Semin will be joining Albert “Road Rage” Haynesworth, Gilbert “Quick Draw McGraw” Arenas, and Jeff “Chemistry is Overrated” George as first ballot inductees into the Washington Sports Hall of Shame. The Hall is located in a four hundred level men's room at RFK Stadium and is staffed by two winos and a bag lady with a crack pipe. The price of admission is a pint of Thunderbird. The Hall's selection committee includes Mayor for Life, the Honorable Marion Barry and Mike Wise, Washington Post sports columnist, who hates this blog.
There are three differences between a business and a profession. First, a profession puts the needs of customers ahead of the needs of the business. In other words, the first duty of a professional is to work in the best interests of his clients. The first duty of a business is profitability. Second, a profession is responsible to the public at large. A professional must not only serve his clients. He must also consider how his services affect society. Third, a profession will never include Albert “Road Rage” Haynesworth. And, if you are a waitress, you'll never approach Prince Albert in a low cut dress. He does this thing with a credit card – allegedly.
Let's look at the first requirement of a profession by looking at a real life situation. A few years back, during the bubbliest time of the residential real estate bubble, I had a client, Joe, who bought a million dollar house. Here was the problem. Joe's annual income was only $80K. The million dollar, no down payment required mortgage had a nine percent annual interest rate when typical rates were in the six percent range. His annual interest payments of $90K exceeded his $80K annual income. Not surprisingly, Joe defaulted on the mortgage after less than a year. There are two people, who were supposedly representing his interests who should have been called to account for conflicts of interest: the real estate agent and the mortgage banker. Neither of these jerks could remotely be considered professionals.
As a true professional, the real estate agent would have had the best interests of his client in mind. He would have told Joe there was no way he could possibly afford a million dollar house on an $80K income. Joe even had a previous foreclosure a few years earlier. He bought a $500K house when his annual income was $40K. What can I say? Joe's wife likes to live the good life. In this case, the real estate agent was working solely for himself, not Joe. The agent wanted that 3% commission more than he wanted to do the right thing. I'm curious how many real estate agents would have been willing to walk away from that commission. I know a few I would bet on, but not many.
The second dude I'd like to see french kiss a Chuck Norris spinning back fist is the mortgage broker. Why would anyone make this loan? Here's the math behind why this loan was made. The mortgage company knew there was no chance Joe would pay the mortgage for long. In the interim, they were happy to collect the nine percent, above market rate, interest. They expected one of two outcomes. First, they would try to sell the loan into the sub-prime mortgage secondary market and recover their money, probably with a premium for an above market rate, even for sub-prime, loan. Second, if they weren't able to sell the loan into the secondary market, they would foreclose on Joe and resell the house for even more the the million dollar original price. Where did Joe's best interests come into play here? Of course they didn't. Ultimately the mortgage broker ended up the fool. By the time they foreclosed on Joe, real estate prices had collapsed. They not only lost money on the loan, they lost money on the house as well.
Joe's situation, with a self dealing real estate agent and mortgage broker, played out at least a hundred thousand times during the boom. This is how the real estate bubble started, and this is how it ended. If you asked Joe's buddies why they weren't looking out for Joe, they would tell you, “It's not my fault. I'm was just doing what Joe wanted. If he wanted something stupid, who was I to stop him? If I hadn't done it, someone else would have.“ Professionals? Hardly.
The second characteristic of a profession is a sense of responsibility to the public at large. As a CPA, I am not required to put a client's interests first. I am required to put a client's interests second, behind the interests of society. Banks, insurance companies, and government regulators rely on my signature on financial statements as an assurance of objectivity. If there is a conflict between a client's best interests and the best interests of society, the interests of society come first. Several times a year, a client will ask me to prepare financial statements and then say, “Frank, I really need to show good numbers to the bank. Do your best.”
My response is, “Actually having good financial results would be a good first step in showing the bank good numbers.”
My license and livelihood is at risk if I try to appease these clients. I have a responsibility to the bank even though they aren't paying me. In these situations, my likelihood of getting paid by anyone is slim. That doesn't matter. The CPA profession is about more than just making clients happy. The same responsibility applies to income tax returns. When a client isn't happy with a tax balance due, I can't just change the return to make him happy whether I get paid or not.
Here is one final example of professionalism. This one comes from my business partner and friend for over thirty years, Paul. Paul had a client, Sue, who was hell bent on owning an Italian ice franchise. The business model is that people will pay a premium price for frozen water with a little syrupy flavoring if you slap the word, Italian, on it.
If you do a little math on an Italian ice franchise, you will find that there is pretty much no way you can possibly make money anywhere north of Florida. The business is just a little seasonal. In case you haven't noticed, rents in retail shopping centers aren't seasonal. Landlords expect to get paid year round. For the business projections to work, you have to assume a Russian nuclear attack that turns Northern Virginia into a desert. Then Mel Gibson, in his Mad Max outfit, may come by in need of a cool treat in January. I once did a seminar on buying businesses for a bank where I used this business as an example of a business model to avoid. Sue was in attendance.
Sue had a fine background to run a food based business. She was a career federal worker. There is a cheap joke in there I'll avoid. Paul not only advised Sue not to purchase a franchise, but he told the bank he didn't think the business could work. Then bank made the loan nonetheless. Sue had a cosigner, her father, with some collateral.
Paul has heard from Sue intermittently over the last few years. She hasn't filed a tax return in that time. She doesn't have the money to pay for either bookkeeping or tax returns. Paul may be a professional, but he isn't a fool. He intends to get paid if we prepare the returns.
I'll leave it to you to decide if either Alexander Semin, or his agent, are professionals. Some team will be tempted into signing him as a free agent – some team that doesn't care about defense. In some brief stretches during the playoffs, he showed he could back check and contribute to the Caps defense. The shame is that his talent is only exceeded by his narcissism. Farewell to Alex.
If you are interested in having a couple of good beers, we are having an outing on June 6th after work. We are meeting at Lost Rhino in Ashburn off Red Rum drive. I hope to see you there. If you want real tax and accounting advice, please visit our main S&K web site, www.skcpas.com. Thanks for reading!
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