"Satyam is Sanskrit for Enron"

Prof Bob Paretta is back again with another lesson on reading financial statements. He shows that it's possible to spot corporate fraud using publicly available records before the market finds it or the company implodes. Remember Satyam? That Indian outsourcing company found with massive accounting fraud only 2 months ago? (See NYTimes article.) Here's Bob's Excel spreadsheet analysis of the cash flows and income statements that Satyam posted over the past 5 (count 'em, 5) years. (you'll need MS Excel to open it.) Paretta's Cash flow analysis for Satyam.

The gospel according to Paretta: "The spreadsheet shows an important accounting indicator -- the QofE (quality-of-earnings) ratio. It's the ratio of cash flow from operations to net income. Because net income includes non-cash expenses, cash flow from opns (CFO) should typically be higher than net income because to arrive at CFO you add back large expenses like depreciation and accrued expenses or expenses you did not pay for yet (Accts payable) and subtract smaller revenues that did not produce cash, like increases in Accts receivables. When CFO/NI is not greater than 1, it brings into question whether net income includes revenues that are being recorded before the're actually earned. (or even fictitious revenues!) So when QofE is less than one for even one period, it's a red flag and when it remains so over nearly a 5 year period, as in the case of Satyam, it is a big red flag! If you fictictiously inflate revenue then you also have to inflate accounts receivable; otherwise the accounts don't balance. Satyam's receivables rose steadily over the five year period and also as a percentage of net income. That relationship can jump around for a period or two (also a red flag) but when it grows steadily then you have to ask, why are they increasingly not collecting the revenues they are recording in A/R (big red flag). If you're a Satyam kind of company, if you want CFO to rise so that it exceeds or approaches net income you have to either stop paying your A/P or you have to make up fictitious A/P, because A/P reduces net income but does not affect CFO. Notice how on the second page of the spreadsheet A/R and A/P and related accruals are increasing and are an increasing percentage of net income? Again if it happens just one period, it is a blip on the radar...a pink flag. If it keeps happening, it is another big red flag. It means you are increasingly not collecting your A/R and you are not paying your debts. The conclusion is you are either a crook or you don't know how to run your business. So three big red flags and it is time to sell, call the cash flow police, or both. The mystifying thing is that Raju admits that 94%, or $1 billion, of the company's cash balance was fictitious. That should have been caught by the auditors (PwC) unless the banking system in India is so corrupt that banks sent PwC false confirmations. In any case Raju could not have done this alone. There had to be collusion on a massive scale to the extent we have never seen before. The international fallout from this is going to be huge. Stay tuned."
Yes we Can! (stay tuned, that is.)
Thanks again, Doctor Bob.

Ever think about chucking it all for teaching?

News accounts suggest that lots of us have and still are. A friend of mine is a public high school science teacher in a highly regarded suburban Washington school district, who's kept a journal of her experience since she joined teaching after a successful career elsewhere. If you're a parent, if you're a teacher, if you're even THINKING of someday becoming a public school teacher, these stories are riveting and detailed. They'll make you feel as if you're in the school with her, real time! Click on Episode 1- The Missing Test Booklet to get a reality check on how public school systems work.

Do Fannie or Freddie own your mortgage?

Today's Washington Post has a great article in Real Estate Section on Fannie and Freddy's policies re: refinancing of your mortgage. (You'll have to register with Washington Post to see it, but hey, it's STILL free!) Article's bottom line-- if they own your mortgage, bad credit rating or underwater mortgage will not stop them from allowing you to refinance. Even if you don't want to refinance, you may be curious about who owns your mortgage-- Fannie or Freddy, or the moguls of the CDO and CDO-squared universe?. Here are the Fannie and Freddy websites that will tell you: Fannie Mae Freddie Mac

Worried yet about antibiotic-resistant bugs?

You should be. Here's an interesting blog site, Extending the Cure, that looks at various aspects of the problem. Especially the March 12 post on pig farms and Multiple Drug Resistent Staph Aureus (MRSA) infections in pigs. Makes you want to skip your bacon, but you'll learn that even that won't protect you. Big question, of course, is how to turn the aircraft carrier that is the medical-industrial-agricultural complex to get results in time to save lots of us from misery or even...well I won't go there.

Do Medicare patients have too much choice?

A recent study by Kaiser Family Foundation found that Medicare patients enrolled in the Rx drug benefit have lots of plans to pick from, but in hindsight seem not to pick the one that would have minimized their annual drug bill. Much is made of how horrible this is, and how Medicare patients have "too much choice." My view is this: "Medicare patients, GET YOUR ACT TOGETHER, or face the consequences of paying too much." There are plenty of aids on the web, and if you can't do it, then be nice to your kids or nieces & nephews, or friends, and they'll help. Start with Medicare.gov.

Best argument for higher Fed taxes on gasoline

Today's Wall Street Journal (3/9/09) has a special section on the environment (Section R). Can only see it online if you subscribe to WSJ online, so fuggedabout it. In a nutshell, Mike Jackson of AutoNation (car retailer) made the case for why we need a gas tax that will bring price of gasoline to $4.00 at the pump. At current gas prices, says he, the demand for high gas mileage cars is nada, zilch. When gas hit $4.00, all that the consumer cared about was getting high gas mileage. Politicos say that it's a no-go with Americans, but what if it was REVENUE NEUTRAL? That is, what if it was given back dollar for dollar to taxpayers (either through payroll tax holiday or tax credits)? Or, maybe, relief could go to taxpayers based on state's population density or miles driven per capita (that's my idea). Point is, no high gas price, no energy efficiency!

How to un-do the meltdown thru re-regulation

Much as I hate to advertise a Huffington Post blog, this one by Robert Weissman on the 12 anti-regulatory steps to the meltdown chronicles every single mutually reinforcing action throughout the last 15 or so years of both dem and repub control of congress and/or white house. We should watch what our glorious Congress does to un-do ALL of these! I'll try to post when I see relevant stuff.