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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: bonnuss_in_austin who wrote (216797)	1/10/2002 4:35:52 PM
From: gao seng	Respond to of 769667

It's not like no one saw this coming. Especially the previous admin, who could have done something about it. Just another Clinton mess for Bush to clean up. -- Questionable financial reporting casts doubts on stock market credibility. First there was road rage and then air rage. Well, now I suggest that it's about time for some long overdue investor rage. Like the frustrated drivers and passengers hopelessly snarled at airports, we should show the powers that be that now we are mad and not willing to take it any more. Why now? Because each day, as the dust slowly settles and we are able to get a closer look at the ruins of the technology sector, it becomes obvious that we were jerked around. A lot of the numbers we were being fed last year were downright wrong. That's inexcusable. Specifically, and the reason why I have temporarily lost my cool, is that Merrill Lynch has just issued a report acknowledging that the profits of 28 out of 37 major U.S. high-tech companies were seriously overstated last year. In each case, the corporation reported higher earnings than in the two prior years when on average they were 60% lower. As a result, the profits were misleading, not comparable, and the shares were much more expensive than buyers thought. Even worse, there was no warning of declining profits. One more vital signal that could have saved at least some investors from the train wreck was extinguished. And the tragedy is that the errors were obvious. These were not judgement calls about goodwill or inventories. They were straight-forward calculations concerning stock options. As I said: inexcusable! One of the first things that I learned to do as an analyst was to adjust the financial statements of companies in order to make them comparable. It's not always easy but absolutely crucial because of the latitude managers have when reporting numbers. For instance, Dofasco's earnings are different from Stelco's, even though they produce steel and are based in Ontario. It's year one work for analyst trainees, one of the first steps in financial analysis. So you would think that at the very least those Wall Street gurus would have gone through the exercise and sounded an alarm about the fact that major high-tech companies were reporting on a materially different basis to each other. They should also have noticed that, by ignoring stock options, most of these producers were publishing overstated profits, earnings that were trending in the wrong direction. The simple truth is that most of the companies were not expensing their stock option programs, which are significant and identifiable numbers. I can only presume that the analysts did see the inconsistencies and chose to ignore them because arguably stock options are not an operating cost. This is nonsense. As everybody knows, the high-tech boom was fuelled by stock options. Skilled technicians worked for nothing in order to make a market killing. So failing to report their compensation was like omitting the payroll. At some time these people had to be paid and if that was through equity then the shareholders were going to foot the bill when their holdings were diluted. And in case anybody thinks that it's difficult to adjust properly for these option arrangements, the numbers have been tumbled in the Schieneman/Milunovich Study. Thanks fellows. Better late than never I suppose. The real culprits, however, are the auditors who signed those statements. Confidence in the accounting firms is eroding fast. This stock option mess comes on the heels of Arthur Andersen being fined US$7 million for overstating Waste Management Inc's profits by US$1.43 billion during the period 1992 to 1996. A serious fraud, incidentally, that nobody at Waste Management has been disciplined for. Now you would think that the professional accounting bodies would expel Andersen for the negligence that cost shareholders millions of dollars. Fat chance. Andersen is too big and anyway auditing has become a relatively small and perhaps unimportant item in the scheme of things. Arthur Andersen billed Waste Management US$11.8 million in advisory fees during the period from 1992 to 1996 and only US$7.5 million for the audits. You can see the conflict. Andersen worked for Waste Management and then signed the statements. The truth is there is little money in auditing. Firms use the contract to get a foot in the door so that they can sell their more lucrative services. According to the SEC, studies show that accounting firms earn US$2.69 in consulting fees for every US$1 of audit fees. If this keeps up, auditing is going to be a loss leader. All of this tells me that, as small Canadian investors, we are on our own. The accounting firms and analysts have massive conflicts of interest because they are all falling over each other trying to work for the companies they are supposed to critique. The investment dealers want the underwritings and the auditors are scrambling for management fees. So there is little incentive for any of them to crack down on sharp practices like those high-tech earnings that were foisted on the public. Nobody is going to rock the boat. Take Merrill's decision to bar its analysts from owning stock in the companies they cover. It's a red herring. The real problem is that Merrill and the other dealers act as advisors to companies at the same time that they have an opinion on the shares. In order to come clean, Merrill should relinquish its multi-million dollar underwriting and M & A (merger and acquisition) business. Failing that, the firm could at least publish the fees it has received from a company along with the analyst's recommendation. Is that going to happen? Are you kidding! Like Andersen, the firm will continue doing business as usual and convincing itself that there is no conflict. What can we do about it? Tell your broker that you are not happy about some of the recent revelations. The comment may filter back to management. If you are thinking about buying a stock, get a second opinion; a third is even better. Above all, take all earnings reports with a grain of salt. There is no precision here, quite the contrary. It's absurd that investors should react to companies beating street estimates by a penny or two. Just take a look at whether the published figures make sense. How do they compare to previous quarters? As I have mentioned before, the direction of a company's results is more important than the actual numbers. Above all, be somewhat sceptical about results from New Economy companies over the next year or so. High-tech managers are under enormous pressure to window dress their statements in order to survive. So they are going to bend the rules and, based on recent experience, neither the auditors nor the analysts are going to blow the whistle. From a recent edition of the Internet Wealth Builder, a weekly e-mail newsletter published by Gordon Pape Enterprises Ltd. Membership information can be found elsewhere on this Web site. gordonpape.com