Surprise From Lucy Luo of Apollo Publication Corp.

This is a follow up to "Joke of the Day," one of my previous posts, and is also a follow up on my "Follow up on Joke of the Day," also a previous post. I'll insert links to those posts later on. For now, see the archives.

Much to my surprise, I found the following in my e-mail inbox this evening:

Where and what do you know about Luobu?

Luobu does not know you at all?

Sent to me from lucyluo@APCorps

I sent a response to Ms. Lucy Luo and here is what I said:

All I know of Luobu is what I read in your company's prospectus. It is to be the currency of the all earth citizen and the only currency admitted bank note by law of IOE. I find your company's vision to be very intriguing and wanted to know how someone can become a part of your mission. Can I trade my U.S. dollars for Luobu?

I'm sorry that Luobu does not know me but how can a currency 'know me?'

Please send me more information of how I can join your mission of one language, one religion, one currency, one people. I am eager.

Thank you.

SEE COMMENTS FOR FOLLOW-UP ON THIS POST.

As I Was Saying...

This New York Times article, titled, “The End of Pensions,” exposes the future of pensions in no uncertain terms, similar to what I mentioned in my post, below, entitled, “Do You Know Where Your Pension Is?” As I was saying, insurance is no assurance. This is an excellent, in-depth article from the New York Times and anyone who has a pension, or an interest in one, should read it. However, after the reading, it still begs the question, “Where is my pension?”

Who Really Wins in Shareholder Lawsuits?

It is commonplace for shareholder lawsuits to arise against corporations when they are required by the SEC to restate earnings for prior periods. When earnings restatement causes a drop in earnings previously stated, the value of the stock sold during the restated period also drops (not to mention its current selling price). Shareholders then attempt to recover their losses through derivative or class action suits. Traditionally, the law has provided for these types of suits as deterrents to acts of negligence and/or fraud by corporate officers and directors and, of course, to provide a means by which shareholders can receive compensation for injurious acts committed by the same. However, in reality, a shareholder cannot expect to recoup, dollar for dollar, the difference between the price paid per share and the restated value per share. In fact, after attorneys’ fees, shareholders should consider themselves lucky to receive as little as $0.15 per share, if anything. That is according to Bhagat and Romano in Empirical Studies of Corporate Law (2004), who also state, “[derivative] suits typically result in no or very low monetary rewards” for shareholders.

The study further points out that a large portion (if not most) of settlement payments or awards in these suits goes to the plaintiffs’ attorneys. In addition, many times these payments (or portions thereof) are made by the defendants’ liability insurers, whose premiums rise as the frequency, cost, and risk of litigation increases. Then, once the legal dust has settled, in many circumstances, corporations are allowed to expense these payments, thereby creating huge tax deductions (as much as $0.40 per dollar paid in settlement) and, in some cases, even tax credits or refunds for the prior years in which earnings were restated. This adds up to huge sums of money that could more rightfully be used to help decrease the federal deficit (See Companies Settling Suits Pay Lower Taxes and Companies That Inflated Earnings Now Seek Tax Refunds.) Of course, even with the tax breaks, in the face of the double-whammy of lawsuits by both the SEC and shareholders, corporations still lose in a big way in terms of investor confidence and stock price. But it seems that shareholders gain virtually nothing to speak of, as well, from these lawsuits which sometimes further embed an indelible bad image of the corporation in the minds of potential investors. An article states that Time Warner’s stock has yet to recover from at least a 75% price reduction resulting from shareholder lawsuits arising from the company’s merger with AOL back in 2000.

With the combination of stricter regulation by the SEC, requirements set forth by the Sarbanes-Oxley Act, and the oversight of the PCAOB all potentially resulting in more restatements, it will be interesting to see whether, and at what point, legislation is enacted to curtail frivolous derivative lawsuits that only serve to richen attorneys and insurers. (Or, how long will it take for shareholders to realize the same?)

More to come on the effects of restatements.

Do You Know Where Your Pension Is?

Subtitle: Insurance is No Assurance

First the steel industry, then the airlines, and now, the automotive industry? The Pension Benefit Guarantee Corporation (PBGC) has its hands full. As stated below, this is the federal agency that insures employee pensions when companies can’t meet their obligations. Don’t hold on to that warm, fuzzy feeling for too long, though because chairman of the PBGC, Elaine Chao states in the company’s 2004 Annual Report that, although the company has been able “to continue paying participants their guaranteed benefits for a number of years,…it is clear that the Corporation does not have sufficient resources to meet all of its long-term obligations.” This could potentially affect more than 45 million Americans whose pensions are insured by the PBGC.

PBGC’s annual report reveals that single-employer programs (those sponsored by only one company, such as GM) recorded a deficit of $23,305 billion and multi-employer programs (sponsored by more than one unrelated company) were in the red for $236 million. The deficits were largely caused by the collapse of the steel industry in 2003, from which the PBGC assumed over $5 billion in pension liabilities. US Airways caused another $3 billion burden for the PBGC and problems at United Airlines will add to that. (Click here for a CBO paper titled The Risk Exposure of the PBGC). The PBGC’s estimate of ‘reasonably possible’ plan terminations (due to corporate failures) in the near future is an additional $96 billion assumption of pension liabilities. Another big part of the problem is that the PBGC was formed to insure pension benefit plans of individual companies, not entire industries. Now, the automotive industry may add to the heap. Just within the past couple of days, both Ford Motor Co. and Dana, another auto parts supplier, announced restructuring plans in efforts to drastically reduce costs. The Ford article mentions that Ford’s decision to limit its number of vendors may cause problems for more auto parts suppliers in the near future.

This past September, the Senate HELP Committee approved a pension reform bill that would supposedly aid in funding the PBGC. However, most changes would be phased in over the next ten years. Additionally, the changes would increase the complexity of accounting for and funding pensions for businesses, which could cause more companies to turn from defined benefit plans to defined contribution plans, such as 401k’s, which are not insured by the PBGC. The proposed act can be viewed here (then search for bill number H.R. 2830) in its entirety. It appears that it’s been put on hold for 'further consideration' until no later than November 4.

Too Much Stuff

My gosh! I took a few days off because nothing was happening in the news on issues that I was watching and then I got caught up in 'stuff I had to do,' otherwise known as 'life,' and by Tuesday, while life was still getting in the way, it seems that all the stories I was watching began to break.

So now I'm overwhelmed, not knowing where to start or what to do first. Some of the things I've been watching and will be following up on shortly include the judge's actions regarding the KPMG investigations, Raymond James and Judge Murray, the PBGC and pensions, not to mention GM, Delphi, and Dana (another auto parts supplier), as well. A topic I'm considering for further investigation is whether the age of a company and/or the age/experience/tenure of its executives has any bearing on the company's ethical or nonethical behavior.

I've also been watching TJX, or T.J.Maxx, as might be more familiar to the shopping variety (like me - I LOVE that store). I caught an article a while back that stated that the CEO of the company is stepping down to make room for a 'fresh face,' or a 'new vision.' I don't quite buy his story. Today, an article states that the senior vice president of TJ Maxx is also resigning without explanation or warning. Seems to me that there might be something more going on behind the scenes that the public is not yet aware of. We'll see if my hunch play out.

Congress, FASB, G.M., and Other Corps Underestimate Our Intelligence

An article in the October 3 issue of the New York Times titled, G.M. and a U.S. Agency See Pensions in Different Lights , discusses how Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures employee pensions when companies can’t meet their obligations, contends that General Motors (GM) is $31 billion short in its pension fund while GM claims that its pensions are “fully funded.” The crux of the disagreement is that there are two legally acceptable ways to account for pension funding. PBGC measures the amount (in pension benefits) that GM would owe if its pension plans were terminated immediately (i.e. if GM were to go bankrupt tomorrow), while GM’s calculations are based on the assumption that business will continue indefinitely. This is all according to “closely held government data,” according to the article.

Now, get this… The article states, “Since 1994, companies with weak pension funds have been required by law to calculate the value of their pension funds on a termination basis and to send the information to the pension guaranty agency [PBGC]. But Congress also enacted a measure keeping [the same] information secret, in response to the stated concerns of companies, who argued that the information could be misconstrued if shared with the public. Uhhh. Doesn't this translate into, "The public is restricted from viable information on which it might base its investing decisions..." Well, although I don’t think GM’s pension fund could be considered ‘weak,’ the article states that GM’s “estimate of its pensions on a termination basis continues to be secret.” PBGC’s estimate was released only in response to a “request under the Freedom of Information Act.” Oh, come on! Are these the lengths to which stakeholders must go to get relevant information?

The article further states, “Business groups say that reporting pension values on a termination basis would needlessly alarm and confuse employees.” Yeah, right. If I were a GM employee, I would construe that statement as a direct insult to my intelligence. Even the FASB, in response to concerns from financial statement users who would prefer that companies were required to include information on pension funding on a termination basis, decided that the requirement would be too confusing and “would not convey useful information about funding.” See FASB Statement No. 132 (revised Dec. 2003), page 20, paragraph A22. As an example, even in its third year of bankruptcy, United Airlines continued to calculate its pension funding on a continuing basis, under which it reported a $6 billion shortfall at the end of 2004. When the PBGC recalculated the funding, United’s shortage was $10.2 billion. Yes, 10 minus 6 equals 4, but we're talking about BILLIONS of dollars.

So, shall we assume that GM will be around forever, anyway, so why worry? NOT! Remember death and taxes? Today, Delphi, the nations largest auto parts supplier who, until 1999, was owned by GM, filed for bankruptcy court protection - "the largest filing ever in the domestic auto industry," according to a New York Times article. It appears that when GM spun off Delphi, they agreed to pay healthcare and pension benefits for Delphi retirees in the event that Delphi filed for bankruptcy within eight years. Hmmm... 99, 2000, 01, 02, 03, 04, 05 - Oops! Two years shy. AND, when the PBGC calculated Delphi's pension fund - guess what? - the company is about $11 billion short of its pension obligations. $11 BILLION!! Thats a TON of money! Financial analysts project that this could cost GM about $6 billion. By the way, GM is Delphi's largest customer. Ahh, what a tangled web we weave. Besides supporting retirees, healthcare costs have become increasingly burdensome for the auto industry as well, costing GM about $1,500 for every vehicle it produces in the U.S.

*Of note* - the first article mentioned here states that there is a bill "now moving through the senate," pushing for making the PBGC's method of pension fund calcultion the 'favored' method, unless FASB beats them to it with a new accounting standard. My personal opinion is that the FASB failed by not already issuing a standard that requires companies to disclose PBGC valuations in their annual reports.

Steve Shu's Blog

I wanted to highlight one of the 'blogs of interest' that I have listed in the sidebar entitled Steve Shu's BusinessWeek Online Blog. Steve is an MBA alumnus from Chicago and the topic of his blog is "Teaching Ethics in Business Schools." There is a very interesting discussion going on there and this topic has come up several times in my classes at USF. I think a more pertinent question is "Can ethics be taught in business schools?" There are a lot of interesting points of view on Steve's blog.

My point of view is that ethics cannot truly be 'taught' after adolescence, since ethical behavior stems from one's values and beliefs. However, is it possible to teach business men and women 'how to act ethically?' Which brings me to an excerpt that I found from the working papers of the Kellog Leadership Studies Project (also linked in the sidebar) entitled Moral Leadership and Business Ethics. It's excellent reading and I hope you take the time to look at it. Author, Al Gini of Loyola University states, "Ethics is an evaluative enterprise. Judgments must be made in regard to competing points of view." He suggests using a modified version of the scientific method when evaluating the ethical component(s) of a decision or action:

A) Observation, the recognition of a problem or conflict; B) Inquiry, a critical consideration of facts and issues involved; C) Hypothesis, the formulation of a decision or plan of action consistent with the known facts; D) Experimentation and Evaluation, the implementation of the decision or plan in order to see if it leads to the resolution of the problem.

Along with this type of evaluation, one should ask the basic questions: How does it affect the self and others? What are the consequences involved? Is it harmful? Is it fair? Is it equitable? Other approaches to ethical dilemmas, as I learned in my second year of auditing are, after analyzing a course or courses of action, take the 'deontology' approach, which would ask, "Does the action fulfill one's duties, obligations and responsibilities to all of the different stakeholders?" If it does, then it is likely an ethical decision. The 'teleology' approach asks whether the action results in the best outcome or result for the different stakeholders. The one I like best is the 'TV' approach: Could you go on TV that will be seen by family, friends, church members, employer, civic groups, etc., and defend your actions?

Other very interesting pieces of Gini's paper include surveys taken of executives and business leaders and their views on ethics, as well as public opinion polls of corporate America. You can find the results for yourself in the article. Very interesting and supports my hypothesis that 'corporate integrity' is indeed an oxymoron.

Follow up on "Joke of the Day"

In my post on September 28, "Joke of the Day," I mentioned that I might e-mail the elusive Apollo Publications Corp. Well, I did. Here is my e-mail to them on September 28:

If the luobu is the only accepted currency in the IOE how can I exchange my American dollars for luobu?

I am very excited about your mission.

Thank you.

I finally got a response on October 7 from lucyluo@acorps.com:

For Currency Exchange, it is quite simple. There will be a exchange rate
from one type of currency, such as UAD or CAD or Yen£¬ to IOE Currency,
called LUOBU. The bank will do the exchange for any currency from all the
nations around globe into IOE's Currency, LUOBU, when we shall be ready in
several years.
Just be patient.

Ugh! 'Several years!' I don't think I'm that patient.

Three of the Big Four in Hot Water

Wow! PricwaterhouseCoopers (PWC) is fined $182.9 million in connection with audits performed for Ambassador Insurance Co. more than twenty years ago! The article is in today’s Wall Street Journal and states that PWC did know or should have known to raise the issue of ‘going concern’ after its 1981 audit of the company, by which time Ambassador “was near the point of insolvency.” The suit alleged that the insolvency was brought about by “gross mismanagement and fraudulent financial reports.” The $182.9 million fine is one of the largest “ever awarded in an accounting malpractice lawsuit,” the largest being $335 million, which was paid by Ernst & Young in 2000 in the Cendant Corp. accounting scandal. The fine is to be paid to the receiver for Ambassador Insurance Co. PWC intends to appeal the judgment.

Two Deloitte & Touche Auditors have been charged by the SEC in connection with audits of Adelphia Communications Corp, which is now operating under bankruptcy protection, awaiting its sale to Time Warner Inc. and Comcast Corp. The auditors are charged with “numerous violations,” which include allowing Adelphia to keep $1.6 billion in debt off its balance sheet. Deloitte has agreed to pay $50 million to settle with the SEC, which, as the article states, is “the most ever levied by the agency on an accounting firm.” The SEC will hold a hearing to determine whether the allegations against the two auditors are true and to impose sanctions, as necessary.

And then there’s KPMG. They are in the midst of settling a class action lawsuit related to providing clients with fraudulent tax shelters. This comes after settling a similar lawsuit back in August, but probably won’t be the end of their troubles since some of the approximately “600 wealthy Americans” that KPMG sold the shelters to are proceeding with individual lawsuits against the firm. To avoid criminal prosecution, KPMG paid out $456 million back in August. Eight KPMG tax professionals were indicted in the proceeding along with an attorney from an unrelated company. KPMG will pay about another $225 million in the current proceeding.

The KPMG article states, “The administrative charges reflect an SEC effort to crack down on ‘gatekeepers - auditors, lawyers and directors who are supposed to be the first line of defense against fraud.” Come on, guys. Where’s your 'character and competence?'