TAME NO MORE. The train ride home to Glasgow from Edinburgh is nothing special to write home about. As far as home-from-work journeys go, it is relatively tame and sedate compared to traversing Edsa in rush hour, or even trying to get out of Cebu City between the hours of five and seven. If anything, I find it a de-stressing journey, a chance to gradually relax and leave my workday behind me.
Thursday night’s trip home, however, was quite out of the ordinary. For one, I had just come home from one of the endless swirls of corporate networking events that I have to attend, especially at this time of the year. Tonight’s was the launch of this year’s batch of Beaujolais Noveau, and so was well attended by members of the British-French business community. That, apart from the fact that I quite fancy a taste of the new tipple, especially at its introduction, was reason enough for me to be there.
A few sniffs, snips and exchanges of business cards later, I was comfortably on the express train home, earphones in place, busily trying to find my relaxing (meaning not rap or hip-hop) music channel, to begin the de-stressing routine I had become accustomed to.
The news I heard made sure a relaxing ride it was not to be.
No, I am not referring to the lambasting the Scotland football team received from the press, after exiting from the Euro 2004 qualifiers with a resounding 6-0 defeat at the hands of The Netherlands. Though I now quite like football, and do support the on again-off again national team of the place where I currently reside, the Filipino in me never really gets as fired up with football as the rest of our readers are when it comes to matters about basketball.
It was not even the news that Turkey—where our family had lived for over seven years—had also exited the Euro qualifiers via a shocking 3-2 defeat to a lightweight Latvian team at home in Istanbul. To put matters in perspective, Turkey placed third in the last World Cup, so not even making the Euro qualifiers would be like the LA Lakers not even making the cut for the Pacific Division playoffs in the NBA. Mighty shocking indeed!
But no, it was the other news about Turkey that jolted me out of my otherwise homeward bound mood. My recollection of Turkey—despite the frenetic chaos of Istanbul, was of a surprisingly serene and beautiful place—which made the news I was hearing sound too incredible to be true. But it was, unfortunately.
Twenty-seven people confirmed dead, 450 people injured, many of them seriously.
The blasts were well timed, striking at the heart of British interests in this very secular and pro-Western Muslim country, at exactly the same time that the meeting between George Bush and Tony Blair was taking place in London.
Hallmarks of Al-Qaeda, you say. The symbolic timing, the precise execution, the ruthless devastation of it all bears the signature of the dreaded organization’s handiwork.
However, behind the blood and debris is another Al Qaeda specialty—striking at the heart of Western economic interests, where it hurts most.
Nine-eleven was the coup de grace to the current recession in the United States—this one may yet derail the long awaited upturn the world has been waiting for since the twin towers came down. Let’s look at the out-of-pocket costs of this latest terror strike next week.
Published in Sun Star Daily, Saturday, November 22, 2003 (http://www.sunstar.com.ph/static/ceb/2003/11/22/bus/batuhan.terror.economics.html)
Saturday, 22 November 2003
Saturday, 4 October 2003
Still An Uncommon Market
Ever had Refosk before? What about Rebula? Or perhaps Sipon? Neither did I, that is until last week, when I attended the inaugural meeting of the European Business Enlargement Club, sponsored by the Glasgow Chamber of Commerce.
The club aims to bring together in one forum nationally based businesses who are looking to enlarge their businesses within Europe, in order to take advantage of what is now almost a borderless European market. And so it was that our whole evening was spent sampling nationally famous but little known (Europe-wide) delicacies, in order to promote them to a wider continental audience.
The new accession countries were well represented, particularly Slovenia, where the three wine varieties Refosk, Rebula and Sipon hail from. Victimized by the monopoly of the French varietal wines like Chardonnay and Sauvignon Blanc, I was quite delighted to discover the quirky but otherwise very quaffable Slovenian wines. Of course a lot of work still needs to be done to promote them to the status enjoyed by the French vintners. Many English families have now started giving their daughters names like Chardonnay, but I think it will not be anytime soon that we start hearing of baby girls named Refosk.
National tastes die hard, except those of the British, who never had national tastes to begin with. But while work to promote goods influenced by national palates across borders seems a daunting task, less resistant to change are corporate activities that are now seeing a massive reconfiguration, driven by the widening of the European market.
Another large segment of organizations represented in the meeting, for example, was shared service center providers and contractors, whose businesses have seen a massive boom since the opening of the common market, and especially after the adoption of the common currency.
Shared Service Centers are the accounting "super factories" where multiple sites of an organization throughout Europe process all their accounting activities in one location. The savings in terms of manpower and facilities costs are enormous for many businesses, prompting many to join the trend. Today, when one orders goods from France, chances are the actual delivery will come from say Italy, the invoice may be issued in Scotland, and the payment collected in France.
Yet for all the changes towards market convergence, parts of Europe are still very much national. The job market, for example, is still quite fragmented. Basic issues such as common qualifications throughout the continent remain a distant reality. So much as a professional from Greece wants to work in the UK, as he has been told that employment across borders is now unrestricted, chances are that non-recognition of his Greek qualifications would prevent him from pursuing his pan-European ambitions.
Clearly, a lot of work still needs to be done to give life to a truly common European market. And it is good for us in the Philippines to watch and see how it all takes shape. After all, Asean may well decide to become a unified trading bloc like Europe, in order to have more muscle and critical mass in the world market. And when that happens, if would be good if we could avoid the innumerable start-up problems, such as we now see in Europe.
Published in the Sun Star Daily, Saturday, October 04, 2003 (http://www.sunstar.com.ph/static/ceb/2003/10/04/bus/batuhan.still.an.uncommon.market.html)
The club aims to bring together in one forum nationally based businesses who are looking to enlarge their businesses within Europe, in order to take advantage of what is now almost a borderless European market. And so it was that our whole evening was spent sampling nationally famous but little known (Europe-wide) delicacies, in order to promote them to a wider continental audience.
The new accession countries were well represented, particularly Slovenia, where the three wine varieties Refosk, Rebula and Sipon hail from. Victimized by the monopoly of the French varietal wines like Chardonnay and Sauvignon Blanc, I was quite delighted to discover the quirky but otherwise very quaffable Slovenian wines. Of course a lot of work still needs to be done to promote them to the status enjoyed by the French vintners. Many English families have now started giving their daughters names like Chardonnay, but I think it will not be anytime soon that we start hearing of baby girls named Refosk.
National tastes die hard, except those of the British, who never had national tastes to begin with. But while work to promote goods influenced by national palates across borders seems a daunting task, less resistant to change are corporate activities that are now seeing a massive reconfiguration, driven by the widening of the European market.
Another large segment of organizations represented in the meeting, for example, was shared service center providers and contractors, whose businesses have seen a massive boom since the opening of the common market, and especially after the adoption of the common currency.
Shared Service Centers are the accounting "super factories" where multiple sites of an organization throughout Europe process all their accounting activities in one location. The savings in terms of manpower and facilities costs are enormous for many businesses, prompting many to join the trend. Today, when one orders goods from France, chances are the actual delivery will come from say Italy, the invoice may be issued in Scotland, and the payment collected in France.
Yet for all the changes towards market convergence, parts of Europe are still very much national. The job market, for example, is still quite fragmented. Basic issues such as common qualifications throughout the continent remain a distant reality. So much as a professional from Greece wants to work in the UK, as he has been told that employment across borders is now unrestricted, chances are that non-recognition of his Greek qualifications would prevent him from pursuing his pan-European ambitions.
Clearly, a lot of work still needs to be done to give life to a truly common European market. And it is good for us in the Philippines to watch and see how it all takes shape. After all, Asean may well decide to become a unified trading bloc like Europe, in order to have more muscle and critical mass in the world market. And when that happens, if would be good if we could avoid the innumerable start-up problems, such as we now see in Europe.
Published in the Sun Star Daily, Saturday, October 04, 2003 (http://www.sunstar.com.ph/static/ceb/2003/10/04/bus/batuhan.still.an.uncommon.market.html)
Saturday, 14 December 2002
Three Weeks
NO CHANCES. When it comes to matters of health, nobody wants to take any chances. The United Kingdom, increasingly a major destination for many of our health professionals, is no exception.
Ensuring the quality of the intake of health workers into their country, no doubt, was a major motivation for the National Academic Recognition and Information Centre for the United Kingdom (UK NARIC) to visit the Philippines a few months ago, to validate the quality of our educational system.
Of course, while they were here, it was also opportune that they looked at the entire spectrum of higher education institutions, rather than just confine themselves to the health sciences and allied professions. Their visit, therefore, was billed as a “country review,” and was facilitated by our own Commission on Higher Education (Ched).
As I recounted over the course of the last couple of issues, I became an unfortunate “victim” of UK NARIC’s recent “country review” of the Philippines.
As one of the requirements for my continued stay in the UK, I had to submit my academic credentials for evaluation to British immigration authorities.
Banking on the fact that I would easily meet the requirement, on the basis of having received a Master in Business Management (MBM) degree from the Asian Institute of Management (AIM), I was greatly shocked to find out that according the the UK’s sole academic assessment body, AIM’s degrees were considered to be less than the equivalent of UK MBAs.
Initially, I was informed by UK NARIC that an MBM from AIM was not even equivalent to a UK bachelor’s degree. Initially infuriated, and totally unconvinced of the outcome of UK NARIC’s evaluation of AIM’s degree programs, I set out to rectify what I believed to be a very serious mistake indeed.
Not knowing where to turn to, where the problem lay, and who was to blame for the error, I set out on what seemed like a wild goose chase at the time, determined that in the end, I would be proven correct. My aim—to ensure that an MBM degree from AIM would be recognized as the equivalent of a master’s degree earned from a UK institution.
Having already been told that I was not even the equal of a UK university graduate, it seemed like a totally impossible objective. All this was just over three weeks ago.
What did I learn between then and now? A lot, considering that from the outside, my familiarity with our own system of higher education is not as up-to-date as I would have hoped it would be.
MISUNDERSTOOD. It is now apparent that in the particular case of AIM, UK NARIC had inadvertently misunderstood the information that was furnished them by Ched.
Apparently, Ched classifies Philippine higher education institutions (HEIs) into three basic categories. At the top of the pecking order are the so-called “prestigious” universities. Three weeks ago, only the University of the Philippines-Diliman, Ateneo de Manila, De La Salle University and the University of Sto. Tomas were in this illustrious group. Basically, all courses from these institutions are considered to be “league-leading” as far as the Philippines is concerned.
Next in line were the “centers of excellence/development.” These are programs within HEIs that are recognized to be of relatively high standard, given their achievements in professional examinations etc. While the HEI may not in itself be “prestigious,” the program is considered to be. An example is the Cebu Institute of Medicine’s Doctor of Medicine degree, which was the only one from Cebu to make the Ched’s list of COEs/CODs in medical education.
The third category is all the other HEIs that are neither “prestigious” nor considered to be COEs/CODs.
For reasons that I now appreciate, AIM was not classified by Ched in the first two categories of HEIs. Automatically, UK NARIC interpeted this to mean that AIM belonged with “all the rest,” with all the implications that this affiliation carries.
In general, our system of higher education is already considered to be lower than that of the UK for a variety of reasons, the major one being that we have a proliferation of schools with widely varying standards of excellence.
On the whole, therefore, the degrees awarded by our HEIs are considered to be below the standard of those offered by UK universities. How much below depends on where a university belongs according to Ched’s categories.
For example, a master’s degree from a “prestigious” HEI is generally considered to be a bachelor’s degree (with honors) in the UK. One from a COE/COD is evaluated either as an honors or ordinary bachelor’s degree (depending on the program and the institution, presumably), while those from “all others” are considered as ordinary British university degrees or less. Three weeks ago, AIM’s MBM was in this latter category.
So what? What does this mean for you and me? Well, clearly much more than one would expect.
For example, if an employer in the UK demands that only nurses with degrees that are equivalent to the UK’s are hired, just those who got theirs either from “prestigious” HEIs or those from COEs/CODs need apply. This means only the graduates of 20 or so schools out of the hundreds that cater to future nursing hopefuls. Caveat emptor indeed!
For me, it meant that even if I was already the chief financial officer of a UK company, my continued stay in the country might be in jeopardy. Surely, no company would want to have a high school graduate running its finances? (To be concluded next week.)
Published in the Sun Star Daily, Saturday, December 14, 2002 (http://sunstar.com.ph/static/ceb/2002/12/14/bus/batuhan.three.weeks.html)
Ensuring the quality of the intake of health workers into their country, no doubt, was a major motivation for the National Academic Recognition and Information Centre for the United Kingdom (UK NARIC) to visit the Philippines a few months ago, to validate the quality of our educational system.
Of course, while they were here, it was also opportune that they looked at the entire spectrum of higher education institutions, rather than just confine themselves to the health sciences and allied professions. Their visit, therefore, was billed as a “country review,” and was facilitated by our own Commission on Higher Education (Ched).
As I recounted over the course of the last couple of issues, I became an unfortunate “victim” of UK NARIC’s recent “country review” of the Philippines.
As one of the requirements for my continued stay in the UK, I had to submit my academic credentials for evaluation to British immigration authorities.
Banking on the fact that I would easily meet the requirement, on the basis of having received a Master in Business Management (MBM) degree from the Asian Institute of Management (AIM), I was greatly shocked to find out that according the the UK’s sole academic assessment body, AIM’s degrees were considered to be less than the equivalent of UK MBAs.
Initially, I was informed by UK NARIC that an MBM from AIM was not even equivalent to a UK bachelor’s degree. Initially infuriated, and totally unconvinced of the outcome of UK NARIC’s evaluation of AIM’s degree programs, I set out to rectify what I believed to be a very serious mistake indeed.
Not knowing where to turn to, where the problem lay, and who was to blame for the error, I set out on what seemed like a wild goose chase at the time, determined that in the end, I would be proven correct. My aim—to ensure that an MBM degree from AIM would be recognized as the equivalent of a master’s degree earned from a UK institution.
Having already been told that I was not even the equal of a UK university graduate, it seemed like a totally impossible objective. All this was just over three weeks ago.
What did I learn between then and now? A lot, considering that from the outside, my familiarity with our own system of higher education is not as up-to-date as I would have hoped it would be.
MISUNDERSTOOD. It is now apparent that in the particular case of AIM, UK NARIC had inadvertently misunderstood the information that was furnished them by Ched.
Apparently, Ched classifies Philippine higher education institutions (HEIs) into three basic categories. At the top of the pecking order are the so-called “prestigious” universities. Three weeks ago, only the University of the Philippines-Diliman, Ateneo de Manila, De La Salle University and the University of Sto. Tomas were in this illustrious group. Basically, all courses from these institutions are considered to be “league-leading” as far as the Philippines is concerned.
Next in line were the “centers of excellence/development.” These are programs within HEIs that are recognized to be of relatively high standard, given their achievements in professional examinations etc. While the HEI may not in itself be “prestigious,” the program is considered to be. An example is the Cebu Institute of Medicine’s Doctor of Medicine degree, which was the only one from Cebu to make the Ched’s list of COEs/CODs in medical education.
The third category is all the other HEIs that are neither “prestigious” nor considered to be COEs/CODs.
For reasons that I now appreciate, AIM was not classified by Ched in the first two categories of HEIs. Automatically, UK NARIC interpeted this to mean that AIM belonged with “all the rest,” with all the implications that this affiliation carries.
In general, our system of higher education is already considered to be lower than that of the UK for a variety of reasons, the major one being that we have a proliferation of schools with widely varying standards of excellence.
On the whole, therefore, the degrees awarded by our HEIs are considered to be below the standard of those offered by UK universities. How much below depends on where a university belongs according to Ched’s categories.
For example, a master’s degree from a “prestigious” HEI is generally considered to be a bachelor’s degree (with honors) in the UK. One from a COE/COD is evaluated either as an honors or ordinary bachelor’s degree (depending on the program and the institution, presumably), while those from “all others” are considered as ordinary British university degrees or less. Three weeks ago, AIM’s MBM was in this latter category.
So what? What does this mean for you and me? Well, clearly much more than one would expect.
For example, if an employer in the UK demands that only nurses with degrees that are equivalent to the UK’s are hired, just those who got theirs either from “prestigious” HEIs or those from COEs/CODs need apply. This means only the graduates of 20 or so schools out of the hundreds that cater to future nursing hopefuls. Caveat emptor indeed!
For me, it meant that even if I was already the chief financial officer of a UK company, my continued stay in the country might be in jeopardy. Surely, no company would want to have a high school graduate running its finances? (To be concluded next week.)
Published in the Sun Star Daily, Saturday, December 14, 2002 (http://sunstar.com.ph/static/ceb/2002/12/14/bus/batuhan.three.weeks.html)
Saturday, 10 August 2002
David Copperfield and his troops are masters of illusion. They make things appear and disappear, with consummate ease. Copperfield made the Statue of Liberty disappear once before millions of live and television audiences. How he does it only he knows, but it is a feat not to be easily duplicated, maybe for a long time to come.
The financial markets have their own share of David Copperfields. They do not train at academies of magic like David went to anymore. More often than not, they will have Harvard or Wharton, rather than Hogwarts diplomas hanging from their walls. Today’s magicians wear pinstripes rather than coattails, weave magic with gold Mont Blancs instead of magic wands. Like true magicians, they have audiences breathless and spellbound, and their abilities at the smoke and mirrors game are no less stunning.
One big difference, though. In Las Vegas, the audiences are there for the magic show.
They know that the rabbit has not actually disappeared; it is still in the hat.
Or maybe not in the hat, but somewhere close by anyway. Animals do not really disappear. Nor do statues of liberty. They just appear to. That is the trick of the master illusionist. And he gets paid for it. Big time, as in the case of the David Copperfields.
On Wall Street, however, a different kind of magic goes on entirely.
Normally, it is the reverse illusion, with things appearing rather than disappearing. Billions of dollars of revenue seem to just materialize from nowhere, exciting the markets and making demigods out of the chief financial officers that made it happen.
But while the people in the seats in Vegas know that completely blinded by the magic tricks. They entrust the magicians with billions of dollars of their life’s savings, only to see a substantial amount of it disappear completely, unlike the rabbit that is still in the magician’s hat. Magic of the most deceitful kind. Something David Copperfield would never contemplate doing.
The magic word is not, as David would exclaim—”Abracadabra.” The new mantra is EBITDA, that harmless line at the bottom of the company’s profit and loss statement that proclaims to the world how much money it has made, before giving the banks and the government their share, and prior to allocating something to cover for the cost of their capital investments.
NOT SO SIMPLE. As we explained in our column last week, earnings should really be intuitively simple to measure. Simply the difference between how much you sell your products and services for, compared to what it cost you to acquire those products, and provide for those services.
The fish vendor knows the concept well. She buys fish from the market for P1,000, and sells it to her customers for P2,000. As far as she is concerned, her earnings for the day are P1,000. She sees the money actually going out of and coming into her pocket. No illusions are necessary. No tricks are required. Business is at its most transparent.
In today’s complicated organizations, measuring earnings is anything but a simple and intuitive process. The time difference between capital investments and their expected revenue streams are often far apart. Outlays for expenditure are many times intended to benefit future periods, and not always when they are paid for. And revenue streams do not often pay for products and services delivered or rendered in the current period—frequently they represent deliveries of goods or provision of services far off into the future.
Complexity like this makes earnings measurement difficult to understand.
Only the experts could navigate their way through the numbers. This environment provides fertile ground for the smoke and mirrors tricks that many companies today play.
Published in the Sun Star Daily, Saturday, August 10, 2002 (http://www.sunstar.com.ph/static/ceb/2002/08/10/bus/batuhan.smoke.and.mirrors.html).
The financial markets have their own share of David Copperfields. They do not train at academies of magic like David went to anymore. More often than not, they will have Harvard or Wharton, rather than Hogwarts diplomas hanging from their walls. Today’s magicians wear pinstripes rather than coattails, weave magic with gold Mont Blancs instead of magic wands. Like true magicians, they have audiences breathless and spellbound, and their abilities at the smoke and mirrors game are no less stunning.
One big difference, though. In Las Vegas, the audiences are there for the magic show.
They know that the rabbit has not actually disappeared; it is still in the hat.
Or maybe not in the hat, but somewhere close by anyway. Animals do not really disappear. Nor do statues of liberty. They just appear to. That is the trick of the master illusionist. And he gets paid for it. Big time, as in the case of the David Copperfields.
On Wall Street, however, a different kind of magic goes on entirely.
Normally, it is the reverse illusion, with things appearing rather than disappearing. Billions of dollars of revenue seem to just materialize from nowhere, exciting the markets and making demigods out of the chief financial officers that made it happen.
But while the people in the seats in Vegas know that completely blinded by the magic tricks. They entrust the magicians with billions of dollars of their life’s savings, only to see a substantial amount of it disappear completely, unlike the rabbit that is still in the magician’s hat. Magic of the most deceitful kind. Something David Copperfield would never contemplate doing.
The magic word is not, as David would exclaim—”Abracadabra.” The new mantra is EBITDA, that harmless line at the bottom of the company’s profit and loss statement that proclaims to the world how much money it has made, before giving the banks and the government their share, and prior to allocating something to cover for the cost of their capital investments.
NOT SO SIMPLE. As we explained in our column last week, earnings should really be intuitively simple to measure. Simply the difference between how much you sell your products and services for, compared to what it cost you to acquire those products, and provide for those services.
The fish vendor knows the concept well. She buys fish from the market for P1,000, and sells it to her customers for P2,000. As far as she is concerned, her earnings for the day are P1,000. She sees the money actually going out of and coming into her pocket. No illusions are necessary. No tricks are required. Business is at its most transparent.
In today’s complicated organizations, measuring earnings is anything but a simple and intuitive process. The time difference between capital investments and their expected revenue streams are often far apart. Outlays for expenditure are many times intended to benefit future periods, and not always when they are paid for. And revenue streams do not often pay for products and services delivered or rendered in the current period—frequently they represent deliveries of goods or provision of services far off into the future.
Complexity like this makes earnings measurement difficult to understand.
Only the experts could navigate their way through the numbers. This environment provides fertile ground for the smoke and mirrors tricks that many companies today play.
Published in the Sun Star Daily, Saturday, August 10, 2002 (http://www.sunstar.com.ph/static/ceb/2002/08/10/bus/batuhan.smoke.and.mirrors.html).
Saturday, 3 August 2002
EBITDA
VAGUE. The accounting profession loves acronyms. EBIT, EBITDA, EAT, EPS, and their kind are common sightings in corporate annual reports. Acronyms are convenient in the best of times, but could be vague and confusing in the worst of them. This is where the accountant is most at home, in a situation so ambiguous that nobody understands what anything is all about anymore.
I should qualify the previous statement. Not all accountants have lost their sense of integrity. Not everyone has turned his back on the principles of GAAP (Generally Accepted Accounting Principles), to which they are eternally sworn to uphold. But some have, as the recent stories of corporate fraud have only too visibly demonstrated.
I have no problems with this dichotomy. It mirrors real life, after all. There are the good guys, and then there are the bad. My issue is with the confusion between the good and the bad in the financial world.
In the real world, the bad guys go to jail. Here, the bad boys get the glory. They have all the pay rises and the fat bonuses. Treading on the thin line between honesty and the absence of it is applauded at the highest corporate circles, encouraging even more dangerous financial acrobatics.
We remember Nick Leeson, or at least some of us must do. Who would forget the boy who single-handedly brought down the venerable Baring Brothers, and had it bought from the receivers for one pound by ING?
He was the perfect example of values gone horribly wrong. He fiddled his reports, fooled his superiors and broke all the rules that ever existed. Yet he had a luxury apartment in Singapore’s most affluent district, drove flashy cars, wore nice suits, and vacationed where most of us could only dream to be. He got caught out in the end, but instead of universal condemnation, there was even adoration from some. His life became a movie, several books were written about him and his exploits, and he is now a cult hero of sorts.
Welcome to the new world of professional depravity!
Until very recently, the bad boys still got all the glory. Only this time, even if their tricks had gotten simpler, no one seemed to notice until the harm had been done.
Fiddling with the books—the simplest trick of accounting magic there is, had the experts looking the other way. Everybody was too busy watching the trend graphs, the obvious escaped their attention. Or maybe the not so obvious.
Nick Leeson actually lost cash, real money. By investing in complex swap transactions that bet on the Nikkei the wrong way, he bankrupted Barings, his bank.
The accountants at Worldcom, meanwhile, merely painted a different story to what was really happening at the company.
But the world is now all the worse for it.
All because of an acronym. EBITDA. An innocuous acronym. Earnings Before Interest, Taxes, Depreciation and Amortization. Between what the company first reported and what its restated earnings report now owns up to, is a hole a few billion dollars deep in EBITDA.
The routine? Move normal repairs and maintenance expenses into fixed assets, and defer their recognition for a few years. EBITDA increases. Share prices go up.
Everybody is happy. Happy at least until the whole scam is uncovered. Then misery ensues, affecting everyone, you and me included. All because of EBITDA. (More next week).
Published in the Sun Star Daily, Saturday, August 03, 2002 (http://www.sunstar.com.ph/static/ceb/2002/08/03/bus/batuhan.ebitda.html).
I should qualify the previous statement. Not all accountants have lost their sense of integrity. Not everyone has turned his back on the principles of GAAP (Generally Accepted Accounting Principles), to which they are eternally sworn to uphold. But some have, as the recent stories of corporate fraud have only too visibly demonstrated.
I have no problems with this dichotomy. It mirrors real life, after all. There are the good guys, and then there are the bad. My issue is with the confusion between the good and the bad in the financial world.
In the real world, the bad guys go to jail. Here, the bad boys get the glory. They have all the pay rises and the fat bonuses. Treading on the thin line between honesty and the absence of it is applauded at the highest corporate circles, encouraging even more dangerous financial acrobatics.
We remember Nick Leeson, or at least some of us must do. Who would forget the boy who single-handedly brought down the venerable Baring Brothers, and had it bought from the receivers for one pound by ING?
He was the perfect example of values gone horribly wrong. He fiddled his reports, fooled his superiors and broke all the rules that ever existed. Yet he had a luxury apartment in Singapore’s most affluent district, drove flashy cars, wore nice suits, and vacationed where most of us could only dream to be. He got caught out in the end, but instead of universal condemnation, there was even adoration from some. His life became a movie, several books were written about him and his exploits, and he is now a cult hero of sorts.
Welcome to the new world of professional depravity!
Until very recently, the bad boys still got all the glory. Only this time, even if their tricks had gotten simpler, no one seemed to notice until the harm had been done.
Fiddling with the books—the simplest trick of accounting magic there is, had the experts looking the other way. Everybody was too busy watching the trend graphs, the obvious escaped their attention. Or maybe the not so obvious.
Nick Leeson actually lost cash, real money. By investing in complex swap transactions that bet on the Nikkei the wrong way, he bankrupted Barings, his bank.
The accountants at Worldcom, meanwhile, merely painted a different story to what was really happening at the company.
But the world is now all the worse for it.
All because of an acronym. EBITDA. An innocuous acronym. Earnings Before Interest, Taxes, Depreciation and Amortization. Between what the company first reported and what its restated earnings report now owns up to, is a hole a few billion dollars deep in EBITDA.
The routine? Move normal repairs and maintenance expenses into fixed assets, and defer their recognition for a few years. EBITDA increases. Share prices go up.
Everybody is happy. Happy at least until the whole scam is uncovered. Then misery ensues, affecting everyone, you and me included. All because of EBITDA. (More next week).
Published in the Sun Star Daily, Saturday, August 03, 2002 (http://www.sunstar.com.ph/static/ceb/2002/08/03/bus/batuhan.ebitda.html).
Saturday, 20 July 2002
Cash flow
MISLEADING. There seems to be some degree of confusion, even within the financially literate sector, as to just what happened at Worldcom. What is certain is that over the last couple of years, a reclassification of a substantial part of its normal repairs and maintenance expenses into deferred expenditure (capitalized assets) boosted its earnings results, thereby misleading investors and outside parties into thinking the company was more profitable than it really was.
However, certain reports also claim that Worldcom boosted its “cash flow” position by the same tactics that it used to obscure its earnings results. Could this be the case?
Imagine the case of a small business. Our neighborhood convenience store spends P10,000 in one month—P5,000 to purchase a dough mixer, and P5,000 to pay for its telephone and electricity bills used for the period. The accountant preparing our store’s books would record P5,000 of utilities as an expense for that month, and the other P5,000 as an asset to be amortized over time. Clearly the store had enjoyed the benefit of the utilities already, while it still had to fully benefit from buying the dough mixer, hence, the difference in treatment.
The matching concept (of costs and revenues) that we know from our basic accounting days makes the distinction between both unequivocally clear, and there should be no argument about what belongs to which period. There are instances, however, where the difference may not be so clear.
Let us say that instead of buying a dough mixer, the P5,000 was used to pay for painting the storefront? Is P5,000 then still an expenditure for future periods, or does it become an expense for the month? The answer is not so straightforward. If the painting job is a recurring item, that is, it is done periodically because of normal wear and tear of the store’s façade, the cost should be expensed as incurred. However, if the painting is part of the establishment of the building, or it is deemed to be a significant improvement on the building that would prolong its useful life, then the cost may possibly be capitalized.
MAKING A CHOICE. Worldcom came face-to-face with such a choice regarding its normal repairs and maintenance expenses, and apparently, instead of declaring them as costs when they were made, the company chose to capitalize them as assets, so they would hit the profit and loss account in the future. Though not too terribly clever or sophisticated, it seemed to fool many people up until recently.
But think about it for a second. Whether our store spent P5,000 on a dough mixer or painting the storefront has no impact on how much remains in our owner’s bank account. At the end of the day, the same amount of money is not in his account.
Say our owner had P100,000 last month. This month, he spent P10,000 on the business, and so has P90,000 left. His cash flow for the month must be P10,000, which is the difference between the cash he had in the beginning of the period, and the cash he still had at the end of it. Does it matter that P5,000 was spent to buy a dough mixer or to paint the storefront? And assuming he did the latter, does it make a difference if he classified the painting cost as an asset or an expense for the period? Of course not! Either way, his cash flow is still P10,000.
Coming back to Worldcom, the only thing the company did was to call a few billion dollars of repairs and maintenance costs assets instead of expenses, a situation very similar to that of our storeowner. Why then do many say that Worldcom enhanced its cash flow through accounting manipulation? (More next week).
Published in the Sun Star Daily, Saturday, July 20, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/20/bus/batuhan.cash.flow.html).
However, certain reports also claim that Worldcom boosted its “cash flow” position by the same tactics that it used to obscure its earnings results. Could this be the case?
Imagine the case of a small business. Our neighborhood convenience store spends P10,000 in one month—P5,000 to purchase a dough mixer, and P5,000 to pay for its telephone and electricity bills used for the period. The accountant preparing our store’s books would record P5,000 of utilities as an expense for that month, and the other P5,000 as an asset to be amortized over time. Clearly the store had enjoyed the benefit of the utilities already, while it still had to fully benefit from buying the dough mixer, hence, the difference in treatment.
The matching concept (of costs and revenues) that we know from our basic accounting days makes the distinction between both unequivocally clear, and there should be no argument about what belongs to which period. There are instances, however, where the difference may not be so clear.
Let us say that instead of buying a dough mixer, the P5,000 was used to pay for painting the storefront? Is P5,000 then still an expenditure for future periods, or does it become an expense for the month? The answer is not so straightforward. If the painting job is a recurring item, that is, it is done periodically because of normal wear and tear of the store’s façade, the cost should be expensed as incurred. However, if the painting is part of the establishment of the building, or it is deemed to be a significant improvement on the building that would prolong its useful life, then the cost may possibly be capitalized.
MAKING A CHOICE. Worldcom came face-to-face with such a choice regarding its normal repairs and maintenance expenses, and apparently, instead of declaring them as costs when they were made, the company chose to capitalize them as assets, so they would hit the profit and loss account in the future. Though not too terribly clever or sophisticated, it seemed to fool many people up until recently.
But think about it for a second. Whether our store spent P5,000 on a dough mixer or painting the storefront has no impact on how much remains in our owner’s bank account. At the end of the day, the same amount of money is not in his account.
Say our owner had P100,000 last month. This month, he spent P10,000 on the business, and so has P90,000 left. His cash flow for the month must be P10,000, which is the difference between the cash he had in the beginning of the period, and the cash he still had at the end of it. Does it matter that P5,000 was spent to buy a dough mixer or to paint the storefront? And assuming he did the latter, does it make a difference if he classified the painting cost as an asset or an expense for the period? Of course not! Either way, his cash flow is still P10,000.
Coming back to Worldcom, the only thing the company did was to call a few billion dollars of repairs and maintenance costs assets instead of expenses, a situation very similar to that of our storeowner. Why then do many say that Worldcom enhanced its cash flow through accounting manipulation? (More next week).
Published in the Sun Star Daily, Saturday, July 20, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/20/bus/batuhan.cash.flow.html).
Saturday, 6 July 2002
60 years ago today
WARTIME. Sixty years ago today, a baby was born somewhere in the mountains between Danao and Carmen. It was wartime then, so the newborn baby’s cries had to be hushed down by her parents, lest the wailing give their location away to the much-feared Kempeitai. Not that they had probably anything to fear from the Japanese invaders in particular, but like much of the shell-shocked populace then, they were not about to take any chances.
Thus it was that this baby was to spend much of her early years until Liberation Day, without making too much fuss, and scarcely attracting a great deal of attention to herself. In fact, well into her growing years, through her adulthood, and to this day, this baby continues to conduct herself with quiet dignity and unobtrusive demeanor, going about her life, generously helping those she can, without calling undue notice to herself in the process.
This baby is my mother, Carmencita Banzon Batuhan, who turns 60 today.
Mom, who has spent most of her life nurturing children during their early formative period, also retires this year from a long career as a public school teacher. Over the years, she has seen her pupils go on to become distinguished professionals, career persons, entrepreneurs and responsible members of our community. Obviously inspired by her unrelenting determination to see them through the conclusion of their education, many of her students—most of whom come from the less fortunate sectors of our community— rewarded her with the greatest gift any teacher could ever wish for—success in their own chosen endeavors.
EDUCATOR. Growing up, I was always amazed at the amount of infectious energy Mom put into her work. Thankless enough as jobs go, hers was made even more difficult by the circumstances in which she taught. Banawa Elementary School, where she spent a good number of years as educator, counts as its pupils children coming mostly from lower middle-class and lower class families. These kids face greater challenges in completing their education than most of us can relate to—everything from lack of money to buy books, to lack of money for snacks at recess time.
Mom would help them out whenever she could. She would loan money to her pupils so they could buy textbooks, purchase clothing and pay for their other educational expenses. To those who were really determined, she would even help to pay for their expenses beyond elementary school. When I was a young boy, it was not unusual for me to see my old shirt or pair of shorts being worn by one of
Mom’s pupils, sometimes to my surprise as I had not quite “retired” a number of them just yet. Mom’s faith in the miracle of education to empower, emancipate and enable all who possessed the determination and drive to succeed did not only inspire those she taught at school, but also her children, who in their own ways have managed to make the most of their individual God-given capacities and abilities.
Totol, Ann, Aleli and I are what we are today, because of the inspiration quietly imparted to us by one humble schoolteacher, who was born 60 years ago in the mountains between Danao and Carmen.
Happy Birthday, Mom, and thank you for everything!
(I will write about more serious issues, starting with Worldcom, next week.)
Published in the Sun Star Daily, Saturday, July 06, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/06/bus/batuhan.60.years.ago.today.html).
Thus it was that this baby was to spend much of her early years until Liberation Day, without making too much fuss, and scarcely attracting a great deal of attention to herself. In fact, well into her growing years, through her adulthood, and to this day, this baby continues to conduct herself with quiet dignity and unobtrusive demeanor, going about her life, generously helping those she can, without calling undue notice to herself in the process.
This baby is my mother, Carmencita Banzon Batuhan, who turns 60 today.
Mom, who has spent most of her life nurturing children during their early formative period, also retires this year from a long career as a public school teacher. Over the years, she has seen her pupils go on to become distinguished professionals, career persons, entrepreneurs and responsible members of our community. Obviously inspired by her unrelenting determination to see them through the conclusion of their education, many of her students—most of whom come from the less fortunate sectors of our community— rewarded her with the greatest gift any teacher could ever wish for—success in their own chosen endeavors.
EDUCATOR. Growing up, I was always amazed at the amount of infectious energy Mom put into her work. Thankless enough as jobs go, hers was made even more difficult by the circumstances in which she taught. Banawa Elementary School, where she spent a good number of years as educator, counts as its pupils children coming mostly from lower middle-class and lower class families. These kids face greater challenges in completing their education than most of us can relate to—everything from lack of money to buy books, to lack of money for snacks at recess time.
Mom would help them out whenever she could. She would loan money to her pupils so they could buy textbooks, purchase clothing and pay for their other educational expenses. To those who were really determined, she would even help to pay for their expenses beyond elementary school. When I was a young boy, it was not unusual for me to see my old shirt or pair of shorts being worn by one of
Mom’s pupils, sometimes to my surprise as I had not quite “retired” a number of them just yet. Mom’s faith in the miracle of education to empower, emancipate and enable all who possessed the determination and drive to succeed did not only inspire those she taught at school, but also her children, who in their own ways have managed to make the most of their individual God-given capacities and abilities.
Totol, Ann, Aleli and I are what we are today, because of the inspiration quietly imparted to us by one humble schoolteacher, who was born 60 years ago in the mountains between Danao and Carmen.
Happy Birthday, Mom, and thank you for everything!
(I will write about more serious issues, starting with Worldcom, next week.)
Published in the Sun Star Daily, Saturday, July 06, 2002 (http://www.sunstar.com.ph/static/ceb/2002/07/06/bus/batuhan.60.years.ago.today.html).
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