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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Expectations for Quality Accounting

C. HUYGENS - Thursday, May 11, 2017
#risk Alan Greenspan noted in 2008 that in a business based on trust, #reputation has significant value.

The UK’s accounting watchdog has fined professional services firm PwC a record £5m for “misconduct” in relation to the audit of Connaught, a FTSE 250 social housing maintenance group put into administration in 2010.…The latest ruling is another blow to PwC’s reputation following its Oscars envelope mishap and a $3.1bn legal battle with MF Global in the US.

Read more in the Financial Times.

Accounting Scandals Put the Big Four on the Spot

C. HUYGENS - Thursday, May 04, 2017
"...there is a wide gap between auditors’ own idea of how far their responsibilities stretch and the expectations of investors and the general public."

From the shambles of the Oscars ceremony to the more serious matters of US lawsuits and UK regulatory investigations, it has been a difficult year for PwC. Its rival KPMG is hardly faring better. The Big Four accountancy firm was castigated by Senator Elizabeth Warren for failing to spot dubious practice at the lender Wells Fargo. Now its auditing of Rolls-Royce is under investigation in the UK after the engineering company admitted bribery and corruption offences going back 20 years.

These scandals are not on the grand scale of the Enron fraud, which led to Arthur Andersen’s demise. Yet they highlight the failure of the accountancy profession and its regulators to resolve, in the intervening 15 years, the fundamental question of how far auditors should be expected to go in their efforts to uncover bad behaviour.

Read more in the Financial Times.

Screw Up, Cough Up

C. HUYGENS - Monday, April 07, 2014
When the big banks screwed up, taxpayers felt the pain. Much was made of the observation that those who could, or should, have seen the disaster coming were financially rewarded in the interregnum. There is no monopoly of socializing risk. The New York Times observed over the weekend that "While shareholders of G.M. will shoulder the costs of fines, settlements and the loss of trust arising from the mess, the executives responsible for monitoring internal risks like these are unlikely to be held to account by returning past pay."

The word is clawback. Two years ago, as the crisis of the London Whale was engulfing JPMorgan Chase, Bloomberg reported "that “New York City Comptroller John Liu said that JPMorgan should tell shareholders it will ‘aggressively claw back every single dollar possible from the executives responsible for the $2 billion loss.’” Huygens observed that employees subject to the clawback would probably have other opinions.

Fast forward, and it is deja vu all over again-but different. In additional to financial shenannigans, Scott M. Stringer, the current New York City comptroller, who oversees five municipal employee pension funds with assets of $140 billion, has successfully negotiated expanded thresholds for clawbacks at five companies this year including both banks and non-banks: Allergan, Halliburton, Northrop Grumman, PNC Financial and United Technologies.

According to the New York Times, "Under the agreements, pay can be retrieved from a wider array of senior executives than is typical. And recoveries can be sought not only for intentional misconduct and gross negligence, but also for violations of law or company policies that cause significant financial or reputational harm to the institution." Failures in governance, controls, and risk management are actionable causes.

Huygens has often suggested that reputational value metrics, such as those published by Consensiv,  could be useful tools for managing reputation. The New York City comptrollers have identified another application: measuring loss to trigger punishment.

Read more.

Giving Intangibles a Backbone

C. HUYGENS - Wednesday, July 31, 2013
Just last week, Huygens happily shared news that management accountants were taking interest in reputation, a highly ethereal and ephemeral asset if there ever was one. Not that what was just shared is true -- reputation leaves a material mark on profit and loss statements which is why its management is so important, and so difficult.

Also, last Friday, the Society hosted its monthly Mission Intangible Monthly Briefing where the issues of giving substance to intangible assets was again hotly debated. Now Society friend Ken Jarboe, CEO of Athena Alliance, shares that intangibles are becoming less intangible as a result of new accounting rules.

The big news...is the treatment of spending on two intangibles: R&D and "creative works" -- which will be treated as an investment rather than an immediate expense ... This means that for purposes of calculating the size of the economy, this spending will be depreciated over a number of years just like spending on plant and equipment.

Intangibles looking more like plant and equipment? Really? Read More.

Welcome Management Accountants

C. HUYGENS - Sunday, July 21, 2013
"These days," write the authors, "bad news spreads faster than ever. Management accountants can help companies prepare to inoculate their hard-earned reputations against damage on social media and repair the harm when it occurs. Here is the expert's prescription."

Come again? "Did you say management accountants?" One can almost hear the other executives chuckling around the water cooler -- or virtual analog, such as Facebook. "Accountants managing reputation is an oxymoron."

The smart money is on the accountants. As described on page 12 of the summer 2013 issue of Certified Global Management Accounting (CGMA) magazine, reputation risk is a core financial issue impacting every line of the P&L statement. "A good reputation can increase margins and reduce borrowing costs, inventory lead time, head-hunting costs, internal litigation costs, regulatory fines and supplier costs." Done properly, managing reputation risk presents a significant opportunity for the company, its directors and officers.

CFOs and their management accounting teams see the writing on the wall. It is alphanumeric.

The Society operates under a big tent, and we are delighted to welcome management accountants to the fold. In their honor, the Mission Intangible Monthly Briefing this coming Friday, 26 July, will take a sweeping view of the many intangible assets underpinning reputation.

Joining in the conversation will be Dale Furtwengler, a consultant's consultant specializing in bringing clarity to the value in intangible asset management; and Mary Adams, author, consultant, and Smarter Companies thought leader, and formerly a member of the Society's Reputation Leadership Council. Jonathan Salem Baskin, author of Tell the Truth, moderates.

Three is no cost to register and listen to the broadcast. Register here.

Reputation: Top BOD concern

C. HUYGENS - Tuesday, May 08, 2012
The accounting firm Eisner Amper published their third annual survey, Concerns About Risks Confronting Boards. Based on the opinion of 193 corporate directors, the data show that excluding financial risk, 66% believe that reputational risks are the most concerning currently. The top three reputational risks of 2012 were quality (30%), ethics/integrity (24%), and “public perception” (16%). Security was #4 at 12%. These three named risks, along with innovation, safety, and sustainability (8%), comprise the six major sources of reputational risk according to research published by the Society in the 2010 book, Mission: Intangible.

St Joe: Bedeviled

C. HUYGENS - Thursday, July 07, 2011
Advisen, the insurance industry newsletter, headlined the story this way. St. Joe Getting Killed As Company Reveals SEC Is Probing Financial Reports. According to Advisen, the SEC has started a formal investigation of St. Joe and Fairholme Capital, the company's largest shareholder. Bruce Berkowitz, the founder of Fairholme, is also the Chairman of St. Joe (NYSE:JOE) which is the largest landowner in the state of Florida.

The Financial Times (July 6, McCrum) observes that that St. Joe was a pulp and paper company formed in the 1930s that became a property investor and then housebuilder. St Joe was forced to halt most of its property development in the wake of the housing bust. However the Watersound-based company has largely refused to write down the value of its real estate, on the basis that last year’s opening of the Northwest Florida Beaches International Airport in the centre of St Joe’s forest land will spur commercial development.

St. Joe is no stranger to litigation and intrigue. Huygen's noted earlier this year that St. Joe distinguished itself by achieving the rare reputation ranking of zero among its peer group. The Securities and Exchange Commission is investigating how St Joe, a US property investor, accounts for the value of its almost 600,000 acres of land in north-west Florida.

Turning to current metrics, St. Joe is demonstrating ongoing depressed reputation metrics according to the Steel City Re Corporate Reputation Index. Over the trailing twelve months, the company's ranking rose from the 1st to the 5th percentile rank among the 139 firms comprising the Real Estate Development sector. To be clear, only 132 firms outranked it reputationally which may explain why it has been underperforming its peer group by 45%. Uncertainty is in the air. The reputation vector has been up and down quite a bit lately measuring in this past week at 44%.

Its market value is in excess of 50% intangible while the mean of its peer group is less than 10%. It is therefore curious that shortseller David Einhorn feels that the shares are overvalued owing to the excessive book value of the real estate assets. Undervalued intangibles vs. overvalued tangibles; a classic question of ethics and innovation vs. accounting. Or optimist vs. short seller: a curious battle indeed.

Leftovers - M:I MB of 10-Jan-8 (Part II)

Nir Kossovsky - Thursday, January 14, 2010
Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some more of the leftovers.

QUESTION TO JON LOW: You talked about how we shouldn't look to the accounting profession for support on intangibles yet you also call for comparability. If we don't get this from financial data, where will we find it? What will it look like?

ANSWER: Useful, comparable data supporting the growing economic importance of intangibles will most likely come from practitioners who perceive a financial benefit to themselves. Historically, this is where such innovations have come from as opposed to regulators or stolid, conservative and internally conflicted practitioner groups like the accountants. In the case of comparable data for intangibles we are already seeing growing interest in certain segments like reputation, brand and R&D as a proxy for innovation. Sustainability in its various manifestations is also gaining as a topic of interest.

From these basic roots, successive branches will grow as more factors become important to more industry segments. For instance, once M&A activity revives, data on post-merger integration success or failure – already a subject of considerable research – will probably also blossom.

It would be nice to think that some supra-national organization like the UN or OECD will take the lead, but they see no financial incentive or moral imperative to do so. Self-organized groups like WICI might have been able to lead had they adopted a more open-source approach, but they appear to be pursuing the secretive ‘let’s corner the market and see how much we can charge for our insights’ approach that has failed repeatedly in the past. Any group wedded to a particular technology or set of what they hope will be patented-able processes are similarly doomed because the market is simply too dynamic and unmanageable at this stage. Again, this is not a philosophical, political or doctrinal point of view, it is simply a reflection of natural phenomenon based on historical experience.

When comparable data emerge I believe they will look like the sort of ratios and benchmarks that managers use as a practical means of evaluating their performance. This is in contrast to the increasingly ambiguous or obfuscated metrics served up by GAAP or international accounting standards. The basis of intangibles importance to managers is their usefulness in evaluating and predicting performance, not in enabling arcane acts of financial sleight of hand. It is this usefulness that has prevented their oft-predicted demise and will support their ultimate adaptation.

Jon Low.

QUESTION TO NIGEL PAGE: You predicted a convergence of IP and IA/IC. I agree with you although in my experience, many folks in the IP space have a very strong prejudice that leads them to think (and often say) that intangibles outside of traditional IP (patents, trademarks, copyrights and trade secrets) have limited value. How do we cross this chasm?

ANSWER: I suspect that the events of the coming few years will see this prejudice start to disappear. Most organisations are likely to refocus their priorities as they emerge from recession and, as they do so, they will begin to pay far greater attention to the whole range of intangible assets they own, as well as the potential for monetising these assets. At the same time, CIPOs (or equivalent) will increasingly realise that the best way to secure C-suite attention for their efforts will be to make sure that they incorporate IP into a broader reputation-based 'package'. CEOs will sit up and pay attention to IP if and when they can be made to understand that it is a cornerstone of their corporate reputation, and not a techy side-avenue that's best left to in-house counsel.

Nigel Page
Intellectual Asset Management Magazine

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