If you are a registered user please log in to see more postings.
 

The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Subscriptions to full posts available for $500 annually.
AAO Weblog (Public)
Author: Jack Ciesielski Created: 10/13/2006 2:54 PM
The AAO Weblog is a weblog published by Jack Ciesielski , dealing with accounting issues and news topics related to investment and finance.
Lease Restater Roll Call, 4/29/05
By Jack Ciesielski on 4/29/2005 7:02 AM
We're doing things a little differently today.

You may have noticed that the weblog postings have been a little light in the past week. (I hope you still find them useful, though.) That's because I've been working on a major report for The Analyst's Accounting Observer, which is what pays the bills. It's one of those pieces that requires total immersion, or it never gets done. And being as how the report dealt with stock options and restricted stock in the S&P 500, I was anxious to get it done as soon as possible.

So, lately, I have not been able to keep my accounting antenna very high. And my office looks more like a giant rat's nest than usual, filled with stuff that's been put off over the last couple of weeks THAT MUST BE ATTENDED TO NOW. So, I hope to clear it up in the next day or two and get back to a normal level of weblogging. Soon.

Anyway, about the lease restater roll call: just a quick update. Only seven new faces this week: Ace Cash Express, Alberto-Culver, Allied Domecq, Alltel, Bebe Stores, Kelly Services, and Wet Seal. That brings the total up to 268. No complete update today, just the names.

The pace has definitely slowed down. Unless things pick up again, I will be posting the complete roll call only twice a month - at mid-month and at month-end. Let's hope that soon there's no reason to continue posting it at all.
Late To Accelerate
By Jack Ciesielski on 4/28/2005 7:02 AM
On April 14, the SEC overrode the FASB on the implementation of Statement 123(Revised), making it effective for calendar year registrants in 2006, while fiscal year filers still had to implement it.

Prior to the SEC's interference, there had been a run on accelerating the vesting of underwater stock options: managements clearly had wanted to eliminate as much future expense as they could. They coaxed their boards into approving early vesting acceleration to push all the associated option compensation into the footnotes before Statement 123(Revised) went effective.

Once the SEC's action was announced, there was a decrease in the volume of companies hitting the accelerator. They might be postponing work they intend to do later; or they might believe that the SEC's action might lead to a more permanent ditching of the standard.

A week after the SEC's interference, however, a couple of smaller firms announced accelerations: one which made complete sense (from the point of view of someone trying to evade accountability, that is), because it has a June 30 year end and will have to employ Statement 123 (Revised) quite soon. That firm was little SBS Technologies. Interesting phrasing in their 8-K on the rationale for the move: "In response to SFAS 123R, on April 21, 2005, the Board of Directors of SBS approved the acceleration of the vesting of all outstanding unvested stock options with an exercise price greater than $9.22 (the Acceleration)...SBS' decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the effective date of SFAS 123R on July 1, 2005 in connection with outstanding unvested stock options issued to employees."

No bones about it. "We did it because we don't like 123R."

The other acceleration took place on the same day as SBS Technologies' at somewhat larger Sinclair Broadcast Group. And their rationale was almost as forthright: "The decision to accelerate the vesting of all unvested options, which the Company believes to be in the best interest of its shareholders and employees, was made primarily to reduce compensation expense that would have been recognized in future periods following the Company's adoption of Financial Accounting Standards Board Statement No. 123, “Share Based Payment (revised 2004)” (“FAS 123R”)... The acceleration of vesting will reduce the Company's compensation expense related to these options by $0.8 million (pre-tax) in aggregate for the years 2006 through 2008, the original remaining vesting period."

Every penny counts. At least when it comes to not recording compensation expense.

Will companies continue their acceleration binge? There'll probably be a steady stream of the fiscal year companies accelerating them; there's yet to be acceleration news from one of the really big fiscal year "expensing opponents" like Cisco. If something like that happens, there's bound to be a flood of "me too" actions. For now, though, it looks like the calendar year companies are taking a rest - Sinclair, so far, is an outlier. Maybe the calendar year firms will continue to rest until the fourth quarter, if it looks like Statement 123R is going to live. And a lot of that will depend on how well HR 913 does between now and the end of Congress.


Deloitte In The Doghouse
By Jack Ciesielski on 4/27/2005 6:40 AM
Yesterday, Deloitte announced its settlement with the SEC for its role as auditor in the Adelphia Communications and Just For Feet frauds. That press release is quite a bit different in tone from the SEC's release on Adelphia and Just For Feet; it all depends on your point of view.

The Deloitte version of the event focuses on "global" blame. According to Deloitte USA CEO James Quigley: “These cases raise a larger issue facing the auditing profession. Among our most significant challenges is the early detection of fraud, particularly when the client, its management and others collude specifically to deceive a company's external auditors. Deloitte & Touche LLP has implemented, and will continue to implement, a number of additional improvements in its policies and procedures for auditing clients in its risk management program and to aid in uncovering fraudulent activity in a more timely manner.”

And the SEC was unsparing in its criticism of Deloitte's failings. Regarding Adelphia: "What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset. When auditors turn a blind eye toward misconduct on a high-risk client and allow a fraud of this magnitude to go undetected, the consequences will be severe." Regarding Just For Feet: "Auditing firms and their personnel are responsible for exercising professional care and maintaining skepticism in auditing financial statements, particularly when the company is identified as having a high risk of potential fraud... Shareholders depend on auditing firms as a check on the honesty of management. They are expected to respond appropriately to wrongdoing, adequately test the claims made by management and complete the work supporting the audit before issuing an audit report."

That Deloitte press release is actually Round Two. The Wall Street Journal carries a very interesting account of the difference between the first version and the current one.
It Happened In Coudersport
By Jack Ciesielski on 4/26/2005 6:33 AM
Yesterday, the SEC and the United States Attorney's Office announced a settlement of $715 million in the case of Adelphia Communications, to be paid to a victim's fund. The case of Adelphia was one of the largest financial frauds to take place in a public company; it's a testament to the strength of the underlying business that there was anything left to sell to Time Warner and Comcast.

Lest you forgot, a brief refresher of what went on at Adelphia's home base in little Coudersport, Pennsylvania, from the SEC news release: "Adelphia, at the direction of the individual defendants: (1) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them on the books of off-balance sheet affiliates; (2) falsified operating statistics and inflated earnings to meet Wall Street estimates; and (3) concealed rampant self-dealing by the Rigas family, including the undisclosed use of corporate funds for purchases of Adelphia stock and luxury condominiums."

Not the kind of stuff that outsiders could detect too well. And not the kind of stuff the auditor, Deloitte & Touche, detected too well. According to the Wall Street Journal, D&T will announce today the payment of a $50 million fine for failure to detect the ongoing fraud.

Next time you hear someone complain about current audit fees, keep this case in mind. If the auditors are truly auditing the client, it's worth paying up.
Donaldson Meets McCreevy
By Jack Ciesielski on 4/25/2005 7:25 AM
Things are heating up in the area of international convergence of accounting standards. SEC Chairman William Donaldson met with the European Union's chief of internal markets, Charlie McCreevy last Thursday: the topic was setting a timetable for the day when foreign filers no longer have to provide a reconciliation of their foreign-basis figures to U.S. GAAP amounts.

Their goal: to eliminate that requirement for foreign private issuers using International Financial Reporting Standards as early as possible between now and 2009 at the latest.

An admirable goal, and one that will take hours of review and haggling over adjusting US and IASB standards. SEC chief accountant Don Nicolaisen gave a speech at Northwestern University on the plans he and his staff have developed for making this happen - down to a detailed "convergence roadmap." If you're an investor, be grateful; you're going to be able to process more information with less effort once this is done. If you're an accountant with an interest in international reporting, be grateful too. Your job security is assured.
Lease Restater Roll Call, 4/22/05
By Jack Ciesielski on 4/22/2005 8:29 AM
If you looked at this before 10:27 East Coast time, please take another look. The information about auditor changes has been pulled: please ignore it if you already saw it. It turns out that some of the auditor changes mentioned took place before the lease revision announcement. I hope to have it back next week in better form. And now... we return you to your regularly scheduled program.

Another Friday, another Lease Restater Roll Call...

Cumulative count through 4PM, Wednesday: 261. New faces in the line-up since last week include Dollar Tree, Goody's Family Clothing, KeyCorp, National City, Neiman Marcus, Regis Corp., RF Micro Devices, Sbarro, Sports Club Company, Stater Brothers Holdings, SuperValu, and Vimpelcom. The pattern remains pretty much intact: most new additions were retailers. But there was a little more variety than usual: two banks (KeyCorp, National City) and a health club operator (Sports Club Company). Award for outlier of the week goes to RF Micro Devices, the first semiconductor company to join the list. The firm's 8-K was spare on details about the nature of the lease corrections to be made.

Industry categories: 144 retailers, 58 in the hospitality industry, 15 in the wireless telecom business, 7 real estate enterprises, 5 in banking/finance, and an assorted 32 others comprised the 261 total companies.

Types of lease accounting errors: There were 155 instances of errors relating to rent holidays, 96 errors tied to construction allowances and 93 errors related to mismatch of lives or lease terms. (For a refresher on the different kinds of errors being reported, link here. For an explanation as to why "rent holiday" errors are most common, link here. )

Auditor headcount: When the lease accounting revisions were announced by firms, Deloitte & Touche were the auditors for 69 of them; Ernst & Young, the auditors for another 69 of them; PricewaterhouseCoopers was the auditor for 57 firms; KPMG, another 54 companies; BDO Seidman, 5 firms; Grant Thornton, 2 of the firms; and the remaining 5 firms were audited by non-national firms.

Human costs: At least one CFO has had enough. Outback Steakhouse's CFO retires after "lunacy over lease accounting took me past the breaking point," reports the San Jose Mercury.

Now, the main event: the 261 companies that have restated, made catch-up adjustments or are in the process of reviewing their accounting. The usual disclaimer: no assurances are given that this is the entire universe of lease-challenged companies; it's strictly a best-efforts attempt.















Buca
Denny's
Harold's Stores
Macerich
Phillips-Van Heusen
Stein Mart

Buckle
Deutsche Telekom
Hastings Entertainment
Main Street Restaurant Group
Pier 1 Imports
Stride Rite

Buffalo Wings
Dick's Sporting Goods
Haverty Furniture
Marlin Business Services
Portola Packaging
SuperValu

Build-A-Bear Workshop
Diedrich Coffee
Healthcare Realty Trust
Marsh Supermarkets
Powell Industries
Talbots

Burlington Coat Factory
Dollar General
Heritage Commerce
May Department Stores
Ramco Gershenson
Target

Cache
Dollar Tree
Hersha Hospitality Trust
McCormick & Schmick's
Red Robin Gourmet Burgers
Texas Roadhouse

California Pizza Kitchen
Domino's
Hibbitt Sporting Goods
McDonald's
Regis
TJX Cos.

Cambrex
Dress Barn
Highwoods Properties
Men's Wearhouse
Restaurant Co.
Too

Carrol's
Duane Reade
Hollywood Entertainment
Michael's Stores
Restoration Hardware
Total Entertainment Restaurant

Cato
Duckwall-Alco Stores
Hot Topic
Monro Muffler Brake
RF Micro Devices
Toys 'R Us

CBRL Group
EGL
Hudson's Bay
Morgan Stanley
Richardson Electronics
Tractor Supply

CEC Entertainment
El Pollo Loco
More...
Doral Revisits Securitizations
By Jack Ciesielski on 4/21/2005 6:25 AM
It's been a while since we tuned in the restatement channel, so let's pull away from the SEC settlement blitz for a bit. An interesting sort of non-reliance 8-K was filed yesterday by Doral Financial, a diversified financial services company. Nifty little company: it's the fourth largest commercial bank in Puerto Rico, and the largest mortgage banker there, too; it also has a presence in New York it's aiming to grow. At $15 billion in assets at year end 2004, it's not an insubstantial player. And being a mortgage banker, the firm employs loan securitizations to loosen up cash for further investment.

The reason for the non-reliance notice was due to the determination that the wrong interest rates had been used in estimating the fair value of the firm's floating rate interest-only securities. IOs, as they are known are extremely sensitive to changes in interest rate assumptions because, as their name implies, they aren't anything but interest. The firm decided that rather than using contractual rates or actual 90-day LIBOR rates at the end of each reporting period, it should be valuing the IOs with rates embedded in the forward yield curve. (Which makes sense: if you're trying to come up with a fair value for an IO, it would be logical to use the same interest rates the rest of the world would use - which is what's shown in the market's yield curve.)

Switching to the forward yield curve will make for an adjustment that will be reflected as a restatement of prior periods, not as a catch-up adjustment. And it might report a material weakness in internal controls as of year end 2004; the firm isn't sure yet.

Doral isn't the only firm to rethink its securitizations this year: it joins Countrywide Financial, Providian Financial and last but not least, Fannie Mae. Interest rates have been building this year, too; they might be forcing more critical reviews of securitization policies. Keep tuned.