Qantas strategy update

Speculation that Qantas will announce a significant change of corporate strategy at their upcoming annual general meeting. I'm sure this will be followed by claims that they are simply responding to the strategy that was proposed by the private equity team that was bidding for Qantas. Note the competing interests of the capital and the product markets here. The capital market wants to know as much as possible about QAN's future plans and strategies, so that it can best guess at how QAN will perform going forward (i.e., so that they can price the equity and debt of QAN). On the other hand, QAN's competitors also get to see what the major player (in the domestic industry in any case) is planning. Competitors may need to adjust their own strategy in response. This is an example of the "proprietary" costs of disclosure - you are giving away (potentially) valuable information to your competitors.

Reporting earnings - GAAP vs "cash earnings"

Ernst and Young have recently released a report (pdf file link here) on how companies communicate their earnings information. They look at the top 20 ASX listed firms, and find that 18 of them report a different earnings figure in their media release to their statutory (GAAP) profit and loss figure in their accounts. They find variation in both the number of adjustments from GAAP and the type of adjustments. The companies themselves seem to be suggesting that the adoption of the international accounting standards (AIFRS) has led to a decline in the 'usefulness' of GAAP earnings, and that the reporting of something closer to "cash earnings" (however defined) will provide more useful information.

Google, IBM and business strategy

Even (especially?) for the high-tech companies, having a decent corporate strategy, and being able to communicate it clearly to investors is an important part of running the business. Stephen Ellis writes about the difference between Google (GOOG) and IBM (IBM), both of which having just reported for the latest quarter.

Or should you be studying dentistry?

Graduate starting salaries not on the rise, according to an AP report in the Herald:

UNIVERSITY graduates entering their careers with dollar signs in their eyes will be disappointed by starting salaries that have fallen in real terms from those of their immediate predecessors.

While their more experienced colleagues are enjoying increased wages as a result of the economic boom, university graduates under 25 earned an average $40,800 last year, up just 2 per cent from 2005, revealed the Graduate Careers Australia's annual survey, released today.

I'd guess that students graduating with accounting majors would have a higher median starting salary than the economics/business students overall ($40,000 for economics/business), though of course the article doesn't confirm this.* The median starting salary for UNSW undergraduate business students in 2006 was $45,000.

*UPDATE: According to the Institute of Chartered Accountants (quoted in the Oz), meadian starting salary for accounting graduates is $42,600.

UPDATE 2: Looks like the shortage is causing firms to try and grab students in high school (just like the Premier League teams, no?!).

Should you be studying accounting?

Why yes, yes, you should. Looks like the shortage of accountants is continuing.

UNIVERSITIES and big accounting firms are recruiting high school students for free accounting degrees in a desperate attempt to alleviate the skills shortage in the profession.

Talented Year 12 students are being offered part-time jobs and free university degrees by firms, even before they have applied for a university place.

First-year students are also being poached by companies to work full-time with incentives such as sign-up bonuses, rumoured to be as much as $10,000 for each student.

Now just think how valuable you'll be if you work hard and get good marks!! Why the shortage? It certainly appears to be demand driven - the supply of graduates with accounting degrees keeps rising. One of the reasons is that accounting "skills" are seen as useful regardless of what 'area' you'll actually end up working in (in much the same way as a law degree is seen as a useful 'general' qualification, even for those not actually practicing law. Another reason that demand is rising is increasing compliance requirements for companies generally (such as the SOX requirements in the United States).

Is cash flow king?

Liu, Nissim and Thomas have recently published a paper in the Financial Analysts Journal, (Vol. 63, No. 2, pp. 56-65, 2007 to be exact) that shows that earnings does a better job than cash flow of explaining share prices. Here's the abstract of the paper:

Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. The question addressed in the article is whether the balance tilts in favor of cash flows when the following are considered: (1) forecasts rather than reported numbers, (2) dividends rather than operating cash flows, (3) individual industries rather than all industries combined, and (4) companies in non-U.S. markets. In all cases studied, earnings dominated operating cash flows and dividends.

This is of course what we would expect. If (accrual-based) earnings didn't do a better job of explaining value (and summarising business performance generally), then we'd see accrual accounting disappear.

Note: UNSW students should be able to access the Financial Analysts Journal through Sirius at the UNSW Library webpage. [It's at the bottom left of the linked page].

(Obligatory) Harry Potter post

The company that publishes the Harry Potter books doesn't appear to have taken advantage of their opportunities to grow their business. [The Australian] That's not smart.

Credit ratings - worth the paper?

Are the credit rating agencies doing their job well? Stephen Ellis, in discussing the 'sub-prime' mortgage market in The Australian, thinks not. Key quote:

And although S&P and Moody's seem to have been the victims of at least some fraudulent misrepresentation of mortgage quality by originating lenders, it seems fair to ask why they were not checking this information in the first place, given sub-prime mortgages were a startling 20 per cent of the entire US home mortgage market last year.

TPI, mergers and the ACCC

TPI's corporate strategy has been growth-focused. John Durie in The Australian suggests that the ACCC would like to know about some of TPI's proposed takeovers before they are announced. As Durie suggests, though, investors "like nothing better than a company that controls its market."

Wesfarmers and value creation

How will Wesfarmers make money out of buying Coles? Only by selling off part of the business, according to Paul Kerin in The Australian. A good article to read about trying to realise synergies in corporate acquisitions.

What happens if you get your audit wrong, then?

Well, if you're PWC and you did the Tyco audit, a fine of about $225million is the result: The Australian. This is an example of why research (especially audit research from the United States) assumes that the fear of litigation will help prevent auditors knowingly signing off on financial reports that don't comply with GAAP (the accounting rules).