In this episode, we dig into two massive, recent frauds: Luckin Coffee of China, and WireCard of Europe. We're continuing coverage of the Paycheck Protection Program, and talking about how the IRS is bringing employees back to the office (but not Tax Court). In other news, Receipt Bank acquires Xavier, a Toronto accounting firm gets hit by ransomware, and more!
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Blake Oliver: [00:00:23] So, the chief executive and chief technology officer of Wirecard is Markus Braun, who, the Wall Street Journal notes, is known for his tall ... He's tall, and known for his intense manner of speaking, and adopted the sartorial style of the tech world, wearing black turtlenecks similar to Apple Inc. founder, Steve Jobs.
David Leary: [00:00:44] Oh, and the blood girl ...
Blake Oliver: [00:00:44] Yeah, you remember- Theranos ...
David Leary: [00:00:47] Theranos, yeah. Elizabeth Holmes.
Blake Oliver: [00:00:51] Yes, she also did the same thing, right? Two frauds perpetrated by Steve Jobs copycats.
This episode of The Cloud Accounting Podcast is sponsored by Synder. If you've ever tried to get your clients' Stripe, Square, or PayPal transactions into QuickBooks or Xero, you've probably pulled your hair out a few times trying to get income and fees recorded correctly so that the deposit amounts match the bank statement so you can reconcile. Did you know that you could be using Synder to automatically do this for you? Synder can auto-categorize these transactions, adding additional data, like classes, and locations, and accurately post them into the accounting system.
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Blake Oliver: [00:02:45] Welcome to The Cloud Accounting Podcast. I'm Blake Oliver.
David Leary: [00:02:48] And I'm David Leary. Blake, it's Father's Day.
Blake Oliver: [00:02:50] Happy Father's Day to you.
David Leary: [00:02:52] Yes, and you, yourself. A lot of change. You are now moved. Your stuff's officially been put in a truck. It's no longer in California; it's now at your new [00:03:00] house.
Blake Oliver: [00:03:02] I no longer have possessions or residency in California. I am now a citizen of Arizona. The land of the free, as I understand it to be. Is that true, David?
David Leary: [00:03:14] It's freer, but, you know, more and more Californians like you keep moving here.
Blake Oliver: [00:03:19] It's really funny because the first thing, my new neighbor across the street, I saw them out there going somewhere, and I said hi. Husband and wife. I think they have grown children. They moved in 20 years ago, when the house was built. The husband says, "Welcome. Where'd you come from?" I said, "California, L.A." He said, "Oh, great! Well, I hope you didn't bring your politics with you." I said, "Well, I can't speak for my wife, but I personally am fleeing."
David Leary: [00:03:48] Yeah, I think I've seen some bumper stickers around here. It's like, "Don't California my Arizona," things along those lines. Not so much different because I think Tucson probably, politically, is a little bit more blue-leaning; and different; a [00:04:00] little bit more hippie-dippy. Phoenix is much different.
Blake Oliver: [00:04:04] Well, and specifically, we're living in Scottsdale, which I understand is very, very split, like right down the middle. So, should be some interesting conversations with my neighbors. I like politics. I like talking about it. It doesn't ... I think there's a way to do it that doesn't have to blow up in your face. We'll see. I'll keep you posted, but yeah [crosstalk]
David Leary: [00:04:22] -the drama.
Blake Oliver: [00:04:22] I'm here. What else is new? Oh, we're all wearing facemasks. They were doing that in L.A. and that just passed in the Phoenix City Council, and I think the Scottsdale mayor issued an order after-
David Leary: [00:04:39] When did that start? I was in Phoenix this weekend, visiting my father for Father's Day, and we wound up going up to- there's a lake north of Phoenix, a big water reservoir called Lake Pleasant. We were there. We wound up ... It gets to be so hot; you just have to go inside. So, we went into this bar/restaurant place to eat lunch and nobody had masks on. It was like those photos they've been posting, like, "Look at these people at [00:05:00] spring break!" It wasn't spring-break bad, but at same time, I feel like, yeah, it may not have been the best idea. So, on what day did masks go into effect in Phoenix, or Maricopa County? Because in Tucson, they went into effect Saturday morning.
Blake Oliver: [00:05:13] I think it started Saturday or Friday. Friday night, I think is when it started. Everyone in Scottsdale, Phoenix, if you're in a public place within six feet of somebody else, you're supposed to wear a mask. All the stores are enforcing it, and everybody- I've seen everybody wearing them, which is good, because they actually have a very, very, very beneficial effect and can reduce transmission by up to 60 percent, which is exactly what we need to do. I'm all in favor of that-
David Leary: [00:05:39] Maybe those rules aren't enforced at lakes and boating areas.
Blake Oliver: [00:05:42] Well, it's ... The governor, Governor Ducey, left it up to local jurisdictions to decide what to do. So, it has to be the mayor, or the city council in that area. Anyway, that's enough-
David Leary: [00:05:54] Should we jump into the news?
Blake Oliver: [00:05:54] Yeah, let's get into PPP, because there was some big news about transparency [00:06:00] of the PPP. We were talking in our last episode about a big controversy. The administration, according to Larry Kudlow, Trump's senior economic adviser, and Steven Mnuchin, the treasury secretary, the administration wasn't planning on releasing the names of any people who got PPP loans. Since our last episode, that has changed. So, now, the Trump administration is gonna be more transparent, like they originally promised, and disclose some of the names of the businesses that have received PPP loans. Actually, over 75 percent of the businesses who received those loans are gonna have their names, addresses, NAICS codes, zip codes, business type, demographic data, nonprofit information, jobs supported, and loan-amount ranges in five different brackets will be released.
David Leary: [00:06:53] They released this news Friday night, again, right?
Blake Oliver: [00:06:55] Mm-hmm.
David Leary: [00:06:55] Late Friday night. Wednesday, they released news [00:07:00] about the new forgiveness application; we'll talk about that separately. Again, they waited til after Friday evening to drop this news again.
Blake Oliver: [00:07:08] Yeah, all the unfavorable news gets dumped on Friday, right? Again, I think this was a negotiation. The administration started from a point of no transparency and compromised. Actually, I'm kind of impressed that the amount is so low. So, any loan above $150,000 is gonna be disclosed. If it's under that amount, it will not, and only aggregated, anonymized data is gonna be released; aggregated by zip code, industry, business type, various demographic categories.
David Leary: [00:07:41] Yeah, and they're gonna make sure they don't show home addresses or anything like that. That's all gonna be withheld.
Blake Oliver: [00:07:44] Basically, all the sole proprietors, all the very small businesses that got loans under $150,000 don't have to worry about their name going on some list, and then, getting shit from people. Anyone over that, you do, which is gonna be interesting because what led to [00:08:00] this transparency, I think, was reports that members of Congress received these loans. It was gonna be pretty hard for the administration, and the Republicans in Congress to deny transparency on this program, when at least four members of Congress have taken the loans, according to an article that came out in POLITICO on the 16th.
David Leary: [00:08:21] Before you jump into that article more, though, what I found that's interesting is, remember, last week, we said Marco Rubio was all for ... Last week, he was like, "We're not gonna disclose," and now, he flip-flopped again, and now he's up for- he wants it disclosed now.
Blake Oliver: [00:08:32] Oh.
David Leary: [00:08:32] He's saying Americans deserve to know-
Blake Oliver: [00:08:34] Of course!
David Leary: [00:08:35] -how effective it was. It's just like that guy flip-flops on this PPP stuff more than anybody else I know. It's kind of been amazing.
Blake Oliver: [00:08:41] It is. It is. This is beside the point now because they have decided to release this information, but the four members of Congress who are highlighted in this POLITICO article are two Democrats, two Republicans. One of them owns a car dealership [00:09:00] in Texas, Roger Williams of Texas. He's a wealthy businessman who owns auto dealerships, and he's got net worth of $26 million. He's one of the wealthiest people in Congress. I mean, most congress people are millionaires, but he is really, really wealthy, and he got a big loan - well, we don't know exactly how much it was, but we will - for his, I think, it's a Jeep dealership in Texas. That was like a big sticking point for the Republicans in the administration that was gonna be hard to overcome that. So, that's done.
David Leary: [00:09:34] Yeah, and somebody else's husband, they had a $15 million loan, but they returned it in full.
Blake Oliver: [00:09:40] Yeah, that was one of the Democrats. Debbie Mucarsel-Powell of Florida. I guess it was a restaurant chain that returned the loan.
David Leary: [00:09:49] So, with all this disclosure coming out, one of the articles actually hit on the SBA, themselves. Do you have any idea how big the SBA is?
Blake Oliver: [00:10:00] I [00:10:00] think they have a few thousand employees - something like 3,000 to 4,000.
David Leary: [00:10:04] 3,200 employees and an annual budget shy of $1 billion. Now, keep in mind, and I saw this ... Maybe I can try to track something down more, but my understanding is the vast, vast, vast, vast, vast, vast, vast majority of small businesses have never interacted with the SBA until the PPP loan.
Blake Oliver: [00:10:23] Right.
David Leary: [00:10:23] So, what has this agency been doing for decades? A billion-dollar budget. A billion dollars!
Blake Oliver: [00:10:31] Yeah. I don't know. Is that a lot of money for 3,000 employees? I don't know.
David Leary: [00:10:36] From a government-bloat perspective, what are they producing? How many employees does the IRS have? I think you mentioned you saw in the news they're hiring again, or they're shutting down hiring? What are they doing?
Blake Oliver: [00:10:47] Yeah. The IRS has decided to start bringing their employees back to their offices, which is a big deal, considering that they had an outbreak in Texas at one of their [00:11:00] centers, recently. We can talk about that. Before we get into that, do you wanna hit on the PPP loan forgiveness application?
David Leary: [00:11:08] We could do that, but we could also ... I think there's an article to bridge us there. Charter schools have been getting the PPP loans.
Blake Oliver: [00:11:14] How does that work? Not-for-profits or allowed to do it?
David Leary: [00:11:19] Charter schools are weird because, over here, you have private schools, which are kind of ran like a business. A lot of private schools, they do not get government money. Charter schools are weird because they are kind of ran privately, but they're part of the school districts, and they get government money because, basically, there's vouchers and grants. You're gonna have to familiarize yourself with this because that is, hence, the school system in Arizona, unfortunately.
Blake Oliver: [00:11:42] Okay.
David Leary: [00:11:42] They're trying to have it both ways. Over here, "I'm a business, I get a PPP loan!" Over here, they're not a business. A lot of these charter schools are backed by Bloomberg, and Bill Gates ... They've quietly just have been taking the money. Regular schools can't get it. Some of [00:12:00] them have even taken the money and then laid off teachers, still. Every week, we're gonna see more things exposed. The way they figured this out is they basically ... Because the charter schools, on one hand, are a little bit- they're part of the school district, so they're part of the school board meetings which are public. They basically watched these virtual school board meetings and pored over the meeting minutes and figured out what schools have taken this money. It's been $48 million in funds that have gone to 27 charter schools.
Blake Oliver: [00:12:28] That is interesting that they can get access to this money, but a regular school cannot. The normal public schools, whatever you wanna call them, they're gonna face terrible budget cuts, potentially, because now, all these local governments don't have money because tax revenues are down.
David Leary: [00:12:44] Yeah. As this gets disclosed, there's gonna be another bucket of people they figure out- these people took out loans, and these people took out loans ...
Blake Oliver: [00:12:54] The loan forgiveness application changed. That was released last week. This [00:13:00] is good news because there is an EZ version of the forgiveness application that applies to borrowers who are self-employed, and have no employees, or did not reduce the salaries, or wages of their employees by more than 25 percent, and didn't reduce the number of hours of their employees, or experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25 percent. So, if any of those apply to you, then you can use the EZ application. Then, you don't have to submit nearly as much documentation. It's a three-page form. You're just certifying that, "I didn't reduce the hours more than 25 percent, and I was impacted by COVID," and you can get that forgiveness [crosstalk]
David Leary: [00:13:46] The regular application went down from 11 pages to, I think, seven now, as well.
Blake Oliver: [00:13:50] Oh okay.
David Leary: [00:13:50] That decreased in size, as well. Both applications give you the option for that eight-week versus the 24-week.
Blake Oliver: [00:13:56] So, this is good. Hopefully, it's gonna make more businesses [00:14:00] apply for this money because there is still $100 billion left on the table.
David Leary: [00:14:04] I think I saw somebody tweet that they attended an AICPA roundtable on PPP, even after these EZ applications came out. Basically, the argument of the AICPA is to still wait. Have your client fill it out when they're done; have it ready; but wait for new guidance. They fully expect new guidance to come out and revisions for these EZ applications, as well.
Blake Oliver: [00:14:26] Lovely. Well, you know-
David Leary: [00:14:27] We're still not out of this. We're still not out of it.
Blake Oliver: [00:14:30] All that uncertainty is one of the reasons why the money may not be getting to the people who need it the most. I spotted a story in the Wall Street Journal called, "PPP Small Business Loans left behind many of America's neediest firms." We've got some data now. We don't have a ton of data because the SBA hasn't been very helpful. Wall Street Journal compiled what they have and figured out what industries got the most loans, and which didn't and correlated [00:15:00] that with how hard were they hit.
[00:15:02] So, the service industry was one of the worst hit, obviously. 67 percent of jobs lost from March to May were in the service industry. They only got 42 percent of the loans, as of May 30, according to economists at S&P Global Inc. The hotel and food services industry shed 40 percent of its jobs - 5.7 million from January to May - the most of any sector. As of June 12, it had received only eight percent of the loans.
David Leary: [00:15:32] I think if I remember correctly, if we take a time machine back three months ago, the way this was written, they did not want the loans because they were pretty sure they weren't gonna reopen. Originally, they did not want the loans. They wanted other considerations ... I think there's a whole 'nother part of the stimulus that's really set up for hotels.
Blake Oliver: [00:15:49] Well, I guess, maybe, but ... I guess that's part of it, but you would think that if the idea is to keep people on payroll and not on unemployment, then the [00:16:00] industries that are losing the most jobs, you would wanna keep those people on payroll. The whole program was built for eight weeks, originally. Everyone's thinking this is gonna be over in two months. Yeah, no chance of that, right? As they were creating the program, we all realized it was gonna last a lot longer than that.
[00:16:19] What ended up happening is that the companies that were hit the least by the pandemic ... An example is professional, scientific, and technical-services providers. They only lost 480,000 jobs - five percent of total jobs - but they got 13 percent of the loans. Professional services, scientific/tech services, these are the kind of businesses where you can work from home, so they were hurt the least by this; and accounting firms are in there. They were able to take advantage of this program because they could keep their people employed.
[00:16:54] The question I have is - did this program actually save [00:17:00] jobs or did it just supplement the earnings of companies that were going to survive anyway? How successful is this program? What did we get for the $600 billion, or, I guess, $500 billion because we haven't spent the other- the last 100 yet.
David Leary: [00:17:16] Yeah, it's about $120 billion that's still left.
Blake Oliver: [00:17:18] Did it just end up supporting businesses that continued to operate? Because if it did that, then what's the point? Obviously, there's examples of businesses that survived because of this, but that may not be the majority even. It may be a small group of businesses that actually were able to survive as a result, and the rest just got free money. It's interesting because you look at the map of the United States, the businesses that got the most money or the greatest percentage of businesses, I suppose, that got the money, they're all in states that were hit the least. Some of them are. North Dakota, South Dakota, and Nebraska had the highest percentages of businesses getting these [00:18:00] loans of all the businesses in those states.
David Leary: [00:18:02] We talked about that before, too. A lot of it is just because it's a lot of firms and they have banking relationships, and those banks [inaudible] ... It was the states, like California, where the average small business owner, they all go to Wells Fargo, and, Wells Fargo- how do they prioritize any of those loans, right? They're overwhelmed with the volume.
Blake Oliver: [00:18:17] States that were really hit, like California, and New York, Washington, Oregon, got the fewest loans, percentage wise.
David Leary: [00:18:28] It'll be interesting to see what that was over time because, in the beginning, it was very, very, very- not in very good balance. I wonder if it's coming down or turning the other way. I did see that the SBA launches a tool to match underserved borrowers with PPP lenders. They have a tool called Lender Match, online. Think of it as a marketplace. I can go on, I can search. I need a loan, and they're gonna give me approved SBA lenders.
[00:18:54] They're launching this, and this is gonna help connect people, minority- depository institutions, [00:19:00] certified development companies, farm credit system lenders, micro lenders. So, it's really gonna only connect them with even small lenders. It's small lenders connecting to very small and disadvantaged businesses. The thing is, they announced this Friday to turn it back on, 11 days before the June 30th deadline. The kicker in this is this program, this website, Lender Match, they launched it in 2017. Then, what they did is they turned it off. They turned it off in March, so they could work on the stimulus stuff.
Blake Oliver: [00:19:34] Oh, so it was a website for their traditional lending programs.
David Leary: [00:19:37] They already had a system set up to help underserved businesses and minority-based businesses get money. They had a system set up. Then, they turned it off. Then, they flip it on like, "Hey, good news. You have 11 days left to apply now." It's maddening.
Blake Oliver: [00:19:54] The whole program was not designed to help the people that needed it the most. That's my conclusion. It helped [00:20:00] a lot of businesses, but not the neediest ones.
David Leary: [00:20:02] We'll get the data soon. If the SBA, and the Treasury don't turn over the data ... Did you see U.S. Democratic lawmakers are sending letters straight to the CEOs of banks asking for them to release the documents?
Blake Oliver: [00:20:13] No, I hadn't seen that.
David Leary: [00:20:13] They're gonna bypass the SBA entirely and just basically squeeze these large banks [crosstalk]
Blake Oliver: [00:20:21] Get them to give us the info. Interesting. I mentioned that IRS employees are returning to their offices. IRS employees in Utah, Texas, Kentucky, began reporting back to their buildings in the first week of June, according to the National Treasury Employees Union. More facilities in other states began opening this week. Three IRS employees tested positive in Austin, Texas, according to Bloomberg Tax, which is causing a bit of distress among the employees there.
[00:20:50] The plan is, according to the IRS commissioner, Chuck Rettig, that all of the facilities will reopen in all the other states on July 13. [00:21:00] Part of the urgency is that they have a ton of unopened mail. The IRS employees have actually been doing pretty good working at home, apparently, but you can't open mail that's at the IRS processing center from home. The IRS still gets a ton of paper returns, and they receive one million new pieces of mail each week; one million pieces of mail. They have been closed for weeks and weeks and weeks, so now they have 11 million pieces of mail that are unopened that they have to go back and open-
David Leary: [00:21:33] I imagine that's one of those jobs where you stand right next to somebody else and do nothing but open up mail, so you're not gonna be able to have social distancing very well, trying to open up all that mail.
Blake Oliver: [00:21:41] Yeah, mail rooms are not exactly well-ventilated, generally. They're opening five million pieces of mail per week, and they've got 11 million on backorder, basically. So. they've gotta take probably three weeks to get through all the mail that they've got and catch up. That's just opening it, right? Who [00:22:00] knows how long it'll take them to process it. Now, the IRS employees may be going back to the office, but tax court is not. They are going to be operating remotely, indefinitely. Now, they also still have a paperwork backlog in terms of their mail room, as well, but they are somehow gonna catch up on that by July 10.
[00:22:22] Some more IRS news: the IRS is being urged by the Treasury Inspector General for Tax Administration to pursue preparers with overdue returns, debts, and penalties. Apparently, there are tens of thousands of preparers who are noncompliant with their own taxes. There are 10,000, over 10,000 preparers who prepared more than two million tax returns for clients in 2016, but who didn't file their own personal tax returns to report the income they received.
David Leary: [00:22:55] Is it just like you're just too busy? You're constantly doing somebody else's, and you never get around to doing yours, or is it on purpose? [00:23:00] Is there some part of the tax code that preparers know about that the rest of us don't?
Blake Oliver: [00:23:04] Well, they must be really aware that you can get away with doing this for a long time, right? Because the IRS isn't coming after them. It's just kind of crazy to me. The Treasury Inspector General estimates that the IRS could collect $45.6 million in potential taxes, if they just simply worked on 6,900 of the preparer non-filer cases. You just wonder, why isn't the IRS going after these guys?
David Leary: [00:23:31] It just sounds... It reads really poor, right?
Blake Oliver: [00:23:36] Yeah, we now that there's a lot of-
David Leary: [00:23:38] There's no excuse not to file. Just do it. You know how to do it.
Blake Oliver: [00:23:41] Yeah, exactly. You know how to ... You would think that the IRS would be enforcing the rules on the people who are preparing taxes for other people to be held to a very high standard, but that obviously isn't happening.
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David Leary: [00:25:07] So, remember last week, we talked about the AICPA of Canada- I forgot, the Canadian charter professionals ... I don't know the exact name, right now, sorry. I do not have the name. The identities of accounting firms and accountants were stolen.
Blake Oliver: [00:25:22] They got hacked.
David Leary: [00:25:23] Yeah, they got hacked. It didn't take very long ... I'm not saying these two attacks are related, but a Toronto chartered-accounting firm is trying to recover from a ransomware attack. Some of the things that were stolen: the bank login credentials, including answers to security questions-
Blake Oliver: [00:25:36] For their clients.
David Leary: [00:25:37] -for their clients; then, screenshots of hundreds of folders from companies' computers. So, people are selling this data; they have access to all of this data. The interesting thing is IT World Canada, who this article is from, they are not naming the firm because they haven't confirmed whether or not for sure it was a breach of the security controls at the firm. How [00:26:00] do you get ransomwared, if a security control did not get breached? Some of these machines, somewhere in the system, got compromised, which would be a security breach.
Blake Oliver: [00:26:08] Well, the lesson here, for me, is don't store your clients' logins, and security questions in an unencrypted format, you know? If it's encrypted, at least if you get hacked, they can't get into that database. People should be using password managers. 1Password, LastPass ... You can get an enterprise account for LastPass, and you can securely store all that stuff, and delegate access just to the people who need it. So many firms are still storing all this stuff in Excel files on their network drive. It's just nuts. They're probably calling it "Passwords."
David Leary: [00:26:44] Yeah, or "Client Passwords" [crosstalk]
Blake Oliver: [00:26:45] Yeah, exactly. How else will your employees find the document?
David Leary: [00:26:50] I saw another article about - only one-third of small businesses inform their employees about their personal-device security requirements. So, more and more people now are bringing their own devices to work; their phone, their [00:27:00] tablet, bringing their own computer. Now, with people working at home, it's even more extreme, right? One-third of all small businesses do not even tell their employees- give zero guidance about it.
Blake Oliver: [00:27:11] Let's talk about the big frauds - Wirecard, Luckin Coffee. I don't know if we talked about this on the show, but there was a story. I don't remember where it was. It was a really great opinion piece. It was either in the Wall Street Journal, or in one of these accounting publications, talking about how we should all be looking out for the next big frauds that are going to be coming to light as a result of the recession. Because every time you enter a recession, all sorts of malfeasance comes to light because it's no longer possible to hide it. That is exactly what has happened with these two really big companies.
David Leary: [00:27:49] You brought this up, not so much related to the recession, more in general, the tricks people were paying with their numbers.
Blake Oliver: [00:27:56] Right.
David Leary: [00:27:56] It was adding up quarter, after quarter, after quarter, after quarter, after quarter. I think this [00:28:00] even caught up to- what's the athletic clothing? Under Armour.
Blake Oliver: [00:28:03] Yes.
David Leary: [00:28:03] Almost a year ago, this caught up to them. I remember, you were talking about this. There are so many tricks people can play with the numbers now that ... Are everybody's numbers just fake? Now, we're seeing, yes, apparently, this is true.
Blake Oliver: [00:28:17] Well, yeah, some, right? I've got two great stories for you. I'll let you choose. Do you wanna start in Asia, or in Europe?
David Leary: [00:28:25] Do the Luckin Coffee ... Is it LOO-kin or LUCK-EEN? LUCK-in?
Blake Oliver: [00:28:29] I just say LUCK-in because I don't ... Luckin ... Lucky? I don't know.
David Leary: [00:28:33] I think that's correct, actually. I think it's tied to the word "lucky."
Blake Oliver: [00:28:37] Luckin Coffee. Amazing story. They are just three years old, and they are a startup that is beating Starbucks in China. At least they were, until this all came to light. They opened 4,500- more than 4,500 stores across China, which made it bigger, by location, than Starbucks, in China. They became a unicorn, meaning [00:29:00] they were valued at over $1 billion, after barely one year. They went public in less than two years, in May of 2019, and raised $645 million in their IPO. Their valuation in January was $12 billion. They had doubled that. They went from $6 to $12 billion just eight months after going public, and recently raised another $865 million selling convertible bonds and additional stock. They are listed in the United States on the Nasdaq exchange.
[00:29:33] So, amazing success story. One of the things that's really interesting about Luckin that made it a darling of the tech world is that they had a mobile app. If you're a Chinese consumer who is developing a taste for coffee, which Luckin was really working to grow in China ... People traditionally drink tea, not a lot of coffee. Coffee is really expensive. Starbucks, in China, costs almost the same as it does in the United [00:30:00] States, making it really expensive, so only wealthy people could afford it.
[00:30:05] Luckin had a mobile app where, if you downloaded that, you would get push notifications of discounts, and the discounts would be 30 to 70 percent. You could either go pick up your coffee, or you could have it delivered; super-convenient; super-high-tech, like a lot of these Chinese companies that are way ahead of U.S. companies when it comes to ease of use on mobile, and delivery, and all that. They're this tech company- actually, it kind of reminds me of WeWork, where it's actually a really traditional company disguised as a tech company, because they're a coffee chain. They sell coffee.
[00:30:40] Just three years, and they are worth $12 billion. Well, on April 2, here comes the fall. It came to light that many of their sales had been faked. Apparently, from the second quarter to the fourth quarter of 2019, [00:31:00] which was during and after the IPO, they fabricated ... The COO - the chief operating officer - and some other highly placed executives fabricated transactions amounting to $310 million. The way they did it is interesting, but also not super-sophisticated. They were selling vouchers to companies with ties to Luckin's chairman and controlling shareholder, Charles Lu.
[00:31:30] This is a real program they had, where you could buy vouchers of Luckin Coffee, and give them to your customers as a third party. Let's say I'm a car rental company in China. While people are waiting for their car to become available, I might offer them a Luckin Coffee voucher. I don't have coffee at my rental shop, but I say, "Hey, here's a free voucher. Order your Luckin Coffee, and they'll deliver it while you're waiting for your car to be ready," something like that. Companies buy [00:32:00] these vouchers at a discount and give them to their customers.
[00:32:04] Well, the COO and these executives were selling vouchers to companies, and they weren't actually being used. They sold tens of- hundreds of millions of dollars of these vouchers. Now, that would be suspicious because you've got to have costs associated with delivering this coffee, making it. If you don't cost of goods sold, that's gonna be a big red flag. So, they also created a fictitious procurement employee who had a name, Lynn Liang.
[00:32:37] This is where the auditors got suspicious. This one employee processed more than 140 million payments for raw materials, delivery, and HR services related to the fictitious vouchers. So, $310 million of fake revenue, $140 million of fake cost of goods sold. When all this came to light, because the auditors uncovered it - I think was Ernst & Young - the [00:33:00] stock plunged 75 percent overnight.
David Leary: [00:33:03] I've been watching that story. I just haven't brought it to the show. You're right, I think it fits in well because there's another major fraud that went down. Do you wanna ump into Wirecard?
Blake Oliver: [00:33:11] Yeah. So, Wirecard ... Let's jump across oceans, or across a continent, to Europe. Wirecard, now, I'd never heard of them either.
David Leary: [00:33:21] Which is interesting because they're apparently a 20-year-old company.
Blake Oliver: [00:33:24] They're a payment processor, right?
David Leary: [00:33:26] That's correct, they're a payment processor. They kind of play middleman ... It's funny because I have them also in app news. An expense-type product in France. Something like an Expensify is partnering with them to create a debit card. That was announced this week, that they were partnering with another company. So, it's kind of the space they're in [crosstalk]
Blake Oliver: [00:33:47] They're competing with Square. They're a modern payment-processing company.
David Leary: [00:33:51] Exactly.
Blake Oliver: [00:33:51] They have been growing like crazy. There's a chart of their growth from 2012 to 2019, where it's just an exponential curve. They [00:34:00] had revenue of €2.8 billion in 2019. Just massive.
David Leary: [00:34:06] Yeah. Their CEO stepped down this week because of the accounting scandal. It comes basically one day after Wirecard admitted to auditors that EY could not find €1.9 Billion of cash that was on its balance sheet.
Blake Oliver: [00:34:21] Yes, this is amazing.
David Leary: [00:34:24] They had to postpone their 2019 annual report; for the fourth time, they've had to postpone that. The interesting thing is the news follows an extensive investigation by Financial Times into the Munich-based payments processor's accounting practices. Among the newspaper's allegations are that Wirecard's Singapore office used forged and backdated contracts to inflate revenue and that staff appeared to conspire to fraudulently inflate the sales and profits at its Dubai, and Dublin subsidiaries, potentially misleading EY? Why I'm confused by this is because my understanding is EY- they've been with EY for a decade ... I [00:35:00] don't know the audit process. I do not, but how does that happen? How does somebody in the books for a decade get deceived?
Blake Oliver: [00:35:16] I don't know the answer to that, but you are asking the right question because it is amazing that it took cash confirmations to discover this fraud. That's the last point at which you can catch something is when they have created fake revenue and ... Eventually, revenue has to become cash in the bank. Otherwise, somebody will figure out it's not real. They created fake bank accounts in the Philippines on their books, and the way it got caught is the auditors were sending confirmation letters. They were doing cash confirmations.
[00:35:58] This is one of the first things that you do as an auditor [00:36:00] is you look at the trial balance of a business, and you go through all the bank accounts, and you send letters to the banks, saying, "Do you actually have an account for this company that we're auditing? Please tell us the amount." Then, you compare that to their books, and you make sure the cash is real, that it's not fake. When they did that, apparently, Wirecard was saying that they had €2 billion in the Philippines. They actually produced fraudulent confirmation letters.
[00:36:32] So, they actually tried to fake that to trick their auditors, and then the auditors got suspicious, I guess, about the letters. They didn't seem right, so then they actually called up the banks, and the banks said, "No, we don't actually even have accounts for Wirecard." That's how all this came out. It's crazy that it got to this point; €2 billion-
David Leary: [00:36:51] There's a quote here from the fund manager at Decca Investments, a top-10 shareholder at the firm. This is a significant position they have in this company. [00:37:00] He said they are stunned. It makes me wonder, these investment companies, when they invest in these other companies, what due diligence do they do?
Blake Oliver: [00:37:09] Probably not all that much. That's what the auditors are there for, right?
David Leary: [00:37:13] So, who do the auditors work for - the company, or the investors, or the public?
Blake Oliver: [00:37:17] Another really good question. Yeah-
David Leary: [00:37:19] I know we've talked about this before.
Blake Oliver: [00:37:20] Well, they are hired and paid by Wirecard, but the work they do is supposedly for the investors. That's the conflict of interest inherent in auditing. Let's quantify this again. Luckin was valued at $12 billion, and that was mostly erased. Very similar situation for Wirecard, where they lost ... I'm not sure exactly where it stands right now, but it was €2 billion in market value erased immediately, and then another €9 billion, so, €11 billion of market value just destroyed. Shares are down 75 percent over two days.
David Leary: [00:37:56] Well, they say they might not even make it out. Wirecard could completely [00:38:00] go under.
Blake Oliver: [00:38:00] Yeah, well, because- here's the reason is that they have all of these credit lines. You mentioned that they had to delay their issuance of their financial results, their 2019 financials. They have all these credit lines worth €2.2 billion that could be canceled because of this delay. If I'm a bank, do I really want to extend credit to a company that has fabricated €2 billion of cash? I don't think so. Who knows? And, actually, side note here, the chief executive and chief technology officer of Wirecard is Markus Braun, who The Wall Street Journal notes, is known for his tall ... He's tall and known for his intense manner of speaking and adopted the sartorial style of the tech world wearing black turtlenecks similar to Apple Inc. founder Steve Jobs, and that-
David Leary: [00:38:50] Oh, and the blood girl ...
Blake Oliver: [00:38:53] Yeah, you remember- Theranos ...
David Leary: [00:38:53] Theranos, yeah. Elizabeth Holmes.
Blake Oliver: [00:38:56] Yes. She also did the same thing. Two frauds perpetrated [00:39:00] by Steve Jobs copycats. Braun's in trouble because he controlled seven percent of Wirecard's shares.
David Leary: [00:39:09] He was at the helm for a good 17 years or something, I think he's been-
Blake Oliver: [00:39:13] A long time, right? T=Yeah. I don't know if he's the founder or what, but, yeah, might as well have been, right? Worth €1 billion before this, and that's now down to a few hundred million. Eventually, they'll trace this back to somebody, right?
David Leary: [00:39:30] Or a team of people. There has to be a lot of groupthink when these things go on. It's very rarely one person.
Blake Oliver: [00:39:38] This is just the beginning, probably. These are some big ones, but we can expect some more frauds to come to light because, now, people are starting to look critically at businesses, given the recession.
David Leary: [00:39:51] People have more time now, right? People have more time. They have less money.
Blake Oliver: [00:39:53] Exactly.
David Leary: [00:39:53] Due diligence is gonna go up, absolutely. You wanna get into some app news?
Blake Oliver: [00:39:59] Let's do it. So, Receipt [00:40:00] Bank, right?
David Leary: [00:40:04] Yeah, we can talk about Receipt Bank made an acquisition. Receipt Bank acquired- they call it a data-quality specialist called Xavier. Xavier, I think, maybe here in the states, may not have heard a lot about Xavier yet. They won Xero's National Emerging App Partner of the Year award.
Blake Oliver: [00:40:23] Yeah, they're new to me. I never heard of them before.
David Leary: [00:40:25] Yeah. They've came across my radar. I've seen them. I've seen apps like them in the past. What they do is they ... It's a tool kit that ... This is gonna be the wrong word to use, but I always think- you know how you can get an antivirus product for your computer, and it's always scanning on your computer, looking for viruses on your computer. Imagine if you had something looking at your data of your accounting system for problems.
[00:40:50] It's connecting your accounting data, looking for duplicates, miscoded things. You can actually use it to do some reporting and things [00:41:00] like that; dates, like, "These things were changed after X date." It looks at patterns with your suppliers. It's really elevating visibility into potential problems in the data file of the accounting system. I've seen products like this come and go over time. One of early ones in the QuickBooks world was something called Audit My Books. Xavier's in that space. They're providing that service.
Blake Oliver: [00:41:25] I could've really used this when I was in practice, because I supervised lots and lots of bookkeepers, and without digging into every file, it was really hard to know if they were doing a good job.
David Leary: [00:41:37] This move is gonna consolidate, they're calling it, the two highest-rated services in the Xero ecosystem. It kinda makes sense if Receipt Bank is pulling data ... You're taking data that's in paper form. Receipt Bank's taking that data, cleaning it up; that's one level; then shoving it in the accounting system. It kind of makes sense to have that other piece of this to [00:42:00] also ... Like, "We're shoving data in," but data is also getting into your accounting system from other places.
Blake Oliver: [00:42:07] Well, yeah, and if they're shoving data in, I wanna make sure that the data looks right.
David Leary: [00:42:11] And that it's clean going in.
Blake Oliver: [00:42:13] Yeah.
David Leary: [00:42:13] It's interesting because I think, in a way, here's another example of an app that you could argue should be a feature of Xero and QuickBooks. Then I start thinking, okay, maybe Xero should've bought them, or QuickBooks should've bought them. So, then, it's like, why did Receipt Bank buy them? I know we've talked about this before, Receipt Bank ... There's tens of them starting a bank and Receipt Bank [crosstalk]
Blake Oliver: [00:42:36] It's in the name.
David Leary: [00:42:36] -Receipt Bank has a self-employed tool in the UK. Is Receipt Bank going to be a full-blown cloud accounting package here, soon?
Blake Oliver: [00:42:46] It makes sense. If everybody else is consolidating features ... GLs are becoming banks. Banks are becoming GLs. A solution like Receipt Bank could easily become a GL. If you're pushing data, why [00:43:00] not push it into your own general ledger?
David Leary: [00:43:03] Yeah.
Blake Oliver: [00:43:03] So, that's Receipt Bank. There was one other piece of app news that I was following. I saw that Rewind now has a client data transfer tool for QuickBooks Online, which is a way to completely clone a QuickBooks Online company. You can make a copy of one, which is pretty neat; like the way that you could make a copy of a desktop file.
David Leary: [00:43:25] Yeah. You could almost have a template file. You could backup the template file and then restore that in a new QuickBooks Online file.
Blake Oliver: [00:43:33] So, they haven't been doing this before? This is like a new thing?
David Leary: [00:43:36] I think you could've done it before through hacking, a little bit. Now, they've actually built a product to properly address this use case. I think there were some creative ways people could figure out how to do it, but I think they ... Then, that other company that Intuit bought, ChronoBooks, I think actually did this, but ... If you take on a franchisee, and they have 20 locations, and you [00:44:00] want to get every single chart of accounts the same, and all the items on the items list the same, and the vendors list the same, this is a good method to do that.
Blake Oliver: [00:44:07] That's really cool. Also testing, right? If you wanna test an integration with an inventory solution, but you don't wanna mess up a QuickBooks file, or you don't wanna risk it, you could create a copy, and then connect the app, and see what happens.
David Leary: [00:44:20] That's where this gets interesting. That's why I was reading that. You basically clone the data, connect the other app. Now you can actually test two apps in parallel and keep them separated.
Blake Oliver: [00:44:32] Or, if you just need a demo file that you use to demonstrate something to a client or a potential client, this is a great way to create that demo account and then copy it when you need to use it, so you don't muck up your demo data.
David Leary: [00:44:48] I also don't know the depth of this yet, and I can tell you there's not ... You can't get payroll APIs. There's gonna be some level of data that the best they're gonna be able to do is to kind of pull out [00:45:00] the balances and create a journal entry. There's just some data not available through an API. So, it's not truly, like you said about a QuickBooks Desktop backup. That is a perfect backup, bit for bit, ones, and zeros of the data. It's reading the data from an API, storing it, and then putting it back. A better way to think about it, it's recreating the data, ultimately, once it pulls down. Did you see Botkeeper had a $25 million raise?
Blake Oliver: [00:45:26] Oh, yeah, that's a lot. Big one. Series B, right?
David Leary: [00:45:29] Yep. Series B. I think the thing I noticed in this article ... We've had, obviously, history with Botkeeper, and like, they weren't disclosing there's humans involved. It was very, very clear in this article about for tasks that can't be automated, like tax filing, wealth-management-type tasks, Botkeeper connects clients with accounting firms and recruits its in-house team of CPAs and accountants to revamp the books and bring them up to date. That was something I noticed in the article. The tone of- the tune that's [00:46:00] being sung is that humans are involved in these processes. I think, in the past, we just had questions on that.
Blake Oliver: [00:46:07] Well, that makes me happy. It's all about transparency. Bringing it full circle, we started with PPP transparency, and now we're talking about transparency when it comes to humans and bots, so that's good.
David Leary: [00:46:18] This article also talked a little bit about Receipt Bank. It's talking about Botkeeper, but it says, "Despite pandemic-related headwinds and competition from the likes of Receipt Bank, among others, the company says it expects a 3X year-over-year run rate in 2020, and plans to add a dozen employees to its workforce of over 100. Because one of the things that Botkeeper's playing up in this is that they basically have their scanbot feature for scanning, and uploading receipts, expenses, sales contracts, I can see where this author of this article compared them to Receipt Bank.
Blake Oliver: [00:46:51] Yeah, it's all about getting data into the system and processing it so that you can generate those reports. There's a lot to be said for a [00:47:00] human-computer-hybrid approach, as opposed to a Receipt Bank, where I have to still manage it. I still have to do something. I have to verify the data. That's why Receipt Bank bought this company that's gonna validate the data. They're going at it from different sides. Botkeeper started with mostly people doing the processing, calling them bots, and they are gradually building the tech; whereas Receipt Bank started as a pure tech approach - no people - and they are adding in more data-verification stuff so that you, yourself, don't have to do the processing, or validate the processing. Both different approaches, and it's great that we've got both of those competing-
David Leary: [00:47:43] That's all I got for this week, for me.
Blake Oliver: [00:47:45] That is all I have, as well. David, if people wanna reach you online, where's the best place for them to do that?
David Leary: [00:47:52] I'm on Facebook, Twitter, LinkedIn. I'm @DavidLeary. If you-
Blake Oliver: [00:47:57] On TikTok, too?
David Leary: [00:47:57] I'm supposedly on TikTok ... I'm not on TikTok- [00:48:00]
Blake Oliver: [00:47:57] I joined!
David Leary: [00:48:01] You did? Okay.
Blake Oliver: [00:48:01] I joined specifically so I could follow Planet Money.
David Leary: [00:48:06] Oh, those commercials worked [crosstalk]
Blake Oliver: [00:48:06] Yeah, well, I listen to Planet Money all the time, and they said they have a TikTok. It's actually quite good. It's funny. I guess that's what they had the interns do over the summer, set up a TikTok. I am @BlakeTOliver on Twitter. That's where I like to hang out. You can also connect with me on LinkedIn. If you do, please say you are a listener, when you send me a connection request.
David Leary: [00:48:28] You can also leave us a voicemail.
Blake Oliver: [00:48:31] Yes, we have a voicemail number. You can call (202) 695-1040. That is (202) 695-1040. Leave us a voicemail. Tell us what you think. You can give us a review. We listen to those, and if we deem it high-quality, we will play it on the air.
David Leary: [00:48:53] Perfect. I think that's a wrap.
Blake Oliver: [00:48:55] That's it. Thanks, David. Stay safe. I'll see you next week.
David Leary: [00:48:58] Bye.
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