Alan Abelson of Barron's poured some cold water on bank reports, especially from Goldman Sachs (NYSE: GS), in an article called "Don't Bank on it".
Abelson tells of the missing month at Goldman Sachs, which reminded me of a similar financial stunt pulled by Comverse Technology Inc. (Pink Sheets: CMVT.PK), which only in recent years has become known for its excellence in financial engineering.
In order for Goldman Sachs to take part in US government aid to the banking industry, the firm switched its status from an investment bank to a commercial bank. As part of the change, it switched its fiscal year from one ending in November, as it had used since its establishment, to a calendar year, which most banks use.
Last week, Goldman Sachs reported huge earnings of $1.8 billion, double what was expected, for the first quarter of its new fiscal year January through March. Goldman's previous report was its fourth quarter, based on its old fiscal year, which was September through November so that December was left alone, not included in either report.
In December, Goldman lost $780 million. If the December loss would have been taken into account, the first quarter's surprise would not have been so large.
Goldman's move was clean and legal, but it reminded me an older, similar story at Comverse, which I am not sure is not being reviewed with a magnifying glass in this time of looking back closely on financial statements of companies run by Kobi Alexander.
In the beginning of 1998, Comverse bought Boston Technologies in a stock swap worth $850 million. Despite the fact that Boston's share in the deal was 40%, and Comverse's share was 60%, Comverse decided for whatever reason to adopt Boston's fiscal year, which begins in February. This was a change from the widely-used calendar year, which Comverse had been using since its establishment.
Comverse's share price treaded water until it published the first report as a merged company, in the middle of 1998, because as with any large merger, there were hesitancies about the success of the consolidation.
The first quarter of the larger Comverse was February through April 1998, and it was fantastic. The share took off on a run which only ended with the bursting of the technology bubble two years later.
The previous quarter was September through December of 1997, so that January 1998 was left out, on its own, just like the December 2008 of Goldman Sachs.
I was curious at the time to know what happened to Comverse in January 1998, and in digging through the US Securities and Exchange Commission (SEC) website, I found a report of low sales and high expenses, which led to a very large loss for the month which was not included in any quarterly figures.
I suspected at the time that there may be a possible move to push sales forward, from January to the first quarter of the newly-merged company, and a move of expenses in the other direction. In attempts to check with Comverse's then-CFO, I was told "no comment".
When Comverse issues retroactive financial reports, later this year it will be interesting to see if they reached so far in their investigations of alleged wrong-doing by previous management. For today it is known that not only options backdating is being checked, but other things as well.
Published by Globes [online], Israel business news - www.globes-online.com - on April 21, 2009
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