Pathways Discussion Page

engaging the broad accounting community

This is a public committee  publicRSS

discussion

    Julie Smith David
    Feedback from John M. Wachowicz
    discussion posted August 20, 2010 by Julie Smith David, last edited February 10, 2012 
    1004 Views, 2 Comments
    discussion:
    Feedback from John M. Wachowicz
    details:

    Given your interest and position in strengthening accounting education, I thought I would share one thought with you. That is, that understanding accounting entries can lead to a greater understanding of accounting.

    In Strategic Finance magazine recently there was an article that I found very interesting: See: http://www.imanet.org/PDFs/Public/SF/2010_08/8lawson.pdf

    Lehman’s Shell Game: Poor Risk Management  By Saurav K. Dutta, CMA; Dennis Caplan, CMA, CPA; and Raef Lawson, CMA,  CPA, CFA
Lehman’s precipitous fall that began in 2008 ended in bankruptcy.  The 2006 strategic shift from a low-risk brokerage model to a high-risk, capital-intensive banking model burdened the company with dangerous illiquid assets, and then the subprime crisis exploded. What followed was a sophisticated implementation of Repo 105 and 108 transactions to cloak the true condition of the company’s worth. The authors analyze the legality and ethics of the accounting practices during the fall.

    I e-mailed the authors to compliment them on their article and their judicious use of 4 sets of journal entries that made some of the author's points come to life for me. They all e-mailed me back and said "thanks" plus they were especially glad that I liked the use of journal entries. They had debated whether to include them or not -- knowing that professional articles nowadays generally do not include journal entries.  Ultimately they decided to include them anyway because they thought they would prove useful. And, to me they did.

    I know that accounting education today neglects journal entries -- for the most part. And, maybe that line of thought should be reconsidered.

    Ta ta 4  now!

John

 
 

    John M.  Wachowicz, Jr., Ph.D.,

    CPA
Professor and Regions Bank Scholar

    The University of Tennessee

    Department of Finance – 438 SMC
916 Volunteer Blvd.

    Knoxville, TN 37996-0540

    Comment

     

    • Bruce K Behn

      John,

      Thanks for taking the time to post your comments--it is greatly appreciated.  We will be reading this article.

      Bruce

    • Robert E Jensen

      "Making Sense of the Ernst & Young Defense," by Caleb Newquist, Going Concern, December 23, 2010 ---
      http://goingconcern.com/2010/12/making-sense-of-the-ernst-young-defense/ 

      Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

      E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

      In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

      After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

      Weil says E&Y is missing the point entirely:

      That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

      In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

      The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

      The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

      In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

      “If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

      “Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.

      Also see
      "The Case Against Ernst & Young: NY AG Cuomo Sues Over Lehman," by Francine McKenna, re:TheAuditors, December 22, 2010 ---
      http://retheauditors.com/2010/12/22/the-case-against-ernst-young-ny-ag-cuomo-sues-over-lehman/

      The State of New York's filing against Ernst & Young ---
      http://goingconcern.com/2010/12/lunchtime-reading-the-complaint-against-ernst-young/#more-23070

      Professor Mark Zimbelman and his son (accounting PhD student at Illinois) don't think the State of NY has much of a case against Ernst & Young ---
      http://fraudbytes.blogspot.com/2010/12/more-on-ernst-and-young-and-lehman.htm

      Francine on the other hand
      "Fraud Happened. The No-Account Accountants Stood By," by Francine McKenna, re: The Auditors, April 18, 2010 ---
      http://retheauditors.com/2010/04/18/fraud-happened-the-no-account-accountants-stood-by/

      Bob Jensen's threads on Lehman's Repo 105/108 transactions are at
      http://www.trinity.edu/rjensen/Fraud001.htm#Ernst