Wednesday, May 21, 2003

Where regulation and markets collide: Interesting, if slightly dated, story I read at the Connie concerning a recent accounting scandal with a British food supply company and its American subsidiary. It seems that energy traders and long-distance carriers aren't the only ones stashing away a few hundred million (or several billion depending) for a rainy day. It works like this: retailers negotiate what amounts to rebates if they purchase and sell a certain target amount of a given product. Assuming the retailer reaches the target, then it gets the rebate. The fun part is that the retailer will usually book the rebate before it receives it. So, what happens if the target isn't met? Well, certainly no rebate is paid, but what about the corporate books? Ahhhh, there is the rub. Anyway, the telling paragraph is at the end:
Lack of transparency makes it difficult to say how much money changes hands, but the sums are huge. Mr Venturi reckons that a big manufacturing conglomerate might spend the equivalent of up to 25% of gross sales on “trade promotions” of one form or another. Measured from the other perspective, a typical big European retailer might extract the equivalent of 10% of its total revenues via trade spending. For an individual retailer that often means a sum measured in hundreds of millions. At an industry level billions are at stake.

"Lack of transparency" makes it impossible to say what is going on. Hmmm, where have we heard this before? This lack of transparency is what makes the SEC a necessary evil in our country, but what's worse, is that even with the SEC, it is usually only reactive, not proactive. A band-aid on the femoral artery.

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