Companies hire independent auditors to examine their financial records as a safeguard against errors and outright embezzlement. They're paid large fees for so-called opinion letters, assuring shareholders everything's up to snuff -- or, in rare cases, alerting investors when there's a problem.Gannett uses one of the biggest, Ernst & Young. Last year, GCI paid Ernst $4.9 million to audit the company's books, and $40,000 to audit the employee's pension plan, public documents show. The firm is among 24 companies Gannett paid a combined $13.1 million in 2008, the most recent year available, to help run the Gannett Retirement Plan.
What puzzles me, however, are what appear to be differences in the letters Ernst issued to Corporate for the company's books, and for the retirement plan. The letter for the company offers a firmly-worded opinion; the one for the plan is far more qualified. Following are the relevant passages.
From the 2009 Annual Report to shareholders, concerning Gannett itself:"In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gannett Co., at Dec. 27, 2009, and Dec. 28, 2008, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended Dec. 27, 2009, in conformity with U.S. generally accepted accounting principles."
From the 2008 annual pension report to the U.S. Labor Department (link unavailable because the report's not online):
"Because of the significance of the information that we did not audit, we are unable to, and do not, express an opinion on the accompanying financial statements and supplemental schedules taken as a whole. The form and content of the information included in the financial statements and schedules, other than that derived from the investment information certified by the trustee, have been audited by us in accordance with auditing standards generally accepted in the United States and, in our opinion, are presented in compliance with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974."
Maybe there's a nuance here that I'm missing. Are there any financial experts out there who can explain? Please post your replies in the comments section, below. To e-mail confidentially, write jimhopkins[at]gmail[dot-com]; see Tipsters Anonymous Policy in the rail, upper right.
It reflects how GCI has been screwing around with putting money aside for pensions. Gracia has talked about this in meetings with analysts and because of the recession, I suspect GCI has been holding back payments. For auditors, that is pretty negative stuff.
ReplyDeleteSome relevant passages from the Feb. 24, 2010, annual 10-K report concerning the Gannett Retirement Plan:
ReplyDeleteWhile asset returns were strongly positive in 2009, the company’s principal U.S. retirement plan, the Gannett Retirement Plan, is underfunded by $437 million.
The company’s principal retirement plan, the Gannett Retirement Plan, had assets of $1.75 billion and liabilities of $2.19 billion at Dec. 27, 2009. Under current U.S. pension laws and regulations, the company is not required to make contributions to the Gannett Retirement Plan in 2010, however it elected to make a $10 million contribution in early fiscal 2010 and may make further voluntary contributions in the future. Due to uncertainties regarding significant assumptions involved in estimating future contributions, such as interest rate levels and the amount and timing of asset returns, the company is unable to reasonably estimate its future contributions beyond 2010.
So, the pension fund is underfunded by $437M, BUT Gannett has lots of cash for executive compensation and bonuses?
ReplyDeleteRemember when newspapers and tv stations used to write about companies that behaved in this manner?
Speaks volumes about corporate.
Jim, I think your post is interesting, but is probably not relevant to the issues of the underfunded pension or its poor returns. If you were to stick this language into Google, no quotes, you'd find many many examples of language like this.
ReplyDeleteI think what is happening here is that the auditor isn't signing off on the declared asset valuations of the numerous individual securities the pension has invested its assets in. This is most likely standard in some or all parts of the pension auditing world, and it is probably boilerplate language. If the Gannett Corp. auditors hadn't been able to properly evaluate the company assets, that would obviously be worrisome, like Enron or AIG. In the case of a pension, where there are hundreds or even thousands of investments, the auditor may simply be saying it hasn't evaluated the assets and balance sheets of all those underlying investments, and the auditor is leaving that information unchallenged. In other words, the auditor isn't saying whether there's fraud in the various stocks and bonds that the pension is invested in. Clearly, if the pension is taking its fiduciary duties reasonably seriously, and there's little to no reason to think that it's not, there's no especially great reason to question whether the value of the underlying investments have been accurately reported to the pension.
It is interesting that the company disproportionately lost value in Gannett's stock, but the stoch it works out to just 2% of assets in 2007 and 0.6% in 2008. If your company pension is going to bother to own your own company stock that doesn't seem especially extreme. Certainly that stock had been a good performer for years, although it's interesting that, if the pension has a professional staff, that they also drank the Gannett Kool-Aid. By 2006, it was clear to the much of the rank and file that the stock wouldn't continue to fly. It would be interesting to learn the details of the folks who are running the pension.
That said, the 34% drop in pension assets in 2008 -- if I have the year correctly -- seems quite high. The average rate of return among the top 100 U.S. corporate pensions in 2008 was -24%, according to a Towers Watson study. That makes Gannett's pension a substantial under-performer, relative or otherwise. Yes, it's a lower drop than the overall S&P 500, as you pointed out, but the stock market is not the pension's benchmark. That's why you have professional pension managers who try to cushion the blow when markets go badly, and outperform the markets overall.
It would be interesting to compare the number and kind of investment managers the pension maintains. The investment consultants on the consultants list seems somewhat long, to my eye, but I could be wrong. However the total fees paid works out to under 1% of the remaining assets and that doesn't sound that high, but again I could be wrong. Do you have a copy of the report you can post?
Also, what's the unfunded percentage? The same Towers Watson report put the unfunded ratio of the top 100 corporate pensions at 78% for 2008.