The mindset of white-collar criminal

Auditors of all kinds would be wise to read up on the psychology of white-collar criminals, to better understand the rationalization vector of the fraud triangle:

David Myers, the former controller of WorldCom, recalled thinking that he was “helping people and doing the right thing” while perpetrating one of the largest accounting frauds in history. In his mind, the fraud was superficially sustaining the company, its stock price, and the jobs of its employees.

For some, the theory is that it was a simple cost-benefit calculation, underestimating the likelihood of being caught and, therefore, the cost. But the article linked to above notes that in other cases, there wasn’t a whole lot of calculating going on at all:

Waksal understood that calling his daughter and telling her to dump her shares was wrong. Since he knew the SEC monitors this kind of trading, his decision couldn’t possibly represent the careful reasoning of a self-made man who prided himself on his intellectual prowess. Had he actually put his mind to it, presumably he could have devised a better fraud.

Part of the problem is how separated the perpetrators of white-collar crime are from their victims, or how relatively small the impact of their fraud will be on them, in their minds. As businesses become bigger, and our communities grow and our connections to each other loosen, this will continue to be a big factor.

Actually the article doesn’t really conclude much. Some felt remorse, some didn’t. Most didn’t think things though, but if they did they underestimated the impact on their lives and their victims’ lives. Some acted out of perceived pressure to meet earnings targets, while others believed they were doing what was right and would be recognized as such (*cough* Fastow).

Interesting read, and always fun to read about the schemes and perpetrators’ justifications for them. Be vigilant, it can happen in your company.

Secondment to the finance department

For the next couple months I’ll be in Kansas City getting some experience in one of the regional offices of a division of my company, helping with some year end tasks. It’s going to be pretty interesting to be on the other side of the table for once, liaising with the external auditors and working with finance staff located across the Midwest to put together the financials.

Anyway, what’s new with you? It’s been a while…

Short-term focus of management ain’t due to accounting

CFO.com had a provocatively titled article this morning that just shouted out for a retort: “Is Accounting Blocking R&D Investments?

Now how could accounting be doing that? Why, because senior management is preoccupied with meeting short-term quarterly earnings targets, and are cutting back on longer-term focused R&D investments!

I thought this was just an overzealous headline writer, out to get clicks (mission accomplished!) and perhaps the article itself would walk back the ridiculous premise, but instead it doubled down:

The accounting treatment of R&D as a period expense and the overemphasis many public-company executives place on EPS. Many executives pay lip service to the long term benefits of R&D. But in reality they base the size of their companies’ R&D budgets primarily on a single period’s EPS dilution. Thus, they are only looking at a tiny fraction of the value equation.

It’s gotta be up to management to teach the market how to appropriately value their company, and it’s gotta be management that shares a long-term vision of sustainable profitability to shareholders. This short-termism simply has to stop.

It isn’t the accountants who are pushing for quarterly earnings reports. I’m sure accountants would love to spread out the reporting, it would make their lives a lot easier not to have to calculate myriad accruals on a quarterly basis only to reverse them after.

Value, real lasting value, not just for shareholders but employees and communities, is built over the long haul.

Do we have a software valuation issue?

Soumitra Dutta of French business school Insead thinks so, as reported in this story on CFO.com:

Insead has developed a “novel technique” to value software assets. Using conjoint analysis — “a time-tested and widely used robust technique in marketing science,” Dutta claims — companies can place a value on software by identifying its individual attributes, compiling trade-off data from employee surveys and crunching the resulting numbers using “a complex form of analysis of variance.”

The report produced by Dutta asserts that companies are therefore “under-reporting” their software assets, which is a troubling leap to make. When it comes to financial reporting, we need to be conservative about the value of an asset like software and stick to objective data like cost and a reasonable amortization rate. Comparability and consistency as twin aims of any accounting framework are thus maintained.

There is great intangible value tied up in software — as well as the users of the software — but that’s not enough to warrant writing up software assets en masse.

The report also argues companies are not leveraging these assets optimally, and cites the company’s brand value and patent portfolio as examples of more optimally levered intangible assets. But if this is the case, they shouldn’t be arguing that accounting treatment is to blame. Other intangibles are not written up using the types of analysis the report urges either. There are more important objectives to financial reporting.

What do you think? Would valuing software assets like this improve or distort financial reporting?

Work-life balance: Laptops on holiday

Work-life balance is a topic that comes up frequently in the accounting profession. Robert Half, a recruiting company, surveys accountants occasionally.

38% of accountants take the office with them on holiday in the form of either a laptop or handheld computer. The research also found that 34% of accountants globally admit to working in the evenings, while 37% respond to e-mails and take phone calls in the evening when they have pressing deadlines.

  • I left everything when I went on vacation last month. No laptops, and the phone was off the entire time!
  • Working in the evenings is a given during busy season and sometimes necessary at other times.
  • I respond to emails if I happen to check my work address, but that doesn’t happen regularly at this time of year (see above).

I may have left the computers at home because I was worried about potential surges and didn’t want to buy a protector. But I definitely cut the cord to the office. Generally you aren’t taking vacation if it is a busy time, though.

I was reading and responding to email earlier this afternoon (Sunday!) because I happened to check. It didn’t really feel like work, and certainly not burdensome. It all depends on the current workload. If I was writing this post in March, it might sound different!