October 2000 Newsletter
Issue Ten, Volume One

AN ACCOUNTING NIGHTMARE?

By Mike Gasior

Never has it seemed like such an unfortunate time for the accounting profession, and those of us who rely on the information that they provide to the public. The latest battle pits Mr. Arthur Levitt and the SEC against the public accounting profession at the very least, and against the "Big Five" accounting firms at most. As hard as I try not to resort to hyperbole, there outwardly appears to be a bit of a death match going on between them. As far as who ends up on top remains to be seen...although both sides make compelling arguments for their cause. These arguments will serve as my canvas for this month's newsletter.

There is, however, other news worth talking about. Most noteworthy is the implementation of the Fair Disclosure rule by the SEC as of October 23, 2000. Throughout my career the practice of companies selectively releasing data early to certain investors, or particular analysts has seemed at best slimy, and at worst illegal. This ruling at least clears up what is legal and what is not.

Finally, there were plenty of notes to me about last month's newsletter, the majority of which I deserved to receive. So before anything else I will take my lumps accordingly.

OKAY, SO I'M A MORON

I honestly feel REALLY bad whenever this newsletter goes out with even the slightest spelling error, or typographical error. Most of you were tremendously sweet by telling me to just clean up my act and make better use of "spellcheck". Of course it wouldn't be a normal month without a few bozos that think picking on me would be a pretty fun activity. Do they honestly forget that I have a forum to get even with them though? I suppose they do. Lucky for them I never use any names.

So as far as the numerous spelling and typographic errors go...I am VERY sorry and will try hard not to let it happen again. I did one last minute re-write last month before sending the thing out and that was my undoing. I will be on my best behavior from now on, I promise.

I do have to make mention of one particular item that seemed to attract an amazing amount of attention, however. That item was my use of the "word" irregardless. My favorite one of them all was a single line note:

"your a writer and you use the word 'irregardless'"

Well all I can do is thank God that THEY'RE not a writer, I suppose. It just seems everybody's a critic these days. All I could think was "Hey Lady...write your own damn newsletter so I can grade you!" Maybe I'm being overly touchy about this, but if you were going to write someone to criticize their grammar wouldn't it behoove you to get it correct yourself; especially if you decide to use an incomplete sentence with no structure? Hmmm.

One small thing in my defense, however, is this passage from Webster's Collegiate Dictionary:

ir-re-gard-less: Probably a blend of irrespective and regardless. Date circa 1912 nonstandard. Irregardless originated in dialectal American speech in the early 20th century. Its fairly widespread use in speech called it to the attention of usage commentators as early as 1927. The most frequently repeated remark about it is that "there is no such word". There is such a word, however. It is still primarily used in speech, although it can be found from time to time in edited prose.

So there. Perhaps I am a somewhat less-than- perfect author, but I continuously must thank those of you who seem to enjoy the content of my ramblings.

OKAY, SO I'M A GENIOUS

While the evidence seems ample that I am a spelling moron, I do need to argue the case that I can occasionally get something right as well. Not that I feel compelled to blow my own horn, but people seem to only write with enthusiasm when I screw something up. So here goes:

Priceline.com

What do I need to say? Last month I said exactly this: "Priceline.com on the other hand is over." Since I wrote those words the stock is down 65% and looking worse by the day. A few of you wrote in their defense, a couple of you mentioning that if the airlines actually got together to do effectively the same thing as Priceline that it would be a disaster. Well Hotwire.com is the result of the airlines banding together to offer discount airline tickets without requiring customers to bid and was yet another shot over the bow of Priceline. And for anyone who doesn't think the airlines can work together on such a project has not followed the history of the Sabre reservation system which nearly every airline cooperates with to enable travel agents to make airline reservations for their customers. It is also the search engine which powers nearly all the Internet based travel sites. I continue to stick with my prediction...put a fork in them, they're done.

NASDAQ

On March 24th, I sent 150,000 people around the world the March 2000 Edition of this Newsletter. On that day the NASDAQ Composite Index traded up to 5,078.86 which was basically its all-time record high. This Monday, October 30, 2000, the NASDAQ Composite Index closed at 3191.40.

Here are the words I wrote in that March Newsletter:

--"Over the next ten years nearly every other asset category will outperform stocks." --"The stock market still goes down. We just haven't seen it in a while." --"There are lots of people managing money who haven't got a clue what a bloodbath looks like." --"In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the 'classic' speculative bubbles." --"Of the Internet 'pure plays' trading right now, probably 90% of them will not exist in five years."

I added the following words in April in case someone was doubting my resolve about the valuations of the market:

--It might be a long, long time before you see 5,000 on the NASDAQ again. For example, if you are currently in first grade, it might be sometime not long after your high school graduation. Sorry for that. --And finally, if you think the worst is over, you're wrong. Sorry again.

I'm looking pretty smart so far. Now I only need to have the NASDAQ not go above 5,000 for another nine and a half years and I'm looking REALLY smart then. Tune in and find out.

INTERNET ACCOUNTING

On this subject I have no ambition to rant about how smart I've been, but instead would like to share with you the most amazing story I have heard so far. A few months ago I made quite a stink over the way many of these Internet companies reported revenue. Or more accurately, what they CONSIDERED revenue. I think you'll appreciate this story a lot.

A company called Ventro (previously called Chemdex) reported earlier this year that they had $30.8 million in net revenues. This was an amazing success story since in 1999 they had total revenues of $29,000 which means their revenues increased ONE THOUSAND times in a year. Wow!! For all of this success their company was given a market capitalization of $5 BILLION. Wow again!!

But you needed to read VERY carefully a finely printed sentence in their annual report. Let me relate them to you, and remember to read the words carefully:

"Under most of our supplier agreements we are acting as a principal in purchasing from our suppliers and reselling them to our customers so that we recognize net revenues equal to the amount paid by our customers and cost of revenues equal to the amount we pay to our suppliers for these products."

What? Well, what it means is that they take orders from their clients for stuff the clients want from Ventro suppliers and Ventro orders the stuff for them and the CLIENT pays for the stuff. Simply stated, Ventro said in that sentence that they would count those sales as revenue, and then would count the money the client would give them as reimbursement as COST of revenues. Hmmmmm. Now the searing question is a simple one, right? How much exactly did they have in that annual report as "cost of revenues"? Well here it comes.

Revenues = $30,800,000 Cost of revenues = $29,300,000 Actual revenues = $1,500,000 Other expenses = ($51,100,000) Earnings = ($48,600,000)

And people actually wonder how these Internet stocks melted down the way they did. What in the hell were people thinking? And the decline in these sorts of stocks is FAR from over. My only wonder is who is going to be held up to blame when the lawsuits begin to fly since somebody signed off on those sorts of financials. Like I said many months ago, "if an `old economy' company ever tried these sorts of practices somebody would be heading to jail."

One more funny story for you...

A California based swimwear company was missing their quarterly earnings target so Senior Executives began rolling back the DOS date on their company's computer system for 2 weeks until they had enough revenue to meet projections, basically postponing quarter-end until things looked the way they wanted. In this case, somebody DID go to jail. Too funny. You just gotta laugh.

Now to the real issues at hand.

FINALLY, THE MOVE TO "FAIR DISCLOSURE"

There has been a practice around for years and years on Wall Street that many investors have been unaware of, and this writer believes they would find it troubling. The practice is simply giving certain investors, analysts and members of the media information just prior to the release of the information to the investing public. Outwardly you would think that something like this would most certainly be illegal, but in truth it has been commonplace for many, many years. I thought it had gotten a little out of control when I tuned into CNBC one morning to catch Maria Bartiromo bitching and moaning about some company who had released some juicy information to the media through some reporter OTHER than the aforementioned Ms. Bartiromo. What was bothersome as I listened to this is that she only cared that the company had slighted her. There didn't seem to even the slightest concern by her that there might be something wrong with the practice in general. If the company had important information to get out to investors shouldn't they get a press release into the hands of all the media so the information can make it to investors quickly? Why should some reporters, money managers or market analysts get special treatment? I have always thought that they shouldn't and now they risk punishment if they do.

On October 23, 2000 Securities Exchange Commission Regulation FD took effect. Regulation "Fair Disclosure" will make the practice of giving special treatment to certain people effectively illegal. This regulation basically states the following things:

1) A company must disseminate material information through a Form 8K filing or news release before making, or simultaneously with making that information available to selected analysts, institutional investors or holders of the company's securities.

2) Should the company make an inadvertent disclosure of material, non-public information in a selected venue, it has 24 hours, or before the market opens the next day, whichever is later, to fully disseminate that information publicly.

3) Issuers (the companies) will have greater flexibility for disseminating material information via their web sites so long as it is non-exclusionary and provides proper notification to interested investors and the media that the information is available. For example, a Webcast conference call, press conference or analyst conference that is open to all interested investors and the media will be considered a means for full disclosure on a "real time" basis. It would make sense for companies to first issue a news release before conducting a conference call, but anything said during the call (for example, during the question and answer portion) will be considered fully disclosed immediately.

The hope of the SEC is to level the playing field for ALL investors, and this regulation should help this issue a lot. If I didn't make it clear enough how things had practiced on Wall Street, let me give you an example of how things might have transpired:

--ABC Corporation arranges a conference call involving some of their Senior Executives and the analysts who follow ABC from 10 large brokerage firms. --The ABC Executives run through some of the recent events for the company and detail some their upcoming plans. Perhaps they will even make some forecasts about what their financials might look like in the coming quarters. --The analysts will have a turn during Q&A to ask some specific questions about their concerns with ABC and although the Executives don't have to answer, sometimes a non-answer is even more revealing. Maybe it becomes clear that ABC is likely to have much less in the way of earnings than investors are expecting. --The moment everyone hangs up from the conference call the analysts go to work cranking out their impressions about what is going on with ABC. Before the day is over, every portfolio manager and trader at those brokerage firms, as well as their biggest clients will have traded based on the analysts' reports. --By the end of the day the stock has dropped by 20% thanks to the selling activity by the investors who got this breaking news. --A day, or perhaps several days later ABC puts out a press release detailing the same information that the select 10 analysts already knew. --The little investors, and the institutional investors who weren't in ABC's good graces are screwed. And until just over a week ago all of the above events would have been perfectly legal.

So that sequence of events is exactly what "Fair Disclosure" was created to prevent, and in fact make illegal. Sadly I don't think all that many investors knew this sort of thing was even going on.

ONE MORE BIG THING COMING FROM THE SEC

There is one more big fight going on right now between the "Big Five" accounting firms and Mr. Arthur Levitt, Chairman of the Securities and Exchange Commission. If this was MTV, I would even have to consider this one of those "Death Match" kind of fights.

Let me summarize the issue:

--Since 1997 362 companies have needed to restate their annual financials which is nearly 1% of all filings. --In just nine of those 362, the cost to shareholders was $41 billion in just the first week following the restatement. --The SEC says that if the accounting firms are offering consulting services to the company, or if they are partners in some venture, then they are not "independent auditors" and for that reason should be excluded from being auditors. --The SEC says that companies should disclose fees that are paid to the consulting arms of their audit firms.

Needless to say the audit firms do not agree with these ideas at all. They argue that no matter how many restatements there have been, the number of lawsuits has not increased so the quality of audits has not been diminished. Another argument they make is that providing consulting services to client's increases their ability to do better audits since they understand the clients business that much better. Finally, the SEC proposal targets only 10 services that auditors would not be allowed to provide and it would empower the SEC to ban other services without any hearings or feedback.

Obviously this is a serious issue and neither side seems to be giving any ground so far. You can easily see why the audit firms wouldn't want the Government saying what they can, or cannot offer in the way of business services. On the other hand the SEC's position is pretty easy to see also. Somebody needs to be held accountable for fiascoes like Microstrategy which I wrote of earlier this year, or that Ventro story at the beginning of this newsletter. These are shameful examples and seem to clearly piss off Mr. Levitt at the SEC.

Stay tuned to this issue, and I will try to keep you up to date when news breaks. But don't expect Mr. Levitt to back off a single inch; or the "Big Five" either for that matter. Mr. Levitt is almost assuredly all done as Chairman of the SEC as of the next Presidential Inauguration regardless of who is elected so why should he back off? And if I'm the accounting firms I'll just keep dragging out the process hoping to get a more "friendly" Chairperson in the next administration. If you were forcing me to lay odds on who wins this fight it is pretty hard to bet against Mr. Levitt since he has almost never NOT gotten his way when he has approached Congress with proposals. On the other hand, the "Big Five" along with the AICPA has given a total of $8,245,460 to Congressional, Senate and Presidential candidates as of June 30th of this year. You would think that would buy you a lot of friends in Washington. So if I were laying odds I would have to call it 5 to 2 for Mr. Levitt, but ask me again on November 8th. Depending on whether it's Gore or Bush will make for a reshuffling of the odds.

BERMUDA FOR THE FINAL TIME

I just wanted to say thank you to those who have made the Bermuda Program a terrific success. All of the programs are effectively sold out at this moment, although there are a few single spaces in a few of the sessions. Call my office at (860) 347-6568 for those details. For those of you who are registered, I will see you there in a few weeks.

Watch for our year 2001 schedule of seminars throughout the U.S. and Caribbean to be posted at
http://www.afs-seminars.com in the next two weeks.

http://www.afs-seminars.com

Copyright 2000, Michael Gasior. All Rights Reserved.

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