Audit & Accounting

The Financial Accounting Standards Board has released its preliminary views on financial instruments with the characteristics of equity in an effort to simplify a patchwork of 60-plus pieces of guidance.

The Internal Revenue Service and the Treasury Department issued a notice that allows taxpayers to make corrections for operational failures in complying with rules for nonqualified deferred compensation, but only when the failures are unintentional.

A survey of accounting industry leaders from around the world found overwhelming support for convergence of accounting standards.

Adding to its continuing professional education portfolio, Thomson Tax & Accounting has acquired AuditWatch, a high-profile audit-training and process improvement consulting firm headquartered in Reston, Va.

The city of Miami named McGladrey & Pullen as its external auditor.

Problems with revenue, related-party transactions and outside auditors were among the deficiencies found among auditing firms, according to a recent report.

The Tax Council Policy Institute plans to host a webcast on the business tax implications of the Tax Reduction and Reform Act, a bill introduced by House Ways and Means Committee Chairman Charles Rangel, D-N.Y.

The U.S. Supreme Court heard arguments in a case involving the ability of trusts to deduct fees for investment advice.

Something out of the Stanford Graduate School of Business (courtesy of Marguerite Rigoglioso) tickled my interest when she said that two Stanford researchers claimed that what investors fear the most is not the risk of a loss but rather the risk that they may do poorly relative to their peers. This especially comes to the surface in light of the current economic plight and sub-prime mortgage debacle. Apparently, these Stanford researchers, Peter DeMarzo and Ilan Kremer, said that individual investors care deeply about how their level of wealth compares with others in their peer group and community. “Investors fear being poor when everyone around them is rich,” pointed out DeMarzo, the Mizuho Financial Group Professor of Finance at Stanford’s Graduate School of Business. Kremer, who is Associate Professor of Finance, added, “It’s worse to have a lower income in an area where everyone is wealthy than it is in an area where everyone has a similar income as you.” They explained that this concern centers around the fact that the cost of living in any community may very well depend on the wealth of its residents. In other words, the more money people have, the more expensive will be their homes, not to mention all sorts of amenities. Using economic models, the researchers noted that external concerns have great consequences on the manner in which people invest. I don’t find this unusual as people oft-times decide on portfolios based upon what others have. It’s kind of a “herd” mentality with the built-in fear that others will rake in the gold while you will not. DeMarzo and Kremer said that they found a traditional economic assumption whereby people are driven by the straightforward desire to maximize their wealth as simplistic but that as soon as actual consumption decisions are considered, peer pressure comes into play. “We might classify behavior based on relative wealth as ‘irrational,’ but in choosing similar, risky portfolios, investors are actually doing what makes sense to them,” emphasized Kremer. They also discovered that investors tend to congregate around high-tech investments (fiber optics, internet-related infrastructure) that have the potential to return big. “These are typically high-risk stocks that, in seven out of eight cases, are likely to go bust. But people are willing to invest in them in the hopes that they’ll hit that one-in-eight jackpot,” added DeMarzo. According to DeMarzo and Kremer, when people begin gravitating to specific investments, the price of the assets they hold may become over-inflated. However, they do find that even if people know a stock is overpriced, their fear of doing something different from their peers and potentially losing out makes them move in ever greater numbers to the swelling investment. For individuals, herding can also provide a kind of buffer when the bubble bursts. “If everyone loses his or her money together, it’s perceived as not as bad as if just you alone lose,” said DeMarzo. Thus the “keeping up with the Joneses” school of investing has benefits on the upside as well as the downside. I don’t know. I tend to march to my own drummer. It seems to work better than worrying about what others are or are not doing.

KPMG International saw combined revenues from its member firms rise 17.4 percent to $19.8 billion in fiscal year 2007.