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PCAOB board member complains of persecution by senators

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Christina Ho, a member of the Public Company Accounting Oversight Board, complained publicly on LinkedIn that a pair of influential senators are singling her out for audit failures at firms.

In a LinkedIn post on Oct. 17, Ho referenced a letter a week earlier from Sen. Elizabeth Warren, D-Massachusetts, and Sheldon Whitehouse, D-Rhode Island, calling on the PCAOB to establish stricter accountability for firms with unacceptable deficiency rates. They noted that last year, the PCAOB’s review of over 200 accounting firms’ audits found that 46% had errors so significant that the auditor “had not obtained sufficient appropriate audit evidence to support its opinion” about a public company’s financial statements and financial reporting. 

In the letter, they pointed to a statement from a speech in September by Ho at an Institute of Internal Auditors event. “Last month, Board Member Christina Ho denied that the inspection results were a problem, instead claiming that ‘there is another side to the story,’ and that ‘PCAOB has become overzealous in its enforcement program,” falsely claiming that the inspection results “lump all deficiencies together without a qualitative assessment of their severity.’

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Center for Audit Quality CEO Julie Bell Lindsay (left) moderates a 2022 panel discussion with (left to right) Public Company Accounting Oversight Board chair Erica Williams and board members Duane DesParte, Christina Ho, Kara Stein and Anthony Thompson at the AICPA & CIMA Conference on Current SEC and PCAOB Developments in Washington, D.C.

Ho complained that the Senators’ letter accused her of appearing to be “focused on downplaying and misdirecting attention from these atrocious findings,” and of making false statements in her speech. “The letter also contains a thinly veiled threat to me (and others) by noting how Senator Warren had successfully urged the Securities and Exchange Commission (SEC) in 2021 ‘to remove and replace all members of the PCAOB.,” she added.

“The fact that the Senators decided to single me out is troubling because I believe they are trying to stifle me from expressing views inconsistent with their false narrative,” said Ho. “I am writing to: (1) protect investors, by providing context as to why the Senators’ alarmism is unwarranted; and (2) defend myself and my views which are based on over 30 years of professional experience.”

Ho explained why the 46% deficiency rate should not be as alarming as the senators said.

“To be clear, I am not saying that a 46% deficiency rate or a 5% incorrect audit opinion rate is acceptable, it’s not,” said Ho. “What I am saying is that when you put the 46% figure cited by PCAOB and the Senators into context, the sky is not falling, and for the Senators to state that investors ‘face a coin flip when it comes to whether they should believe and trust the results of public companies’ audits,’ is unfair and unwarranted.” Since my work at the U.S. Department of the Treasury (Treasury) leading the governmentwide implementation of the first federal open data law sponsored by Senator Mark Warner (D-VA), I have dedicated my career to promoting data-driven government and evidence-based policymaking, because that is how we build trust in government. The best way to protect investors is to drive audit quality, especially through innovation. However, regulating through enforcement will not be effective. Fear might extract compliance, but it will not achieve audit quality. There is a significant opportunity to promote audit quality through innovation.”

Ho said she had worked with 10 experts in the past two years to develop recommendations to the PCAOB regarding ways to promote audit quality through emerging technologies like artificial intelligence. 

She took umbrage at the accusations from the senators. “As an immigrant and a naturalized U.S. citizen, one of my most treasured values of American democracy is freedom of speech,” said Ho. “Like many women of color, it has taken me a long time to be able to use my voice to express my views. As a public servant who contributed significantly to the advancement of federal financial transparency and accountability, I have earned the trust of many people in governments, industries, academia, and civil societies. As a PCAOB Board Member, I have applied my expertise in auditing, financial reporting, technology, and public policy to advance the PCAOB’s mission of investor protection. That is why the Senators’ letter was so stunning to me.”

She felt threatened by the senators’ letter. “U.S. Senators have tremendous influence,” said Ho. “Senators Warren and Whitehouse made it clear in their letter to the PCAOB that Senator Warren got the former PCAOB Board fired. Is this a threat for simply using my voice to speak the truth in the name of investor protection? If Congress did not want dissenting voices on the PCAOB Board, why did it pass a law that required a five-member board to govern the PCAOB? Yes, those in charge have the power to fire me without cause; the power to put my daughter’s healthcare, education, and future in jeopardy as I am a single parent; the power to deprive investors of the whole truth; and the power to sow distrust about the public company auditing profession and with it our capital markets.”

Ho pointed to her right to speak out as an American. “But why?” she wrote. “Is there anything more undemocratic than trying to silence the voice of a fellow American? Is there anything more abusive than U.S. Senators’ thinly veiled threat to take away the jobs of public servants just because they have different perspectives? Is there anything more hypocritical than Senators who claim to serve underprivileged and underrepresented populations, but do not think twice about threatening a woman of color for simply doing what she believes is right?”

She pointed out that the PCAOB is not a federal agency even though it is a federal regulator.

“I am not a political person,” she added. “I was a career executive at Treasury and served under three Treasury Secretaries during two Administrations. I took an oath to serve the American people and support the Constitution, which I take seriously every day. I agree that the PCAOB should be held accountable. Like all financial regulators, PCAOB has enormous power. However, unlike other financial regulators, we are not a federal agency. In my opinion, all regulators should be subject to congressional oversight because unchecked power is dangerous and harmful to our people and democracy. I welcome any opportunities to be held accountable for doing my job honestly and serving investors as well as the American people at large.”

Ho suggested in her IIA speech that financial restatements were a better measure of audit quality than the audit deficiency rate. “To me, the best and most direct metric that measures reporting, and audit quality is the number of public company financial restatements, and this particular metric suggests a more positive and hopeful reality,” she said. 

The senators’ letter also criticized a statement by PCAOB chair Erica Williams in response to the report.

“In a statement upon the release of the report, Chair Williams commented that: ‘These inspection results point to some small signs of movement in the right direction.'”

“This is the wrong conclusion to draw from an embarrassing and intolerable set of findings,” wrote Sen. Warren and Whitehouse. “Even more troubling is the PCAOB’s attribution of these systemically high failure rates—which appears to affect virtually all auditors—to ‘more isolated incidents’ and outliers.”

Williams in turn seemed to counter Ho’s claim that restatements are a more accurate reflection of audit quality than deficiencies during a speech last week. 

“These Part I.A deficiencies are relevant when assessing the quality of work done by an audit firm,” she said. “But audit quality is complex, and it escapes simplistic proxies or measures. For instance, some have suggested that audit quality can be best measured by the number of issuer restatements. Specifically, some argue that a relatively low number of restatements translates to high audit quality. I believe that view is too simplistic. A properly performed audit should identify errors before the need for restatements. At the same time, a poorly performed audit does not always mean that the financial statements are erroneous.”

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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