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

From: Jack Tencza <jtenz@yahoo.com>
Subject: RE: [CANSLIM] Accounting stuff (off topic, sorta)
Date: Sun, 14 Jul 2002 16:50:24 -0700 (PDT)
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Fred, thanks for sharing/venting. Much food for
thought here. 

Jack
- --- Fred Richards <adrich@gte.net> wrote:
> 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.
> 
=== message truncated ===


=====
Jack

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