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''Federal banking regulators do not look out for investors,'' writes a reader. Other letters to the editor: monetary incentives for accurate invoices; baseball revenue sharing; turning the job corner; more.
CFO Staff, CFO Magazine
May 1, 2004
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I found your article on the federal banking regulations ("Playing Favorites," April) excellent and right on point. In my interactions with these regulators [as former chief accountant of the Securities and Exchange Commission], I found that they constantly failed to consider the transparency needs of investors and the capital markets, placing the interests of their banking constituents first and foremost.
In one meeting with the heads of the agencies, the chairman of one of the agencies asked me, "What's wrong if the banks fudge their numbers a little?" The federal agencies then proceeded to lobby Congress to pass legislation that handcuffed the SEC when it came to enforcing securities laws with respect to certain accounting practices of banks.
While the banking agencies agreed in a public statement to work with the SEC, the Financial Accounting Standards Board, and the American Institute of Certified Public Accountants to develop more-transparent accounting standards, behind closed doors they proceeded to do everything they could to tank the project. The project was recently dropped by the AICPA due to tremendous opposition by the banking regulators.
In reality, the federal banking regulators do not look out for investors and do not place a priority on their needs, but rather turn a blind eye to the type of practices that occurred at Enron.
Professor of Accounting
Colorado State University
Formerly SEC Chief Accountant
Right on the Money
Your article "The Great Inflatable Service Bill" (April) was right on the money. Many other areas have the same or similar types of billing overcharges.
As a former cost-recovery specialist, I have experienced many of the situations Mr. Durfee mentioned. The fact is, generally, other than good will, there is no monetary incentive to issue accurate bills or invoices. Incorrect/incomplete invoices occur even though the billing function is repeated so many times that the billing department would know how to issue correct invoices.
If an inaccurate invoice happens to be discovered, it is corrected and the overcharge refunded. This approach does not take into account the (potentially) numerous other incorrect bills/ invoices. After the incorrect invoice is corrected, the vendor/supplier falls back into the routine of creating more incorrect invoices.
One solution is to incorporate a billing-accuracy policy into the contract/purchase order. This policy should include the method for determining accuracy and the consequences. The policy could be something like this: At the buyers' discretion, 10 invoices will be selected judgmentally from past invoices to be reviewed. The overcharge error rate (if any) on this sample would be applied to the total of all invoices for the period to yield an overcharge amount. Vendors with an error rate of .02 percent or less would be notified. Those with an error rate of .021 percent to .05 percent would have the overcharges charged back. Those with an error rate of .051 percent to .10 percent would have the overcharge plus the cost of the review charged back. Those vendors with an error rate greater than .10 percent would have the same chargebacks, plus they would be suspended for one year on first offense, two years on second offense, and so on.
Correcting Baseball Stats
In "Squeeze Play" (April), there was one factual misstatement regarding Major League Baseball's new debt-service rule. As reported, 15 clubs were asked to present their financial plans in detail to the commissioner's office. However, after review and revisions (including pledges of additional equity, if necessary), fewer than 5 clubs would fall into the category of potentially not complying with the new rule by 2005.
As for inferences from critics that the revenue-sharing system isn't effective, those statements are either inaccurate, inconsistent, or just plain wrong. For example, I stated that the Marlins could not have won the 2003 World Series without revenue-sharing support. The team owners made both early- and late-season roster moves involving payroll commitments that exceeded their normal revenue resources. They have no other related-party interests (not the stadium, broadcasting affiliates, nor other commercial interests). To suggest that receiving tens of millions of dollars in revenue-sharing payments didn't matter ignores the plain facts—which certain "experts" enjoy doing in order to sell books based on long-held myths that titillate the sports media and the public.
Further, recent experience has shown that pouring millions of dollars into payroll only (as opposed to player development: see the Oakland A's and the Minnesota Twins) does not ensure winning. The revenue-sharing plan requires "investment in team operations," not investment in Major League payroll only.
Major League Baseball
Turning the Job Corner
I have run associations of six figure finance executives for 6 years, have been a member of Financial Executives International for 12, and am the founder and executive director of the Finance Leaders Association (www.financeleaders.org). I can't agree with some of the metrics on the market that you mention in your article on job searches ("Bouncing Back," Your Move, April).
For one thing, we have seen a lot of our members land [jobs] during the past year and into this year. We now track more than 1,800 six-figure positions a month, up from about 1,000 a month a year ago and about 800 a month two years ago. We look at other groups for comparison, and see across the board that attendance is down as much as 33 to 50 percent. Why? Because people have landed [jobs], especially those who have been out of work for an extended period of time. While it is far from a hot market, the corner has turned.
Your article on pricing-optimization software ("Answering RFQs, PDQ," Techwatch, March) was interesting—as far as it went. I would advise pricing managers to be cautious of any strategy based on price discrimination.
In an era of high price transparency and readily available information on competitors, alternatives, and substitutes on the Internet, buyers are quick to reject anything that smacks of price discrimination. The drive for uniform college-textbook prices, the reimportation of drugs from Canada to the United States, and calls for common automobile pricing across the European Union are just a few examples. Perhaps the most vivid illustration is in the airline industry—which you correctly cite as the source of much pricing-optimization business practice.
Low-cost carriers tend to offer one-way, restriction-free, reliable prices. They market directly against the complexity and unpredictability of traditional airline fares arrived at with the sophisticated tools your article describes. "Personalized prices" to the airline look like "gouging" to the passenger.
Yes, these tools can provide "optimal" prices in record time. For industrial sales and for custom products, they may be the way to go. But otherwise, managers would do well to be wary. You may be generating "optimal" prices for goods and services that remain unsold.
Unisys R2A Transportation
In "The Cruelest Blow of All?" (Techwatch, March), you state that "...by next year, U.S. businesses will send a staggering 35 billion E-mails each day."
Staggering is hardly the word. The population of the United States is approximately 300 million. To send that many E-mails would require every resident to send about 116 a day. In turn, this means that every resident would have to receive the same number daily. Going further, between sending and receiving, not much time would be left for other activities. In the case of the (mal)functions of government, this may be all to the good.
Hilford Moving & Storage
The VC Circus
Your article "Capital without the Venture" (February) succinctly and clearly described a complex, fluid situation. But the quote at the end from the National Venture Capital Association official—about the mysterious 10-year business cycle for VC investment—got me thinking about a couple of key factors that are likely responsible for the sweeping rise and fall of the VC investment circus.
One factor is the rapid emergence of new technologies or capabilities—most recently the development and adoption by consumers of the Internet, along with the evolution of cheap and robust wireless hardware, software, and regulatory support for it all. In the past, VC investment also soared when biotechnology became acknowledged as a new capability that could be applied to plant, animal, and human improvements, and with the electronics revolution. (Indeed, I remember reading a paper by a VC guy who once looked actively at the hot new area of hard-disk technology. He got investment pitches from 13 start-ups, each projecting its share of the future market and collectively describing a cumulative market share of 720 percent!)
The other factor relates to the cash that is available from investors, something that actually lags economic upturns by quite a bit. The huge amount of dry powder that VCs now have is due to cash commitments investors made three to five years ago; that is, when times were good. Because much less cash is being raised currently, VCs are hoarding, and only picking the best deals. Of course, this will change in the near future as the economy improves.
Since these two factors are unrelated, it's hard to make the case that there is a reliable cycle in investment spending. "All the stars have to be lined up" for there to be another explosion of investment. But it will happen.
Deer Isle, Maine
I was deeply disappointed when you failed to point out that all of the "digital pathogens" in your "Spy vs. Spy" article (Techwatch, February) depend on Microsoft products. If it were not for specific design decisions made by Microsoft, this plague would simply not be happening. Were this any other type of product, the vendor in question would have a significant contingent liability fund.
If your readers are going to use Microsoft-based E-mail clients and servers, I strongly recommend the servers be protected behind a gateway server such as the one described on the following site: http://www.flakshack .com/antispam/. Firms should also implement SPF (http://spf. pobox.com/) to protect the good name of their E-mail domains. Both of these are free.
Anyone who lets a Microsoft product face directly on the Internet, client, or server has not made a sufficiently diligent effort to secure important company assets or guard against well-understood liabilities. Think of it as a "drop-trow" level of security.
The Financial Accounting Standards Board is proposing to require companies to expense employee stock options in the income statement. This proposal will lead to a double accounting of the impact of stock options in computing earnings per share. Since this charge could reduce EPS of all businesses up to 10 percent, unless Wall Street figures out a new mechanism to value companies aside from historic price-to-earnings multiples, the potential impact could cost U.S. investors as much as $1.5 trillion to $2 trillion.
This proposed FASB accounting has the potential to create far greater damage to the U.S. economy than the combination of all events relating to Osama bin Laden and Saddam Hussein. A simple compromise would be to put this highly questionable calculation of so-called stock-option compensation costs in another principal financial statement, which accountants certify, called the "Consolidated Statement of Comprehensive Income." In this way, those who value this noncash charge will have a vehicle to use the data as they see fit, while avoiding potentially catastrophic injury to America's capital markets.
Perhaps this solution is too simple and logical to work. We all know there are many in the world who would get a lot of pleasure from costing U.S. investors $1.5 trillion to $2 trillion in value.
Robert S. Weiss
CFO and Executive Vice President
The Cooper Cos.