Wednesday, January 28, 2009

Corporate America Part 1

Shrink: So is today the worst day of your life?..:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Peter: Ya

Shrink: Wow man that sucks

-Office Space paraphrased

Corporate ..:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />America is full of a bunch of red tape bs. Now I hear the government is worse and I cry at the thought. A lot of money is spent and a lot of time is taken up doing a lot of crap that has to be done because people are liars, cheaters, and thieves. My profession solely exists because people won't tell investors their actual financial information unless they are forced too and/or they can't keep track of it in the right way.

So let's look at part 1 above which is that people are liars. Why? Well if I told you that if you changed a few numbers you could make an extra 10 million would you do it. Now a lot of us myself included want to be moralistic about this, but the bottom line is that $10 million is a lot. Look at Enron. By lying the owners of Enron had made the heads of Enron made well over $100 million. That's not chump change. That's a house in Aspen, your own island, and a trophy wife with some spare change for a Ferrari. Business is big dollars. CEOs of companies who get fired walk away with double digit (some cases triple) severance packages. That's more than most people will make in their lifetime.

Now said CEO will obviously make more staying with the Company. So let's say our earnings are projected at $5.00 a share for this quarter. And we're at 4.99 earnings out of 500,000 shares that's $24,950,000 in earnings as opposed too $25,000,000. So we need to make $50,000. If not our share price right now could drop 10% just by missing earnings estimates by 1 penny. Sounds stupid right? How do we get this $50,000 we can't sell more stuff last period the auditors would catch that for sure and we could go to jail. Well not to worry cause crack executive team has been stowing money away for a rainy day. Cause in Q1 they earned extra money so decided to restructure one of their business units setting aside $4,000,000, but after looking at it further they shouldn't have recognized o say around $50,000. It's not that cut and dry or that easy but this is a simple example to show you really how easy earnings management is.

There are TONS of ways to do this. For people reading who actually look at the stock market notice how close companies get to those projected earnings. Those guys making the predictions aren't that good. The management team just knows what will make their stock price soar (and all these guys have options and so are directly benefiting from said management). The investors are cashing in too so it's almost a win win. The only people who are screwed are the people actually working at the lower levels of the Company which I will get to tomorrow.

If you have any questions to the one or two readers reading this post and I will respond.

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