Readers of the Old Testament – particularly the Book of Revelation – will recognise The Four Horsemen of the Apocalypse as the forces of man's destruction.
Although pedants and keen students of the Bible will point out that the Good Book only names Death, common usage has it that the four are named:
• War;
• Famine;
• Pestilence; and
• Death
Film Buffs on the other hand have no interest in debating the handles of evil, preferring instead to squabble over whether Rex Ingram’s 1921 WWI masterpiece starring Rudolph Valentino, does a better job of depicting fatal Franco-German familial rivalry than Vincente Minnelli’s 1962 WWII work.
Meanwhile US tech company leaders – affectionately known by their VCs as the Living Dead - and who are familiar with www.aim4tech.com will know that, as in times of yore, their ambition is dogged by the four forces of evil that ride freely on the entrepreneurial plains of America.
The latter day Four Horsemen are:
• Sarbanes Oxley;
• The SEC;
• Nasdaq’s disinterest in smaller “unpredictable” companies; and
• The Plaintiffs’ Bar
These nihilist forces work in harmony to speed the destruction of the VC-backed tech sector as we know it.
War, famine, pestilence and death are obvious bedfellows that naturally provide little opportunity for wit or humour.
What no observers of the Grim Reaper’s kissing cousins would ever expect is that there is an opportunity for irony amongst the latter day Four Horsemen.
But irony there is.
Before I go on, and at the risk of turning this blog into a dissertation on classical literature, I feel the need to call upon the Bard for help.
One of the critical junctures in Shakespeare's No 1 play - the tragedy Hamlet - Prince of Denmark– comes when the play’s eponymous character surreptitiously changes the target of the death warrant carried by his treacherous college buddies - Rosencrantz and Guildenstern - swapping their names for his.
An act that he celebrates with the words:
For 'tis the sport to have the enginer
Hoist with his own petar; and 't shall go hard
Which roughly translated into 21st century English means:
“The next best thing to sex is to turn the tables on someone who wants to do you harm”
(For the students of 16th century English having difficulty with this translation - “hoist” means to blow up, an “enginer” is a soldier whose job it was to hoist doors and walls to allow attackers in, and a “petar” (aka petard) is a small bomb used by enginers to hoist doors and walls to allow attackers in.)
Oh, and definitionally, turning the tables in suitable circumstances is the physical equivalent of irony.
And, ironically, like petards, ironic hoists can come from the most unexpected sources: in this case the relationship between the SEC and the GAO (United States Government Accountability Office).
In a surprisingly lightly reported judgement, David M. Walker - who is none other than the Controller General of the United States - found in his report “Securities and Exchange Commission’s Financial Statements for Fiscal Years 2007 and 2006” that the:
“SEC did not have effective internal control over financial reporting;”
Now I know what you’re thinking –
“This can’t be right. Surely the organisation that is charged with ensuring reporting accuracy can’t make mistakes? Or at least if they do make them, presumably they’re not material? They're probably just itsy bitsy little errors”
Well, prepare to be shocked. It may not be right – I leave that conclusion to the great American voting public – but it is correct.
The GAO report says:
“During this year’s audit, we found control deficiencies in SEC’s period-end financial reporting process, in its calculation of accounts receivable for disgorgements and penalties, in its accounting for transaction fee revenue, and in preparing its financial statement disclosures. We believe these control deficiencies, collectively, constitute a material weakness.”
“Aha!” I hear the optimists cry as they cling futilely to hope
“Material? There's a terminological inexactitude here – these terms have always been confusing – isn’t ‘Material’ less significant than ‘Significant’?”
For those of us who serve on Boards subject to the oversight of the SEC (and I sit on two) we have grown to be very familiar with the terminological difference between “significant” and “material” but for the layperson who can only stand in wonder as the big beasts with deep pockets wrestle with the agonies of the SOX taxonomy, let me quote the GAO’s definition from page 4:
“A material weakness is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.”
Hard to believe then that material weaknesses can exist in a body charged with maintaining probity in the capital markets and whose head – Christopher Cox – says things like:
“I think we all recognize that effective internal controls over financial reporting are necessary to help ensure that companies provide investors with accurate financial statements. ……………………………….. Our regulatory scheme, which is based on full and accurate disclosure, provides transparency, which fosters the success of the financial markets. If investors lose faith in the accuracy and completeness of companies' financial statements and other disclosures, they will be less willing to invest, and our financial markets will suffer.”(Speech to Twelfth Annual CFO Summit, Tampa, Florida, May 8, 2006)
And for those still confused about the difference between material and significant deficiencies – rest easy - it doesn’t matter. The SEC also clocked up three significant deficiencies!
“We also identified three control deficiencies that adversely affect SEC’s ability to meet its internal control objectives. These conditions concern deficiencies in controls over (1) information security, (2) property and equipment, and (3) accounting for budgetary resources,”
Hard to believe, but true.
All of which raises a big question:
“Who, in their right mind would want to IPO a young high potential, fast growing, but unpredictable company on a market regulated by a body whose passion for enforcement is equalled only by their own failure to comply?"
To help you to compose your answer, here is some homework:
1. Take a moment to read the following extracts from the GAO report:
“In our review of SEC’s year-end draft financial statement disclosures, we noted numerous errors including misstated amounts, improper break out of line items, and amounts from fiscal year-end 2006 incorrectly brought forward as beginning balances for fiscal year 2007. For example, in its disclosure for Custodial Revenues and Liabilities, SEC improperly excluded approximately $320 million in collections. In another example, for its disclosure on Fund Balance with Treasury, SEC misclassified approximately $90 million into incorrect line items.”
And, given the SEC's anal focus on companies meeting deadlines:
“In addition, the cumbersome and complicated nature of SEC’s financial reporting process discussed above did not allow SEC finance staff sufficient time to carry out thorough and complete reviews of the disclosures in light of the November 15 reporting deadline.”
2. Check out the SEC’s own clear statement on the subject.
(You’ll have to dig deep for it – the SEC doesn’t do contrition - but to aid your search, start on page 20.)
3. Use Google news to exlore the piercing commentary from the fearless members of the Press whose love of irony is legendary.
Enter “The SEC's Material Weakness” - it won't take long to read the entries.
Or you could just refer back to Who Shaves the Barber” Who Regulates the Regulator? for a prescient analysis of what happens when 50% of the Horsemen of the Apocalypse find themselves locked in ironic conflict.
Which brings us back to the question:
“Who, in their right mind would want to IPO a young high potential, fast growing, but unpredictable company on a market regulated by a body whose passion for enforcement is equalled only by their own failure to comply?"
Especially when there is a perfectly welcoming alternative in London?
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