Few publicly traded companies have been more scrutinized than online retailer
, which at times has served as the punching bag for Wall Street's frustrations with the New Economy.
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With its formidable spin machine, Amazon has come under fire from analysts and investors for how it conveys financial information. That is, until its most recent earnings release. In response to its critics, Amazon reconciled its so-called pro forma results -- which exclude many costs of doing business, such as interest expense and amortization of goodwill -- with results compiled using generally accepted accounting principles, or GAAP.
to thank for these changes, at least in part. Lutin, an investment banker at advisory firm
Lutin & Co.
, has been the public face of an ongoing
New York Society of Security Analysts' Committee for Corporate Governance
workshop on Amazon. Lutin held periodic meetings to discuss Amazon's finances and disclosure practices before
Securities and Exchange Commission
began delving into New Economy abuses, such as analyst conflicts and opaque financial reporting. All along, he was a pesky thorn in the side of
, Amazon's chief executive officer. Here, Lutin talks with
about how well Amazon's reporting practices measure up now and where he'd like to see the SEC move with respect to disclosure requirements.
TSC: What did you hope to accomplish by starting the forum, and secondly, have you reached those goals?
The original objective of the forum was to examine issues and responsibility for the information used by investors in their decisions. The issues have become much more visible as a result of the dot-com -- or New Economy -- issues, in which a lot of these things were being questioned. We selected Amazon as an example partly because it illustrated many of the issues, but partly because Amazon itself appeared to be a leader in the New Economy.
I believe we accomplished a great deal of what we set out to do, including Amazon's ultimate assumption of a leadership role. They did in fact demonstrate exactly the right way to present pro forma numbers so that people could understand them, and reconcile them to GAAP, or so-called reality-based numbers. They deserve a lot of credit for having done that. They've also more recently undertaken to expand their board, to add people with more diverse views, which I think would also contribute to the desired model of responsibility for investment information.
TSC: Why do you think Amazon arouses such passion in people -- it seems like whether one is in their court or not, the company evokes this unusual fervor among its followers?
I think a lot of that has to do with Mr. Bezos, personally. He's devoted himself much more to inspiration than other CEOs tend to do. The company itself has a culture of almost cultlike enthusiasm, for the enterprise as well as its community.
TSC: The SEC is now taking up your cause -- it was reported this week that the commission is investigating so-called pro forma abuses in four undisclosed companies. From a regulatory standpoint, what would you like to see the SEC do?
I think the SEC's essential objective of ensuring that investors are properly informed is very relevant here. However, the regulations that the SEC has and their means as a regulatory agency may have limited applicability. If someone makes a statement in which they present a pro forma number -- in which it is found, through several layers of adjustments, to be clearly irrelevant -- but then refer to obscure data that is filed somewhere with the SEC in its GAAP numbers, technically they have not violated any regulations.
The SEC can enforce the requirements to file numbers; they can also enforce the regulations that prevent companies from making misleading statements, but if management presents something they call a pro forma profit, and it's defined in such a way that it has nothing to with profits and the company also satisfies the requirements to file GAAP numbers, they haven't violated any SEC regulations.
What the SEC can do, and what I hope they will do, is that to the extent that there are examples that they can address that will help people to understand what is and what is not permitted, is make good use of those examples.
TSC: One thing you have said you wanted to do was make boards of directors more accountable. Most investors, however, focus on management. Why should investors pay more attention to boards, and what should they expect from their directors?
I think everyone, ultimately, is looking at management. But investors should understand that the duties of the board members are to provide oversight and to be responsible for the interests of shareholders. Board members are not the agents of management. Their fiduciary duties are to shareholders. And a board member's job is to oversee and measure performance and to react, ultimately, to make sure the company adapts to its environment. In the course of doing that, their job is clearly on behalf of shareholders, and that includes making sure shareholders are informed.
TSC: You have praised Amazon for reconciling its pro forma results with GAAP figures in its most recent earnings report. What more would you like to see the company do in the way of disclosure?
I really don't want to focus on specific disclosure issues. The amount of information they provide is certainly adequate. What I think is beginning to concern a lot of journalists, as well as a lot of analysts -- and clearly the public, too, as evidenced by recent Congressional hearings -- is the clarity or the reliability of the information, not simply the amount that is disclosed. And I think that is ultimately the responsibility of a company's board of directors -- to make sure that the information that is provided, whatever the regulations are, is clear, understandable and not misleading.
TSC: The issue of a cash crunch at Amazon was the topic of one of the forum's gatherings earlier this year and had a lot of play in the media, including on
. However, that has quieted since, and few today speak of the chance that Amazon might run out of cash before year's end -- it was hardly mentioned, for example, at the company's annual analyst meeting in early June. Do you think this issue was blown out of proportion?
I'm not sure I'd say it was blown out of proportion. I think the nature of attention to it was sometimes misplaced or exaggerated, but it is a real issue. And it's something I'm sure both the company and trade creditors will be focusing on increasingly during the third quarter.