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EJ
11-03-06, 10:19 AM
Ex-Computer Associates CEO Draws 12-Year Sentence (http://www.usnews.com/usnews/biztech/articles/061102/2kumar.htm)
November 2, 2006 (Kit R. Roane - U.S. News)

Sanjay Kumar, the once highflying former CEO of Computer Associates International, was sentenced to 12 years in prison today and ordered to pay $8 million in fines and restitution for his part in a massive accounting fraud that came to exemplify the lack of oversight and excess of the Internet-bubble era.

In sentencing Kumar, U.S. District Judge I. Leo Glasser said that Kumar had "been the embodiment of the American dream" but that his downfall had been of his own making. Speaking of the fraud and Kumar's later obstruction of justice, Glasser said that his "cupidity" called for a meaningful sentence and that he must send a message that "the law's reach is long."

...the lead federal prosecutor on the case, Eric Komitee, responded that while Kumar had done many other good things in his life, it did not take away from the fact that he was responsible for what was "the most brazen, comprehensive obstruction of justice in the modern era of corporate crime." Komitee added that Kumar had repeatedly lied to the government, had directed employees to lie to the government, and had had a witness bribed. He called Kumar's obstruction "elaborate and detailed."

AntiSpin: US markets don't need new laws. What is needed is enforcement of existing laws. While Sarbanes-Oxley has been a boon to auditors, information technology risk assessors, accountants, compliance analysts, and so on (see the 17 pages of job listings (http://www.sarbanes-oxley.com/displayjobs.php) at the Sarbanes-Oxley web site), the new rules have increased the minimum regulatory overheard of running a small public company to more than $1 million while doing nothing to reduce the number of large public company options pricing and other scandals that are eroding public faith in US equity markets. To restore vitality to small business in the US, we need more and longer prison terms for law breakers and to repeal Sarbanes-Oxley.

Meanwhile, back in the land of the USIP (http://www.itulip.com/glossary.htm#USIP)–iTulip's term to replace the inaccurate term "hedge fund" to refer to unregulated speculative investment pools–rules continue to be stretched (broken?) while the SEC dithers (http://www.forbes.com/columnists/2006/07/11/leadership-harve-pitt-cs_hp_0711coveringupnakedshorts.html), according to ex-SEC chairman Harvey Pitt.

The longer the SEC takes to step in an fix the risk of market dysfunction if an event occurs to cause a short squeeze among "naked short sellers," the greater the chances we will, as ex-SEC chairman Harvey Pitts says– paraphrasing Will Rogers–"have to be content to live with even more government than they're already paying for." Imagine a time in the future, after the USIPs that are making naked short sales bets blow up, where we have Sarbanes-Oxley style regulation for all manner of private capital markets, including venture capital and so-called "private equity." Guess we didn't learn our lesson from the dot com bubble: more Kumars in prison, less new regulation.

Beyond the market risks of future over-regulation that we are likely to see after naked short selling sets off some future market havoc, there is the even greater risk that we refer to as Risk Pollution (http://www.itulip.com/riskpollution.htm). Today's USIPs are the modern equivelant of 1920s investment trusts–exclusive to the very wealthy, non-transparent, highly leveraged, and borrowing heavily from commercial banks. The banking system is financing the USIP bets, providing loans the banks believe to be safe, giving the USIPs the leverage they need to make their bets. As John Plender wrote recently in "The credit business is more perilous than ever (http://www.ft.com/cms/s/e8d5eafe-5a57-11db-8f16-0000779e2340.html)" for The Financial Times:

The mechanics of moral hazard in the exponentially growing newer financial markets entail the destruction of the old relationship between banker and borrower. This is because banks no longer retain the credit risk in much of their lending. They originate and distribute; and where the intention is to distribute, the lender is inevitably less bothered about loan quality.
Readers may recall how well this all turned out last time. The U.S. Securities and Exchange Commission (SEC) was created by section 4 of the Securities Exchange Act of 1934 in response to the havoc created by the collapse of investment trusts, that took the banking industry down with them, to prevent a recurrence. We've seen this movie before:

"We have seen security prices soar out of sight of earnings, brokers' loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others' stocks and by borrowing and lending everybody's money in the market. But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured."

Business Week - September 7, 1929
And we have all been warned repeatedly, such as in "Somebody Turn on the Lights (http://www.brookings.edu/views/articles/mayer/199911.htm)" by Martin Mayer, 1999:

Derivatives markets guarantee a winner for every loser, but they will over time concentrate the losses in vulnerable sectors. Nature obeys Mayer's Third Law, which holds that risk-shifting instruments will tend to shift risks onto those less able to bear them, because them as got want to keep and hedge while them as ain't got want to get and speculate. The logic behind margin requirements in stock markets and capital requirements in banking also holds in the derivatives markets. Permitting highly leveraged institutions to hold private parties behind closed doors is the political version of selling volatility: the predictable likely gains will one day be overwhelmed by an equally predictable disastrous loss.The 1995 to 2000 bubble wasn't the rhyme of the 1920s bubble; the 2001 to 2006 echo-bubble is closer to that period, in terms of risks posed to the financial system and economy. What we got last time when it ended was a nuclear meltdown of the financial and banking systems. Future heavy regulation may be the least of our problems.

Pervilis Spurius
11-03-06, 03:20 PM
The 1995 to 2000 bubble wasn't the rhyme of the 1920s bubble; the 2001 to 2006 echo-bubble is closer to that period, in terms of risks posed to the financial system and economy. What we got last time when it ended was a nuclear meltdown of the financial and banking systems. Future heavy regulation may be the least of our problems.

OK, so assuming the financial armageddon is at hand, how does ka-poom answer this? Is it possible to have ka and poom (using different definitions for each, perhaps) at the same time?

You mention in "Risk Pollution" that the outcome of the 20's bubble was Socialism. I don't disagree. I think this outcome suits Wall Street just fine, despite their protestations. I have contended for years that Wall Street really is the Government. And the Socialism of the 30's and onward only increased its power. The success of that prior outcome, from their point of view, was predicated on the ability to manage the information flow to the public.

With the advent of the internet and sites like this and others, Wall Street is rapidly losing that ability. However, time is running out. For both sides.

Ishmael
11-04-06, 11:33 PM
Erik:

Even though I believe much of what you said if your antispin, I have to disagree with you on the SOX comments. These comments are based on 10 years with a Big 5 firm and 4 CFO positions with public companies. First -- accounting deparments are not what they were 30 years ago. To hit earnings targets, accounting departments have been cut till they are hardly functional. Do you know why 80% of companies fail SOX -- quality and quantity of the staff in accounting departments. I always say to get in compliance with SOX you need to support your journal entries, sign and date them, have some one review them and in addition some one needs to perform account reconciliations, sign and date them and some one needs to review the entries and sign them. Is this too much to ask. I have done several SOX engagements. The latest I am finishing is a biotech. I think the biotech will pass. What is the cost? Probably $50,000.

In one SOX job we were working on we found a company had cooked books. Booked revenue that did not occur. It is now delisted and in all sorts of lawsuits. CFO and controller gone.

The problem is not SOX. In many cases the problem is a bunch of these companies out there should not even be public. If you are going to be public you have a fiduciary obligation to the public to maintain an adequate set of internal controls. Much of the cost of SOX is to put internal controls in that should have been there already.

When Wall Street stopped making big bucks on brokerage accounts it looked at the IPO process and began taking crap out there to be public. Since these companies have poor earnings they can not put in the infrastructure needed for a public company. They do not clear suspense accounts, they do not reconcile accounts, entries are not supported. It should also be pointed out that all of this was also a requirement under the Foreign Corrupt Practices Act. SOX just took it from being a fine to being criminal.

In one SOX engagement we asked the people if they reconciled their accounts (now this is a fairly large well known public company) they said yes. Later on we went back and started asking to see them. We kept getting the stall. Well they did not reconcile their accounts. We found there general disbursing account was over a million dollars out of balance and had not been reconciled in over a year. Is this reasonable behavior for a public company. Do you think this is reasonable behavoir for a public company.

SOX can be implemented for a low cost if a company has a reasonable set of internal controls. Don't believe everything you hear. Personally, I am kind of surprised to hear as many companies passed SOX as did.

Jim Nickerson
11-05-06, 12:33 AM
Don't believe everything you hear. Personally, I am kind of surprised to hear as many companies passed SOX as did.
Serious:
Ishmael, your post is an excellent comment as I see it because it comes from someone apparently with experience in the subject at hand. Thanks for taking the time to write your assessment.

Humor (hopefully):
Ismael, as you are "kind of surprised to hear as many companies passed SOX as did,"
Don't believe everything you hear.

spunky
11-05-06, 05:30 AM
Erik:

Even though I believe much of what you said if your antispin, I have to disagree with you on the SOX comments. These comments are based on 10 years with a Big 5 firm and 4 CFO positions with public companies. First -- accounting deparments are not what they were 30 years ago. To hit earnings targets, accounting departments have been cut till they are hardly functional. Do you know why 80% of companies fail SOX -- quality and quantity of the staff in accounting departments. I always say to get in compliance with SOX you need to support your journal entries, sign and date them, have some one review them and in addition some one needs to perform account reconciliations, sign and date them and some one needs to review the entries and sign them. Is this too much to ask. I have done several SOX engagements. The latest I am finishing is a biotech. I think the biotech will pass. What is the cost? Probably $50,000.

In one SOX job we were working on we found a company had cooked books. Booked revenue that did not occur. It is now delisted and in all sorts of lawsuits. CFO and controller gone.

The problem is not SOX. In many cases the problem is a bunch of these companies out there should not even be public. If you are going to be public you have a fiduciary obligation to the public to maintain an adequate set of internal controls. Much of the cost of SOX is to put internal controls in that should have been there already.

When Wall Street stopped making big bucks on brokerage accounts it looked at the IPO process and began taking crap out there to be public. Since these companies have poor earnings they can not put in the infrastructure needed for a public company. They do not clear suspense accounts, they do not reconcile accounts, entries are not supported. It should also be pointed out that all of this was also a requirement under the Foreign Corrupt Practices Act. SOX just took it from being a fine to being criminal.

In one SOX engagement we asked the people if they reconciled their accounts (now this is a fairly large well known public company) they said yes. Later on we went back and started asking to see them. We kept getting the stall. Well they did not reconcile their accounts. We found there general disbursing account was over a million dollars out of balance and had not been reconciled in over a year. Is this reasonable behavior for a public company. Do you think this is reasonable behavoir for a public company.

SOX can be implemented for a low cost if a company has a reasonable set of internal controls. Don't believe everything you hear. Personally, I am kind of surprised to hear as many companies passed SOX as did.



Yes, I agree with Jim; thank you for posting

akrowne
11-05-06, 08:43 AM
Ishmael:

What would you say, then, about the declining popularity of US exchanges as a place for increasingly-globalized companies to go public?

I have a hunch that SOX cannot fix deeper structural and cultural problems in our markets, and makes matters worse by punishing the good guys along with the bad.

SOX is just another set of rules for the desperate and unscrupulous to circumvent. More failed regulation; just like everything else the US has tried. I know rolling it back is as ethically uncomfortable as legalizing drugs, but is it really solving the underlying problems? I doubt it.

Ishmael
11-05-06, 11:18 AM
Akrowne:

What would I say about companies who do not want to list on our exchanges. How about who needs them.

Among other things, I lived and worked in several countries while working for the Big 5 firm and if you think our reporting standards are bad you should look at theirs. I was working in an Australian office cleaning up a bunch of problems and bitching about some of things I was seeing there and a Canadian who had been there for a couple of years responded by saying, "I had forgotten how bad it really was." The Aussies wanted me to stay for three years I said get me the hell out of here. I was afraid I would lose sight of right and wrong.

Let me give you an example. Gold mine being developed. Cost being capitalized. One of their partners was one of the biggest mining companies in the world and pulled out. I told the partner that is a sure sign the mine was impaired and should be reserved against and he would not do it. A number of other items came up on the same client some clearly against firm standards. The partner would not change his position so in the end I told him that I could not be associated with the engagement and removed my name from all work papers. Later on I ran into the engagement senior in London and she told me that later on all top management at the company went to jail.

Later on I was at a firm wide meeting bitching about some of the audits in one country and this American who has spent three years in Rome told me that it was not nothing and I should have seen the audits there. After the audits were completed the workpapers were whipped off to some unknown location so they would not be subpoenaed.

To me you kind of have this whole listing thing ass backwards. It seems to me that in the past the US was known to have the highest listing standards and the best requirements for audits. Accordingly, people felt safe in investing there money in the companies because they knew they were not getting a salted gold mine. This in turn brought more money to the markets.

Your argument seems kind of like the argument that brought an end to Andersen. For years Andersen was known as the most hard nosed auditors out there and would walk on an audit. Then it lowered its standards, played on its name and in the short term made a lot of money and then got slammed on a bunch of audits and went out of business and the partners lost all of their investment.

In most things I have found you can either take the long term thinking and do things right or take the short term and play off of your name, dilute your brand and in the end disappear.

A few years ago everyone was running into Russia investments. I thought to myself, what a bunch of idiots and they proceeded to have their heads handed to them. Now they are running into China investments. Talk about a lack of transparency. When I lived in Australia, I read the only exchange more risky than the Australian Exchanges was the Hong Kong Exchange.

Let me assure you. With SOX all we are doing is stepping back and doing audits close to the way they were done 30 years ago and the numbers get a pretty good scrubbing over. The firms cut back so much on audits during the late 90's to keep clients that big errors slipped by.

One more war story. We were doing SOX for a billion dollar company on the west coast. They had $5 million of unapplied cash. What that means is that this cash had not been used to offset the customers receivables. This unapplied cash went back several years. Why, the company did not have the manpower to figure out whose account to post this cash to and it had been building over the years. We went in and made them clean that up. The outside auditors who really wanted to get out of this client called the company "Two men and a spreadsheet." That gives you an idea of how bad the internal controls were and I am talking about a company with a billion in revenue.

When I worked in public accounting we use to have a saying, "Think straight, talk straight." Now it is all about spin. Either you can think long term or think short term. If you ask me the whole country is thinking short term and you can see where it is taking us. Thinking long term requires courage, introspectiveness and the willingness to do the right thing.

Ishmael
11-05-06, 11:30 AM
Can I say one more thing. As I mentioned, I was the CFO for a number of public companies preEnron. I lost my job once because I would not go along with some accounting (we had been purchased and I was not a SVP of finance). Several years later this company melts down into one of the big frauds. People at the board and the auditors could say they knew nothing but I had pointed out one of the early signs of the problem. The SEC and FASB have passed new rules against the things I was pointing out.

About a year before Enron, I had an HR person tell me that I should be more "flexible on things". I look back and laugh. After Enron I received a phone call from a high school teacher of mine. She said you certainly called that one, and I respond I really did not know what she was talking about. She then reminded me of something I had been saying for several years which was "that sometime in the future there is going to be an accounting scandal that is going to shake the country and one of the Big 5 was going to disappear." That is how prevalent bad accounting was. Every firm was doing it.

Personally I thought our standards of reporting and etc would be exported to the rest of the world. Instead we imported the poor standards from places like Australia and Italy. It is a crying shame.

jk
11-05-06, 12:10 PM
ishmael, want to add my thanks to others' for your posts. we're all thinking about how to invest, trying to think globally. you remind me to think even harder about visibility. i have long avoided any direct china or russia investments for that reason, maybe i have to think more about other asian and eastern european loci.

Ishmael
11-05-06, 06:11 PM
JK:

If you can not tell, I am very sceptical of financial information.

A couple of weeks ago I was talking to a guy who ran the SOX project for one of the high flying companies that blew up over stock options. He was telling me that their internal controls were so weak that they were afraid the report that the company would get on internal controls, stock dropped and they would get sued over it. He told me they attempted to communicate this to the company and could hardly get anyone to listen. He said the stock option problem was the tip of the iceberg.

When dealing with foreign companies there are two other things to consider. One - do you have property rights protection and two -- what is the culture like. In a large number of countries people believe you are a sucker to invest in them. They kind of see it like someone sticking their head in a lions mouth. Don't blame them if you get your head bit off.

Let us put it in perspective. Fair is an English word and is really not found in many languages. The only countries I come close to believing the financials are US, Canada, Uk, Germany and the Scandinavian Countries. Most others I am leery about.

jk
11-07-06, 04:45 PM
found this at minyanville.com



The US has suffered a worsening in its perceived levels of corruption following a series of business scandals and increasing worries over political party funding an anti-corruption watchdog said, according to the Financial Times (http://www.ft.com/cms/s/7c1c49ac-6d90-11db-8725-0000779e2340.html).

In an international ranking of countries released ahead of Tuesday’s mid-term congressional elections, the US fell to 20th place from 17th last year.
Its score fell from 7.6 to 7.3, with 10 representing “least corrupt” and 0 “rampant corruption.”
Transparency International’s annual Corruption Perceptions Index ranks 163 countries based on opinion polls and expert assessments.
Finland, Iceland and New Zealand are the world’s least corrupt countries, while Haiti, Burma, and Iraq are most corrupt, according to the index.
This year’s index score for Iraq of 1.9 is based only on surveys made after the invasion.
“The systems for upholding integrity in Iraq, the rule of law and courts, are not functioning, or have been destroyed,” said David Nussbaum, Transparency International chief executive.
The index revealed a link between corruption and poverty, Transparency International said, with all low-income countries scoring below 5.0.
http://www.minyanville.com/assets/Image/corruption.jpg