Audit Analytics has prepared a research brief tracking director departures, including reason for departure, over five years. The research examined the entire filing population while focusing on accelerated filers and includes an industry specific breakdown of banking entities. We are pleased to offer a complimentary download.
Some points of interest in the briefing include:
- In 2007 the percentage of accelerated filers with a director departure was 37.5% as opposed to 33.8% for all filers.
- The percentage of departures among directors of banking entities increased by 7% between 2005 and 2008.
Banking entities experienced a sustained increasing trend in director departures starting in 2006 whereas director departures for all filers peaked in 2007.
The full report Director Departures – Five-Year Overview is available free of charge to Research Recap users for 30 days by special arrangement with Audit Analytics, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $49.00).
Audit Analytics also has released Financial Restatements – A Nine-Year Comparison ($149.00), which indicates that the impact of the Sarbanes-Oxley Act on Internal Controls over Financial Reporting (ICFRs) has been beneficial. Some highlights of the report are:
- For the third year in a row, the total number of restatements in 2009 declined, falling by 27% from 2008.
- For the third year in a row Audit Analytics found an equivalence or reduction in the severity of the restatements:
- The restatements with the largest negative impact on net income dropped from $605 million in 2008 to $357 million in 2009.
- The average cumulative impact on net income per restatement dropped from $7.1 million in 2008 to $4.6 million in 2009.
- The average number of days restated dropped from 510 in 2008 to 476 in 2009.
- The average number of issues per restatement dropped from 1.67 in 2008 to 1.48 in 2009
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, corporate directors, corporate-governance, restatements, SOX, U.S. banks
The Securities and Exchange Commission (SEC) settled with 205 defendants in its first quarter of fiscal year 2010, compared to 181 in the previous quarter and 123 in the first fiscal quarter of 2009.
NERA Economic Consulting says the increase in the number of settlements is particularly notable given that the first quarter is not typically one of the more active times for SEC settlements. Indeed, since the 2002 passage of the Sarbanes Oxley Act (“SOX”), the first quarter of the year has, on average, seen the fewest number of settlements, while the fourth quarter has seen the most.
Since SOX, the only other fiscal year in which the number of settlements in the first quarter exceeded that in the prior quarter was 2007.
Although large in number, settlements in the first fiscal quarter were generally modest in amount. Both the average and median settlement were lower than for fiscal year 2009 as a whole. The average settlement for companies whose settlement included a monetary payment was $4.7 million, compared to $10.8 million over the course of the SEC’s fiscal year 2009 (FY09). The median company settlement in the fiscal first quarter was $0.4 million, compared to $1 million in FY09.
Full report available here.
Technorati Tags: corporate-governance, litigation, NERA, settlements
Guest Post by Oxford Analytica
During the past decade, blogging has simplified the process of publishing and distributing words, enabling anyone with an internet connection to share thoughts with the world at virtually zero cost. However, with the development of broadband internet, it has evolved into a richer, more immersive platform that draws on a wider range of media — spanning text, images, audio, video and software applications.
The net result is a very different kind of media system. With millions of blogs engaged in production of news, comment and analysis around every conceivable topic, the media is becoming more open, collaborative and participatory in content and operation. The blogosphere’s impact can be seen most vividly in the speed of information distribution. It is a crucial link in a wider chain of technologies (such as camera phones, wireless connectivity and cheap computing), which is reducing lag time between incidence and reporting of news to minutes, even seconds. Recognising the shift from static to ‘realtime web’, Google recently updated its search algorithm to include latest results from the blogosphere.
Traditional media implications. The development of the blogosphere into an extensive and rapidly updated information repository poses a challenge to established parts of the media, such as newspapers, television and radio, which have traditionally functioned as gatekeepers between large audiences and global news. Under financial pressure, traditional newsrooms are cutting investment in original journalism, notably in specialist areas. This is due to the cyclical shock of recession and longer-term structural changes brought about by the web (and associated migration away from traditional formats of audiences, with advertisers).
Individually, bloggers can devote more time and energy to topics the traditional news media otherwise would struggle to cover. Reflecting this shift, many newsrooms license digital media monitoring services to trawl the blogosphere for stories and leads.
Transparency concerns. The growing influence of the blogosphere has led regulators to impose new forms of accountability on bloggers. For example, in the United States, the Federal Trade Commission in October 2009 issued new guidelines that require bloggers to disclose vested interests — such as free merchandise or payment from companies they write about.
Reputation management. The blogosphere also challenges the public profile of individuals and organisations. For example, the web makes every employee a potential point of contact with the media — or a leak. Information is harder to contain, whatever the topic or source:
- Local problems and secrets quickly can be transformed into digital liabilities that can affect an individual or organisation on a global scale.
- Conventional protections, such as libel or defamation law, struggle to have leverage due to distributed server location and the frequently anonymous attribution of blogs.
A growing number of companies are being hurried into unscheduled announcements or regulatory disclosures due to the blogosphere. There is growing realisation that digital news flow cannot be controlled, and the best course of action is to engage with the blogosphere as quickly and fully as possible. The best way to achieve this is by monitoring, in real time, what people are saying on the web.
For many, this points towards a new politics of communication that will force industries and governments to accept a higher degree of accountability.
Outlook. The dual shock of the recession and digital revolution is sparking a process of retrenchment and consolidation, but over the longer term traditional media will probably find themselves at the heart of a more diverse media landscape, in which blogs play an important, but not dominant, role. Traditional media still function as the main anchor of the news — their brands serve as trusted filters, flashpoints for debate, and incubators for media talent. The blogosphere will supplement these, notably filling gaps and extending coverage.
Technorati Tags: accountability, blogs, corporate-governance, government-affairs, Media, newspapers, online-media, traditional media
Research Recap frequently highlights Audit Integrity’s accounting and governance risk reports as we believe them to be helpful tools at a time when corporate governance and risk are increasingly complex and important factors in investment decisions. From time to time, Audit Integrity’s methodology and motivations have been questioned (mostly by those who don’t like what the company is saying). Now Audit Integrity has provided a compilation of academic studies that support the company’s approach and results.
The results have consistently shown a clear correlation between Accounting and Governance Ratings and major negative events – regulatory actions, shareholder litigation, material financial restatements, bankruptcy and severe stock declines.
The AGR rating and risk models are designed to be predictive of such events, with all but the restatement model indicating the likelihood of the event occurring over the next 12 months (for restatements, the model identifies the risk for any time in the future.)
Granted that the report was produced by the company and may not be comprehensive, it provides a solid argument that the company’s AGR ratings should be taken seriously by any investor looking to manage exposure to accounting and corporate governance risk.
The full report can be downloaded here.
Technorati Tags: accounting, Audit-Integrity, corporate-governance
Fitch Ratings conference multimedia - European Credit Outlook 2010 (free with registration)
Compelling indictment of PwC’s conflicted role in AIG affair from @retheauditors
Non-U.S. venture investing in 2009 off 47% from 2008 as Israel financing drops 61% (DJ VentureSource)
Inaugural Kauffman Economic Outlook: survey of leading economics bloggers
History suggests economic recovery is closer than you think, with a new silicon-based global elite at the helm (Booz)
In encouraging sign for economy, US banks stop tightening lending requirements for businesses (WSJ)
Burkle’s Yucaipa fund seeks to increase its18% stake in Barnes & Noble (BKS) (via Alacra Pulse)
Technorati Tags: (AIG), (BKS), accounting, Barnes & Noble, blogs, Burkle, corporate-governance, economy, PwC, venture-capital, Yucaipa
Guest Post by Oxford Analytica
The scope of human social networks is often thought to be near-limitless, especially in the modern era. In fact, it is surprisingly small and has remained so despite the opportunities offered by the internet. This has implications for best-practice in organizational structure.
For most of history, humanity has lived in very small-scale, closed communities. Historical sources such the Domesday Book census of England in 1086 as well as census data on contemporary small-scale societies indicate a typical community size of around 150 individuals. This also turns out to be the typical size of personal social networks — roughly the number of people with whom one has a personal, reciprocated relationship.
Where the outcome depends upon personalized contact, it is crucial to keep structures small.
‘Friend lists’. Such a limitation at first glance contradicts the conventional wisdom that email, text messaging and social networking sites like Facebook dissolve the constraints imposed by face-to-face interaction. Yet detailed analyses of the size of Facebook ‘friends’ lists suggest this does not happen. While a few people do indeed have very large numbers of friends (in excess of 1,000), most people’s lists approximate exactly what they have in real life.
Concentric circles. Personal social worlds consist of a series of concentric layers, with each successive layer including progressively more individuals but with declining quality of relationship. The successive layers consist of five, 15, 50 and 150 people. This layered structure is characteristic and can be documented in different cultural and economic contexts.
Dunbar’s Number. The limit of 150 is known as ‘Dunbar’s Number’, after Robin Dunbar, the University of Oxford academic who developed the concept. It is not a limit on acquaintance or recognition. It is the limit on the number of individuals with whom one can have a personalized relationship, which not only has a history but is reciprocal:
- Relationships with people beyond 150 are more casual. They connote facial recognition and name association. They may even be completely one-sided, as might pertain between a very junior staffer in a multinational corporation and the managing director or chief executive officer (CEO).
- Beyond 150, detailed personal knowledge of how that person thinks and behaves is missing, making it hard to calibrate one’s own behavior in the subtle ways that normally facilitate everyday personal relationships.
Community attributes. The lessons of small-scale communities shed further light on this issue. Dynamics here depend on two key attributes:
- Trust. Direct knowledge confers trust, which depends on having spent time with someone on a purely social level. Relationships of trust are formed only by activity.
- Peer pressure. A sense of community is created when the whole group of 150 shares the same 150 friends. This generates a ‘grandparent effect’. Misbehavior towards one member will upset a lot of other relationships within one’s social world, and the grandparent will wag their finger menacingly.
Organizational application. These concepts are familiar in the growing research area devoted to the concept of ’social capital’. The consistency of these patterns complements this research, and has implications for how organizations might be structured:
- Personal trust. A key consideration is whether the organization depends on personalized contact between individuals. If personal contacts or trust are crucial to how well the business functions, then structures need to be kept small.
- Motivation. Where the community needs to act as a community — ie it polices itself through peer pressure — then a sense of belonging, of a common ‘grand project’, acts as a much stronger carrot in persuading people to cooperate than any amount of management and coercion.
The fact that social networks are limited, but at the same time highly structured, offers a model honed by millions of years of evolution as to how organizations might best be structured. Well-integrated organizations are self-policing because the sense of communality and commitment to the communal project that arises from personalized relationships ensures best motivation. Where the outcome depends upon personalized contact, it is crucial to keep structures small.
Technorati Tags: corporate-governance, management, organizational structure, social-media, social-networking
Guest Post by James A. Kaplan, Chairman and CEO, Audit Integrity
“The Big Zero,” a recent op-ed piece by Paul Krugman of the New York Times,was a real eye-opener.
The author points out that this has been a decade of Zero job creation; Zero economic gain for the typical family (median household income adjusted for inflation, actually fell); and Zero stock returns, with the market closing just above the 10,000 mark at the end of 2009.
He goes on to quote a speech given in by Laurence Summers, then Deputy Treasury Secretary:
“If you ask why the American financial system succeeds, at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis, that there is discipline on company managements in the way they report and monitor their activities…. There is an ongoing process that really is what makes our capital market work and work as stably as it does.”
In other words, in 1999 Americans were told they had honesty in corporate accounting, which in turn allowed investors to make good decisions and allowed the financial system to function. But in fact, the opposite proved to be true.
Operating under the guise of FASB transparency and Sarbanes-Oxley compliance, many of America’s largest corporations have been robbing the store as shareholders and employees suffer. Over the last decade executive officers’ compensation has grown from over $24 billion to a total of $55 billion – an aggregate increase of 129%, or 144% computed on an individual basis.
The Analyst’s Accounting Observer reports that by 2008, S&P 500 companies were awarding $44.5 billion in stock grants and options to their executives while contributing only $39.5 billion to pension plans for all other employees.
Historically, there has always been an argument justifying astronomical executive salaries (see “Why Has CEO Pay Increased so Much?” by New York University’s Xavier Gabaix & Augustin Landier[3]). After all, aren’t these the people making the important decisions that increase corporate profitability and enrich their investors?
That doesn’t seem to be the case. Since 1999, earnings per share for the S&P 500 have grown from $56.13 to $59.65, or 6.22%, a paltry sum – particularly when compared to the 144% growth rate in C-suite salaries.
I wonder how it is possible to justify more than doubling executive compensation while revenue growth, earnings, and other financial measures have deteriorated so dramatically.
By what logic are we paying them so much to run our investments into the ground? Did management deserve the $30 billion dollar increase – or would the companies’ owners (shareholders) have been better served if they had received $30 billion in dividends? In short, this decade can be considered an age of C-suite “robber barons,” and shareholders are the ones they are robbing.
In all fairness, recent years have been a struggle. Expectations were not met on many fronts, and U.S. economic domination began to wane. I could accept the argument that those C-suite managers did their best to mitigate negative results — but I struggle with the disproportionate size of their rewards, much of it created through incentive options which were “timely exercised.”
There is no evidence that increased compensation has a positive impact on corporate results. In fact, Audit Integrity’s studies over the last decade-plus have shown quite the opposite, particularly in regard to excessive incentive compensation. Incentive compensation as a percent of total compensation for CEOs and CFOs is a significant measure in determining the probability of a company’s poor future performance. Companies with abnormally high incentive compensation often end up as poor performers because management manipulates short-term returns to the detriment of the companies’ long-term interest.
This observation is not new. In a rallying cry for a return to shareholder capitalism, in which a company’s decisions are made by the owners, rather than “managerial capitalism,” Martin Hutchinson quotes none other than Adam Smith on conflict of interest:
“Economic theory is pretty clear on the advantages of shareholder capitalism, in which there is no separation between the ownership of businesses and its decision-making. The benefits of the price mechanism, in which economic actors compete with each other for advantage, have been with us since Adam Smith famously wrote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ Thus selfish people acting in their own interest and controlling their own capital produce benefits for society as a whole.
“However, Smith recognized that when managers were separated from capital, a very different picture emerged. ‘The directors of such companies … being the managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance … Negligence and profusion must always prevail, more or less, in the management of such a company’.’”
Not only does short-term incentive compensation provide managers with outsized rewards; it also results in increased C-suite turnover by removing any interest in the company’s long-term health – which is the very purpose for which incentive Options were designed. Trustworthy companies, by contrast, perform well over the long term (see http://www.trustworthycorporations.com). None of the companies on the list offer a high ratio of incentive compensation.
Click here for a list of companies which have excessive C-suite compensation compared to their industry peers, and an Accounting & Governance Risk (AGR®) ranking in the bottom decile.
It is incumbent on us to take a more active role in compensation issues. I encourage stakeholders in these companies to realign their executives’ compensation and focus on management goals that will provide Bang for your Buck before the decade is over.
Technorati Tags: activist shareholders, bonus, corporate-governance, executive compensation
Audit Integrity says Oshkosh Corporation (OSK) and BorgWarner (BWA) are among riskiest North American public companies in the automotive sector, based on their “Very Aggressive” corporate governance practices. Borg Warner is also on Audit Integrity’s Investor Watchlist. Among other factors, the company was “Flagged for incentive compensation of CEO & CFO (91st percentile), ratio of CEO to CFO compensation (83rd percentile), and Chairman is CEO (since June 2003).”
However, Morningstar noted on Oct 29 that BorgWarner’s investment-grade balance sheet’s net debt/capital ratio had declined to 21% from 25% at year-end. “Only healthy firms can strengthen their balance sheet in a recession rather than increase leverage to survive. If the positive scenario comes true, then BorgWarner can quickly increase production without hiring more people. Despite the recent decline in auto stock prices, we think BorgWarner is one of the best parts suppliers we cover. The firm’s products should see higher demand for years as governments keep imposing higher fuel economy regulations.”
The least risky, according to audit Integrity, are Genuine Parts Company (GPC) and Westport Innovations (WPT), both which have Conservative governance practices.
Audit Integrity’s forensic analysis of accounting and corporate governance practices distinguishes between the companies of greatest and least risk based on its Accounting and Governance Risk (AGR) ratings.
Companies in the bottom-ranked Very Aggressive AGR category have had consistently opaque financial reporting, weak corporate governance, and as a group are expected to have inferior performance relative to their peers over the next three months on a total return basis.
In contrast, companies in the top-ranked Conservative AGR category have had consistently transparent financial reporting, strong corporate governance, and as a group are expected to surpass their peers over the next three months on a total return basis.
Audit Integrity says its AGR Ratings and AGR Equity Model scores are highly correlated with equity returns. “Companies with better Audit Integrity ratings outperform those with poor ratings. Our 10- year back-testing produced evidence of a 15.3% return spread between the best and worst deciles.” For the auto industry, trailing-twelve month equity returns are as follows:
The full report is available free of charge here.
Technorati Tags: (BWE), (GPC), (OSK), (WPT), auto parts, automotive, BorgWarner, corporate-governance, Genuine Parts Comany, Oshkosh Corp, Westport Innovations
A new study from Audit Analytics supports the view that smaller companies should not be exempt from Sarbanes-Oxley rules requiring companies to have auditors attest to the strength of their internal financial controls. (Complimentary download)
An amendment to pending financial regulation reform legislation would exempt firms with a market capitalization of less than $75 million from including an independent auditor report on their internal controls over financial reporting.
But the Audit Analytics study finds that companies that have not yet had an auditor’s review of internal-control reports are more likely to have a restatement than larger companies, which are required to do so. This is despite the fact that their managements claimed to have effective controls.
The analysis divides filers into two groups: (1) Those that filed an auditor attestation and (2) those that filed a “management-only” report. These two groups of filers were then further separated according to whether they had disclosed effective Internal Controls over Financial Reporting (ICFRs), ineffective ICFRs or had not disclosed their ICFR status.
Key findings of the report:
- The rate of restatements filed either 90 days before or at any point after a disclosure of effective ICFRs was 46% higher among companies that filed management-only reports as compared to those that filed auditor attestations.
- When an auditor is involved in a company’s ICFRs assessment and there is a subsequent financial restatement, the disclosure that past financials cannot be relied upon is given to the public more promptly.
The full report Restatements by SOX 404 Issuers is available free of charge to Research Recap users for 30 days by special arrangement with Audit Analytics, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $49.00)
Technorati Tags: accounting, auditing, corporate-governance, financial-regulation, SOX
Audit Integrity has added two large cap companies – both in the energy sector - to its Watchlist of European companies with the greatest short-term equity risk. Selection criteria include: the lowest Accounting and Governance Risk (AGR) Rating of Very Aggressive, and an Equity Model Ranking of 1 (Substantially Underperform Market).
Oil and gas companies Repsol YPF SA (REP) and Galp Energia SGPS SA (GALP) were both added Dec 7, based on their reports for the quarter ended June 30.
Analysts are divided on Spain’s Repsol YPF. In late November after the company’s quarterly results, UBS maintained its Buy rating, while Evolution Securities rated it an “Add” and recommended disposing of its YPF subsidiary. On the other hand, DeutscheBank downgraded Repsol YPF to a Sell because of difficult trading conditions, joining ING, which maintained its Sell rating.
REPSOL YPF reported third quarter earnings of 30 euro cents per share (45 cents per ADR), compared to the Zacks Consensus Estimate of 43 cents and year earlier earnings of 58 euro cents (82 cents per ADR). While earnings were down year over year due to the steep decline in oil and natural gas prices, a sequential increase in net income (€859 million vs. €647 million or $1.23 billion vs. $975 million) shows the signs of recovery in the macro backdrop. Zacks has a neutral rating on the company.
We believe that the long list of challenges facing Repsol will continue to weigh on its valuation, limiting its upside from current levels. These include declining reserves, weak volumes, very low reserve lives and rising costs. - Zacks
Galp Energia SGPS SA ’s stock rating was downgraded in July by JPMorgan Cazenove, which cited concerns about the capital structure of Portugal’s biggest oil company and a “weak” outlook for refining margins. “We do not believe that Galp’s capital structure can support the shift in the company’s focus from downstream to upstream,” said Nitin Sharma.
Audit Integrity also added small Cap companies GFKL Financial Services AG (GFS1) and Pirelli & C Real Estate SpA (PRS). The only comany removed was Aker BioMarine ASA, as its market capitalization fell below $100 million.
The full list is available here.
Technorati Tags: (GALP), (REP), corporate-governance, Galp Energia, oil and gas, Repsol YPF
