If you need a lawyer, you seek one with the proper license. If you need an accountant for your important taxes, we think you should find one with a valued CPA license. Here’s more info about the AICPA Code of Professional Conduct.
When comparing to the storefront, also consider that many local CPA firms are experts in other areas; the great majority aren’t familiar with online traders, the various elections, nuances and strategies that we focus on as our main area of expertise. We’re a virtual firm. No matter where you are in the country, you can easily work with us. Why not choose our service over a local CPA firm that doesn’t have the knowledge and experience you need for trader tax?
Think smart this tax season.