Aloke Ghosh

Professor of Accountancy Baruch College, CUNY

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Toshiba: Accounting and Accountability

July 23, 2015 / / 0 Comments

Toshiba Corp. overstated nearly $1.2 billion (152 billion yen) of profits (accounting earnings) over the last six years. It expects to take a charge of nearly $3 billion for improper accounting and restate its prior period financial statements. Not surprisingly, since May 8, when it withdrew its earnings forecasts, canceled the year-end dividend and widened an accounting probe, the company has lost $3.8 billion in market capitalization. The stock has declined 26% this year making it the second-worst performer on the Nikkei 225 Stock Average, which has climbed 18% (Toshiba is not listed in the US).

The company initially uncovered irregularities related to percentage of completion estimates and then appointed a third-party committee to expand the investigation. The Chair of the audit committee, the CEO, and a string of other senior officials also resigned. At least eight analysts have suspended their ratings on the company’s shares.

Who was the auditor of Toshiba during the period of accounting irregularities? It was E&Y’s Japanese affiliate E&Y ShinNihon. Why did the auditors, a Big 4 affiliate, fail to uncover this accounting “fraud”?
http://www.bloomberg.com/news/articles/2015-07-20/toshiba-to-restate-152-billion-yen-of-past’-profits-after-probe

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SEC Solicits Public Comment on Audit Committee Disclosures

July 21, 2015 / / 0 Comments

SECThe audit committee plays an active role in monitoring the financial reporting practices of a public company and in the oversight of the independent auditor. Because of concerns that investors may have limited information on how audit committees exercise their oversight of the independent auditor, the SEC has issued a “concept release” on the audit committee disclosure requirements while soliciting public comments on factors considered by the committee when overseeing the independent auditor which includes the appointment and retention of the auditor.

SEC Chair Mary Jo White said “The way audit committees exercise their oversight of independent auditors has evolved and it is important to evaluate whether investors have the information they need to make informed decisions.” The SEC intention is to examine whether improvements can be made to enhance the information provided to investors about the audit committee’s responsibilities and activities.

Investors can expect more expanded disclosures on the functioning of the audit committee.

For further details, see

http://www.sec.gov/news/pressrelease/2015-138.html

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Management Discussion and Analysis (MD&A) Usefulness

July 19, 2015 / / 0 Comments

As part of required annual (10K) and quarterly filings (10Q) with the SEC, public companies must include a section titled “Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” that typically precedes the financial statements. Although auditors are not required to audit the MD&A section, they must examine and review its contents and presentation for annual and quarterly periods. Currently, the SEC is looking for ways to improve the focus, clarity and navigability of the MD&A.
According to LogixData, the average word count for the Fortune 50 companies 10Ks (MD&A and footnotes sections) for the last three years has been around 17,000. Assuming about 250 words per page, 17,000 words translate into about 68 pages of discussion and analysis of the accounting numbers. The conventional wisdom is that MD&A is useful, but how important are these pages for investment decisions? For more information on the usefulness of MD&A to investors, read PWC’s 2013 survey of U.S. professional investors’ views.

http://www.pwc.com/en_US/us/pwc-investor-resource-institute/publications/assets/pwc-insights-from-investors-on-mda.pdf

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India’s Booming Commercial Paper Market

July 16, 2015 / / 0 Comments

Aloke GhoshAccording to the WSJ, during the last 3 months, the Indian commercial paper market reached $41.2 billion (about 55% higher than last year). The total amount of commercial paper outstanding in India, as of June 2015, is around $49 billion. While this amount is large, it is still relatively small compared to the size of the banks loans (commercial paper market relative to bank loans is only 4%). So there is plenty of growth opportunity in the Indian commercial paper market.

Companies in need of short term cash often rely on commercial paper (debt with maturities between one week and 3 months) by directly borrowing from capital markets (e.g., pension funds, mutual funds, insurance companies) because this form of borrowing is relatively cheap. For example, presently in the US, the commercial paper rate is less than 2% and the total size of the commercial paper market exceeds $1 trillion. In contrast, in emerging markets, companies are forced to borrow from banks because capital markets may not be sufficiently developed or deep. Banks in India can charge as high as 10% for well-rated companies for short term debt.

By borrowing directly from capital markets, Indian companies can save about 2%, which means more investments by companies and higher growth for the Indian economy. This is very encouraging news for investors targeting Indian companies because of the upside potential — redistribution of wealth from banks to investors.

http://blogs.wsj.com/indiarealtime/2015/07/03/why-indian-companies-looking-for-cash-are-bypassing-banks/

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Goodwill Hunting By Microsoft: Satya Nadella’s Truth-Telling

July 14, 2015 / / 0 Comments

microsoft-logoGoodwill Gone:
In a recent press release (July 8, 2015), which comes just before its earning release scheduled for July 21, Microsoft’s CEO Satya Nadella announced that the company will record an impairment charge of $7.6 billion related to the acquisition of Nokia Devices and the restructuring the company’s phone hardware business. The company also announced that it will lay-off 7,800 employees and essentially exit the Web display advertising business because it failed to make headway against other hand-held devices using Apple’s and Google’s mobile operating systems.

Goodwill Hunting:
On April 25, 2014, Microsoft acquired Nokia’s Devices and Services (NDS) but overpaid by $5.5 billion (or by 58%) and attributed the overpayment to increased synergies from the integration of NDS. This year, the company is virtually eliminating the entire goodwill recorded in 2014 and is acknowledging publicly that the prior CEO Steve Ballmer overpaid for NDS. Welcome to the “Game of Thrones”!

The Future:
Even after eliminating $5.5 billion of Goodwill, Microsoft will still have more than $14 billion in Goodwill remaining on its books (about 12% of total assets). The last time Microsoft recorded a goodwill impairment charge was in 2012 ($6.3 billion). So investors should embrace for future goodwill impairment charges. Some more truth-telling may follow.

http://news.microsoft.com/2015/07/08/microsoft-announces-restructuring-of-phone-hardware-business/

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Professor Aloke Ghosh’s Teaching Evaluations — Spring 2015

July 13, 2015 / / 0 Comments

Aloke GhoshProfessor Ghosh’s teaching evaluations from Graduate Intermediate Accounting (ACC9804) class in Spring 2015 (from 85 respondents).

 

 

The majority of students agree or strongly agree on the following points:

  • The course was organized:                                      88%
  • Communicated course objectives/goals:        88%
  • Assignments contributed to learning goals: 90%
  • Course requirements stated/followed:           90%
  • Books helpful:                                                                 90%
  • Well prepared:                                                               92%
  • Communicated course content clearly:          95%
  • Helped learn subject:                                                  83%
  • Helpful feedback:                                                          88%
  • Returned work in timely manner:                       93%
  • Available outside of class:                                        95%
  • Class environment fostered learning:               88%
  • Treated students with respect:                             95%
  • Generated enthusiasm:                                             93%
  • Clear grading system:                                                 96%
  • Challenged me intellectually:                                 90%

Some specific comments include

  1. “I appreciated Prof. Ghosh’s work ethic. He always came to class well prepared and took the temperature of the class to see if we were understanding and maintaining the material. He brought real life issues and work to the classroom and that is hugely appreciated. Well done Professor. Uniquely and amazingly well done.”
  2. “I love Professor Ghosh! He has a great passion about accounting which makes me more interested in the industry.He has also designed a great syllabus which pushes me to learn so much during the semester. I am very grateful that I have him as one of my accounting professors.”
  3. “Overall, I enjoyed this course. The Connect quizzes were stressful but gave structure to the course, set the pace for the class. However, I’m sure some people cheated on the connect quizzes, which gave them an unfair advantage for the part of their grade related to the connect quizzes. I thought you did a good job of teaching complex topics such as accounting for leases, deferred taxes and pension accounting. You gave us every opportunity to manage our grades and do well. I do think that in the future there should be two midterms and a final exam because the midterm exam had so much material on it. Great professor, humorous, brings into the class relevant outside stories. Great course but a lot of work.
  4. “Professor, Thanks for everything this semester, you were wonderful. I really feel that you want your students to succeed, and you are doing a great job. I will keep in touch. Thanks!”
  5. “Prior to this class, there has never been a professor that can fully grasp my attention for the entire class time. The guidance provided by Professor Ghosh, and his passion to engage his students has made this one of the most rewarding courses I have ever taken. Thank you!”

To view the complete evaluation, click on the following link

Distribution-GhoshAlokeACC-9804-SMWA-GRAD-LEC-2015-Spring

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Center Funds Independent Trustee

July 11, 2015 / / 0 Comments

centerProfessor Ghosh is one of the three Independent Trustees of Center Funds.  He also serves as its Audit Committee Chair. Center Funds is a SEC registered mutual fund offering a select series of funds for  investor and institutional share classes. The Funds manage collectively around $500 million in net asset value.

http://www.centrefunds.com/fund-trustees.php

 

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Porsche and Profitability: Winning the Race Aided By Euro

July 11, 2015 / / 0 Comments

Porsche-Logo-AT-4Earlier this year, Porsche AG, headquartered in Stuttgart and owned by Volkswagen AG, which is itself majority-owned by Porsche Automobil Holding SE, was cautious whether it would deliver on its goal of a 15% pretax profit margin because of slowing growth in China, turmoil in emerging markets, and a shift toward cheaper cars. However, a weaker euro makes Porsche cars cheaper in many foreign markets. Although Porsche hedges 20 currencies, those that are unhedged are translating into higher profits especially those from the U.S. and China (U.S. is the single largest market for Porsche high performance sports cars but China is expected to get the #1 spot by 2016).

Porsche’s margins have come under pressure, falling from 19% to about 15% largely because of its SUVs (Macan and Cayenne) which have much lower profit margins but account for 58% of the company’s sales. This is in contrast to the 911, Boxster, Cayman and Panamera sports cars which have much higher profit margins.
At the Frankfurt Motor Show in September 2015, Porsche will unveil an exclusive arrangement with Apple Inc. to launch an updated version of its 911 sports car, with new engines and a new communication system. The new 911 will come with Apple’s CarPlay preinstalled. CarPlay is an in-car information and entertainment system that allows drivers to use their favorite iPhone apps such as iTunes and iPhone contacts on their car’s dashboard computer.

Porsche remains an all-round winner – a proven winner on the tracks, a thrill-provider for its drivers, and a darling stock for its investors.

For more details, read the following Wall Street Journal article (may require subscription)
http://www.wsj.com/articles/porsche-on-track-to-hit-profit-target-1436464536

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How Do Banks Analyze a Business?

July 9, 2015 / / 0 Comments

BankFor creditors, cash flow almost always trumps all other accounting-based measures. This is in stark contrast to investors who care more about current earnings measures because current earnings are a better predictor of future operating cash flows than current operating cash flows.

According James Adams, a senior analyst at Sageworks (provider of credit risk management), the following procedures are helpful in analyzing whether to advance a loan to a company:

1. Declining account balances in cash flow are a reliable leading indicator for predicting delinquencies.
2. Review tax documents in lieu of company-prepared statements because some borrowers might be tempted to overstate their income in order to qualify for a bigger loan. They are less inclined to do so on tax returns
3. The accelerated depreciation schedules used for tax returns result in more conservative asset valuations which is another reason to prefer tax documents over company-prepared statements.
4. As a general rule, strong balance sheets are also correlated with healthy liquidity positions.
5. Also important are credit reports, loan repayment history, cash balances, and new asset acquisitions.

http://daily.financialexecutives.org/how-banks-analyze-a-business-to-interpret-its-cash-position/

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Organizational Structure of the largest U.S. Banks

July 7, 2015 / / 0 Comments

BankThe largest U.S. banks are constantly under regulatory pressure to simplify their organizational structures especially following the 2010 Dodd-Frank Act. How complex are their operations?

Subsidiaries

  • JPMorgan Chase & Co., the largest U.S. bank by assets, has 3,400 subsidiaries as of March 2014, which is relatively stable from the number in 2012.
  • Morgan Stanley, the sixth-largest bank, has 2,900 units as of 2013, the same number as two years ago.
  • Bank of America Corp. had 1,736 subsidiaries at the end of last year, 86 fewer than in 2013, which was unchanged from 2012.
  • Wells Fargo & Co. has 1,273 subsidiaries as of December 2013, the fewest of the six largest banks.
    These  subsidiaries can often be interconnected through complex connections. For example, Banc One Capital Holdings LLC, a wholly owned subsidiary of JPMorgan, owns BOCP Holdings Corp., which in turn owns Tax Credit Acquisitions LLC. Tax Credit is the owner of Banc One Housing Investors GTC-1A LLC, which owns a 50 percent stake in BOTCF I LLC. That company owns a 48 percent stake in ORC Tax Credit Fund 1 LP, which in turn has eight subsidiaries, including one named Faith Village LP. Faith Village is a low-income housing project in Columbus, Ohio.
    Overhauling Plans

Resolution Plans

JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley, along with six other firms, submitted resolution plans to simplify the holding company structure of their respective banks but their plans were deemed insufficient last August by the Fed. According to the Fed, the new blueprints needed to ensure that banks can be wound down without systemic contagion.

For more, read the following article in Bloomberg.
http://www.bloomberg.com/news/articles/2015-07-06/u-s-banks-keep-thousands-of-units-after-push-to-simplify-them

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