Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Blake Oliver: [00:00:04] Yeah. You got to change the financial incentives, right? Financial incentives are what drive the world. And so like we just have them totally set up the wrong way. And no amount of ethics training can counter it, in my opinion, because we do a lot of ethics training and doesn't make a difference. People just hate on the ethics exams.
David Leary: [00:00:24] Coming to you weekly from the OnPay Recording Studio.
Blake Oliver: [00:00:30] Hello and welcome back to the show. I'm Blake Oliver.
David Leary: [00:00:33] I'm David Leary.
Blake Oliver: [00:00:34] And, David, I got a present in the mail yesterday. The Arizona CPA society, as you know, did a survey back in the fall on the 150 hour rule. And I have eagerly, eagerly awaited the results of this survey. And I have been emailing the president over at the Arizona CPA society. And he is.
David Leary: [00:00:54] So he delivered you a package with the results, like like a sealed briefcase. Well, did you get this?
Blake Oliver: [00:01:00] Well, he wouldn't reply to my emails, but I do subscribe. You know, I am a member of the Arizona CPA society, so I get the magazine.
David Leary: [00:01:08] So Blake is holding up a magazine. For those of you listening.
Blake Oliver: [00:01:10] This is the latest issue of AZ, CPA, the January February 2024 edition. And I actually wasn't even reading it. My dad came over for happy hour and he picked it up and started reading it because he's that kind of person, even though he's not an accountant, he he reads through my CPA society magazines and he opens it up and he sees this article, The Future of CPA Licensure Insights from an ASE CPA member survey on the 150 hour requirement. And there's a chart here, the very first chart.
David Leary: [00:01:45] Before you get into the chart. So make sure I'm framing this properly. This this survey results you've been pestering people about for almost a full year, almost got completely missed like this. Just went into the pile of paperwork of magazines. Yes. And beyond bath gift cards and all that stuff.
Blake Oliver: [00:02:02] Just by chance, my dad was over and opened up the magazine, which I, you know, don't always read. I should, but I don't always because I'm online. Right? I'm not reading this like, this is paper, right? Uh, so I almost missed it for this week, but thank thankfully, your dad saved the show.
David Leary: [00:02:17] He saved saved the show. And that's.
Blake Oliver: [00:02:19] Really all. That's all thanks to Datamatics, because I was doing a webinar with Datamatics yesterday. Hitendra Patel, who is a prolific writer on CPA trendlines, invited me to do a webinar with him and he sent me a gift basket. And the gift basket had so many snacks, I told my parents, hey, come on over and help me eat all these snacks. I'm trying to lose weight. So, uh, so let me get to the chart because this is very, very exciting. Dear listeners, uh, as you know, if you listen to this show even somewhat infrequently, you know that we are passionate advocates for an alternative pathway to CPA licensure that does not require a ridiculous five years of education, which I personally believe creates very little value because most CPAs do not need the content of that extra fifth year of education. And it appears that you all agree with me. At least the folks who responded to the Arizona survey agree. And you know, Arizona is a battleground state. We're pretty balanced, right? 5050 kind of state. So I feel like this could be representative of the whole country. And I don't see why it's significant.
David Leary: [00:03:22] We're a big enough state where there's enough members, where this is not a survey of ten members.
Blake Oliver: [00:03:26] It's no this I mean, I think like there's got to be tens of thousands of CPAs in Arizona at least. Right? So, yeah. Um, so the question here, question one is, do you believe it would be beneficial to the profession to provide alternative pathways to certification, where 150 hours of college education is one option but not the only option? So do you support an alternative to the current regime? Yes, 81% said yes, 81% of CPAs. Well, we don't know if everyone was a CPA who responded, but every 81% of those who responded said, yes. We need an alternative pathway that.
David Leary: [00:04:09] Exceeds because for the last year and a half, two years, you've been saying it's probably 80% of the profession. So yes, seeds your guess.
Blake Oliver: [00:04:16] It's slightly slightly now is it 20% are opposed? No, because 10% are unsure. Less than 9% say no, 8.76% say no. So fewer than 10%, less than 10% of the profession thinks that we should keep things the way it is. Now, if that doesn't tell you that the leaders at Nasba and AICPA who have been opposing this are out of touch. I mean, I don't know what else does. Right? So if you want to be on the right side of history, dear CPA society leaders or administrators or anyone listening to this, you know, pay attention to this survey and I'm not lying. I'm going to put it right here in front of the camera. So those who are on the live stream can see.
David Leary: [00:05:00] Because as far as you know, this is not digital anywhere. We can't link to it.
Blake Oliver: [00:05:04] I don't know, I haven't I haven't tried to find it. Uh, maybe, maybe, maybe I don't know if they have a digital version of this magazine. So.
David Leary: [00:05:11] So you sent me a text last night with pictures from the magazine, and I can't. I can kind of read it. I zoom in a little bit, but I think it had stats and maybe you could discuss this now that you have the magazine in your hand where they're at. I think this question kind of asked people, do you notice a difference between somebody with one? 20 hours versus 150 when it comes to their work. Can you kind of clarify that?
Blake Oliver: [00:05:32] Right. That's the question is also, does having that extra 30 semester hours, that extra year of education actually make you a better CPA? And all of the academic studies that I have seen say, no, there is no discernible difference. There's no measurable difference in the quality. Which kind of makes sense considering that most CPAs who are licensed today didn't have to earn 150 semester hours of education, and you can't tell really a difference between those and the ones who have to like me. So the question here is, um, when looking at staff who recently graduated with an accounting degree, which of the following statements best describes their preparedness to be a CPA? There is no noticeable difference in preparedness level between staff that have accounting degrees with 120 or 150 credit hours. Over half, 51% said there is no noticeable difference. Staff with 150 credit hours have a slightly higher preparedness level than staff with 120 hours, so slightly higher preparedness. Uh, round up eight. Let's say 18% said that there's a slightly higher preparedness. Staff with 150 credit hours have a noticeably higher preparedness level than staff with 120. Only 10.7%, so call it 11% said that, 20% said none of the above or I don't know. So. Only 1,011% say that the staff with 150 credit hours have a noticeably higher preparedness level.
David Leary: [00:07:10] So, so so I hire 100 accounting graduates with 150 hours, and only ten of them are really better than the 100. Non?
Blake Oliver: [00:07:22] Well, no, I mean, this is just saying that like the people who hire accountants into firms when you're hiring.
David Leary: [00:07:28] Even notice.
Blake Oliver: [00:07:29] It. Yeah. Only 10% say that there's a noticeably higher difference in preparedness and 18% say there's a slight slightly higher preparedness and 51%. So more than half say there's no there's no difference whatsoever.
David Leary: [00:07:47] But that's. Yeah.
Blake Oliver: [00:07:49] Which makes sense.
David Leary: [00:07:50] That's so. Quote unquote important you would like. You'd think if somebody got it, you'd be like, oh, it's obvious they did that. They must have got the extra education. Yeah.
Blake Oliver: [00:07:59] Well, consider how much money we as a profession spend on this extra education. It's I calculated that it's $20 billion a year that students have to spend to earn that one year master's. If you count opportunity cost, and if you count the cost of the credits and you count the cost of the housing, all of that, right? It's it's billions of dollars. Even if I'm overestimating, it's still billions of dollars. And that opportunity cost is shared with the firms who don't have access to the staff because they're in in school, school, or they're working reduced hours because they can't work full time and do school. There's another question here about the talent shortage. Are firms facing a shortage of talent? We say yes. All the surveys by Accounting today and CPA Practice Advisor and CPA trendlines say yes. And this survey also says yes. 55.56%. So just over half say that they have a shortage of both CPAs and accountants. 13% say they have a shortage of CPAs, and 10% say they have a shortage of accountants. That includes Non-licensed and non CPA path employees. And I think the important stat here is that only 22% say they have no talent challenges at this time. So again it's like we have this 80% 20%. In the survey, and there's only 20%. About 20% of firms say we have plenty of staff.
David Leary: [00:09:32] 80% need a survey only to firms because I imagine the state of Arizona a percentage of. My understanding is more than half the members of the Arizona CPA society aren't even in public county. They're private accountants. So was this survey to just firm people at firms, or was this in general?
Blake Oliver: [00:09:51] I think it was sent out to all the members. So that would be, you know, industry folks too. And it says organization, not just firms like the way the question is phrased. Yeah. So. That's a good point, David. This is not just firms. This is all organizations. Wow. Isn't that incredible? There's some member feedback here because there was the option to give comments, free text, verbatim comments.
David Leary: [00:10:15] Yeah.
Blake Oliver: [00:10:16] Well they didn't they didn't.
David Leary: [00:10:17] Quote ones.
Blake Oliver: [00:10:18] But they summarized some of the.
David Leary: [00:10:19] Feedback. Okay.
Blake Oliver: [00:10:21] Um, several respondents proposed replacing the 150 hour requirement with years of experience in the field. Suggestions include experience based or additional testing, emphasizing critical thinking skills and expertise in specific areas like IT or advisory services. A recurring theme is the importance of on the job experience, with suggestions for work experience requirements beyond mere time, akin to an apprenticeship. I like that I think we should just swap the extra education with work experience, just go back to the the way it used to be, or offer that as an option. Many argue that passing the CPA exam should be the primary criterion for certification regardless of education hours, stressing its relevance as a measure of competence. That's fair, right? If the CPA exam is in fact a true judge of like whether you have the knowledge to be a CPA, then why do we require people to have credits on a transcript? A considerable number view the rule as an unnecessary financial burden, suggesting a disconnect between education and practical application. And as one of our listeners pointed out in the live stream, many point out that the additional 30 hours of education may not be beneficial because these credit hours can cover any discipline potentially lacking relevance to accounting or other courses essential for becoming a proficient CPA. It's viewed negatively in terms of recruitment, deterring students and leading employers to hire without certification. And, uh, yeah, that's it. Well done, Arizona CPA society. Uh, I would love to interview you, Oliver Yandel, president of the Arizona CPA society, on this topic. Please reply to my emails.
David Leary: [00:12:03] So obviously you have not found this digital yet or haven't searched.
Blake Oliver: [00:12:07] I haven't looked for.
David Leary: [00:12:08] Take some screen, take some photos of it and put it on your.
Blake Oliver: [00:12:11] Oh yeah. Yeah. Heck yeah. I've been a little busy this morning because I had to take my car to the shop and so. But I'm going to post this all over LinkedIn. You bet. Are you kidding? I mean, this is David. This feels so good because it's like when your theory is proven true. I've said I feel like 80% just based on who I talk to. I feel like 80% of CPAs are against this. And it's true in Arizona anyway.
David Leary: [00:12:36] So I know you said you were going to, uh. You've applied to be the president of Nasba. Right.
Blake Oliver: [00:12:42] Yes I did.
David Leary: [00:12:43] I was well, I don't know if you saw this bubbled up yesterday in the latest Republican debate. Uh, you know, there's talk about an accountant being in the white House, an accountant being president, because do you know Nikki Haley, who's one of the Republican front runners? She is an accountant. Now, she never worked as an accountant, from what I could tell, based on her, you know, wiki pages that are only good as they are Wikipedia page. But since August, she's been using this line. It's time for an accountant in the white House.
Blake Oliver: [00:13:10] But she's not an accountant.
David Leary: [00:13:12] She has an accounting degree.
Blake Oliver: [00:13:14] Oh, she does. She does have.
David Leary: [00:13:15] An accounting degree. Yes.
Blake Oliver: [00:13:17] Oh, but she never.
David Leary: [00:13:18] It doesn't look like she ever practiced as an accountant at all. She kind of maybe went the finance route a little bit more.
Blake Oliver: [00:13:23] She has a bachelor's of science in accounting and finance from Clemson University. That's cool.
David Leary: [00:13:29] So maybe Blake, you could run for real president one day so we can accountant in the white House. But the big hubbub is because Ron DeSantis flat out said, we don't need an accountant in the white House. We need a leader in the white House. Employing accountants cannot be leaders, is what he's implying.
Blake Oliver: [00:13:49] Ouch. Ron, you know he's not doing himself any favors, is he? He's losing the accountant vote. I. I can't vote for Ron DeSantis now, David. I guess I got to vote for Nikki Haley.
David Leary: [00:14:01] Well, that's what I was thinking. Like, we've talked about this before, about politicians that are accountants or understand things differently, like, is it okay to blindly just vote for only politicians that are accountants, like, and just put all your other beliefs and political things aside and just assume because they're an accountant, we're automatically going to get a better situation.
Blake Oliver: [00:14:22] Well, given the state of audit in our profession, I don't know if I would do that because the auditors, like if this person has a background in audit, I would not want them running the country because I just saw yet another. Another story about a massive audit failure. This time it was Deloitte in Nigeria. Do you want to talk about audit failures or do you want to talk about. You have this story about horizon accounting software and a scandal in the UK.
David Leary: [00:14:52] Let's talk about your audit story first, and I'll talk about this other scandal, because this other scandal is a little bit more serious. We can't really make light of it as much I think. Okay.
Blake Oliver: [00:15:02] So are you familiar with Hindenburg research? I love that name, by the way.
David Leary: [00:15:07] They're like the the short sellers right there. I think they they determined something else is a big fraud once, right.
Blake Oliver: [00:15:15] Yeah. They've they've come up with some um, they had a we've talked about them on the show and they have uncovered some really big like frauds and done reports and done short selling and have made a bunch of money on this in the past. And I wish I could remember what it was right now, but I can't. But that's beside the point. So Hindenburg Research accused Nigerian company Tingo Group of fraudulent activities back in June. The company's auditor, Deloitte, was also criticized for approving Tingo financial statements despite glaring inconsistencies. Now, how glaring are these inconsistencies? Well, it's pretty bad. So you can find this story on Forbes. It is paywalled. So I did subscribe to Forbes as a result. You're welcome Forbes, I hope you enjoy my $7 a month as a result of Hindenburg's report. Tango's stock. Dropped by 80%. The SEC intervened, halting trading. In December, the SEC charged Teneo CEO Dozie Mabuza with massive fraud. The SEC's civil complaint revealed that Teneo, which claimed to have $462 million in Nigerian banks, only had 50 million.
David Leary: [00:16:29] Can we pause it for a second? Because I just want to like the insanity of this in general. The most common form of spam we get is about money in a Nigerian bank. So like already everybody's fraud warning should be super alert. So if you're the auditor and you're going to audit some Nigerian bank related things, yes, already you be on extra due diligence. Like it screams fraud just automatically.
Blake Oliver: [00:16:56] Yeah. Uh, that's a good point, David.
David Leary: [00:16:59] So what happened here?
Blake Oliver: [00:17:01] Well, okay, so like I said before you so rudely interrupted me. I'm sorry. Just kidding.
David Leary: [00:17:08] I couldn't wrap my head around it.
Blake Oliver: [00:17:10] No, no, it's good, it's good. Uh, so their audited financials said they had $462 million in Nigerian banks. It turns out they only had $50 million. And they got a clean audit from Deloitte. So the question is where were the auditors? This is almost exactly what happened with Wirecard, where Wirecard was giving fake bank statements to their auditors in Germany. I think it was E and E wasn't checking with the banks to make sure that the money was actually there. It's super basic, like this is the most fundamental thing. This is what you do as a first year auditor. You audit cash and you have to ask, how is it possible that Deloitte audited this company, gave them an unqualified opinion and the money wasn't there? We're talking hundreds of millions of dollars. They quoted Matthias Breuer, an accounting professor at Columbia University's Graduate School of Business. He told Forbes, as outsiders, we'd like to think that auditors are looking for fraud. But fraud detection isn't one of their mandates. Auditors don't go into their work with an adversarial mindset. The mandate isn't to be a whistleblower, and because of that, it's usually insiders and short sellers that uncover these issues.
Blake Oliver: [00:18:26] And then the article goes on to mention Ernst and Young's approval of Wirecard's books when when the money really wasn't there. Um, there's also the infamous one MDB saga, which caught three of the big four. And of course, you gotta remember Arthur Andersen and Enron. But this is even more basic than like what happened with Enron, where it was like really complicated. What was going on. This is just like they didn't audit the cash. And Breuer, this professor at Columbia, he's pretty brutal. He says what's happened in the audit industry is that they've lobbied to do check the box exercises to limit their legal liability. They're just trying to satisfy the auditing standards. They're not necessarily trying to attest to the real economic reality of the business. So like you wonder, how is it possible that the auditors got the cash balances wrong? And something this year made me understand this better? Apparently there's a move now to change the auditing standards where you can no longer rely on a negative confirmation. So you have to get positive confirmation of bank balances. Now what does that mean?
David Leary: [00:19:38] Well, can I guess because I think we discussed this before. Let's see if I paid attention. See if you paid attention.
Blake Oliver: [00:19:43] Did you take the CPE quiz.
David Leary: [00:19:44] So so if I emailed Bank of America and I said, hey, does client X have bank accounts there and can you verify them if they never replied b r o well, I can still accept the audit, but now they've changed the law to where the bank has got to reply. I can't just accept a no answer.
Blake Oliver: [00:20:02] Yeah, so you used to be able to and I'm not sure if this has changed yet, but the standard has been that like and you wouldn't send an email, you'd actually send paper mail because that's how this is done. So you'd send a letter to Bank of America and say X client says they have $100 million in an account with you. Is this correct or not? Reply to us if it's not, and if the bank doesn't reply, then you assume it's right. That's a negative confirmation.
David Leary: [00:20:25] Got it?
Blake Oliver: [00:20:26] It's ridiculous. Right? So client gives you fraudulent bank statements and then you do a bank confirmation. The bank never replies okay, that's how it gets on the financials that way. So thankfully that is changing. But it's kind of crazy that it's been that way for so long. So now if you don't get confirmation, there's going to have to be additional steps that you do to confirm those balances. Now here's what's interesting about this whole thing. It wasn't Deloitte in Nigeria that was auditing the books of Tingo. It was Deloitte's Israeli branch. That signed off on this. So why would you have auditors in Israel? Auditing a company in Nigeria. Was the idea to keep the auditors far away from this company so that they didn't uncover the fraud. Why not use auditors in the country?
David Leary: [00:21:19] So are these questions that were investigated and asked or is this you just being rhetorical here?
Blake Oliver: [00:21:24] These are questions that the investigative reporter is asking okay. Over at Forbes in this article, I mean, $461 million that didn't exist on these financial statements for a public company. Ed Ketz, an accounting professor at Penn State's Smeal College of Business, told Forbes in an email. The cash account is the most important balance sheet account and one of the easiest to audit. One wonders how Deloitte Israel could have missed that. Verifying a company's cash is a foundational part of the auditing process, and one of the boxes auditors are supposed to check, said Stephanie Mason, an accounting professor at Driehaus College of Business at DePaul University. In the process of an audit, there are some pretty basic things that should be done, Mason told Forbes. One of those is confirming cash balances by sending a form that goes directly to the client's bank. The standard essentially says that the auditor has to verify the bank account independently. So. I mean. I don't really have words for this. It just seems. It just seems like. If this keeps happening. Like this happens on a regular basis, right? These massive frauds. This is what destroys the reputation of accounting and auditing in the mind of the public, because this is what they think of.
Blake Oliver: [00:22:40] Right? We're not doing our jobs. So we got to clean up our act, right. Auditors need to be independent. They need to be truly independent. They need to do more than checking the box. You know, this is why the US Second Court of Appeals issued a ruling in which it said that audit reports are so general as to be immaterial. We talked about this on the last episode. It's it's the most scathing thing anyone has ever said about auditors, that their own audit opinions don't matter and are immaterial. So if you want to talk about why we have a talent crisis in accounting. It's the pay and it's the hours, but it's also the lack of meaningful work because guess what? Young auditors, they're not stupid and they know when they do the work. If it's just check the box activities that it's meaningless. The Emperor has no clothes. Everyone can see it, right? And they don't want to work doing a job. Just for a paycheck where these are work papers that don't matter.
David Leary: [00:23:42] Yeah. Where's the audit engagements? Finding fraud. I never see those news stories. It's always a reporter or a short seller. It's it's some other third party that things don't smell. They smell funny, so they gets investigated. Right? But it's never the auditor that finds the fraud for some reason, like. But the public assumes that's what they should be doing. So then when they get a signed off audited statement, must be safe. Must be correct.
Blake Oliver: [00:24:05] Yeah. Um, only 4% of frauds are detected by external auditors. Only 4%. Most of the time it's whistleblowers. Now, you might say, and this is what defenders of the audit profession will say, is that it's not the job of auditors to detect fraud. But you would think that if they were doing a good job of auditing, that they would find more frauds and especially this kind. This is. Come. This should have been detected very easily at the very beginning of the audit.
David Leary: [00:24:38] Is it a reward like so? If I find if I, if I'm a junior staffer at an accounting firm and I find this, do I get an attaboy, or do I.
Blake Oliver: [00:24:47] Know you probably get spanked because you just created a ton of work for the audit team, right. And that's the problem with the way things are set up, right? These audit firms are designed like to sell an audit opinion. They want an unqualified opinion because if anything comes up, they have more work to do. And the worst situation is when you can't issue the audit and you have to let the client go, because now you can't charge the client for the work you did. So the system we have punishes auditors financially for finding problems. And that's not what you want. You want the auditors to find the problems. You want them to have an incentive to find the problems. In short, sellers have a big incentive to find problems because they make a lot of money when they bet that a company's stock is going to decline and they issue a report. So you want auditors incentivized, like Hindenburg? Maybe not in the same way, right? You don't want auditors profiting when a company's stock falls. But perhaps if stock exchanges hired them, then they would be more independent of the companies that they audit. And the stock exchanges could incentivize the auditors to, like, find the bad companies on their listings. I mean.
David Leary: [00:25:57] Maybe the the big public accounting firms get special tax breaks when they find fraud. They get a they can take an extra deduction on their their income for their firm, maybe, I don't know, or the partners get to take it or I don't know. You know like you're right. It's going to have to be motivated by the money a little bit. Yeah.
Blake Oliver: [00:26:13] You got to change the financial incentives right. Financial incentives are what drive the world. And so like we just have them totally set up the wrong way. And no amount of ethics training can counter it. In my opinion, because we do a lot of ethics training, it doesn't make a difference. People just cheat on the ethics exams.
David Leary: [00:26:33] Hey, did you watch the Netflix special, uh, painkiller yet? Not yet. It's episode series, and it's about the the. It's slackers, the family and the opioid crisis and OxyContin. It's about the whole thing. But there's a lot of disturbing things that as I'm watching that I'm like, this is just like the accounting industry. And I think it's probably true for the Food and Drug Administration with restaurants and this these like, people go into the private company, then they move back over to the government, government agency that's in charge. And like we've seen this where the people at the PCAOB, they're buddies with the people that work at the big four. Then they move back and forth and you see that dance. But watch that from an accounting point of view. And it's a little disturbing because you're like, oh my goodness. Like we're we're we're close to this like behavior. It's it's it's disturbing a little bit.
Blake Oliver: [00:27:20] I want to get to this story about the post office in the UK. Before that, I want to do a little uplifting story. So here's some.
David Leary: [00:27:29] Can I do an uplifting story first?
Blake Oliver: [00:27:30] Then you go first when you do yours.
David Leary: [00:27:32] Okay, so I discovered a new website that's starting to become a little bit of a favorite. It's actually it's, um, it's a certified pastry aficionado, CPA.
Blake Oliver: [00:27:45] Certified pastry aficionado, aficionado.
David Leary: [00:27:48] Aficionado. So it's certified pastry aficionado.com. Um, Sharon, she's a certified pastry aficionado or a CPA, but she's also a real CPA based in Atlanta. So she has all these great recipes and she posts everything you know. For example, like everything precocious, she made focaccia that has like seasoning from bagel, everything seasoning. So check out the site. It's a feel good story. I think, uh, you know, I like it's positive association you to the word CPA.
Blake Oliver: [00:28:16] Are you sharing your screen?
David Leary: [00:28:17] Oh let me share the screen on this one.
Blake Oliver: [00:28:19] I want to see what this looks like. And while you do that I want to show everyone my CPA placard which says. Blake Oliver, CPA and under that cello playing accountant. My father in law got me this when I became a CPA. It's one of those blocks you put on your desk. Now, I don't I don't have anyone that comes into my office and, uh, to and I don't need a name card on my desk, so I put it behind me.
David Leary: [00:28:43] Yeah. So here's Sharon and Sharon's bio. She talks about. Welcome to Certified Pastry Aficionado, CPA for short. My name is Sharon, and yes, you guessed it, a CPA.
Blake Oliver: [00:28:53] That's great.
David Leary: [00:28:54] That stands for Certified Public Accounts. So we have some good positive association with the word accountant. Uh, lots of cool recipes in here. We can a lot of bakery type stuff. Yeah, it's it all looks amazing. So.
Blake Oliver: [00:29:05] You know, one of the criticism of CPA firm websites is that, you know, they all seem to have recipes on their blogs. So this is this is an example of a recipe website where perhaps you could put some financial advice on the blog.
David Leary: [00:29:19] Sneak it in. Now it's a funny thing. She has like a menu item on her thing that says cookbooks, which I don't know if you want that associated with you. Cook the books, cook the books. So I'll stop sharing.
Blake Oliver: [00:29:32] All right, my turn for some good news. The headline here is tsunami. Miracle baby now 19 pursues accounting degree. 19 years ago, when a 9.1 magnitude earthquake hit the west coast of northern Sumatra, Indonesia. S Thulasi was just a 22 day old baby. On that day, the waves raced 600km from Sumatra to Penang at 800km/h. Thulasi was sleeping on a mattress at her family cafe on the beach when the first one came and swept her out to sea. A second wave came and miraculously sent her back to shore. She made world headlines, sleeping throughout the whole episode without a single drop of seawater on her body, earning her the nickname Tsunami Miracle Baby. Speaking to the New Straits Times, Thulasi shared her gratitude for her survival and honored the 37 lives lost at Pantai Miami. And she's now pursuing a degree in accounting, and she helps out at her parents seaside cafe.
David Leary: [00:30:38] It's great. Uh, but she in like a vessel. Like, how did she not get any water on her?
Blake Oliver: [00:30:45] She was sleeping on a mattress on the beach.
David Leary: [00:30:48] And it just happened to float perfectly.
Blake Oliver: [00:30:50] It floated because, you know, people think like tsunamis in the movies or these giant waves like surf waves, right? But they're not. It's just the water level suddenly rises. So the water came in. It didn't swamp her mattress and she floated.
David Leary: [00:31:06] Amazing. Wow. Isn't that incredible? Truly a miracle. Truly a.
Blake Oliver: [00:31:10] Miracle. I mean, that is. So that's your, um, feel good news in accounting for the weak. Now, let's get to the really depressing stuff. David, you have a horrible, awful story that made me feel terrible. Uh, yeah. So, I mean, it's just terrible what's happened to these people in the UK due to accounting software not working properly? It's put people in jail, it's ruined lives.
David Leary: [00:31:31] Somebody committed suicide, and so I. What? So we've been doing this podcast for six years now and we never talked about this story. We never saw it because this story has been taking place for the last 20 years prior to us doing the podcast. And then nothing can not it wasn't really much in the news the last 4 or 5 years, but now it's bumped up into our radar and into the news this week because British TV, the new British TV channel ITV, broadcasted a four part drama series called Mr. Bates Versus the Post Office.
Blake Oliver: [00:32:04] So this is a documentary series that was on TV about this whole thing, about.
David Leary: [00:32:10] This whole thing and that just got broadcast last week or this week. And things have been happening daily. So since the first episode, uh, was aired, dozens of new victims have started contacting lawyers to appeal their convictions, piling on the already. Let's think about the math on this. Thousands that have been accused of Post Office branch managers, 700 wrongly handed out criminal convictions, numerous bankruptcies, divorces and for people even took their own lives bleak because of this issue.
Blake Oliver: [00:32:41] Okay, so you said this has been happening for decades. Walk me, take take me back to the beginning. What is I got it.
David Leary: [00:32:47] So so here's the story. So first we'll set the table a little bit on this. Right okay. So you have Fujitsu. So a lot of accountants the listeners here in the States a lot of people are familiar with their scanners.
Blake Oliver: [00:32:57] Yeah I got a Scansnap Fujitsu Scansnap.
David Leary: [00:32:59] Yeah Fujitsu scanner. Well there are $20 billion Japanese tech giant maybe 24 billion. They're gigantic, monstrous. But they own a lot of software companies all over the world. One of these companies is a UK company that made accounting software called horizon, and arguably it was an accounting software. It was probably more of an enterprise point of sale system. Okay. So you have this one part of the story is the software, the Point-of-sales. It has.
Blake Oliver: [00:33:23] Accounting features.
David Leary: [00:33:25] Accounting features. Yep. And then you have the UK Post Office. And so the post office, the way they run it, they have smaller branches and they almost feel like franchisees like so if you're the manager of a sub post man or a manager of the smaller branch, under the terms of your contract, Blake operators are liable for the financial losses. So that's why it feels more like a franchise, right. You're taking the responsibility running this smaller postal branch. Right.
Blake Oliver: [00:33:55] And so I have to make sure that I collect the proper amount of, of postage for the letters that I'm taking in through my office.
David Leary: [00:34:03] Whatever services are selling the stamps, who knows. Right. Okay. So, you know, in the olden days, they all ran pen, paper, paper receipts. And everybody's were running these for decades. Probably hundreds of years in the UK were probably ran this way. Okay. Um, in the late 90s, you know, when computers started coming around, they rolled out an accounting point of sale system called horizon. So that is this company that Fujitsu owns. So basically the the point of sale would give the main post office visibility to all the revenue due to them, right, by totaling up all the transactions in the smaller branches, which kind of makes sense, like you'd want from an accounting perspective, you'd want to know that information. Right. But the system was buggy. Hundreds and hundreds of bugs, super buggy system. Two of the bugs were bad enough that they even got names. Right. So I'm going to I'm going to mess this up because it's named after a village in Scotland, but it's the Dalmellington bug. Dalmellington bug. But anyways, so the reason it's named that is that's where the first victim fell prey to it. So here's the bug okay. So you're if you've ever rung up a sale on a point of sale before you finish the sale, you hit a total, right. You you finalize the sale, the screen would just freeze. So what are you going to do, Blake? As somebody using a computer when the screen freezes, what's the first thing you do? Reboot the enter key or you hit the enter key again. Right. A couple of times. Oh, yeah.
Blake Oliver: [00:35:31] Yeah, yeah.
David Leary: [00:35:32] You hit the enter key. Hit the enter key. Well, every time you hit the enter key it was logging another sale to the. Letcher.
Blake Oliver: [00:35:40] So I'm trying to get my screen to unfreeze. I'm hitting the button a few times. It finally does. But and I don't realize that I've entered multiple transactions now.
David Leary: [00:35:49] Since.
Blake Oliver: [00:35:50] Duplicate transactions.
David Leary: [00:35:51] Duplicate transactions are registered. Okay. And so and so. For example, the first operator that discovered this 24,000 pounds, they were accused of stealing because it recorded all these fake these incorrect transactions that never happened. Then they have another one called the calendar square bug, which is even worse because it's the underlying database was just creating duplicate transactions.
Blake Oliver: [00:36:15] Just on its.
David Leary: [00:36:15] Own. Just on its own. There's a bug, okay? It's creating duplicate transactions. So if you think about you have thousands of ledgers or subledgers for all these subpost office without thousands of tens of thousands errant transactions that according. So, according to a 2015 testimony, the Post Office to the House of Commons said there's no functionality in horizon at either a branch, post office or Fujitsu to edit, manipulate or remove the transaction data once it's been recorded in branch accounts. So they were claiming in 2015. So they rolled this out in 1999? Yeah, in 2015, they were testifying saying nobody could ever edit and fix this, these problems. So they're claiming four years later they determined it was untrue. And they determined that Fujitsu could access the accounts in an unrestricted, unaudited access. So you see the problem here, like the bug the actual issue. Yeah.
Blake Oliver: [00:37:08] So so you're creating duplicate transactions, the sub post offices, the people running these post offices are they've got to send the money to the post office. Right. Yeah. And and so the post office is saying you didn't send us enough money. You owe us. Lots of money, right? Exactly.
David Leary: [00:37:29] Because remember the contract you signed that said you're financially responsible, right?
Blake Oliver: [00:37:33] And and you're stealing from us?
David Leary: [00:37:35] Yes. So for a decade plus, the post office destroyed thousands of people's lives. Um, so accusing them of theft, demanding they repay the money. They worked with the UK police to put people in jail for theft.
Blake Oliver: [00:37:48] How many people are we talking about?
David Leary: [00:37:52] Um, so about 700. It's about 3700 were convicted. Uh, people were put in jail. Um, there were suicides, divorces, bankruptcies. It's it's it's very broad. It's shocking how long this went on. And the other shocking part of it, of course, the Post office, Fujitsu were informed about the bugs a long time ago.
Blake Oliver: [00:38:15] And they didn't fix it and they didn't fix it. What did they not connect? The fact that there were these duplicate transactions and then the criminal prosecutions and I mean, well.
David Leary: [00:38:27] Yeah. And so in 2006, uh, tech savvy branch operator, he happened to have a computer science degree, and he was like an earlier tech adopter. So he rolled out his own point of sale at one time. Some DOS based point of sale and a couple branches add this DOS based point of sale. And just like anybody doing good technology rollout, you would run both side by side. So in 2006, he ran both Point of Sale side by side and discovered the problem with the double recording that was happening. He went up all the support channels, wind up getting to like a third tier at Fujitsu and got a reply back. That said, we managed to replicate the bug. We know about it. He asked Fujitsu when it was going to warn the network of subpostmasters like let everybody know this bug exists and they said no, we won't do that. We'll just let it carry on. So they refused to tell all the other locations about this. And then crude. Incidentally, of course, he was terminated in 22,006, accused of stealing 13,000 pounds because the register didn't do it.
Blake Oliver: [00:39:29] Wow.
David Leary: [00:39:29] So even in that year, the post office in Fujitsu, they didn't care. And even that year, 50 more people, 51 more people got prosecuted just in that year alone for these these these thefts.
Blake Oliver: [00:39:43] What is is this just like a problem with British culture or something like how could they how could the post office prosecute people for stealing money? When they're using reports from a buggy accounting system.
David Leary: [00:40:00] I kind of have that answer. I did some research on that. Are these just asking me this?
Blake Oliver: [00:40:04] Were these horrible people running the post office?
David Leary: [00:40:06] Well, I think there's some of this like how to happen. Right. So you have stubbornness, you have egos, there's billions of dollars involved. You have politics. I think it's all that. But based on my research, it's actually the way computer testimony is treated by UK law. Now, we might have to put those disclaimers at the end of the episode, because I have no clue about US law. I don't know how this applies, but prior to 1984. So the dawn of the computer age, really right to submit computer evidence in court, you had to prove that the computer system basically was perfect. It was working accurately, had no errors. You had to prove that. But then in 1984, the law has changed. So in England and Wales, courts considered computers as a matter of law to which have been working correctly, unless there's evidence to the contrary. Therefore, evidence produced by computers is treated as reliable unless other evidence suggests otherwise. It's the whole innocent until proven guilty applied to computers.
Speaker3: [00:41:03] Mhm.
David Leary: [00:41:04] Right.
Blake Oliver: [00:41:05] Well yeah. So the well you're and in the case of evidence produced by a computer you are guilty unless proven innocent.
David Leary: [00:41:12] Yes. And so a thousands of accusations and prosecutions happen because of this. The computer was right mentality. Wow. Think and think about that. We all have clients. We have QuickBooks. We're sinking data in from different apps. Every time I turn around some data is incorrect. Yeah, it's it's mind boggling. That is that it's at that.
Blake Oliver: [00:41:33] And you said you said people committed suicide. Like how much money was at stake in a lot of these cases.
David Leary: [00:41:39] Oh 5060 100,000. These were. Their cash register write shortages.
Blake Oliver: [00:41:47] But I mean, hundreds of thousands of pounds is a lot of money.
David Leary: [00:41:50] Yeah, for probably one of these operators that was only making 20,025 or whatever it might be.
Blake Oliver: [00:41:55] They're a small business owner. Yeah. Wow.
David Leary: [00:41:58] And so where does this bring us to today? So it's being called one of the biggest miscarriages of justice in British legal history. Um, and the British have done a lot of bad things in the past, so it's pretty. Yeah. Um, currently there are settlements happening, payouts are happening, but even the payouts are introducing more controversy because they're determining do they want to tax it, should it be taxed. There's arguments about the taxation on the payouts. Um, people are being exonerated. So people are being let go of prison as of January 10th. So this is two days ago, the prime minister, Rishi Sunak, he announced new legislation and I'll, quote unquote, to make sure those convicted are swiftly exonerated and compensated. Government officials said a bill would be introduced within weeks to grant an acquittal this year. And now criminal investigations may have started against the executives of the Post Office and Fujitsu, and there is an effort to roll out a new cloud based point of sale to replace the horizon system. But even that now that rule has been delayed and hasn't happened. So the UK Post Office just had to write another check for 36 million pounds to Fujitsu and to keep them around until 2025, so bringing the total spent on Fujitsu's buggy software to 2.3 billion pounds. This. Is that money going around, right? It's money.
Blake Oliver: [00:43:16] It's like the money that, uh, what California has put into its new accounting system. That still doesn't work.
David Leary: [00:43:22] So for me, I think there's there's lessons here, right? Like, um.
Blake Oliver: [00:43:26] People suck, I mean, always.
David Leary: [00:43:28] Well, yeah, that is that. But I mean, I think, you know, you can't assume that you have to work from the other way. A computers and tech are always wrong. Work from that direction. Right. You have to sanity check stuff. There's always bugs. There's there's bugs.
Blake Oliver: [00:43:42] You got to think that people at the post office and people at Fujitsu knew that there were these bugs, and they knew that people were getting prosecuted, and they somebody had to have connected this and figured it out and probably covered it up and didn't want to tell the truth because they'd done all this horrible stuff. They'd put people in jail, they'd ruin people's lives. Nobody wanted to. Nobody wanted to clean it up. That's that's what that's. Yeah.
David Leary: [00:44:10] In the beginning, when maybe you discovered something was wrong, you could have took the right path, right? And just admitted, oh, we signed a bad contract, or we got bad software, fixed the bug like nobody wanted to fix it. And just for decades, like, for a decade, let people be put in jail. Um, the other thing, too, is I think the takeaway is be part of communities. Apparently all these subpostmasters were kept in silos, so they had no idea all these other subpostmasters were being accused.
Speaker3: [00:44:36] Right?
David Leary: [00:44:37] So so be part of communities and know what your cohorts are going through.
Blake Oliver: [00:44:41] I feel like because of the like this, a lot of this happened before social media, before community online communities existed. I feel like now it would be harder for this to happen because people would get together and say, we're not all stealing.
Speaker3: [00:44:58] Right.
David Leary: [00:44:58] Yeah. And you see this, like, text Twitter. You know, somebody discovered something wrong. Something wrong. You see, with the QuickBooks communities. Yeah. And everybody piles on. I've had that problem too. But yeah, this is it's a very disturbing article. It really or it's not even an article. There's lots of articles I pulled together. But, uh, so if anybody wants to try to find the show, it's called Mr. Bates versus the post office is the four part drama. But I don't think there's the end of this story, but it's it's shockingly disturbing.
Blake Oliver: [00:45:26] Thanks everyone who's joined us live today. We've got Giles Pearson in the live stream from accounts normally in New Zealand, so he doesn't get to join us live, but he's here in the States. And he said, finally get to listen in a sensible time zone and not at 6 a.m. on a Saturday. Well, actually yeah. If you get up early you can listen to us. And so thanks, Giles, for tuning in. Um, it was great. We went for a hike the other day because he was in, uh, in Phoenix. Doopy doo says should PCAOB or SEC offer bounties to firms for discovery of fraud? It's worth considering. I think that, um, at a minimum, they should be hired and paid by someone other than who they are auditing. Think about health inspectors in your local city who inspect restaurants. Would you want the restaurants hiring those health inspectors, or do you want the city hiring those health inspectors? Just think about.
David Leary: [00:46:19] That. That's a good analogy. That's a great one. Yeah.
Blake Oliver: [00:46:22] Because if you if you had it set up the way that we have it set up, what would happen is that only a tiny percentage of restaurants would ever fail inspection. And it would have to be like something truly horrendous and the rest would be getting away with, you know, having rats in the kitchen because the auditors didn't see them, because the auditors don't want to see them. And the same is.
David Leary: [00:46:40] True for building inspections. And yeah, exactly. We'd have buildings falling over all the time. Yeah. If it wasn't, if we ran it like that.
Blake Oliver: [00:46:47] Regarding the 150 hour rule and the survey that we talked about, Tyler says, I love having the work experience replace the extra hours, but the work experience shouldn't be a factor of working for a CPA. Many have gone the corporate route and have only worked for expired CPAs. Yeah, I think that's a problem. Is that to get the experience, you have to have like a CPA sign off on your experience. We need to fix that too. And that's not really talked about because it can be really hard if you aren't in public accounting to find a CPA to sign off on your hours. And now even in public accounting, because firms are promoting non CPAs to manager, it's really hard to get. It can be hard to get the hours there. Yeah. So we need to fix that. It needs to be it just should be experience in a role that's appropriate that you can prove. It shouldn't have to be. Why do you have to be working for a CPA? I feel like that rule was just created to like force people to go work for CPAs so CPAs would have more labor. Um, possible, man, crab says. But what is an appropriate amount of additional work experience? Will someone really want to wait the extra time for their license? So the old rule was two years of experience, 120 hours of education.
Blake Oliver: [00:47:52] I support offering that again because it swaps the year of education back for a year of experience. Um, I mean, if you're going to work in accounting, to get two years of experience is not that hard, right? I think it could even be three. I think that would be an appropriate amount, I believe, for the certified management accountant, it is three years of experience in a relevant role, Alex said. I'm not sure about other states, but here in Louisiana, the 30 extra credit hours do not even have to be in business, much less accounting insanity. Yes, it is insanity. Uh, but the people who put this in place are the ones in charge today, and they don't want to admit they made a mistake. And that is the sad truth. And actually, that's just like what David was talking about with the post office. I bet you it's the the people who started prosecuting these cases didn't want to admit that they'd really screwed up. And that's how really bad things happen in this world.
David Leary: [00:48:44] All right. They probably kept the police in and the police didn't know. Yeah, right. The police probably they.
Blake Oliver: [00:48:49] Thought they were doing their.
David Leary: [00:48:50] Job going off the evidence. Yeah.
Blake Oliver: [00:48:52] Um, they probably feel horrible now. Here's something related to the talent shortage on going concern. The headline is there are only two firms in Wyoming that can do government audits, and one can't do its job because of staff shortages. Yeah. They found this in the Sheridan Press. The city of Sheridan and Sheridan County's fiscal year 2023 audits will come in after the state mandated deadline. Both the city and county utilize the services of Porter Muirhead Cornia and Howard Pmch, a certified public accountant based in Casper, for their audits. The firm works with the local governments to compile information for the audit throughout the year. Holding up the audit this year, Duff said, is a short staffing at Pmch and as the firm competes with other accounting firms across the nation for employees. So basically the city and the county aren't going to have their audits done on time because of short staffed. They're short staffed over at the accounting firm. It's been delayed previously for the same reason. And there are only two accounting firms in the entire state of Wyoming that do government audits. So we're starting to see the talent shortage really impact small, uh, town America, right. Main Street America. And it's going to continue to do so. We also saw a report recently that midsize auditing firms are pulling back from public company audits because of increased PCAOB inspection. This is in the Financial Times. In 2023, several mid-sized US accounting firms withdrew from auditing public companies due to a lack of new recruits and a stricter regulatory environment. This led to smaller companies struggling to find new auditors before the end of the financial year. Who are we talking about? I'd Baillie, a top 20 accounting firm, and Cliftonlarsonallen, another top 20 firm, both ceased auditing listed financial services companies.
Blake Oliver: [00:50:50] They cited the significant investment needed to serve public company clients as a reason for their withdrawal. And as auditors are well aware, the Public Company Accounting Oversight Board, the auditors of the auditors, have increased their enforcement of audit standards under the Biden administration, which means more inspections imposing record fines on accounting firms. And so the firms are like, you know what? Audit was never really our most profitable line of business anyway, at least in recent years. So let's just drop it and we'll do consulting instead. So it's it's interesting. Right. You have this I think well-meaning approach of we're going to increase audit quality by regulating audit harder. But in this case I don't think that regulation is the answer. More regulation is not the answer because it's regulation that got us into this problem in the first place. There is actually too much regulation. There are too many rules around audits that have made audits essentially meaningless because they are mostly check the box activities, and they're not about the true economic situation at the business. And so you come down hard on auditors. The firms will just say, you know what? We'll do something else because the profit has been sucked out of this because it's a check the box pass fail system that doesn't create a lot of value for investors and for businesses themselves. So we've gotten ourselves into this situation with regulation and. Like you have said in previous episodes, David, it might be time just to burn it down and start afresh.
David Leary: [00:52:26] Yeah, I think, uh, I don't know if there's a better way to end this episode. It's a little.
Blake Oliver: [00:52:30] I think that's good. Uh, we are past our time for today. We have exceeded the requirement for CPE. As a reminder, you can earn free CPE for listening to this episode. You made it all the way through. You listened to me drone on about audits. You listened to David talk about a massive I would call it a fraud, a fraud on the postal workers in the UK. You deserve CPE credit, continuing professional education. You can get it for listening to this episode. Download the earmark app on the Apple App Store or the Android Google Play Store. Just search for earmark. Download the free app, create an account. Find this episode. We put out the courses about a week after the episode drops, and you can take a quick quiz and you can earn free CPE.
David Leary: [00:53:16] So I'm driving up to Phoenix. It's like a two hour drive. I'm not a CPA, so I don't need CPE, but I can listen to this podcast in my car and then when I pull over to park, I can just quickly take the quiz, get my CPE. Yeah.
Blake Oliver: [00:53:29] That's it. And we had a listener write in who said, I have been earning CPE this year already on my commute, and you could be done with your CPA requirement before December even rolls around. If you get the earmark app now, you can at this time earn a free CPE every week. You don't have to pay a cent, but if you want to support our work in the development of the app, please do consider subscribing. Um, we will honor your subscription price for now. So like you'll get the lowest price because it goes up every year and we're going to be adding premium content. We have earmarked webinars now that I host where you can get actionable AI tips. So far those have been free. But we're going to make some of them premium. So subscribe now. Lock in the low annual price. It's only $139 a year for unlimited self-study CPE, and you're going to get great content and help us support the work. Last year we issued, I don't remember how many was it 37,000 CPE certificates.
David Leary: [00:54:33] To date, 739. Yeah.
Blake Oliver: [00:54:35] To date, since we started this company and we've been offering CPE now for like two years, we have issued over 50,000 CPE certificates. So I want to make that 100,000 this year. And, uh, I want to make CPE accessible and affordable to everyone easy, uh, high quality. So thanks to everyone who has supported us. We're over, uh, 2500 paid subscribers. Now.
David Leary: [00:54:59] That's all I got. I will see you in about three hours.
Blake Oliver: [00:55:02] Oh, yeah. We're gonna meet up for a happy hour. Dinner team. Team dinner. So, uh, thanks everyone who joined us. I hope you are having a great January so far. And you can write us if you want to tell us about anything we missed. Uh, tell us how busy season is going. Let us know a story we should cover. Tell us what you think about what we say on this show. If you're an auditor and you're pissed off about me dishing on audit all the time, I want to hear from you because you're all so quiet. Like I assume you agree with me. I'm going to actually take a negative confirmation approach to that, because I don't hear any of you complaining about what I say. I'm going to assume you think I'm right, and if you think I'm wrong, you should email me at The Cloud Accounting Podcast at earmarked me and, uh, tell me what you think. I would love to interview you and, uh, you know, get another perspective. The only auditor we've ever talked to on this show who has lots of experience is Jerry McGinnis, uh, who was the Philadelphia KPMG managing partner. Um, I want to talk to more. But it's funny too, because there's like so many audit partners in this country, there's like thousands or of them, but they're all like very quiet. Is that just the nature of auditors or audit partners? They just stay stay out of the limelight. Tell me who I should talk to.
David Leary: [00:56:13] In the audit. They're busy doing the audit.
Blake Oliver: [00:56:15] I want to talk to them. I want to find out, like, what's the what's the truth? Is this right? Because it doesn't look good if I'm an outsider. Uh, I don't think audits look great. It's not a good situation. It's not headed in the right direction. It's not any better than it was before Enron. I think I'll end it there. Bye, everyone. Bye, David. Hi.