RE: [CANSLIM] Accounting stuff (off topic, sorta)

From: "Fred Richards" <adrich@gte.net>
Subject: RE: [CANSLIM] Accounting stuff (off topic, sorta)
Date: Sun, 14 Jul 2002 17:06:37 -0500
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As some of you know, I first became a CEO at age 28 after being one of the
youngest partners of a Wall Street firm.  On the wall behind my desk was a
plague given to me by my former mentor, it read,

"You will always be the last to know what is going on within your own
company!"  And he was often correct.

In all of my businesses, I tried to spend 1/3 of my time visiting customers
and/or clients, 1/3 articulating and implementing the corporate vision,
overseeing the organization and the excellent people who worked with me, and
1/3 keeping abreast of competitors as well as the technologies which were
developing in them.

There are so many problems in preparing a realistic view of a corporation's
financial health that it would take a book to set them down.

Take for example --- the various depreciation and/or depletion policies and
methods available for capital equipment here and in overseas markets versus
the actual useful life of the equipment and/or asset.

In some countries, you just expense the cost of a building and all the
equipment in it the first year it is placed in service.  In others, the cost
of the building must be depreciated over a number of years while the
equipment within is depreciated over a variety of time-frames.  Of course,
all of this depreciation and/or depletion with the exception of expensing it
in the initial year does not take into account the effect of currency
fluctuation either through inflation and/or world market currency
fluctuations.  Since the true goal of depreciation is to allow you to
amortize the cost over its useful life and supposedly to have sufficient
funds to replace the equipment at the end of that useful life, the failure
to take currency valuation into account is nothing more than government
confiscation of shareholder equity.

Many years ago, two of my companies which were not owned in a
parent-subsidiary relationship contracted over a six month span for two
complete assembly lines for our products from a Swiss manufacturer and
bought currency hedges to protect our capital investment prior to delivery.

One line went to the Far East and the other to the US.  Although each
assembly line originally cost the same, the so-called profit after adjusting
each assembly line for wage differentials amounted to over 18% of the total
profit because of depreciation differences in the two countries during the
first year.

I am absolutely amazed that the CEO's, CFA's and the entire CPA profession
is not up in arms over the new SEC regulations on statement sign-off.  There
are so many ways to account for GAAP income and expenses and still be legal
that unless you have the chart of accounts and the accounting manual for the
corporation, you may never know what is going on.

I recall a situation in one of my companies where the day after the clean
audit was issued by a Big Four accounting firm, I went into the office and
opened that Saturday's mail.  In one of the bank impressed statements, I
found deposits and withdrawals for many thousands of dollars.  The account
was supposedly only for incidental expenses and the balance was to be under
$5,000 at all times.  That statement showed over $150,000 flowing through
it.

The company sustained a fraud loss of $450,000 as the CFO was double paying
the social security taxes and taking the refunds and depositing them to the
impressed cash account and writing checks to himself.  When we questioned
the auditors as to why the impressed cash account had not been audited, they
said "it was not a big deal and too small to worry about." Right!

You can't make honest people honest with regulations.  Nor can you make
dishonest people, honest with them. That is the big fallacy with
regulations.  What you will do is lower the willingness of people to expose
themselves to risk over which they have little or no control.

But you will saddle the company with increased expense to comply with all
the new regulations and with bureaucrats who will second-guess your
decisions if things don't turn out.  And as that mentor of mine said, you
will probably only make 50% of your decisions correctly.  The key to success
is knowing how to cut your losses.

I know that this is off-topic!  But I had to vent!



- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Tom Worley
Sent: Sunday, July 14, 2002 4:00 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)


I agree, Fred, that this by itself only serves to keep the honest executives
honest, while still exposing them to some future complaint or lawsuit or
criminal prosecution because an accounting interpretation changes, or some
underling was doing something illegal that the CEO or CFO couldn't detect
(they can't be everywhere). Look at Barings, huge bank brought down by the
illegal trading activity in Asia by one rogue trader. Would have been hard
for the parent bank to know what was going on when the Asian subsidiary
didn't.

Fred, how about some specific suggestions of what you think should be
changed or mandated, either as law or by accounting standards?

- ----- Original Message -----
From: "Fred Richards" <adrich@gte.net>
To: <canslim@lists.xmission.com>
Sent: Sunday, July 14, 2002 4:39 PM
Subject: RE: [CANSLIM] Accounting stuff (off topic, sorta)




This is a perfect example of a "feel-good" regulations that will prevent a
lot of good and qualified people for refusing to take on the responsibility
of being CEO's and/or CFO's.

In fact, I already know of three CEO's who are top-notch and rather young
who have been advised by their financial advisors to resign and retire
before this terrible regulation goes into effect.

At this point, at least two of them are submitting their letters of
resignation.

Over the last 20 years, a large number of my acquaintances and myself have
refused to accept offers to be on public boards.  Even with the liability
insurance, it isn't worth the hassle.

In the end, these types of "feel-good" will have the exact opposite effect.
Qualified people will find it increasingly necessary to refrain from the
potential financial and criminal exposure.

As a result, you are left with candidates who are cronies,
politically-correct figure-heads who haven't the faintest idea of what the
business is about, and people who could not read a financial statement,
interpret the accounting notes, and make a decision if there life depended
upon it.



- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of J. Lobatto
Sent: Saturday, July 13, 2002 8:30 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)


Have to admit I find this provision of the law fairly bizarre. How can a CEO
or CFO of a huge corporation personally verify the accuracy of a financial
report. Is he or she supposed to hire his own auditors to audit the report.
If I were facing a possible criminal charge for false certification, I'd
want to........

Jon
- ----- Original Message -----
From: "Tom Worley" <stkguru@bellsouth.net>
To: <canslim@lists.xmission.com>
Sent: Saturday, July 13, 2002 6:56 PM
Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)


> I think you are referring to a new requirement that the CEOs and CFOs
> personally certify the accuracy of their Q3 financial reports. A false
> certification would be subject to criminal prosecution.
>
> ----- Original Message -----
> From: "zillagirl" <zillagirl@email.msn.com>
> To: <canslim@lists.xmission.com>
> Sent: Saturday, July 13, 2002 6:54 PM
> Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)
>
>
> I heard that starting in August the law is different and these people and
> the CEOs will be breaking the new laws?? Didn't listen to all the details
> because I thought Id hear it again by then.  I was wondering if a lot of
> these companies will try to restate to get in under the wire.
> ----- Original Message -----
> From: "Duke Miller" <dukemill@tampabay.rr.com>
> To: <canslim@lists.xmission.com>
> Sent: Saturday, July 13, 2002 1:53 PM
> Subject: RE: [CANSLIM] Accounting stuff (off topic, sorta)
>
>
> > And, if you believe what we've seen lately in the press, the Andersen
> > auditors are going to the company's new accounting firms with the
> > account.  The SAME auditor will be in charge of the audit!
> >
> > -----Original Message-----
> > From: owner-canslim@lists.xmission.com
> > [mailto:owner-canslim@lists.xmission.com] On Behalf Of Winston Little
> > Sent: Saturday, July 13, 2002 2:56 PM
> > To: canslim@lists.xmission.com
> > Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)
> >
> >
> > Let us assume that the second house does a full audit.
> > How much confidence can one have that the second audit is "good"? The
> > rules for treatment of the financials do not appear to be absolute, thus
> > the second audit could just be as full of controversy as the first,
> > perhaps in different areas, as the popular sentiment for criticism
> > changes.
> >
> >
> > ----- Original Message -----
> > From: "Patrick Wahl" <pjwahl@attbi.com>
> > To: <canslim@lists.xmission.com>
> > Sent: Saturday, July 13, 2002 1:12 AM
> > Subject: Re: [CANSLIM] Accounting stuff (off topic, sorta)
> >
> >
> > > Do you blame them for wanting to do a full audit?
> > >
> > > On 12 Jul 2002 at 23:05, Tom Worley wrote:
> > >
> > > > cool way for the Big 4 to increase their revenues and potential
> > > > earnings (BTW, who audits the auditors??). This way they will be
> > > > able to charge
> > for
> > > > two full audits instead of just one, at the expense of the corps
> > > > (shareholders).
> > >
> > >
> > >
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