MSNBC reports in this article that the SEC is examining possible evidence of fraud at Freddie Mac. Freddie Mac has acknowledged underreporting earnings by about $4.5 billion or more over three years because of accounting tricks. And in June Freddie Mac replaced its top 3 executives due to accounting scandals. Currently the SEC has provided no details about the investigation

Using Software to Sniff Out Fraud. This BW article is about accounting softwares and frauds. Especially, the first part is very impressive. Author mentioned a mathematical law, " Benford's Law." It's statistic data, but not only accounting. Just glance even first part.

In the 1920s, Frank Benford, a physicist at General Electric (GE ), discovered an astonishing mathematical law: In just about any given set of numerical data, numbers occur as the first or second digit at a predictable rate. For example, "1" will appear as the first digit 31% of the time, but "9" will appear first only 5%. While that sounds unlikely, Benford tested lists of numbers from many different sources -- accounting ledgers, geographic data, even magazine articles -- and found that the same probability persisted.

Applied to accounting, Benford's Law makes for a great way to check to see if numbers are fabricated (since when liars make up figures, they usually don't follow the same statistical pattern Benford identified). The law is now enjoying booming popularity as the basis for a fairly easy, routine test that's used to uncover accounting fraud. Easy, that is, if you have a sophisticated software package and enough high-powered computers to crunch numbers from reams of documents.

This article from Forbes is from late July of this year, but it raises a pretty good point about corporate governance and the way accounting is used to determine executive compensation. In Chapter 5, the text dicusses how changes in operating parameters can change the values of performance ratios. Some of those changes can have a negative impact on the long term performance of the company. But in passing this seems to imply another point, which is that basing executive compensation on these ratios can reward executives for making changes in accounting procedures without making any real change to the performance of the company at all.

Still, the officials made it clear that the process of corporate reform, including last year's legislation and the establishment of the Oversight Board, is far from over. While both the Senate and House are preparing oversight hearings in the fall on implementation of Sarbanes-Oxley, they want to let regulatory changes filter through the system before instituting further changes.

"It's too early to pass definitive judgment," said Sarbanes.

In response to a question about creating guidelines for executive compensation, which are not spelled out in the law, Donaldson said increased independence will require boards to assess "exactly what they are compensating for."

"They'd fallen into the trap of looking at simple financial measures," Donaldson said. "Now there's real examination of what it is we're measuring."

I read this as "the business of the balance sheet". It was very interesting to see valuation of and trading of assets for other assets indirectly addressed in the article. I would not have understood this prior to the class.

The popularity of recent business books urging a return to "core competencies" has added to the push to shed assets that companies believe are no longer central to their strategic positions. The numbers support their moves: One study found that companies that sustain the most shareholder value over time generally have a well-defined core business. Such divestitures now make up nearly 40 percent of middle-market transactions, according to Mergerstat.

This MSN-Slate article suggests that the best way to punish corporate criminals is through lawsuits, not prison sentences. The article gives an overview and link to a recent study that examined this topic and also touches on the SEC's role in investigating these issues from a public and private standpoint. I thought this article related to our recent class dicussion on holding business misfits accountable for their actions along with how these issues that may affect stockholder perceptions.

...according to this study by a troika of Ivy League economists—Dartmouth's Rafael La Porta, Yale's Florencio Lopez De Silanes, and Harvard's Andrei Shleifer—stockholders shouldn't hunger for perp walks and criminal prosecutions. In fact, markets develop better when civil—not criminal—law is strong.

Their conclusion is surprising—and surprisingly practical. What works best, it turns out, is a combination of mandated disclosure (thus allowing the markets to work their efficient magic) and the ability of plaintiffs' lawyers to sue the hell out of corrupt CEOs and underwriters. In short, a more private system. As for cops at the SEC, they may talk tough and hold flashy press conferences when they nab insider traders. But in the global scheme of things, they may not be so important.

Reuters reports that Eastman Kodak Co. (EK), which has been battling shrinking sales of film and cameras, on Thursday slashed its dividend for the first time in its almost 120-year history, sending its shares to a record low. Recall that the value of a stock is based on two factors: 1) ability to predict future cash flow and 2) amount of risk (real or perceived). Given Kodak's history of increasing dividends since 1902, the recent management decision to reduce it and investors' concerns about its cash flow & debt level resulted in the significant drop in its stock price. To investors, both future cash flow and risk are uncertain in today's more competitive environment.

Kodak reduced its dividend by 70 percent, the first cut since it started paying a dividend in 1902.

The Rochester, New York-company said cutting the dividend would give it financial flexibility as it shifts away from investing in film products and widens its range of digital products.

"The downgrades reflect concern about Kodak's earnings and business profile ... and the need to reduce debt, which remains elevated given Kodak's rising business risk and investment strategies," S&P analyst Steve Wilkinson said in a note.

S&P, which warned in June that it might cut Kodak's ratings due to concerns about cash flow and debt reduction, on Thursday said its outlook on the company was stable because the dividend cut will help Kodak reduce its debt while investing for growth.

Analysts questioned how efficiently -- and how soon -- Kodak, which has undergone several reorganizations in recent years to counter an anticipated decline in film sales, could remake itself.

"It's going to take investors a long time to feel comfortable with their strategy and see results," said analyst Shannon Cross of Cross Research. "The big problem with the stock now is that there are so many unknowns."

- GDK

This is from the Wall Street Journal Online, which requires a subscription, so I won't post a link, but the article is pretty short. It relates to an oversight board formed under the Sarbanes-Oxley Act, which states that it will be scrutinizing situations in which corporations fire their auditors very closely. As we discussed in class on Tuesday relative to the Chambers Development case, firing the auditor often means the corporation is up to no good. SWH

Acctg Regulator To Inspect Auditor Firings,Says Bd Member

By PHYLLIS PLITCH

Of DOW JONES NEWSWIRES
(This article was originally published Monday.)

NEW YORK -- The newly created accounting industry regulator will scrutinize situations where companies fire their auditors, a top official warned on Monday.

"Whenever you see a change in auditor, the Public Company Accounting Oversight Board is going to look into it," said board member Charles D. Niemeier, speaking on a panel here at the "first annual" Directors' Institute on Corporate Governance.

Niemeier urged board audit committees to ask tough questions when management moves to change auditors. At issue are situations where companies dump auditors because they are reluctant to go along with management when the company wants to improperly push the accounting envelope.

In the past, audit committees were too willing to go along with such mid-stream auditor switches, he indicated.

While it's true that sometimes there is a disagreement over technical issues, "there are plenty of times (companies) wanted to change auditors because they weren't being given the answer they wanted," he said.

The sweeping 2002 Sarbanes-Oxley Act gave birth to the PCAOB , which is just beginning inspections of Big Four accounting firms.

The Sarbanes-Oxley Act also requires audit committees to have direct responsibility for the appointment, compensation and oversight of the independent auditors who must report directly to the audit committee.

Despite regulatory encouragement for audit committees to have at least one financial expert, it doesn't take a financial expert to ask auditors the kind of questions that could catch some of the earnings management problems that corporate America has seen in recent years.

For example, he said if various divisions at a company aren't performing well, but top corporate management "did some top-level adjustments" that make earnings look rosy, that is something that should grab an audit panel's attention. "All you have to do is ask the auditors have they looked into those transactions," he said.

If the audit panel finds problems, they must "think and act independently" and resist any attempt by management to take a "less painful" alternative that doesn't deal head on with the problem, he said.

Many of the glaring frauds of the past couple of years have started as attempts at earnings management, Niemeier said.

"Be very, very careful when you hear that," he said. "It may not be painful to anyone but you. The most important thing is to actually deal with it and confront it. Don't let it be buried."

The Charlotte Business Journal reports that Duke Energy Corp. is offering voluntary separation in an effort to increase cash, reduce debt and fund its dividend.

If enough workers don't volunteer to leave, layoffs are possible. Randy Wheeless, a Duke spokesman, could not provide the number of jobs the company wants to shed.

Up a Creek--with Lots of Cash. BW Online 2001. This is a somewhat dated article but shows how companies use accounts to change the financial statements without affecting the cash acconts.

Accounting rules go a long way toward explaining why corporate cash positions can improve when profits fall. For one thing, companies have massively overinvested in capital equipment. Now they're writing off unneeded gear and depreciating what's left as it becomes worn out and obsolete. It's appropriate that depreciation and writedowns are squelching profits, because those assets--and therefore the companies--truly aren't as valuable as they were thought to be. But the enormous accounting adjustments don't drain cash, which is what counts for paying the bills.

SunTrust gets burned for $60 million - Atlanta Business Chronicle. This is a good article that describes a situation similar to Maxidrive Corp. and Exeter. SunTrust is in a lawsuit with DVI Inc. over accounting errors.

On June 9, just days after SunTrust bought the $60 million worth of notes, DVI disclosed publicly that Deloitte & Touche had resigned as DVI's auditor, effective June 2, over a dispute involving a review of the company's financial statements.

BusinessWeek reports that McDonald's has a new CEO, new products and a new strategy that seems to turning around the fortunes of a slumping company.

New CEO Jim Cantalupo has made the long overdue change of slowing annual store growth to about 1% to 2%, vs. the 5% or more of previous years. And McDonald's has reported several straight months of same-store sales gains in the U.S., indicating better productivity per outlet. In August, after more than a year of negative monthly performance, its Europe stores also saw a modest same-store gain of 1%.

I found this article interesting since we just discussed McDonald's problems during the early 90's. They seem to be correcting the problems along with being lucky on a tie in promotion with Finding Nemo.

SCO's Shell Game - Computerworld:

This is an opinion article from Frank Hayes at ComputerWorld.com. It is interesting analysis of how a company can use stock as currency and why investors really need to look at the SEC filings to get a better idea of what is really happening.

So, what do you do when you have no real business but your stock price keeps going up? We all learned that lesson during the dot-com bubble: You use that stock as currency. . . .

It turns out SCO didn't simply use stock to buy another company. SCO printed up about $3 million in new stock. Then, in the complicated deal in which SCO acquired Vultus, the stock was cashed out, with most of the proceeds going to Canopy.

Some went to Canopy as a Vultus shareholder; the rest went to Canopy as compensation for taking on Vultus' debt, some of which was presumably owed to Canopy.

Got all that? If it sounds like a shell game, well, that's the way Canopy likes to move its companies around. But in effect, Canopy used SCO's stock price, boosted by SCO's Linux threats, to rake in a couple of million dollars in cash behind the scenes.

'Poison pill' overshadows PeopleSoft results:

A good article discussing revenue recognition and GAAP.
Background: Peoplesoft took a "poison pill" in an attempt to prevent an uninvited takeover by Oracle.

The "customer protection programme" clause stated that should PeopleSoft be acquired, and the acquiring company discontinues its products, customers would be awarded compensation of between two and five times the value of the initial contract.

But experts have expressed doubt whether PeopleSoft should be allowed to recognise all of the revenue under US GAAP law, and not take into account the potential liability of the clause. "(PeopleSoft) recognised all the revenue, but it is questionable whether that is correct by US GAAP standards," said Brian Skiba, global analyst with Deutsche Bank Securities.

Valuation of Private vs. Public Firms:


This is a well-reasoned article from Entrepreneur.com. It reinforces some of the classroom discussions about the differences between private and public companies. I really liked the second point "Profit Measurement" and the discussion about the goal of reporting for a public vs. private company. It is apropos to the Financial Accounting course.

While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.

AOL reaches deal to sell basketball and hockey teams - Sep. 16, 2003
The real question is though, how is this going to affect AOL Time Warner's Income Statement?

The world's largest media company said late Monday it had agreed to sell the National Basketball Association's Atlanta Hawks, the National Hockey League's Atlanta Thrashers, and operating rights to Philips Arena, where the two teams play, to an investment group known as Atlanta Spirit LLC.

CFO.com article about the costs to corporations of accounting and recordkeeping required to comply with the Sarbanes-Oxley Act, passed by Congress in 2002 as an attempt to curb corrupt accounting practices such as those of Enron, Worldcom, and Tyco. This was an interesting article, because we talked about the cost versus benefits of gathering accounting information in class; in this case, there seem to be a lot of corporations arguing that the costs are too high. SWH

Yet by the end of the year, EMC will have spent more than $1 million and thousands of man-hours complying with two of the main statutes in the Sarbanes-Oxley Act of 2002 — Section 404, related to internal controls; and Section 302, mandating CEO and CFO certifications of quarterly financial statements. Teuber won't even speculate on the price tag for full compliance, except to say "it's not insignificant." Moreover, he doesn't expect that burden to lift, thanks to ongoing testing and disclosure requirements. "Even maintenance mode will require a sizable effort," he says.

Like Teuber, CFOs across America say they are spending more time and money trying to shoehorn existing practices into legally acceptable formats. Forty-eight percent of companies will spend at least $500,000 on Sarbanes-Oxley compliance, according to finance executives who participated in a recent CFO magazine survey. Unlike Teuber, however — who sees the increased internal-controls documentation as "a chance to get best-of-breed solutions in our sales offices across 50-plus countries" — other CFOs (nearly 40 percent) see the increased burden as having "very little" or "no effect" on their current processes. Moreover, only 30 percent believe the benefits outweigh the costs.

Former Enron Treasurer Pleads Guilty

Fired Enron Corp. Treasurer Ben Glisan on Wednesday became the first Enron executive sentenced to prison after pleading guilty to criminal conspiracy.

Glisan's guilty plea may be bad news for his former boss, former Enron Chief Financial Officer Andrew Fastow, who is named in the same 109-count indictment and is accused of being the architect of many of the misdeeds that brought about Enron's collapse.

Glisan pleaded guilty to a single count of criminal conspiracy and was immediately sentenced to five years in federal prison. He also forfeited $938,000 in profits from an illegal transaction involving one of Enron's off-balance-sheet partnerships.

Sorry there's no link to the article here (WSJ would make you pay to get it). The rest of the article just discusses major holdings in the Evergreen Eq. Inc. fund. This article gives us an example of an external use of financial statements.

Wall Street Journal - September 9, 2003

Sujatha Avutu thinks a turnaround is at hand, but she is hedging that bet by investing in companies with strong balance sheets. "I do believe we're at the cusp of a corporate profit recovery and an economic recovery," says Ms. Avutu, who manages the $1.1 billion Evergreen Equity Income Fund. If the rebound were to take longer than she expects, however, she thinks balance-sheet strength and cash flow give companies the "strength to withstand a soft patch.

Yahoo Finance


The following is an article about Hillenbrand Industries buying Advanced Respiratory, Inc for $83 million. The acquisition will be funded out of Hillenbrand's cash on hand and is expected to have a modestly accretive impact to Hillenbrand's earnings in fiscal year 2004 and in the years beyond.

INDUSTRYWEEK DAILY PAGE
This is a good article on how the divesting of an asset can have negative effects on sales.

"Lagardere's overall sales declined year-on-year, slipping to 5.802 billion euros in the first half versus 6.475 billion posted in first six months of 2002, largely due to the spinoff of its Matra Automobile business."

Corp Law Blog: Painful Lessons: Recommending Your Cleaning Lady on EDGAR:

One of the homework questions had us look up the Papa Johns EDGAR filing. I think it is important that the class realize that Edgar filings cannot be retracted. Once they are in EDGAR, they stay in EDGAR. I found this painful lesson at the Corporate Law Blog, and thought the class might find it interesting.
-JLS

Corporate lawyers have a love/hate relationship with the SEC's Electronic Data Gathering, Analysis, and Retrieval system. We love being able to retrieve other people's SEC filings and material contracts on the internet at the press of a button, but we hate the idea that other people can retrieve our clients' documents at the press of a button. We especially hate EDGAR when we make mistakes. Mistake filers quickly learn that EDGAR is an unforgiving system -- once filed on EDGAR, a mistaken document stays there forever for all to see.

A Business Week article reports how federal prosecutors are making progress towards indictments in the WorldCom, Enron & HealthSouth scandals despite what the general public thinks.

RevenueRecognition.com - Recognizing the Unrecognizable Article in RevenueRecognition.com stresses the importance of due diligence and reveals six key tests an acquiror should consider regarding revenue recognition practices before making an acquisition.

"Revenue recognition has perennially been one of the hottest of the SEC’s buttons, but perhaps never more so than now. During the past year the Commission has mounted high-profile investigations of such brand name companies as Xerox, Lucent and K-Mart, as well as several energy and telecommunication companies. SEC staff members have also recently said that the Commission will conduct a sweeping investigation into revenue recognition practices across a range of industries.

Such intense focus on revenue recognition raises at least two concerns for dealmakers. First, this may well be a case of smoke indicating real fire. Studies of detected accounting irregularities have found that more than half of the fraudulent financial reporting cases involves overstated revenue. If a target’s revenues are important in pricing a potential acquisition, the reliability of reported revenue is obviously critical.

Second, given the level of attention that the SEC is paying to this issue, almost any publicly held target’s past revenue recognition practices could be the subject of a post-acquisition SEC investigation. If the parties structure the acquisition as a stock purchase or a merger, the problem will become the acquiror’s."

- posted by Gordon Kwok

New Accounting Issues Derail a Filing. Article from CFO.com about Symbol Technologies delaying the release of their annual report indefinitely due to accounting problems uncovered by external auditors. Problems relate to irregularities in the exercise of stock options by the company's executives, and to the way in which revenues from two types of transactions were being made by the company.

More trouble for Symbol Technologies Inc., the bar-code giant, which is already restating five years of financials and is being investigated by at least two government agencies, Friday said it will delay releasing its 2002 annual report due to 'two significant accounting issues.'

Symbol had planned to file its annual report by the end of August, but the company now maintains that it is impossible to commit to a timetable. The first new significant issue is related to the exercising of stock option; the second is related to the revenue recognition for two types of transactions occurring during the restatement period.

'Due to the unique nature of the stock option exercise issue, we are working together with the company's external auditors, as well as the staff of the SEC, to determine the appropriate accounting treatment for the company's stock option plans,' said chief financial officer Mark Greenquist in a statement. 'In addition, we are working with our external auditors to resolve the revenue recognition timing matters.'

Business Week discusses executive pay issues. In particular, it reports about CEO's (e.g., Oracle's CEO) who delivered the least to shareholders while scoring big on exercising stock options in a declining market. It also presented examples of alternative solutions to determining performance and pay based on pretax income.

RJR refuses SEC request for documents. In class we talked about the various uses of financial information by people external to the corporation. Management has to do a balancing act between providing information useful for accurately pricing the stock while avoiding providing information that could be used against the company by its competitors or others.

"Rather than being a case of us refusing to turn over documents, this is a case in which the SEC has refused to provide us with agreements that preserve confidential and highly sensitive information," Moskowitz said in a telephone interview Thursday.

"What the SEC is asking us to do is to break out the specific dollar figure amounts of the money we spend on smoking and health litigation," he said. Those amounts are currently combined with other expenses such as marketing and sales, he said.

The SEC wants the specific amount that RJR pays for litigation, he said.

"This could be used to try to persuade a a jury to award larger damages," Moskowitz said. "We do not have a problem providing it to the SEC if they agree to honor the confidentiality of that information."

Monstermoving.com has a salary comparison calculator. Plug in your Cincinnati salary and find out what you'd have to earn in another city to have the same spending power. I didn't realize Cincinnati is such an expensive place to live.

Here are some recent financial reports highlighting two interesting items- CDSOA & a bankruptcy payment LancasterColony

CFO.com has an interesting article on the debate over expensing stock options. In the writer's opinion...

"Congress is once again trying to derail the Financial Accounting Standards Board's efforts to require companies to expense stock options".

The article provides a good overview of the issue at hand.