All profits are equalbut some are more equal than others

Panel session ‘reporting on companies in the EU’

European Investigative Journalism Conference, Brussels 2008

Mathijs Rotteveel, financial reporter

Paul van der Cingel, lecturer Business & Economics, Department of Journalism

Panel session 'All profits are equal...’2

Main question:

How can financial statement analysis help you decide if it’s worthwhile to investigate a EU company more thoroughly?

Panel session 'All profits are equal...’3

2 sections:

1. Understanding financial statements of EU-companies (Paul van der Cingel)

Basic principles:– Rules and regulations– Results: balance sheet / income statement / cashflow

statement

2. Using financial statements in tracking down interesting EU companies (Mathijs Rotteveel)

– Examples and case-studies– See numbers on your handout

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Panel session 'All profits are equal...’4

Rules and regulations (1)

• Listed companies, since 2005:

International Financial Reporting Standards (IFRS) for annual and half-year statements

So: easier comparison between companies

but statements are not exactly the same

Quarterly statements IFRS still not obligatory

• Small and medium sized enterprises (usually not listed):Statements according to national legislation

So: Intercompany comparisons are hazardous

…but IFRS-SMEs could make it better

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Rules and regulations (2)

Who checks whether companies live up to the rules? For listed companies:

1. External auditors (under EU supervision)‘Auditors are our major line of defence against crooks who want to cook the books.’ --Bolkestein, EU Internal Market Commissioner 2004

2. National member state supervisorse.g. The Netherlands Authority for the Financial Markets

represented in Committee of European Securities Regulators (CESR)

databases

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The balance sheet (1)

date November 22, 2008

Value of properties 100 Value of debt 70

(assets) (liabilities)

Value of equity 30

100 100

}What do they own?

What do they owe?

Do they own more than they owe?

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The balance sheet (2)

• Liquidity: can they pay their short term debts?– Current assets versus current liabilities

• Leverage: just how dependent are they on borrowed money?– Total debt versus total assets– or: total debt versus equity

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Stick to the basics as long as possible

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The income statement (1)

Revenues

-/- Costs (expenses)

-/- Taxes

= Net income (profit or loss)

What have they earned?

What did it cost?

Partly paid to shareholders

Partly retained =added to equity

Stick to the basics as long as possible

4b

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The income statement (2)

• Revenues up = thumbs up? Not necessarily– When is the cash coming in?

• Some costs do not result in payments– e.g. Depreciation

the income statement does not reveal the firm’s cash position

• Net income– Is ‘other income’ (e.g. from discontinued operations) boosting

profits? E.g. Ajax Amsterdam 2007

– From boost to bust: software firm Landis

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The cashflow statement

‘Cash is a fact (profit is an opinion)’

All figures represent actual payments (expenses or proceedings)

Divided into 3 parts:

1. Cash flows from operating activitiesDid they actually make money with usual activities?

2. Cash flows from investing activitiesDid they actually put money into new activities?

3. Cash flows from financing activitiesWhat happened to the debt position?

Cashflows from Ajax Amsterdam, PCM

Stick to the basics as long as possible

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To sum up: Are all profits equal?

EU made (semi) annual statements from listed companies more comparable through IFRS– International benchmarking easier than before– But statements not exactly the same

• EU offers platform for national supervisors• Quarterly statements still unregulated• Small and medium sized enterprises nationally regulated

• When is further investigation worthwhile? 8 lessons • ‘There’s more to explore’

– Coming up: the biggest cartel case so far

The rules

The results: handout1

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