My latest column is up at American Banker, “Are Cozy Ties Muzzling S&P on MF Global Downgrade?”

You may recall the last time I wrote about MF Global. That story was about the “rogue” trader that cost them $141 million. In the meantime we’ve seen another “rogue” trader scandal and PwC has given MF Global clean opinions on their financial statements and internal controls over financial reporting since the firm went public in mid-2007.

I’m sure PwC thought everything was peachy as recently as this past May when the annual report came out for their year end March 30. Instead we’re seeing another sudden, unexpected, calamitous, black-swan event that no one could have predicted let alone warn investors about.

Right….

This video is NSFW. Many will find it offensive. I find it offensive – the dogfighting scene is antithetical to my love for my Rottweiler – but the phrase “99 problems” has entered the popular lexicon as a result of this video. You can’t pick your inspirations…

Most media enable him.

His latest stunt, ostensibly meant to save Bank of America while closing a savvy deal for Berkshire Hathaway, garnered laudatory headlines. Bank of America spun Buffett’s $5 billion investment for maximum effect.

Buffett supposedly came up with the idea in the bath. Several journalists added to his repertoire of folkways by reporting it.

Unfortunately, Bank of America is going to need more than $5 billion and temporary use of Warren Buffett’s aura to solve their problems.

The Wall Street Journal, September 2, 2011: U.S. regulators have pushed Bank of America Corp. to show what measures it could take if conditions worsen for the Charlotte, N.C., lender, according to people familiar with the situation.

Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank’s most profitable division.

It’s easy to forget that Buffett is the CEO and Chairman of a publicly held company when he’s seen scurrying around like Mighty Mouse, nibbling at failing banks and pulling billions from his fanny pack. Berkshire is a big company with some shareholders that aren’t him, his family, or his ego-stroking entourage otherwise known as the Board of Directors.

Buffett’s Bank of America move is not the kind you see most fiduciaries, bound by duty and good faith, make. It’s a public relations coup as performance, designed to leave a refreshing aftertaste.

Instead, investors are often stuck with a bitter one.

The next time something goes terribly wrong at a Berkshire Hathaway company, there’s a strong possibility no one will hear about it. Warren Buffett and Charlie Munger won’t be held directly responsible either. That’s the beauty of Buffett’s version of a conglomerate corporate structure, decentralized to such an obscene level such that its minimalism is brandished as a feature not a bug.

As our first owner-related principle tells you, Charlie and I are the managing partners of Berkshire. But we subcontract all of the heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication: Though Berkshire has about 260,000 employees, only 21 of these are at headquarters.

Buffett judges the investments he makes ruthlessly, but allows his operating companies to run on autopilot. It’s a wonder such financial, legal, and regulatory issues as the Salomon Brothers slip-up, Berkshire’s non-prosecution agreement with the Department of Justice over its dealings with AIG from 2000-2004, the James River lawsuit, and Sokol’s usurpation ever saw the light of day. It’s a testament to a few diligent folks who pushed those rocks, like Sisyphus, up transparency hill.

None of the issues mentioned above has tarnished Buffett’s halo for long, but the list of missteps grows longer. The Berkshire chairman claims plausible deniability. That’s made possible by the insatiable appetite of investors for gurus and sages rather than sirens.

The most frequent rebuttal to any attempt to burst Buffett’s bubble of infallibility is that “proof is in the performance”. Lots of long-term investors swear by Berkshire Hathaway stock and hang on every word from Buffett and Charlie Munger for investment insight.

But, as Aaron Task at Yahoo’s Daily Ticker recently reminded us, all that glitters is not gold:

“…investors who’ve followed Buffett into investments like Goldman Sachs and GE got burned, assuming they adhered to Buffett’s dictum about “forever” being the best holding period. The rest of us didn’t get the big dividends Buffett earned and both stocks are currently trading below the levels when Buffett made his “confidence-boosting” investments in 2008, Goldman by 12% and GE by 37%.

Finally, shares of Buffett’s own company, Berkshire Hathaway, have underperformed the S&P 500 in the past year and the company recently split its B-shares, violating yet another of Buffett’s not-so-sacred tenants.”

Buffett himself has admitted that being too big now affects his ability to capture outsize returns for the primary business of producing cash from other companies.

From the Berkshire Hathaway 2010 Annual Report:

The past growth rate in Berkshire’s book value per share is not an indication of future results.

In the years since our present management acquired control of Berkshire, our book value per share has grown at a highly satisfactory rate. Because of the large size of our capital base (shareholders’ equity of approximately $157.3 billion as of December 31, 2010), our book value per share will very likely not increase in the future at a rate even close to its past rate.

Buffett’s reluctance to sell loser portfolio operating companies or fire under performing managers means he has to make repetitive $5 billion Bank of America and Goldman Sachs preferred stock plays to compensate for tragic flaws like misplaced loyalty and day-to-day conflict avoidance.

And then there’s the numbers.

Berkshire Hathaway is a publicly traded company, listed on the New York Stock Exchange and regulated by the Securities and Exchange Commission. The integrity of Berkshire Hathaway’s external financial reporting should be ensured by the strictures of the Sarbanes-Oxley Act of 2002. Berkshire Hathaway and Warren Buffett, however, pay no more than lip service to the requirements and reject many other recommended corporate governance practices.

What’s left – of the financial reporting process, the internal audit organization, and the external audit relationship – is not enough, in my opinion, to prevent someone from spinning straw into gold.

Questionable corporate political campaign finance practices and foreign corrupt practices in the mid -1970s prompted the U.S. Securities and Exchange Commission and the U.S. Congress to enact campaign finance law reforms and the 1977 Foreign Corrupt Practices Act (FCPA) which criminalized transnational bribery and required companies to implement internal control programs. The Treadway Commission, a private-sector initiative, was formed in 1985 to inspect, analyze, and make recommendations on fraudulent corporate financial reporting. The original chairman of the Treadway Commission was James C. Treadway, Jr., Executive Vice President and General Counsel, Paine Webber and a former Commissioner of the U.S. Securities and Exchange Commission.

The accounting industry regulator, the PCAOB, tells us that existing auditing standards are neutral regarding the internal control framework that auditors use for obtaining an understanding of internal controls over financial reporting (ICFR), testing and evaluating controls, and, in integrated audits, reporting on ICFR. For integrated audits, PCAOB standards state that auditors should use the same internal control framework that management uses.

Since the Committee Of Sponsoring Organizations of the Treadway Commission’s (COSO) Internal Control-Integrated Framework (IC-IF) was published in 1992, many companies and auditors have used IC-IF as their framework in considering internal control over financial reporting. Also, since companies and auditors began reporting on the effectiveness of ICFR pursuant to §404 of Sarbanes-Oxley Act of 2002, many of those companies and auditors have used IC-IF as the framework for evaluating and reporting on ICFR.

Before leading the Treadway Commission, before the savings and loan scandals of the 1980’s, before Enron and the rest of the scandals of the 90’s such as WorldCom, Tyco, Adelphia, HealthSouth, and many others, James Treadway, SEC Commissioner, made a speech about financial fraud. His remarks specifically mentioned corporate structure, in particular a decentralized organizational structure, as a common characteristic of companies involved in financial fraud.

An excerpt of remarks by James Treadway to the Third Annual Southern Securities Institute, Miami Beach, Florida, April 8,1983

I refer to a decentralized corporate structure, with autonomous divisional management. Such a structure is intended to encourage responsibility, productivity, and therefore profits—all entirely laudable objectives. But the unfortunate corollary has been a lack of accountability.

The situation has been exacerbated when central headquarters has unilaterally set profit goals for a division or, without expressly stating goals, applied steady pressure for increased profits. Either way, the pressure has created an atmosphere in which falsification of books and records at middle and lower levels became possible, even predictable. This atmosphere has caused middle and lower level management and entire divisions to adopt the attitude that the outright falsification of book and records on a regular, on going, pervasive basis is an entirely appropriate way to achieve unrealistic profit objectives, as long as the falsifications get by the independent auditors, who are viewed as fair game to be deceived.

Treadway goes on to describe a company that’s almost an exact replica of Berkshire Hathaway. What’s most troubling is that nearly thirty years later there’s no excuse – lack of technology, real time communications, or specific regulatory requirements – for these conditions to still exist in a company of the size and systemic importance of Berkshire Hathaway. The weaknesses remain by design, not by default, which begs the question of whether they could serve an illegal or unethical purpose at any time.

Treadway’s speech goes on to describe eight characteristics of decentralized companies that promote lack of accountability and, potentially, the existence of financial fraud. I repeat them here, in italics, with a few comments after each related to Berkshire Hathaway.

1.The divisions and subsidiaries were autonomous, with little or no oversight by headquarters, particularly in the areas of auditing, accounting, and internal controls.

Berkshire Hathaway’s divisions and subsidiaries are, by Buffett’s admission, run with little or no oversight by Omaha headquarters. Each year he sends the CEOs a general letter outlining high-level goals and requires very few reports or status updates. One-way communication of monthly and quarterly financial results is the primary method used by most of the business units to report to headquarters.

From Warren Buffett’s annual letter to shareholders this past February, 2011:

At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.

Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.

2. Constant pressure was strongly exerted by distant top management on subsidiaries and divisions to achieve profit goals set unilaterally and arbitrarily by corporate headquarters.

I don’t know to what extent pressure is brought to bear on subsidiaries by headquarters to meet specific numeric goals. What we have seen, in the Sokol scandal most recently, is that joining the Berkshire family may give some CEOs the impression they can break rules as long as they deliver expected results. In fact, they may even be touted as a possible Buffett successor.

Sokol’s Ways Questioned in Past Suits, The New York Times, April 4, 2011: Lawsuits involving David L. Sokol after he joined Berkshire Hathaway suggest that management had some warnings about his rules-pushing nature long before his resignation last week for buying stock in a company shortly before Berkshire acquired it. The most serious lawsuit centered on the accounting of an irrigation project by MidAmerican Energy, where Mr. Sokol was chief executive when Berkshire bought it in 1999.

In a rebuke last year, the judge ruled in that case that MidAmerican had improperly changed its accounting on the project and criticized Mr. Sokol directly. The change in accounting was “intended to eliminate the minority shareholders’ interests,” the judge wrote, awarding more than $32 million to the minority shareholders. The case had taken more than five years to work its way through the courts. During that time, Warren E. Buffett, the chief executive of Berkshire, expressed confidence in Mr. Sokol by broadening his portfolio beyond MidAmerican to include Netjets, a company that sells fractional use of private aircraft.

After Mr. Sokol took over Netjets in July 2009, some critics complained about his management style and his strategy for shrinking the company, which had been ailing even before the financial crisis did more severe damage.

3.  Communications between divisions and headquarters about the practicability of reaching established profit goals ranged from limited to non-existent.

From the 2010 Berkshire Hathaway Annual Report:

Berkshire’s operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses.

4. Headquarters and top management created an atmosphere in which sales and marketing functions in the divisions we reviewed as more important than accounting and auditing.

To say that there’s a strong focus on sales and marketing at Berkshire Hathaway would be a significant understatement. Buffett himself calls the company’s annual meeting “Woodstock for Capitalists”. Reports of the proceedings describe a carnival like atmosphere. Some of the highlights of the weekend are a showcase for the portfolio companies highlighting their products and services, a Q&A for international journalists held in the dazzling Borsheim’s jewelry showroom, and a BBQ at their Nebraska Furniture Mart.

But for a taste of the performance art purveyed in service to the Buffett cult, take a look at this excerpt from Michael de la Merced’s live blog for The New York Times Deal Book:

9:41 A.M. A brief commercial break

Because this is a haven for capitalism, there’s a brief commercial break. There’s Coca-Cola, one of Mr. Buffett’s most famous investments, and there’s Geico’s commercial about woodchucks chucking wood.

9:38 A.M. The Gekko arrives, and the day is saved

The Geico Gekko is one of several Berkshire employees to appear — along with Charlie Munger and Mr. Buffett’s assistant Debbie Bosanek — offering the MBA cyborg insurance. The MBA responds: “I’m self-insured.”

Of course, Ah-nuld and Mr. Buffett show up to save the day.

9:35 A.M. Buffett, action movie star

The movie begins with an animated segment about the “MBAs,” ruthless trading machines who plan to destroy the world.

The only hope is Warren Buffett.

We’ve already got a couple of celebrity cameos. Arnold Schwarzenegger is suiting up as “The Governator,” shortly after having stepped down as governor of California. (And there’s Larry King asking him a question!)

9:30 A.M. The lights have dimmed

After a brief introduction from Mr. Buffett, explaining the movie and asking shareholders not to record it (in part to assuage the famous people — who, “surprise, surprise” work for Berkshire for free), the movie begins.

It’s a time-lapse video of the prepping of the Qwest Center for the Berkshire annual meeting, set to U2’s “Beautiful Day.” It’s really amazing to see just how people flow into the arena and fill it to the brim.

It’s also amazing how the crowd, so noisy just minutes ago, has turned silent in the dimness.

9:26 A.M. Ladies and gents, take your seats

It’s almost showtime. A gravelly announcer — who sounds awfully similar to that guy from all the movie trailers — tells of those who have gathered for “one gloriously capitalistic weekend.” He further intones, “All roads led them to Omaha” before the big finish: “You’ve arrived at the Berkshire Hathaway shareholders meeting. The movie will begin in 10 minutes.”

5. That atmosphere caused divisional managers and personnel to believe that falsifying or “cooking the books” was the only way to achieve the profit demands, and that this was acceptable to headquarters. The divisional personnel engaged in the improper activities as part of an admitted” team effort.” In some instances, divisional employees stated that they believed it a “mortal sin not to meet the profit goals.

Here’s an excerpt from Buffett’s letter to his CEOs (“The All-Stars”) in July of 2010:

Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That’s inevitable: We now employ more than 250,000 people and the chances of that number getting through the day without any bad behavior occurring is nil. But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. Culture, more than rule books, determines how an organization behaves.

In other respects, talk to me about what is going on as little or as much as you wish. Each of you does a first-class job of running your operation with your own individual style and you don’t need me to help. The only items you need to clear with me are any changes in post-retirement benefits and any unusually large capital expenditures or acquisitions.

6. No employee involved received any direct personal benefit from theft, bribes, kickbacks, or diversion of assets.

What was so disturbing to so many about the Sokol scandal at Berkshire Hathaway last spring was the sheer audacity of David Sokol putting himself first, not the company. That was surprising to observers and seemed to take Warren Buffett by surprise, also. But it’s not so clear that Buffett had made Sokol, and by implication perhaps his other CEOs, understand where he truly draws the line and when, and if, failure and bad behavior would be subject to punishment or banishment.

Warren Buffett, Unplugged, The Wall Street Journal, November 12, 2005: Mr. Buffett tends to stick to investments for the long haul, even when the going gets bumpy. Mr. Sokol recalls bracing for an August 2004 meeting at which he planned to break the news to Mr. Buffett that the Iowa utility needed to write off about $360 million for a soured zinc project. Mr. Sokol says he was stunned by Mr. Buffett’s response: “David, we all make mistakes.” Their meeting lasted only 10 minutes. “I would have fired me if I was him,” Mr. Sokol says. “If you don’t make mistakes, you can’t make decisions,” Mr. Buffett says. “You can’t dwell on them.” Mr. Buffett notes that he has made “a lot bigger mistakes” himself than Mr. Sokol did.

7. The falsifications were large, simple, and direct. Expenses were improperly shifted from one accounting period to another. Goods ready for shipment, sometimes not even manufactured, were accounted for as sales in the current period, even though not actually shipped or manufactured until a succeeding period. False statements were made to auditors. Multiple sets of expense records were kept. Shipping invoices and bills were altered, with third parties sometimes enlisted to assist.

Buffett once criticized derivatives, for which there are particularly complicated rules and often difficult to determine values, as “financial weapons of mass destruction”.  Now he likens them to insurance and counts on the contracts to juice his earnings.

From Warren Buffett’s annual letter to shareholders this past February, 2011:

Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the unwinding or expiration of some contracts.

Our continuing positions, all of which I am personally responsible for, fall largely into two categories.

We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are identical to those we use in our insurance business. You should also understand that we get paid up-front when we enter into the contracts and therefore run no counterparty risk. That’s important.

But for the benefit of you, the investor, he tries to “keep it simple, stupid.”

On Reporting and Misreporting: The Numbers That Count and Those That Don’t

Earlier in this letter, I pointed out some numbers that Charlie and I find useful in valuing Berkshire and measuring its progress.

Let’s focus here on a number we omitted, but which many in the media feature above all others: net income. Important though that number may be at most companies, it is almost always meaningless at Berkshire.

Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like… If we really thought net income important, we could regularly feed realized gains into it simply because we have a huge amount of unrealized gains upon which to draw. Rest assured, though, that Charlie and I have never sold a security because of the effect a sale would have on the net income we were soon to report. We both have a deep disgust for “game playing” with numbers, a practice that was rampant throughout corporate America

in the 1990s and still persists, though it occurs less frequently and less blatantly than it used to.

Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our businesses are doing. Ignore our net income figure, however. Regulations require that we report it to you. But if you find reporters focusing on it, that will speak more to their performance than ours.

Contrast that tough talk with their actions when questioned by the S.E.C. about the declining values of some of their equity investments. Warren Buffett and Berkshire Hathaway had to be dragged kicking and complaining to recognize those significant unrealized losses. They resisted taking others.

They hate to admit a loser.

Berkshire Wrote Down Stocks After SEC Query, The Wall Street Journal, March 29, 2011: Warren Buffett’s Berkshire Hathaway Inc. took an accounting charge to reflect the declines of three stocks in its portfolio after regulators asked about the company’s policy for writing down investment losses.

But Berkshire pushed back when securities regulators asked about two of its largest holdings, including its $11.1 billion stake in Wells Fargo & Co., saying it didn’t plan to write down losses on those investments… Chief Financial Officer Marc Hamburg complained…Despite Mr. Hamburg’s objection, the company recorded $938 million in impairment charges in the fourth quarter to reflect declines in shares of Swiss Reinsurance Co., U.S. Bancorp and pharmaceutical firm Sanofi-Aventis SA….

“Berkshire management,” Mr. Hamburg wrote, “does not believe that the validity of the efficient market hypothesis as suggested by the Commission can either be proven or disproven. Information made available by the issuer of a security including current results and expectations regarding the future will likely be interpreted differently by individual investors.”

Berkshire also told the SEC it wouldn’t write down its $413 million in unrealized losses in Wells Fargo or a smaller loss on its investment in Kraft Foods Inc. The two companies are among the largest holdings in Berkshire’s stock portfolio.

8. The falsifications were undetected by top management, not for brief periods of time, but for years and years. In short, the break-down was systemic.

If systemic breakdowns in accounting and financial reporting in Berkshire Hathaway companies, or via “top-side” journal entries made at headquarters, ever surface, they will have gone undetected for years. The revelations may not come until Warren Buffett no longer sets the high water mark.

After Enron, Buffett criticized “toadie” auditors and lackadaisical audit committees.

But perhaps the best place to focus attention is on the audit committee of boards of directors. Warren Buffett proposes that the audit committee have a Q&A session with auditors.

“You can’t meet on an audit committee for two hours twice a year and really know what’s going on,” says Buffett. “Auditors most of the time will know–put them on the spot.” And Buffett wants these questions and answers to go into the minutes unfailingly.

However, Berkshire’s own audit committee was seriously understaffed last year when the Sokol debacle played out and met only five times in 2010, mostly without its third member. When the audit committee launched an investigation of the Sokol scandal, they used the house law firm, Munger, Tolles rather than an independent one, even though a Munger, Tolles partner is the company’s ad-hoc General Counsel and was already being sued, along with the rest of the directors including audit committee members, over their handling of the issue.

James Treadway goes on to discuss, in his 1983 speech, the role of the auditor in finding fraud. What’s sad is that the examples he cites – auditors abdicating their duty to shareholders -are eerily similar to the ones cited recently by PCAOB Chairman Jim Doty. Doty has been emphasizing the need for more auditor skepticism. PCAOB inspectors see an appalling lack of it and the deficiencies cited in their reports are increasing rather than decreasing.

Preventing “cooked books” requires careful attention to sound accounting controls and procedures, and a corporate atmosphere and structure that emphasizes the significance of such controls and procedures — at all levels. But that lesson of attention to detail and the need for verification and sometimes tough-minded questioning seems difficult to learn.

To draw a parallel, let me quote from a few Accounting Series Releases over the last four decades.

“The time has long passed, if it ever existed, when the basis of an audit was restricted to the material appearing in the books and records …. [T]he partner in charge.., was not sufficiently concerned with the basic problems of internal check and control to make the searching review which an engagement requires.”

ASR-19, 1940. In the Matter of McKesson & Robbins, Inc.

“We have also found that in certifying such financial statements the respondents failed to comply with generally accepted auditing standards … by their reliance upon the unsupported and questionable representations of the Seaboard Management …. ”

ASR-78, 1957. In the Matter of Touche, Niven, Bailey & Smart, et al. (Seaboard Commercial Corporation.)

“A major deficiency of the Stirling Homex audit was Peat, Marwick, Mitchell & Co.’s reliance on the unsupported, undocumented representations of management.”

ASR-173, 1975. Mitchell & Co.

In the Matter of Peat, Marwick, (Stirling Homex.)

“Throughout the years, it appears that no auditor ever asked for supporting documentation for this asset account, nor did the auditors ever confirm with outside sources the existence of the balances.”

ASR-196, 1976. In the Matter of Seidman & Seidman. (Equity Funding.)

I’ll write next about Berkshire Hathaway’s relatively small spend for internal audit, external audit, and internal controls over financial reporting. (Berkshire Hathaway’s external auditor is Deloitte.) If something goes sideways at Berkshire Hathaway,there’s very little besides “culture, not rule books” to regulate behavior and insure financial reporting integrity.

Here’s an Andy Kaufman performance treat. The late comedian was famous for his put-ons. Or were they?

True, it was a hot story yesterday. Anything with Buffett is an automatic traffic attractor, since people will read it whether it’s “for him” or “against him”. It was a no-brainer to write yesterday about the news of his investment in Bank of America.  I saw the Google Alert from the Wall Street Journal when I woke up, knew it was “the” news after the Steve Jobs resignation news of the night before, and emailed my editor at Forbes that I would put my two cents in.  That was 8:30 am Chicago time.

I thought I’d finish it sooner.  It’s always good to get my posts up for Forbes before 11 am CST or else they wallow in the east coast afternoon oblivion. But I wanted to get in something about John Hempton’s post.  Since we have now spoken on the phone, shared a radio program, and shared thoughts about Chinese reverse mergers and the auditors, I saw his thoughts as a good counterpoint to what I wanted to write.  His sin was to be on Australia time, so far ahead of the crowd he wrote about Bank of America’s stock slide from earlier in the week  - and the bloggers who are blamed for precipitating it – before the news of Buffett’s investment.

I published the post slightly after 2:oopm Chicago time, which is really late for the East Coast.  And they are totally preoccupied with Hurricane Irene. But within a minute it was on the front page.

No worries.  My points on what Hempton said were still valid and he had added an update later which, by then, was very late in the day for him. Or maybe it was already Wednesday there?  I get confused with the international date line…

The story of Bank of America is now one that I have a whole series of posts about – another Kindle e-book, maybe – all the way back to their purchase of Countrywide and their initial pain in realizing that mistake.  It’s obviously still haunting them.

Here’s a small look at “Bank of America Buys Time Via Buffett Effect.”

What Hempton ignores is the accounting. There are rules about when banks are supposed to be taking losses – they are not as flexible as some would have you believe – and how much they should reserve for those losses, whether due to bad loans, wrong trades,litigation contingencies, or falling asset valuations.

To suggest otherwise is to suggest banks are fraught with earnings manipulation.

Hempton, and others like him, bet on two things when continuing to place their confidence, and their money, in the big banks:

1. That the U.S. government will never let a big bank fail.

2. That the U.S. government and the banks’ regulators and auditors will be lenient in enforcing accounting standards that force earlier and more honest recognition of the true status of the banks’ balance sheets.

There is a way to measure working capital and regulatory capital. The banks do it every day and report it to regulators. As we have seen, this daily measurement is both possible and taken seriously. The decisions regarding Lehman, Merrill Lynch, and the other banks were taken over that fateful weekend in September of 2008 because some of them reported less than a few days of capital available to meet obligations. They know what they have to pay out each day and they know, and should know, how much capital they have of various types available to meet those obligations.

It’s a moving target but you still have to hit it at least once a day…

Please go read the rest at Forbes.com.  Leave a nice comment. If I do really well, maybe they will ask me to write someday for the magazine.  ;)

It was repeated in Australia at 7pm Tuesday and is available as a podcast. There is also a transcript available.

Where does the buck stop when big banks and corporations, even nations collapse. Who signs off on the books? The auditors or the directors of the board? And who should tell investors when there’s something shifty going on? Who are the auditors answerable to? Reporter, Stan Correy.

Stan told me that I speak directly about a subject where so often other people try to obfuscate. One of the problems he had, I’m sure, and that I have every day is making news of auditing, accounting, and the business of the Big Four audit firms accessible to an audience that may think it’s boring or that nothing much happens.

Even general business professionals are sometimes confused or completely unaware of the role that Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers play in the capital markets and global financial system regulatory scheme.

Given the serious economic issues we are all dealing with, all over the world, I’m glad to see journalists like Stan Correy push the story of the audit firms and the accounting industry off the business pages and onto the front page.

Updated: I listened to the show live and had goosebumps. It’s a great summary of the state of the audit industry and, therefore, the accounting profession.

I was quoted generously based on Stan’s extensive interview with me. I was also pleased to hear so many other distinguished commenters including several university professors, John Carney from CNBC, and Richard Murphy in the UK.

Stan gives me the last word, in response to investor John Hempton who recently defended the audit firms, in particular Deloitte, for the Chinese reverse merger frauds.

John Hempton: What auditors do and what they’re expected to do is follow process. And there’s a perfectly good reason why you follow process; if you follow process in a world where most things are honest, the process works, and auditors get into trouble when they don’t follow process. The problem is that the process doesn’t work in China, ‘cos this is so pervasive that there’s no fixed point of reference.

Stan Correy: John Hempton from Bronte Capital.

Columnist for Forbes Magazine and herself an auditor, Francine McKenna, doesn’t buy the partial defence argument. She says auditors who take on these jobs should be looking at these clients as extremely high risk. After all, it hasn’t been a secret, even in China, that fraud is a problem in government and the private sector.

Francine McKenna: The audit firms are so… it’s so embarrassing to the profession for me, their most common response when they get hit with a fraud-I mean, I could show you several examples, quotes-they’ll say, ‘We were victims too. We were fooled; we were duped.’ What other profession is willing to say that they’re idiots and incompetent and can be fooled over and over and over again by their own clients, just for the sake of evading liability? It’s embarrassing! It’s embarrassing.

I can’t be there tomorrow in person so I thought I would answer a few of the questions for you and for them.

I’ve provided comments to some of the questions below in Bold. I’ve written on these topics many, many times. Instead of repeating those remarks, I’m directing you to some of the most relevant posts.  If you’d like to add your comments please add the appropriate question number for the PCAOB Board.

Ernst & Young Lehman Litigation: It’s No Victory If You’re Going To Trial (Judge Kaplan was damning in his criticism of vague and subjective auditing standards and found it impossible to hold Ernst & Young liable for not complying with them.)

New At Forbes: My Comments On The Latest Sanctions Against Ernst & Young

Going In Circles: A Few Remarks On Audit Reform (On auditor rotation and auditor signing of audit reports.)

The State of Sarbanes-Oxley Compliance: The Protiviti Survey Results

Say Anything: The Big 4 Defense of Overtime Exemptions

McKenna At The Georgia Southern Fraud And Forensic Accounting Conference (With a link to my presentation, “The Skeptical Professional: Requirements and Case Studies”)

Being Expedient: PwC Settles US Class Action

McKenna Speaks At The American Accounting Association Public Interest Section

Not Over Until It’s Over: Price Waterhouse India Settles Satyam (The Satyam case is a classic one regarding auditor independence and auditor skepticism.  Price Waterhouse India demonstrated not much of either.  The PwC US and International firms lack the authority to force them to.  The regulators are not doing anything about this and the courts are impotent, in many cases, to correct this fault.)

Price Waterhouse India Settles With Regulators But Satyam Saga Not Over

Will Auditors Be Held Accountable? The PCAOB Has A Plan

Auditors Abandon Investors On Liability Limits

Auditors Under Pressure In The UK. Or Are They?

Dear PCAOB Board: Your Job Is To Serve And Protect Investors

Top Ten Things Lawyers Should Know About Auditors

Asking The Difficult Questions: An Article About Audit Committees For IIA’s Internal Auditor Magazine

Questions in PCAOB Concept Release on the Auditor’s Report

Content of the Auditor’s Report

Questions

1. Many have suggested that the auditor’s report, and in some cases, the auditor’s role, should be expanded so that it is more relevant and useful to investors and other users of financial statements.

a. Should the Board undertake a standard-setting initiative to consider improvements to the auditor’s reporting model? Yes

Why or why not? Investors pay billions worldwide for an audit report that is universally panned. Investors have been vocal In the UK and in the US regarding the uselessness of the ‘pass/fail” approach to the auditor’s opinion. The current report provides little information about the judgments and decision processes taking place behind the scenes.  Auditors failed during the financial crisis to warn investors of trouble, let alone provide the realistic guaranty of safety for even a limited period of time that shareholders expect.  If this is an “expectations gap” we must close it, either by removing the requirement for an audit opinion from exchange rules – and admitting its futility like the US SEC did with ratings agencies – or improving it so it has a useful purpose for investors. They deserve to get their money’s worth from the effort.

b. In what ways, if any, could the standard auditor’s report or other auditor reporting be improved to provide more relevant and useful information to investors and other users of financial statements? Two places where the current report could be improved are:

1. Development of a clearing house of auditor names attached to public company audit engagements worldwide with their biographies and information about sanctions, suspensions and litigation against them.  I’m not so concerned about seeing a name on a printed report as knowing who is responsible for that audit over time and their qualifications and professional history.

2. The addition of an auditor’s “Disclosure and Analysis” would be priceless. It should be addressed directly to shareholders, not the Audit Committee, and be written in the style of Warren Buffet’s letter to shareholders.  It should state where the auditors and management disagreed and which one prevailed.  It should focus on judgments, estimates, and the range of practices especially regarding interpretation of key accounting standards amongst that issuer’s peer group.

c. Should the Board consider expanding the auditor’s role to provide assurance on matters in addition to the financial statements? If so, in what other areas of financial reporting should auditors provide assurance? Auditors should provide explicit assurance on MD&A. They are already required by standards to communicate with the Audit Committee regarding the adequacy of required disclosures. Interim Auditing Standard AU 380 requires auditors to determine whether all audit-related matters are communicated to the committee:

The auditor’s responsibility under Generally Accepted Auditing Standards (GAAS)

• Significant accounting policies
• Management judgments and accounting estimates
• Audit adjustments
• The auditor’s judgments about the quality of the entity’s accounting principles
• The quality of the management discussion and analysis (MD&A)
• Disagreements with management
• Consultation with other accountants
• Major issues discussed with management before retention
• Difficulties encountered in performing the audit

An Auditor’s Discussion and Analysis should repeat the substance of these communications and highlight where the Audit Committee and/or management disagree with auditors.

2. The standard auditor’s report on the financial statements contains an opinion about whether the financial statements present fairly, in all material respects, the financial condition, results of operations, and cash flows in conformity with the applicable financial reporting framework. This type of approach to the opinion is sometimes referred to as a “pass/fail model.”

a.    Should the auditor’s report retain the pass/fail model? No If so, why?

b.    If not, why not, and what changes are needed? The auditor’s report requires more detailed grading with an explanation of the grades.  Perhaps the grades can be assigned based on whether the failings are individually material or material in aggregate and whether they relate to adherence to standards, aggressive use of estimates and models, lack of disclosure, or poor internal controls.  I am in favor of the separate opinion on internal controls and question a company that could have an adverse opinion on internal controls (material weaknesses) and yet receive a clean opinion on their financial statements.

c.     If the pass/fail model were retained, are there changes to the report or supplemental reporting that would be beneficial? If so, describe such changes or supplemental reporting.

3. Some preparers and audit committee members have indicated that additional information about the company’s financial statements should be provided by them, not the auditor. Who is most appropriate (e.g., management, the audit committee, or the auditor) to provide additional information regarding the company’s financial statements to financial statement users? I am skeptical that most Audit Committees are sufficiently detached and independent of management that communications from them would be any more useful to shareholders.  That is a problem in and of itself.  If auditors were required to provide their own discussion or analysis, they may be reminded of their own need for independence from management.  However, the problem we have, and which is not solved by revisions to the audit report itself, is the problem of auditor independence as long as the auditors are paid by and contract for their services with an Audit Committee controlled by and in service to management.

At the PCAOB’s public meeting in March I heard some object to the auditor providing information to shareholders directly because that might harm the “relationship” between auditors and management.  Yes.  And that is exactly why auditors should be forced to face shareholders directly. Even the SEC’s Chief Accountant and the PCAOB Chairman have admitted auditors are too cozy with management, a non-independent Audit Committee encourages and enables that, and many auditors have forgotten who their true clients are – shareholders.  Auditors should respond directly to shareholders, not to the management-controlled proxy – a potentially non – independent Audit Committee.

4. Some changes to the standard auditor’s report could result in the need for amendments to the report on internal control over financial reporting, as required by Auditing Standard No. 5. If amendments were made to the auditor’s report on internal control over financial reporting, what should they be, and why are they necessary?

We should go back to a separate auditors report on internal controls over financial reporting. If an issuer receives an adverse opinion on internal controls it should be rare or impossible for that issuer to receive any “passing” grade on the financial statements.

Potential Alternatives for Changes to the Auditor’s Report

A. Auditor’s Discussion and Analysis

Questions

5. Should the Board consider an AD&A as an alternative for providing additional information in the auditor’s report? Yes

a. If you support an AD&A as an alternative, provide an explanation as to why. See above 1.b.

b. Do you think an AD&A should comment on the audit, the company’s financial statements or both? Both. Provide an explanation as to why. Should the AD&A comment about any other information? The quality of management’s D&A and any disagreements in that regard over sufficiency or quality of disclosures.

c. Which types of information in an AD&A would be most relevant and useful in making investment decisions? I think information about how the issuer compares in key metrics, disclosures, aggressive interpretation of standards, and use of models and estimates to their peers would be very useful.  In some industries, one auditor has an audit relationship with several major companies, addresses similar issues, evaluates similar approaches and either sees consistent or inconsistent results. This type of discussion and comparison would be very useful to identify outliers and anomalies as well as instances of collusion amongst companies with significant business alliances or who act as counterparties to each other.

d. If you do not support an AD&A as an alternative, explain why.

e. Are there alternatives other than an AD&A where the auditor could comment on the audit, the company’s financial statements, or both? What are they?

6. What types of information should an AD&A include about the audit? What is the appropriate content and level of detail regarding these matters presented in an AD&A (i.e., audit risk, audit procedures and results, and auditor independence)?

7. What types of information should an AD&A include about the auditor’s views on the company’s financial statements based on the audit? What is the appropriate content and level of detail regarding these matters presented in an AD&A (i.e., management’s judgments and estimates, accounting policies and practices, and difficult or contentious issues, including “close calls”)?

8. Should a standard format be required for an AD&A? Why or why not?

9. Some investors suggested that, in addition to audit risk, an AD&A should include a discussion of other risks, such as business risks, strategic risks, or operational risks. Discussion of risks other than audit risk would require an expansion of the auditor’s current responsibilities. What are the potential benefits and shortcomings of including such risks in an AD&A? The auditor is required to be aware of and knowledgeable about these areas per the standards. The auditor must take them into consideration in planning the scope of the audit. I see no additional work to disclose them and to give investors information about how this issuer compares to peer group.

10. How can boilerplate language be avoided in an AD&A while providing consistency among such reports? Regulators should forbid it and enforce accordingly.  All shareholders will, hopefully, start demanding meaningful information.

11. What are the potential benefits and shortcomings of implementing an AD&A?

12. What are your views regarding the potential for an AD&A to present inconsistent or competing information between the auditor and management? I’m not troubled by this.  In fact, I look forward to it. What effect will this have on management’s financial statement presentation? Management will be required to defend it. They should be prepared to do so or to back down.

B. Required and Expanded Use of Emphasis Paragraphs

Questions

13. Would the types of matters described in the illustrative emphasis paragraphs be relevant and useful in making investment decisions? If so, how would they be used?

14. Should the Board consider a requirement to include areas of emphasis in each audit report, together with related key audit procedures?

a. If you support required and expanded emphasis paragraphs as an alternative, provide an explanation as to why.

b. If you do not support required and expanded emphasis paragraphs as an alternative, provide an explanation as to why.

15. What specific information should required and expanded emphasis paragraphs include regarding the audit or the company’s financial statements? What other matters should be required to be included in emphasis paragraphs?

16. What is the appropriate content and level of detail regarding the matters presented in required emphasis paragraphs?

17. How can boilerplate language be avoided in required emphasis paragraphs while providing consistency among such audit reports? 18. What are the potential benefits and shortcomings of implementing required and expanded emphasis paragraphs?

C. Auditor Assurance on Other Information Outside the Financial Statements

Questions

19. Should the Board consider auditor assurance on other information outside the financial statements as an alternative for enhancing the auditor’s reporting model?

a. If you support auditor assurance on other information outside the financial statements as an alternative, provide an explanation as to why.

b. On what information should the auditor provide assurance (e.g., MD&A, earnings releases, non-GAAP information, or other matters)? MD&A, 10Qs.  Auditors should distance themselves from non-GAAP disclosures. Earnings releases should not be inconsistent with 10Qs.

c. What level of assurance would be most appropriate for the auditor to provide on information outside the financial statements?

d. If the auditor were to provide assurance on a portion or portions of the MD&A, what portion or portions would be most appropriate and why?

e. Would auditor reporting on a portion or portions of the MD&A affect the nature of MD&A disclosures? If so, how?

f. Are the requirements in the Board’s attestation standard, AT sec. 701, sufficient to provide the appropriate level of auditor assurance on other information outside the financial statements? If not, what other requirements should be considered?

g. If you do not support auditor assurance on other information outside the financial statements, provide an explanation as to why.

20. What are the potential benefits and shortcomings of implementing auditor assurance on other information outside the financial statements?

D. Clarification of the Standard Auditor’s Report

Questions

21. The concept release presents suggestions on how to clarify the auditor’s report in the following areas:

• Reasonable assurance
• Auditor’s responsibility for fraud
• Auditor’s responsibility for financial statement disclosures
• Management’s responsibility for the preparation of the financial statements
• Auditor’s responsibility for information outside the financial statements
• Auditor independence

a. Do you believe some or all of these clarifications are appropriate? If so, explain which of these clarifications is appropriate? How should the auditor’s report be clarified?

b. Would these potential clarifications serve to enhance the auditor’s report and help readers understand the auditor’s report and the auditor’s responsibilities? Provide an explanation as to why or why not.

c. What other clarifications or improvements to the auditor’s reporting model can be made to better communicate the nature of an audit and the auditor’s responsibilities?

d. What are the implications to the scope of the audit, or the auditor’s responsibilities, resulting from the foregoing clarifications?

22. What are the potential benefits and shortcomings of providing clarifications of the language in the standard auditor’s report?

Questions Related to all Alternatives

23. This concept release presents several alternatives intended to improve auditor communication to the users of financial statements through the auditor’s reporting model. Which alternative is most appropriate and why?

24. Would a combination of the alternatives, or certain elements of the alternatives, be more effective in improving auditor communication than any one of the alternatives alone? What are those combinations of alternatives or elements?

25. What alternatives not mentioned in this concept release should the Board consider?

26. Each of the alternatives presented might require the development of an auditor reporting framework and criteria. What recommendations should the Board consider in developing such auditor reporting framework and related criteria for each of the alternatives?

27. Would financial statement users perceive any of these alternatives as providing a qualified or piecemeal opinion? If so, what steps could the Board take to mitigate the risk of this perception?

28. Do any of the alternatives better convey to the users of the financial statements the auditor’s role in the performance of an audit? Why or why not? Are there other recommendations that could better convey this role?

29. What effect would the various alternatives have on audit quality? What is the basis for your view?

30. Should changes to the auditor’s reporting model considered by the Board apply equally to all audit reports filed with the SEC, including those filed in connection with the financial statements of public companies, investment companies, investment advisers, brokers and dealers, and others? What would be the effects of applying the alternatives discussed in the concept release to the audit reports for such entities? If audit reports related to certain entities should be excluded from one or more of the alternatives, please explain the basis for such an exclusion.

IV. Considerations Related to Changing the Auditor’s Report

A. Effects on Audit Effort

B. Effects on the Auditor’s Relationships

C. Effects on Audit Committee Governance

D. Liability Considerations

E. Confidentiality

Questions

31. This concept release describes certain considerations related to changing the auditor’s report, such as effects on audit effort, effects on the auditor’s relationships, effects on audit committee governance, liability considerations, and confidentiality.

a. Are any of these considerations more important than others? If so, which ones and why?

b. If changes to the auditor’s reporting model increased cost, do you believe the benefits of such changes justify the potential cost? Why or why not?

c. Are there any other considerations related to changing the auditor’s report that this concept release has not addressed? If so, what are these considerations?

d. What requirements and other measures could the PCAOB or others put into place to address the potential effects of these considerations?

32. The concept release discusses the potential effects that providing additional information in the auditor’s report could have on relationships among the auditor, management, and the audit committee. If the auditor were to include in the auditor’s report information regarding the company’s financial statements, what potential effects could that have on the interaction among the auditor, management, and the audit committee?

Making the non-obvious connections between the audit firms and their clients, between the clients and each other, and between the firms and each other is like shooting fish in a barrel. As each new story comes out, especially about the banks, the web of connections and the repeated attempts by desperate executives to move the same deck chairs around on the financial system Titanic are becoming easier to spot.

Sometimes I don’t even have to close my eyes to see the last story where the same guy or the same assets or the same scam is mentioned.

Yesterday it was news of the sale of servicing rights to a gazillion dollars of almost worthless mortgages by Bank of America to Fannie Mae.  Why Fannie Mae?  Because they are so good at using their marketing skills to “conduit” bad paper from the very needy to the less needy.  But is the next guy really a sucker or do they know something we don’t?  When was the last time Fannie Mae assisted the system in this way?  And how do we know it was rotten paper crossing from one bad actor to perhaps another on a government-sponsored bridge built of the taxpayers’ aching backs?

And who is standing on the sidelines watching it all with a wink, a nudge, and a “say no more”?

For the answers to these and other questions, you’ll have to read, “Fool Me Twice: Bank of America Plays Hide and Seek Using Fannie Mae.”

Here’s a teaser:

The last time Fannie Mae got involved in shape-shifting servicing rights to hide fraudulent activity was Taylor Bean Whitaker. That‘s the mortgage originator, audited by Deloitte, that used Fannie Mae’s silence and their influence, according to Bloomberg, to market servicing rights on bad loans to GMAC.

How do we know the most recent $73 billion portfolio might be full of loser loans made via potentially fraudulent means? Fannie Mae told us so when they sued Countrywide, the mortgage originator and source of significant woe Bank of America bought in 2008.

Even better, he liked my reporting from the Ohio AAA meeting. I had no idea Ohio CPAS CEO Clark Price would be speaking. I was quite surprised when that seasoned lobbyist veteran assumed everyone on the room was sympathetic to his dismissive attitude towards media and others who might question auditors’ roles in the crisis.

The fact that I was invited as a featured panelist shows that there are academics seeking all sides of the story about the profession and its future. I certainly met and talked with many who strongly encouraged my efforts to raise awareness.

And McKenna, a former auditor, has her own site called re: The Auditors, and she’s particuarly attuned to those issues. This is a very good piece of reporting:

The auditors, for example, are grateful for their continued “good crisis”. I tweeted the CEO of the trade association for Ohio CPAs, Clark Price, saying last weekend:

” I’ve rec’d no calls re: Where were auditors? in this crisis. Great. I hate those calls from media.”

“Senator Reed held a hearing about auditors and crickets chirped. We’ve been lucky. No one is paying attention.”

McKenna and very few other journalists (Jon Weil is an exception that comes to mind) are paying attention. Where’s everybody else?

Might want to give old Clark Price a holler.

Read the rest here.

I’ve been writing a lot about the David Sokol “usurpation of corporate opportunity” case. That’s the one where he used his playa position to make a cool $3 million on the purchase of Lubrizol by Berkshire Hathaway.

Now $3 million is Starbucks tip money to a guy like David Sokol. He’s one of Buffett’s “guys who run my companies because they want to not because they need the money.” Unfortunately, Sokol turned out to be an ungrateful brat who was thinking more about his own legacy, family, and investments rather than Uncle Warren’s reputation.

Warren Buffet may have not been entirely innocent in this deal. Or write it off as a “senior moment”. Either way, Buffett can’t remember Sokol ever telling him in enough detail what he was up to before Buffett agreed to buy Lubrizol. And then Buffett tried to paper over his lapses in judgment by concocting a mock investigation riddled with conflicts of interest.

Creating conflicts of interest is exactly what David Sokol is accused of, in lawsuits, when he bought Lubrizol ahead of  recommending it to Berkshire Hathaway as an acquisition.

Well done, grasshopper.

The “some eyebrows” referred to below are mine.

“…The upshot of these risks is that while it was once common for lawyers to serve on their client’s boards, “today, it’s the exception rather than the rule,” says Douglas Richmond, a senior vice president in the professional services group of AON Risk Services, a large broker of lawyers’ professional liability insurance. Some firms outright forbid the practice, says Richmond. Those firms that allow board memberships are very sensitive to the risks, and often carefully document the relationship to let the company know the differing roles of lawyer and board member.  “If it’s being done, it’s done very carefully,” he says.

It’s not a stretch to assume that Buffett and Berkshire Hathaway view Olson and Munger Tolles’s long-running history with the company as outweighing the risks that could accompany Olson’s board seat. As we’ve previously reported, Munger Tolles has been Berkshire’s go-to law firm ever since founding partner Charles Munger left the law firm to join Buffett in a business partnership in 1965. (Munger is now the vice-chairman of Berkshire.) The law firm’s relationship is particularly important because Berkshire does not have a general counsel.

Still, the selection of the firm and Olson to assist the independent audit committee’s report on Sokol raised some eyebrows. Olson was named as a board member defendant in a shareholder derivative suit relating to Sokol’s trading filed in Delaware Chancery Court in April. And though the audit committee is comprised of independent directors, Olson does not qualify as independent under NYSE listing rules given the $4.68 million in Berkshire legal fees paid to his law firm in 2010, according to a recent proxy.

“It’s a little bit unusual because it’s hard to be objective [about the evidence] when you’re a defendant in a lawsuit even if it’s a tangential role and you’re [only] accused of not providing sufficiently vigilant oversight,” says Francis Pileggi, a litigation partner at Eckert Seamans Cherin & Mellott…”

Read the rest here.

I was previously quoted in American Banker on bank balance sheet window-dressing.

My quote focused on disclosures and transparency – for the loans and the reserves for losses. It’s a subject I’ve written about extensively.

Has transparency improved?

Financial Accounting Standards Board rule updates that went into effect last December did require banks to disaggregate their data and to be more specific in their disclosures.

However, the FASB rule updates still leave banks with a lot of discretion as to how they break out their data on receivables such as second-lien loans.

“In general, we are seeing definitely better disclosure and more detailed disclosure,” said Francene McKenna, president of the consultancy McKenna Partners LLC. “However, it looks like they are still to some extent being somewhat a little optimistic on what the future is going to hold,” she said. “There are still missing pieces; you really wish for some kind of consistent disclosure.”