Professor Elam

Luckin Coffee Defaults

Monday April 16 2020

The CEO of the China equivalent of Starbucks, Luckin LK, has defaulteed on hundreds of millions of dollars in loans.

Seems the management has falsified the revenue for the firm.

For years it has been speculated that Chinese accounting is tantamount to what do you want the number to be. Expect to see much more of this in the developing bear market.

PCAOB Elimination Discussed

Monday March 2 2020

Often the letters section in the WSJ contains some interesting comment of a previous editorial. Last week we noted the Trump administration suggested the SEC 'absorb' the PCAOB. This is typical top of the market thinking, regulations are repealed at market tops. In this case the repeal idea virtually timed with the  29,548 new high.  Here are comments about Arthur Levitt's op ed on the topic

Notice the last letter claims auditors abide by the toughest independent rules of any profession. Well the problems crop up when they don't,  hello Arthur Andersen and Enron and the whole Lehman sub prime mortgage mess.

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Former Securities and Exchange Commission Chairman Arthur Levitt ignores the failure of the SEC, the Public Company Accounting Oversight Board (PCAOB) and my profession (CPAs) in the last financial crisis ("Without an Independent Watchdog, Who Will Audit the Auditors?," op-ed, Feb. 20). The mandatory finger of blame never points inward.

There is a principle of "substance over form" that was supposed to be applied by all the watchdogs, who readily stayed in their respective dog houses. Junk bonds are a useful mechanism in the market, as long as you call them junk. If a collateralized mortgage obligation (CMO) includes a majority of borrowers with a FICO score of two and have unverified income, that sounds like junk to me even with a purchase rating of triple-A. And if they were "insured" with a credit default swap that really wasn't insurance (inadequate reserves to cover potential losses), it was obvious to me that appropriate reserves should have been required (50%, 85% or 100%) to carry these fallacious assets. How many of these CMOs would have been sold if the purchaser could only have them on their books at 15% of their purchase price? I suspect very few, and the accumulation of those garbage loans would have died on the vine.

Technically, all the "loans" were legal, but if the watchdogs had done their jobs, the market would have corrected itself. The critical responsibility of the accounting profession and the SEC is the proper application and valuation of all accounting principles to insure market stability. I blame the SEC and the accounting profession for looking the other way. More bureaucratic oversight wouldn't have been needed if Mr. Levitt's successors had only done their jobs.

Dan Webb

Reno, Nev.

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Mr. Levitt suggests that the semi-independent PCAOB is preferable to the SEC absorbing the board. The inherent conflicts noted by Mr. Levitt remain under either arrangement.

A significantly better (honest and ethical without conflicts of interest) arrangement is to have truly independent auditors. All we need is the major pension plans and institutional holders to insist that any organization in which they hold stock be audited periodically by a truly independent auditor. Most of the periodic scandals to which the Big Four subject stakeholders would disappear.

Em. Prof. J.H. Heizer

Texas Lutheran University

Camp Verde, Texas

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Auditors abide by the stiffest, most comprehensive independence rules of any job in the private, public or nonprofit sectors. Instead of attacking them, Mr. Levitt's advocacy for the PCAOB would be more credible if he explained what has been achieved during its 18-year tenure. Maybe what's really needed is an audit of the auditors' auditor.

Edward Abahoonie

Sparkill, N.Y.

Who Will Audit the Auditors?

Thursday Feb 20 2020

Arthur Levitt, former SEC Comm. questions Trump Admin idea to eliminate the PCAOB.

As I have noted in socionomic presentations, the regulations come off at market tops, akka  29,000. the regulations go on

at market bottoms as in after the Enron Worldcom fiasco. SARBOX was passed 99-0 in the Senate after the Enron collapse. Accountants lost their right to self regulate. Instead the Public Company Accouniting Oversight Board PCAOB was created to be a watchdog on public audits. The PCAOB regularly sample public audiits and rates them.  Regularly the so called Big Four as Arthur puts it fail these tests.

This should be a topic of lively debate in the profession.

 

full text of article

 

 

The Trump administration is calling for the Securities and Exchange Commission to absorb the independent Public Company Accounting Oversight Board. The president's budget proposal says this would reduce duplication of function and regulatory ambiguity.

Yet sometimes the government we seek to erase exists for a very good reason -- we just have to recall why it's there.

The PCAOB was established by law through the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley passed the Senate 99-0 and the House by 423-3 in the wake of accounting-related scandals, including Enron and WorldCom, that led to trillions of dollars of investor losses and the bankruptcy of a once-venerated auditor, Arthur Andersen LLP.

With the trauma of fraud and the burst dot-com bubble fresh in their minds, legislators and the Bush administration sought to draw up regulations for the previously self-regulating audit profession. One result was the PCAOB, a nonprofit organization, which reports to the SEC but is otherwise independent. It conducts regular oversight of auditors, the ones who are supposed to conduct oversight of public companies. Why do auditors need auditing? Because auditors make mistakes -- some of commission and some of omission. Auditors can be sloppy. Auditors can be gullible.

Auditors, in short, are not all-knowing. More critically, they often work for larger organizations that sell other professional services, such as advisory, tax and information-technology work. The so-called Big Four auditors -- Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG -- all boast significant non-auditing business, which are growing sources of growth and profit, and a majority of revenue.

By comparison, auditing is a prosaic, slow-growing business. The result is an imbalance of power within the firms: Audits may be how they're best known, but other services are more important to their business. What, therefore, is to prevent an auditor from softening a judgment on a company's questionable accounting practices if the client is dangling non-audit work? The incentives create a conflict between the interests of the auditor and those of investors.

When I was chairman of the SEC in the 1990s, I called attention to this problem. Auditors, I argued before the dot-com bubble burst and the Enron and WorldCom scandals emerged, are critical to the trust that is at the heart of our financial system. "Sound and verifiable financial reporting is to financial markets what oxygen is to breathing," I said in a Senate hearing on auditor independence in September 2000. That's why Congress had long held public accountants responsible for upholding their independence -- both in reality and in perception.

It's not enough to be independent of other considerations in performing the audit. Investors must also have confidence in that independence. The auditing profession's failure to meet that expectation in the late 1990s is why the PCAOB was created.

That is not to say the PCAOB's work has been spotless. Critics say, with some merit, that the board could be far tougher. Fines are relatively minor, and auditors rarely pay the most unpleasant price -- bad publicity -- when they do a sloppy job. In addition, from the beginning, the SEC's nominations to the PCAOB and supervision of the board's performance under Sarbanes-Oxley has fallen short when it comes to objectivity, independence and improving audit quality.

But the PCAOB is, on balance, a very good thing. Consider the attention auditors pay to quality-control reports issued regularly by the PCAOB. When the board pegs an audit firm in a quality report, it's usually because of significant and serious concerns about accuracy and effectiveness. The result is a thorough review of the engagement, the lead partners and whether audit processes followed standards or deviated from them. Audit firms take these matters seriously, as they should.

Abandoning the PCAOB would disrupt investors and markets. It would likely undermine confidence in the audit profession itself. After all, the PCAOB is primarily funded through an "accounting support fee" on public companies and brokers, and there has not been an investor organization I know of that has called for the PCAOB to be abolished.

Would the SEC be able to command the same respect as the board? No. The commission's mandate is already full, and to meet the expectations set for the PCAOB would require an expansion of staff and expertise not currently funded by the Trump administration's budget proposal.

This is an unserious proposal, and I urge Congress to reject it and thereby affirm that the PCAOB plays a vital role in our financial-market regulatory structure. We know what happens when we ignore the importance of auditor independence because we've seen it. No one wants to see it again.

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Mr. Levitt was chairman of the Securities and Exchange Commission, 1993-2001.

SanAntonio Dr. Guilty of $325 M Fraud

Wed Feb 19 2020

A San Antonio Dr was found guilty of a $325 M fraud for false diagnosis.

Do you suppose this 63 year old just began a crime spree at this age, or a few years back?  Of has he been working up to this over the years?

Doug Hodge Wishes He Had Never Met Rick Singer

Monday Feb 10, 2020

An op ed on Page A 19 of today's WSJ.

is authored by Doug Hodge, who WAS CEO of Pacific Investment Management Co or PIMCO, the giant bond and stock investment house.

Mr. Hodge has been sentenced to nine months in prison for paying Rick Singer and others $850,000 to asecure admission of one of his children to shUSC and Georgetown.

IN the article he claims college donations are an unfair admissions policy, but he did it anyway. He then claims he thought his payment to Singer went to an underfunded athletic program

Huh

does anyone think anything at USC or Georgetown is underfunded?

And why wasn't the payment made to the university?

And he admits it was a scheme to provide his kids with a false athletic brank

 

Yet he claims he was duped, gee we give to so many causes this just sounded like the rest

Oh please and you were CEO of PIMCO?

I am not buying this I never saw it coming excuse. This is why I required students to read Emerson's essay on Self Reliance.You are in charge of you.

DC Solar Fools Berkshire Hathaway

Weekend Jan 26 2020

 

DC Solar solutions attracted $340M from Berkshire Hathaway.

Decades ago Warren Buffet turned Gates down on Microsoft saying he did not understand it.  Gee Warren, MSFT was pretty straightforward they wrote sofware. 

DC Solar Solutions provided solar generators for cell towers for phones and lighting at sporting events, or so they said. And you got a 30% tax credit for investing. Warren, better run these ideas by Barack Obama who created the framework that allowed this to happen..

$140 M was siphoned off for fancy cars and such, $500 M has been recovered.

I have to wonder if a stock market top is nearing if Buffet can be persuaded into a flimsy scam like this.  Remember maximum mood occurs at the end of a stock market move.

The Ethics of Rhetoric

Wednesday January 22 2020

One of the popular series on Amazon Prime is the Marvelous Mrs. Maisel. It is the story of a 1958 house wife, mother of two kids, whose husband divorces her. She becomes a stand up comic.   I love the period pieces, the clothes, the cars,  the interiors, the props

but not the language.

 

Within eight hours of his announcement she is in a comedy club doing a faux Lenny Bruce routine complete with the four letter language. And it is not just her, everyone in the cast is talking this way,, all the time.

I am no prude but

Folks did not curse a stream back then and certainly not a Richard Pryor F bomb stream.

Yes I lived through that era and not people did not talk that way.

I rented a copy of IT Chapter II from the library. When the movie was announced two years ago, I bought a made for TV mini series off Amazon. While I had not read the lengthy book, it appeared to track the book and I Bought it a great job, especially on a low budget.

As the newer version progressed I could anticipate what would happen. But  it was clear the first ten minutes this was a very different version of Derry, Maine.  No one in the cast  of now grown kids missed the chance to insert an F Bomb, usually multiple times, in their comments. Huh, this was not in the first movie  and I doubt in the book.  King the author states you can tell a lot more to the reader by letting your character talk than by describing the character.

Such talk is now common among so callled rappers.   All of this goes back to Richard Pryor's act in 1973-74 at the bottom of the  1968-1982 bear market.

What say you, have we made vulgar language so common place it loses its meaning, and now that is the norm?

 

AnotherEntry for Who's the Worst?

Thursday Jan 16, 2020

San Antonio Ferrari totalled a client Ferrari.

Rather than admit the wreck, the dealer who had the car on sonsignment, attempted to get the owner to take a below market price.

Apparently the dealership hoped to close the deal and then collect dealer insurance. But the owners saw the 'buyer' was the dealer.

 

A lawsuit is underway.

As I say, I never run out of new material for our fraud chapters in audit and ethics class..

Words Have Meaning

Tuesday Dec 10, 2019

The Republicans made a huge mistake in attempting to 'impeach' Bill Clinton when they did not have the votes.

It would be only a matter of time until the power shifted and sure enough, the Dems want to impeach  Trump, without having the votes.

Now a Congressman suggests that if Biden wins, we already have the forms to impeach him.

Louie Gohmert a former Dist Judge and Aggie Corps member, says he is worried for the country. I agree,  now that impeachment has been lowered to the level of a traffic ticket,  do we have I don't like this guy or gal, let's tart iimpeachment inquiry with the hope we can ruin his or her reputation without ever actually proving anything.

Negative mood abounds.

Emerson on Gifts

Posted Friday Nov 15, 2019

Emerson wrote this essay in 1844 but quite a few lines are as relevant today as then. I have posted this essay for many years but the last few were before Black Friday. Black Friday is of course our National Day of Orgy Shopping.   Shoppers line up in the early hours vying to get the bargains retailers set up by the hour. Violence and fights have been known to occur.

Arnold and Sinbad parodied this national main in 1966 Jingle All the Way

contrast the theme of that movie, the race to find a Turbo Action Man Figurine, with Emerson's suggestions below.

 

 

 

Essays

XIII. Gifts

1844

Gifts of one who loved me,—   ’Twas high time they came;   When he ceased to love me,   Time they stopped for shame.      IT is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay, and ought to go into chancery, and be sold. I do not think this general insolvency, which involves in some sort all the population, to be the reason of the difficulty experienced at Christmas and New Year, and other times, in bestowing gifts; since it is always so pleasant to be generous, though very vexatious to pay debts. But the impediment lies in the choosing. If, at any time, it comes into my head, that a present is due from me to somebody, I am puzzled what to give, until the opportunity is gone. Flowers and fruits are always fit presents; flowers, because they are a proud assertion that a ray of beauty outvalues all the utilities of the world. These gay natures contrast with the somewhat stern countenance of ordinary nature: they are like music heard out of a work-house. Nature does not cocker us; we are children, not pets. She is not fond; everything is dealt to us without fear or favor, after severe universal laws. Yet these delicate flowers look like the frolic and interference of love and beauty. Men use to tell us that we love flattery, even though we are not deceived by it, because it shows that we are of importance enough to be courted. Something like that pleasure, the flowers give us: what am I to whom these sweet hints are addressed? Fruits are acceptable gifts, because they are the flower of commodities, and admit of fantastic values being attached to them. If a man should send to me to come a hundred miles to visit him, and should set before me a basket of fine summer-fruit, I should think there was some proportion between the labor and the reward.	1
For common gifts, necessity makes pertinences and beauty every day, and one is glad when an imperative leaves him no option, since if the man at the door have no shoes, you have not to consider whether you could procure him a paint-box. And as it is always pleasing to see a man eat bread, or drink water, in the house or out of doors, so it is always a great satisfaction to supply these first wants. Necessity does everything well. In our condition of universal dependence, it seems heroic to let the petitioner be the judge of his necessity, and to give all that is asked, though at great inconvenience. If it be a fantastic desire, it is better to leave to others the office of punishing him. I can think of many parts I should prefer playing to that of the Furies. Next to things of necessity, the rule for a gift, which one of my friends prescribed, is, that we might convey to some person that which properly belonged to his character, and was easily associated with him in thought. But our tokens of compliment and love are for the most part barbarous. Rings and other jewels are not gifts, but apologies for gifts. The only gift is a portion of thyself. Thou must bleed for me. Therefore the poet brings his poem; the shepherd, his lamb; the farmer, corn; the miner, a gem; the sailor, coral and shells; the painter, his picture; the girl, a handkerchief of her own sewing. This is right and pleasing, for it restores society in so far to its primary basis, when a man’s biography is conveyed in his gift, and every man’s wealth is an index of his merit. But it is a cold, lifeless business when you go to the shops to buy me something, which does not represent your life and talent, but a goldsmith’s. This is fit for kings, and rich men who represent kings, and a false state of property, to make presents of gold and silver stuffs, as a kind of symbolical sin-offering, or payment of black-mail.	2
The law of benefits is a difficult channel, which requires careful sailing, or rude boats. It is not the office of a man to receive gifts. How dare you give them? We wish to be self-sustained. We do not quite forgive a giver. The hand that feeds us is in some danger of being bitten. We can receive anything from love, for that is a way of receiving it from ourselves; but not from any one who assumes to bestow. We sometimes hate the meat which we eat, because there seems something of degrading dependence in living by it.          Brother, if Jove to thee a present make,   Take heed that from his hands thou nothing take. We ask the whole. Nothing less will content us. We arraign society, if it do not give us besides earth, and fire, and water, opportunity, love, reverence, and objects of veneration.	3
He is a good man who can receive a gift well. We are either glad or sorry at a gift, and both emotions are unbecoming. Some violence, I think, is done, some degradation borne, when I rejoice or grieve at a gift. I am sorry when my independence is invaded or when a gift comes from such as do not know my spirit, and so the act is not supported; and if the gift pleases me overmuch, then I should be ashamed that the donor should read my heart, and see that I love his commodity and not him. The gift, to be true, must be the flowing of the giver unto me, correspondent to my flowing unto him. When the waters are at level, then my goods pass to him, and his to me. All his are mine, all mine his. I say to him, How can you give me this pot of oil, or this flagon of wine, when all your oil and wine is mine, which belief of mine this gift seems to deny? Hence the fitness of beautiful, not useful things for gifts. This giving is flat usurpation, and therefore when the beneficiary is ungrateful, as all beneficiaries hate all Timons, not at all considering the value of the gift, but looking back to the greater store it was taken from, I rather sympathize with the beneficiary, than with the anger of my lord Timon. For, the expectation of gratitude is mean, and is continually punished by the total insensibility of the obliged person. It is a great happiness to get off without injury and heart-burning, from one who has had the ill luck to be served by you. It is a very onerous business, this of being served, and the debtor naturally wishes to give you a slap. A golden text for these gentlemen is that which I so admire in the Buddhist, who never thanks, and who says, “Do not flatter your benefactors.”	4
The reason of these discords I conceive to be, that there is no commensurability between a man and any gift. You cannot give anything to a magnanimous person. After you have served him, he at once puts you in debt by his magnanimity. The service a man renders his friend is trivial and selfish, compared with the service he knows his friend stood in readiness to yield him, alike before he had begun to serve his friend, and now also. Compared with that goodwill I bear my friend, the benefit it is in my power to render him seems small. Besides, our action on each other, good as well as evil, is so incidental and at random, that we can seldom hear the acknowledgments of any person who would thank us for a benefit, without some shame and humiliation. We can rarely strike a direct stroke, but must be content with an oblique one; we seldom have the satisfaction of yielding a direct benefit, which is directly received. But rectitude scatters favors on every side without knowing it, and receives with wonder the thanks of all people.	5
I fear to breathe any treason against the majesty of love, which is the genius and god of gifts, and to whom we must not affect to prescribe. Let him give kingdoms or flower-leaves indifferently. There are persons, from whom we always expect fairy tokens; let us not cease to expect them. This is prerogative, and not to be limited by our municipal rules. For the rest, I like to see that we cannot be bought and sold. The best of hospitality and of generosity is also not in the will but in fate. I find that I am not much to you; you do not need me; you do not feel me; then am I thrust out of doors, though you proffer me house and lands. No services are of any value, but only likeness. When I have attempted to join myself to others by services, it proved an intellectual trick,—no more. They eat your service like apples, and leave you out. But love them, and they feel you, and delight in you all the time.