disparate.info

As the Journal of Accountancy reported yesterday, a Swiss court blocked the release of confidential information identifying the owners of 26 Swiss bank accounts sought in the IRS’ ongoing tax-fraud investigation. Considering that the earlier settlement entitled the IRS to information on 4,450 accounts, this is an almost imperceptible victory for proponents of Swiss bank secrecy. Nonetheless, for the owners of those accounts, the decision is certainly more than welcome.

The ruling, delivered by a Swiss administrative tribunal, determined that simply failing to file an informational form identifying the account owner as a U.S. citizen (IRS From W-9) does not constitute tax fraud. Since the tribunal ruled that its decision could not be appealed, the owners of the 26 accounts in question are, at least for now, safe from further scrutiny, and ultimately, penalties and interest on unreported earnings. As the settlement reached earlier this year between the IRS and Swiss government called for the release of roughly 10,000 names, the IRS will likely let the 26 accounts covered by the Bundesverwaltungsgericht’s¹ ruling in U.S. Taxpayers v. Swiss Federal Tax Administration forgo further investigation. It is unclear, however, whether more of the 10,000 names to be released will benefit from this ruling.

While many decisions made over a number of decades created the circumstances that led to the worst recession since the Great Depression, certain government actions were particularly devastating to the US and world economies. Embodied in the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999), the law made two important changes to the securities regulations enacted in response to the Great Depression.

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The following is a paper I coauthored in December 2006 for a Seminar in Management Control Systems while completing my Masters of Science in Accounting & Taxation at the University of Hartford. Given the recent resurgence of news relating to options backdating, I thought I’d reprint the paper for those who might be interested.

Executive Summary
Stock option backdating is a complex issue. While there are legal ways to backdate stock options, as we found, few companies can properly account for backdated options. As a result, we found that many companies lose top talent, are scrutinized by regulatory bodies, and are subject to fines and penalties. The negative effects on shareholder value are significant cause for concern. Ultimately, the potential gain executives’ reap is far outweighed by the likelihood of detection. Nonetheless, stock option backdating is a prevalent practice. The statistics can be staggering: $5.9 billion in fines, more than 120 companies under investigation. In the coming pages, the history, legal issues, and effects on shareholder value will be explored.

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Today, both Citigroup and Wells Fargo announced plans to repay their TARP funds. Their announcement comes shortly after Bank of America announced its plans to exit the bailout program. Apparently, December is the month for those banks remaining in the program to make their way out.

Could this move have anything to do with the approaching year-end?

Considering that all three have fiscal years ending December 31, 2009, the move is hardly surprising.¹²³ By repaying their TARP funds during this fiscal year, all three can start 2010 free of government encumbrances on executive compensation and the additional oversight that came with the Troubled Asset Relief Program (which, by the way, never relieved [government speak for buying assets from the banks] any troubled assets, but instead infused capital into the banks to prevent their collapse).

In the past few years, much has been made of the plans to merge the accounting standards used in the US with those used by much of the rest of the developed world. In 2002, the US standards setter and the international standards bodies agreed to a framework for convergence of US generally accepted accounting principles (US GAAP) with the International Financial Reporting System (IFRS) in a document known as the Norwalk Agreement.¹ Since then, the US and international bodies (known, respectively, as the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, or IASB) have worked to align their respective standards so that, eventually, developed nations will have a homogenous accounting system. One particular point of difficulty in this effort, however, has been the issue of fair value accounting. The economic recession that began in 2007 further complicated convergence efforts as attention was drawn away from reconciliation efforts and focused on both placing blame and reforming the practices that caused the crisis. Then, with the election of President Barack Obama, the entire convergence movement was threatened when the newly-appointed chairwoman of the Securities and Exchange Commission announced that she would not “feel bound”² by the convergence roadmap established by her predecessor.

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Recently, public-interest news organization ProPublica, in partnership with public radio’s Marketplace, reported on allegations of fraud and deceptive enrollment tactics at the University of Phoenix, the nation’s largest for-profit educational institution. While the allegations are both saddening and disconcerting, they should come as no surprise. After all, the University of Phoenix’s parent company, Apollo Group, is a publicly-traded entity whose shares are listed on NASDAQ. As such, Apollo Group and its subsidiaries have one responsibility, and one alone: to increase shareholder value.

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In the world of corporate governance, American companies espouse certain managerial practices found almost nowhere else in developed economies. A prime example of this disparity lies with the dual roles of Chairman of the Board of Directors and Chief Executive Officer (CEO) often being bestowed upon a single individual. As The Economist magazine recently reported, a Norwegian pension fund operator is encouraging certain US companies to separate the roles, but doing so does not necessarily enhance an organization’s corporate governance. The Economist’s article, which appeared in its Schumpeter column, notes that some 30 academic studies produced over the last 20 years have failed to show that either combining or separating the roles has any meaningful impact on an organization’s management. Instead, the decision should be made on an individual basis, selecting the most-appropriate option for a particular company’s circumstances. Nonetheless, some members of Congress would rather see the roles separated at all US companies, and a “Shareholder’s Bill of Rights” introduced by New York Senator Charles Schumer would do just that. Opponents of the measure fear that forcing all corporations to separate the roles may place an undue burden on smaller entities and could lead to internal disagreements and managerial gridlock if the individuals appointed to the two roles cannot work together. Rather than requiring all companies to split the duties of CEO and Chairman of the Board of Directors, Congress should require that corporations justify their decisions to either combine or separate the positions.

The Shareholder’s Bill of Rights Act of 2009, Senate Bill 1074, was introduced on May 19, 2009 and referred to the Committee on Banking, Housing, and Urban Affairs, where no further action has been taken.

Yesterday’s report that the FCC recently asked broadcasters to return a portion of their spectrum is curious because of its timing. Coming just four months after broadcasters switched to exclusively transmitting a digital signal, the request begs the question, “Why did the FCC wait until after broadcasters had invested in the digital transition?” As TVNewsCheck reported, in exchange for returning two-thirds of the present television broadcast spectrum, current licensees would receive a portion of the auction proceeds collected when the FCC re-licensed the spectrum. If, however, the FCC were truly serious about repurposing the current television spectrum, the Commission’s offer would have come before broadcasters committed to digital broadcasting.

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For some time now, the nation’s two largest mobile phone carriers have competed almost exclusively with each other, marginalizing their smaller competitors. Verizon Wireless (VZW) has touted the reliability and extensiveness of its wireless network, while AT&T has focused on its network coverage and the superiority of its wireless technology. Now, as mobile phone operators prepare to deploy the next generation of wireless technology, the competitive pressures these companies face are changing dramatically.

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If television networks want to drive more traffic to their websites, they should post more full-length episodes of their programming online, and do so sooner, rather than focusing on superfluous marketing gimmicks. In the DVR and TiVo age, when many viewers simply fast-forward through commercials, providing full-length programs on networks’ websites with limited commercial interruptions has a better chance of keeping viewers focused on the advertising. As someone who regularly finds himself catching up with certain programs on the network’s websites, I have noticed that because the commercial breaks are rather short (often between 15 and 45 seconds), I am exposed to more advertising. Also holding my attention on the commercials is the fact that I cannot channel surf during the breaks. Simply put, by delivering shows in an environment that eliminates most distractions from an advertiser’s message, networks can increase exposure to both their programs and their revenue sources.

Timely posting of shows to networks’ websites also helps, as I often need to catch up with a previous episode before a new one airs.