Investopedia.com outlines the types of off-balance-sheet entities that are and are not compliant with GAAP regulations. The article also warns that there may be severe repercussions if investors lose faith in financial statements.

Companies have used off-balance-sheet entities responsibly and irresponsibly for some time. These separate legal entities were permissible under GAAP and tax laws so that companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet subsidiary. This was also helpful to investors who did not want to invest in these other ventures. Since "Enron-gate," however, companies that have any kind of off-balance-sheet items, whether justifiably or not, are being branded with a scarlet letter "E." This article will define some typical off-balance-sheet items and discuss whether they are "good" or "bad.

CFO.com announced that the SEC was expected to release guidelines for revenue recognition as a result of the proliferation of frauds that involved premature revenue recognition.

"Premature revenue recognition appears to be the recipe of choice for cooking the books." So quipped Walter Schuetze, chief accountant in the Securities and Exchange Commission's Enforcement Division, in a recent speech. Revenue-recognition issues accounted for about 50 percent of fraud cases in a study by the Committee of Sponsoring Organizations of the Treadway Commission of 200 SEC probes. It's no wonder, then, that following its bulletin on materiality (see "Playtime Is Over," September), the SEC is expected to release pointed guidance on properly recognizing revenue.

CFO.com discusses the attempts made by some small companies to spark interest with ridiculous stock splits.

Investors have been reeling lately over the volume of opportunistic stock splits--and we aren't talking the usual twofers. Many small companies have been trying to influence market interest with splits that range anywhere from a modest 4-for-1 (Rambus Inc.) to a middling 15-for-1 (stereoscape.com) to a dizzying 100-for-1 (Biofiltration Systems Inc.). But can the companies involved expect any measurable benefits from splits?

CFO.com reports that many traditional large corporations have started issuing convertible bonds.

The convertible bond market is off to another record year. Although convertibles usually are associated with technology and communication companies, there seems to be plenty of demand for bricks-and-mortar businesses. Indeed, any company with a growth story seems to be eligible. Last year, 103 convertibles were issued, with a record total value of $28.8 billion. In the first two months of this year, 39 convertibles were issued, with a value of $13.4 billion.

Culpepper e-bulletin says that the number of public technology companies paying dividends has nearly doubled in the past year.

No doubt, the current dividend trend will continue in 2004. More tech companies will pay dividends, and their dividends will grow. This move to offer greater dividends may be enhanced by the desire of some founders for greater personal liquidity and diversification while minimizing their sale of stock. Of course, only modest diversification can occur via dividends as long as stock prices remain high and payouts low. Nonetheless, dividend payments will please many rank-and-file shareholders. Not only will they receive a cash return, they will not be troubled by as much insider selling.

CNN Money reports that companies are scrambling to issue corporate bonds in expectation of higher interst rates. Intersting to note that all companies are taking on debt, but that it's very uncommon to do so so late in in the year. What are they doing with it all?

Because so much of the corporate issuance is going toward rolling over debt and shoring up balance sheets, little of the money raised will be earmarked for new projects, points out Miller Tabak bond strategist Tony Crescenzi. But that doesn't mean that the issuance doesn't mean companies don't see higher rates on the horizon. "It's a sign that the treasurers of these companies see this as a great opportunity to refinance," he said. "They recognize that rates may not get better."

CFO.com published this article a few days back about cash flows and earnings. I thought it was timely, given Chapter 13. It is basically saying that although the trends in cash-flows are up in many companies, the actual earnings may not be.

This MSNBC article reports the announcement of Merck & Co. about earnings to rise between 5 percent and 9 percent in 2004. Is this good sign or bad for future business?

"That’s slightly below the average 2004 earnings forecast of $3.18 a share from analysts polled by Reuters Research, a unit of Reuters Group Plc.

However, Merck said its expected 2004 profit range includes the costs of additional cost-cutting, on top of 4,400 jobs already slashed.

The company also reiterated a 2003 forecast from October, when it said its 2003 operating profit would fall 6 to 8 percent to between $2.90 and $2.95 per share."

As we move to the end it is time to blog some opinion. From McKinsey Quarterly Numbers investor’s can TRUST.

"Executives worry too much about accounting strategies that aim to smooth the performance of companies over time and reduce everything to a simple, bottom-line number. To show what goes into it, companies and their investors would be better served by a greater degree of disclosure. This in turn would help rebuild the trust between them."

This CNN article about Walmart and how they recognize revenue when it comes to gift cards is a perfect example of what we learned in class this semester.

"Wal-Mart Stores Inc. gave a chillier outlook for December on Monday as more people delayed holiday shopping or opted for gift cards that do not immediately count toward retailers' revenues."

The CNN money article reports that SEC launched a formal investigation into H&R Block Inc.'s (HRB) disclosures about its refund anticipation loan litigation.This case is "contingent liability" we learnd in class, but ongoing litigation. What timing HRB records the liability on their finacial statement?

Not just companies' annoucements have effects on stock prices, world events can as well. The capture of Saddam is going to have a positive affect on stocks but to what degree remains to be seen.

"Initially, there's little doubt that it's a boost for the market," said Milton Ezrati, senior economic strategist at fund manager Lord Abbett & Co. "A major uncertainty has been removed, and it also gives hope that this situation, on a fundamental basis, will improve.

Deloitte & Touche agreed to pay $32 million to settle lawsuits over its audits for the now-defunct Manhattan Investment Fund, a hedge fund that cost its investors millions when it collapsed four years ago.

The Securities and Exchange Commission won a $20 million judgment against Berger, who allegedly created fake account statements to hide losses and overstate the fund’s value....investors led by Cromer Finance Ltd. alleged that Deloitte "disregarded numerous red flags that should have alerted it to the fraud, and in consequence, Deloitte's 'audits' amounted to no audits at all."

This AccountingWeb.com article reports that Freddie Mac, a federally chartered mortgage finance company, is fined $125 million for understatement of earnings.

"The Wednesday report cited "a pattern of inappropriate conduct and improper management of earnings" at the company. It also said that Freddie Mac "disregarded accounting rules, internal controls, disclosure standards, and ultimately, the public trust in pursuit of steady earnings growth."

-GK

This CFO.com article advises companies to keep safe and secure from accounting scandals and other material missteps, comparing the problems to wildfires. He warns the problems hiding in anywhere. The closing phrase borrowing Mark Kontos' words is very impressive. It is "True risk prevention really comes back to the culture of the organization."

This CFO.com article discusses the vagueness of Sarbox penalties when corporate executives sign false financial reports. HealthSouth CEO Richard Scrushy is reportedly the first executive to face charges under Sarbox.

To follow up with from my previous post about Goodyear, now it's reported that Goodyear has found even more accounting errors. Most of the blame, according to this article, is put on the Accounting software that they were using. This brings up a question --- do companies hold the software designers accountable for such errors (i.e. sue them) or is the "it was the software's fault" a common excuse that never gets followed up on?

CNN reports that in the month of October inventories increased more than expected, but inventories did not increase at the same level as sales. This has caused the stock-to-sales ratio to be at record low.

Inventories at U.S. businesses climbed more than expected in October but failed to keep pace with sales, a government report showed Thursday, suggesting a need to restock shelves is helping fuel a rise in production.

Inventories at the nation's manufacturers, retailers and wholesalers rose 0.4 percent in October to a seasonally adjusted $1.18 trillion, the Commerce Department said. Economists polled by Reuters had expected only a 0.2 percent gain.

The department said business sales rose 0.7 percent, outstripping the inventory increase and pushing the stock-to-sales ratio, a measure of how long it would take to deplete stocks at the current sales pace, down to a record low 1.35 months.

Goodyear decided to postpone the selling of debt and/or equity to raise some much needed cash. As we learned in class, companies can raise money either thru debt or equity and in this case, Goodyear is considering both options.

Goodyear Tire & Rubber Co. said Wednesday it had discovered more accounting problems, forcing it to postpone a planned debt sale until next year and possibly unleashing additional labor problems for the top North American tire maker.

BusinessWeek writes about retailers' strategy (timing of sales, discounts, and volume of goods) in managing the movement of their inventory over this holiday season (in comparison to the last several years of sales trends). In class, we have calculated and talked about the importance of inventory turnover as a measure of both liquidity and operating efficiency.

After putting too much merchandise on the shelves for the past three years and being forced to discount heavily, purveyors of everything from women's leather coats to high-end televisions are being conservative this year. Many have cut inventories sharply, hoping to keep prices firm and profits decent -- even if that means losing revenues when popular items sell out. Says Michael Keefe, CEO of Hilco Merchant Resources, an inventory-management company: "Retailers want to create a sense of urgency so shoppers will buy early and not try and wait them out."

ajc.com reports that Time Warner will complete the sale of Warner Music and then look towards investing in high-growth businesses.

"With its healthier balance sheet, Time Warner will look to invest in high- growth businesses both inside and outside the company, said Pace. If it is unsuccessful in finding those opportunities, the company will consider a share buyback. "That doesn't mean we're satisfied with the stock price," he added. "We're not."

Pace went on to say he is confident Time Warner will meet all of its objectives for 2003. "I feel very good about the performance this year."

Kroger Profits Fall (and should have fallen more). Kroger reported a decrease in profits but an increase in sales. However, this was due largely to the addition of new stores. When new stores were removed from earnings, sales fell 0.6 percent. While not blatantly deceiving, they are being somewhat misleading by not clearly stating this in their press release.

For the fiscal third quarter, ended Nov. 8, Kroger said earnings fell to $110.2 million, or 15 cents per share, from $254.6 million, or 33 cents per share, a year earlier.

Kroger, based in Cincinnati, said quarterly sales were $12.1 billion, up 3.8 percent from the prior year.

However, identical food store sales -- excluding fuel sales -- fell 0.6 percent. Identical store sales are a key measure of supermarket retailing performance as they exclude new or replacement stores.

In the December 8, 2003 issue of Forbes [link no longer working], Daniel Kruger discusses how investors can now buy bonds directly and avoid funds. Recently added direct-access programs by Incapital, Merrill Lynch, and LaSalle Broker Dealer now allow for investors to access 28 companies that want their debt in the hands of individual investors. The significance of this is that the mark up / commissions for bonds typically can eat up 0.25% to 3% of the principal. By buying direct, the yield is less than what institutions see in the o-t-c market but have significantly reduced fees. The cost of transaction is reduced to an average of $10 per $1000 bond, allowing for easy bond portfolio diversification and transaction fees similar to stocks.

Dollar may face renewed pressure. This article claims that the value of the dollar falling against that of the Euro and Yen might actually be a good thing.

THE RECENT DECLINE in the U.S. currency, particularly against the euro and yen, has been long awaited by many economists, who say it could help to rebalance the global economy and reduce the large U.S. current account deficit. And though the slide has been quite rapid, it has also been relatively smooth, raising hopes that the transition to a lower dollar can be managed without disruption and volatility.

Accounting web Treasury and IRS Shut Down Abusive Tax Avoidance Transaction.

The Treasury Department and the Internal Revenue Service has issued guidance to bar transactions in which taxpayers dispose of a pair of offsetting options, claiming a loss on one of the options but contending that they never have to recognize the corresponding gain on the other. These transactions are now “listed transactions.” Taxpayers who have entered into these transactions must disclose them to the IRS, and advisors promoting their use will be required to maintain lists of participating taxpayers.

I finished this class on Monday, but some intersting events have occured here at GE, so I decided to post it. GE is reorganizing its businesses in an attempt to better align itself with the marketplace. From an accounting standpoint, one interesting item is that GE wants to be seen as a technology, services and finance company. One assumes that GE may expect a higher valuation on its stock price if seen strictly in these terms. Another item of interest is that GE expects to jumpstart earnings with this change (after a one-time restructuring charge, perhaps).

GE to reorganize divisions. Company pushes to return to 10 percent annual profit growth
IN AN E-MAIL SENT to GE employees, Immelt said he wants to streamline the corporation’s divisional headquarters while emphasizing GE’s future as a technology, services and finance company. Immelt’s plan combines businesses that serve common customers and industries.

The shake-up comes as Immelt pushes for GE’s return to 10 percent or better annual earnings growth, a benchmark that has eluded him since taking over from legendary Chairman Jack Welch in 2001. GE doesn’t expect to hit that target until 2005. It expects only modest profit growth next year.

GE said its reorganization will create new divisions that include Energy, Transportation, Infrastructure, Health Care, NBC-Universal and Advanced Materials.

Cincinnati Business Courier reports that LCA-Vision, a provider of laser vision corrections services, prices stock offering at $16.50 a share.

The company will offer 2.4 million shares, and its CEO Stephen Joffe will offer 600,000 shares. LCA-Vision said it will use net proceeds from its portion of the sale to open more facilities, to market its brand name, to fund potential transactions and to provide working capital for general corporate purposes.

IBM's website has published a simplified introduction to financials. The page discussing the Statement of Cash Flows is greatly simplified. From this page you can get a 3,000 foot view of other financial statements and additional help in interpeting them.

Cash is a company's lifeblood. Cash includes currency, checks on hand, and deposits in banks. Cash equivalents are short-term, temporary investments — such as treasury bills, certificates of deposit, or commercial paper — that can be quickly and easily converted to cash.

The Cincinnati Enquirer reported in August that Ohio Attorney General Jim Petro sued mortgage buyer Freddie Mac to recover more than $25 million lost by two state retirement systems due to purposely underreporting profits.

Freddie Mac was so intent on maintaining its public image that its officers and board were willing to ignore the rules of proper accounting at the expense of investors," Petro said. "This shoddy accounting and lack of corporate ethics is shameful.

This is not really an accounting topic, but a blog info tidbit:

InstaPundit's take on a recent dissent from a 9th Circuit Court case.
Libel immunity for bloggers regarding comments by others hasn't been reduced, but several bloggers get mentioned. Win/win!

Here is the link from Hoard Bashman, author of the Blog "How Appealing."

And here is a link to the opinion they mention.

Jeff

We've talked in class a lot now about the differences between stocks and bonds and the advantages and disadvantages of investing in each. In Sivy's Mailbag, a Q&A column by Michael Sivy, CNN/Money contributing columnist, he gives his two cents on safest, most profitable way to combine investing in both. Some examples of topics covered are as follows:

"Q: Why do you advise owning stocks rather than mutual funds?
A: Funds are ideal for investors who are just starting out, even now, when the fund industry is under government scrutiny. ...

Q: Is there any reason to buy bonds now?
A: Income investments should still play a part in your total portfolio, but Treasury bonds are less attractive than they've been in a long time. The superior returns that most bonds have earned ...

Q: How beneficial is it when companies buy back their own stock?
A: Companies that regularly buy back their own shares can outpace comparable stocks by as much as three or four percentage points a year, on average..."

Who's to blame for the Enron Fiasco? Just about everyone according to this article from Accountingweb.com.

Enron Corp.’s former Chief Executive Ken Lay, its lawyers and accountants should be held liable for millions of dollars in claims against the fallen energy giant, according to a bankruptcy court examiner’s report filed last week.

Lay could be liable for $94 million for taking a loan from the company that he paid back illegally with Enron shares, according to Reuters’ account of the report. Examiner Neal Batson also said that Jeff Skilling, Enron's former chief operating officer, could be liable for a $2 million loan he paid off with Enron stock.

SunSpot.net reports companies will face more pension scrutiny with the pending accounting rule which would require disclosure of investment strategies.

All U.S. companies with traditional retirement plans would have to start disclosing the investment strategies they use in the plans under a pending rule, accounting rule-makers said this week. Under the new rule, which is expected this year, companies will have to make public the proportion of stocks, bonds, real estate, private equity and other investments they hold in their pensions. Under the adopted method, a company would have to say how much it expects to pay during each of the next five years and also report total expected payments for the five years after that initial period.

Mind the Gap in CFO Magazine is very timely article. The article states reasons why the recent upturn in corporate profits is unsustainable. A study of operating cash flows of 87 non-financial companies suggests profits are not sustainable.

The study compared cash flow trends with earnings for large blue-chip companies. A gap between cash flow from operations and operating income existed for companies in the study. The difference between operating cash flow and income last year for the median company in the group was almost 12 percent greater than the average for the three years that ended in 2002.

The concern is that the excessive cash margin of 12% reflects a heavy dependence on improvements in working capital and other types of improvements that will boost cash flow. The article states that “Unless more sustainable growth has materialized in 2003, which at this point is impossible to determine, the study suggests that operating cash flow will soon decline. So, ultimately, will earnings.”

Divergence of the Twain from CFO magazine discusses why FASB (Financial Accouting Standards Board) and IASB (International Accounting Standards Board) are at odds. FASB and IASB do not agree on the best way to divide tax benefits between the Income statement and the Stock Holders equity section on the balance sheet. FASB believes their approach would be sufficiently better, but also believes both methods will yield the same result. FASB is unwilling to change its mind as they believe they are the most correct. IASB is locked into their process and also have stated if FASB is unwilling to compromise by way of a modified approach, they will not change to the FASB process.

The IASB approach estimates tax benefits based on the stock price at the end of each reporting period. Using the proposed rule, if the tax deduction is less than or equal to the compensation expense, the associated tax benefits are recognized using the income statement. If the actual or estimated tax deduction exceeds the compensation expense, the excess would be recognized as a change in SE using the balance sheet.

In reality, FASB's process will yield the same final answer. FASB proposes that companies first record an estimate of the tax benefits using compensation expense in the income statement with the mindset that those benefits are actually a tax deduction. At a later time, companies would reconcile the estimate with the actual deduction.

To follow up on Rich Muny's posting regarding Google's potential for an IPO in Fortune, an interesting point is raised by Mr. Vogelstein in regards to SEC requirements of non public corporations. He states:

".... Barring any last minute exception, by April 30 the company will be required to start publishing its financials - an SEC rule for firms with as many shareholders or option holders as Google has."

It would appear that Google, having to reveal its finances to the public (and competitors), will not only go public, but attempt to raise capital that will increase Google executives' personal wealth. This suggests that Google employees may have been heavily compensated for services with options - common to the tech industry.

This is an interesting letter from the 2nd Disney Board member to resign this week.

Letter From Stanley P. Gold to the Board of Directors of the Walt Disney Company
"This Board has become an enabler to entrenched management and, in so doing, is not effectively discharging its duties to the shareholders."
It should be interesting to watch Disney stock and see how EMH plays out with this news.

Jeff

This is a good article that reiterates the comments about the efficient market hypothesis. It defines and elaborates on weak form, semi-strong, and, and strong form. Lastly, it talks about different anamolies that contradict the EMH principle.

This article talks about the the conservatism of German accounting. Then, argues that it may not really be as conservative as one would think because smoothing is so commonly practiced. Lastly, the articles talks about the possible effects of smoothing on the market.

Driven by accounting scandals, there has been a recent boom in the technology used to uncover accounting fraud. Benford's Law, discovered by a GE physicist in the 1920's, is being used in forensic accounting software packages to check to see if numbers have been fabricated. Benford's Law states that "in just about any given set of numerical data, numbers occur as the first or second digit at a predictable rate." When numbers are fabricated, people generally do not follow a statistical pattern.

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.

This article talks about DuPont's efforts to increase revenues by 6 percent by cutting $900M in expenses. One of the major reasons for this is due to high prices of raw materials.

This article discusses how Sipex, a semiconductor manufacturer, is taking a $1.2M non-cash reduction in net sales by changing the accounting treatment of a previously announced convertible promissory note.

Sipex Corporation (Nasdaq: SIPX) today reported that, following consultation with its independent auditors, it will modify the accounting treatment of the previously announced convertible promissory note issued in June 2003 to an affiliate of Future Electronics, Inc., the Company's largest distributor. The effect of the revised accounting treatment is a non cash reduction of $1.2 million to GAAP net sales, based on the fair value of the conversion rights attributed to the proportion of the annual sales target achieved in the third quarter of 2003. Net loss was also increased by the same amount. In addition, following a post close review, the Company reduced net sales by $85,000 and increased net loss by $39,000 ($0.002 per share). The modified accounting treatment has no effect on the Company's operational results or cash flow.

This is an article discussing how Ahold(world's 3rd largest supermarket operator) is trying to pick up the pieces from a huge accounting scandal.

Doug Probasco

This article on MSN Money talks about how investors focus too much on prices and don't really understand the value of an investment. If this is true, how efficient can the market really be?

Boeing CEO out. Condit follows CFO out the door a week after hiring scandal; top job split between two. Boeing Co. Chairman and CEO Phil Condit resigned yesterday, one week after a hiring scandal led to the firing of its chief financial officer.

On Nov. 24, Boeing fired Chief Financial Officer Michael Sears, saying he had discussed the hiring of a senior Air Force procurement official with her while she was still considering Boeing contracts. That executive, Darleen Druyun, was also dismissed from Boeing at that time. U.S. Defense Secretary Donald Rumsfeld subsequently announced a delay in signing a key contract with Boeing for 767 refueling tankers that had already been under fire from some members of Congress.

Rich Muny

Here's a good article on Google's earnings growth and the possibilities of an upcoming IPO......Rich Muny

How to Detect Creative Accounting: Proforma and Nonrecurring Items promotes the use of a nonrecurring expense ratio as a tool for evaluating the risk of owning a stock... S. Mitchell

The FASB and the Capital Markets addresses the importance of neutral financial reporting to the efficient functioning of the market, the role of the FASB, and the importance of preserving FASB's independence. The point is made that more information creates less uncertainty and people pay more money for certainty. Therefore, more information should be good for the market....... S. Mitchell