How to fix gaps in disclosures at Canadian stocks[theglobeandmail]

When a Canadian company publicly restates its financial statements, the restatement suggests a material weakness in its internal controls. Those controls comprise the checks and balances, which are supposed to provide investors with reasonable assurances that their financial statements are accurate and complete.

To examine these issues, we reviewed all financial restatements by Canadian-listed companies (with a market capitalization above $75-million except for dual-listed companies) between Jan. 1, 2009, and Dec. 31, 2016. In this period, there were 78 financial restatements by such Canadian companies.

Read the rest at theglobeandmail.com

What will happen to Dodd-Frank under Trump’s executive order [Brookings]

On Friday, February 3, President Trump issued an executive order directing the Secretary of Treasury to report, within 120 days, on whether governmental rules and policies promote or inhibit the order’s Core Principles for Financial Regulation. These generally stated Principles stress investor choice, economic growth and international competition as well as the more traditional goals of financial regulation such as preventing bailouts, analyzing risk and increasing accountability.

Although the executive order did not mention Dodd-Frank by name, President Trump made clear: “We expect to be cutting a lot of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.” By contrast, the Federal Reserve data show that total loans and leases by banks grew by almost 7% per year during the last three years.

Read the rest at brookings.edu

Paul Ryan preps bold corporate tax plan [Boston Herald]

While almost everyone agrees that the current U.S. system for taxing foreign proäts of American corporations is counterproductive, there has been heated partisan debate about what should be done. Now, with Republican dominance of Congress and the White House, we should look carefully at House Speaker Paul Ryan’s path-breaking plan for corporate tax reform.

Under current law, foreign proäts of American corporations are legally subject to a 35 percent U.S. tax — the highest corporate tax rate among industrialized countries. In fact, American corporations do not pay this tax unless and until they bring these foreign proäts back to the U.S.

Thus, the current system mainly beneäts tax lawyers and accountants.

Read the rest at bostonherald.com

No More Dizzying Earnings Adjustments [Wall Street Journal]

Whether Microsoft’s $26.2 billion purchase of LinkedIn makes sense might depend on where you look. Glancing at LinkedIn’s press release for the full year 2015, you will see a prominent projection for “adjusted” earnings this year of $950 million.

Yet if you closely read the press release and its appendix, you can figure out that the company’s projected 2016 earnings under GAAP, the generally accepted accounting principles required in securities filings, are minus $240 million.

What accounts for that enormous difference? Like many companies, LinkedIn reports one set of figures to the Securities and Exchange Commission but touts adjusted figures elsewhere. LinkedIn’s adjusted projection excludes large expenses: $630 million for stock awards to executives and $560 million for depreciation and amortization.

Read the rest at wsj.com…

Independence is a Desirable Quality in Chairmen [Financial Times]

In the 2015 proxy season, shareholders submitted more than 60 proposals asking US public companies to appoint an independent director as a board chairman, as opposed to one person serving as both chief executive and chairman.

In 2012, 45 per cent of the S&P 500 companies split the chief executive and board chairman roles, almost doubling from 23 per cent a decade ago. However, of the 45 per cent, roughly half of the separate board chairs were held by former chief executives.

By contrast, most public companies in Europe have a truly independent director as board chairman. Some commentators have suggested that the US adopt the European model.

While US companies typically oppose this suggestion, they should ask three practical questions:

Would an independent chairman improve the financial performance of the company substantially? Could the internal governance functions of a company be satisfied by other measures? And would an independent board chairman significantly reduce the time spent by a chief executive engaging with shareholders?

After reviewing empirical studies, David Larcker, professor of accounting at Stanford University, concluded that there was no systematic evidence for or against an independent chairman. Similarly, a further study found there is “no statistical relationship between independence and firm performance”.

However, a 2012 study by GMI Ratings, the research provider, showed that, over the past five years, large US companies with a separate board chairman had higher stock increases than companies with a combined chief executive and chairman. Yet another study found that separating the role of chairman from that of chief executive improved financial performance only when the company had been doing poorly.

Read the rest at ft.com…

The Role of Institutional Investors in Curbing Short-Termism [Financial Analysts Journal]

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term proj- ects to avoid missing earnings estimates for the upcoming quarter.

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably.2 The typical activist program involves raising dividends, increasing stock buy- backs, or spinning off corporate divisions—usually accompanied by a request for board seats.

Read the rest at cfapubs.org…

Relief for Cities’ Budget-Busting Health-Care Costs [Wall Street Journal]

Co-authored with Joshua Rauh

The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.

The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.

The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.

Read the rest at wsj.com…

Let’s Cut Taxes By Reducing Tax Bias [Real Clear Markets]

Tax experts from around the world gathered two weeks ago in Washington DC to push forward a Euro-led project for the prevention of BEPS — base erosion and profit shifting. This project is aimed at getting multinational companies to locate facilities and jobs in real countries, instead of post office boxes in tax havens.

The corporate tax rates in Europe are already 10% to 15% lower than the 35% rate in the U.S. If Europe moves forward with BEPS, that will put more pressure on US large companies to move people and plants abroad — unless Congress substantially reduces the U.S. corporate tax rate.

While almost everyone wants to reduce the U.S. corporate tax from 35% to 25%, almost no industry is willing to give up its current tax preferences to achieve this rate reduction on a revenue neutral basis. This means that the national debt would not rise because revenues lost by rate reduction would be offset by revenues gained by restricting existing tax preferences.

Therefore, Congress should finance a substantial lowering of the U.S. corporate tax rate largely by reducing the tremendous bias in the current tax code for debt and against equity. Most importantly, companies may deduct interest paid on all their debt, but may not deduct any dividends paid on their shares. As a result, the effective tax rate on corporate debt is negative 6.4%, as compared to positive 35% for corporate equity, according to the Congressional Budget Office.

Read the rest at realclearmarkets.com…