Mr. George Pugh

President, George Pugh & Co

GLG News by Mr. George Pugh, President

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.

February 3, 2009

Analysis of:'Idiots' Indeed | online.wsj.com

In the Wall Street Journal opinion, paying off the $18 billion in bonus pool is just good sense. The only real problem was that some bankers exercised poor timing. “John Thain's year-end bonuses to Merrill Lynch executives, whatever their rationale, reflected an acute case of political tin ear.” The Journal also feels that the compensation is mislabel: it is not bonuses at all, but rather like tips, constituting the majority of the employees compensations and it has the bonus pool in way has fallen to the insignificant level of about $112,000 person, and paying them will help the NYC. The Opinion Page opposes any limits on employee compensation for fear of harm to the business motivation.

Wal-Mart Banking on the Unbanked

June 28, 2007

Analysis of:At Wal-Mart, a Back Door Into Banking | www.nytimes.com

Jane J. Thompson, called prepaid cards and money center services “foundational products” and ““Our concept is to go up the credit ladder of financial services,” The new products, like the prepaid debit card, will be offered through third-party partners, allowing Wal-Mart to sell bank like services without a government license, very important in view of the previous failures and current regulatory climate. .“The logic behind a lot of these services is to increase traffic and do it in a way that puts money in people’s hands,” said Andrew Dresner, a payments industry consultant at Oliver Wyman Financial Services. “You give them a couple hundred dollars,” when they cash their paycheck, “and they will buy other things.” Combine the logic of proximity with the fact that 20 percent of customers, 27 million people do not have checking accounts, and you have a truly potent combination.

Fair Value Is Not a Just or Proper Price

June 20, 2007

Analysis of:PCAOB ponders how to audit fair value | www.cfo.com

PCAOB’s chairman Mark Olson has said of SFAS No.159: "The increased use of fair value accounting poses a challenge for auditors and the PCAOB." Time is short as this SFAS goes into effect for most companies for financial years beginning after November 15, 2007, except for early adopters. The new standards cover valuations of stocks, bonds, loans, warranty obligations, and interest rate hedges when the Fair Value option is elected. Under existing PCAOB standards, the auditors need to understand how such estimates are derived and may have to develop independent estimates when independent data is available. Both SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities” and No.157 “Fair Value Measurements”, are going to have a great impact on how financial information is presented and the additional testing, both factual and procedural to properly audit it.

In Fraud, Many Hands Make Light Work

June 18, 2007

Analysis of:Financial-Statement Fraud not a Solo Job, According to Study of Pre-Sox Years | www.acfe.com

This article is based on “Control Overrides in Financial Statement Fraud” by Robert Tillman and Michael Indergaard of St. John’s University, available at http://www.theifp.org/research%20grants/tillman_final_report.pdf The study examines 834 companies that filed financial restatements between 1997 and 2002. Of those 374 (45 percent) were accused of securities fraud and subject to shareholder suits, SEC enforcement action or both. Of those resulting in legal action seven individuals on average were implicated holding a variety of senior positions, including board members. management and auditors

Finding Better Arguments for Amending Sarbox

June 5, 2007

Analysis of:Dealing With Sarbox | online.wsj.com

Kenneth Wilcox, President of SVB Financial, believes that Sarbox has made the US economy less competitive. He disputes claims by a Big Four accounting firms that the costs are declining, with second year costs only 40% of the first year. In 2006 SVB paid over $20 million to the Big Four, for an average of about $17,000 per employee. This is more than five times as much as we paid them only three years ago. The new rules have contributed to a shortage of trained personnel while PCAOB under SEC guidance discourages the auditors from either offering advice or exercising judgment. As a result, almost 10% of all publicly traded companies announced restatements in 2006. SARBOX has greatly increased the cost of doing business, and in the author’s view to no good purpose.

The Real Cure for SARBOX or the Iatrogenic Illness

May 31, 2007

Analysis of:Growing the 'Private' Club' | online.wsj.com

Ms. Orit Gadiesh, Chairman, and Mr. MacArthur, Director of The Global Private Equity Practice at Bain & Company, believe that private equity is becoming a benchmark of performance for CEOs and boards of directors. The authors offer the following reasons for the popularity of private equity funds: -Funds focus on a reasonable time frame, three to five years typically, rather than on quarterly performance, the common timeframe for public companies. -Funds have detailed plans and time tables, enforcing discipline for clearly understood goals. -Funds quickly dispose of poorly performing assets, unlike some traditional managements. -Funds have a record of success, and exceptional earnings. Though not the only model, private equity funds provide an example of clear planning and solid execution with high returns from 1969-2006.

How Proposed Rules Could Render Current Accounting Practice Meaningless

May 24, 2007

Analysis of:Profit as We Know It Could Be Lost With New Accounting Statements | online.wsj.com

In the months to come, the FASB and the IASB, its European counterpart, will release a draft on plans to revamp current financial statement disclosures. Two possible changes cited in the article are the disappearance of net income, and an asset presentation that no longer separates assets and liabilities. The following link provides possible financial statements under the proposed rules:http://online.wsj.com/public/resources/documents/WSJ0507-fasac_march07.pdfIn the past, financial statements were issued to satisfy the needs of bank lenders. One of the goals is to provide investors with better information. It is envisioned that one day, a global set of accounting standards will come from this effort.Certainly, if implemented, the accounting disclosures would change radically, making the current professional knowledge base obsolete. The question should be: will these changes help the users?

Do Declared Aims Fit the Company?

May 24, 2007

Analysis of:Telling a Big Story in a Few Words | online.wsj.com

“101 Mission Statements form Top Companies” by Jeffry Abrahams is the author’s on the great modern creation, the Mission Statement.The book itself has only eleven pages of original writing, then all collection of mission statements. The ones mentioned in the review, have little if any connection with what a company is actually doing. Gillette’s mentioned nothing of shaving, “. Perhaps a mistake: Today Gillette is a part of Procter & Gamble.”The whole issue turns on providing a clear statement which can usefully guide the people in a company. It is basic and simply, but a thing people can refer to when making decisions for which there is no other guidance. J&J’s served it well during the Tylenol recall. Would others do as well?The implications go beyond mission statements to quality of thought going into planning and strategy,.

No Harman Trying

May 24, 2007

Analysis of:Unusual Buyout Offers a Piece to Shareholders | online.wsj.com

On April 26, 2007 Kohlberg Kravis Roberts & Co. and Goldman Sachs Group agreed to buy Harman International for $7.8 billion in cash: $120 a share, a 17% premium. The wrinkle is that shareholders would be allowed to exchange their holding for shares in the new privately owned company. There have been other instances such as Kindercare, but ordinarily they don’t build them into the original offer. These so-called stubs would be traded OTC if at all, and would be subject to reduced regulation. Stub equity allows a buyout firm to put more of its own money to work on a deal, by reducing the amount of capital it needs to raise from other buyout funds, and the need for other partners. The concept is interesting, but it says a great deal about other issues as well.

Ox in the Box

April 29, 2007

Analysis of:Oxley: I'm Not Happy with Sarbox | www.cfo.com

The Sarbanes-Oxley Act of 2002 passed all most unanimously and received a grudging acceptance from corporate America. This article contains and interview with Mr. Oxley.

Section 404 of the Act and the rules promulgated by the Public Company Accounting Oversight Board (PCAOB) a private-sector, non-profit corporation created to oversee the public company auditors.. Its stated purpose is to 'protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports'.

The results tied to Section 404, especially relating to the PCAOB have been very strong. Mr. Oxley, himself, has come to view the actual implementation of this section as flawed. He believes that: “It was Auditing Standard No. 2 [the standard for auditing internal controls over financial reporting], promulgated by the PCAOB that started all the problems…. but by the time the PCAOB was done, it was 330 pages of regulations. It was far too prescriptive and [more] expensive than anyone anticipated.”

Thus we have a section of the Act, which has grown to the level that one of the authors sees problems with it. The following link gives good, general help:

http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act

Is Dell going to Heck?

April 27, 2007

Analysis of:Dell's Internal Accounting Probe | online.wsj.com

Dell Inc. announced that its 10-K, due April 3, 2007 extended to April 18, would not be filed on time. Dell has also failed to meet NASDAQ requirements for continued listing as a result of its delinquent periodic report filings.

This delay was based on evidence of unspecified misconduct, and has involved prior quarters as well. In August 2006, the Dell announced that it was under informal investigation by the SEC on revenue recognition.

The resolution of these issues, have been long in coming, and still it is not clear how high in the organization the issues reach, though there have been firings, but also in what they entail.

Even with all the delays, there is really no clear picture of what has gone wrong.

D&B? Wait and See!

April 25, 2007

Analysis of:D&B Acquires First Research in $22M Deal | www.webcpa.com

On March 20, D&B announced that it has acquired First Research for $22.5 million cash on hand. The agreement provides the seller with an earn-out potential of up to $4 million based on financial performance.

First Research provides Internet-based marketing research and industry trends, for use sales professionals. D&B said that it plans to enhance its Hoover’s Inc. database with deeper, industry-specific content through the acquisition.

First Researchrevenue of $6.5 million, a nearly 30 percent increase over the prior year. Because of GAAP rules on deferred revenue, the acquisition will have no material impact or change 2007 earnings guidance.

The acquisition is of greater moment, than would be gathered from its price.

Levi Leaves KPMG

April 23, 2007

Analysis of:Levi Strauss Dumps KPMG as Accountant | accounting.smartpros.com

This article is very sparse, and the subject matter relatively old.

It discusses the decision by Levi Strauss to change auditors, leaving KPMG for PriceWaterhouseCoopers.

With KPMG in charge, the Levi Strauss had suffered a number of issues relating to restatements and KPMG’s assertions about a lack of internal control, though the specific troubles were not current.

Finally, Levi Strauss replaced them, after the release of the 2006 10-K.

Option Abuse: What to Do?

March 30, 2007

Analysis of:The War at Home | www.auditintegrity.com

Mr. Kaplan, the head of Audit Integrity, is deeply disturbed by a Wall Street Journal article, “Companies Say Backdating Used in Days After 9/11” (March 7, 2007). Many companies rushed to grant options then claiming happenstance or rationalizing the action as a way to motivate executives in a difficult period.

With the statute of limitations approaching, SEC Chairman Cox has yet to decide who was damaged and what penalties might be placed on the companies involved. Further, is it fair that the costs come from the shareholders? Further he points out that the companies that were the worst offenders under-performed, despite of rich management compensation.

Mr. Kaplan believes that the individuals who did the backdating should pay and not the shareholders.

Construction Fraud or Dissatisfaction?

March 29, 2007

Analysis of:Fraud rampant in construction industry | www.financialdirector.co.uk

KPMP found, in it 2007 survey of the global construction industry, that twenty percent of respondents were aware of fraud in recent projects.

Richard Whittington, head of the firm’s construction practice was taken aback by the scale and the potential risks to the global economy and to the companies defrauded.

Is General Motors Dead or Only Sleeping?

March 28, 2007

Analysis of: GM Says Internal Controls at Root of Accounting Troubles | webcpa.com

This article is one of the best teasers I have seen and raises some supremely important issues relating to internal control weaknesses and if they have any import for investment decisions.

What the article is actually referencing is GM’s 10-K for 2006, filed March 15, 2007. GM disclosed, among other things that internal control weakness might preclude implementation of the company’s recovery plan. These disclosures are part of a longer history of accounting related issues culminating in a massive restatement in 2006.

Despite these very real issues, this article points out that analysts believe that demonstrated progress in reorganization, trump control weakness in determining shareholder value.

In summary, results trump form at least for the analysts.

Predicting Option Abuse

March 26, 2007

Analysis of:Research firm hunts for clues in insider sales | news.moneycentral.msn.com

Stock options and insider trading are fascinating topics, and when you mix the two as this piece does, you have a very interesting article.

Carr Bettis of Gradient Analytics has completed a project that claims to pin-point when executives exercise their stock options “abnormally early.” Typically these early exercises come about six months before the market decline.

According to Bettis, "What we found was that not only do these early, deep-in-the-money exercises result in share price declines over the period that follows, but they also are associated with earnings misses and future misses,"

Even good theories don’t account for everything: In January 2006, Gradient noted abnormal exercise activity at Smith International Inc. Shares have seesawed since the report, but after a year were flat "We looked at it as a case that didn't work out as expected," Bettis said.

The question is: how much can it do, and where do we have to do more work?

Moore Nukes for Greenpeace?

February 28, 2007

Analysis of:Fuel Fight | online.wsj.com

Dr. Patrick Moore, a Greenpeace founder, has changed from an opponent to a proponent of nuclear power.

He left the group in 1986 in the belief that the group had abandon the scientific method and was sailing into darker waters. The change was a radical one for him. In 1976 he wrote in a Greenpeace report that aside from nuclear warheads, nuclear power plants were "the most dangerous devices man has ever created".

Dr. Moore’s change in belief is not universally lauded by other environmentalists, however. Greenpeace is still actively against nuclear power, at least partially because there has been no long term policy of spent fuel. Other founders of Green peace have been very uncharitable toward Dr. Moore. Robert Hunter, a founding member of Greenpeace referred to Dr. Moore as an "eco-Judas”, Paul Watson called him and him an "eco-whore."

The question is will nuclear power gain enough support to prosper in the struggle against global warming?

Electric Conservation: The Bottom Line

February 20, 2007

Analysis of:The Bottom Line | online.wsj.com

For a variety of reasons, from strategic to green, there is an emerging policy goal of stopping new power plant construction.

On the regulatory level, there is movement to disconnect utility financial health from selling more power. Part of the effort is called decoupling, which means that actual profit will be negotiated at year end.

Allowing a return on conservation expenditures (capitalization) while treating them as allowable expenses for rate making purposes raises its head, again, after a long hiatus.

The analysis is not new and should include other elements for a fuller picture of potential policies.

Old Electrons in New Bottles

February 16, 2007

Analysis of:The New Math of Alternative Energy | online.wsj.com

The authoress has written very good articles on the energy industry, two others of which I have commented on Texas deregulation and transmission line construction: