The $99.25 million dollars associated with the CD came from the review of the CD by BDO. When a firm reviews the FMV of the asset they are required to get a valid appraisal and assess all known liabilities against that asset. Normally, the FMV of a security can be located in the WSJ, etc. etc. as most securities are either stocks, bonds, CD's (regular ones), or other types of investment securities. In the case of the "special" CD that GIFS owns, which is I believe a security interest in real estate, BDO received an independent valuation of the underlying assets that make up the CD. This provided a starting point.
Once you know what the FMV is, you need to perform audit procedures to see if anyone else has a claim against that asset. I think few doubted the CD was worth $100 million. I know most people believed that the prior year financials were wrong and SOMEONE had a right to claim the entire CD, meaning that it may have been worth $100 million, But GIFS owed someone $100 million for it. As I have stated earlier, understating liabilities in this manner would be SEC fraud and a lot of attorneys, CPA's, management, etc. would be in a lot of trouble.
What BDO found is that yes, some people have a claim against the $100 million CD, BUT ONLY APPROXIMATELY $750,000. That means GIFS essentially owns the CD and owes about $750,000 of the entire CD to someone else.
For financial statement purposes, the liability was not booked in prior years or prior periods. It may not have existed. I don't know. However, in the current year, it may be immaterial. When you audit, you look at materiality threshholds. That means you do the following as an auditor:
1. You put your shoes in the investor's shoes.
2. You say, if I were buying GIFS, would it matter to me if the asset was valued at $99 mill or $100 mill. Probably does not matter. If the answer was say $90 million, it might, meaning that it is material and should have been disclosed.
3. It wouldn't surprise me if the liability existed at the 9/30/96 balance sheet date but was not disclosed due to immateriality. If this was the only difference between what the auditor found and what GIFS had, then it would basically be noted as an audit difference, discussed with management and not disclosed and the books not adjusted. Trust me, THIS HAPPENS ON EVERY SINGLE AUDIT THAT IS PERFORMED EVERY YEAR. In five years in the business, I have never seen financial statements that are 100% correct. They are all close enough to be considered accurate. That is why the audit opinion is worded so carefully. We don't say they are 100% correct. We say the financial statements provide a reasonable basis, etc. etc. to say that the financials approximate what the company has.
4. I probably shouldn't state this, but the way audits work and materiality threshholds are utilized, the "true" BV of GIFS is probably between $130-$150 million. It is not exactly $140 million. I would bet all my shares of GIFs on it. The BV is close to $140 million, though, or else the prior accountant could not have signed the report. Well, he could have signed the report if the BV was $100 million. I'n sure his liability insurance carrier would have not appreciated it though.
5. I have personally worked on audits where I have discovered irregularities of a few million dollars and because the amount was immaterial to the overall audit, we did not disclose anything. We had clients that had subs valued at several million dollars. Due to materiality thresholds, we didn't even look at them. They may have not even existed, we will never know, but they were immaterial.
6. This all brings back my nightmarish days as an auditor. As stated previously, I am a tax consultant/tax accountant who was required to work a certain number of months in audit so as to become a CPA.
I'm off to bed. I will elaborate more on the CRIC deal tomorrow, probably late evening. |
