Big 6 accounting firms call for changes

The Big Four audit firms – Deloitte, Ernst & Young, PricewaterhouseCoopers, and KPMG – along with the number five and six firms – BDO and Grant Thornton – have joined forces to call for significant changes to the way public companies report their results.

They propose businesses report realtime financial data via the Internet, rather than quarterlies. It’s obvious that this would provide more timely information for investors, and that’s a good thing. It also seems like this could at least take advantage of the costly effects of Sarbox, that of thoroughly documenting controls – because the controls would be even more critical if information is constantly updated and available.

Either way it’s nice to know the guys at the top are still thinking about ways to improve the industry. Taking advantage of technology, especially the web-based variety, will continue to grow in importance not just for auditors and accountants, but in every aspect of business. Some accountant bloggers have been quite hysterical about the lack of focus on our part on technology.

Now if I can slide off on a tangent, I’d like to draw your attention to the headline (from the link above): “Accounting firms want company accounts revamp, paper says.” First of all, is this even a sentence? Is revamp a noun now? I had to read that thing several times over to really get what they were trying to say.

BlackBerry maker getting the probe on options backdating

The Ontario Securities Commission has launched a probe of Research In Motion’s stock option practices. An OSC spokesperson said the review was launched in early October, which is not long after the company announced it would have to restate past financials because of its options accounting.

Another tech company is having difficulties with their options accounting. The reason is clear: the prevalence of stock options as compensation in cash-strapped startups.

RIM revealed Oct. 28 that the U.S. Securities and Exchange Commission had launched an “informal inquiry” into the way the company granted stock options. RIM did not disclose information about any similar OSC probe.

And the SEC had announced an investigation over a week earlier! Seems to me that the two major commissions in North America should have been communication between them.

This whole options backdating thing seems to me like it’s something you would intuitively know is against the rules, isn’t it?

That quaint value pricing fad

It’s all the rage these days on accounting blogs – value-based pricing. You’ll see it everywhere, hip accountants (Who’s a hipper accountant than one who blogs? One who blogs about value pricing!) posting missives decrying the historical basis of hourly billing and extolling the virtues of pricing based on value.

What value pricing means to them, is that we should charge for our services based on a basically intuitive notion of the “value” we’ve provided. Sometimes that value is quantifiable, when you identify cost savings the client would not have come up with on their own. (These poor clients, they’re a hapless bunch to the value pricing gang.)

But most of the time it’s like pulling a number out of thin air. What’s the value of creditor-proofing? Is the value the money you save the company that would’ve gone to the creditors? How about due diligence? Surely a percentage of the sale price is the value of that!

You see, value is in the eye of the beholder. Clients will have a different value attached to the services provided than the provider does – it’s inevitable. How about advising a client against a tax plan that could potentially draw the attention of the CRA? (Aside: CRA is the Canada Revenue Agency, our IRS.) If advice is heeded and the attention diverted, where is the value? The amount the client would’ve had to pay after a tax audit?

In most cases (possibly not with the Big Four, I’ll have to consult with my friends one that one) there’s already value pricing in effect. It’s called the “fee quote.” Many of our clients – actually most – request and get from us a quote at the start of whatever work we’re doing for them, typically audits, of how much the bill is going to be. In this way, the “value” of the service to be provided is agreed upon. Isn’t this a better way to do things than generating a figure to represent the value created at the end of the job?

If the job turns out to be more difficult than forecasted, we’ll usually sit down with the client and explain what sort of extra work we’re having to do and why we need to do it. We provide an itemized list of the extra work and the extra time it required. Right the value pricing gang is choking on the bit: “Extra time? Value isn’t based on time! The billable hour is evil!”

Any way you swing it, the fee quote is the type of value pricing that both clients and professional service providers prefer, because it sets expectations at the beginning of the work and it doesn’t expose those despicable timesheets to the client. And timesheets are still very useful in determining the cost to the firm of an audit.

Income trusts in Canada to be taxed after all

The Canadian Federal government announced on Halloween that income trusts will now be subject to income tax of 34% in line with corporate income taxes in the country. You might remember that many corporations were converting or considering conversion to income trusts to take advantage of the flow-through nature of the structure recently.

I argued that the tax corporations would save upon conversion could be considered unfair tax anyway since it was entirely consisting of double tax. The government seemed to disagree with me or not care, and made the announcement to the apparent chagrin of many people, which is strange considering how much heat the government was taking to close the loophole and maintain their base.

What I was thinking today is that the government could end up enlarging their base with this move. They wanted to take away the incentive for companies to convert, and they’ve done that. Bell Canada is reconsidering the move to income trust and probably won’t do it after all. Telus may reverse plans to convert. So things will stay the same on that front, only now income trusts that were always income trusts (ie. mutual funds) will also be taxed.

This is probably going to only increase the already-embarrassing federal surplus in the country, which was recently in the news because it was much higher than forecasted.

I’m not sure this is the most elegant solution to the problem, but it’s a solution when one was needed, and for that the government should be applauded. Perhaps introducing some rules that made income trusts even more restricted would’ve been a way to discourage corporate conversions while not introducing a whole new tax on trusts. After all, there are still some pretty fundamental differences between a mutual fund and an operating company.

The [professional services] sky is falling!

If you’re into this sort of thing, you have probably noticed that about 95% of accounting related blogs are focused on the impending death of professional services firms, because of course all PS firms have lost the plot and have ceased to be useful to business.

I can’t even link to all of the accounting blogs bemoaning how horrible PS firms have become and how business no longer finds their services useful or wanted. Actually, by default I’m already linking to them in my blogroll, because by default (it seems) all accountants writing blogs hate the industry they’re in.

Maybe I’m just a starry-eyed optimist with my head in the clouds, but I’m not buying it. There’s certainly nothing wrong with my firm – client service and professionalism are cornerstones. I know it because I see it, every day. I know it because I’m doing it, every day.

And who loves an audit anyway? It’s not the management of a company that benefit from audits (necessarily), it’s the shareholders, potential investors, debt-holders, and other public stakeholders who do. I don’t want to give the impression I’m not always thinking of ways to improve my client’s business, because I am, but I’m realistic when I recognize that first and foremost we’re there to make sure the financial statements are all good.

The bottom line is this – we’re hired because of our knowledge, and we try to help our clients every chance we get. Maybe there are some bad apples in the barrel, but we aren’t all bad. And if value-based pricing is so great, the market will decide. If there are some bad communicators out there with CPAs, the market will even things out.

Let’s find something else to blog about.