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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, February 8, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
Governor Taft's initiative to invest $100 million a year for 10 years
in the technology sector, the continued moves by large accounting firms
to segregate their audit functions from their consulting functions to
avoid conflicts of interest, and another financial services fraud announcement
by an Irish bank's US subsidiary involving a $750 million dollar loss.
David C. Barnett–Governor Taft made high-tech
a focus of his State-of-the State message this week, the same time that
President Bush was saying he wanted to scale back the emergency steel
loan program. Another accounting firm split off its auditing and consulting
operations. For this attempted rebuilding, investor trust may have been
torpedoed by the revelation of another mind-boggling scam, this one involving
$750,000 million from a major Irish bank. Unless you think that's just
so much blarney, the issue of investor trust just seems to be behind the
5-day slide in the stock market. Let's get some insight now from our leprechaun
of high finance. Scott Roulston of Fairport Asset Management, top of the
morning to you.
Scott Roulston–Likewise to you, David.
DCB–Let's talk about Governor Taft and his
third frontier. He says he wants the State to spend $160 million a year
over the next ten years, per year - $160 million per year over the next
ten years growing high-tech businesses in Ohio. Democrats who would like
to have his job say it's too little, too late. How accurate is that complaint?
SR–I think that his program is very exciting.
What I like about it is that it is a long-term initiative. I think it's
overdue that we really look to the long-term, certainly in our region
with the news we've had over the last year. We've been dependent on certain
industries and big companies. The whole notion of bringing along a whole
bunch of technology-oriented companies, bio-tech - people talk a lot about
bio-tech, but it's not just bio-tech, it could be medical technology,
medical service companies, it could be medical device companies. We have
some great ones here in Cleveland with Athersis. The Cleveland Clinic
is our largest employer. That's the direction of the future - I'm very
excited about what he had to say and this other announcement with bio-enterprise
coming along with their $60 million initiative.
DCB–Well, let's talk about that a little more.
We're talking about high-tech or bio-tech. How well positioned is greater
Cleveland to benefit from the State's input?
SR–We have a tremendous opportunity to leverage
what the Governor's initiative is all about. It's going to take more than
just state spending. It really takes spending from the private sector
as well, and I think you're going to see a leveraging effect from the
government initiative. The whole thing we need to do is change our culture
here, because we're not just investing in one or two companies. We want
a lot of companies like Athersis, which has been promoted almost as a
poster child. We need dozens and dozens of Athersis-type companies and
that's going to create a lot of high-paying jobs, too.
DCB–While we're talking about culture and
climate, what kind of business climate are startup high-tech companies
looking for exactly?
SR–Innovation and some risk-taking has to
be involved here. When you're in the venture capital arena, you are going
to have failures. It's just a given. And so you need lots and lots of
initiatives, lots of ideas. The fact that we have the Clinic and University
Hospitals cooperating in bio-enterprise is a great sign. You're going
to have lots of initiatives coming from those doctors, from those research
efforts. Case Western is there. It's a natural. Like I said, the Clinic
is the largest employer here. We have a good, substantial critical mass
to get things started.
DCB–Deloitte Touche is the latest accounting
firm to put up a wall between its auditing wing and its other operations.
Do you think that is going to be enough or is there going to have to be
some more self-policing in here someplace?
SR–The whole industry needs to be cleaned
up, David. You know, they are called certified public accountants for
a reason. They are there to guard the public trust. And I think that pendulum
needs to swing back there. Most of these public accounting firms have
done that. I think specifically what we are going to see is that accountants
are not going to be auditing their own consulting work, like they were
at Arthur Anderson. Arthur Anderson was putting in internal controls and
then their auditors were auditing their own work at Enron.
DCB–Do you think there are more time bombs
out there some place?
SR–More time bombs?
DCB–More revelations like that.
SR–I don't know that there are many more Enrons
going on, but I think there is a systematic change that needs to take
place. There is still a lot of issues out there relating to the accounting
standards board that needs to be cleaned up. There are just all sorts
of issues - for example, the way that options are accounted for. Right
now, options aren't an expense, so if a company grants options to their
senior executives, it doesn't count as an expense per se. You might see
changes there, to just tighten up the rules.
DCB–Now this week, and I referred to this
earlier, the biggest bank in Ireland revealed an American-based currency
trader, who was working for the bank's U.S. subsidiary, stole $750 million.
Bank officers say they don't know how it happened. So again, we have to
ask, how could someone get away with something like that?
SR–Beats me. I really don't know much more
than you do. But I guess it is a sign of the times, David, when someone
with a keystroke on a computer or several keystrokes, perhaps, because
we don't really know, can do that much damage.
DCB–Yeah, maybe that's it.
SR–You know, they do also have things like
daily electronic reconciliation of these accounts. So it is a little perplexing
when the Irish bank (which as I understand it was one of the most conservative
banks with good management systems in place), how they could have something
like this go on. I guess the good news is they discovered it. But they
are still investigating it, according to the reports that I'm hearing,
and they're not even calling it theft.
DCB–So no convictions have come down yet.
SR–We don't know yet.
DCB–So we don't really know. Well, we do know
that we are talking to Scott Roulston of Fairport Asset Management on
our usual Friday fling. Scott, thanks so much for joining us.
SR–Top of the morning to you again, David.
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