Re: More War Games

Response to an FO comment, since my comment on FO seems to keep getting eaten by a black hole.

I’m sure Jeremy can speak to whether this has actually increased transparency in practice, but it definitely has been the case that the onerous nature of Sarbox compliance as it currently stands has hurt the US capital markets because some companies who would otherwise have listed their shares on the NYSE or NASDAQ are now listing overseas instead (like the LSE in London).

Anyone who claims that companies are against Sarbanes-Oxley is about 18 months behind on their accounting news. There are a lot of forces within companies that were highly in favor of the regulations, in particular because they required that companies document their internal controls and that firms report on them.

If you believe congress, though, it's been a massive failure.

In reality, the first year implementation costs were high, but the cost dropped dramatically from that peak because there was a lot of house cleaning to do. After you've got the house cleaned, you pretty much just have to sweep up from time to time to keep it clean and orderly.

The sign-off was just propaganda though.

Oh, and by the way, all of that Sarbanes-Oxley style stuff is coming to a company near you. Anyone who has an audit, whose CPA firm is doing their job, is going to be subject to a new cohort of risk assessment standards that the firms are going to be implementing this year. If the companies want to keep having audits, and intend to keep the cost of audits down, they're going to have to document their own systems of controls. In fact, in a lot of ways, the new standards that are applying to non-public companies are more rigorous than those that now apply to publicly traded companies because the PCAOB basically rescinded most of AS2 in AS5.

Technically SAS 112 went into effect last year, and the risk assessment standards are just now going into effect, but I can tell you that most firms are only now figuring out how they are going to approach the issue of extensive internal control documentation at their clients.

In addition, CPA firms are of course prohibited from becoming part of the client accounting systems, including their system of internal control...so you're going to see quite a bit of belly-aching.

IMHO, it's good because:

1. Companies have always been responsible for maintaining their systems of internal control.
2. CPA firms in general, and particularly at small clients, have had a practice of ignoring internal controls (basically, if you depended on internal controls to safeguard information, then you had to document them, do walkthroughs to confirm that they were in operation, and then test them for effectiveness. In a lot of scenarios it was less work to just do more actual transaction testing).
3. A proper internal control system starts with the tone at the top of the company (and this is something that is stressed in the RASes). The problem at Enron wasn't the honesty of the employees at the bottom, it was the guys at the top who were pushing all sorts of boundaries, with the knowledge of their external auditors. Under the new standards, the fact that they are pushing boundaries rises to a level that it has to be reported to the board of directors of the company because it represents a risk that there will be future financial misstatements BECAUSE of that tone.

Publicly traded companies are required to submit financials so that traders will be on a level playing field when evaluating which companies are good investments and which ones are not. The market doesn't work when nearly all of the information is sealed away. Assuming that the disclosures that need to be made under current rules for publicly traded companies represents "transparency" is a major mistake though.

Nothing that can be done at any level of regulation is going to prevent frauds though. By definition, frauds are difficult to detect. They frequently represent short-circuits of internal control systems, even properly designed ones. In a lot of cases, you are just trying to detect those frauds in a timely manner, and that is the responsibility of management, because THEY are in a fiduciary relationship with the shareholders.

The sign off standards were in part designed to remind management of that fact.

There are a lot of things that need to be cleaned up though. Part of the problem is that in the case of Enron etc, they didn't do anything that was per-se illegal. In fact, a lot of wrangling was done to make sure that they adhered to the letter of the law and accounting standards. There were a lot of weasel words in there that they took advantage of. AA was complicit in that, to the point where they were giving them advice with the explicit purpose of avoiding regulations and avoiding consolidation of companies.

If the company's board of directors had been aware of this, then they probably would have found someone else to run the company (assuming that it was properly comprised of non-shareholders in non-management positions with no relationships to company management or shareholders, and with adequate financial expertise to make these decisions, which is yet another thing that's rolled into the new RASes). The fact that they weren't is kind of scary, because even though the auditors are paid by the company, their responsibility is to report to the board (particularly the subset of the board known as the audit committee).

Whatever, I'm going on at length here.

Publicly traded companies with K-1s etc are NOT providing transparent information. They just aren't. Nothing we do can cause them to do that. However, we can improve the overall environment so that companies are more likely to provide better information.

But you also need to remember, Zuffa is managed by their shareholders (Dana and the Fertitas). Lenders would be fucked if they went out of business, but they would immediately pierce the veil and go after the other assets of those shareholders to recoup their loans if there was evidence of a fraud, and those guys DO have assets.

There's a lot of strength that UFC is currently deriving from secrecy, because they're able to contract with fighters in a way that one guy doesn't know what another guy is making, outside of what is publicly reported, and where they make it clear that a lot of guys are making amounts that are different from what is reported. That cloud of uncertainty works in their favor right up to the point where individual guys start quitting or signing with other organizations.

At some point, transparency to the fighters is going to be necessary if they intend to take that next step. The best way to do that, while keeping the information close to their vests (i.e. not just putting it completely out in public) is to form a fighters association and create a union shop. Negotiate with the fighters as a unit, give them some hard numbers on what they're going to get that's going to be reported to the CSAC or whatever, give them some minor concessions on healthcare etc (a good idea in any case, and not an overly expensive one), give them a 401k to participate in (you don't even have to make matching contributions, guys just want to have a place to sock away some money at fair rates), and put in some incentives that will allow fighters that are loyal to the organization or who are defending champs to have greater participation in event revenues.

What isn't ever going to happen at Zuffa is stock options to fighters.

Which is a good thing. The worst retirement investment that you can have is your own company's stock. That's the least diversified, and most risky investment you can hold.