[BobC]

Originally Posted by Peter_Spaeth

Yeah the way it's evolved it's somewhat chaotic on the Board but the events keep unfolding. But certainly the warranty is a big pressure point on Collectors Universe and obviously they have to review the adequacy of the reserve as do the auditors. Of course, since they control the ultimate decisions (short of litigation) as to whether to reimburse, that may play into their calculation. And they clearly, see Sloan's statement several weeks ago, are hoping to foist this onto the sellers.

Peter, agree completely. I know you're an attorney, but I'm a CPA and perform and issue audited statements and know what is involved and goes into the reporting and financials of these companies, and what the auditors are required and supposed to be doing. I wasn't merely trying to re-hash what had already been talked about and explained in numerous other threads, I was also trying to show and highlight issues as they specifically would be looked at and dealt with by an actual auditor. Apologies for not being so clear on that. That was why I was mentioning about how Collector's Universe's year-end is June 30, so the audited financials and Annual Report are going to be coming out pretty soon in the next few months. I am going to be extremely interested in seeing what, if anything, is reported or shown in their financials and Annual Report in regards to all these recent events. And those excerpts from CU's Annual Report I was posting were to highlight what was being said by the company itself, not someone else, and how they are supposed to be factual and accurate as part of their financials and Annual Report. And to whoever their auditor is, they would have to sign off and basically guarantee in writing to them that all their statements and everything they had been telling them as part of the audit and including in the Annual Report and all were factual and true, to the best of their knowledge, or they wouldn't be getting a clean and unqualified audit opinion from me if I was their auditor.

And if I were their auditor, I would be required to review their reserves for things such as warranty costs, and assess if they appear to have adequately reserved for it. If in my assessment they did not, I would discuss and suggest to them that they should change the reserve to what would appear to be a more appropriate number. And that assessment would stem from and be based on the warranty policy as stated by them that I had posted. And if they did not agree to change their reserve to what I felt was more appropriate, and the difference was egregious enough and material to the financial statements, I would be obligated to at least make mention of the difference in our report or footnotes, or even to issue an exception and a qualified opinion of the overall financial statements. And CU being a publicly traded company, exceptions and qualified opinions would likely not go over well with the investing community. And also being a publicly traded company, CU must conform and operate under the rules and requirements of the SEC, who look at financial statements and reporting in an extremely serious manner. An auditor of a publicly traded company would not want to sweep something under the rug that could later come out and get them blasted by the SEC and the public.

That warranty policy as stated by PSA/CU doesn't mention anything about them having to be taken to court and have litigation to force them to pay such warranty claim costs. It merely states that PSA is liable if a card previously graded by them is re-submitted to them, still in its original PSA holder, and is subsequently found and proven that it had been over graded incorrectly, or ended up not being authentic, that they would either offer to buy back the card from the current owner/customer at the value based on the incorrect grade, or AT THE CUSTOMER'S OPTION, not buy back the incorrectly graded card and instead pay the owner/customer the difference in value between the incorrect grade and what the card really should have been graded at. And I assume that means that if a card doctor had picked up say a PSA 4 version of a card and then altered and submitted it so that it now came back as a PSA 6, which was then later proven to have been altered/doctored when a subsequent owner resubmitted it to PSA looking for a grade bump, the true grade of that former PSA 4 card would/should now and forever after be no better than an "A", correct? And in that case, under their warranty policy, PSA would be liable to pay the owner/customer the difference in value between a PSA 6 version of that card and one that was just an "A" (authentic) version, and the customer/owner still keeps the card apparently, if the custoner/owner chooses that option. So if I was their auditor, I would have to use those parameters in looking at their warranty reserve calculation and determine if I felt it was adequate and reasonable given the known facts and circumstances.

Quite frankly, if I was PSA/CU's auditor, and knowing what I know about the whole thing, I would look at the warranty reserve calculation PSA did as of 6/30/19, along with their facts and calculations in how they came up with it, and start with the questions from there. Again, because of my knowledge of cards and the industry, I would be extremely critical of whatever reserve figure they came up with and be very demanding in knowing how they came up with and then justified it. Quite clearly to me, because the number of questionable cards in PSA holders already purported to be out there are being considered as maybe only the tip of the iceberg, there is no possible way to really and truly come up with an anywhere near complete list of what potential cards may be subject to the warranty. And couple that with the added difficulty of then having to decide what the potential values of those incorrectly graded cards are that PSA could be on the hook for, and there is no possible way currently to really come up with a good, reasonable and defensible figure as to that the reserve should be, at least not in my opinion. So as their auditor, I would probably end up telling them that I was going to at least explain how we arrived at whatever number we ended up using as the warranty reserve, and then be sure to add footnote disclosure to further explain the issue and the inability to determine an accurate, reasonable potential reserve with what information was currently available. I would also further explain that the warranty reserve costs could be significantly higher than reported in the current and future years, and have a serious material, negative impact on the business andc its financial statements going forward.

And trust me, the idea/concept of materiality is not simply a vague, unknown term or amount when it comes to audits. There are set and prescribed calculations and formulas that all auditors are supposed to follow in calculating materiality. In the case of PSA/CU, based on their 6/30/18 financial statements and total sales reported for that fiscal year, the entire company's planning materiality amount/level for that year was $498,694, which would/could then be rounded up or down slightly at the auditor's discretion. What that then means is that in looking at the financial statements of PSA/CU for that year as their auditor, if I ended up finding that I disagreed with amounts the company was reporting, and those differences netted to more than this materiality amount/level, I would have to go back to PSA/CU and tell them that they would either have to make some adjustments to their financial statement figures that I would propose to them to remove the differences, or if they did not agree to do so, I would have to at least have them disclose those material differences in the footnotes to the financial statements. And if they refused to even allow the footnote disclosure of the the material differences, I would most likely only issue them a qualified opinion and have to explain the material differences in my report then, or depending on how egregious the differences actually were, I could even possibly back out and refuse to issue an opinion because I didn't think an accurate opinion could then be given. And if you think that if I did back out as their auditor, or if they fired me as their auditor because I wouldn't go along with what they want, that they could simply go out and find and hire another accounting firm to agree with them and perform their audit and make the problem go away, that won't work. Any subsequent auditor of theirs is required to inquire of prior auditors and them as to why the change and what the issues were. And since they are publicly traded, the SEC also requires even further reporting and the filing of Form 8-K to explain the dismissal and change in auditors, and all the reasons and issues for doing so. In other words, the company being audited can't just hide the issues or try to sweep them under the rug. So from what I'm seeing, I expect there should be some interesting reporting on their upcoming financials.

And since the warranty guarantee appears to be triggered only when a PSA card is re-submitted to them in the same, original PSA holder it was in when originally misgraded, it more or less means that PSA gets to be the one, and only one, to decide if they actually misgraded the card to begin with. So has anyone already tried to re-submit one of these suspect cards in a PSA holder back to them yet? First off, with their ridiculous turn-around times (so I've heard) how long will it take someone to even get a response back. I imagine someone with a suspect card(s) could go to their offices along with scans and emails and all the documentation and evidence that has come forward and present it and the card(s) to them and say pay me. I'd love to be in the room to hear the response to that from a PSA official. And even with all the supposed evidence and scans you could present, what happens if they say they stand behind the grade and the card(s) presented is fine as graded and you are owed nothing by them, what recourse would you have then? Sue them in court to prove they are wrong, even though they are considered by many as the top card authentication and grading firm in the country? Most individuals wouldn't have the time nor resources to be able to go after them that way. And then think how that could impact the guilt and potential liability of the card doctor(s) or others involved in the sales of the altered/doctored cards. If someone went after a suspected card doctor(s) in court and the defense can pull in someone from PSA to say they back the grade they gave on cards the defendant supposedly doctored (remembering PSA is considered by many as the top, expert card grading firm in the country, if not the world), how would that possibly end up in court for the card doctor(s)? The problem is that even if there isn't true collusion and cooperation among the TPGS, dealers and card doctors in this whole thing, they all do share potential financial liability because of it. So it behooves them all to shut up and not admit to or say anything, and for the TPGs to continue saying the grades they gave certain cards are correct and they are not altered/doctored, which helps to maintain and preserve their reputation and keep them from being hit with financial liability under their own warranty guarantees. And that in turn provides protection for the dealers selling the bulk of these supposedly altered/doctored cards who can then just say that they didn't grade them and since the TPGs are standing behind the grades, that they didn;t do anything wrong either. And as for the card doctors, if the TPGs and dealers continue to keep saying the cards are good and the grades accurate, how can you accuse/convict them of anything if the recognized hobby industry experts keep saying the cards are good after all?

Now I've heard and read that PWCC has actually gone ahead and started to pay off/buy back/reimburse some people for alleged altered/doctored cards that they had sold them. But with all the allegations and finger point that has come out of this, they can easily argue they are doing so to maintain their reputation and business, without formally saying or proving that they knowingly sold cards that were altered/doctored and incorrectly graded by TPGs. In other words, they can assert it is merely a very lenient return policy they have on sales by them for unhappy customers. For PSA to start doing such payouts though, that would likely be considered by many in the hobby community as an admission by them that they had inaccurately graded and missed so many doctored/altered cards. So I can fully understand why they aren't out there offering to make payments to people for their alleged grading errors. And as for any of the card doctors themselves, good luck on getting anything should someone try knocking on one of their doors asking for a return of money!

Here's a thought on how to possibly make some money from all this then. Reach out to the people who currently own some of these alleged altered/doctored PSA graded cards and see if they would be willing to sell them to you, at a discount of course because of the taint their card now has. Then take the cards and go to PSA and resubmit and ask them to pay you for their erroneous grading. Depending on how much of a discount you may have gotten the card for originally, you could potentially make some decent money, if you can get PSA to actually admit they blew the original grading and slapped an improper grade on an altered/doctored card.