NYU accounting and finance professor Baruch Lev is one of the most incisive contrarian critics of current accounting practices. In his recent book, The End of Accounting (written with Feng Gu) and his blog, Lev argues that current accounting methods have become hopelessly out of step with how value is created in the modern economy, and that an accumulation of new accounting regulations have only made things worse. Professor Lev backs up his critique with reams of market data and regression analyses to demonstrate how flawed accounting measurements have caused earnings and book value to become nearly meaningless to investors and now create very serious managerial biases and errors in how capital is allocated.
MarcumBP’s Drew Bernstein met with him to understand his views on where the principles of accounting went awry and how the structure of accounting might be reformed.
"If the trade war continues to escalate as Trump has threatened, there's going to be a big impact on the capital markets... I expect that we're going to see a winter in IPOs next year."
Paul, you've gotten to this point where you've become this guru for all issues related to accounting in China. How did that journey come about?
I came to China 21 years ago. I was transferred here by the international accounting firm PriceWaterhouseCoopers. It was Price Waterhouse at the time. I was in China with them for seven years. Then I took early retirement from PwC and I tried playing golf for a while, but got bored with that. So I went back to school. I first studied theology. I enjoyed the academic side of it, so I decided to get a PhD in accounting. I chose, as my topic for my dissertation, the development of the accounting profession in China.
One of the things that I discovered in my research was that there were gaps in the regulation of Chinese companies that were starting to rush to U.S. stock exchanges in the early 2000s. Those gaps in regulation were likely to lead to an environment where there might be a lot of fraud. I predicted it would happen in my doctoral dissertation. About the time I finished it, it all came true. There were over 100 cases of fraud brought against overseas-listed Chinese companies. My work came to the attention of the Public Company Accounting Oversight Board (PCAOB), which asked me to serve on their standing advisory group. And also a lot of hedge funds and other market participants got interested in what I had to say.
My blog, The China Accounting Blog, got quite a bit of attention. After a while, basically, everybody who was following the China stock market was reading what I was writing. That has led to me being, probably, the leading Western expert in Chinese accounting and auditing problems for overseas -listed Chinese companies.
2018 has been a banner year for Chinese IPOs thus far, with 23 Chinese companies going public on the U.S. stock markets in the first nine months. In the technology sector, Chinese innovators are outpacing American companies in the race to the opening bell. And there is a gathering herd of Chinese “unicorns” with multi-billion dollar valuations and strong backing from large private equity funds waiting for their turn to tap the public markets.
An Interview with Howard Schilit
Howard Schilit is America’s foremost scholar of the accounting tricks that public companies use to make their financial performance appear more enticing than the underlying reality.
His seminal work, Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Statements, is required reading for financial analysts and aspiring fund managers. But like the prophet without honor in his own country, Schilit’s work has been strangely ignored in his own profession of accounting. MarcumBP’s Drew Bernstein sat down with Howard to learn about the latest in accounting skullduggery and why every auditor should be schooled in the fine art of financial fraud.
More than eight years into the current stock market rally, professional equity bears have become an endangered species on Wall Street. And yet when I had the chance to sit down with famed short seller James Chanos last week, he was friendly, open, and highly optimistic about the opportunities to practice his tradecraft of sniffing out skunky accounting and malodorous business models.
Following the Party Congress, Is China on Path to Global Ascendancy or a Nasty Bust?
And Drive Any Professional Services Firm Into the Ground
Over the past twelve months, accounting scandals have tarnished some of the most illustrious corporate names and embarrassed some of the putatively smartest investors on Wall Street.
Effective July 10, 2017, the Securities & Exchange Commission ("SEC") began allowing all companies to submit non-public, draft registration statements for initial public offerings ("IPOs"). Why make this significant change? In altering the disclosure requirements, the SEC hopes to reduce organizations’ exposure to market fluctuations while going through the IPO process, rationalize the filing process so that compliance is less burdensome and expensive for small organizations, and further streamline disclosures to make them more meaningful and useful to investors.
The SEC’s new rule is largely an effort to reverse the decline in IPOs, encourage more public offerings, among both U.S. and foreign companies, on U.S. exchanges, and provide investors with access to a wider range of small, successful companies in which to invest. While this ruling may encourage more companies to consider (or reconsider) listing within the U.S. market, for foreign issuers, numerous complexities remain that should be considered.
Back in January of 2017, the Securities & Exchange Commission (SEC) announced a significant expansion of its cooperation framework with Hong Kong's Securities and Futures Commission (SFC), as the SEC seeks to effectively protect U.S. investors from fraud and trading abuses in increasingly globalized capital markets.
The new framework expands on the agencies' 1995 Enforcement Cooperation MOU and 2002 IOSCO Multilateral MOU. It provides for significant information-sharing and enforcement cooperation including, but not limited to, investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies. With this expanded cooperation framework, the SEC is signaling that market players cannot evade the reach of U.S. law simply by operating from an offshore location.