Audit fees and earnings quality

This is a bit of a twist on the usual story. The 'concern' about audit and advisory fees is usually expressed like this: higher fees (either absolute or at a relative level) can be thought of as akin to a 'bribe' to the auditors, who will then sign off on financial statements that present a company in a better light than they perhaps should. That's how the regulators seem to view the problem. It's been harder for researchers to 'prove' that this is the case: think about the difficulties in measuring both "earnings quality" and also the level of the 'economic bond' between auditor and client.

In this example (Diverseport Fixed Income), it looks like the auditors and advisors were going for the $ just before a collapse.

St George Westpac takeover

Seems not all St George shareholders are happy with Westpac's proposed takeover. Here's one of the major shareholders, Orion Asset Management's Dushko Bajic, reported in The Oz.

St George had not indicated its opinion of its value. "I find it frightening that the board has not identified its own valuation of St George as a stand-alone entity. How can you be sure of the value of Westpac's scrip and, even more outlandishly, the value of a merged St George/Westpac scrip, when you haven't established your own valuation of your own stock?

"And by the way, it's not good enough to draft in an independent expert after the event -- you've already set the goalposts," he said.

Seems a fair complaint. Note though that simply providing an independent expert's report will not solve everything. See prior posts here.

NAB's pro forma earnings

Adele Ferguson takes apart National Australia Bank's "cash earnings" figure. Once again, the issue with firms reporting non-GAAP, or pro forma earnings, is that of comparability. Comparing NAB's results with those of competitors for this reporting season, and comparing NAB's results over time.

Blame ASIC?

ASIC's chairman argues that ASIC should not be blamed for recent upheavals in the market (oh, other than the short selling stuff). It's an interesting one, though. To what extent should we, and can we, regulate against bad business decision, and bad investment decisions? However, even acknowledging that we can't protect all against all of their bad decisions doesn't mean that companies should be able to go around breaching disclosure rules and the like, seemingly without any meaningful penalty.

Nyles lowers earnings forecast

As reported in The Oz, Nylex lowers its earnings forecast. Note the focus on EBIT and EBITDA numbers, and in particular the 'normalised EBITDA' nubmers. It's not until the end of the article that net income (or net loss) gets a mention!

Macquarie Bank

Here's a nice piece on Mac Bank by Michael West with some financial policy analysis (level of debt), accounting analysis (write-down of assets) and management communication (disclosure about the level of write-downs, and questions about debt levels).

Dividends and franking credits

Here's a good overview of dividends, and Australia's franking credits system (dividend imputation).

That's thanks to our system of "franked dividends" (or "dividend imputation") introduced by the Labor government in 1987 and improved by the Coalition government in 1996.

The system is logical -- and simple. When a company pays tax on its profits to the Australian government, and then pays a dividend to its shareholders, the shareholders receive credits ("franking credits") for the income tax already paid by the company. These credits, which apply whether the Australian resident owns shares directly or through a managed fund, are included in the shareholder's tax return both as income and as tax already paid.

The extent of the benefit depends on the shareholder's marginal rate of tax. If the company pays tax on its profits at the full company tax rate of 30 per cent and distributes a dividend, a taxpayer on the 30 per cent tax rate (which this year applies on taxable incomes of $30,000 to $75,000) effectively receives the dividends tax-free.

Have a look at the whole article. Note also the impact of continuing economic uncertainty could result in decreases in dividends, or at least a stop to increases in them. Probably more so in the U.S than here.

"Re-equitisation"

Jeebus. Apparently that's what they're calling the process of getting more equity onto the balance sheet. That's what happens when debt falls out of favour. Which is currently is. See Michael Sainsbury's analysis here. In the case of Wesfarmers, getting shareholders to stump up more money to pay back the loans taken out for the Coles takeover.

Branding

We here a lot about the importance of branding in generating (abnormal) returns. In a recently released survey, Google tops the global brands.

Closer to home, here's how branding is reported for some of the local retailers:
David Jones & Myer and changing demographics, and Just Group focuses on the so-called Generation Y.

Insider trading

The 7.30 Report on ABC1 did a nice show on insider trading by directors of Australian companies, and the regulators' response, last night.

Transcript and video available at this link.