When "information" equals garbage

It is a fundamental tenet of capitalism that an investor should be fully informed of all matters relating to his investment. Over the years, regulatory authorities have been increasing disclosure requirements so that there is as much transparency as possible. But has this gone too far ? And has the overreaching legal recourses, especially in the US, led to the purpose being defeated ? No this is not a boring, dry post. Read on.

Take the case of Manchester United's IPO filing (if you ask what Manchester United is, I'll clobber you). IPO filers are required to disclose the risks associated with their business. Fair enough. But look at Man U's risks disclosed. They have listed 51 risks. Amongst them are such gems as

• There could be a decline in the popularity of football (beggars belief)
•  To service our indebtedness, we require cash, and our ability to generate cash is subject to many factors beyond our control. ( Ha Ha)
• We are dependent upon the performance and popularity of our first team. (Really ?? - this is like a company saying that we are dependent on the popularity of our products)
• If we fail to properly manage our anticipated growth, our business could suffer. (this is supposed to be an earth shattering revelation)
• Our international expansion and operations in foreign markets expose us to risks associated with international sales and operations (brilliant insight which we otherwise did not have).

There are 51 such gems and monuments to inanity. Obviously lawyers have written this piece of garbage, including everything they can possibly think of. I am surprised that they did not add the following, which I will freely offer for inclusion in the filing

•  Wayne Rooney (Man U's star striker) might develop a pimple on his ass that might prevent him from scoring goals
•  An asteroid might hit the earth tomorrow
• All other teams in the league might gang up and refuse to play Man U saying that they are fed up of getting thumped.
• The queen might die and Prince Charles might succeed her (Prince Charles is a known Burnley supporter)
• China may pass a law banning the Chinese from wearing Man U T shirts on the grounds that the Dalai Lama visited Old Trafford for a game.

This disclosure business has gone too much. To cover their asses, lawyers disclose a mountain of irrelevant stuff. Any sane follower is buried under a ton of garbage. Take Annual Reports of companies. They have become so bulky and big, that nobody reads them anymore. They are also written in such complex legalese that they are largely unintelligible to anybody. The only thing that anybody even sees , if they ever open one of them, is the constipated faces of the pompous Board. So much for the riveting reading annual reports make.

The purpose of full disclosure has been completely thwarted. Only three classes of people read these things these days. Lawyers who wrote the gibberish in the first place (I am not entirely convinced that they read it, but we shall give them the benefit of doubt). Lawyers looking for ways to sue. And finally a few unemployed  bloggers like yours truly.

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Sox and smelly feet

Remember the Sarbanes Oxley Act ? The one that was promulgated in the aftermath of Enron. This was supposed to ensure that accounting scandals are greatly minimised. The Act that had every business chief howling that it was draconian , that compliance was putting a huge cost on business, etc etc. Well, it turns out that investors, whom the Act was supposed to protect, actually don't care all that much about accounting scandals.

Take the case of the "success" of many of the Chinese IPOs in the US market. In the fine print , most of them have disclosed accounting deficiencies. But does the market care ?? Not one bit. Take Renren which IPOed yesterday. The stock rose some 50% above the issue price. Never mind that the Chair of the Audit Committee resigned on Tuesday, they changed a key growth figure, they disclosed a "material weakness" that they did not have enough people in their accounts department and a "significant deficiency" that they had no policy on the treasury function and investment of cash.

Material weakness and accounting deficiency are Ramamritham speak. The former means the accounts are definitely wrong. The latter means that it is most probably wrong.

And yet investors seem to care two hoots. These days anything with a China name will sell like crazy. Even if they presented their accounts in Chinese and qualified it by saying that they just made it up to satisfy a legal formality.

Even the famed General Motors IPO showed a material weakness in the accounts. Didn't come in the way of its much touted success.

I am sure that the Public Companies Accounting Oversight Board ( what other name can you expect Ramamritham to dream of), that was supposed to regulate auditors under the Sarbanes Oxley Act has done enough research to prove that disclosures of accounting weaknesses have had a positive correlation to the share price and therefore they should be considered as having done great benevolence to the human race. It is probably true - the research finding that is. But as long as cases like Renren exist, its hard to take Sarbanes Oxley seriously.

Sure Sox, does reveal smelly feet. But if gorgeous blondes find smelly feet sexy, there's not much that can be done about it.

Disclosure : This blogger has made merry with the aforesaid Act; making a fair bit of money for his company from it. His opinions are therefore completely biased.

Material Weakness : This post is utterly without research, written on a whim and totally opinionated.

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I cannot predict the future accurately !

The United States is well known for the excesses of its lawyers. Citizens of other nations, while marveling at the upholding of the law in the US, are left scratching their heads in bewilderment at the famous McDonald’s case or the Washington DC laundry case. Cases like this have resulted in some labeling gems such as “Contents Hot” on a cup of coffee or “Remove the baby before folding the pram”. This post covers such an impact on the glamorous world of accounting.

When lawsuits against companies began mounting in the late eighties and early nineties, companies started to become extremely careful in disclosing any information at all, other than the statutory minimum, for fear of being sued. Best to say nothing ; say your name ( presumably safe) and say nothing more. The powers that be, in the US, realized that disclosure of more information , especially plans and strategies would be good for investors . In order to encourage companies to do so, some protection against being sued had to be given. The Private Securities Litigation Reform Act was thus passed in 1995.

This Act offered protection from being sued for companies making “forward looking statements”. The framers of the Act were oblivious to grammar - statements can neither look forward nor backward, not possessing any eyes, but we shall pass lightly over. If they had left it at that, we would have had some very interesting company announcements on the following lines – this is a forward looking statement ; my name is Ramesh. This is a forward looking statement; I may or may not post on my blog tomorrow. This is a forward looking statement. The blog may or may not be up tomorrow …..

So they very kindly stated that you do not have to preface every statement with a declaration that it is a forward looking statement and instead statements that contain words like “expect,” “anticipate,” “intend,” “plan,” believe,” “seek,” , “will”, etc may be deemed to be forward looking and that the company cannot get sued if such statements ultimately don’t turn out to be right. So if you say we expect to grow our market share and one year later it has fallen, you cannot be sued for having made a false statement.

This has hence resulted in the famous disclaimer that now precedes every company’s accounts, every earnings call, every filing, every anything. Its called by various names – simply disclaimer, or safe harbor statement, or whatever. It says that the company may be making some statements about the future, can’t guarantee that they will come true, and isn’t endowed with godlike powers to predict the future accurately. Of course, not in those words, but to that effect. If you are seriously interested in exactly what is said in wonderful legal language, click here for an example.

This is one of those useless statements nobody reads or pays the slightest attention to. As if anybody needs to be told that you can’t predict the future. But the absence of this statement would be fatal for a company, as some lawyer will then sue the pants off it. So they dutifully make it – page 1 of any filing, slide 1 of any presentation, first words (after Good Morning) of any speech.

What a waste.

Disclaimer – This post may contain certain forward looking statements, blah blah ..

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The Satyam case - PWC partners

The PWC partners, S.Gopalakrishnan and Srinivas Talluri, who signed the Satyam balance sheets over the last few years are in jail for the last three months. Their latest bail petition was rejected yesterday.

Is it right for them to be jailed now ? I am not a legal man and have no pretensions to expertise in law, but from a common sense of what is right and wrong, this does not seem to be right.

The two partners seem to have been collectively charged, along with Raju and the others on criminal conspiracy and other counts, cheating (the famous 420) etc.

The fraud was not committed by them ; it was committed by those at Satyam. They may be guilty of colluding with Raju, but that has to be proven in a court of law. They may have been negligent, in which case they need to be dealt with by the Institute of Chartered Accountants of India. Or they may have just been incompetent in detecting the fraud, which is not an offence under law - if incompetence were an offence, millions of people would have to be in jail !

What is the logic for keeping them in jail before the trial has even started ? That they will tamper with the evidence ? Nonsense. Its already 4 months since the CBI has been investigating and if by now they haven't secured the evidence, they never will. That they will not cooperate with the investigation ? There seems to be no evidence of that - both the firm and the partners have said they will cooperate. That they will flee the country ? That can be easily achieved without locking them up. The ex CFO of Satyam, who is himself in jail, has said that the partners were not in a conspiracy. Raju has said the same thing. So why keep them in jail ?

I am proud to be a citizen of India, where, at least in name, the rule of law holds. Detention before a trial is not something to be summarily and endlessly used. If the partners are held guilty by a court , and if the verdict warrants a punishment in prison, by all means do so. But not until then.

I think this is a case of mobocracy. Everybody is angry at the fraud. So catch hold of anybody in sight (the more "important" they are, the better) and lock them up. Anger is somewhat assuaged. The mob is happy that VIPs are in jail.

That's not the India I am proud of. You are innocent, until proven guilty. Gopalakrishnan and Srinivas have not been proven guilty. They do not deserve to be in jail.

PS - After I made this post, I got an email from Niraj Kapasi who has posted a very good perspective on the affair in his blog at http://productiveexperiences.blogspot.com/

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It ain't the same anymore

Accountants are, by nature, cautious and tradition bound. You wouldn't expect to see accounting in the forefront of change. And yet sweeping changes in accounting have happened in the 20 odd years that I have been acquainted with this profession. Here is a trip down memory lane.

When I first started working as an accountant in the early eighties, computers had still not come into common use. The more common contraption was something called a comptometer (with various clinks and bells), which anybody below the age of 40 would not have heard of. Calculators were there, but you needed a capital budget to buy one with detailed justification of cost benefit. Ledgers were manual , in loose leaf binders. Sounds prehistoric ? Read on.

Everything was manual. There was a role of a ledger keeper, whose only job was to post entries into the ledger, using double sided carbon - the proof sheet being a method to ensure that at the end of each day, at least the total of debits and total of credits matched. The ledger keeper could not go home until the proof sheet tallied.

There was no such thing as monthly or quarterly closing. Closing was only an annual activity. It was a major event - it took some 15 days to close the books of a factory or a branch and another 15 days to consolidate the accounts of all the units inside a country - god knows how long it took to add up globally. All other activity came to a halt in January - no payments, no routine transactions. The ledger keeper was a key man - he would post furiously during this period. The comptist was another key person. This was the expert on the comptometer who added up the ledger sheets. Both of them knew that this was their moment - so demands for higher wages, and threats to go on strike were usual (you could almost predict when exactly their tummies would begin to ache and when they would decide to go home in the middle of the day). Cosying up to these guys was an important part of the accountant's job. And the first time the trial balance was struck, it would not tally ! So every hand was called, to total and retotal the sheets until the trial balance tallied. I still remember the year when it stubbornly refused to tally for 3 full days and nights of non stop totalling and when it finally did, we all let out a war cry, which they say frightened all the cats and dogs in the town to run and take cover.

Closing was virtually over when the trial balance tallied - whether the numbers were all fully right and made sense was secondary ! As soon as the trial balance tallied, an army of typists would type out the trial balance in the forms that were mandated and a nice packet weighing in at 5 kg would be created. There was of course no email or internet, so somebody would be found to catch a plane, carry the accounting returns to headquarters, while everybody else left for home to sleep flat out for 24 hours.

And then would come the auditors, including one worthy who was their comptist (with his own "independent"comptometer), who would retotal all the ledger cards. Green pens would come out in their dozens for the auditors to tick - stories abound of how you could get the auditors to put their green ticks on any two sheets of paper as long as they carried the same numbers.

When you decided to qualify to becoming an accountant, you had to serve as an articled clerk (read bonded labour) in a Chartered Accounting firm. And a geriatric "senior" would start training you by making you add up each page in the telephone directory mentally for three months, to sharpen your adding skills.

All payments, were of course, made by cheques. Cheques would be typewritten by a dedicated typist using the old typewriter that made a racket.

Management accounting was the art of mastering the green sheet - for some reason, ruled sheets with columns came in green color in India in those days. The tool of choice was the pencil - sharpening 25 pencils was the first thing you did in the morning. The expert, who consolidated management reports was a sight to see - he would join together 2 or 3 desks and stick together some 10 of the dreaded green sheets to create a super sized sheet with 342 rows and 74 columns. Various underlings would then write numbers into the correct cell as he called them out. He would then run from one end of the sheet to the other, adding numbers along the way with lightning speed. His total was then the company's sales or profits or whatever else they were reporting !

It was a different world in those days. In a short span of 20 years, the accountant has changed beyond recognition. If somebody who was an accountant in the late seventies, was suddenly plucked into today's world, he would probably die of shock.

How did the boring conservative accountant change this way,. Especially as other functions have remained more or less the same (let me bait you guys) ? The sales guys still explains why he cannot sell because he does not have the right stocks. The marketing guy still can't quote a credible market share number and still makes lousy ads. The production guy still makes the product that is not needed and won't make the product that is. And the HR lady still can't get the increment letters or the payroll out in time.

Raise a glass to the super sexy accountant !!

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