The poster child for sleazy subprime mortgages, New Century Financial, is facing a criminal probe over how they booked gains. It appears they may have been using the MSU Method of Accounting (that would be “Making Sh*t Up”).
In a filing with the U.S. Securities and Exchange Commission, New Century said it was “extremely difficult to validate the assumptions” it used in determining its gains from these transactions called securitizations.
In related news, KPMG, their auditor just quit, something which is a gigantic red flag, and New Century just announced they are laying off 2,000 more employees. Thus, the company as it existed has cratered completely, leaving much road kill in its path. A few fat cats got richer, there was a huge transfer of wealth from the poor and middle class to the ruling class. But this time they all got so greedy and exploitative that their mad schemes for more plunder have exploded in their faces.
CPA Sue Sez: Here’s what New Century’s defense will be during the criminal investigation: (A)”We did not have to consider affordability in our consideration of collectability”: (B) “The debtor is an adult, entirely responsible for his or her own actions. The contract is fair, and allows early repayment. The debtor is responsible for taking actions to protect himself by refinancing. *Thus* we have *no* responsibility”; and (C) In the event of a BK, we are ultimately protected by the lifetime ball & chain of the new bankruptcy law.”
The SEC rules (SAB 102) have been there for a long time, and there’s no excuse for not following them and little if any weasel room.
a]n institution’s method of estimating credit losses should be well documented, with clear explanations of the supporting analyses and rationale.”6 Additionally, the Audit Guide states that “the institution’s conclusions about the appropriate amount [of the loan loss allowance] should be well documented.
An estimated loss from a loss contingency, such as the collectibility of receivables, should be accrued when, based on information available prior to the issuance of the financial statements, it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.
Translation: The MSU Method of Accounting is not allowed.
Remember the hanging chads? There was lots of superior sniggering about it at the time this side of the pond as you might imagine.
Looks like our own chads are hanging right now: http://1820.org.uk
Couldnt be anything to do with the masisve rise in popularity of the Scottish National Party could it? Its not over yet: 31 seats still to be announced:
http://news.bbc.co.uk/1/shared/vote2007/scottish_parliment/html/region_99999.stm
Actually the MSU method of accounting is perfectly acceptable, as long as it is “well documented, with clear explanations of the supporting analyses and rationale.†In my understanding, there is (and could be) no method of accurately stating future losses– that would be predicting the future– so accounting relies on estimates, which are by definition educated guesses (some more educated than others). That’s one thing that makes accounting fun!
I have not done future loss estimates, except in the classroom, but in choosing a tax position, you try to get one that’s to your best advantage, while still in the ballpark of what is “acceptable.” It’s when you screw up and find yourself out in the parking lot alone (and without your auditor) that you’re in trouble.
Incidentally, don’t you wonder why KPMG is just quitting now, when New Century probably has been using the same estmate method for some years? I guess they were fully on board while the fat cats were making money. Now that the ship is sinking, they’re rethinking their position?
After the Arthur Anderson indictments, EVERY auditor is scared!
The comment by Gus as it relates to KPMG may be on target. Enron’s public accountants didn’t escape thw wrath of SEC etc although a later analysis attempted to clear them of error, omission or downright skullduggery. I for one do not see how an error or omission of the magnitude currently being discussed went unnoticed by anyone.