Dr. Robert Kemp CPA

GLG News by Dr. Robert Kemp CPA, Professor

Reality Impact - Grasping the Cost of Not Acting to Restore Trust in Capital Markets

September 19, 2008

Analysis of:Fed Tentatively Agrees to Provide $85bn to AIG | www.washingtonpost.com

There are significant arguments today on what should or should not be done to address the current capital market crisis.  In reality, market economies first and foremost rely on trust.  When trust is lacking, the ramifications are significant and far reaching.  The mistrust of one sector multiples into problems throughout other sectors.  A good example is the impact of capital markets on nonfinancial services businesses.  This point is easily seen in the cost of credit, or the lack of credit.  However the impact is much greater than mere credit.  An example is unfudned pension and other post retirement benefit plans (OPEB). The cost of not restoring trust in the capital markets needs to be understood, in all aspects.  The price is high (e.g., government spending and assuming risk) on both sides of the argument.  However all costs, on both sides, must be understood and measured before judgements are made.

Fair Value Accounting - The Good And Bad Of It In The Real World

September 15, 2008

Analysis of:Fair-Value Revolution: Historical cost accounting is fading as Corporate America marches into a new era. | www.cfo.com

Fair value accounting, or mark-to-market accounting, is not new.  The debate of how to account for value has been around for decades.  However the implications of fair value accounting, versus historical accounting, are far reaching and often not grasped.  A society needs to be careful in setting accounting standards that may or may not reflect its cultural values.

Valuation - The Trick Is In The Fundamentals

August 25, 2008

Analysis of:Kazakh rival lifts ENRC stake to block bid | www.ft.com

To accept or reject an offer to sell all or part of a company is a challenge.  There are two issues.  First is the maximization of shareholder value.  The second is understanding the basis of conflicting valuations. 

Value Creation in Banking: The Key Is Information

April 1, 2008

Analysis of:Top Tier Bonanza In Store For Core Banking Vendors | www.finextra.com

1.   Banks create value for shareholders by creating value for customers.  Much of that value to customers is embedded in information systems. 2.   The business of banking evolves quickly, forcing banks to evolve their competitive strategy and resulting advantage.  Information systems are at the heart of this evolution. 3.   The recent challenges of risk management will only accentuate the oversight of regulators, requiring banks to seek better information systems (e.g., more accurate, timely, and integrated information). 4.   As noted by the article, this will create a boom for consultants and providers of information systems.

Derivatives - More Disclosure Is Always Better for Financial Analysts

March 27, 2008

Analysis of:Statement of Financial Accounting Standards 161 | www.fasb.org

1.  Value is defined by risk.  Risk deals with uncertainty of the future.  How a firm manages risk is a major determinant of its value. 2.  Accounting standards are dedicated to reporting the past.  Given it is the past, there is little risk or uncertainty regarding such events.  Merely reporting the past does not give the financial analyst the insights needed. 3.  FASB 161 tries to bridge this gap between past/present and the future.  It attempts to make management disclose intent.  It attempts to answer the following question: "How will current actions and positions affect future performance?"      

Understanding the Pros and Cons of Pension Fund Investing - the Issue Applied to Asian Investments

February 26, 2008

Analysis of:Canada Pension Funds Turn to Asia | online.wsj.com

1.    Investing in Asia has three benefits.  First, there are the returns from investing in environments that show greater growth potential than in the West. Second, there are the returns from investing in opportunities denominated in currencies that are forecasted to appreciate. Three, there is the benefit of diversification. 2.     The costs, or risks, of investing in Asia are threefold: First, there is the risk that high growth opportunities present. Second, there is the risk of investing in a depreciating, not appreciating currency. Third, there is the asset-liability risk inherent in all financial intermediaries, particularly pension funds.

Financial Analysis - The Ultimate Impact of IFRS

December 10, 2007

Analysis of:The Economics of IFRS | www.cfo.com

1.  Countries adopting IFRS are not always adopting the same standards.  If you look closely, the term "as adopted' is being used a lot (e.g., China).  What that means is countries are adopting IFRS in principle, but are differing on interpretation and actual application/practice. 2.  The end result is the need for financial analysts to become more educated and dig deeper into financial statements.  The idea that we will have one set of standards, simplifying analysis, is false.  Analysts must begin to appreciate how each country is "adopting" IFRS.   3.  Accountants must likewise be sensitive to the "as adopted" challenge.  This goes beyond understanding and dealing with different approaches in different countries.  It also deals with investor expectations and the legal structure within and between countries.  Unless accountants grasp changing investor expectations, they will find themselves in a legal nightmare. 

Pension Pressure Reduced - Good News For Corporate Valuation

November 15, 2007

Analysis of:Out of the Shaows? PBGC Deficit Shrinks by $5 billion. | www.cfo.com

The reduction of the PBGC's deficit reduces pressure on Congress to take action that could impact corporate values.   Such action would most probably hurt corporate value by adversely affecting cash flow and risk.

Financial Analysts Beware: The Rules of Pensions Are Always Changing

October 31, 2007

Analysis of:PBGC sets new pnsion benefit limit for 2008 | money.cnn.com

1)  The PBGC increasing the amount of insured benefits for qualified, defined benefit plans is a normal, annual event. 2)  Ignoring the impact of this increase on firm valuation can be problematic. 3)  Financial analysts, following mature and declining industries and firms, must pay particular attention to this increase due to solvency and liquidation issues. 

Beware the Cost of Pension Possibilities

September 26, 2007

Analysis of:Democrats to Push Bill to Protect Workers | online.wsj.com

Unfunded pension and OPEB benefits (e.g., Other Post Retirement Benefits - health care) have little or no priority of claims in bankruptcy, in relationship to other forms of debt.  As political currents change, the possibility of radically changing this situation also changes.  (See source article.)  If pension and OPEB liabilities gain higher priority in bankruptcy, the imbedded risk in other forms of debt will increase.  This increase in risk will ultimately force higher required rates of return and thus lower values. Financial analysts need to be aware of this when pricing such debt and related equity.  

Pensions and OPEB - Make Sure You Know "All" The Risks

September 13, 2007

Analysis of:Pension Investment Risk Disclosure - What You Don't Know | news.glgroup.com

Dr. Mangieor's analysis is insightful and correct. Investors need better pension/OPEB disclosures regarding risks. However all the risk within a pension scheme must be recognized, understood, and managed. Too many times the risk within a pension/OPEB scheme is viewed as having a single dimension: default and market risk. This is problematic.

The Auto Industry - It's Simple Risk and Return Regarding Health Care Issues

September 13, 2007

Analysis of:UAW Talks Get Push | online.wsj.com

US auto manufacturers face a huge dilemma.  To be competitive with Toyota and other non-US auto manufacturers, they must lower health care costs and unfunded liabilities.  (This is well documented in the referenced article.)  What is interesting is the impact on value from both the the firms' perspective and the UAW's perspective.

Pensions - Management is responding to economic realities

September 4, 2007

Analysis of:Rank to consider sale of its pension scheme | news.yahoo.com

The key implications of Rank Group's actions are threefold. First, it is harder for companies to borrow from employees with off balance sheet pension schemes.  Disclosure requirements have increased (i.e., FASB). Second, pensions have always been a too-often neglected risk dimension in corporate valuation.  With more disclosure, this risk dimension is being recognized, appreciated, and used in pricing value. Last, the reasons for a company to retain influence over its pension fund are diminishing.  Regulation (e.g., Pension Protection Act) is requiring more discipline in the assumptions used to evaluate pension obligations and the funding of pension obligations.

The Need to Balance Return and Risk: Wake Up Call for Pension Funds

August 31, 2007

Analysis of:Pension Fund Managers Rethink Their Love of Hedge Funds | online.wsj.com

Too often the managers of pension funds use an objective of maximizing return.  However in doing so, they neglect risk.  In the volatile markets of today, the focus on returns, while neglecting risk, is causing problems.  It's time to stake a step back and rethink the management of pension funds. 

Pensions, Risk, and Reality

August 22, 2007

Analysis of:Insurers Brace for Policy Fight | online.wsj.com

The process of managing pension plans (defined benefit plans) is too often simplified and neglected due to its long-term nature.  Like Dr. Mangiero, I also agree that the degree of sophistication needs to be raised.  However to do so, all risks within the process must be recognized and managed in an integrated framework. 

Global Convergence of Accounting Standards: A Reality Check for Financial Analysts and All Involved

June 21, 2007

Analysis of:Foreign Affair: Is End Near For "U.S. Only" Accounting? | online.wsj.com

1.    Convergence of U.S. and international accounting standards is coming. 2.    The pace for this evolution is quickening. 3.    This convergence is troublesome, not because of its goals, but because of the expectations of financial statement users. 4.    Users of financial statements must be educated to the differences in accounting standards, and the implications that different approaches yield.  These implications also include legal issues/recourse.

The Fair Value Challenge: The Real Challenge for the PCAOB, Auditors, and Financial Analysts

June 20, 2007

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

The real challenge for the PCAOB, auditors, and financial analysts is not the lack of expertise.  The real challenge is twofold: 1.    The user of financial statements must be educated and revise their expectations. 2.    The US legal system must adapt.

Fair Value Accounting - A Reality Check For US Auditors and Financial Analysts

June 19, 2007

Analysis of:PCAOB:Can auditors handle fair value | www.cfo.com

The US accounting profession has long dealt with fair value.  However how US accountants deal wit fair value is first a function of the US legal system.  Until the US legal system changes, the US accounting profession will always have challenges.  Thus the US accounting profession will cling to historical cost methodology.

Pensions and Risk Management - An Underlying Cause of Neglect

May 9, 2007

Analysis of:Risk Management for Pensions, Endowments and Foundations | www.amazon.com

As the author notes, pension managers often neglect risk management.  The question is, "Why?"  To understand the answer one must look for incentives to manage pension risk.  One must focus on the accounting for pensions.

Financial/Risk Analysis of Lenders - The Cure May Be As Troublesome As The Problem

April 18, 2007

Analysis of:Subprime solution: Swap ARM's for fixed-rates | money.cnn.com

The problems of subprime lending are hot topics.  Lack of underwriting standards and poor pricing are the primary concern.

However lenders need to understand the cure or reaction to such concerns can cause even more harm.  Financial analysts need to understand how their clientele (e.g., banks) are coping with the challenges.  Financial analysts must consider the proposed solutions.  The solutions may cause as many, if not more, problems.  The issue is value at risk.

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