Steven Mayne on the recent earnings results

In the Herald.

ASIC takes action against

After a long time during which ASIC has been accused of being too lenient on enforcement issues, action is taken against auditors involved in a corporate collapse.

THREE partners of accountancy giant KPMG have been banned from acting as auditors for periods of up to two years over their involvement in the $390 million collapse of the Westpoint property empire.

Leases and valuation

We were speaking this week in class about adjusting for accounting distortions. Here's a link to a recent article about capitalising operating leases by Aswath Damodaran from New York University. It's in the Journal of Applied Research in Accounting and Finance (JARAF), Vol. 4, No. 1, pp. 3-29, 2009

Here's the abstract:

When analyzing or the value of a firm, there are three basic questions that we need to address: How much is the firm generating as earnings? How much capital has been invested in its existing investments? How much has the firm borrowed? In answering these questions, we depend upon accounting assessments of earnings, book capital and debt. We assume that the reported operating income is prior to any financing expenses and that all debt utilized by the firm is treated as such on the balance sheet. While this assumption, for the most part, is well founded, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease payments are treated as part of operating expenses, but we will argue that they are really financing expenses. Consequently, the stated operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have far reaching implications for profitability, financial leverage and assessed value at firms.

Some old accounting analysis / earnings qaulity articles

Here's one by Gretchen Morgenson in the New York Times about how to spot and undo questionable accounting.

Also an old Businessweek cover story back from 2004 - Fuzzy Numbers.

News Corp - underlying economics or big bath?

News Corporation recently announced its full year 2008-09 earnings, and they included large write-downs. By large, we mean just under $US9 billion. Now we'd expect large write-downs given the impact of the "Global Financial Crisis"; but now would be a good time to take an aggressive approach to write-downs. Here's how The Australian (owned by News Corporation) reported the results. Here's the New York Times take on it. Here's the conference call transcript News held with analysts and investors.

* Photo by Flickr user oh_simone. Original photo here.

Security analysts & incentives

Not surprisingly, there still seems to be some pressure on (sell-side) security analysts to provide an optimistic outlook. Here's Andrew Main (City Beat) on analyst Brett Le Mesurier leaving the industry.

Le Mesurier's form includes being the first analyst to have put a sell on Babcock & Brown -- "not early enough" as he ruefully put it yesterday.

He's got a reputation for calling things as he sees them, which may not be an instant hit with the big corporate brokers. Take his view on NAB: "It's the worst-performing bank, and they've consistently delivered in that department."

He admitted such lines don't make him instant friends on the sell side.

"But the fund managers love it."

Australian retailing

How successfully implementing your strategy can benefit your competitors.

Matthew Stevens in The Australian:

SOMETIME before Christmas Bernie Brookes and his fellow owners of Myer Group could be given 1.5 billion reasons to thank Mark McInnes for being such a fine retailer.

This might seem a strange proposition, given that McInnes runs David Jones and is the bloke lauded for the impressive restoration of the brand and balance sheet of Australia's up-market department store operator.

* Photo from Flickr user Voice Pictures. Original photo here.