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reddog

"financial Engineering" In Big Companies

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This comes of the back of Tesco's problem with trying to make results better than they actually were:

http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11113243/Tesco-suspends-four-executives-over-250m-accounting-scandal.html

How common do you think this is in big companies? I have worked for a couple of massive I.T. outsourcing companies that tried to pressure employees to taking their holidays at certain times, banning travel for business, and banning overtime. In each case the idea was to make that quarters results look good.

If this sort of thing is happening at my lowly level, could more serious things be going on up the management structure and could we be in for a real shocker one day?

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I've encountered experiences like yours. They're often associated with ill-considered targets and incentives for the lower-level middle managers to whom the people affected report.

I think Tesco just announced something worse than that. Though it could also be the "new broom" effect as Drastic Dave trawls all the closets for skeletons and exorcises a pile of bones just in case :unsure:

[edit to add] If you want to see systematic and sustained fictional profits, look to the financial sector. Tesco is no Enron: all those shops are a huge real business trading real things with real people. Real questionmarks hang over different kinds of companies, like Naibu whose real assets are (to say the least) in question, or Quindell which looks very enronesque.

Edited by porca misèria

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If you reward executives with shares they have an incentive to boost the share price by any means necessary to boost their "wealth". The issue is if you can't boost the share price honestly there's clearly a massive incentive to boost it via accounting tricks.

We may have reached a point now where share scheme's for executives are now becoming a perverse incentive and encouraging Enron style accounting.

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The new Tesco boss is reported to come from Unilever and by coincidence they were reported to have some sort of issue in their official accounts a while back which needed some sort of regulatory investigation (apparently).

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My wife worked for a large multinational FMCG company until earlier this year and what you say rang true for her. Travel bans, rearranging chairs on the deck etcetera etcetera.

Another trick was to stock load consumer goods with wholesalers (sandbagging) and that could then be marked on the balance sheets as a sale. Problem is this was a two way street and most of it would end up being returned and swiftly moved on for pennies in the pound to bargain retailers. A bad 'good' example of this was one product a *quill with a shelf life of two years and one wholesaler had twelve years worth of quills sitting in the warehouse. You do the maths.

*deliberate obfuscation.

Edited by longtomsilver2

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My wife worked for a large multinational FMCG company until earlier this year and what you say rang true for her. Travel bans, rearranging chairs on the deck etcetera etcetera.

Another trick was to stock load consumer goods with wholesalers (sandbagging) and that could then be marked on the balance sheets as a sale. Problem is this was a two way street and most of it would end up being returned and swiftly moved on for pennies in the pound to bargain retailers. A bad 'good' example of this was one product a *quill with a shelf life of two years and one wholesaler had twelve years worth of quills sitting in the warehouse. You do the maths.

*deliberate obfuscation.

this is normal for a target driven organisation

The reason is a: sales figures, b: production is actually out the door, and c: warehouses stuffed with stock have an incentive to deal and prioritise in next months sales promotions.

It was always my aim in this type of sale to stuff the resellers where possible...and a lot of incentive pricing is aimed to generate just this sort of business.

In manufacturing, the aim is to keep the lines flowing...

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I haven't paid much attention to this, but I believe the figures were actually created counter to their stated accounting policies, which is probably "fraud". "Financial engineering" is more presenting things to their best advantage within the framework of the law, accounting policies, etc.

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Accounting in large corporations can't be easy with so much money, so many rules and so many people to please.

I find it interesting that in my company we even play accounting tricks internally (and I suspect this is common). The idea is that the business is set a budget at the beginning of the year by group (this in itself is a fascinating process with much politicking associated) and the business deliver it. Doing better than budget can be as detrimental as being behind, so you can end up with the perverse situation of an accountant/MD doing everything they can to reduce the amount of money the business has apparently made so the 'right' numbers are reported to corporate, who in turn report the 'right' numbers to the city. All absolutely above board and legal.

Apparently senior accountants know the tricks and tend not to push the less senior (but still senior) accountants too hard about the numbers.

Edited by frozen_out

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They're all at it.

Standard practice in Financial Services. Setting aside the recent banking debacle which got too big to internalise, insurance companies and banks use creative accounting and reserves to adjust the position in any given year.

For example, big european insurer exposed to hurricane damage in USA via co-insurance/re-insurance.

The honest situation is that this year and next year will have bad results. Instead the accountants will draw down on reserves in year 1 magically creating a good year. Year 2 will intentionally be a very bad year, with deferred losses from year 1, year 2 losses and any year 3 losses brought forward. The management (and some staff) will know in advance of course along with their contacts in the city so will position accordingly. This way the losses will be socialised via reduced tax take and losses bourne by far off foreign pension funds, inexperienced private investors and some staff via job losses, cancelled bonuses and zero payrises.

Year 3 will show a spectacular turnaround with share bounce back, reinstated reserves and turbo charged dividends.

I admit I have benefitted personally by dumping SAYE share options mid term in order to load up on cheap shares when I recognised a 'year 2'.

Tesco are just inexperienced at this particular game - provided they survive the Aldi/Lidl onslaught they will finesse their accounting practices and we will not even notice next time they (legally) fiddle the figures.

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Standard practice in Financial Services. Setting aside the recent banking debacle which got too big to internalise, insurance companies and banks use creative accounting and reserves to adjust the position in any given year.

For example, big european insurer exposed to hurricane damage in USA via co-insurance/re-insurance.

The honest situation is that this year and next year will have bad results. Instead the accountants will draw down on reserves in year 1 magically creating a good year. Year 2 will intentionally be a very bad year, with deferred losses from year 1, year 2 losses and any year 3 losses brought forward. The management (and some staff) will know in advance of course along with their contacts in the city so will position accordingly. This way the losses will be socialised via reduced tax take and losses bourne by far off foreign pension funds, inexperienced private investors and some staff via job losses, cancelled bonuses and zero payrises.

Year 3 will show a spectacular turnaround with share bounce back, reinstated reserves and turbo charged dividends.

I admit I have benefitted personally by dumping SAYE share options mid term in order to load up on cheap shares when I recognised a 'year 2'.

Textbook. Exactly what the company I worked for did when the financial crisis hit. Drew down reserves to make it look like the storm had been weathered for 08/09, took the hit in 09/10 then bounced back in 10/11 and 12/13.

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If I was in a situation I was looking to buy or take over another retail business essentially I would, pretty much, look at two things. The number of customers through the doors and the property leases and generally this would be by perusing the actual lease documents and viewing till audit rolls directly on a shop floor level. From those two things I can pretty much determine if there's a business to be had there or not.

Everything else is just 'figure noise' items are seemingly far too fungible on a balance sheet level and I wouldn't entertain any spreadsheets that showed alleged profitability. So many agreements for goods and services will be so opaque as to be almost impossible to get to the bottom of what is actually being paid for something. If you pull out any random invoice, from a supplier, there might be a net price per item but there'll be so many rebates under marketing soft-money or any other number of different names it will be all but impossible to determine the actual profitability of a line.

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A manufacturer I used to work for were accounting products as being 'shipped to customer' when actually they were still being made in the factory or raw material, a few million pounds worth.. caused chaos.

When they were audited for Assets, tools/equipment etc. around a million pounds shortfall was discovered. The solution was to find bits of scrap metal/equipment, invent an asset number for it, give it a ludicrously high value, put it on the accounting system. The auditors then re-audited, they didn't spot the fraud so the audit was passed with a 'well done' and they got away with it.

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