Audit

Tax prep firm Gilman Ciocia has acquired Madison CPA, a Fort Lauderdale accounting firm.

The Treasury Department's recently established Advisory Committee on the Auditing Profession can play a role in improving the usefulness of audits, said a letter from an audit profession watchdog group.

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.

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.

Dave Scudder has been following developments in auditing standards closely.

LeMaster Daniels has acquired Abramson Pendergast & Co., another CPA firm based in Washington State.

Deloitte's office in the Netherlands is preparing for a lawsuit by a group of investors there over its audits of food distributor Royal Ahold in a case that could cost the firm hundreds of millions of euros.

AccountantsWorld has teamed up with ExpertPlan to help accountants provide retirement-planning services to clients.

CPA firm Habif, Arogeti & Wynne has acquired another Atlanta-based accounting firm, Miller Ray Houser & Stewart, in a multimillion-dollar deal.

The Public Company Accounting Oversight Board plans to explain the deficiencies it found in its recent inspections of smaller auditing firms during an upcoming webcast.

WebCPA presents a free online session discussing various facets of philanthropy and its potential benefits for accountants.

Auditors at some of the largest accounting firms are working on tougher standards for valuing the assets of banks in an effort to calm jittery investors.

It began in college, continued in law school, and still exists today, my fascination with court and disciplinary opinions that provide an inside view of something the involved parties would rather had never come to light. The most recent one is a PCAOB disciplinary order involving an accountant who worked for KPMG.

CVS CAREMARK DISMISSES KPMGCVS Caremark Corp., a prescription drug provider, has jettisoned Big Four firm KPMG as its independent accountant and named Ernst & Young as its successor.