Bramwell’s Lunch Beat: SEC to Hear Appeal From Big Four’s China Affiliates

AstraZeneca pipeline is lottery in tax-fed Pfizer pursuit
Naomi Kresge of Bloomberg wrote today that when Pfizer Inc. CEO Ian Read faces UK lawmakers to justify his proposed takeover of AstraZeneca PLC, one question will underpin the debate: whether the more than $100 billion offer is really about drugs, or about taxes.

A review of AstraZeneca pipeline assets suggests the latter may be true. AstraZeneca lacks first- and best-in-class experimental drugs in the core cardiovascular, diabetes, and cancer sections Pfizer cited as grounds for the offer, Kresge noted.

Last week, AstraZeneca CEO Pascal Soriot cast the pipeline in a positive light for investors, predicting peak sales potential of about $23 million. That implies a 36 percent chance of success overall, he said, with odds on individual drugs, such as a BACE inhibitor for Alzheimer’s, as low as 9 percent, according to Kresge.

But judging by investor reactions to AstraZeneca’s projections and Pfizer’s figures, it’s a case of measurable benefit – tax – being weighted together with a hypothetical one.

“It doesn’t work financially on most people’s calculations without the tax benefit,” said Mark Clark, a London-based analyst for Deutsche Bank who called AstraZeneca’s estimates “blue sky” in a note to investors last week, according to the article. “Without a doubt, tax is a major motivation.”

SEC agrees to hear audit appeal of ‘Big Four’ accounting firms’ China affiliates
Michael Rapoport of the Wall Street Journal reported on Friday that the US Securities and Exchange Commission (SEC) has agreed to hear an appeal by the Chinese affiliates of the Big Four accounting firms of a ruling penalizing them for refusing to give the SEC documents about their audit clients.

He noted that the firms are appealing a January decision in which an SEC administrative judge said the Chinese affiliates of the four firms – PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG, and Ernst & Young – should be suspended from auditing US-traded companies for six months because of their refusal.

The SEC’s decision on the appeal isn’t expected for a while, though, as the firms and the SEC won't finish filing their legal briefs until September.

[Read more from Rapoport about the January ruling and appeal here and here.]

Dougan’s reign tested as Credit Suisse tax charge looms
Credit Suisse Group AG CEO Brady Dougan is starting to lose support in Switzerland, with the Swiss Social Democrats, the second-biggest party in parliament, yesterday calling for his resignation along with Chairman Urs Rohner, Bloomberg reported on Monday.

Shareholders are also unhappy with the bank’s management. “Fish stinks from the head down, more precisely, that’s the head of CEO Brady Dougan,” Ernst Schmid, a shareholder wearing a traditional Swiss edelweiss shirt, said at the bank’s annual meeting last week, calling for the CEO’s resignation over an investigation into whether it helped Americans evade taxes, according to the article. “Management always tries to sweep things under the carpet, but it’s no longer possible to hide.”

US prosecutors are pressing for a guilty plea from the parent company of Switzerland’s second-largest bank, a person familiar with the negotiations said last week, Bloomberg reported. The case could cost the lender more than $1.6 billion, according to a second person, who asked not to be identified because talks are confidential. That’s more than twice what Credit Suisse said it set aside for legal costs.

2 banking giants implore US authorities to go easy
More on Credit Suisse from Ben Protess and Jessica Silver-Greenberg of the New York Times. They reported that to avoid the fallout from pleading guilty – no giant bank has done so in more than two decades – Credit Suisse and BNP Paribas, which is also facing the threat of criminal charges, made last-ditch appeals to prosecutors and regulators in recent weeks, according to people briefed on the talks.

The private meetings came after prosecutors sought guilty pleas from the parent companies of both banks: BNP of France over doing business with countries like Sudan that the United States has blacklisted, and Credit Suisse for offering tax shelters to wealthy Americans.

While Credit Suisse and BNP proposed more modest guilty pleas from their subsidiaries rather than parent companies, the people briefed on the talks said, prosecutors appeared to balk at those overtures, challenging broader public concerns that banks have grown so important to the economy that they are effectively “too big to jail,” Protess and Silver-Greenberg wrote.

In the case of Credit Suisse, which recently created a subsidiary to house the “US offshore business,” prosecutors have privately indicated that they are unwilling to charge the newly formed unit. The bank is now expected to strike a deal with prosecutors as soon as this week, the people briefed on the talks said.

Will the House arrest Lois Lerner?
According to House Speaker John Boehner (R-OH), the answer is no. Russell Berman of The Hill wrote yesterday that under a precedent affirmed by the US Supreme Court, each chamber of Congress can authorize its sergeant-at-arms to detain individuals it holds in contempt. But Boehner said on Sunday Morning Futures with Maria Bartiromo on Fox News that he has no interest in doing that with Lerner, whom the House last week voted to hold in contempt over her refusal to testify about her role in the IRS’s targeting of conservative groups.

“I’m not sure we want to go down that path,” Boehner said, according to the article. “It’s never been used,” he said of the provision allowing Congress to arrest individuals and place them in the Capitol jail. The Senate has in fact used that power, but not in the last 80 years. “I’m not sure that it’s an appropriate way to go about this,” Boehner said.

[This past weekend marked the one-year anniversary of the IRS targeting scandal. You can browse through AccountingWEB’s coverage of the controversy here.]

Holding auditors accountable on reports
In the United States, auditors’ letters have been among the least interesting parts of annual reports. If the opinions said the accounting was proper – and virtually all did – and did not voice concern about whether a company could stay in business, the letters were basically the same. There was no reason for an investor to read them.

But in Britain, there are new rules this year, Floyd Norris of the New York Times wrote last week. Auditors are supposed to comment on the particular risks that companies face and to say what they did to deal with those risks. They are also supposed to discuss how much of the company they actually audited, to disclose what figure they deemed to be the lower limit for materiality, and to explain how they arrived at that number.

“The new disclosures open the way for the firms to indicate just how diligent they have been,” Norris wrote. “And they could also open the way for investors to assess different partners of the leading firms. In Britain, but not in the United States, the names of the lead partners have been disclosed in the past, but at most that could serve as a negative indicator: If an audit blew up because of undiscovered fraud, that reflected badly on the lead auditor. But unless and until that happened, an outsider had no way to assess what the auditor actually did. Investors certainly had no way to form a positive opinion of a particular auditor.”

Quick Links:

  • If you’re engaging in insider trading, you probably shouldn’t connect with your insider on LinkedIn (Going Concern)
  • Rothstein Kass resigned ‘immediately’ from a SEC client due to ‘a transaction’ (Going Concern)
  • Who audits Alibaba? (China Accounting Blog)
  • IASB agrees standard-setting charter of co-operation (Accountancy Age)
  • Tax advantages raise premiums in cross-border deals (Wall Street Journal)
  • Head of Dutch KPMG quits after investigations (Reuters)
  • Why take-and-bake pizza is giving the tax guys a headache (NPR)
  • Geithner: I told you so on tax-driven megamergers (CNBC)
  • Tax follies in pursuit of equality (Forbes)
  • Brynner’s tax spat augurs rush to give up US passports (Bloomberg)
  • Japan shows resilience to tax-rise on record confidence gain (Bloomberg)
  • Will Obama threaten to veto Senate’s tax-cut bill? (Roll Call)
  • Tax-writing congressman violated tax law (CNN)
  • It’s time to raise the gas tax (Vox)
  • Are child-related tax breaks appropriate, fair (Don’t Mess With Taxes)

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