News Corp.'s Accounting More Problematic Despite New Compliance Unit
News Corp.'s new chief compliance officer Gerson Zweifach will announce the hiring of people including John McCoy, the associate regional director of the SEC’s enforcement arm in Los Angeles, Calif., and Brian Michael, a former federal prosecutor for the U.S. Attorney’s Office in New York, according to the Financial Times.
While that development sounds positive, chairman and CEO Rupert Murdoch has also been cutting away and adding to his company in a confusing fashion. For example, in December 2011 News Corp. paid $400 million for the 67% stake in the international sports programmer Fox Pan American Sports LLC that it didn't already own. In July 2012 News Corp. and funds advised by the European private equity firm Permira Advisers LLP sold the digital technology supplier NDS Group to Cisco Systems Inc. for around $5 billion, including the assumption of debt. In June News Corp. agreed to buy the half of the Asian broadcaster ESPN STAR Sports that it did not already own and also offered to pay around A$2 billion for the Australian media investment company Consolidated Media Holdings Ltd. Meanwhile News Corp. is also planning to separate its publishing and its media and entertainment businesses into two distinct publicly traded companies.
"We find ourselves in the middle of great change, driven by shifts in technology, consumer behavior, advertiser demands and economic uncertainty and change brings about great opportunity," Murdoch explained in a statement this August.
True enough. Nonetheless, these various and sundry events will make it more challenging to evaluate News Corp.’s financial performance. As of June 30 the trailing twelve-month average of News Corp.’s unusual expenses amounted to $2.8 billion, or more than 8% of sales versus the industry median of nearly 3%. One-time items cloud News Corp.’s true financial performance by adding noise unrelated to its core operations. Numerous items get lumped together and netted against each other in the unusual expense category, compromising transparency.
Meanwhile the trailing twelve-month average of News Corp.’s restructuring costs as of June 30 amounted to more than $3 billion, or nearly 10% of total operating expenses versus the industry median of nearly 2%. If it turns out that News Corp. has overestimated the extent of these costs, the company will be able to correct that mistake in later periods, inflating its earnings down the line in the process.
As cost from items such as restructuring caused News Corp. to earn less net income in the quarter ended June 30 compared to the previous year, Murdoch and his team continued spending money on share repurchases. On May 9, 2012, News Corp. said its board approved a $5 billion increase authorizing the company to buy back $10 billion of stock. But earnings per share that have improved from revenue growth in core operations differ in quality from those that gained a boost from share buybacks.
News Corp.’s accounting continues to have red flags. For example, the company assumed a discount rate of 5.7% for its pension liabilities as of June 30 compared to the industry median of 5.35%. This move lowers the value of future pension liabilities reported on News Corp.’s balance sheet.
Of course, none of this means that Murdoch has necessarily done anything wrong, but the transformative confusion at News Corp. will make it easier for him to hide aspects of the company’s performance should he choose to do so. And, as we already discussed here and here, the company has many business ethics concerns. News Corp.’s Accounting and Governance Risk (AGR ® ) score was a 21 as of August, indicating higher accounting and governance risk than 79% of companies. That’s up from a 50 as of March.