FEI Members and Prospective Members
Greetings from the HOME office for once, and I do mean HOME. It's
a beautiful morning in "Jersey" (learned last week that to be a real local you
don't say "New Jersey").
It's been a really big week for FEI! We had our first virtual
chapter meeting, our big quality of earnings conference yesterday, and we're on
front page of the WSJ today. Sometimes, there is so much interesting stuff
going on I think my brain's going to pop!
Earnings Press Releases and
Pro Forma Earnings
You may have seen this in today's WSJ, but FEI and
NIRI just released best practice guidelines on the use of pro forma earnings in
earnings press releases. CCR Chairman and GE Comptroller Phil Ameen did another
masterful job on this project, along with many other committee members. NIRI
contributed significantly as well and jointly published the guidelines with
The important points in the release are that earnings should
include "reported" results under GAAP. While there are many cases where pro
forma earnings are more useful, they should always be accompanied by clearly
described reconciliation to GAAP results, which are often provided in a tabular
format. In addition, the release includes a discussion of both the positive and
negative factors significantly impacting the results.
You really should read the full document
on our website.
Replay of Rossabeth Moss
Kanter Virtual Chapter Meeting
Were pleased to present to FEI
Members our first-ever virtual chapter meeting, recorded last week. Rossabeth
is the Ernest Arbuckle Professor of Business Administration at Harvard Business
School. She specializes in change management. In my opinion, she is one of the
best public speakers in America, and she absolutely delivered on her
outstanding reputation. Thirteen chapters around the country participated, and
I want to give them special thanks for their extra effort. The replay will be
available Monday, April 30 on FEI's
FASB Summary of Business
Combinations Comment Letters
The FASB has made some progress and
additional decisions on the business combinations project. Here's a summary
from our VP of Technical Activities, Dean Krogman:
G. Michael Crooch, board member of FASB, commented on changes the
Board has tentatively made to the proposed standard on business combinations to
improve operations. First, the definition of "Reporting Unit" will be changed
to mean a unit that is at the same level as, or one level below of, an
operating segment as defined in FASB Statement No. 131. We hope that this
change will clear up a lot of confusion. Second, goodwill will not be
considered impaired unless the fair value of a reporting unit is found to be
less than its carrying amount, including goodwill. Therefore, when testing for
impairment, if a company determines that the fair value of the reporting unit
being tested exceeds its carrying (or book) value, the unit will be categorized
as "not impaired," and the time and cost involved in determining the fair value
of all the assets and liabilities of that reporting unit (paragraph 88 of APB
Opinion No. 16) could be avoided. This could be yet another positive step.
You can also read the FASB's summary of all the comment letters
(interesting reading that I recommend)
on the FASB website.
FAS 133 and
Our Committee on Corporate Finance recently lobbied the FASB and
its Derivatives Implementation Group (DIG) regarding an important FAS 133
issue. CCF member Al Wargo, Treasurer of Eastman Chemical Company, reported
this week on the DIG's ruling:
"Great News for users of options/caps/collars/floors! The FASB
staff has just issued an interpretation of FAS133 that permits the
market-to-market of options to go to OCI rather than earnings. Thank you to
many of you for writing letters to the FASB on this issue over the past several
months, both individually and as a committee."
You can view the new interpretation on the
FASB's web site. (look about halfway down the page).
Quality of Earnings
Yesterday, the FEI Research Foundation and the AICPA
produced a one-day conference on Benchmarking the Quality of Earnings. Denny
Beresford chaired the day. The following is a summary of speaker
- SEC Chief Accountant Lynn Turner - Lynn criticized sell-side
analysts heavily. He recommended that they remove the word "analyst" from their
titles and recognize that they are salespeople. He encouraged them to renew
their commitment to professionalism. If they do not, he suggested there would
be new regulations implemented that include lots of transparency as to the role
of the analyst and their economic interests.
Lynn listed numerous CFOs that received jail time for
fraudulent reporting and manipulating the numbers. He also made the point that
some defendants involved in current problem cases are looking at a minimum
sentence of ten years in prison! He definitely got the audience's attention at
this point, but I thought his comments were a little heavy-handed.
He commented on FEI and NIRI's just-released best practices
guidelines for earnings press releases. He applauded our efforts and called it
a major step forward, especially citing the call for comparable reconciliations
of pro forma earnings to GAAP-based results.
Asked about the rate of change in the accounting rules, Lynn
felt that the world was changing rapidly and that the rules needed to reflect
the substantial changes we've experienced.
On FAS 133, the audience wanted to know if the SEC staff would
be lenient where a company had made a sincere effort to properly implement 133
and just missed the right answer due to the complicated nature of the standard.
He said it was the SEC's job to enforce the rules and was hesitant to go much
further. He discussed situations where they can tell the company has tried its
best to implement a particular rule, but noted that it was of utmost importance
to correct the error.
- Pat McConnell - Pat's an analyst from Bear Sterns, and was
part of a panel of analysts commenting on the quality of earnings:
"Financial reporting is like sausage; properly prepared, it's
delicious. But if you look at how it's made, you wouldn't eat it."
She cited the press's low opinion of the quality of earnings
and reporting. She also complimented IBM on their excellent annual report just
issued. Additionally, she indicated that she loves the increased length and
information contained in financial statements.
She defines high-quality earnings as those that result in
"cash in the bank" immediately, with little uncertainty or contingencies and
with a high likelihood of recurrence on a regular basis. She recognizes that it
is low volatility and low uncertainty earnings that get higher P/E ratios. But
she also pointed out that the old model of taking the historical earnings and
applying a P/E to get a value is long gone. Today, analysts take apart the
results, dissect the cash flow, and use DCF models or EBITDA to enterprise
value to more scientifically value the company. The repetitive nature of the
cash flows is most important. She encourages companies to disaggregate the
information and numbers as much as possible to make it understandable to
- Howard Schilit - Howard is a noted commentator on "financial
shenanigans" in corporate reporting. Mere technical compliance with the
underlying accounting rules is not enough, in his opinion. Being true to the
economic transaction and the company's situation is more important. He defines
a "shenanigan" as a situation where companies have poor control environment,
lack of independent board members, inadequate internal audit function, are
small fast growth companies, and have a management team facing competitive
His seven "shenanigans" include: 1) recording revenue too
soon; 2) recording bogus revenue; 3) boosting income with one-time gains; 4)
shifting expenses to a later or earlier period; 5) failing to disclose all
liabilities; 6) shifting current income to a later period; and 7) shifting
future expenses into the current period. Howard is a leading source of
ammunition for the short-seller community.
- Roger Trupin, Controller of Citigroup, responded to the
analyst's comments. He feels that management teams put more pressure on
themselves than the "street" does. He has no sympathy for those teams that
break the rules. Neither does he have any sympathy for management that doesn't
have strong control systems or strong audit committees.
Roger observed that FAS 133 has had little impact on the
bottom line of companies. He can't understand why we go through all the trouble
to implement it with all the cost and tracking.
- Phil Ameen of GE echoed Roger's comments, indicating that GE
had $3 billion net income in their recent first quarter and they had a $8
million impact on net income from FAS 133. He asked the question: "How can the
confusion and cost of the FAS 133 make it worth the implementation?" Phil also
commented on FEI's CCR support for the FASB business combination proposal.
- Shaun F. O'Malley, Chairman Emeritus of Price Waterhouse,
talked about the work of his Public Oversight Board (POB) panel on audit
effectiveness. In the panel's review of actual audit, they found the number of
meetings to be deficient in too many cases. He listed subject areas of
under-reporting by the auditors to the audit committees: risk of fraud,
compliance with laws, interim financial reporting, and the quality of financial
reporting. Regarding the auditor, they must recognize the audit committee as
the client, not the management team. Audit committees should request management
to report on the control environment within the entity. Also, audit committees
should exercise more control of the external auditor relationship.
- Charles Elson, noted corporate governance expert and a
professor at the University of Delaware, pointed out that audit committees must
pay attention to their charter and review it each year to be sure they are
doing what they are expected to. Due to that requirement, Charles expects audit
committees to incur higher expectations and possibly higher liability. On
financial literacy / expertise, he thinks all directors should be financially
literate, but precisely defining what the term means for the audit committee is
a problem, because there is no legal definition for the term "financial
On the topic of earnings management, he commented that the new
audit committee requirements aren't going to solve any problems. He thinks that
a much too cozy relationship already exists between the auditors and
management. He is also concerned that the new audit rules will create a new
super-director category that will discourage qualified applicants from
attempting to join audit committees.
- Harvey Goldschmid of Columbia Law School and former general
counsel of the SEC strongly disagreed with some of Elson's comments. He noted
that increased activity by directors and especially audit committees provide
better defenses, not increased legal liability. I think Harvey is right. It is
hard to find a case where a director has been found liable when they were
diligent and active in their role as a director.
Overall, I was really pleased with the conference and the
tremendous insight into these timely topics offered by all the speakers. Kudos
to the FEI Research Foundation for doing such a fantastic job!
Women's Forum Series:
Investor Relations And The Creation of Value
Join us on Tuesday, May
8, 2001, at the Hacienda Restaurant, located in the Fairmont Scottsdale
Princess, Scottsdale, Arizona from 12:00- 1:30pm.
Nancy Humphries, Vice President of Investor Relations for
BellSouth Corporation, will be the guest speaker. Nancy will share her views on
how investor relations can create value for a corporation in the financial
marketplaces as well as how to manage market expectations under Regulation FD.
Beth Broderson, Chief Marketing Officer for Hyperion, will give opening
Partnering with FEI on this Women's Forum Series is Hyperion, the
major provider of analytic financial software. For more information, please
visit the Conferences Section of FEI's
Sixth Annual Spring
Professional Development Conference
FEI's Chicago Chapter is pleased
to invite other FEI Members to this special event on May 17, 2001 at
Northwestern University. This award-winning, one day program is designed to
provide senior financial executives and associates with an overview and
discussion of issues in areas that will enhance their effectiveness in the
workplace and in their careers. Instructors with proven expertise in their
fields have been gathered to discuss the topics in which our members have
expressed significant interest. For more information and to register,
please click here.
The FEI Research Foundation would like to thank the more than
350 executives that have responded to the ongoing enterprise-wide risk
management survey. Results from the survey will provide content for Andersen
Partner James DeLoach's May 7 presentation at the FEI Summit. If you haven't
been able to fill out this survey yet and would like to,
click here. Those who respond to the
survey by 6:00 p.m. CDT on Monday, May 7, will get a free copy of the Executive
Summary of Jim DeLoach's book on Risk Management published by the Financial
There has been an enhancement to FEI's Ask the Librarian
service, "Ask the Librarian About
," which offers answers to popular
questions condensed into a single article. The current article resides on the
Research Foundation page here, and an archive is
FEI TechKnowledge from the
Earlier this month, the Research Foundation
debuted TechKnowledge, a monthly electronic newsletter that will report on new
IT products and services, trends in IT services and feature interviews with
financial executives who have recently implemented new programs.
Check it out!
We just published our first e-newsletter, Global
Update, focused on International financial matters. I think it's outstanding
and enlightening. Check it
Interested In Becoming A
Member Of AcSEC?
The AICPA has asked us to recommend a business
candidate to serve on its Accounting Standards Executive Committee (AcSEC),
which is composed of 15 members drawn from a variety of CPA firms, industries,
and universities. Someone from manufacturing has traditionally filled this open
spot; however, the AICPA is also interested in considering candidates from new
economy and technology companies and financial services. Industry
representation on this committee is important because the Statements of
Position (SOP) issued by AcSEC can have far-reaching implications, as evidenced
by the recent real estate exposure draft which may go beyond real estate
investments and become the guidance on when and how to use the equity method of
accounting for any equity investment.
If you would be interested in serving on this committee, please
contact Janet Luallen at firstname.lastname@example.org
or Dean Krogman at email@example.com and
send in a bio by May 4, 2001. Information on AcSEC projects and their meeting
calendar are available on the AICPA web site, in the site directory under AICPA
Teams/Accounting Standards Team.
The AICPA is creating Expert Roundtables to explore the
current and emerging trends and issues in select industries in a
non-competitive environment. Discussion will focus on best practices, risks,
valuations issues, financial reporting issues, professional
development/conferences, other guidance, etc. For the finance exec,
participation in these roundtables will give them an opportunity to network
with their peers, share/learn best practices and get issues on the table that
need to be addressed by organizations like AICPA. By sponsoring these
roundtables, AICPA has a chance to better connect with finance and create
programs, products and services to support them. For more information about
participating, e-mail Marc Simon
(Pharm/BioTech) or Dan Noll (High
SEC Corporate Governance Update with Roger
Bayless: A discussion of accounting and reporting issues arising from
recent registrant filings as observed by the SEC Division of Corporate Finance;
including compliance with the disclosure requirements of SFAS 131 on Segments
of an Enterprise, Restructuring Charges (EITF 94-3, EITF 95-3, and SAB 100),
implementation of the interpretive guidance of SAB 101 on Revenue Recognition,
and other current issues. Wednesday, May 2nd at 12:00 p.m. ET/ 9:00 a.m. PT
GE Best Practices: Acquisition Integration, How to Avoid the 7
Pitfalls of Buying a Business: Wednesday, May 16th at 1:00 p.m. ET/ 10:00
Financing Strategic Initiatives in the Middle Market
Wednesday, May 22nd at 2:00 p.m. ET/ 11:00 a.m. PT.
Sign up for all upcoming teleconferences
Congratulations to James Goltz, President and Treasurer,
Quadratech Group LLC, Washington, D.C., and Maureen Lundy, VP of Finance,
Jenzabar, Inc., Boston, MA.
Job Posting- CFO (FEI Job
DHL Airways, the U.S. based cargo airline recently divested
from DHL International, is seeking an experienced executive to serve as Chief
Financial Officer. As a key member of this new entity's first executive team,
the CFO will help the company quickly establish appropriate profitability and
ramp up to expected high levels of operation. Based in Chicago and reporting to
the CEO, this is an exceptional opportunity to get in on the ground floor of
this strongly backed airline's new future. Candidates MUST have experience as a
financial executive in the airline, aviation or air-cargo industries, coupled
with well-rounded financial expertise, to include experience with Wall Street
analysts. CPA/MBA desired. Please respond to: Fleming Jones, Robert W. Dingman
Company, Inc., E-Mail: firstname.lastname@example.org. For more career
opportunities, please visit the Career Services
Center on FEI's website.
That's all for now,
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