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  • RSM Tenon Group PLC's Investors Could Have Anticipated Its Accounting Problems

    U.K. regulators are investigating the global accounting firm PricewaterhouseCoopers (PwC) for its audits of RSM Tenon Group PLC (TNO)'s financial statements for the years ended June 30, 2011 and 2010. Back then, RSM Tenon's investors could have found warnings of problems that continued in the London-based tax and advisory firm's documentation.

    The U.K. Accountancy & Actuarial Discipline Board said Monday that it is examining the "preparation, approval and review of financial information in connection with the admission of RSM Tenon Group plc to the main market of the London Stock Exchange and the acquisition of RSM Bentley Jennison."

    GMI Ratings doesn't rate PwC, as the private company doesn't trade on a public stock exchange. But RSM Tenon's financial statements reflect an AGR score of 21 as of this June, indicating higher accounting and governance risk than 79% of comparable companies. The score has improved only slightly since June 2010, when it was a 4.

    RSM Tenon and Tenon Audit Limited said on December 30, 2009 that they completed their acquisition of the professional services firm RSM Bentley Jennison for £76.3 million, after raising £40 million through the issue of 88.89 million shares to fund the transaction, according to the website In the period ended December 31, 2009, RSM Tenon said it had paid £125.5 million above book value for its acquisitions, or more than 49% of its total assets. This had raised a red flag at the time, given that such estimations of assets can turn out wrong and later need revision. RSM Tenon's score has improved since in part because the company's goodwill declined to £75.6 million as of December 31, 2011, or nearly 36% of total assets.

    In another sign of potential problems, RSM Tenon said on October 18, 2011 that its finance director since March 2008, Russell McBurnie, stepped down from the board. While he remained with the group to ensure proper handover and to implement "certain ongoing projects," Adrian Gardner became CFO with immediate effect.

    The accounting firm said months later that it cost $16.8 million to produce its goods in the period ended December 31, 2011, or only 7% of its total revenue versus the industry median of more than 65%. Either the company was more operationally efficient than its competitors, or certain expenses were being excluded from its costs. Meanwhile the trailing twelve-month average of RSM Tenon's "other operating expense" - a catch-all category that stock analysts do not typically ask for details about - amounted to $114.9 million as of the period ended December 31, 2011, or more than 37% of the trailing twelve-month average of RSM Tenon's total operating expense. In the period ended June 30, 2011, other operating expense had only been $40.7 million, or more than 17% of total operating expenses.

    In January this year RSM Tenon announced that it might have to restate its financial results for the year ended June 30, 2011 as a prior year adjustment and to incur additional charges in the six months to December 31, 2011. RSM Tenon also said its board chairman Bob Morton and CEO Andy Raynor had stepped down immediately. On February 15 the company said it appointed the former CEO of Matrix Group Chris Merry as its new CEO, and Adrian Martin, the chair of RSM's audit, renumeration and nomination committees as of April 2010, as its non-executive board chairman.

    On February 29 the new team said they had adjusted prior year accounts in a way that reduced pre-tax profit by £12.1 million, and changes included the downward revision of RSM Tenon's goodwill by £60.7 million. They also said the company failed to take "full advantage" of the potential restructuring, cost savings and efficiency synergies following its acquisitions of RSM Bentley Jennison and certain assets of Vantis Plc acquired in June 2010 for around £4,911,000. As a result, they plan to cut the company's headcount by around 10% and to consolidate some offices, resulting in employment cost savings of approximately £14 million annually.

    The board is "confident" of the company's "ability to implement robust and accurate financial reporting controls and procedures for the future," RSM Tenon said in its filing this February. And Chairman Martin promised that RSM Tenon's executive team is "fully focused on restoring the business to profitability."

    (click to enlarge)

    Region: Western Europe
    Sector: Industrials
    Industry: Business Support / Supplies
    Market Cap: GBP 20.2mm (Nano Cap)
    ESG Rating: N/A
    AGR: 21

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a corporate governance specialist.

    Tags: accounting
    Aug 15 5:48 PM | Link | Comment!
  • DST Systems' Investors Exposed To Increased Accounting Risk

    DST Systems, Inc.(NYSE:DST)'s investors are exposed to the increased possibility of adverse events, in part due to warning signs such as the information processing and software services company's estimations about its recent acquisitions.

    The Kansas City, Mo-based company's financial statements reflect an AGR score of 8 as of June, indicating higher accounting and governance risk than 92% of comparable companies. The AGR score has worsened from 44 as of December 2010.

    DST said this August that its profit soared by 162.5% to $144.9 million during the three months ended June 30 compared to the same period last year. But the gain came from investment sales used to pay down debt, at the same time DST's earnings from operations declined year over year.

    While DST has been selling off investments to raise money, it has also spent in other areas recently. The company undertook a number of acquisitions in 2011, such as the retirement and healthcare marketing firm Newkirk Products, Inc. that May, the automated compliance and surveillance solutions provider Subserveo Inc. that June, and the asset management solutions provider ALPS Holdings Inc. that October. The amount it paid above book value for such acquisitions was $484.9 million as of June 30, or nearly 14% of total assets, compared to nearly 10% of assets as of September 30, 2011. Meanwhile DST's estimation of the value of assets that have no physical substance such as patents, brands, or licenses also jumped to $161.1 million as of June, or nearly 5% of total assets, compared to nearly 3% of assets as of September 30, 2011.

    Sometimes DST makes mistakes on its estimations. For example, DST also said this August that it backed out of an insurance processing service that was tied to its joint venture with State Street Corp, and as a result downwardly revised its earlier estimate of assets by $5.8 million related to software costs associated with the development of services. And DST took additional impairment charges in its December 2011 filing and in its September 30 filing.

    In another red flag, DST's managers aren't as well supervised as they could be. For example, 77-year-old A. Edward Allinson, who was executive vice president of State Street from March 1990 through December 1999, has served on DST's board since 1995 after taking a pause from an earlier stint between 1977 and 1990. While experience undoubtedly has its merits, those who are more familiar are also less likely to hold those they supervise accountable.

    DST is rated "F" on its corporate governance overall.

    (click to enlarge)

    Region: North America
    Sector: Technology
    Industry: IT Services / Consulting
    Market Cap: $ 2,430.7mm (Mid Cap)
    ESG Rating: F
    AGR: 8

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a corporate governance specialist.

    Tags: DST, technology
    Aug 14 5:51 PM | Link | Comment!
  • Australia And New Zealand Banking Group's Strong Corporate Governance

    Some are looking to the land down under for help with financial reform. In one example of a bright spot in the industry, Australia and New Zealand Banking Group (ANZ) is rated "A" on its corporate governance.

    As regulators investigate the possible misuse of interbank lending rates at a number of global firms such as Charlotte, N.C.-based Bank of America Corp., European policymakers have been studying New Zealand's trade-based interbank rate, IFR Magazine reported this August. Australia's bank bill rates are considered more transparent than the U.K.'s Libor, media have reported in recent months.

    ANZ is involved in the regulation of Australian financial markets and operates primarily in Australia, New Zealand and the Asia Pacific. The Melbourne-based firm publishes a plethora of information about its corporate governance practices, and not just lip service, but with detailed descriptions of its actions. For example, CEO Michael Smith is the only non-independent director on ANZ's board. The bank also discloses the extent of its supervisors' responsibilities, such as the audit committee's having unrestricted access to ANZ's global internal auditors and external auditors.

    ANZ has also been taking steps toward improved corporate responsibility on other fronts. For example, ANZ cut back on the energy use in its Australian-based commercial buildings by 12% in 2011 by taking steps such as moving staff out of more energy intensive buildings. The bank has set itself a number of concrete goals for 2012, ranging from reaching at least 40% representation of women in management to resolving 90% of retail customer complaints within five business days in Australia.

    Meanwhile, ANZ's managers have presented the bank's business results in a conservative manner that rarely raises questions. The company's financial statements reflected an AGR score of 98 as of June, indicating that its accounting and governance risk is higher than only 2% of comparable companies in the Asia-Pacific.

    To be sure, ANZ remains far from perfect. For example, when Gun Capital Management Pty Limited, Exchange Minerals Pty Limited and Bejjal Pty Limited proposed in April 2008 that ANZ's subsidiary ANZ Nominees Limited had no basis for its earlier assertions about its stake holding in BioProspect Limited, the Australian Government Takeovers Panel said the same month that ANZ had undertaken corrective measures such as selling down its interest in the product development company to less than 5% of its issued capital within 12 months. Such run-ins have taken place at ANZ much less frequently than they have done at many other global banking firms, however.

    In the meantime, the other regulators can watch and learn how the Australians get it done.

    (click to enlarge)Region: Asia-Pacific
    Sector: Financials
    Industry: Banks
    Market Cap: AUD 62,678.8mm (Large Cap)
    ESG Rating: A
    AGR: Conservative (98)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a corporate governance specialist.

    Tags: ANZBY
    Aug 13 4:49 PM | Link | Comment!
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