SHAC 4033 - Integrated

Case Study

MIKE MAYO TAKES

ON CITIGROUP
Group Members:
FELISHA JONAH A/P B. RAJANDRA PRAKASH

A14HA0025

NURFARIDAH BT MOHD NASIR

A14HA0221

ANIS AFFIQAH BT MOHAMAD NOR

A14HA0271

HAIYUSNIZA BT HAIRI

A14HA0274

AIN SHAFIKA BT HASBI

A14HA0198

OUTLINE OF
PRESENTATION
Question 3
Question 2
Question 1
Citigroup &
Mike Mayo
Background

Deferred
Tax

CITIGROUP BACKGROUND
In 1811, a group of merchants takes the
first steps towards setting up a new bank,
which is City Bank to help New York
compete with rivals such as Philadelphia,
Boston, and Baltimore.

(Schneider, 2013)
3

In 1998, Citicorp (diversified global banking and financial services group)

have merge with Travelers (a diversified insurance and financial services
group) with intention to create the worlds premier global financial services
supermarket institutionalized with cost incurred $70 billion.
(Schneider, 2013)

In 2007, global financial crisis has cast its long shadow on the economic
fortunes of many countries, resulting in what has often been called the Great
Recession
(Verick & Islam, 2010)

Net Income

2005

2006

2007

2008

2009

$24, 589

$21,538

$3,617

($27,684)

($1,606)
Exhibit 3a

MIKE
MAYO

Mike Mayo began his career as a

bank analyst in 1992 with UBS,
Lehman Brothers, Credit Suisse
First Boston, Prudential
Securities, and Deutsche, prior
to joining CLSA.
He was ranked in the Institutional
Investor Research Analyst
rankings several times.
Not all of the attention Mayo
received was positive, example
with Bank One and CSFB.
(Srinivasan & Kaser, 2012)
5

DEFERRED TAX
IAS
12

Temporary
Differences

Being the amount of income tax payable in future periods in

respect of taxable temporary differences.
Deferred tax is tax that is payable in the future.
Temporary differences are defined as being differences
between the carrying amount of an asset (or liability) within
the Statement of Financial Position and its tax base ie: the
amount at which the asset (or liability) is valued for tax
purposes by the relevant tax authority.
Carrying Amount
A/C

Carrying Value
Tax Base

DEFERRED TAX
- Exp

Year
1
2
3
4

Depreciation
500
500
500
500

When the capital allowances are greater

than the depreciation expense in years 1
and 2, the entity has received tax relief early.
This is good for cash flow in that it delays (ie
defers) the payment of tax. However, the
difference is only a temporary difference and
so the tax will have to be paid in the future.

Capital Allowance
800
600
360
240

Differences
(300)
(200)
140
260

In years 3 and 4, when the capital

allowances for the year are less than the
depreciation charged, the entity is being
charged additional tax and the temporary
difference is reversing. Hence the temporary
differences can be said to be taxable
temporary differences.

DEFERRED TAX
- Exp
Year

Carrying Amount
A/C (RM)

Carrying Value
Tax Base (RM)

Temporary Differences
(RM)

1,500

1,200

300

1,000

600

400

500

240

260

Nil

Nil

Nil

Assume tax rate: 25%

Year

Temporary Differences
(RM)

Deferred tax recognised

300

300 x 25% = 75

400

400 x 25% = 100

260

260 x 25% = 65

Nil

Nil

Proforma in Statement of
Financial Position
Year

Opening deferred tax

75

100

65

Increase/(Decrease) in the year

75

25

(35)

(65)

Closing deferred tax

75

100

65

2,425

2,475

2,535

2,565

75

25

(35)

(65)

2,500

2,500

2,500

2,500

Proforma in Statement of
Comprehensive Income
Year
Income Tax
Increase/(Decrease) due to deferred tax
Total tax expenses

(ACCA, 2015)

QUESTION 1:
Do you agree with Mike Mayos concern
about the extent of Citigroups DTAs? Why or
why not?

10

Mayos
Concerns
He stated that Citigroup might have to take up to a $10 Billion
charge against the DTAs
Citigroup had 3 years of losses, the economic outlook was highly
uncertain
Citigroup should write-down purely based on the principle of
accounting standard
SFAS 109 indicates that forming a conclusion that a valuation
allowance
is not
(Srinivasan
& Kaser, 2012)
needed is difficult when there is negative evidence such as cumulative losses in
recent years

Citis position defies imagination and logic. Instead of

talking about making money, what Citi ought to do is reserve
for at least part of the DTAs and reap the benefits of reducing
the reserve once it actually makes money
Lynn Turner
(former chief accountant of SEC)

Despite the existence of an abundance of negative evidence, Citi

has decided to forgo the establishment of a valuation allowance
(VA) against its net DTA. This is a risky strategy, in our view, and
if events do not transpire the way Citi projects they will, a
capital-depleting VA will have to be established in the future.
Robert Willens
(tax expert & Leghman Brothers
managing director)

(Srinivasan & Kaser, 2012)

SEC questioned Citigroups DTA

accounting through a series of
comment letters
Asked for sufficient evidence to support that the
DTAs valuation allowance is not necessary, despite
the fact that Citigroup losses in 3 cumulative years.
Asked for further explanations regarding Citigroups
confidence on its projected future pre-tax income

13

(Srinivasan & Kaser, 2012)

AGREE OR DISAGREE WITH MAYO?

#TeamM
ayo
Considering its previous consecutive losses, there is high level of
uncertainty for Citigroup to achieve the projected future profit.
The evidences provided by Citi is not enough
Suppose Citigroup should provide VA against the DTA when there
was negative evidence

QUESTION 2:
Why might Citigroup be reluctant to follow
Mayos advice?

15

Citigroup was very comfortable

with its recording of DTA
Confident in its ability to
earn enough over the next 20
years to warrant the current
size of DTAs

There is a positive sufficient

evidence to overcome the
negative evidence:
The projected future
income

By maintaining its DTA,

Citigroup will be able to
shield an equivalent amount
of future profits from taxes

(Srinivasan & Kaser, 2012)

Citigroup insist that Mayos

critiques are just for the purpose of
his publicity

Citi claimed that Mayo has no clients at his most recent

firm, CLSA. Therefore he picks fights to get his name in
the press.
This will boost his publicity, thus might attract
more clients
(Gasparino, 2011)

Citigroup plotting with KPMG to

violate Sarbanes-Oxly Act (SOX)

Mike Mayo has pointed fingers at Citigroups 2007 10K

filling saying that both KPMG and CEO Vikram Pandit
signed off on financial that wrongfully wrote off DTAs that
should have been written down as losses

(Sihksnel, 2014)

QUESTION 3:
Why might Citigroup be reluctant to follow
Mayos advice

19

CITIGROUPS
REPUTATION
Shortly after Citigroup freeze out Mayo, the issues regarding
Mayo critique on Citigroups accounting have been reported by
Fox News.
The issues have been known worldwide, shows that Citigroup is
untrustworthy.
Fox News also reported that Citigroup cant be trusted to provide
investors with accurate disclosure about its financial condition or
future plans to make money.

MAYOS
CREDIBILITY
Mayo is a certified financial analyst where he has worked for many
big financial company such as UBS, Lehman, Credit Suisse,
Prudential Securities, and Deutsche Bank.
Therefore, he has the unique credibility in understanding the
financial system flaws in a company.
Example - Lehman company where he has worked for, has
collapsed in late 2008 when the decision was made not to bail it
out.

REFERENCES
1. ACCA. (2015, Apr 20). ACCA. Retrieved Dec 8, 2016, from Deffered Tax: http://www.accaglobal.com/
2. Gasparino, C. (2011, May 25). Citigroup Goes After Mike Mayo Over Accounting Accusations.
Retrieved Dec 9, 2016, from THE HUFFINGTON POST: http://www.huffingtonpost.com/charlesgasparino/wall-street-firms-have-shb696486.html
3. Murphey, D. D. (2012). One Man's Fight for Stewardship and Professionalism: A Lesson in Business
Ethics. The Journal of Social, Political, Economic Studies.
4. Schneider, G. A. (2013). Forging Citigroup: the making of the global financial services supermarket and
the remaking of postwar capitalism., 312.
5. Sihksnel, M. (2012). 10 Years of Dirty Sox. Social Science Research Network Electronic Paper
Collection, 12(5), 1-28.
6. Srinivasan, S., & Kaser, A. (2012, July 31). Mike Mayo Takes on Citigroup. Harvard Business School.
7. Verick, S., & Islam, I. (2010). The Great Recession of 2008-2009:Causes, Consequences and Policy
Responses. Discussion Paper No. 4934, 62.
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THANK
YOU
Have a nice day

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