Who Audits the Auditors?
Three weeks into the war with Ukraine, and it feels like we are no closer to an end. Negotiations have made little headway, and the attacks are escalating in both scope and nature. The consequences of this war are far reaching despite it happening half a world away. It just points to how interconnected the global economy has become these past four decades. I had hoped a resolution would have been found quickly, but sanctions against Russia have only emboldened Putin and heightened tensions.
The sanctions against Russia, by both the United States and its allies, are far broader than any previously imposed on a foreign country. I suspect Russia may have underestimated the resolve of the global community and assumed its forces were more up to the task. As was expected the U.S., Canada, and the UK have banned all oil imports from Russia. Russia has been kicked off the SWIFT network (for all transactions except for oil and energy) and today it was suspended from the Bank of International Settlements and lost most favored nation trading status with the United States.
We’ve watched as the price of oil surged to $130 per barrel, global shipping rates rose sharply, wheat prices shattered records, and nickel prices surged 73% in one day. Electric vehicle manufacturers fell in tandem due to the rising cost of nickel and rare earth minerals. Semiconductor chip foundries fell on news neon gas will be in short supply as half of the world’s production comes from Ukraine. And global airlines are reeling once again as the prospects of higher jet fuel prices continue to reduce expectations. The litany of companies suspending operations in Russia expanded to include Procter & Gamble, McDonalds, IBM, Shell, Starbucks, PepsiCo, Yum! Brands, and Coca-Cola among many others. I’m sure more will be announced next week and all will, to some extent, take a hit to earnings in the current quarter.
Another gambit that seems in play is new pressure on China to fall in line with sanctions against Russia. China has made overtures to import some of the Russian oil which the world has rebuffed. This week the Securities and Exchange Commission (SEC) announced it will be investigating Chinese companies listed on U.S. exchanges for proper financial reporting and auditing. The threat is that those companies that aren’t in compliance could be delisted. Roughly 270 Chinese firms face increased scrutiny including some favorites such as Alibaba, Baidu, Tencent, and JD Power.
In company news, Amazon announced a 20-for-1 stock split, its first since 1999, and a $10 billion buyback program. At almost $3,000 per share, the stock can be difficult to purchase for many smaller investors. Not only will the split give retail investors easier entry, the buyback will help support earnings. In other news, Anthem has decided it no longer likes its name and chose to replace it with the not so catchy “Elevance Health”. It is a mashup of the word elevate and advance, suggesting it is transcending health insurance. I am not a fan, but I guess rebranding might help people forget how much they have a love/hate relationship with the company. And finally, Google has agreed to purchase Mandiant for $5.4 billion. Many technology giants are shoring up their cybersecurity abilities in the face of increasing threats both domestically and abroad. Mandiant is the third largest holding in the Cybersecurity ETF with the ticker HACK.
There is so much to cover and not nearly enough space. Legislators introduced a bill yesterday to tax the windfall profits of large oil companies at a 50% rate. Tax proceeds would be returned to consumers earning less than $75K/y through stimulus checks. Yes, the very stimulus checks that helped spike inflation in the first place. Also announced, the Senate passed a $1.5T spending bill, surprisingly not a stopgap measure, for the remainder of the current fiscal year. Included in the package is $13.6B in aid to Ukraine. The reconciled bill should be headed to President Biden’s desk soon.
In closing, have you ever wondered who audits the auditors? This week I read, with the smallest amount of delight, that the Internal Revenue Service (IRS) is being audited itself. The U.S. Treasury Inspector General for Tax Administration, or TIGTA for short, will be investigating whether the agency favors large businesses and global companies in compliance matters. Among the many areas they will be shining light on is how the IRS handles conflicts of interest and the revolving door between the accounting industry and the IRS. They will pay particularly close attention to whistleblower cases that died within the IRS or have sat inside the agency for years. I just hope they have all their ducks in a row. I’d hate for them to be missing any critical documents. Now you know.
Bruce J. Mason, MBA