Private Equity

Try Not to Hate on This 2013 Stanford MBA Graduate Making $522k Out the Door

Perhaps you've come across this report already today, which I figured I should share because we all love money AMIRIGHT and you guys are always so concerned with salaries while seeking career advice so let's talk about what a Stanford MBA can make based on Stanford's recently published employment report for the Class of 2013. […]

Accounting News Roundup: Senate Proposal Would Double Tax on Carried Interest; Take Client Compliments with Skepticism; Agents Honored for Busting Petters | 06.09.10

Showdown on Fund Taxes [WSJ]
The U.S. Senate plan to tax private equity and hedge fund managers who earn carried interest has been rolled out and it would double the rate on this income from 15% to 30% in 2011 and 33% in 2013. Supporters of the bill argue that carried interest is “basically wages” and that the 15% is a “fundamental unfairness in the tax code.”

The industry is not amused by the Senate’s latest rich hating measures. The Journal quotes Douglas Lowenstein, president of the Private Equity Council, “[E]arning carried interest involves taking risks, making long-term investments and exposing yourself tot you’ll have to return your earnings if things don’t work out. No one who gets a paycheck has to face those consequences.”

But that’s not all! Also in the proposal is a “enterprise-value tax” provision that would tax the sale of any private equity fund, hedge fund, or real estate partnership at higher rates than of other businesses including publicly traded oil and gas partnerships.


Ex-CEO and CFO of Duane Reade Convicted in NY [AP]
No matter what Anthony Cuti and William Tennant did (“scheming to falsely inflate the income and reduce the expenses that Duane Reade reported to investors.”), if you bank with Jamie Dimon, you’re grateful for every DR.

How White-Collar Criminals Exploit Your Vanity – Beware of Compliments [White Collar Fraud]
Sam Antar has all but eliminated any possibility of ever getting a date ever again by admitting that any compliment that he gives is may have an ulterior motive, “The more likable and charming that I was as a criminal, the easier it was for me to successfully lie to my victims and deceive them. People are far less skeptical of people who they like and the white-collar criminals know it and exploit it.”

Most of you have never been paid a compliment by Sam but maybe some of you can think of a client that seems to go out of their way to stroke your ego. Or maybe it’s a combination of a compliment here or there (e.g. “you’re looking buff” or “nice ass”) from the controller and the hot junior accountant that keeps inviting you out to lunch for no discernible reason.

The lesson here is be skeptical of things being a little too good to be true for an audit. If your client doesn’t particularly like you and they look like they came from deep inside the ugly forest you might be able to rest easy. Otherwise, stay on your toes.

EBay’s Whitman Faces Brown for California Governor [Bloomberg]
A former auctioneer will face off against a failed Presidential candidate for the arguably the worst job in the country.

Four who took down Petters honored [Minneapolis Star-Tribune]
Swashbuckling industrialist-cum-Ponzi Scheme architect Tom Petters is doing 50 years for his crimes but the four investigators – FBI special agents Brian Kinney and Eileen Rice, FBI forensic accountant Josiah Lamb and Kathy Klug of the IRS’ Criminal Investigation Division – were honored yesterday for their efforts with a 2009 Law Enforcement Recognition Award by the Minnesota U.S. Attorney.

Of course, they couldn’t have done it alone (plus it’s honor just to be nominated), as they were assisted by more than 100 other agents who brought down Petters. Then someone made a Bernie Madoff joke and the fun ended right there.

Integrated Reporting Will Gain Momentum as Banks, Private Equity Increase Their Focus on ESG Issues

In the first part of our conversation with Michael Krzus, co-author of One Report, Integrated Reporting for a Sustainable Strategy, we discussed the nature of integrated reporting, how it will change corporate reporting as it is commonly known and some of the benefits to both stakeholders and companies.

The second part of our discussion looks at how small and midsize entities will benefit from integrated reporting, the feedback received from clients, and what the future holds.


Going Concern: Do you see a point in time when companiessults for sustainability issues on a reoccurring basis similar to quarterly earnings reporting?

Michael Krzus: I know enough about this to be dangerous, so I’ll give you that caveat, but I am aware of the somewhat recent EPA rule making that is going to require companies to report emissions and things of that nature. There are some limitations, but there will be more frequent reporting for U.S. domiciled companies. I think some of it will depend on the technology available. I don’t know what it takes for a coal-fired electric plant to account for CO2 emissions. So I’m not really in a good position to tell you that in five years whether that will evolve into more regular reporting or not.

GC: What kind of companies will be able to utilize integrate reporting? Can any size company embrace it or will it start with the largest players and work its way down?

MK: As a practical matter, it will have to be large, public traded companies, particularly the global players. On the other hand, I think small and mid-cap companies, especially private ones, have as much or more skin in the game and a lot more upside than the big guys. And that’s because of the complexity of information and the complexity of accounting standards. If you’re Microsoft, you’ve got a lot of issues that can be addressed by your large accounting department but if you’re a $400 million manufacturer of widgets, you don’t have those kind of resources. But you do want to tell stakeholders your story clearly and succinctly. I think the idea of the integrated report gives them the opportunity to do that.

Additionally, in the last couple of years, I’ve developed a good working relationship with the Society of Investment Professionals in Germany and one of the things that group has done is build example reports of what an integrated report could look like for a small or mid-cap sized company. If you think about it from the German perspective, much of their market base is small and medium sized companies and analysts there are very interested in the benefits that an integrated reporting can provide. So, there’s a lot upside for companies that fall outside the Fortune 500.

GC: Do you see a point in time where banks start requesting more non-financial information (i.e. ESG information) in order to qualify for lending?

MK: The short answer is “Yes.” To me, sustainability really has to do with long term viability of an entity. I don’t think a company can be viable for the long term without understanding and managing their environmental, social and governance risks because those three risk types specifically translate to reputation.

To some degree a lender will have to start considering non-financial factors. The price of admission is opening your heart and soul, as a company, to the banker. A banker can ask all kinds of question whether its about CO2 emissions or manufacturing location in Thailand that may cause child labor problems because you’re running a sweat shop.

To parallel that, I recently attended a conference of institutional investors. I found it interesting that a group of people that wanted to know more about integrated reporting were private equity folks. These private equity people are in the same boat as the bankers. If they are going to make an investment, they will open up everything. It’s not just about getting the 10-K, it’s about understanding everything from financial projections and processes to social and environmental risks in China. So, the markets in general, not just bankers, but also private equity and traditional sources of capital have become more and more interested in a broad set of non-financial information.

GC: What has been the experience with clients?

MK: Clients have assisted us by presenting challenging questions to help us think more clearly about the situation. For example, some people have argued that we don’t need integrated reporting because the markets are efficient and already have all the information they need. I would argue that, even without the events of the last couple of years, markets aren’t efficient and don’t have all the information they need because we have so many firms employing armies of analysts, all of who are looking for that shred of information that will give their company an edge. There’s always something that the analysts don’t have.

Another argument is whether or not the integrated report somehow diminishes the corporate responsibility report. My response to that is that by not integrating the two types of reports, companies avoid an audit of non-financial information. In general, the companies that have an integrated report do have some assurance over the non-financial information; it’s not necessarily subject to the same standards as auditing standards but there is some kind of assurance. So I think some kind of audit over the information – and over time perhaps controls and processes – will elevate the quality of the reporting. So good questions from very sharp people like “Have you guys thought about this?” forces us to engage in some dialogue of our own so we do have a coherent responses.

GC: How does IFRS fit into integrated reporting?

MK: I’m one of those people who think that there should be one global set of accounting standards. To speculate just a little bit, I could envision a world that might have IFRS that govern the financial statements and perhaps an international non-financial reporting standard, because at some point we’re going to have to address that. I think the larger question of IFRS is to first, how do we develop a global standard of non-financial information? And secondly, can we develop some sort of benchmark for auditors? So, I remain optimistic that U.S. will eventually adopt IFRS and would hope in the next few years there would be some kind of move to adopt international standards for non-financial information.

GC: What’s next?

MK: There are a couple of major conferences coming up this year where integrated reporting will be a topic in several sessions. We use various conferences to spread the word and build some momentum behind the idea. The Harvard Business School and the Harvard University Center of the Environment are co-sponsoring an event on integrated reporting later this year. Two newspapers in Japan are hosting an event in November and the Prince of Wales Accounting for Sustainability has an annual event in December that hosts roundtables on various topics.

On the Accounting for Sustainability website, there are a number of press releases including a PDF on a governmental collaboration that calls for the establishing an international integrated reporting committee. I can tell you that the Accounting for Sustainability Group has the resources and, frankly, the brand name that could call for the IASB or some other group to undertake the idea of a global framework for reporting non-financial information. I could see us having this conversation a year from now and I’d be very disappointed if there was not some kind of formal announcement from an international integrated reporting committee.

So I’m cautiously optimistic about the future. The timing for this is right and integrated reporting is important when you believe in the concept of inter-generational responsibility. This is the only planet we’ve got and we should every intent to leave it in as good as condition as we found it.

But as a hard-headed capitalist I also think integrated reporting makes sense because you don’t want to invest in company that will go bust. A company simply cannot be viable for the long-term unless they are considering ESG issues.