Who are you going to believe? Jamie Dimon? Or your own eyes?
With the benefit of hindsight, anyone can see there must have been something amiss with the way JPMorgan Chase & Co. put together some of the disclosures for its first-quarter earnings release on April 13. The press release contained inaccurate data about the market risks at the bank’s chief investment office, which was the source of the mysterious $2 billion trading loss that JPMorgan divulged this month.
Here’s the odd part: To believe JPMorgan, there was nothing wrong with the company’s disclosure procedures at the end of the first quarter, or at least not anything worth mentioning. In a report JPMorgan filed with regulators May 10, the bank’s management concluded that as of March 31 -- only 13 days before the earnings release with the erroneous numbers -- the company’s “disclosure controls and procedures were effective.”
Dimon, JPMorgan’s chief executive officer, signed a certification letter the same day affirming as much. So did the company’s chief financial officer, Douglas Braunstein. What was the basis for their conclusion? A company spokeswoman, Kristin Lemkau, declined to comment when asked that question. Surely they must have had one. They just won’t say what it was.
From the standpoint of an outside layman looking in, JPMorgan’s assertion looks ridiculous, even if there might be some technical explanation for how it was legally accurate. Here we have JPMorgan’s management on May 10 saying there were no major weaknesses in the company’s disclosure procedures as of March 31, even though the company in the same regulatory filing had to correct serious errors in the disclosure it made on April 13.
Defies Common Sense
“It defies common sense,” says Douglas Carmichael, an accounting professor at Baruch College in New York and the former chief auditor for the U.S. Public Company Accounting Oversight Board, which regulates auditing firms. “It seems logical that if the bad information was disclosed in the press release in April, there must have been a material weakness back on March 31 that permitted that to happen.”
The erroneous disclosures had to do with the company’s “value at risk” numbers, which are supposed to provide an estimate of how much the bank might lose in any one trading day. Initially, JPMorgan said the average figure for its chief investment office last quarter was $67 million. JPMorgan revised that to $129 million when it filed its quarterly report May 10 with the Securities and Exchange Commission.
That wasn’t the only such number JPMorgan had to correct. The figure for the chief investment office is a component in other calculations, including total value at risk. That amount also was understated in the April press release and needed to be fixed, as did some related disclosures.
Dimon explained during a conference call that the company implemented a new value-at-risk model last quarter that it later realized was “inadequate.” It then switched back to an older version it had been using for several years, which showed the higher number. The SEC says it’s reviewing the matter.
The point here isn’t to suggest anyone was fooled by the statement that JPMorgan’s disclosure controls were effective. (I doubt anyone was.) It’s simply a reminder to view what the company says with great skepticism. Words that seem to have clear meanings actually might not. To understand what is and isn’t being said, investors must parse everything.
So what might JPMorgan be hanging its hat on? Perhaps the company determined that any control weaknesses were immaterial, although that’s hard to imagine. Investors didn’t think so. JPMorgan’s stock is down 17 percent over the past two weeks.
Another possible explanation has to do with the way the SEC has defined the term “disclosure controls and procedures.” The SEC’s rules say it means “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed” is “recorded, processed, summarized and reported, within the time periods specified in the commission’s rules and forms.”
Note the word “required” in that definition. Perhaps JPMorgan reasoned that earnings releases are voluntary disclosures, unlike the quarterly financial reports that companies file with the SEC. Also, companies report value at risk in the discussion-and-analysis sections of their SEC reports as a way to satisfy the agency’s risk-disclosure requirements. However, they are allowed to use other methods instead, if they choose to.
Then again, there is some precedent for citing press-release errors as grounds for concluding that disclosure controls are weak. In March, the online coupon company Groupon Inc. said it had provided incorrect revenue and loss figures in a Feb. 8 press release, due to accounting errors. Groupon corrected those numbers by the time it filed its annual report with the SEC. Nonetheless, its management concluded the company had a “material weakness” that rendered its disclosure controls ineffective, as of Dec. 31. That made sense, because clearly it did.
It’s not only the letter of the rules that matters. So should the plain English meaning of the words that companies use in their communications with investors. Whatever rationale JPMorgan might have been relying upon, its disclosure systems obviously weren’t all functioning properly in real life, as of March 31. The better approach would have been to just say so.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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