JOBS Act is worrisome but startups have no monopoly on accounting charades

| April 11, 2012 | 0 Comments

The reading on the outrage-meter for the recently passed JOBS Act is fast approaching the danger zone. You can always count on Matt Taibbi of Rolling Stone to take the umbrage to new heights. He writes that the JOBS Act couldn’t “suck worse” and points out the lunacy of some of its provisions. His overall conclusion is that it “appears to have been specifically written to encourage fraud in the stock markets.” I think he’s right, and I’m somewhat red-faced about my earlier post re the crowdfunding component. I still love this aspect, but I should have also delved into and explained to FA readers some of the obvious weaknesses of the entire legislation, which may undo whatever net good the crowdsourcing component brings. Mea culpa. If you want a balanced view on how drastically this legislation will change investor safeguards then a good place to look is a memo created by white shoe law firm Davis Polk & Wardell for its corporate clients. Here are some verbatim quotes regarding the new freedoms that will be given to an “emerging growth company” (EGC) & its investment bank for the first 5 years after an IPO:

  • An EGC would not be required to provide an auditor’s attestation report on its internal controls.
  • An EGC would not be required to hold shareholder advisory votes on executive compensation, or disclose certain executive compensation information required for other companies, such as a comparison of executive pay to performance and median compensation
  • An EGC would not be required to comply with new GAAP accounting pronouncements applicable to public companies until the pronouncements are also applicable to private companies.
  • An EGC would not be required to comply with any future PCAOB [Public Company Accounting Oversight Board] rules mandating auditor rotation, or requiring a supplement to the auditor’s report covering additional information about the audit and the financial statements.
  • The JOBS Act would make three significant changes to current law (and possibly current practice) regarding the role of research analysts around the time of an EGC’s IPO. It would:
    • permit publication of a research report related to an EGC prior to a proposed IPO by that company;
    • rescind [...] rules restricting a research analyst from participating in meetings with an EGC alongside investment banking personnel; and
    • rescind [rules] prohibiting research about an EGC during any particular period of time following either its IPO or the expiration of any lock-up period related to its IPO.

All of this seems like a very bad move. Especially when you consider the liberties that many startups are already taking with generally accepted accounting principles. The professors who run the Grumpy Old Accountants blogdo a beautiful takedown of the fun being had with numbers by the likes of Zynga, Groupon, Demand Media and LinkedIn.

So, there you have it…lots of revenue and asset valuation assumptions in these internet companies.  Do you really believe that these companies with their limited operating histories, and often inexperienced management, are able to make the kind of assumptions and judgments that drive their accounting?  Scary thought, huh?

With all of this fuss over startups, the blue-chip companies in other industries are probably feeling pretty good about themselves. Not so fast. A recent article by Bloomberg’s Jonathan Weilshows quite well that it’s not just the new kids on the block playing charades.

Depending on how you look at it, Bank of America Corp. last year had a $1.4 billion profit or a $3.9 billion loss. Both figures are accurate. The big difference is that the second one is harder to find in the company’s financial reports. To locate the first number, known as net income, simply check the bottom of Bank of America’s income statement. The other figure, called comprehensive income, is buried deep in the company’s statement of changes in shareholder equity, where the loss is easy for readers to miss.

It appears that the accounting fun & games are for the old as well as the young. —

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Category: Accounting