VideoTake Me To Your Ledger
The key to catching accounting improprieties may lie in your computer--via automated auditing processes called "auditbots."
"The ERP [enterprise resource planning] systems put in place at many companies have made it possible for outside auditors to embed software in the systems to audit transactions," says Robert Jensen, an accounting professor at Trinity University in San Antonio.
He says that automating the audit process could free up auditors to look for other problems beyond routine transactions, like under-the-table dealing. The auditbots would also be able to audit every transaction instead of just sampling them, thereby eliminating sampling error. "It would limit some of the suspicion that auditors aren't doing a good job," explains Jensen.
Auditbots are starting up at AT&T and HCA Healthcare, and about 15 other companies are experimenting with the technique, says Rutgers University accounting professor Miklos Vasarhelyi. The biggest hurdle so far is how to make the systems secure, even to the companies where they are installed. "It's coming," says Vasarhelyi. "It's just a matter of when." -- Joseph McCafferty
Metrics
Down to the Core
It's not just the recession that's taking a bite out of earnings. The entire S&P 500, as well as the 10,000-plus companies included in Standard & Poor's Compustat database, are slated for an earnings slim-down this summer, at least by S&P's calculation.
Blame a new metric known as "core operating earnings." The measure, which S&P analysts, among others, will factor into their debt and equity ratings, adjusts traditional GAAP net income by excluding such items as pension gains, gains or losses from asset sales, and goodwill write-offs, and including such items as restructuring charges and employee stock-option grant expenses.
"Popular replacements have come to be used instead of GAAP numbers," says David Blitzer, chief investment strategist at S&P. Blitzer cites operating earnings, pro forma, and what he calls "EBBS" (everything but the bad stuff) as some of the substitutes companies use.
S&P president Leo O'Neill says the measure "will help restore investor confidence in the data used to make investment decisions." While many laud the intent of the effort, few believe it's the magic number investors have been seeking. "The spirit of what they're attempting to do is commendable," says Brooktrout Inc. CFO Bob Leahy, "but it's essentially creating an S&P version of pro forma." He says that Brooktrout, a Needham, Mass.-based telecom equipment supplier, reports GAAP results only.
Other CFOs who use pro forma in their reporting are skeptical about whether "core earnings" will appeal to investors. "I believe the right approach is to put out all the information investors will be interested in and let them build their own models," says Jeff Naylor, CFO of Big Lots Inc., a $3.4 billion Columbus, Ohio, discount retailer. He doesn't include annual stock-option expense in his version of pro forma, and he says he doesn't agree with the S&P including it in its new measure.
Analysts, too, are doubtful that the new numbers will have much impact. "They're making a good theoretical case, but I'm not sure it will change a whole lot," says Jack Ciesielski, publisher of Analyst's Accounting Observer newsletter and an adviser on the S&P project. "Most of what moves Wall Street is not trailing earnings, it's forecasted earnings, and a lot of the things they're including aren't in forecasted earnings, because they're not forecastable." --Alix Nyberg
Just Kicking Back
Russian, Asian, and U.S. companies are the most likely to pay bribes when looking for business in developing countries, according to a survey by Transparency International.
The average closing cycle is 6 business days, says a recent poll by Hyperion; 50% of firms had a reporting cycle of 11 days or more. Lightbridge CFO Harlan Plumley wants to communicate more with shareholders. Investor Relations
Investor Relations
Too Much Is Never Enough
Eager to soothe jittery investors, companies bulked up their annual reports this year with additional disclosures. Now, many CFOs are looking beyond the annual report for additional ways to convince shareholders that their accounting practices are on the up and up. General Electric, for example, issued a 21-slide PowerPoint guide to its wordy annual report. It also instituted quarterly earnings calls for the first time in its history.
Companies are discovering the virtue of more-frequent communications. Lightbridge Inc., a Burlington, Mass.-based telecom-services provider, simplified its annual report but is supplementing it with quarterly fact sheets. "Rather than the once-a-year, glossy publication, we can communicate five times a year with investors," explains CFO Harlan Plumley. And it's cheaper to boot.
Software provider Comshare Inc. has been gradually boosting the amount of information in its 10Qs for about six quarters, says CFO Brian Jarzynski. "We have added some supplemental schedules that break out our revenues on a more specific basis," he says.
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