Title: Background Reference Links for Frauds and Accountancy Scandals
1- Background Reference Links for Frauds and
Accountancy Scandals - Bob Jensen's homepage --- http//www.trinity.edu/r
jensen/ Bob Jensen's accounting theory documents
--- http//www.trinity.edu/rjensen/theory.htm Iss
ues in the accounting, finance, and business
scandals --- http//www.trinity.edu/rjensen/fraud.
htm - Scandal Updates --- http//www.trinity.edu/rjensen
/fraud.htmScandalUpdates - Bob Jensen's Summary of Suggested Reforms ---
http//www.trinity.edu/rjensen/FraudProposedReform
s.htm - Revenue Accounting Controversies ---
http//www.trinity.edu/rjensen/ecommerce/eitf01.ht
m - Electronic Business Controversies ---
http//www.trinity.edu/rjensen/ecommerce/000start.
htm - Bob Jensen's Bottom Line Commentary ---
http//www.trinity.edu/rjensen/FraudConclusion.htm
2- Background Reference Links for Frauds and
Accountancy Scandals Bob Jensen's homepage ---
http//www.trinity.edu/rjensen/ Bob Jensen's
accounting theory documents ---
http//www.trinity.edu/rjensen/theory.htm Issues
in the accounting, finance, and business scandals
--- http//www.trinity.edu/rjensen/fraud.htm - The Virginia Tech Overview What Can We Learn
From Enron? --- http//www.trinity.edu/rjensen/fra
udVirginia.htm - Fraud References --- http//www.trinity.edu/rjense
n/fraud.htmReferences - Fraudulent Dealer Tricks An Interactive DHTML
Illustration --- http//www.trinity.edu/rjensen/F
raudDealerTricks.htm This includes a summary of
ten unethical tricks of the trade by automobile
dealers. - Many of the scandals are documented at
http//www.trinity.edu/rjensen/fraud.htm
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5Standard Poors Core EarningsPotter, Renee L
renee_potter_at_standardandpoors.com
Dear Professor Jensen I recently received your
request regarding Standard Poor's Core Earnings
data and materials for your upcoming conference
on April 28th. In order to facilitate your
request, it would be easiest to speak with you
over the phone to discuss possible data sets and
other collateral. In the meantime, most of our
information can be obtained on www.coreearnings.st
andardandpoors.com. On this web page, you will
be able to access our Technical Bulletin (which
discusses the methodology), the SP 500 Market
Study (completed in October, 2002) and other
supporting data sets and papers. Please call me
at 212-438-1468, so that I can better assist you
in your speech preparation. I look forward to
hearing from you. Sincerely, Renee
PotterProduct Manager- Standard Poor's Core
Earnings
6Agenda
- What it is
- Why we publish Standard Poors Core Earnings
- How its defined
- Plans for Standard Poors Core Earnings
7Standard Poors
- Standard Poors Core Earnings is supported by
Standard Poors three major units - Developed by Investment Services
- Prepared in consultation with Corporate Value
Consulting - Utilized by Credit Market Services as part of its
debt analysis
8Standard Poors Core Earnings
- Standard Poors Core Earnings is
- a standardized calculation of earnings from a
companys core business, designed to capture
long-term true earnings power of the business
9Something Was Needed
- Investors want an earnings measure they
understand and trust. Without any definition of
earnings measures, there is no consistency across
companies or through time. - Standard Poors recognized that inconsistency
and confusion were hurting investor confidence. - Just calling for change was not enough someone
had to propose a definition, listen to comments
and build a consensus. - Standard Poors has stepped up.
10Standard Poors Core Earnings vs. GAAP
- Concerns about GAAP
- GAAP net income doesnt tell the whole story.
- GAAP lets companies write their own definitions
for operating earnings. - GAAP tries to be all things to all people.
- Standard Poors response
- Standard Poors Core Earnings targets a
companys core business. - Standard Poors Core Earnings focuses on
consistent comparisons. - Standard Poors Core Earnings is used in
investment analysis.
11Standard Poors Core Earnings vs. GAAP
- Unlike GAAP, Standard Poors Core Earnings does
not smooth out the volatility that is really
present in earnings and operations. However, the
Standard Poors Core Earnings history we have
developed will mute that volatility. In addition,
we have provided guidance on how investment
managers can easily take pension interest costs
i.e., market-induced volatility out of the
Standard Poors Core Earnings calculation.
12Standard Poors Core Earnings and Analysis
- Standard Poors supports analysis using
Standard Poors Core Earnings - Data in Standard Poors Compustat
- Recognition of the SP 500
- Analysis that will be added in Standard Poors
Stock Reports and other Standard Poors
services for brokers, analysts and institutional
investors - Standard Poors is an independent source of
analysis, information and data Standard Poors
does not have apparent or potential conflicts.
13How to Define Standard Poors Core Earnings
- Begin with as-reported earnings, a widely used
measure defined with GAAP - Make adjustments to focus on the companys core
business
- As-reported EPS is GAAP net income excluding
discontinued operations and extraordinary items. - It is the longest time series for SP 500 EPS,
extending back over decades.
14Standard Poors Core Earnings Defined
Included in Standard Poors Core Earnings Excluded from Standard Poors Core Earnings
Employee stock option grant expense Goodwill impairment charges
Restructuring charges from on-going operations Gains/losses from asset sales
Write-downs of depreciable or amortizable assets Pension gains
Pensions costs Litigation or insurance settlements
Purchased RD Reversal of prior-period charges and provisions for bad debt
Unrealized gains/losses from hedging activities
MA-related expenses
15Earnings Measures Compared
Standard Poors Core Earnings GAAP Net Income (SP As-Reported) Operating Earnings
Stock option expense Included Excluded Excluded
Net pension Income Excluded Included Included
Restructuring charges Included Included Excluded
16Our Perspective
- Standard Poors is not rewriting GAAP or trying
to do FASBs job. - Standard Poors is not suggesting new SEC
regulations or new legislation.
- We are using existing accounting and reporting
concepts to give investors and analysts a better
understanding and more complete information about
companies.
17Stock Option Grant Expense
- Stock options are compensation, just like wages,
salaries and benefits. Therefore - Expenses related to stock option grants should be
treated like other compensation costs in
calculating earnings. - Expenses should be reported quarterly rather than
annually. - Employee stock option grant expense is included
in Standard Poors Core Earnings. - Standard Poors takes no position on the tax
treatment of stock option grants.
18Times Are Changing
Companies expensing options as of May 1, 2002
Wynn Dixie (WIN) and Boeing (BA) Companies
expensing options as of November 4, 2002
128 companies for updates see www.coreearnings.co
m
19Pension Accounting in 1-1/2 Lessons
- Net pension gains (pension income after
pension-related expenses) are funds held in a
trust for retirees and future retirees. These
gains are not corporate funds. Therefore, net
pension gains should not be included in Standard
Poors Core Earnings. - Pension expenses include service costs and
interest costs - Service costs are deferred compensation,
representing the benefits that accrue from the
current years labor services. - Interest costs are financing costs, reflecting
the passage of time as the moment when benefits
will be paid draws closer. - These costs should be covered by the pension
fund. Specifically, the actual return on pension
plan assets should cover interest costs.
20More Pension Accounting
- For Standard Poors Core Earnings, pension
costs include - Service costs
- Interest costs to the extent that they are not
covered by actual returns on plan assets - Because any pension gains become part of the
pension fund assets for the benefit of retirees
and employees, these are not corporate funds and
are not part of Standard Poors Core Earnings.
- Companies do not benefit from funds reserved for
pension beneficiaries. - However, pension plan assets can, actual returns
permitting, cover pension interest expense.
21Questions on Pension Accounting and Pension
Interest Costs
- Interest costs are charges in years when the
pension plan makes little money. Doesnt this
make earnings very volatile? - It can have that effect. Interest costs are real
costs and, if the pension plan returns cant
cover these costs, the company is responsible.
22Questions on Pension Accounting and Pension
Interest Costs
- How does FASB treat interest costs?
- FASB looks to the pension plan first to cover
interest costs, as Standard Poors Core
Earnings does. Then FASB uses expected returns
rather than actual returns. While the expected
returns eliminate the volatility, they also
obscure the true impact of pensions on earnings.
An important note Pension interest charges this
year can be a warning that a companys cash flow
and net earnings next year could be reduced by a
required contribution to its pension fund.
23Questions on Pension Accounting and Pension
Interest Costs
- Is there another way to measure pension costs
without making earnings volatile? - As long as one wants a year-by-year measure of
the true earnings, the volatility will be there.
However, in most years, actual pension gains
cover most or all of the interest costs. For
analysts who want to make other adjustments, such
as using a multi-year moving average, Standard
Poors Core Earnings data show pension interest
as a separate item. It is easy with Standard
Poors data to take this cost out of Standard
Poors Core Earnings for each company and each of
our indices. - If the SP 500 is up 7.8 in 2003, Standard
Poors estimates, there will be no pension
interest costs charged against Standard Poors
Core Earnings for the SP 500.
24Restructuring Charges
- Operating earnings often exclude restructuring
charges that are part of ongoing operations. - GAAP defines discontinued operations.
- Charges that are not related to discontinued
operations should be included in Standard
Poors Core Earnings. - If a company subsequently reverses a prior
provision, that reversal is not credited to
Standard Poors Core Earnings.
25Other Provisions
- Discussed in detail in the white paper published
in May 2002 and the Technical Bulletin published
in October 2002 - Available at www.standardandpoors.com
26Plans for Standard Poors Core Earnings
- Standard Poors Core Earnings and detailed
information will be provided in Compustat. - Standard Poors will continue to publish and
use as-reported and operating data for the SP
500 and our other indices, in addition to
Standard Poors Core Earnings. - We will forecast Standard Poors Core Earnings
for companies we follow analytically through our
Equity Research Department.
27Standard Poors Core Earnings Data
- SP 500 earnings measures compared
- Table showing as-reported earnings and Standard
Poors Core Earnings for the SP 500, and the
pension interest costs - Table showing Standard Poors Core Earnings for
GICS Sectors in the SP 500 (per share data) - Table showing Standard Poors Core Earnings for
GICS Sectors in the SP 500 (return on sales
data) - Chart showing option expense by GICS Sector for
the SP 500 - Chart showing pension adjustments by GICS Sector
for the SP 500
28SP 500 Earnings Measures Compared
29As-Reported Earnings and Standard Poors Core
Earnings
30Standard Poors Core Earningsby GICS Sector
31Standard Poors Core Earnings by GICS Sector
32Option Expense as a Percent of Revenues
33Pension Interest Expenseas a Percent of Revenues
34Further Steps
- Standard Poors will continue to work with key
leaders in the investment community to develop
consensus to support more informative and
accurate earnings information. - Standard Poors will support Standard Poors
Core Earnings with data and analysis, including
full data in Compustat, EPS data on indices,
forward EPS estimates on over 1,200 companies in
Standard Poors equity analytical universe, and
other efforts. - Standard Poors CVC will provide assistance to
corporations in the use of Standard Poors Core
Earnings in their financial reporting.
35Thank You.
- 800-523-4534
- www.standardandpoors.com
- www.coreearnings.com
- Core_earnings_at_standardandpoors.com