Corporate Unaccountability

[maplesyrup]

Every since I worked a long time ago for a transnational, and saw how my company executives treated our external auditors, when the auditors found discrepancies, by threatening to change auditors, if the auditors didn't leave the financial statements the way the transnational had prepared them, I have not had any confidence in audited financial statements. To me an external audit is not worth the paper it is written on.

And in the case of my transnational, of course the auditors left the financial statements alone, as they wanted to keep the transnational's business. The sooner people realize it is a bullshit industry, and that there is little protection for their investments, the better.

Gomery rips apart audit by Ernst and Young

"You didn't rewrite it, you watered it down," he said. "Why did you water it down?"

[August1991]

And in the case of my transnational, of course the auditors left the financial statements alone, as they wanted to keep the transnational's business. The sooner people realize it is a bullshit industry, and that there is little protection for their investments, the better.

I wouldn't go as far as saying that external audits are pure fiction. They have several useful purposes.

But I see a big difference between an audit in the public sector (Public Works) and an audit in the private sector (a transnational).

Managers in transnationals compete for my money - whether it be in selling me products or getting hold of my savings. If I feel that the managers of a transnational are being dishonest, there are many other transnationals out there. From the investors standpoint, the choice is almost limitless. Dishonest transnational managers will be punished in the marketplace very quickly.

IOW, managers in transnationals have a strong incentive to tell the truth. There are long term, big bucks available in having a reputation for honesty.

The managers in Public Works (including our politicians) have no incentives of the sort. If anything, it is in their interest to dissemble. They have my credit card and my debit card and they can use either at any time they want and I can't stop them.

The government and transnational corporations are two entirely different beasts.

[maplesyrup]

I know, I know, business all good, government all bad.

What a load of s***

Earnst & Young, business community auditors, screwed up their audit concerning Adscam. Let's be clear here!

[August1991]

I know, I know, business all good, government all bad.

No, MS, I'm not saying that. I'm saying that corporations and governments are very, very different beasts. But they both can do good.

The incentives for politicians and bureaucrats are such that we must always be careful. The incentives for corporate managers require much less concern.

[maplesyrup]

TSX chief's swan song unworthy

It's unfortunate that Stymiest reinforced Canada's already unflattering reputation for spawning world-class boondoggles like Nortel Networks Corp., Bre-X Minerals Ltd., and the Hollinger group. This phenomenon once prompted cable czar Ted Rogers to complain about the "Campeau factor," in which mavericks such as the erstwhile Bloomingdale's owner Robert Campeau delight the U.S. business press with their spectacular flame-outs. "People are thinking, here's another Canadian entrepreneur who's going to get blown out," said Rogers. "That's the Canadian way."

Unfortunate, too, because Stymiest will be stepping down in two months from her post as CEO of TSX Group Inc., owner of the TSE and the TSX Venture Exchange, to take on the newly created role of chief operating officer at the Royal Bank of Canada — which now regrets its own dealings with Enron.

In her relatively brief five-year tenure heading TSX, Stymiest solved the TSE's seemingly intractable computer glitches, served as catalyst for bringing all of Canada's principal equity trading venues under one roof and took that enterprise public as the world's seventh-largest exchange. But with no background in retail financial services, the new Number 2 executive at the Royal Bank has not been recruited to confront the bank's difficulties in its recent U.S. expansion. Stymiest, it appears, will instead be the Royal's defacto chief ethics officer, given that her responsibilities are to include governance, compliance, regulation and accounting standards.

As an outspoken critic of Sarbanes-Oxley ("Rules become the maximum that's required, not the maximum that is possible," she has said), Stymiest will have to assert a low tolerance level for chicanery lest she be mistaken for having a casual attitude toward the many governance challenges that arise within a sprawling enterprise.

Stymiest's star turn in London was unfortunate, finally, because of its faulty premise — that new U.S. governance standards are chasing foreign companies away from American exchanges; that the reforms have stifled the initial public offerings market; and that the spike in accounting costs for the average company under "Sarbox" has inspired many U.S. firms to contemplate going private.

In fairness to Stymiest, the TSX boss cited only a few of the complaints now heard in the United States about new strictures viewed by some chief executives as harshly expensive, laborious and constraining.

In the aftershock of Enron et al, Corporate America kept its head down and simply wondered how punishing the inevitable reforms would be. But as the U.S. economy has recovered, a few prominent voices are now heard in the mainstream media protesting the brake on entrepreneurialism that the cleanup effort threatens.

To some degree, this is a public relations exercise aimed at preventing still more reforms from being hatched by populist legislators and zealous regulators at the urging of attack-dog prosecutors like Eliot Spitzer of New York and his peers in other states who have been altogether too successful in collecting corporate heads.

Describing the evolution of this non-story, Clay Risen of The New Republic noted in June that "the so-called backlash (against Sarbox), while signifying a genuine measure of unhappiness among companies, is in large part a creation of big-time corporate lobbying groups like the (U.S.) Business Roundtable. While these groups have been arguing against the law for years, it takes time to manufacture dissent — that is, to find photogenic small-business owners burdened by compliance paperwork, or to parse the data so that it delivers sympathetic results."

Thus we learn that General Electric Co. and insurance giant American International Group Inc., or AIG, endured a jump in compliance costs of $30 million (U.S.) and $300 million in 2003, respectively. But media reports of this added burden seldom mention that as a fraction of GE's $15 billion in profits and AIG's $20 billion in total expenses last year, the added measure of investor protection is negligible.

The Ontario Securities Commission calculates the cost of its own new governance rules for publicly traded companies at no more than $165 million (Canadian) over the next decade. Even if that estimate turns out to be on the low side, spread across 10 years and hundreds of public companies, it's a trifling sum to restore investor trust and guard against debilitating fraud.

An overlooked payoff from the newly mandated vigilance, after all, is a greater ability of managers to understand the internal financial workings of their enterprises — something that clearly eluded Ken Lay, Bernie Ebbers and the boards of Conrad Black's companies.

And it's not as if the corporate world has been turned upside-down.

"If you were running your company right, if you weren't trying to deceive someone, if you were making judgments that were intended to tell the public as closely as you could exactly what your earnings were, then Sarbanes-Oxley and the (recent) New York Stock Exchange regulations are just a minor addenda to what you're already doing," Herb Kelleher, legendary co-founder of Southwest Airlines Co., said recently. "It may take you a little more time. It may cost you a little more money to comply. But it is not unduly burdensome."

Indeed, the latest reforms are not burdensome enough, argues Business Week's current cover story on "fuzzy numbers." Two years after the enactment of Sarbox, the magazine reports, "Corporate financial statements are often incomplete, inconsistent, or just plain unclear, making it a nightmare to sort out fact from fantasy. Says Trevor S. Harris, chief accounting analyst at Morgan Stanley, `The financial reporting system is completely broken.'"

And what of all those defectors from the U.S. exchanges? Of the 1,300 non-U.S. companies listed on U.S. exchanges, just six have voluntarily delisted from the NYSE in the past four years, and only 10 have decamped from Nasdaq this year.

That is not a trend. Neither is going private, with just 120 U.S. firms dropping their U.S. exchange listings thus far in the Sarbox era, barely noticed among the remaining 14,000 U.S. public companies. And going public is not going out of style — something to which the new billionaire co-founders of Google Inc. can attest.

David Brown, the OSC chair whose organization is chronically faulted for being behind the curve on reform, got it right when he warned two years ago that, "We can't be seen to be coming from a country with lesser standards."

That's the opposite of Stymiest's message in Britain last week. That doesn't reflect well on her, the Canadian capital markets or her new employer. Both Stymiest and her new boss, Royal Bank CEO Gord Nixon, have been circumspect about the precise mandate of an operating chief who already is touted as Nixon's likely successor.

Does Stymiest's contempt for Sarbanes-Oxley extend to all manner of reform? Or does she believe in exacting governance standards, but of her bank's own devising, built on character rather than rules, and made to measure for the Royal's unique business lines and personnel?

Let's hope it's the latter, for the sake of one of Canada's few global corporate ambassadors, and one of the country's most accomplished executives.

Two things:

1 I am stunned that I am reading about this kind of behaviour concerning the CEO of TSX .

2 I am apalled, stunned, and blown off my chair, to hear someone who operates with these kind of principles is slated to be the CEO of the Royal Bank.

How in the world could the Royal Bank conceive of hiring a person with these kind of values?

I seriously am shocked, as I thought the Royal Bank was better than this. How so very sad for the Royal Bank and for Canada! :angry:

We sure have slide a long way down since Ronald Reagan's values took over and made priciples worthless in the business world. Sick is the only word for it. :angry:

[Big Blue Machine]

You left wing guys have no faith in free enterprise and the business community.

[Black Dog]

You left wing guys have no faith in free enterprise and the business community.

In the age of Enron, Halliburton, "golden parachutes", Martha Stewart, Tyco, outsourcing, downsizing, layoffs,. tax shelters and widespread corporate malfiesnce: why should we?

[August1991]

In the age of Enron, Halliburton, "golden parachutes", Martha Stewart, Tyco, outsourcing, downsizing, layoffs,. tax shelters and widespread corporate malfiesnce: why should we?

There are about 3000 firms listed on the NYSE and about 3500 on the NASDAQ. You mention four companies. Do you think that's representative?

outsourcing, downsizing, layoffs

I would expect managers to take decisions in the interests of the shareholders. Anything else would mean the shareholders will go elsewhere. Corporations are not charities.

Should a corporate managers keep on staff an employee who costs more than the employee generates in additional revenue? Should a corporation in effect "destroy" value?

Apart from the immorality of wasting resources, corporate managers that keep such an employee will soon find the company's share value at zero, the company in bankruptcy and their own jobs in jeopardy.

widespread corporate malfiesnce

Widespread?

Quick buck artists may want to cheat but the really big bucks lie in having a good reputation. And the investors on the stock market are not usually easily bamboozled. In any case, it's just a question of risk and there are many ways to deal with that.

----

But BD, you haven't addressed the fundamental difference between the managers at Public Works Canada (HRDC, Fisheries and Oceans, Indian Northern Affairs) and the managers of a private corporation.

1 I am stunned that I am reading about this kind of behaviour concerning the CEO of TSX .

2 I am apalled, stunned, and blown off my chair, to hear someone who operates with these kind of principles is slated to be the CEO of the Royal Bank.

I read the article. Other than the Toronto Star's basic ignorance of how financial markets operate, I found nothing shocking nor appalling. What did I miss, MS?

[Black Dog]

There are about 3000 firms listed on the NYSE and about 3500 on the NASDAQ. You mention four companies. Do you think that's representative

Not of every single one. But it's a serious problem. I hyave no doubt that thr examples I listed are teh tip of the iceberg.

I would expect managers to take decisions in the interests of the shareholders. Anything else would mean the shareholders will go elsewhere. Corporations are not charities.

Exactly. They have no concern for anything but the bottom line. Why should we place our trust in such institutions?

But BD, you haven't addressed the fundamental difference between the managers at Public Works Canada (HRDC, Fisheries and Oceans, Indian Northern Affairs) and the managers of a private corporation.

That's becasue I wasn't commenting on that matter, only BBM's statement.

[ticker]

You left wing guys have no faith in free enterprise and the business community.

In the age of Enron, Halliburton, "golden parachutes", Martha Stewart, Tyco, outsourcing, downsizing, layoffs,. tax shelters and widespread corporate malfiesnce: why should we?

another selective example of a bad free enterprise company is research in motion from 10 US to 150US.

wait its roots are in Canada so the left can claim it is not a ture free enterprise company but an example of canadian socialism at work.

[cgarrett]

hang on a second!!!

are august and other suggesting that each and every shareholder hire an auditor to audit every company that he either holds shares in or is thinking about buying share in!? because he shouldn't trust corporate management?

because corporations are not responsible to their owners?

listen, if you bought a business and then the managers told you everything was rosy and then one day you found out exactly the opposite... then would you think... should have bought a different business?! stupid me?

this is ridiculous.

the abbreviated real story...

as early as 1994, the financial accounting standards board (fasb), the independent body that represents the association of chartered accountants was raising the red flag on the rising practice of not reporting stock options as expenses. the security exchange commission agreed. corporate america quickly descended on washington and found mostly republicans as great friends of the cause. fasb was told to shut it and stop pissing on the parade. then the auditors started advising their clients! another fasb and sec no-no! and again, fasb was told to shut it and the sec chair was replaced by some pro-corporate lackey! then... the tech stock market crash and what came out of it. enron, worldcom etc etc... serious crooks!

if you like the idea of public ownership then you better like the idea of regulated auditing. there is nothing scarier to an investor then not knowing what one is buying. and the financial markets will never recover until investors trust that public companies are following strict guidelines regarding the reporting of their business health.

[August1991]

I would expect managers to take decisions in the interests of the shareholders. Anything else would mean the shareholders will go elsewhere. Corporations are not charities.

Exactly. They have no concern for anything but the bottom line. Why should we place our trust in such institutions?

BD, people compare two different things all the time - apples and oranges. Mathematics allows us to put a number on something so that we can compare things more precisely and more generally. There are tremendous benefits from using numbers to make otherwise complicated comparisons. A corporation's "bottom line" is just a numerical way of asking: do we consume more than we produce? Are we spinning our wheels and wasting people's time or are we doing something positive for the world?

A misunderstanding of "profit" is one reason I believe Leftists are bad at mathematics. At least, you could refer to something like "social accounting".

are august and other suggesting that each and every shareholder hire an auditor to audit every company that he either holds shares in or is thinking about buying share in!? because he shouldn't trust corporate management?

garret, before you start asking loaded questions, it might be wise if you understood the subject.

This forum amounts to about 20-odd regular posters exchanging opinions, gossip and facts. Multiply this forum by about 10,000 and you've got a very conservative estimate of the number of people in North America exchanging opinions, gossip and facts about shares.

For them, an external audit is just more info. Rumours of the CEO's love life too. Just like we trade stories, they (10,000 fold) trade stories.

listen, if you bought a business and then the managers told you everything was rosy and then one day you found out exactly the opposite... then would you think... should have bought a different business?! stupid me?

Cheat me once, shame on you. Cheat me twice, shame on me. Look garret, it's all about risk.

No one would ever buy shares in one business only.

the abbreviated real story...

as early as 1994, the financial accounting standards board (fasb), the independent body that represents the association of .....

Stock analysts knew all about this, and a heck of a lot more.

I will return to my original point. There are about 7500 companies listed on the two largest markets in the US. What percentage are accused of "accounting problems"?

More pertinently, corporate managers have a strong incentive to increase shareholder value. If they succeed, they earn a reputation which is worth far more than any amount they could steal now.

For a corporate manager to get money out of my wallet, there are only two ways: she must sell me a product/service I choose to buy or sell me a share/bond I choose to buy.

For a civil servant to get money out of my wallet, she puts in a budget for the next fiscal year.

if you like the idea of public ownership then you better like the idea of regulated auditing. there is nothing scarier to an investor then not knowing what one is buying.

Regulated by whom? Not knowing what one is buying? WTF? garret, I suppose you're one of those people who thinks the stock market is just an organized horse race.

----

I am not anti-government. (I've got the scars from duelling with Hugo.) I'm arguing that corporations and governments operate in a fundamentally different way.

People on the Left should understand this. Otherwise, all thinking people will simply dismiss their arguments.