Internal Controls and BRLI
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Internal Controls and BRLI Until we recently did some tax loss selling, one of my investment clubs owned BRLI. While my club members did agree that this was a good candidate for tax loss selling (we had a big loss, other gains it could offset and a reason to believe the price would not recover within 31 days), they still felt this looked like a good company to own and insisted on only approving the sale if there was agreement to also repurchase the stock after the 31 day wash sale rule limitation had ended. I decided to spend some time doing some further investigation into BRLI. Personally, I'm not convinced that this is a must hold stock, despite the recent quarterly earnings report which sounded good in the press release and was played up by the CEO in the December quarterly conference call. Given the questions I see surrounding the company financial reporting, I really hesitate to feel comfortable until I see the full results in the 10-K report that will probably be released in January. One of the first things that caught my eye when I started doing some further research was the fact that in July of 2011 they filed an amended version of their 2010 10-K report. At the beginning of it was a list of the changes in the amended report. One of them was that their entire section on Internal Controls and procedures had been "Removed and Replaced" Sarbanes Oxley Section 404, mandates an annual filing of an internal control report to the SEC Management is required to: 1. Evaluate the design of the companies controls to determine whether they adequately address the risk that a material misstatement of the financial statements would not be prevented or detected in a timely manner. 2. Gather and evaluate evidence about the operation of it's controls. The nature and extent of this evidence is to be aligned with its assessment of the risk associated with those controls. 3. Present a written assessment of the effectiveness of internal control over financial reporting 4. Subsequently, as part of the annual audit, each companys independent audiitor must test and report on the effectiveness of the company's system of internal controls. I thought it was an interesting section for them to replace completely in an amended filing. This led me to further investigation about why this had happened. That led me to a series of correspondences between the SEC and BRLI requiring a variety of changes to the initial annual report. http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000792641&type=UPLOAD&dateb=&owner=exclude&count=10 The more I read, the more I feel uncomfortable about the way this company is run and the historical financial results that we are basing projections of future results on. For example, one of their top sales executives had to repay the company 1.6 million dollars in 2009 because of expenses he "improperly" was reimbursed for. This would be something that would happen if the internal controls in the company were ineffective. The repayment was counted as income from BRLI in 2009 and accounted for $.04 per share or 5% of their $.79 EPS. Further investigation of this led me to a court filing by two former employees of BRLI which contain a fascinating list of improprieties which they claim against the company perpetrated by this same executive: http://thestreetsweeper.org/uploads/RutaCareyCounterSuit.pdf I also think it is important to note that the net revenue numbers reported by BRLI are based on a set of complex estimates about how much of the gross price charged for a service will actually be realized. This comes about for several reasons. For example, due to contractual situations, they often accept payments which are lower than the list price for services. There are also some services for which they will never be paid, something they need to account for as an estimated expense in the time period the sale is recorded. BRLI when pressured by the SEC, came up with further detail about the information about these estimates. It looks to me like they had been underestimating them in 2007 and 2008 and overestimating them in 2009. http://www.sec.gov/Archives/edgar/data/792641/000110465911034121/filename1.htm But what is striking is the fact that the percentage they actually collect versus the price of a service has gone from an overall percentage of 29% in 2006 to 18% in 2010. They indicate that this has to do with pressures on insurance reimbursement amounts and they indicate they expect this will be ongoing. I know many of you have dismissed the Streetsweeper articles that caused the big drop in the BRLI stock price as the manipulations of a short seller. But there are a lot of fascinating reference materials provided to justify the statements in the articles. I really encourage you to take the time to read through the supporting documentation thoroughly and decide for yourself if this is really a company you can feel comfortable that you know enough about to invest in. -- Laurie Frederiksen Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio Laurie, Excellent research and analysis Thank you, Etana On Mon, Dec 19, 2011 at 1:49 PM, Laurie Frederiksen <laurie@bivio.biz> wrote: Until we recently did some tax loss selling, one of my investment clubs owned BRLI. While my club members did agree that this was a good candidate for tax loss selling (we had a big loss, other gains it could offset and a reason to believe the price would not recover within 31 days), they still felt this looked like a good company to own and insisted on only approving the sale if there was agreement to also repurchase the stock after the 31 day wash sale rule limitation had ended.
Here is another take on the situation at BRLI. See this link to a story in a recent Forbes issue. If the link does not work, copy and paste. Dave Swierenga But in light of what Laurie found about For example, one of their top sales executives had to repay the company 1.6 million dollars in 2009 because of expenses he "improperly" was reimbursed for. 3 different insiders purchased 17,000 shares at an average price of $14.38/share, for a total of $244,420 This is pennies ( $80K each investor) and could be a cover to hide bigger fraud, since "Investors are aware that insider BUYING is a GOOD SIGN" Etana Finkler (note new email)
240-678-8142 cell On Dec 19, 2011, at 9:24 PM, Dave Swierenga wrote:
Conspiracy theories are no better than the short sellers. Either you have proof or you don’t, and you don’t. I have sold my BRLI shares and will watch the company from the sidelines. My view of the accounting practices Laurie noted say that they do not have a qualified accounting staff and the audit firm, MSPC, should be fired. Many of the questions from the SEC were simply asking BRLI to follow the established rules. If they truly could support the accounting, fine, put it in the disclosure and follow the rules. Mark Eckman From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Etana Finkler But in light of what Laurie found about
3 different insiders purchased 17,000 shares at an average price of $14.38/share, for a total of $244,420 This is pennies ( $80K each investor) and could be a cover to hide bigger fraud, since "Investors are aware that insider BUYING is a GOOD SIGN" Etana Finkler 240-678-8142 cell (note new email) On Dec 19, 2011, at 9:24 PM, Dave Swierenga wrote: Here is another take on the situation at BRLI. See this link to a story in a recent Forbes issue. If the link does not work, copy and paste. Dave Swierenga Laurie,
Thanks for all this investigative reporting on
BRLI. I've read through some of the many SEC filings that you referenced
and came to one conclusion for sure: it's very complicated!
If nothing else I think I understand now why
companies don't like Sarbanes Oxley. And why it's so expensive to
comply.
I do have a question, though. Do you have a
feel for how unusual it is for a company to get so many questions from the
SEC? It seems like with such a complex set of rules to comply with, it
would be understandable that not everything in a company's filings would be
perfect and acceptable by the SEC. And therefore all the questions would
follow.
Or is the accounting profession on top of things
enough that most companies don't get many of these kinds of
questions?
Or to put it another way (and I think I already
know the answer), is this quantity of questions from the SEC enough that we
should be extremely suspicious of BRLI? Even though it seem like BRLI
answered all the questions to the satisfaction of the SEC?
This has certainly been enlightening and
educational. Investing seems to get more difficult all the
time.
Eric
Hi Eric, Good questions. I don't know for sure but my gut feeling is that this number of questions and having to file an amended 10-K is a pretty unusual occurrence. It may look complicated, but a lot of it looks to me like pretty straightforward accounting stuff that they should know how to handle. For example, the wording in the Internal Controls section is pretty boilerplate stuff. Some of the disclosures asked for are pretty straightforward GAAP requirements. Companies complain about Sarbanes Oxley but it's not necessarily bad. There is feedback that having to going through the process of developing strong systems of internal controls has helped companies to weed out inefficiencies and streamline their operations. The thing to know is that there is general recognition that any control system is only as good as the "Control Environment" of the company. That means that it is the corporate culture that ultimately will determine how straightforward and reliable financial reports are. That is something established at the very highest levels of the organization. The accounting profession is working very hard to make sure that financial reporting information is valuable to investors. They aren't perfect but it's good for all investors to learn more about what is out there so they can take advantage of it. Personally I think this is even more critical when evaluating a smaller company such as BRLI. There are a lot of stocks to invest in. I think sometimes it's better to move on than to stay with one which makes you uncomfortable because of some sort of complicated situation going on. -- Laurie Frederiksen Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio |
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