Common Clues Of Financial Statement Manipulation

Teaching accounting in a finance class is always difficult, but article like this will be of interest to the students and a good way for all to get some practical applications of what to be aware of when examining financial statements.
From Investopedia:
Common Clues Of Financial Statement Manipulation:

"One of the most prevalent approaches to corporate accounting is to omit the bad and exaggerate the good. There are a number of subjective figures in any financial report that accountants can tweak. For example, a company may choose to exclude costs unrelated to its core operations when figuring its operating cash basis - say an acquisition of another company or purchasing investments - but will still include the revenue from the unrelated ventures when calculating their quarterly earnings. Fortunately, companies have to break down the figures, thus dispersing the smoke and mirrors, but if you don't look beyond a few main figures in a company's financials you won't catch it."

Bush Backs Linking of Executive Pay and Performance - New York Times

Bush Backs Linking of Executive Pay and Performance - New York Times:

"President Bush took aim Wednesday at lavish salaries and bonuses for corporate executives, standing on Wall Street to issue a sharp warning for corporate boards to 'step up to their responsibilities' and tie compensation packages to performance.... He said some workers are being left behind in the booming economy and the disparity between the rich and the poor is growing.

'The fact is that income inequality is real. It has been rising for more than 25 years,' the president said. 'The earnings gap is now twice as wide as it was in 1980,' Bush said, adding that more education and training can lift peoples' salaries."

Why is the gap increasing? There are many reasons, but technology, larger firms, and the the flattening of organizations have played key roles.

That said, it is easy (and often, bit not always correctly) say that managers are paid too much. The evidence is mixed in this regard. Yes, there are some CEOs who get paid too much and whose pay is not tied to performance, but they seem to be the exception and not the rule.

New York and Tokyo Stock Exchanges Announce Alliance - New York Times

From the NY Times: New York and Tokyo Stock Exchanges Announce Alliance - New York Times:

"The New York Stock Exchange and Tokyo Stock Exchange announced an alliance Wednesday that extends the NYSE's global reach and could lead to an eventual combination of the world's two largest financial markets....allows the two stock markets to cooperate on joint developments such as financial products, mutual listings and technology.

The deal comes amid a backdrop of mass consolidation between domestic and global exchanges, highlighted by the NYSE's transformation into the first trans-Atlantic market with its recent acquisition of Paris-based exchange operator Euronext NV. The NYSE Group Inc., which is competing fiercely with the Nasdaq Stock Market Inc., just weeks ago announced it had led a team of investors to buy a 20 percent stake in India's largest financial market, the Mumbai-based National Stock Exchange."

A Small B-School Can Be a Big Plus

SBU scores well on this!! From BusinessWeek

A Small B-School Can Be a Big Plus: "

"So what, exactly, is the small school advantage? In a word: community. Students say it's easier to form close bonds with classmates at a small school like Tuck or UNC's Kenan-Flagler, where each graduating class is kept to under 300 people, compared with larger ones like Harvard and Wharton, where the graduating class size is roughly triple that."

Not academic and not even that good but it is interesting to read and the conclusion is pretty good: i.e. passive and automatic investing wins out in the end!

From FoxNews

Short version: Quantitative analysis, which limits impact of behavioral finance's impact, is catching on and indexing seems to be better way to go than stock picking (nothing new with that!)

Two look-ins:

"Behavioral Finance, the new science of irrationality, [is] also known as behavioral economics, quant-trading, neuro-investing, etc.

later:

"Behavioral finance is going through a major transition that will impact the future of investing worldwide. The old behavioral finance has been around for several decades, dominated by psychologists studying irrational human behavior. Recently a newer, more secretive and potentially dangerous version has emerged. Psychologists are being sidelined by mathematicians speaking a language as foreign to Main Street investors as ancient Mayan without subtitles."

and later:

" What can you do? Very simple: Since you can't beat them, don't play their game by their rules. Build a lazy portfolio. Then leave it alone. Let it do its job automatically. Build wealth doing something you love in a business or profession you enjoy, and spend as much time as you can with family and friends."

In fact, even if you might be able to beat them" this is good advice!

The Thinkers: He brings higher mathematics to bear on high finance

The Thinkers: He brings higher mathematics to bear on high finance: "

"It's called stochastic calculus, a branch of mathematics that measures what happens in any system that is beset by random fluctuations.

Dr. Shreve, the Orion Hoch Professor of Mathematics at Carnegie Mellon University, does research into both the convertible bond and YouTube problems."

How could any pass up an article that has bogth convertible bonds and YouTube references?

Davos 2007 - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

A couple of follow ups on previous stories:

Two recaps from Davos:

1. Davos 2007 - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times: "The five-day event, meant to generate discussion of major global issues, featured dozens of panel sessions, nonstop networking among its high-powered attendees and, for those tired of such serious fare, a long list of private parties"

2. From Forbes:

"While there wasn't much of a "wow factor" this year, there were certainly interesting developments: YouTube's Chad Hurley, for example, said his company may soon give users a cut of the advertising revenue generated by the site's 70 million video views each day. Dupont, Caterpillar, General Electric and other companies told us they are actually lobbying the government to restrict the greenhouse gasses that American companies produce. And in a little-publicized announcement, a new business council made up of 200 Israeli and Palestinian CEOs was formed. They plan to host their first joint meeting this May."

From Nichol a Milton Friedman day party hat!!

Financial Engineering News - January/February 2007

Looking for a finance-ethics case for class? Or just trying to learn more about what happened at HP? Financial Engineering News has you covered!

Financial Engineering News - January/February 2007:

A few quick look-ins:

"Even after Fiorina's victory on the merger and proxy challenges, the HP board continually heard complaints from employees and officers about Fiorina's autocratic style, her rock-star-iconic appearances at non-company events, and the increasingly horizontal structure of the company, with Fiorina in control of nearly all divisions and aspects of the company. "

And later:

"The key to curbing misconduct by the gods (boards, officers and otherwise) is taking action on observations and concerns of employees, regardless of their level. Listening to employees, realizing their insight and acting on it are three critical parts of a successful ethics program."

Helping revive free trade

Yeah! Good news from Davos!!

Helping revive free trade | The Courier-Mail:

"MAJOR world powers have agreed to resume global free trade talks suspended six months ago amid deep divisions over farm subsidies between the US and the European Union.

Australian Trade Minister Warren Truss said the breakthrough at a meeting on the sidelines of the World Economic Forum in Davos, Switzerland, meant there were again clear signs of life in the negotiations.

'There is a window of opportunity to make the necessary breakthroughs in the negotiations to achieve a satisfactory outcome for the round,' Mr Truss said.

'I am encouraged by the recent con"

Author interview | Economist.com

Author interview | Economist.com: "A discussion with Edward Carr, Business Affairs Editor of The Economist

“Median pay for executives is around $7m per year. That's a lot of money, but not that much when you compare it with people in similar professions—lawyers, traders, hedge fund managers. They've actually outpaced executives. If you look at executive pay in the context of other high-flyers, it is not that egregious.”"

Thanks Anne for the link!

Cool! Milton Friedman day!!

From Jeff:

"I am writing to you because I thought you and your blog readers might appreciate hearing about this. “Milton Friedman Day” will be celebrated next Monday, January 29 and The Economist will pay tribute to the famous and highly influential economist by hosting an online discussion with prominent economists and officials such as Leo Melamed, Ben Stein and California Governor Arnold Schwarzenegger.

Beginning today, members of the public are invited to engage in the spirited discussion by submitting their their questions to Free Exchange, The Economist’s economics blog, moderated by Megan McArdle. To join please visit: http://www.economist.com/debate/freeexchange/. "

Big Deal(s): What's Driving the M&A Frenzy? - Knowledge@Wharton

Knowledge at Wahrton does its usual great job this month. The highlight? A look at the takeover market. GREAT stuff:

Big Deal(s): What's Driving the M&A Frenzy? - Knowledge@Wharton: "2006 set a record for mergers and acquisitions worldwide. Deals totaled $3.79 trillion, 38% higher than in 2005, and 55 of the transactions were valued at more than $10 billion each, according to data from Thomson Financial. "


One more look-in:

"mergers have asymmetric effects on different stakeholders. They don't have uniform effects across stakeholders.

There is always a degree of controversy surrounding M&A. So, one way of answering the question is to say that mergers are, generally speaking, good for sellers. Sellers typically get about 15%-25% premium on the pre-existing value of the firm, so they tend to do well. The evidence on buyers is more mixed.

The New York Times article says 3 in 10, but a lot of research says that it's probably 4 out of 10, buyers tending to make money and perhaps even 5 out of 10. And so buyers tend to essentially pay the fair market value for their candidate. What that means is because acquisition is usually initiated by the buyer, the buyer needs to insure that they have unique synergies. Just having synergy is not enough."

Definite required reading! Simply great. Thanks Wharton!!

Media-Newswire.com - Press Release Distribution - PR Agency

Note to self: add Fama-efficient to vocabulary!

Media-Newswire.com - Press Release Distribution - PR Agency:

"Nobel prize winner Professor Robert Engle, New York University, will discuss Generating Return on Capital in a ‘Fama-Efficient’ World with Fabrizio Gallo and Robert Ferstenberg from Morgan Stanley in a public event at LSE on Tuesday 30 January. The equity investment management business has undergone dramatic change in recent years as a result of regulation that has induced competition between market centre and provided equal access to financial information for all market participants. Consequently, global equity markets are becoming ‘Fama-efficient’ in the sense that it is increasingly difficult for any single investor to outperform the overall market for an extended period of time."

Winston-Salem Journal | NOT A BAD BET: Vice Fund's returns indicate that people are always going to drink, smoke and gamble

Winston-Salem Journal | NOT A BAD BET: Vice Fund's returns indicate that people are always going to drink, smoke and gamble:

"Vice can be nice when it comes to the investment returns of a mutual fund that counts on consumers to smoke, drink or gamble in good and bad economic times.

But analysts caution that the Vice Fund has benefited from good economic timing since its inception in August 2002 and that the odds are against its repeating this year its average 18 percent annualized total return.

The Vice Fund was formed by Mutual Advisors Inc. in Dallas to invest in the alcohol, gaming, tobacco and aerospace/defense industries"

This is the fund that we spoke of in class.

The Chronicle, 1/19/2007: Sales Go Up $6 for Every $1 Companies Add to Giving Budgets, Report Says

So reputation DOES matter and being nice pays off! have to admit the numbers surprise me. I will have to read the actual study!

The Chronicle, 1/19/2007: Sales Go Up $6 for Every $1 Companies Add to Giving Budgets, Report Says:

"For every new dollar a retail company, bank, or popular-goods manufacturer
allocates to its charitable-giving budget, it can expect sales to grow on
average by $6, according to a study by several university researchers who
attempted to quantify the economic benefit of corporate giving.
.....'When firms increase their charitable giving, then we see in the
future more revenue growth,' says Christine Petrovits, an assistant professor of
accounting at New York University Stern School of Business and a co-author of
the report.....Ms. Petrovits conducted the research with Baruch Lev, a finance
professor at Stern, and Suresh Radhakrishnan, a professor of accounting and
information management at the University of Texas at Dallas School of
Management."

Finance & Accounting Jobs - Search Finance Jobs & Careers at Monster.com

With the start of the new semester, many seniors will get more serious about their job search. Monster.com's finance channel is a good starting point! It has tips for resumes, interview questions, and of course openings.

Finance & Accounting Jobs - Search Finance Jobs & Careers at Monster.com: "

Find out which positions in finance and insurance are at the top of the pay food chain and have the strongest prospects for employment."

Welcome back!

After about two weeks with zero internet (working with BonaResponds and Randy's Rangers in Pass Christian Mississippi) classes started this week and I have internet again so I will soon be back to blogging. I have a couple of long overdue reviews to do first, but hopefully by the end of the week it will be business as usual.

jim