A potluck of stories as we enter Thanksgiving week
Here's a free newsletter edition with lots of gift links and references to prior stories. Won't you consider a paid subscription if you're not already at the table?
Thanksgiving, then, symbolizes that there is still great work to be done before a nation that readily prides itself in its goodness, honesty, and wholesome relationship with Divine Grace will actually resemble the stories it tells itself. Via Loud Canary.
Guest lectures
Last week I visited Ohio State University, at the invitation of MAcc program head Patrick Kielty and Department Chair Tzachi Zach.
I think the first time I spoke to an Ohio State MAcc class was in Washington DC, in October 2020. When I worked full time for MarketWatch/Dow Jones in DC, I’d speak to the MAcc groups who did a fall or spring trip to the Capitol such as Baylor, Indiana, Purdue, Michigan, and OSU. In some cases, I’d invite them into the newsroom.
The OSU connection also led to me teaching a Maymester course there for two years for the KPMG sponsored MAcc program. As you can imagine this was prime time in terms of post-KPMG/PCAOB scandal and my reporting on the scandal led me to encourage my new Ohio State colleagues to consider working on some research on the subject.
So, OSU’s Prof. Zach and Prof. Amy Sheneman, Prof. Mikhail Pevzner of Univ. of Baltimore, and I embarked on a multi-year effort to publish an empirical paper and a teaching case on the KPMG/PCAOB scandal.
We did it!
I am teaching our award-winning case, and the British Accounting Review published research paper, whenever I guest lecture or adjunct teach, including for the Cambridge Executive MAcc program, for the University of Miami MAccs, and this term and next spring at Montclair State University. I’ve taught the KPMG/PCAOB case to the Michigan group now in DC every year since.
However, this year, for Ohio State, there has been so much other news that I thought I would cover two of my favorite topics — auditor independence and the impact of private equity on the accounting profession — by covering the Tricolor and First Brands alleged frauds and bankruptcies.
Stay tuned for a wrap up next week of what we know now and what we still wonder, based on my preparation for this guest lecture and on all of the wonderful reporting we’ve seen.
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Berkshire Hathaway and Kraft Heinz
I wrote back on September 7 about the disco moves meant to distract that Berkshire Hathaway made when reporting for the 2nd Quarter. BRK wanted to avoid bearing the full brunt of its massive mistakes with Kraft Heinz.
I predicted three years ago that the glow would go off Berkshire Hathaway when Buffett exited stage left, since no one could run it with the halo and ready benefit of the doubt that Buffett did. (Gift link.)
Splitting the conglomerate would enable more scrutiny and allay some investors’ concerns Francine McKenna Published APR 27 2022
When Warren Buffett inevitably leaves his post after more than 50 years at the helm of Berkshire Hathaway, no one else will be able to run the company as successfully as he has. The behemoth conglomerate should be broken up...
Berkshire Hathaway has been successful for so long because of Buffett‘s acumen. There is a “halo effect” for the conglomerate that others such as GE lost long ago. Shareholders, regulators and the majority of the media give Buffett the benefit of the doubt and forgive screw-ups. I doubt any successor can repeat that.
Others are catching up to this idea and to what I would think is the most logical use of the massive cash hoard that has built up: a giant dividend and then a dismantling. WSJ (Gift link.):
Warren Buffett still has a couple months left as Berkshire Hathaway’s chief executive. The company’s shares are already feeling his absence.
Buffett, 95 years old, stunned investors at Berkshire’s shareholder meeting in May when he revealed his plans to hand off his CEO duties to Greg Abel, his handpicked successor, at the end of this year.
The succession plan will also bring big changes to several treasured traditions for Berkshire watchers, many of whom treat Buffett’s words of wisdom on business and investing as gospel. Abel will take over writing the annual letter to Berkshire’s shareholders, Buffett’s assistant confirmed to The Wall Street Journal, and will lead Berkshire’s annual meeting in Omaha, Neb. Starting next year, Buffett, still chairman, will sit with the company’s other directors.
There is another consequence to Buffett’s retirement, especially to Berkshire shareholders, and it is already happening: Berkshire is losing its “Buffett premium,” or the higher price investors are willing to pay to own Berkshire’s stock thanks to the longtime chairman and CEO’s presence.
Berkshire’s Class B shares have declined 11% since the May meeting, in part on concerns about how Berkshire will manage without Buffett, some analysts say. In comparison, the S&P 500 index has gained 20% during that stretch. For the year, Berkshire shares are underperforming the benchmark index by the widest margin since 2020.
Berkshire Hathaway has now reported on its 3rd Quarter results and we should have seen the impact of the Kraft Heinz catch up. That will require a bit more time for me to reconcile, since my quick take is that BRK pulled another sleight of hand. In the meantime, while I work on that, keep an eye out for Berkshire selling Kraft Heinz shares in the open market.
There was no change in holdings from end of 2nd Q to end of 3rd Q, September 30, but I think BRK will be completely out of KH soon, especially since its share price has stopped crashing.
Top Berkshire Hathaway holdings, https://13f.info/13f/000119312525282901/compare/000095012325008343#google_vignette
I’d also like to draw your attention to coverage of Buffett’s Thanksgiving letter, a now promised annual occurrence now that he has turned over the annual letter to shareholders tasks, along with the CEO job, to the able-bodied Greg Abel. There’s a lot of schmaltz here, but one particular niblet I found interesting: a mention of neglecting to act when Berkshire Hathaway executives had already gone way far down the senile dementia path before they were exited. He’s a conflict avoider extraordinaire. (Emphasis is mine.)
One unpleasant reality: Occasionally, a wonderful and loyal CEO of the parent or a subsidiary will succumb to dementia, Alzheimer’s or another debilitating and long-term disease.
Charlie and I encountered this problem several times and failed to act. This failure can be a huge mistake. The Board must be alert to this possibility at the CEO level and the CEO must be alert to the possibility at subsidiaries. This is easier said than done; I could cite a few examples from the past at major companies. Directors should be alert and speak up is all that I can advise.
I wrote about several of those situations, including on his own board, but one in particular sticks out.
Buffett used to make jokes about buying companies even someone with Alzheimers could run, if you can believe it!
From The Dig:
After riffs on their age and how investors should be able to see them live and make sure a “Weekend at Bernie’s” situation hadn’t developed during the pandemic, Buffett starts at the 2:25 mark to tell a story of someone who used to run one of their companies in California.
He says the guy had been suffering from dementia for “a while” and, given Buffett and Munger’s famous hands-off approach that provides the two amigos ongoing plausible deniability except for the investment coups they want sole credit for, they missed it.
“The business had run fine. So that became our test for new businesses. We look for ones that guys with Alzheimers can run. There’s less competition for those.”
The FT writes about OpenAI’s auditor
It seems that FT reporters were ruminating in the background on a fresh OpenAI angle, including asking me if I knew or would venture a guess: who signs the audit opinions for the private company. And then Big Short bro Michael Burry pushed it to the foreground.
FT Alphaville published a preliminary version on Wednesday evening and then a more conclusive version on Thursday, based on anonymous tips. But the tips were really just unofficial confirmation of what can be deduced based on auditor independence rules. (None of the Big 4 auditors including Deloitte would comment, as auditors never do comment on clients, and neither would OpenAI, which is inexcusable.)
You can get the answer to the FT’s question via process of elimination, if you assume it has to be a Big 4 firm. Here’s what I prepared and shared with the FT on the 18th and 19th, from my prep for my Friday OSU lecture.
Hey FT, now do Anthropic!
In other OpenAI news, Joe DiStefano at The Philadelphia Inquirer quotes my friend and frequent collaborator Olga Usvyatsky and I — based on our earlier newsletter — on OpenAI’s change in business model to a Public Benefit Corporation and how the Delaware Chancery Court was involved.
Microsoft has invested $11.6 billion in OpenAI over several years (and promised at least $1.4 billion more).
Thanks to exploding OpenAI sales and additional private investments, Microsoft says its investment is now worth $135 billion. That’s more than 10 times what the company paid. Microsoft is the largest OpenAI shareholder, with around 27%. .
Under a recent agreement following the restructuring, Microsoft said, OpenAI promises to buy another $250 billion in Microsoft Azure cloud networking and other services, but also gains the right to form more partnerships with other companies.
The companies also enjoy a revenue-sharing agreement — the first time that’s been disclosed, according to McKenna and Usvyatsky — though details will have to wait for future disclosure.
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The U.S. Securities and Exchange Commission today filed a joint stipulation with Defendants SolarWinds Corporation and its Chief Information Security Officer, Timothy G. Brown, to dismiss, with prejudice, the Commission’s ongoing civil enforcement action. As stated in the joint stipulation, the Commission’s decision to seek dismissal is “in the exercise of its discretion” and “does not necessarily reflect the Commission’s position on any other case.”
I wrote extensively on this case — here are just a few links — and the recent penchant for this SEC to drop good cases, perhaps at times because they chose the wrong law to enforce in the first place.
