The Ethical Barometer

The Trump Administration has proposed putting the Public Company Accounting Oversight Board (or as we called it in the early days, “Peek-a-Boo”) under the SEC. Arthur Levitt, a former head of the SEC who was effective in exposing accounting mumbo jumbo in financial statements, believes it is a mistake to shuffle the function over to the SEC. Mr. Levitt says:

1. The SEC is slow
2. Elimination of PCAOB would undermine confidence in the audit profession

The Barometer concedes the first point to Mr. Levitt. The SEC is slow, except when it comes to Musk Tweets. That sounds like a treat for rodents, but it would be the SEC jumping on Elon Musk for his defiance of the agency. Not that a CEO trashing the SEC is a good thing, but it does seem to be a timeliness focus for the agency.

However, elimination of PCAOB would undermine confidence in the audit profession?

Let’s recap what the audit profession has been able to do all on its own, and all with the mighty PCAOB in place:

Audit quality has not improved much despite PCAOB’ ratings (its minimal sanctions have not helped the cause)
PwC got the wrong envelope for best picture in 2017 — somehow the firm mixed up the envelope — how are you going to do goodwill valuation and ACRS if you can’t see the difference between “La-La Land” and “Moonlight”?
PwC’s tax strategy at Caterpillar netted that company early-morning IRS raids at its facilities
A KPMG partner entered a guilty plea to feeding a friend insider information on clients so that the client could do some advance trading (but he got a Rolex in exchange)
PCAOB fed information to KPMG’s audit folks, turned state’s evidence, and one partner was convicted of collusion with PCAOB (and despite KPMG being given a heads-up on which companies’ audits PCAOB would be examining, KPMG’s audit quality was not affected — there some crackerjack work)
Ernst & Young is now under criminal investigation for allegedly being fed bid information by management so that the independent audit committee of the company board would pick EY for its auditor
KPMG was the auditor for collapsed New Century
PriceWaterhouseCoopers (PwC — and this acronym at least matches the letters in the words) settled for $41.9 million for overfilling federal agencies for its work
PwC, EY, and KPMG settled with the federal government for overfilling travel expenses to the government

The list could go on — and that it just the most recent stuff. What could possibly go wrong with this group handling audits of publicly traded companies?

The semi-private PCAOB has not proven itself to be a fierce watchdog. Perhaps its resources would be better used in an existing regulatory framework such as the SEC. The again the SEC missed both the Madoff and Stanford Securities Ponzi schemes. You can’t relate ethics. Fundamentally, the strength of audit firms is dependent on the ethics and backbones of auditors. From watching out for conflicts to refusing to back down when clients pressure them on issues, the critical juncture lies in auditors’ ability to call ’em as they see ’em, not as the client would like to have it. PCAOB was never ever to move the needle on that metric.

Car dealers seem to be giving some bad credit advice to customers who bought a car above their pay-grades. The advice? Buy another car, then turn the first car over to the repo guy. The dealer makes two sales instead of one. The buyer has a more affordable car. And the lender is stuck with the repo.

Dealers deny the practice. But the Wall Street Journal offered data: Transunion says that there were 24 million auto loans in the US in 2018. About 300,000 of those cars were repossessed — up 17% since 2018 despite a booming economy. Just think of the ethical issues in this practice.

The credit experts tell consumers not to do it because it is bad for their credit score. And destructive to their souls.

Like the Astros, Mr. Milken has never gotten it. During his time since prison (he served only two years of a ten-year sentence because of prostate cancer), he has twice been involved deal-making despite a lifetime ban against, well, deal-making. While he made no admissions, he did settle with the SEC. Let’s be frank: No one ponies up a fine of $47 million to the SEC because of innocence. That was in 1998, and he has walked the straight-and-narrow since then. But somehow the hubris is still there. We have not heard the last of Michael Milken.

It was painful to read. The reports on the apology fest of the Astros leave you with one thought, “C’mon guys!”The report of the Commissioner, which you can find here (https://img.mlbstatic.com/mlb-images/image/upload/mlb/cglrhmlrwwbkacty27l7.pdf.) reads a tad differently. The union got the players immunity for their roles, and it showed.

The Astros had developed a system for decoding their opposing teams’ sign sequences using live game feed. Over time, they then evolved their means for getting that information to the dugout. They went from runners being sent to the dugout, to text messages from the review room to a smart watch or cell phone in the dugout, to phone calls to the review room from the dugout. Then there was the hurdle of getting the info to the batters. They went from clapping, whistling, yelling, and eventually to banging on the garbage can with a bat, which proved to be the perfect low-tech finish to high-tech espionage.

The report concludes that most of the players received signals from the banging and added:

“Several players told my investigators that there was a sense of “panic” in the Astros’ dugout after White Sox pitcher Danny Farquhar appeared to notice the trash can bangs. Before the game ended, a group of Astros players removed the monitor from the wall in the tunnel and hid it in an office. For the Postseason, a portable monitor was set up on a table to replace the monitor that had been affixed to the wall near the dugout.”

The report does not offer conclusions on whether the decoding and banging helped the Astros. However, here is some insight from the Barometer — ignorant in all matters related to sports — in post-season play, the Astros were 2-6 in their road games and 8-1 at home. Ah, the power of those Home-town cheers.

The stark reality of the report does not match the apologies, coupled with a large dose of, “Who knew?” and “It didn’t make a difference.” Okay, on that last one, with one question, “Then why did you do it?”

There was a lot of hedging, hemming, hawing, hesitation, and hubris in the apology campfire meeting. What was missing was full admission and sincere regret. Worse, the folks who worked in the video room are still there — that’s not immunity, that’s organizational culture. The overall message was not what the Commish hoped for in requiring the apologies. Here’s the meeting in a nutshell. “It was bad. We are done with this. We still won.”

There is a criminal investigation into the process that Sealed Air followed in selecting Ernst & Young (EY) as its external auditor. Senior executives at Sealed Air allegedly favored EY by leaking details of competitor KPMG’s bid.The same two executives worked together at Carlisle Cos ten years earlier when EY got that audit contract. Sealed Air has fired one of the senior executives as well as EY.

The bidding process issues arose as the SEC has been looking into Sealed Air’s accounting practices. The agency’s questions focus on write-offs related to asbestos claims. In investigating the accounting issue, the SEC ran across the e-mails that piqued interest in the bidding process.

Years ago, post-Enron, the audit selection process was placed in the hands of the board’s independent audit committee. Management “collusion” (air quotes here in a tip of the hat to the word of our times) was headed off at the pass, we thought.

The Barometer thought that bid-rigging was a thing of the past. A number of professional organizations have codes of ethics that prohibit even the slightest communication between purchasers and vendors during the bid process. Purchasing professionals frown upon saying to vendors something as generic as, “You are going to have to get your price down.” In fact, the foundation for these rules is no ex parte contact. If there are questions, distribute the question and answer to everyone. If there is confusion, clarify for everyone. What a stunning series of events! What a sad commentary on yet another of the Big 4 accounting firms.

BlackRock, the fund manager, fired two of its senior executives last year. The executives had romantic relationships with subordinates. What else is new, you sniff. However, BlackRock did not send out the usual “leaving to spend more time with their families” explanation. Whoever believed such an explanation? They would be lucky to still have families. Nay, nay! BlackRock sent out a memo to its 16,000 employees that said the two executives had broken company rules.

CEO Laurence Fink, who was close to at least one of the executives, said that one of the goals is to make clear that it is important for staff to speak up when they see problems. The egg-shell walking approach of most companies is the signal employees get. They already know what happened. Privacy exists only in the minds of HR and attorneys. The corporate grapevine tops Napa for quality. The hush-hush is a signal of “embarrassing and we were forced to do this to one of our own.’ The public discussion is the signal of, “Enough.”

Full disclosure: Some fund held by the Barometer for some sort of savings, SEP, IRA, etc. is managed by BlackRock. The Barometer saves for a flood, not a rainy day. ‘Tis best not to know exactly how much you have saved — keeps the spending in check.

Bernie Ebbers, the former CEO of WorldCom, a company that was once the largest company in the U.S. (capitalization). Of course, that ranking assumed that the accounting was accurate. It was not — the company had $3 billion in accounting overstatements on its revenues. When WorldCom declared bankruptcy, it was the largest bankruptcy in U.S. history with $107 billion in assets.

Mr. Ebbers was convicted of fraud and sentenced to 25 years in prison. He was scheduled to be released in 2028. However, he was released in December 2019 because he was in the advance stages of dementia. Mr. Ebbers died at home this past week at the age of 78.

Bernie Madoff, he of the largest Ponzi scheme in American history, has requested early release from his 150-year prison sentence because he has “chronic kidney failure” and a life expectancy of 18 months. He is in the comfort-care unit of the prison and initially refused dialysis, but is now undergoing treatment.

Tragic endings for two men who had everything from cattle ranches to Miami and East Hampton estates to Bentleys. It was never enough. The desire for wealth consumed them, yet mere mortals they were and are, subject to the ravages of time and the debilitation of disease.

“The wretch, concentred all in self,
Living, shall forfeit fair renown,
And, doubly dying, shall go down
To the vile dust, from whence he sprung,
Unwept, unhonored, and unsung.”
Sir Walter Scott
1805
The Lay of the Last Minstrel

Wall Street Journal headline February 3, 2020, p. A3

Michael Sanchez, the brother of Lauren Sanchez, Mr. Bezos’s girlfriend, has filed a defamation suit against Jeff Bezos for allegedly claiming that he (Michael) leaked the suggestive photos of Mr. Bezos to the National Enquirer. The Barometer is confused. Mr. Bezos and his experts allegedly believe that the Saudis leaked the photos.

It’s just like junior high, except we never employed the courts and defamation suits to resolve the boy-girl-brother-romance complexities. We just shot spitballs through straws. Disclaimer: They were paper straws.

Economists say that one of the ways we achieve economic stability is to get married and stay married. It seems to be a formula for avoiding lawsuits and entanglement with the Saudis as well.

Rachel Louise Ensign and Ben Eisen, “Wells Fargo Wealth Advisers Struggle as Market Booms,” Wall Street Journal, February 3, 2020, p. B9

The report notes that Wells Fargo Wealth Advisers have grown client assets 12% since 2016. Bank of America and Morgan Stanley are up 21% and 28%, respectively. Wells consumer banking is just not referring as much to the Wealth Advisers. Wells Advisers is paying up to 200% of their revenue from the prior year in order to recruit new advisers to replace those who are leaving because “they don’t want to have to apologize for the firm they work for.”

Oh, what a tangled web and all.

Representative Martin Sandoval, 11th District in New York General Assembly, seemed to favor red-light cameras. We now know why. Representative Sandoval had accepted $250,000 in bribes from red-light camera companies. His wiretapped conversations with company representatives included tidbits such as, “consulting fees” and “go balls to the walls for anything you ask me.” As a result, he entered a guilty plea with sentencing pending, depending upon hi “fully and truthfully” cooperating with federal prosecutors. Translation: Representative Sandoval is throwing the companies and their reps under the bus in exchange for leniency.

Representative Sandoval, soon to be former Representative Sandoval, also faced federal income tax charges. He did not report the bribes as income. On the upside, New York does have quite a few red-light cameras installed. No word yet on their efficacy in stopping red-light runners.

Right up there with “the dog ate my homework” is a new explanation from Amazon’s founder in the midst of a mid-life crisis, “The Saudis did it.” When suggestive text messages from Mr. Bezos to his girlfriend, Lauren Sanchez, showed up in the National Enquirer, Mr. Bezos hired experts to determine who got them to the infamous supermarket tabloid. Their conclusion: The Saudis did it.

The FBI has another theory. Ms. Sanchez’s phone records indicate that she sent them to her brother, Michael Sanchez. The FBI has records showing that Mr. Sanchez received a $200,000 payment from the Enquirer. American Media, publisher of the Enquirer, long ago issued a statement saying that the brother was the source. The FBI is investigating whether American Media attempted to extort Mr. Bezos. American Media has also stated that no third party was involved in their sourcing, just AM and MS doing a deal via a written contract. The Wall Street Journal has reviewed the contract, the text messages, and the payment documentation. Mr. Sanchez says that the Journal has it wrong.

Carlos Danger, Pierre Delecto — these public figures with online presences that they somehow believe are secret. It’s all going public, with or without the Saudis. Think before you post, send, text, tweet.

Goldman Sachs has announced that it will no longer have companies with exclusively white male boards as going-public clients. Unless those clients are in Asia, Latin America, or the Middle East.

Along with that, Goldman Sachs also announced that it will no longer fund oil and gas development in the Arctic region. There goes Alaska.

This from a company that just had its tentacles into IMBD, a Malaysian government investment fund. That finished with charges of money laundering, and Goldman agreeing to a fine for ignoring red flags that were beating it about the head and shoulders. A Goldman employee entered a guilty plea to helping Malaysian government officials embezzle from the funds. Just the sight of the Jho Low character at the heart of IMBD scurrying around with the rich and famous and investing in DiCaprio films should have raised at eyebrow or two at the now highbrow firm. The company’s revenue was down 13% as a result of its legal cost alone on that choice of customers.

Goldman may have made a splash with its announcement at Davos and won the hearts and minds of Greta fans by abandoning the Northern Slope. Hoity-toity is not the same as cautious or scandal-free. Woke does not equal wise.

Mr. Stumpf, who presided over the largest growth of bank accounts and services per customer in the banking industry, also agreed to pay a $17.5 million fine. The individual sanctions against a banker were unusual. Following the 2008 market and bank collapses, banks were held to account with fines and compliance requirements. However, there was little to no accountability for executives at the Wall Street banks post-crisis. Tjr settlement appears to be a message to banking executives on minding the store more carefully. Know what thy employees are doing.

Dr. John Kapoor, the founder of Insys, who was convicted in May 2019 of conspiring to bribe doctors and defraud health insurers, was sentenced to 5.5 years in prison. The Chandler, Arizona-based company had a market value of $3.2 billion in 2015. Its fentanyl drug, Subsys,was a top seller. Today Insys is worth only $3.87 million, because of all the civil lawsuits by families of those who died of overdoses and by state and local governments seeking to recoup the costs of treating those addicted to the drug. Dr. Kapoor had already surrendered his 59% interest in the company. The rights to Subsys royalties were sold for $60 million.

Prosecutors sought 15 years because of the evidence at the trial that Insys paid doctors for sham talks and offered them lap dances in exchange for increasing their Subsys prescriptions. But Judge Allison D. Burroughs was unsure whether Dr. Kappor was the central player in the conspiracy. Insys’s former CEO and a Vice President entered guilty pleas before the trial and testified against Dr. Kapoor. They received sentences of three years and 30 months, respectively. The sentences for sales personnel, who also cooperated with prosecutors, ranged from one year to 33 months.