Welcome to my weblog, www.alokeghosh.com. Via this personal blog, I am sharing pertinent issues, current topics, and policy matters in the fields of auditing, financial reporting, and corporate finance with relevance for auditors, hedge fund and mutual fund managers, controllers and CFOs of public companies. The targeted audience includes my current and past students, colleagues from academia and practice, and anyone else fascinated by the crossroads of auditing, accounting and finance. Because my academic training and professional experience overlaps these three interconnected business fields, my commentaries/ideas/claims are often a distinctive outcome of a triangular subject-matter lens rather than a specialized subject-matter lens.by
Advanced learning and retooling via degree and non-degree programs has been the exclusive domain of academic institutions. The more reputable the academic institution, arguably, the higher is the quality of learning.
Things are about to change as one of the Big 4 accounting firms decides to enter the field of advanced learning. KPMG, a leading U.S. audit, tax, and advisory firm, broke ground for construction of its $450 million learning, development, and innovation facility in the Lake Nona community of Orlando.
KPMG is one of the world’s leading professional services firms, providing innovative business solutions and audit, tax, and advisory services to many of the world’s largest and most prestigious organizations. KPMG is one of the Big 4 Accounting Firms (the other three being E&Y, PwC, and Deliotte).
KPMG LLP is the U.S. member firm of KPMG International Cooperative. KPMG International’s member firms have 189,000 professionals, including more than 9,000 partners, in 152 countries.
- KPMG’s revenues for 2017 was $26.40 billion
- Revenue growth for FY2017 was of 5%
- KPMG invested more than US$1 billion this year in a multi-year program focused on new technology, innovation and developing new services and solutions
- More than 37,000 new graduates and other entry-level professionals hired, with the total workforce growing to a record-high of 197,263 people.
- KPMG network achieves gender parity for new hires, and an increase to 28% women in partner promotions across our 10 largest countries.
State-of the-Art Learning Facility
The firm announced on January 9, 2017 its commitment to create a 55-acre, state-of-the-art campus with 800,000 square feet of space for meeting, classroom, residential, and dining facilities. The campus will feature cutting-edge technology, including an innovation center that will support training and client engagement, and a heritage center to highlight the firm’s rich history and culture. KPMG expects to complete the project by year-end 2019.
The facility expected to accommodate 1,000 people at a time and has 800 single-occupancy rooms. It also has a four-star environment which includes multiple dining options, a coffee and wine bar, and a pub-like venue as well as “total wellness” amenities such as a sizable fitness facility and hiking and biking paths.
“This campus is our firm’s largest capital investment ever. More than that, it’s an investment in our people,” said Lynne Doughtie, Chairman and CEO, KPMG LLP. “Today marks a major milestone toward creating a world-class environment that inspires our professionals to achieve their fullest potential and helps enable our firm to attract and retain the best talent.”
Good or Bad?
Is this brand of executive education offered by US corporations good or bad for US academic institutions? The answer is unambiguously yes. Why?
- Any healthy competition between the for-profit and not-for-profit organizations can only improve the quality of education.
- The executives being trained will benefit as they get a broader perspective that is based on rigorous academic viewpoints and high quality practitioner experience.
- It increases the human capital of the attendees regardless of whether these forms of learning yield degrees or certificates in a specialized area.
As one of our Nobel Laureates said “For the times they are a-changing”
February 11, 2018by
We are all familiar with the notion of a bath in our communal lives, but the term “big bath” is equally common in the corporate world. Big Bath is an earnings management technique whereby a one-time charge is taken against income in order to reduce the value of an assets. This technique is often employed in a bad year, e.g., when sales are down, or when a company reports losses, to account for overvalued assets on the balance sheet.
Although the process is discouraged by auditors, it is frequently used by public companies. A notable feature surrounding big baths is that this accounting treatment tends to coincide with new management team because the new management team can then blame the one-time charges on the prior management team while simultaneously calibrating current reported income to unusually low levels thereby making it easier to meet or beat income in future periods.
Big Bath in Non-profit Sector
Does Big Bath happen in the non-profit sector? Bien sûr!
Harvard University has the largest endowment fund in the world with assets around $37 billion. The new chief of Harvard University’s endowment, Narv Narvekar, actively pushed to slash the value of some of its investments in natural resources portfolio of forests, farms and vineyards given his bearish outlook on some of the assets. Although Harvard University has the largest endowment, it was the only Ivy League endowment which generated less than 10% in the most recent year, which is why there was a “change of guards” at fund management level.
New endowment chiefs often have an incentive to write down investments they inherit because it is easier to blame the losses to the prior investment chief. It also helps remove potentially overvalued assets. Mr. Narvekar described Harvard Management Co. as having “deep structural problems” that would take five years to restructure. “An honest, reflective, and clear-sighted recognition of these problems is the first critical step towards generating solutions,” he wrote in his first annual letter in September, 2017.
Under Mr. Narvekar, Harvard reduced the value of its natural-resources investments by more than 25%, which is an unprecedented amount of a write-down (Harvard had valued the portfolio at roughly $4 billion at the end of the prior fiscal year).
Big Subjective Decisions
Many asset managers and appraisers say valuing assets that trade infrequently or aren’t generating cash—trees, for example, take years to grow before they can be sold for timber—is difficult. However, the new chief investment officer indicated that some natural-resources investments carried more risk than previously calculated. Therefore, he raise the discount rate (because the risk was high), which caused some investments to lose value.
Valuations for the endowment’s private assets were approved by the board, reviewed by Harvard and “the valuation process was independently verified by external auditors,” board Chairman said in a statement.
Big Pay Day
Harvard has guaranteed Mr. Narvekar at least $6 million a year for his first three years on the job. Additionally, the Chief is expected to earn additional performance-based compensation which is expected to be closely tied to the endowment’s performance in the long term.
When a non-profit sector mimics the pay of the for-profit sector in order to generate high future returns on the largest endowment fund!
January 25, 2018by
A Porsche Cayenne achieved a new GUINNESS WORLD RECORDS™ title on the 21st of April, 2017, by towing an Airbus A380 over a distance of 42-meters. This feat by Porsche’s Cayenne beats the previous record for ‘heaviest aircraft to be towed by a production car’ by a margin of 115-tons.
Porsche is now a Guinness World Record holder. Cayenne is a Sports Utility Vehicle (SUV) manufactured by Porsche. The German SUV is credited with pulling the heaviest aircraft at Paris Charles de Gaulle Airport.
A Cayenne S Diesel, with a 4.1-liter V8 twin-turbo engine producing 380bhp, and more importantly, 850Nm of torque, was able to tug a colossal, 285 ton, 516 seat, 73 meters long Airbus A380 supplied by Air France over a distance of 42 meters. The achievement was then repeated by the Porsche Cayenne Turbo S, cementing Porsche firmly in the record books, whether the car be gasoline or diesel.
Air France devoted one of its fleet of ten A380 aircrafts to the project and the contrast between the two machines was striking. The Cayenne (measuring 4.8-meters in length) was connected to the most sophisticated and largest (73-meters) passenger aircraft in the world via a special towing attachment that sat on the Cayenne’s standard tow bar.
The previous Guinness World Record for heaviest aircraft pulled by a production car was set back in 2013 by a Nissan Patrol, which managed to tow an airplane weighing 170 tons.
Pravin Patel, Adjudicator to the GUINNESS WORLD RECORDS attempt: “I’ve verified some amazing record attempts during my time as a GUINNESS WORLD RECORD adjudicator – watching a Porsche Cayenne tow one of the largest aircrafts in the world definitely ranks as among the most spectacular. My congratulations go out to all those involved in achieving this remarkable feat.”
November 4, 2017
A shell corporation often has no active business operations or hold any productive assets. Structured as an efficient financial vehicle, a shell corporation can serve as a convenient mechanism to raise funds, to complete a hostile acquisition or to take a company public. Nevertheless, these corporate structures can also be used for nefarious purposes some of which include disguising ownership from law enforcement or the public, or to evade taxes.
For instance, the “Panama Papers” leaks revealed that banks, political leaders and wealthy individuals had allegedly hidden billions of dollars in shell companies through a Panama law firm. The scheme allowed clients to evade taxes. Reportedly 214,000 shell companies were created to facilitate illegal activities.
Not all shell companies are creating to siphon off funds or to evade taxes. There can be merits to creating a shell company.
- A startup can use a shell corporation to safeguard its assets before officially launching its business.
- A company preparing for a merger or an acquisition can hold its assets in a shell company for legal reasons and keep those assets separately from the acquiring entity.
- Foreign companies can create shell companies in tax havens like Panama (Swiss private banking, Hong Kong, Belize are some of the other dubious and prominent tax havens) and lower their taxes at home. How so one may ask? Most tax haven countries do not mandate tax information for the funds being funneled into the tax haven countries via shell companies. Further, some tax havens do not report the existence of these shell companies to the government of the owners operating the shell companies thereby creating a “black hole.”
- Shell companies are often set up to mask the identity of the individual owning assets in the company or to evade taxes.
- Occasionally, companies take advantage of the secretive nature of shell companies and engage illegal activities like money laundering.
Limited Games in the Land of the Free
In the U.S., we are fortunate to have monitoring agents like the Securities and Exchange Commission, the Justice Department, and the Public Company Accounting Oversight Board (PCAOB) guarding the corridors of capital markets to ensure that public companies are not actively engaged in “shell games” to defraud minority shareholders.
In sharp contrast, and most inappropriately, in emerging markets and particularly in the BRICS countries, minority shareholders may not be as fortunate where the use of shell companies to hide business ownership or to evade taxes is rampant.
What is the auditors’ role in policing dubious shell companies which are actively created by publicly listed companies to siphon off funds and to dupe minority shareholders?
Let the Games Begin in BRICS Countries
The Securities and Exchange Board of India (the counterpart of US SEC) is scrutinizing the functioning of auditors in various public companies in India, especially if the auditor has had a long-standing relationship with the client. Under the Companies Act of 2013, auditors, have greater responsibilities to ensure that financial statements of an Indian company are not materially misstated and that auditors red flag “dubious” transactions.
The Finance Ministry in collaboration with SEBI is taking actions against 331 listed suspected shell companies. More than 100,000 directors (holy cow!) may be disqualified for their association with shell companies. Investigations are in progress to identify professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies.
The auditors are not exempt from these inspections. Authorities are looking at the possibility of having stricter scrutiny of global auditing firms (e.g., the Big 4 audit firms) and to make them more accountable when their auditors certify companies with a clean opinion even when clients are actively engaged in corporate misconduct.
Commentary on BRICS
Similar to the initiatives in India, China, where the problems of shell games are even more pervasive, under President Xi Jinping, has been actively confronting these problems. While these are modest steps, India and China can do more to bring the unaccountable or black money back into the mainstream economy for the betterment of their citizens.
While India and China are at least attempting to tackle this social ailment, sadly not much can be said about the other 3 countries within the BRICS which include Brazil, Russia and South Africa where their top leaders appear to be the cause and not the solution to this social ailment.by
Scotch whisky inspires a near cult-like devotion among circles with an affinity for malt beverages. Known for its pungent, peaty aroma with a long, lingering finish, Scotch whisky, the iconic malt beverage from Scotland, is designed to sip, and not shoot akin to its popular siblings like Vodka and Tequila.
How to do you prefer sipping your favorite Scotch? This quintessential question can generate a diverse set of responses some of which include I take my Scotch neat, I prefer adding a splash or a few drops of water, I like my Scotch with a few ice cubes, or I like to blend my Scotch with soda and/or coca-cola.
While there are no “correct” responses, because drinking alcoholic beverages is a matter of taste and preference, aficionados have long recommended taking your dram with a few drops of water. A Scotch enthusiast may ask why must I add water? The answers vary, but some of the more emblematic responses include:
- Splash of water takes away the stinging or burning sensation when you “nose the whisky” thereby liberating the true spirit locked in the bottom of the glass to rise to the top
- Splash of water dilutes the alcohol volume
- Splash of water takes away the heady alcohol smell/taste away
Nose your Whiskey
To fully appreciate the spirit, which has been craftily aged in a barrel anywhere from 3 to 25 years, you must let the nose kiss the tip of your whisky glass and then proceed to inhale deeply (your chance to “inhale if you missed it when you were young and restless”). This ritual is very similar to how you get acquainted with, or nose, your red wine. When nosing, we are paying careful attention to the following olfactory receptacles.
- Smokiness: Flavor the peatiness as malted barley is often thrown over a peat fire to smoke it.
- Saltiness: Smell the distinctly maritime smell mostly unique to Islay whiskies.
- Fruitiness: Identify the fruits contained in the alcohol which may include dried currants, apricot, peach, or cherry.
- Sweetness: Savor the discrete caramel, toffee, vanilla, honey tones or some other confections that you might decipher.
- Woodiness: Oak is an integral companion of the whisky-aging process, which makes the smell of wood in Scotch omnipresent.
Bjorn Karlsson and Ran Friedman, a pair of Biochemists doing nose-breaking research at Linnaeus University in Kalmar, have finally provided a truly spiritual response to why splash of water is highly recommended for deriving the optimal olfactory pleasures from whisky consumption. Scottish whisky, especially the ones from the Island of Islay, contain a group of flavor-packed molecules known as “phenols” and “guaiacol.”
Laboratory simulations reveal that adding a splash of water or H2O makes guaiacol rise to “the air-liquid interface.” Because the drink is consumed at the interface first, adding water to whisky helps to enhance its taste. The concentrations of guaiacol are in much higher proportions in Scottish whiskies than in American or Irish ones, which is why the releasing of taste/flavors is much more pronounced in Scotch whisky than in its counterparts in the US or Ireland.
The fundamental conclusion from this original path-breaking scientific study is that it behooves us not to add a splash of water when we commiserate with our own spirits while leisurely sipping that perfect Scotch whisky.
Enjoy your Perfect Dram! High Noroc!by
Law Enforcement Against Drugs, or LEAD, partners with Schools in New Jersey to educate our youths on the dangers of drug use. One of the initiatives of LEAD this year was to invite seven gifted students from Fifth Grade to write an essay, poem, or narrative on the dangers of drug and alcohol (ab)use. A LEAD-jury selected three winners from this competition. Emma Ghosh was awarded the second place in the competition held at Lafayette School District.
The battle with drug addiction has afflicted our society for decades. Our approach to tackling this societal predicament has been from the supply side, i.e., trying to restrict the inflow of drugs from other countries. Nevertheless, it is hard to regulate contraband items when payoffs are high because of the escalating demand for these coveted products. A simpler and more effective solution, which is often ignored in our societies, is to limit the demand by making our youths familiar with the heightened risk from drug (ab)use. We applaud the efforts of these seven fifth graders who are committed to disseminating the dangers of drugs, alcohol and tobacco.
Name: Emma Ghosh
Teacher: Ms. Dellano
Project Chosen: Essay on the Dangers of Drugs, Alcohol and Tobacco
Doesn’t everyone want to live life to the fullest? Don’t you? I do, my friends do, my classmates do, my family does. Well, the L.E.A.D program teaches kids how to be safe and protect themselves from obstacles that could possibly prevent kids from living a happy and healthy life. The program helps kids learn what drugs, smoking, and alcohol can do to their body and how it can affect the way we treat others and others treat us. The L.E.A.D officers teach us that there is nothing good about taking drugs, alcohol, and/or smoking. There are many morals that L.E.A.D is able to help kids understand, like the difficulties of life when you do start alcohol, drugs, and/or smoke. Three things that I have learned from the L.E.A.D program are that life is supposed to be a journey, exploration, an adventure, when you start drinking alcohol, smoking, and/or do drugs, you physically cannot keep up with the adventure and journey. You wind up hurting those around you, those that love and support you. Secondly, smoking, alcohol, and/or drug usage has deadly effects on your brain and body. Lastly, and most importantly, L.E.A.D taught me strategies on how to say NO to drugs.
First off, life is supposed to be a journey, exploration, an adventure, basically action-packed. When you start drinking alcohol, smoking, and/or use drugs, you physically cannot do even the basic functions. Alcohol, drugs, and smoking make it hard for you to stay active and keep up with all your other friends. Most importantly, you hurt the ones around you and the people that love and support you.
Secondly, smoking, alcohol, and drugs stop your brain from functioning properly. The chemicals in cigarettes are horrible for the brain. The ingredients in cigarettes, alcohol and drugs are in every way, harmful to you body. I can recall that one of the L.E.A.D teachers said, “One of the main effects of alcohol is brain and nervous system damage. Alcohol can be memory-impairing, vision-and-speech-affecting, seizure-causing disorder. You won’t be able to form new memories. You’ll mumble involuntarily and your eyes will twitch constantly.” The brain and heart are 2 of the most important body parts. We would not be able to survive without them, and smoking, drinking, and drugs target you heart and brain, which is one of the reason people die from one of the three.
Additionally, smoking, especially, can lead to irreversible damage to your lungs and heart. Which can then cause the person to have trouble breathing and put them at a greater risk of heart disease or lung cancer. For example, the L.E.A.D teachers explained, “Smoking, in particular, can give you lung cancer or heart disease because of the smoke that you inhale. The smoke that is inhaled can damage your lungs because of all the chemicals in tobacco, which are also released into the smoke. The chemicals in the smoke are absorbed by your blood cells and then reach your heart and hurt the function of your heart and lungs. That will subsequently make it hard to breath. Smoking can also cause cancer of the lung, esophagus, mouth, throat, kidney, bladder, liver, stomach, and much more.” The L.E.A.D teachers also mention the horrible consequences of using drugs too. From deadly cancer to fatal heart attacks, some prescription drugs have even been known to cause either slow or immediate death. Other drugs may cause patients to do things they wouldn’t ordinarily consider. Drugs can also cause cancer of the bladder and other organs. Drugs can also elevate diabetes symptoms. This all proves that smoking, drinking, and drugs can cause irreversible damage to your body.
Most importantly, L.E.A.D taught me strategies to say no to drugs. One big problem is that some people are really hurting others and making them suffer through peer pressure. One of the most important factors is that drunk people think smoking, drinking and doing drugs is “cool”, but that is just the chemicals taking over their brain! “Peer pressure will usually stop after the person says no, but in some rare cases it doesn’t. And that is where you want to go to a trusted adult, like a family member or whomever is closest, like if you are at school tell a teacher or aid. This is NOT tattle-tailing! Peer pressuring is wrong and not ok, it should be reported immediately. Even if you see someone being peer pressured who doesn’t know how to say “no” or is being threatened, you could help by telling an adult immediately, or the person being peer pressured could get seriously injured!” stated one of the L.E.A.D teachers. This shows that although some people may say it’s cool to take drugs, drink or smoke, in reality you would know not to listen to them because you had L.E.A.D classes! This is an extremely important thing to know because if you are clueless when something like that happens to you, you need to stick up for your own health and wellbeing! ‘Cause not everybody else will know what to do during such a situation.
In conclusion, if you’re on drugs, drink, or smoke, life is a bottomless pit that drowns you in sorrow and remorse. You cannot trust drugs, alcohol, and smoking to help you or heal you or make you forget that horrible past, you have to handle it yourself and learn to deal with it like so many other people in this world have. The L.E.A.D teachers tell us that our mind is still growing then, which is when smoking, drinking, and doing drugs have the ability to take their hardest strike at our brain, heart, lungs and other internal body parts. L.E.A.D is an important program that I feel, everyone should know about. The program is not your average program that tells kids “drinking is bad”, “don’t smoke or do drugs”, it is able to get into more detail and give kids an absolute crystal clear image of how dreadful it is to smoke, drink, or do drugs. In conclusion, I have learned valuable lessons from L.E.A.D. Most importantly, life is supposed to be a journey, exploration, an adventure, and when you start drinking alcohol, smoking, and/or do drugs, you physically cannot keep up with the adventure and journey. You wind up hurting those around you, those that love and support you. I, Emma Ghosh, pledge to never ever try to drink alcohol, use drugs,or smoke.
July 4, 2017
For the year 2017, a well-diversified portfolio consisting of US public companies generates returns anywhere between 4% and 8% (S&P MidCap 400 gained 4%, Dow gained 6%, S&P 500 gained 8%). Quite impressive.
What about a more aggressive investor, or a more flamboyant hedge fund manager, seeking even bigger alphas/returns? Is there any country offering bigger equity returns than the US equity markets? Much of continental Europe generated relatively modest returns for the year 2017. While emerging markets may be more promising, the returns were no better than the US. Key indices in China and Brazil are up between 4% and 8%. Given the risk, the US seems a much safer bet.
There is one emerging market, however, that stands-out in 2017. India has outperformed most developed and emerging markets. Most key indexes in India are up more than 11%.
You Are My Destiny: Slumdog Millionaire
- Roughly, half of India’s 1.2 billion population is under 25
- The country, especially parts of the south, west and north, is entrepreneurial
- While educating billion people remain a daunting task, much of the Indian population understands the value of good education
- Low oil prices have been a blessing because India imports nearly 80% of its oil to sustain growth
- In 2014, Modi, the leader of the conservative party, captured the imagination of Indians because his economic vision is tied to domestic investments and he intends to attract foreign investments by removing various barriers to foreign capital and by pledging to eradicate corruption.
Despite the promise of tomorrow, there is no denying that India today remains a poor country. Even relative to the other BRIC countries, its per capital GDP is about half of China and a third of Brazil.
World Bank Sings Jai-Ho for the Bengal Tiger
The World Bank projected the Indian economy to expand at a rate of 7.8% this year and 7.9% over the next two years. The continuing slump in prices of oil, which is one of the major imported commodities in India, had a significant effect on the Indian economy over the past one year. The Bank said: “In contrast to other major developing countries, growth in India remained robust, buoyed by strong investor sentiment and the positive effect on real incomes of the recent fall in oil prices .”
The World Bank estimates India’s growth projections to be higher than that of the Dragon Warrior. The Bank expects Chinese GDP growth to be around 6.5% over the next two years. Brazil and South Africa, the two other BRICS countries, are embroiled in major corruption scandals involving their leaders, which injects enormous uncertainty for investors. Russia seems determined to inject global anarchy into the world while disregarding the welfare of its own citizens.
A distinct attribute propelling India’s economic growth is its appetite for domestic consumption. According to Adrian Lim, a Singapore-based investment manager with Aberdeen Asset Management, which manages $11.5 billion of assets in India, “India is being seen as a relatively resilient place to invest because quite a bit of the economy is driven by domestic consumption.” Moreover, Lim asserted “More than two thirds of the stocks listed (on the Sensex) are driven primarily by domestic demand, something you can’t see on the Chinese benchmark.”
India’s stocks reached a new highs recently powered by foreign funds. India’s bellwether S&P BSE Sensex broke a two-year-old closing record Monday as it rose to end trading at 29,910.22.
Exposure to India
How can US investors play India?
Consider investing in one of the top 5 India-based ETFs, as per the US News and World report (http://money.usnews.com/funds/etfs/rankings/india-equity?sort=category_rank).
#1 iShares MSCI India INDA $5.11 billion in assets
#2 VanEck Vectors India Small-Cap ETF SCIF $0.32 billion in assets
#3 IShares MSCI India Small-Cap SMIN $0.19 billion in assets
#4 PowerShares India ETF PIN $0.26 billion in assets
#5 Columbia India Consumer ETF INCO $0.12 billion in assets
The U.S. News Best Fit ETF rankings are designed to help long-term investors evaluate and compare the structure of exchange-traded funds. Since all ETFs are intended to track an underlying index (for a variety of equities, or the price of a commodity, for example), the rankings aim to identify large, liquid funds that perform reliably. The report also compares funds’ costs and the fund’s level of diversification and success in tracking its index. We discuss each of these measures in depth below.
Consider playing Danny Boyle’s Slumdog Millionaire!
Finland, June 8, 2017by
Some U.S. multinational companies are avoiding paying high U.S. taxes through relatively simple tax strategies. If a U.S. multination company generates part of its income in a foreign jurisdiction, the foreign income is not subject to U.S. taxes until it gets repatriated back to the US. Contrary to personal income tax, which is levied on all sources of income regardless of where the income is earned, only U.S-based income is subject to taxes for U.S. corporations. The foreign income earned is subject to US taxes once the money is transferred back to the U.S. for redistribution or reinvestment.
Therefore, U.S. citizens cannot shelter foreign income from U.S. taxes, but U.S. companies are able to do so.
Another tax strategy to shelter income from U.S. taxes is more dubious in nature where the objective is to attribute a higher percentage of the income to a foreign jurisdiction with low tax rate even when the income is not economically earned in the foreign jurisdiction.
The Pillar in the Cat-and-Mouse Strategy
Caterpillar is under intense scrutiny for shifting much of the profit from its lucrative replacement-parts business to a Swiss subsidiary where the tax rates are low. The strategy, which dates back to the late 1990s, has generated an employee lawsuit, a U.S. Senate investigation, and a federal criminal investigation that led raids on Caterpillar’s headquarters and two facilities in Illinois.
How large is the tax avoidance? According to a U.S. Senator (see the April request from Sen. Carl Levin, D., Mich., for the PCAOB to look into the tax avoidance matter), Caterpillar has deferred $2.4 billion in taxes under strategies devised by PricewaterhouseCoopers LLP.
CtW, an investment group, wants to shake up the company’s audit committee following the terminator’s (machinery giant) offshore tax strategy. The investment group, has issued a public letter asking shareholders to vote against Caterpillar’s three board members because of inadequate oversight of tax strategy and dysfunctional monitoring of the external auditor. In the case of Caterpillar, PricewaterhouseCoopers LLP happens to be both the external auditor and the tax consultant!
The audit committee members of Caterpillar include
- Daniel Dickinson, a private-equity executive
- Dennis Muilenburg, Chairman and CEO of Boeing Co.
- William Osborn, former Chairman and CEO of Northern Trust Corp.
Conflict or Efficiency
By serving as the tax consulting and external auditor, does PricewaterhouseCoopers LLP generate efficiencies for the company or is there a conflict of interest whereby the audit quality suffers because the external auditor is no longer an independent monitor of the company’s financial statements.
Independent or Dependent
PricewaterhouseCoopers has been Caterpillar’s independent auditor since 1925, according to the 2017 proxy statements filed by Caterpillar, which means the big accounting firm has been with this client for almost a century! Can an auditor with a century long relationship with a client provide high quality audit assurance?
How much has the accounting firm earned from this company?
Audit services Tax consulting Total Fees
2016 $33 million $0.1 million $35 million
2015 $32 million $20 million $54 million
Why did tax consulting fees drop suddenly in 2016? Too much political heat?
If you use 2016 fees as a proxy for annual fees earned by the auditor for the prior years, which is an exaggerated assumption, PricewaterhouseCoopers has earned around $3 billion from the Terminator since 1925.
I wish we could buy shares of PricewaterhouseCoopers!
Is PricewaterhouseCoopers a tax consultant or an “external” auditor for Caterpillar? Does PricewaterhouseCoopers have the conviction to question accounting practices adopted by Caterpillar and confront questionable accounting practices in light of this money train?
Your guess is as good as mine…..
May 29, 2017by
New York City or the “Big Apple” is the financial capital of the world—the city that never sleeps. Walk down the streets of Broadway, and you can hear someone humming the tune “New York, New York” immortalized by Liza Minnelli and Frank Sinatra. With access to Central Park, I believe a more appropriate label for New York City is the “Garden of Eden.” The trees in this Garden sustain life, support knowledge, and generate forbidden fruits. One serpentine bite of the forbidden apple and we are at the cross roads with Genesis!
Why was New York City baptized as the “Big Apple?”
In the early 1920s, “Big Apple” was a nickname for large monetary awards associated with horse racing contests, many of which were organized in and around New York City. The name was commercialized by prominent writers from the New York Morning Telegraph reporting on the City’s horse-racing. Because the city hosted important races, rewards associated with the races were substantial, which may explain the term Big Apple.
Big Apple was subsequently adopted by the City’s jazz musicians. An old saying in show business was “there are many apples on the tree, but only one Big Apple.” New York City being the premier place for jazz musicians to perform made it customary to designate New York City as the Big Apple.
The City in 1971 started a campaign to increase tourism and officially adopted the nickname Big Apple. The campaign featured red apples as reminder of the bright and cheery side of the City, in stark contrast to the common belief that New York City was dark and dangerous. Since then, New York City has officially been designated as the Big Apple.
What if a bite of the Big Apple eludes you? There is a solution to this biblical dilemma—own a piece of Steve Jobs’ Apple. Apple Inc. designs and manufactures computer hardware, software and other consumer electronics. The company is best known for its Macintosh personal computer line, iTunes media application, the iPod personal music player, and the iPhone.
The original logo of the company, which portrays a man sitting under an apple tree, draws on the Newtonian inspiration from a falling apple. Subsequently, Apple redesigned its logo depicting a bite of an apple. I believe the bite taken out of the Apple represents the story of Adam and Eve from the Garden of Eden with apple representing knowledge.
- Holy Cash Cow
The company today is a colossal holy cash-cow. Based on data from the most recent financial statements, i.e., April 2017, the company has a cash balance including short term marketable securities of around $67 billion. If you add long-term marketable securities, the balance increases to nearly $260 billion, which is larger than the GDP of Greece!
What is the genesis of the cash balance? iSimple, high margins. The company’s gross profit margin is around 40%, which means for every $1 of sales, the company generates 40 cents of profit after deducting the cost of sales. The operating margins are equally staggeringly high (around 27%). Even after netting out all operating costs, the company generates $27 of profits for every $100 of sales. The sales for the first quarter of 2017 alone was $52 billion, a mind- blowing number.
- Investments and Acquisitions
Apple is all about organic growth. The company is very frugal with its investments and acquisitions. Much of the excess cash is heavily invested in marketable securities (parking the cash and generating returns on those dollars). Its corporate investments, i.e, purchase of other companies or fixed assets, is rather modest at less than 5% of total assets.
- Giving Back
What does the company do with its surplus cash balance? It pays dividend and buys back its own stock. Over the 6-months period ending April 2017, the company paid $6 billion as dividend. Over the same period, it repurchased $18 billion of its common stock. Thus, the cash returned to its shareholders was around $24 billion over a period of six months only.
No wonder shareholders are elated and appear flying on Elon Musk’s spaceship to the red planet. Over just under a year, the stock price of the company has increased from around $93 to $155, which translates into a 67% annual return. No legal business in the world can come close to generating these holy numbers.
If you cannot get a bite of the Big Apple, I suggest you consider a bite of the Apple company. Apple’s history is being cooked with a hint of exotic spices by its own “Cook.” The taste is simply divine.
May 16, 2017
CEOs of for-profit companies are paid handsomely for their nifty management skills and for creating shareholder value. According to Associated Press study, the median annual CEO pay for S&P 500 companies in 2016 was $11 million (average pay was even higher at $14 million). When compared to the value created by these companies, the pay appears economically insignificant and immaterial. In 2016 alone, nearly $1.5 trillion of shareholder wealth was created by the S&P 500 companies.
What about the pay of the top bosses in nonprofit organizations like academic institutions? Much less. The average pay of a University President is less than $0.5 million. Therefore, S&P-500 CEOs get about 30 times more than a typical University-CEO.
The Art of Presidential Pay
The highest paid academic top gun was not from an Ivy League institution but a leader of an arts college in Georgia. According to the Wall Street Journal, in 2014, Paula Wallace, the president of the Savannah College of Art and Design (say what?), earned a whopping $9.6 million in 2014. That is, the pay was about 20 times a traditional academic presidential pay.
Ms. Wallace earned a base salary of $859,000 and a bonus of $1 million. In addition, the board/trustees of Savannah College of Art and Design voted to pay Ms. Wallace supplementary deferred compensation of $7.5 million as a cumulative reward for her prior 14 years of service (this is in addition to the annual salary she drew over the past 14 years).
Deferred compensation refers to the portion of an employee’s compensation that is set aside to be paid at a later date in the form of retirement plans or pension plans. In most cases, taxes on deferred compensation are delayed until income is paid. In common parlance, deferred compensation is the ability to provide for a “highly prosperous retired life” by leveraging current position and power.
Stellar Savanah College
Ms. Wallace is one of the founders of the college. Her achievements include overseeing enrollment growth, and the expansion of academic majors and branch campuses. According to a consulting firm retained by the arts college in Georgia to approve presidential pay, “the compensation is fitting given her four decades of contribution towards the success of the institution.”
Tuition, fees, and living expenses can exceed $50,000 a year. Students at this institution collectively received about $115 million in federal student loans. Among nonprofit art and music colleges, students of Savannah College of Art and Design rank among the top quartile for graduation rates and earnings. About two-thirds of full-time students graduate within six years, and their students receiving financial aid reported median earnings of roughly $35,000 a decade after entering.
Scarcely stellar when you consider that a representative student can potential rack-up federal loans of up to $250,000 to get this coveted arts and design degree from Georgia.
Raymond Cotton, a lawyer who advises university boards on presidential pay, called Ms. Wallace’s compensation “..such an outlier in the world of higher education; it’s really incredible.”
Benchmark: Harvard’s Presidential Pay
How does this pay compare to the Presidential pay at country’s leading academic institution with a largest endowment?
Harvard University’s President, Drew Faust, earned a $811,000 salary and received a meagre total compensation package worth $1.2 million.
Nonprofit organizations are organized for a public or mutual benefit other than generating profit for owners or investors. Because a nonprofit company’s intent is to increase the welfare of society, the government sponsors those objectives by defraying some of the nonprofit’s costs by exempting nonprofit organizations from paying taxes.
If Presidential Pay at academic institutions mimic CEO-pay at S&P 500 companies because academic institutions draw inspiration from for-profit companies, why the big need for subsidy from the federal and state government?
Midnight in the Garden of Good and Evil!
Chatham; April 17, 2017by