Globalization and Accounting Fraud
While reading the big accounting fraud at Satyam,a company based in India, which got a lot of media coverage not only in India but also in the US, I realized that globalization is also a good policing methodology. Most of the earlier cases of reported accounting frauds have been in the USA, UK , but now such cases in the upcoming economies are also coming to light thanks to globalization.
Any company that desires to join the globalization bandwagon needs to follow the rules and ensure that their financial statements reflects their true performance. If not then beware because the Gloablization Police is watching!
Dells dilemna
Another big company, same old story. To meet the street’s expectation, the company tried to cook its books.
The allegation by SEC is that Dell met or beat the analysts’ earnings expectations by using a cookie jar reserve, from 2002 to 2006. Dell received from Intel, the computer chip maker payments not to use chips from Intel’s rival Advanced Micro Devices. It gets even more interesting, these payments accounted for 76% of Dell’s operating income in early 2007.
So this is what Dell did. They put the payments that they got from Intel in reserves. Every time their financial results were below expectations they would use somepart of the reserves to bridge the gap. And this is how they kept looking good to the analysts, the street and the shareholders.
Well they paid the price. The company did not accept or deny the charges, they have agreed to pay $100M to settle charges. Their CEO Michel Dell agreed to pay $4M. A few more executives also agreed to pay fines.
Another accounting fraud, settled by fines!
Lehman Brothers – Repo 105
Lehman failed, but so did their auditors, Ernst and Young to report deliberate balance sheet manipulations that the company used to show better metrics to the outside world.
Leverage and liquidity ratios are the two key metrics that counterparties and credit rating agencies look at while evaluating investment banks. When Bears Sterns’ failed in March 2008, confidence in the industry as well as Lehman began to decline. At that time the executives felt the need to manipulate the financial statements in order to stop the declining confidence.
In the 2nd quarter of 2008, they started to manipulate their balance sheet by using accounting tricks, referred in Lehman world as Repo-105. The Normal repo transactions consisted of selling assets with the obligation of repurchase within a few days. These are considered a financing activity; and these sold assets stay on the bank’s balance sheet. Repo 105 made use of an accounting rule where, if the assets sold were valued at more than 105% of cash received, the transaction could be called a true sale and the assets removed from Lehman’s books. $50 billion of assets were removed from the balance sheet in this way, improving their leverage ratio from 13.9 to 12.1 at the time.
Throughout 2008 Lehman made false claims of having billions of dollars in available cash to repay counterparties, showing a far better liquidity picture than what was true, significant portions of the reported amounts were encumbered or otherwise unavailable for use. September 12, 2008, 2 days after reporting $41 billion in liquidity, true available funds totaled only $2 billion. And 3 days later, on September 15, 2008 Lehman filed for bankruptcy. An end to another behemoth.
GE – Breaking the rules
In August of 2009, the SEC filed charges against GE alleging that it misled investors by using improper improper accounting methods to increase its reported earnings or revenues.
GE met or exceeded analysts’ earnings per share expectations every quarter from 1995 through 2004. Well I would say if a company meets or exceeds analyst’s expectations continuously for such a long time that should raise some red flags. It was found that on 4 separate occasions in 2002 and 2003, high level GE personnel approved accounting that was not in compliance with GAAP (Generally Accepted Accounting Principles).
The four different violations were:
- Beginning in January 2003, an improper application of the accounting standards to GE’s commercial paper funding program to avoid unfavorable disclosures and an estimated approximately $200 million pre-tax charge to earnings.
- A 2003 failure to correct a misapplication of financial accounting standards to certain GE interest-rate swaps.
- In 2002 and 2003, reported end-of-year sales of locomotives that had not yet occurred in order to accelerate more than $370 million in revenue.
- In 2002, an improper change to GE’s accounting for sales of commercial aircraft engines’ spare parts that increased GE’s 2002 net earnings by $585 million.
Like in most other such cases, GE did not accept or deny the charges but agreed to pay $50 Million to settle.
The business model behind .cm websites
Ever wondered what happens when we type a website name ending in .cm instead of .com. Well this is what happens. The .cm country code is owned by Cameroon. Not many websites are registered in the country. But the similarilty of .cm with .com makes it a big business opportunity. Kevin Ham, the domain king who has built a $300 million empire on domain names, sent some of his people to Cameroon to discuss the possibility of moving the .cm traffic to his website. This is what happens. When an internet user types a website with .cm extension, it gets transferred to a server in Cameroon. If the website is not registered with them it gets transferred to the website “agoga.com”. Agoga’s servers query Yahoo to find ads related to the typed name, which are then displayed on a parked page. Whenever a user clicks on an ad, Yahoo pays Ham, who shares an undisclosed slice of the revenue with Cameroon.
Mukesh Ambani
He is the richest man in India, with a net worth of $20 Billion. He is the chairman, managing director and the largest shareholder of Reliance Industries, India’s largest private sector company. He is Mukesh Ambani. Since splitting with younger brother Anil in 2005 and taking control of $20 billion (revenues) Reliance Industries, founded by his late father Dhirubhai Ambani, his fortune has soared by $11 billion. Reliance Petroleum, the oil refining subsidiary of Reliance, in which Chevron has 5% stake, listed on May 2006. Betting $5.5 billion on retail ventures including Reliance Fresh, a chain of food stores; 60 are now open. Megaplans include $10 billion investment to develop special economic zones. Recently got board approval to hike personal stake in Reliance Industries from 44% to 48%.
Lakshmi Mittal
He is the fifth richest man in the world with a net worth of $32 billion. His company accounts for 10% of world’s production of steel. He is Lakshmi Mittal, the steel titan, who began his career working in his father’s steel making business in India and today is the chief executive of Arcelor-Mittal, a UK based company with $80 billion in sales. Not content to dominate the steel industry, Mittal is branching out. Among his latest deals: spent $980 million for a 50% stake in Kazakh oil firm Caspian Investment Resources, a subsidiary of Russia’s Lukoil. And last but not the least he is the richest man in the UK!
The Social Security crisis
Over the past few months, a lot has been said about the future of Social Security. And most of it is not very pleasant. Most of us are wondering whether we will be able to reap the benefits of our Social Security in our old age.
Reading an article recently I found some interesting information about Social Security, the present state and the future. Presently Social Security is taking in more money that it needs to pay the beneficiaries. This surplus is being delivered to the U.S. Department of Treasury, which in exchange gives the Social Security Administration an IOU in the form of special non negotiable bonds (at present there are $1.9 trillion worth of these bonds with the Dept of Treasury). So when the tax revenues going into the Social Security system start to fall short, the SS Administration will start cashing in the IOUs. The Treasury has already spent that money, so when the SS starts cashing in the IOUs, the Treasury will have to look for ways to raise the money- hike taxes, reduce spending on things like education, infrastructure.
Even though we will be able to reap the benefits of Social Security, we will be paying more taxes and getting worse services (education and infrastructure being a few).
But the Social Security system will be in trouble once the IOUs are redeemed. The system will then have a deficit and will have to reduce the benefits or increase the payroll taxes.
One solution to the problem as suggested in the article was to change the way the benefits are calculated. Instead of raising the benefits at the rate at which the wages are increasing, i.e 1-1.5% higher than the cost of living indexes, they should be raised by the increase in cost of living. This would always give you the same purchasing power. It will reduce the burden on the system and help get the system back on its feet.
Till a solution is put into place we can all hope that some day we will be able to reap the benefits of the Social Security tax we pay today.
Gender Discrimination in Inflation rates!!!
The inflation rate for women is higher than that for men. The Consumer Price Index for products catering to women (jewellery, clothing, shoes, cosmetics, household appliances) is higher than for products targeting men. Year over year inflation rate in the US, for products catering to women is 18 times higher than the 0.8% for products for men.
The reason for the disparity is the higher demand for women’s products, which in turn is pushing the prices. Women have a higher rate of employment growth than men, more are living single- single women spend more on themselves than men, so there is more being spent on women’s jewellery and clothing thereby pushing the prices and finally leading to a higher inflation rate for women.
Exxon Mobil does it again
In the year 2005, Exxon Mobile reported annual income of $36B, becoming the top earner in the history of the American corporate world. Well they did it again, the annual income of Exxon Mobil for 2006 was $36.5B. The 4th quarter results were lower than expected by 4%, but the record annual profit made up for the lower than expected last quarter.
With this the company has widened its lead over Walmart as the company with the largest revenues in the USA. Oil is definitely the gold of this century, and perhaps the next too.
