AT&T to Replace Verizon Wireless as Largest Mobile Phone Operator in the US in 2Q 2011 (IEMR forecast)
Hurd’s resignation consistent with HP’s low corporate governance ranking (Audit Integrity)
Russian wheat export ban credit positive for Archer-Daniels-Midland, Cargill and Viterra (Moody’s via Alacra Store)
Regulators’ Search for Credit Rating Alternatives Likely to Be Tough @StructuredFin
Clouds, big data, and smart assets: Ten tech-enabled business trends to watch @McKinsey updates 2007 list
Pressure Grows to Repurchase Faulty US Mortgages (Moody’s via Alacra Store) Credit negative for big originators
Interesting graph of economic newsflow from Societe Generale via @FTAlphaville
Technorati Tags: (ADM), (HPQ), (T), (VZ), Archer Daniels Midland, AT&T, Cargill, economic indicators, grains, Hewlett-Packard, mortgages, rating-agencies, technology, Verizon
Guest Post by James A. Kaplan, Chairman and CEO, Audit Integrity
As our economy struggles to stabilize and start growing again, there is a high focus on debt and debt repayment. Areas of concern range from the massive amounts of consumer debt, to record-breaking government debt, to corporate debt — particularly low-quality debt, which is increasing at record rates.
One item that has escaped scrutiny is the amount of Accounts Receivable held on the books of U.S. businesses. For large U.S. public companies (those with market capitalization is in excess of $250 million), total Receivables exceeded $41 trillion in the first Quarter of 2010. In the first Quarter of 2009, Accounts Receivable totaled $36 trillion.
Not only do these large Receivables represent an absolute high level of debt owed by others, but the companies have taken on ever-increasing Receivables risk.
This 14% growth in Receivables substantially exceeds growth in corporate revenues over the one-year period.
It could be argued that some of the increase in Accounts Receivable is a reflection of improved business. Unfortunately, there is one important negative sign: Average Days Payable for all U.S. public corporations have stretched from 93 days to 136 days. A substantial increase in Receivables may not only reflect slow pay by customers; it may also include low estimations for Uncollectibles, early recognition of Sales, or even fictitious Sales. The misrepresentation of Accounts Receivable, or improper Revenue recognition, is the leading fraud technique identified by the Committee of Sponsoring Organizations of the Treadway Commission (www.coso.org) in its comprehensive study analyzing fraudulent financial reporting for the period 1998 to 2007.
While there is talk of improving corporate liquidity, I see no such evidence in the numbers above. This increase in Days Payable reflects poorly on the quality of the Receivables held.
Below is a short list of companies whose condition should be of heightened concern to stakeholders. These companies have rapidly-growing Receivables, and some have a history of poor transparency and weak governance, as identified by our AGR® ranking. Most importantly, their chance of insolvency is more than negligible.
A low AGR percentile is indicative that the company is experiencing financial distress and has an increased likelihood of negative events such as an earnings restatement, enforcement action, or class action litigation. A low Bankruptcy Risk percentile signifies poor performance in those measures specifically correlated to bankruptcy. Click image to enlarge.
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On a day when the US Supreme Court struck down a provision of the Sarbanes-Oxley Act of 2002 that was supposed to strengthen corporate governance, Audit Integrity notes that the law has failed to prevent an increase in breadth and depth of corporate fraud .
Audit Integrity cites a recent study from The Committee of Sponsoring Organizations of the Treadway Commission analyzing fraudulent financial reporting for the period 1998 to 2007.
In its review of the COSO study, Audit Integrity highlights the following observations:
The most commonly cited motives for fraud included the need to meet external/internal earnings expectations; an attempt to conceal the company’s deteriorating financial condition; the need to bolster performance for pending equity or debt financing; or the desire to increase management compensation.
- The dollar value of fraudulent financial reporting soared in the last decade (despite the implementation of Sarbanes-Oxley).
- The companies engaging in Fraud were much larger than those observed in an earlier study, for the period 1988-1997.
- The SEC named the CEO and/or CFO for some level of involvement in 89% of fraud cases studied.
- The most common fraud techniques involved improper Revenue Recognition, followed by Overstatement of Assets, followed by Expense Recognition.
- Initial news in the press of an alleged fraud resulted in an average 16.7% abnormal stock price decline in the two days surrounding the news announcement.
- News of an SEC or Department of Justice investigation resulted in an average 7.3% abnormal stock price decline.
- Long-term negative consequences of fraud included bankruptcy; de-listing from a stock exchange; or material asset sales.
- The number of fraud cases between 1998 and 2007 increased compared to the prior 10-year study.
- The industries where fraud occurred most frequently included computer hardware/software.
- Most frauds were not isolated to a single fiscal period. Fraud periods averaged 31 months.
- There appears to be no difference between the number or character of frauds since the passage of the Sarbanes-Oxley Act of 2002. [Author’s note: the sample periods after 2002 are shorter than prior to 2002.]
- Fraudulent firms disclosed significantly more related party transactions than non- fraudulent firms.
- All of the 347 fraudulent firms received an unqualified opinion from their auditors on the last set of fraudulently misstated financial statements.
Audit Integrity’s conclusions:
- Fraud continues to increase in breadth and depth despite Sarbanes-Oxley.
- The motivation for committing fraud continues unabated.
- The methods of committing financial fraud have not materially changed.
- Traditional measures of corporate governance have limited impact on predicting fraud.
Audit Integrity’s full analysis is available here.
The COSO study is available here.
Technorati Tags: audit, corporate-fraud, corporate-governance, Sarbanes-Oxley, SOX
Audit Integrity updates its corporate governance rankings for airlines in a new report. Winners include Hawaiian Holdings, Aegean Airlines, Air France – KLM and easyJet. Not faring so well are SkyWest and Icelandair.
Selected Excerpts:
The Airline industry occupies a particularly vulnerable position. In addition to disruptive events such as 9/11, any factors impacting the general economy – from the declining employment rate to the eruption of Eyjafjallajoekull – severely limit the airlines’ ability to take corrective action for their own survival. They are so susceptible to volatile fuel prices, increasing fees and taxes, the declining passenger base, labor problems, weather, and chronic uncertainty, that analyst Michael Bell recently held them up as a model for lessons in corporate governance to cope with economic stress.
The industry review published earlier this month by the Air Transport Association Office of Economics provides a crystal-clear picture of an industry besieged on all sides, even as the general economy begins to revive.
- Pretax profits have trended sharply downward since 2007, currently ($16 billion) versus the U.S. corporate average of $6 billion.
- Airlines did not benefit from the stimulus package.
- They have received no regulatory or legislative support to help them manage the 2009 oil price bubble driven by oil futures speculation. Despite reductions in service, U.S. airlines spent $16 billion more on fuel in 2008 than in 2007, and $42 billion more than in 2003. For 2010 year-to-date, the price per gallon of jet fuel averaged 136% of the average price from 2001-2009 as trading in oil futures surged.
- Airfares rose only 10.9% from 1995 to 2001, compared to a 40.7% inflation rate.
- Leisure travel is the largest segment of airline revenues, and is discretionary. In a slow economy with high unemployment, the public doesn’t travel, or elects shorter trips and other means of transport.
- Domestic air travel has not recovered from 9/11. Annual passenger revenue in 2009 was $37.5 billion less than the average for the decade 1991-2000. Although international capacity is at an all-time high, domestic capacity in 2009 was the lowest in aviation history.
- Taxes and airport fees have increased dramatically since 9/11, now accounting for approximately 20% of the ticket price, making it difficult for airlines to maintain a price point acceptable to consumers. In addition to corporate taxes, FAA, Homeland Security, and airport charges were $16.6 billion in 2009.
- The widespread popularity of discount travel websites forces airlines to cut prices in order to fill empty seats, even as fuel costs rise.
Holding up Southwest Airlines as a model of good management, Mr Bell offers several lessons to be learned from companies navigating this difficult environment. Lesson No. 1 is to balance the interest of all stakeholders: customers, investors, employees, regulators, suppliers, and others. In other words, don’t jeopardize long-term survival by favoring short-term returns to shareholders which provoke a labor strike, which drives away consumers, which in turn worsens the company’s financial condition.
For details of Audit Integrity’s AGR corporate governance rankings of airlines, click here.
Technorati Tags: (AEGN), (AF), (EJZ), (HA), (ICEAIR), (SKYW), Aegean Airlines, Air France-KLM, Airlines, Alaska Airlines, easyJet, Hawaiian Holdings, Icelandair, SkyWest
Audit Integrity has provided more detail on the methodology behind its list of ten companies that failed its “due diligence test” and whose valuations are based on a degree of investor trust that AI says may not be justified. The list includes big names such as Caterpillar (CAT), which was featured in a subsequent Pulse Check post.
Audit Integrity has provided the example below (based on Caterpillar) of the proprietary accounting and governance metrics compiled in creating its Accounting & Governance Risk (AGR®) ratings. Companies are flagged for negative outliers (relative to their industry peers and to the company’s own history) which have been statistically correlated with manipulation or fraud. Click on the image to enlarge.
Technorati Tags: (ATSG), (CAT), (CPWR), (EXPE), (RJET), (SKYW), (STLD), (UNTD), (WYN), Air Transport Services Group, Belo, BLC, Caterpillar, Compuware, corporate-governance, due diligence, expedia, Republic Airways Holdings, SkyWest, Steel Dynamics, United Online, Wyndham Worldwid
Audit Integrity’s latest Bankruptcy Risk WatchList shows an increase in the number companies with a risk of bankruptcy greater than 1 in 10. While the likelihood of filing for bankruptcy protection is low on an absolute basis, Audit Integrity says a high Bankruptcy Risk score is an indication of severe financial distress.
On the the latest WatchList, eleven large-cap companies have a likelihood of bankruptcy greater that 10% in Audit Integrity’s estimation:
Those include cruise company Ambassadors International, Inc. (AMIE) – 16.8%, , TV miniseries producer RHI Entertainment, Inc. (RHIE) – 16.2%, solar cell supplier ARISE Technologies Corporation (APV) – 15.3%, Jackson Hewitt Tax Service Inc. (JTX) – 13.7%, Coalcorp Mining (CCJ) – 13.2%, and trucker YRC Worldwide (YRCW) – 12%.
Last month the three highest risk companies were Coalcorp Mining (CCJ) – 14.32%, Evergreen Energy (EEE) – 11.35% and YRC Worldwide (YRCW) – 10.26%.
Stakeholders are encouraged to watch these companies closely
Companies on the WatchList rank in the bottom two deciles of Audit Integrity’s Bankruptcy Risk Model (indicating a higher risk of bankruptcy than 80% of companies rated), have an AGR® rating of “Aggressive” or “Very Aggressive,” and have recently experienced high-risk events associated with an increased likelihood of bankruptcy. These include Accounting issues, Divestitures, Insider Trading, Late Filings, Litigation, Regulatory issues, Negative Earnings Surprise, Officer or Director changes, Restructuring, and/or a price drop in excess of 20% during the four-week period.
Download the full list here.
Technorati Tags: (AMIE), (APV), (YRCW), Ambassadors International, ARISE Technologies, bankruptcy, Coalcorp Mining, Jackson Hewitt, WatchList, YRC Worldwide
Caterpillar Inc. (CAT) reported strong earnings last month and analysts had expected its stock to benefit further from more growth in Asia and Latin America. But Audit Integrity last week listed the largest maker of construction equipment on its list of ten companies that failed its “due diligence test,” and it looks like CAT could be hit by a strengthening dollar.
Audit Integrity’s list comprises companies whose valuations are based on a degree of investor trust that may not be justified. Business Insider’s Joe Weisenthal also told investors to watch out for Caterpillar’s future stock trend, as U.S. exporters could be getting hit amid the strengthening of the dollar, the falling Euro and China’s unwillingness to revalue the Yuan upwards. Especially because Caterpillar’s sales growth is concentrated in markets outside of the U.S.
MarketWatch’s Shawn Langlois also highlighted that Caterpillar was among the hardest hit blue chip stocks duringthe recent market selloff. ”Now that the dollar has strengthened, the Euros Caterpillar earns overseas are worth less when they are brought home.”
Next month, the company will see its CFO, David Burritt, and four top managers leave the firm. But analysts don’t seem to be too worried about the management shake-up just yet, and Douglas Oberhelman, who takes over for James Owens as CEO in July and as chairman later this year, says he wants to make the company leaner and more responsive, accoding to Bloomberg.
Owens, who retires this summer, was able to lead Caterpillar through the financial crisis where the firm’s global sales fell almost 40 percent in 2008. He was also a key reason why Caterpillar’s sales more than doubled from $23 billion in 2003 to $51 billion in 2008 and earnings more than tripled from $1.56 a share to $5.66 a share in 2008.
“Caterpillar used to be a company that made a lot of money in good times and lost money in bad times,” Eli Lustgarten, an analyst at Longbow Securities told Reuters. “Under Owens, they were able to become far better downside managers than they have ever been in their history.”
Owens told Business Week earlier this month that “We’re seeing a very sharp recovery in 2010.” The company said in April it has added about 1,500 jobs since year-end because of higher production volume, including 600 in the U.S.
Regionally, revenue in North America was down 18% year over year, but “We expect an improvement in the economic conditions by the end of 2010 and particularly in Latin America,” writes Zacks Equity Research. Still, Zacks maintained its Neutral rating, citing concern over CAT’s “unfavorable product mix and higher pension expenses” for 2010.
The median price target by analysts is now at $80, higher than its current share price of about $63, according to Thomson/First Call. Given the currency and economic headwinds the company is facing and after seeing the company’s shares rise around 14 percent this year, maybe it’s time to reevaluate Caterpillar’s future stock price growth.
Sheena Lee
See also Pulse Check: Heavy Equipment On The Move
This post was based on a Company Search of Alacra Pulse for Caterpillar (CAT).
Technorati Tags: (CAT), Caterpillar, dollar, euro, PulseCheck
Audit Integrity has identified ten companies that failed its “due diligence test” and whose valuations are based on a degree of investor trust that may not be justified.
In a Chairman’s Corner letter, Audit Integrity’s Jim Kaplan cites the recent scandals involving Bernie Madoff, Lehman Bros, Goldman Sachs and the ratings agencies along with the the due diligence effort that would have protected stakeholders from being damaged.
The obvious rule of thumb is to obtain independent third-party verification before investing. That is neither hard, expensive, nor time-consuming – and avoids continuous head-slapping.
Audit Integrity’s list includes big names such as Caterpillar (CAT), which recently reported strong earnings and also a management shakeup.
Technorati Tags: (ATSG), (CAT), (CPWR), (EXPE), (RJET), (SKYW), (STLD), (UNTD), (WYN), Air Transport Services Group, Belo, BLC, Caterpillar, Compuware, corporate-governance, due diligence, expedia, Republic Airways Holdings, SkyWest, Steel Dynamics, United Online, Wyndham Worldwide
Audit Integrity is now updating its Bankruptcy Risk WatchList every month. While the likelihood of filing for bankruptcy protection is low on an absolute basis, Audit Integrity says a high Bankruptcy Risk score is an indication of severe financial distress.
On the the latest WatchList, only three companies have a likelihood of bankruptcy greater that 10% in Audit Integrity’s estimation: Colombian coal company Coalcorp Mining (CCJ) – 14.32%, Evergreen Energy (EEE) – 11.35% and YRC Worldwide (YRCW) – 10.26%.
[Tim Wicks, YRC Worldwide's president and chief operating officer, resigned earlier this month to work for his former employer, United Healthcare. Wicks’ visibility within the company was raised last year as he frequently worked with its biggest lenders to renegotiate debt agreements. The company’s capital restructuring culminated late last year with a $470 million debt-for-equity swap that kept YRC out of bankruptcy.]
Companies on the WatchList rank in the bottom two deciles of Audit Integrity’s Bankruptcy Risk Model (indicating a higher risk of bankruptcy than 80% of North American companies rated), have an AGR® rating of “Aggressive” or “Very Aggressive,” and have recently experienced high-risk events associated with an increased likelihood of bankruptcy. These include Accounting issues, Divestitures, Insider Trading, Late Filings, Litigation, Regulatory issues, Negative Earnings Surprise, Officer or Director changes, Restructuring, and/or a price drop in excess of 20% during the four-week period.
Download the full list here.
Technorati Tags: (CCJ), (EEE), (YRCW), bankruptcy, Coalcorp Mining, Evergreen Energy, WatchList, YRC Worldwide
In recognition of their fair dealing with stakeholders, Audit Integrity has announced the 2010 list of the Top 100 most trustworthy publicly traded firms in the U.S. Four companies, Bemis (BMS), CDI (CDI), Fred’s (FRED) and United Natural Foods (UNFI) have made the list for four straight years. Among the highest rated large-cap companies are Bed, Bath and Beyond, (BBB) and Hess Corp. (HES).
To be included in the Top 100, a firm must be ranked as “Conservative,” Audit Integrity’s highest Accounting and Governance Risk (AGR®) rating. The AGR score is derived from statistical analysis of over 100 metrics that historically have been associated with transparent financial reporting and corporate governance.
The Top 100 companies scored a low likelihood of risk in the following areas during the past year in comparison with their peers:
- Accounting Metrics, including revenue recognition, expense recognition, and asset/liability valuation
- Corporate Governance Metrics, including incentive compensation, amended filings, and litigation/regulatory actions
- High-Risk Events, including insider selling, share repurchases, and divestitures
Unfortunately, corporate fraud and malfeasance continue to rise despite outcries in the press and among regulators and the general public. Companies with poor accounting and governance practice are statistically likely to hide their true financial condition by manipulating the balance sheet, to the detriment of investors and other stakeholders.
The top 100 companies have gained 53% over the past 12 months, compared with 45% for the S&P 500. Download full list.
Technorati Tags: (BBB), (BMS), (FRED), (HESS), (UNFI), Bed Bath and Beyond, Bemis, CDI, corporate-governance, Fred's, Hess Corp, United Natural Foods
