news stories now at half past the hour exactly g. eight leaders publicly voice hopes of keeping greece in the hands of the euro and advocating growth as these summits efficiency and relevancy are put to the test. germany's financial help frankfurt his thousands of police fled the city in a bid to contain a fourth day of protests. opposing sides in the same plea the loss of loved ones brings israelis and palestinians together in a unique organization seeking better understanding between conflicting sides. for me and the news team for the moment we'll be back with another summary for you

from now but in the meantime ninety minutes from the u.s. begins very shortly with lauren list as capital account. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for friday may eighteenth. here that you see that all eyes seem to be on it today on facebook's i.p.o. but we will look at some of these hyped up social media and gaming companies that have gone public and ask if they can get away with some choose your own adventure accounting to boost profits also back in march our guess futures veteran mark mullin said this about m.f. global's bankruptcy. m.f. global is worth more to certain and cities dead than it was a lot. well now we know how much it's carcass is worth to the legal team winding

down the estate and remember this is the one led by the trustee and former f.b.i. director louis freeh they reportedly racked up twenty five million dollars in fees so far customers are reportedly upset understandably so their money is still missing we'll talk about some possible m.f. global enablers that seem to be getting a free pass with regulators and investigators plus the financial times reports j.p. morgan's chief investment office has built up positions totaling more than one hundred billion dollars in complex risky bonds of the types that were at the center of the two thousand and eight crisis this is in addition to the ones in credit derivatives that led to the two billion dollar loss that is now infamous as the banks for a few taishan until now of course as an excellent risk manager allowed it to escape scrutiny for taking these types of arrests we'll talk about it let's get to today's capital account.

ever is certain off with facebook let's start with risk because facebook is public everyone is talking about the hype or the lack thereof today because investor interest reportedly fell short of expectations forget today we'll ask of social media and gaming companies like facebook how do you need the opportunity to i guess you could call it cooking the books if you will speaking of the books the people responsible for signing off at them at m.f. global auditors have seemingly escaped scrutiny from regulators and investigators in that firms bankruptcy. what's that about we're talk about it and we all know that jamie diamond has egg on his face over this two billion dollar trading loss

the london whale lost look you can see there he's quite literally has egg on his face that's what protesters did to his photo reportedly but did his reputation and j.p. morgan's reputation allow the bank to escape scrutiny it's an interesting question and here to answer that and more is francine mckenna she is author of the blog read a regarding the auditors and a columnist for forbes and american banker and she's done a really good interesting work on all of this stuff and first of all francine thank you so much for being on the show and welcome to capital account thank you thanks for having me absolutely now let's just touch on facebook because we cannot avoid it today it is everywhere we've talked about it on the show before we've talked about it with people like reggie middleton who was not enthusiastic about this company at all said this is a story stock and overvalued all these things i know you have some concerns about facebook what are they. talk about anticlimactic i think of it a sort of more with

a whimper than a bang although they'll be pundits that will talk about how it all worked out really well in the talk about the numbers in the billions but it turned out that at the end i think the underwriters had to support the price just so that it stuck at thirty eight dollars the opening price so that just goes to show how many people are involved in making this. a reality true story stock and you also talked about some problems with the actual company and and how much people have been able to look under the hood and been able to learn at this point about how it's run and also the control that the c.e.o. has. what are your concerns a spokesman around facebook's been around for a little while longer than most most of these yet just now filed just now has i.p.o. day and so when you saw the filing you got three years' worth of audited financial

statements but there were a few more of those in the background that they didn't have to disclose at the filing that means somebody has been around for a while their auditor ernst and young is for the helping them get ready for this and given all the delays and stops and starts they were they've been around for a while i've talked about in a recent magazine article in forbes how ernst and young was probably in from the beginning helping facebook put together the business model how they would characterize the kinds of revenue they thought they were going to generate and when you look at how to characterize facebook it's really sort of a network that collection of data and sells it to advertisers so advertising revenue is really the big generator there right now you pointed out the auditors and some of the conflicts of interest that exist with these auditors that can work with a company as consultants from the beginning and then go onto to be the auditor what

how do you see this is a conflict of interest and can you give an example of how that matters. sure. curiously enough three of the most popular social media social networking social gaming kind of i.p.o.'s group. now facebook and the granddaddy google are all audited by ernst and young they're not in that business just for kicks they're in the business because it's very good business to be in on the front and there's a lot of lucrative consulting revenues involved in setting these companies up when they first are funded by the cs and then the using that relationship to create a longer term annuity bought it relationship that doesn't maybe pay as well but certainly pays over the long run once the company gets used to them once they get used to the company everybody knows what's going on then they can stay with them and everybody is reluctant to make the switch the conflict comes in because

auditors are not supposed to be auditing their own work and depending on how long and how extensively they were involved in getting things set up they could be auditing their own policies and procedures that they helped develop talk about in the forbes articles they actually created word for word the accounting policies that zynga uses for revenue recognition and they could be also looking at systems that they helped implement financial systems technology systems etc so do you think that there is reason to question the integrity of the accounting or the financial statements some of these tech companies or that you're talking about. i certainly do and i think that there's a growing number of people who also do when you look at facebook i think they've learned from sort of the stumbling that zynga did when they first went through their i.p.o. process they had to reissue their filing eight or nine times before they got it

right before the. everybody else so that they had it right group of have the same problems a group on has had even more problems trying to get their public filings correct so you have a situation where facebook did learn from those mistakes but really what's under the hood we haven't seen in the annual report we haven't seen a quarterly a q we've only seen this one filing and there's issues like their relationship with zynga is twelve percent of facebook's revenue and facebook basically generates all of singles revenue almost all of singles revenue for them so they're almost like a wholly owned subsidiary or as i said on twitter today they're more like a off balance sheet special purpose vehicle the kind of thing that caused all this trouble in other companies but there's a separate public company and yet there are so highly dependent on facebook we haven't seen the details of that relationship of the advertising that's going back

and forth and some of the other payments that could be going back and forth to pump up the one thing to do well and i should note for our viewers that didn't see the stock got crushed today and even had to halt trading for a while that's a little like a topical issue but i did one thing that was super interesting to me that you and i were talking about before the show is ok these are the stocks these are the i.p.o. that have been so highly anticipated facebook obviously but others like. groupon and and all these companies some of these kind of these new business models of social media or social gaming and the interesting thing that you said about that is that that means that it's kind of the new deal when it comes to accounting and what these guys can get away with can you talk a little bit about that aspect. well there's a perception that it's a totally new business models particular because it's social gaming it's not just

gaming like gambling or casino casino operations and it's not just social like facebook so social gaming is a little bit different and all of the various relationships and alliances like they get has with facebook are a little bit new but it's really not so much different that way back when you had a.o.l. or any other advertising based media company attract users sell advertising against those accounting rules have been in place for a long long time they're pretty straightforward the key is that these companies give the perception that there's something new and they come up with all kinds of creative ways with the assistance of in this case in particular ernst and young to to explain what is inevitably happened most of them start off with with a lot of losses and they have to sort of. color that a little bit with what. tricks so they make up their own metrics that explain

away the kinds of things that they think are typical or that don't explain how their business really works those are the words that the c.e.o. that group on c.e.o. have actually used well and you showed the difference between what our earnings and the bottom line and the top line reported by a company like the guy looking at gap birth is non gap accounting methods used by the firm and they're i mean it's a vast vast difference and it kind of allows them to pull the wool over some people's eyes in the media you are talking about that how so what how does that work. even very sophisticated media because these are so highly anticipated because we want so much these successes because we want so much to cheer success wealth building i heard that today on some other cable news stations that they are so anxious to report good news to show that the economy is back and people are providing jobs that they're looking past the fact that the earnings that they're

reporting are not generally accepted accounting principles basis which is the standards that everybody in the company across industries are going to follow their . tricks and that means that management has made the judgments in the past of if they go into that any time you hear nonghet metrics that means management gets to decide how those numbers get created what of the measurements what are the volumes what are the activities that they're going to measure in order to try to paint a different picture of their results which is. if your sentence didn't mean to interrupt. as such they're not comparable across industries across companies they're basically easily manipulated yeah i thought that was such an interesting point so you literally have the management you have the executives saying ok we want to include this here we don't want to include this there and it can be the difference in you noted not including like a four hundred million dollar net laws then you're you know we're porting net

income of three hundred million dollars and then that's what people run with in the headlines it's absurd we're going to talk about more absurdity after the break because when we're talking about risk we've got to talk m.f. global we've got to talk j.p. morgan so hang tight francine mckenna we will have more with you after the break she's author of the blog regarding a re the auditors also still ahead you responded now all answer check out if your comment caught my eye this week and your feedback but first your closing market numbers. seem to exist. to. make you seem to trust. them to supply.

the be. thanked. welcome back we talk a lot about m.f. global because we think it's a really important story not just because a lot of people had money stolen but because of what that means for the safety of the financial system in this country we think that it matters for that a lot and one of the things that we've just learned is that the trustee is making out pretty well twenty five million dollars so far that louie freeh has racked up

in unwinding the m.f. global a state meanwhile we have heard that you know junk or zine is being investigated that there is a d.o.j. investigation we haven't heard a lot about days we don't really know what's going on there's been hearings on the hill there has been a bit of a circus that way but. there is someone that has escaped scrutiny or rather an entity involved in this that is a safe escape scrutiny we haven't seen them testify on the hill we haven't heard about them being investigated and that's the auditors that signed off on the firm's financial statements so what's going on there francine mccann is going to tell us because this is what she follows in to such great work on she's author of the blog read the auditors and a columnist for forbes an american banker so for instance let's bring you back again with m.f. global is that bizarre that we haven't seen more scrutiny of the auditor.

well it's it's said that it's on surprising the auditors usually the last one to come in the picture they stay on the sidelines like switzerland and play both sides . seemingly helping the investigation they do know a lot because they're on the inside they have access to all of management to all of the financial statements all of the systems but until someone sues the usually general media doesn't notice however they have been active on the sidelines and they are there are probably helping with the investigation however they're helping from a friendly perspective they should be scrutinized though because they know global very very well they've been with that firm since it was part of financial which peter you see pricewaterhouse coopers also audits and they were also involved in refco the legacy firm that is that was a major part of m.f.

global that man for the actual bought out of bankruptcy when that fraud occurred so they were involved for a long time they know the controls they know the business that audit was run out of chicago which is my hometown i'm here in new york right now but chicago is my home town and that was where a lot of the people worked in the back office the people that you're hearing about now supposedly who know more or that course i've pointed to are all based in chicago area so should the auditor have raised the alarms would they in your view have had the information to raise the alarms on m.f. global most going on before it imploded absolutely absolutely they've been there again as i said since before the firm was fired out of man financial in fact the cea. is a pita obviously along i he was working with the firm at mann financial before it spun out he came from peta. you see before he went to work for man financial so

he's an accounting expert he's actually a sort of a technical guru kind of guy and if they were doing something special with regard to the sovereign debt trades that corps and did himself or if they were hiding something or not managing it well he's someone that should have known because he's worked with other companies in that situation so what's the message we should be taking from this that we need a different system of auditing or of happy hiring auditors or allowing them to work for certain periods of time. well i think we definitely shareholders and the citizens need to be more skeptical they're not necessarily friendly they're also looking to maintain relationships and make fees so there has been talk about auditor rotation not letting an audit firm stay with a company for too long that may or may not help but in this case the best case

scenario is that they didn't raise their hand when things got out of control when things broke down when corps signed perhaps started to bypass the controls that were in place and that something they should have raised their hand around the end of a report. last march april period or perhaps when m.f. global sold bonds to the public last august. and the worst case scenario if they actually saw or thought that there was a possibility of illegal activity of actually executives giving orders to raid customers segregated accounts or to do anything else that was against the law with regard to a futures commission merchant or a broker dealer they have an obligation to take that to the board of directors and if they don't get a good hearing if they don't think they're following up to actually have a legal obligation to take that directly to the c.c. i don't think any of that happened if it did we're certainly not hearing about it

as the public or as the customers and we certainly aren't and one other interesting anecdote is that guess who shares an auditor with m.f. global g.d.p. morgan another bank that has a hand in the m.f. global situation in bankruptcy and they were m.f. global's banker it's quite interesting they also have been involved in their own scrutiny for that london whale trade more recently you made an interesting point which is that perhaps jamie diamond reputation as being a good risk manager allowed the firm to take such outsized rests without with some scrutiny how so. it's difficult to question someone like. that i can imagine and peter you see is that involved with j.p. morgan chase and its various legacy firms since the sixty's so again you have a very significant client here from the new york office you have a very high profile client and you have

a tendency perhaps for the auditors in that situation to lose their professional skepticism to not want to question to not want to think that potentially maybe jamie diamond or someone that's reporting directly to him is bypassing all the good policies procedures controls that might be in place or at least might be on paper in other parts of the bank so the moral of all of these stories is be skeptical as a show we hope to be we appreciate you being here to kind of give us all this in-depth backstory on some of these headlines that mainstream media just runs with that was francine mckenna author of the blog read the auditors. thank you.

all right it's friday which means it's time for viewer feedback i know i did it earlier this week but that was to make up for what we lost last weekend so now we're caught up and there is more that i wanted to respond to so first of viewers name unfortunately that i can't read off one hundred seven did have a rather colorful and fun comment which was about your also led to who we had on earlier this week he said celebrity reminds me of john walsh except he doesn't attack criminal killers he attacks criminal bankers so if you need. some to jog your memory about who john walsh is and what is good is take a look at this. hour you know based on. john walsh going after criminals america's most wanted that's what he did. yes confirmation. anyway

we have an idea we don't know if this will go anywhere but remember this video this very creative video that that you tube user used and put online showing this gentleman and dimitri kofi anan this capital counsel and producer max kaiser going after the bankers going after wall street set to music they are rocking it out well i maybe we will see a gerald solenn tape john as john walsh going after the bankers we like the idea just a suggestion we're not talented enough to do that ourselves so just throwing it out there let's move on. for two eight ghost said the falling as the economy tanks the loose change intro will change to dimitri and lauren tackling shannon when she takes the gold from the jar well first of all thank you for our next big idea when things really go south here's a reminder of what he's talking about. so

the next time you're going to see us tackling shannon and shannon's response to us that you just don't for me in my ear is bring it so thank you we will follow up with that meanwhile son man one thirty nine had a recommendation capital account needs to do an entire show on exposing the debt is a money monetary model in slaving the lives of every person on this planet if you show people how borrowing money into existence at interest is a process that only creates bankruptcy for the borrower but seized assets for the banking industry that people would finally rise up and create their own public banking system well i don't know about the public banking system or what people rising up and you know would create ideally but i do see your point and i think that we should dedicate maybe a show to explaining really breaking down the debt is money and how money is

borrowed into existence loaned into existence and just this whole issue which we completely agree is a is a very big problem that needs to be understood meanwhile i want to bring it to your attention that we have some exciting news this is my i guess your feedback we are now on hulu in full h.d. if you subscribe to hulu plus so you can check out our show in very high quality now at hulu dot com slash capital dash account and if you're wondering how it is i am very happy to report that the trucking life one of our very loyal viewers and who also tweets with me he watched it and he gave us his feedback said the video audio quality is outstanding and there is no news feed right across the bottom of the screen only on our t.v. in the right hand corner so thank you for that review of our show that is now up on hulu for everyone to see that is for our u.s.

viewers from what i understand hulu cannot be used internationally except in japan so international viewers you can still catch our show on our you tube channel but in the meantime. that is our show for today thank you so much for watching and make sure to come back tomorrow. in the meantime you can follow me on twitter at more in the store or you can give us feedback on the show or catch any of the shows you missed so this week were very popular so i think that you'll want to go catch up you have the weekend to do it you can view all those at youtube dot com slash capital account and as i said you can also catch our show now in h.d. on hulu again that address is hulu dot com slash capital dash account if you want to get excited about next week i can tell you that monday we have the very popular and very good at breaking down criticism of the dead body english he will be here he's a blogger is zero hedge and all around expert and you won't want to miss that but

until then from everyone here at capital account have a great night a wonderful weekend.