Credit ratings agencies still under fire for their role in the GFC. Here's the Herald with the latest thoughts.

The essential conflict many of these agencies face is described here:

Critics want the cosy club inhabited by the three big credit ratings agencies to be replaced by a system with more accountability to investors, and less crippling conflicts of interest.

So what can be done to fix the credit rating agencies, seen by many as the unsung villains of the crisis?

Some suggestions include holding the firms responsible for their opinions in the courts, breaking up the oligopoly, and cutting investors' reliance on ratings. None is foolproof but each attempts to address the conflict of interest that was brutally exposed by the credit crisis.

A credit rating from one of the big three firms is virtually indispensable for companies looking to raise debt on the market. But it is now clear the incentives in the current system were skewed to encourage agencies to provide as many ratings as possible, at the expense of good advice.

For decades issuers have paid for the ratings because they need them most, and it has been in the agencies' interest to approve as many ratings as possible. However, the Bank for International Settlements says growth in structured finance - complex bundles of corporate debt - created huge systemic risks for this arrangement.

Explaining your accounts

I have mentioned in class that companies can use voluntary disclosure to explain how the accounting rules impact on their results, and also that we have seen examples of this with the adoption of A-IFRS accounting standards in Australia.

Here's one example - Westpac provided this presentation in April 2007 (note - link to pdf file).

How banks can manage earnings

No surprises, it's the loan-loss reserve. Businessweek with more details.

Inept boards - Krispy Kreme

From the New York Times (2005). Posted as KK is one of the case studies. Also shows the problems of rapid growth and franchising.

Security analysts & insider trading

The better the job you do as an analyst, the closer you get to insider trading. Apparently. An old (2005) New York Times article about the drug approval process and the work of security analysts

Stock options

From a few years back, how companies were trying to 'ignore' the requirement to expense stock options. This one was about the stressing of "pro forma" results, i.e. excluding the impact of expensing options. From the New York Times in 2005.

And a bit of background from the year before in Forbes focusing on Silicon Valley. Why hi-tech? Well that's where a large number of companies were paying large proportions of salaries as options.

Xerox and lease accounting

Here's an old one from the New York Times (by old, I mean from 2002) about Xerox's battles with the SEC over lease accounting.

And an even older one (from 2000) in Forbes about nonrecurring items that turn out to be, well, recurring.

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.