KPMG

The Wall Street Journal today discusses the possible indictment and criminal charges against KPMG (here is a reuters story). The story quotes KPMG's press release about the charges which states the folowing:

KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.

In order to ensure that this type of conduct does not occur again, KPMG has taken the following actions:

* We no longer provide the services in question.

* We have put in place a process to ensure that those responsible for wrongdoing have been separated from the firm.

* KPMG has instituted firm-wide structural, cultural and governance reforms to ensure the highest ethical standards.

* KPMG has undertaken significant change in its business practices.

So KPMG admits that it acted unlawfully, that certain of its partners (as late as 2002) obstructed justice. The funny thing is that when you look at KPMG's website this morning there is not one statement about the charges. The only thing that shows up is links to KPMG's survey of ethics and corporate responsibility. It is doubtful that the US could stand to lose another large audit firm, but it seems rather congruent when you think about what happened to Andersen and now what is happening to KPMG - Employees lost jobs, partners lost entire savings, so what will happen to KPMG?

Pensions

The airline industry and its pension plans have been the subject of hearings on Capitol Hill and of course accounting is the major issue. Pension accounting is difficult enough for accountants, but put in the hands of politicians and there can be real problems. This does not excuse accountants who should be embarrassed by the pension standard.

Here are some comments from the L.A. Times :
Sen. Charles E. Grassley (R-Iowa) on Tuesday said United took advantage of accounting loopholes to meet the legal requirements for its pension plan, even though funding was falling far short of demands. One such technique is known as "smoothing," which allows companies to project past financial gains into the future, creating a false picture of a fund's stability.

Grassley compared United's pension bookkeeping to with the "phony accounting" of Enron Corp. but added that there was "a very significant difference: Unlike Enron, however, everything United did was perfectly legal. In fact, what the company did is accepted practice by pension plans everywhere."

Sentiment is growing in Congress to force changes to strengthen the pension system, but it is far from clear what measures will be adopted. Moreover, too-tough legislation could lead more companies to abandon pensions because they are under no obligation to provide them.

However there is no reason that many companies should not have done a better job funding their pension plans. Right now we are examining Anheuser Busch in my core MBA class and even this company that is a cash machine is underfunded by $705M (up from $640), when comparing the projected benefit obligation to the fair value of plan assets. Now of course Bud shows prepaid pension cost asset of $527M as a result "unrecognized net acturial losses" and "unrecognized prior service costs" that total $1.2B. Only accountants could make acturial losses into an asset component...

During this period when Bud's pension plans were becoming severely underfunded (the underfunding represents 24% of the projected benefit obligation) the board of director's has made contributions of only $187M, $75M and $201M. So even though Bud made an accelerated payment during 2005, the plan became even more underfunded. What makes this even worse is that Bud has repurchased $6 B dollars of treasury stock over the last three years. By diverting 10% of these resources to its "most valuable assets" Bud could ensured that its pension plans were in much better shape.

Accountants are King of the job market

Sarbanes-Oxley (or the Accountants Full Employment Act) seems to have worked, accountants are incredible demand. Based on this Reuters' story hiring has started early and the firms are offering money and incentives:

Glover said Ernst & Young is looking to hire 4,500 accounting graduates this year, up 30 percent from last year. To lure new hires, it has boosted benefits -- including a concierge service for employees too busy to run errands.

"(Graduates) are in a very competitive space right now where you have lots of opportunities and choices of where you go to start your career," Glover said.

Concierge service!! Wow, ping-pong tables are mentioned also :)

Go Retro

The FASB released Statement 154 today which requires that accounting changes be handled retroactively (unless impracticable). The big changes form Opinion 20 are that changes in depreciation or amortization method are changes in estimates (that is affacted as a change in accounting principle, i.e. restate prior periods) and

Statement 154 carries forward many provisions of Opinion 20 without change, including the provisions related to the reporting of a change in accounting estimate, a change in the reporting entity, and the correction of an error. Statement 154 also carries forward the provisions of Statement 3 that govern reporting accounting changes in interim financial statements.

Statement 154 becomes effective for fiscal years beginning after Dec. 15, 2005.

Berkshire Hathaway's dollar bet

Lately, the dollar has been appreciating against the Euro, taking a look at the this graph and you can see that the dollar has moved from a low of about .73 Euros at the end of 2004 to about .82 Euros. One of the biggest bettors of a continued decline in the value of the dollar is Warren Buffett and his company Berkshire Hathaway. At the end of 2004 owned approximately $21.4 billion dollars of foreign exchange contracts (spread among 12 currencies). Given that 2004 saw a steady decline in the value of the dollar of about 12-14% Berkshire racked up large gains on its foreign currency forward contracts. From the annual report Berkshire reported $1,839 M of gains. However, since the votes in France and the Netherlands the dollar has been on a tear. What does this mean for Berkshire?

In the first quarter Berkshire reported $307M in foreign currency losses (go to page 19 of the document). And this is prior to the dollar really starting to appreciate, if the last month's trend continues second quarter losses could be about $1B.

Just something to think about.