Supreme Court Ruling

In August a Peter Lattman, a reporter for the New York Times wrote an article on the dramatic effects of a resent United States Supreme Court ruling. The ruling limited the amount of issues that prosecutors could go after under the “honest services” statute. Prior to this ruling there were a number of fraudulent acts that could fall under this statute. On June 24, 2010 the United States Supreme Court decided that parts of the section 1988 federal fraud statute was unconstitutional. They set the precedents by ruling on three major cases which includes one against the former chief executive of Enron, Jeffrey K. Skilling and one against Conrad M. Black, the newspaper mogul.  “It ruled that an honest services prosecution required more than an allegation of an undisclosed conflict of interest or self-dealing on the part of a business executive or politician. Instead, the court said that prosecutors must prove that defendants had received bribes or kickbacks,” said Peter Lattman.

After this ruling there were numerous cases that had to be re-examined. One of these cases was in Kansas. Just hours after Barry R. Grissom was sworn in as the United States attorney in Kansas, he had to dismiss just such a case. This case was the most prominent case they had in their books. It was a seven-year-old case against two of Westar Energy’s former top executives for corporate fraud. “The law no longer supported our position, we were duty bound not to go forward with the prosecution.” Grissom said.

Daniel C. Richman, a professor at Columbia Law School said, “In its heyday, the honest services theory allowed prosecutors to pursue sleaziness of all sorts without identifying a victim who lost property or money. Now the Supreme Court decision has thrown a large wrench into the system, and the Justice Department finds itself with the prospect of reversals and abandoned cases.”  This has been happening over and over around the country. One of the main problems with this is that our courts are already over flowing and all of these appeals are just making it worse. It is important that these cases are correctly ruled upon, but there are a lot of them that were the first time and now that these new precedents have been set, everyone is trying to jump on bored for a get-out-of-jail-free card.

I do not believe that these greedy executives should have a chance to get away with the things they have done. Their actions have hurt a lot of people and cost companies millions of dollars. Not only can the company lose money by the person stealing it, but like in the Westar case the company spent a lot of money on their executives legal bills. Westar is planning on going after them in civil claims court to try to recover this money. When one of these companies loses money in this way it effects everyone that is associated with them because it drives up prices and drives down stock prices.

Lattman, Peter. "Fraud Ruling Is Reshaping Federal Cases." New York Times 08 25 2010. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2010/08/26/business/26energy.html?ref=accountingandaccountants>.

Accounting for Public Pensions

Floyd Norris brings up a very good point in his 2010 article for the New york Times, “Accounting for Public Pensions”. It is about the change in the ways that companies mush account for their pension plans. A generation ago the rules for declaring the monetary stakes a company had in these pension plans was changed. Prior to these rules a company could get away with only declaring the actual amount of money invested into the plan. Since the rule change, a company now must estimate the future obligation of the pension. At the time this was a very controversial issue. Many companies were afraid that these new rules would dramatically decrease the profits they were able to report. These new rules were not perfect due to the fact that a company could only estimate the cost of the pension benefits that they would be accruing in a given year. A ‘smoothing’ effect could be used to even out the rise and fall of this estimation caused by market changes of the pension assets. This caused some controversy among people because they argued that the figures were not accurate and could be misleading.

This controversy over the reporting of pension plans has caused many companies to start phasing out defined benefit plans to new employees. The complexity of reporting these pension plans is also a reason some companies do not deal with it. With this complexity comes more accounting hours that the company would have to pay for. There are many more risks associated with a pension plan now that a company must guarantee the investment will grow. This risk does not seem worth it for many companies. Now, instead of pension plans, a lot of companies choose to go with defined-contribution plans. A defined-contribution plan is an investment strategy in which the employee and employer contribute funds to be invested. In this type of plan the employee has much more control over what the money is invested in but they also vary the consequences of the rise and fall of the value of the assets. This has caused far more Americans to be directly involved in the stock market. This involvement intensified the effects of the 2007 economic recession in America. With the effects of this recession being felt by far more people they have had to re-envision their retirement plans. There has been a ten percent increase in people over sixty still holding jobs. It’s not that these people still want to be working; it is because they have to still be working to afford the lifestyle they are accustomed to.

Even though many companies have moved away from defined pension plans, city and state governments have not followed this trend. The main reason for this is because they do not have to follow the same rules of declaring pension plans as publicly and privately held companies do. This does not seem right. The government should be held to the same standards as the corporate sector. Recently, there has been legislation proposed to stop the government from getting special treatment in this area. “Three Republican members of Congress, led by Representative Devin Nunes of California, a senior member of the Ways and Means Committee, proposed legislation to force states and cities to report pension fund liabilities on the same basis, and to force them to disclose market values of assets. The bill would not even allow smoothing, so the state of pension funding will seem volatile as markets rise and fall,” stated Floyd Norris.

Pensions are a very complex and controversial issue in the accounting field. There is not necessarily a correct way to handle this situation. Any way it goes, somebody will be losing out. The only thing that can be done is try to compromise and find the best solution for the entire country.

Norris, Floyd. "Accounting for Public Pensions." New York Times 09 12 2010. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2010/12/10/business/10norris.html?ref=accountingandaccountants>.

Integrity of Accountants

In the article, ‘Lawyers and Accountants Once Put Integrity First’, Mark W. Everson discusses how the accounting and law practices have become more of a profit oriented business in recent years. Fifty years ago these industries were thought of as pillars of the financial system. They were trusted by society to uphold the federal guidelines and to protect the country from corporations taking part in unreasonably highly risky business practices. Mark W. Everson states, “But over time, attorneys and auditors came to see their practices not as independent firms that strengthen the integrity of capitalism, but as businesses measured chiefly by the earnings of their partners.” What he means by this is these attorneys and auditors are more worried about the profits they put in their pockets than the integrity of their industry.

One of the biggest fields that this is shown in is the field of tax law. In tax law there is so much gray area and room for interpretation of the laws that companies must pay tax professionals a very handsome sum of money to navigate this tricky field. These tax professionals must examine every aspect of the corporation to insure that all forms of income have been accounted for and properly recorded on the correct tax form. They are also responsible for finding every little tax write-off possible. Some of these tax write offs can be questionable and not straight forward to an individual without the proper training. Corporations are willing to pay this due to the fact that even with these high fees paid to accountants it will save them money in the long run by minimizing tax obligations. These corporations must put their faith in these accountants because even if it is an independent accounting firm that prepares a corporation’s tax return it is still the corporation that will be responsible for any penalties or fees imposed upon them by the Internal Revenue Service. These penalties and fees can be rather hefty in certain circumstances.

That is why most major corporations only trust their accounting needs to one of the Big Four accounting firms. Even this does not guarantee that things will be done correctly. This was demonstrated with great emphasis in the case of Enron. In this case Arthur Anderson, one of the five biggest accounting firms in the world, at the time, was responsible for the auditing of Enron. Even with Arthur Anderson’s great reputation and world class accountants they were unable to foresee the catastrophic collapse of Enron. I believe this is due to the fact that Arthur Anderson was more concerned about satisfying a multi-million dollar account than it was concerned with upholding its industries integrity standards. Arthur Anderson seemed to be so worried about losing this account so they overlooked vital details in the financial reports that should have indicated the serious problems that Enron was facing. This concern with stuffing their pockets just a little bit fuller eventually caused them to lose everything. Since the collapse of Enron Arthur Anderson has completely dissolved and any individual involved with the company at the time of the Enron scandal has lost all of the industries respect. Integrity is a vital part of the accounting industry because without it no one will trust your work.

Everson, Mark. "Lawyers and Accountants Once Put Integrity First." New York Times 06 18 2011. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2011/06/19/opinion/19everson.html?ref=accountingandaccountants>.

Why CFO's are Important

Darren Dahl, a writer for the New York Times presents a strong argument for hiring a Chief Financial Officer in corporate business. In his article he describes three scenerios that involve hiring a chief financial officer. The first involves a software company that sells applications for mobile devices that allow users to create and edit documents. This company is called Quickoffice. Quickoffice’s co-creator, Alan Masarek, was performing multiple duties as the chief executive officer and the chief financial officer. In 2010, Mr. Masarek decided it would be in the best interest of his company to hire a chief financial officer.  “It depends on how dynamic the business is. I needed to hire someone who could function as my business partner and allow me to step away from the books so I could manage other aspects of the business better.,” said Mr. Masarek.

                The second scenario is of a company called Parties That Cook. Parties That Cook is a company that holds parties and corporate team building events where the participants actually get hands on cooking lessons. In this case, the company is not large enough to justify a six figure salary for a chief financial officer so they elected to hire a part time chief financial officer. They hired Jeff Gustafson as a part time chief financial officer for $150 an hour for eight hours per month. In this limited time he works on several small projects to benefit the company’s financial situation.

                The third scenario is of VirtuOz, which is an online marketing, sales and support company. Their need for a chief financial officer comes from the fact that they are planning on becoming a publically held company. Publically held companies are held to a much higher standard than privately held companies are. This is why VirtuOz needed to hire a chief financial officer.

                These three scenarios show that there are many different reasons that a company can be in need of a chief financial officer. At a small start off company a chief financial officers are usually unnecessary. When a company is first starting up they normally just hire an outside accounting firm to do their finances and keep an accountant on hand to handle taxes and payroll. As a company’s financial reporting becomes more complex and more vital to their success it becomes time to consider hiring a chief financial officer. There are some basic guidelines that a company can follow to determine if they need to hire a chief financial officer. These guidelines are normally monetary in nature.  “Typically, however, hiring one does not become essential until companies reach a tipping point — often $10 million to $20 million in revenue.,” according to Mr. Masarek. Before this point there is always the option of hiring a part time chief financial officer such as Parties That Cook did. The biggest factor that keeps a company from hiring a full time chief financial officer is the fact that they typically make over one hundred thousand dollars per year. For a newly formed company this is a tremendous expense. Even with the high cost of a chief financial officer, it is unwise for a company to try to navigate these difficult economic times without the expert guidance of the chief financial officer.

                Dahl, Darren. "When Should a Small Business Hire a Finance Chief?." New York Times 10 26 2011. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2011/10/27/business/smallbusiness/when-should-a-small-business-hire-a-chief-financial-officer.html?ref=accountingandaccountants>.