AUDIT FINDS JOHNSON CONTROLS "LACKS CONTROLS"

Dear Reader,

Well, here we are together again, basking in Milwaukee’s winter gloom. Today I note that Johnson Controls, Inc., Milwaukee’s largest company, was chided by its accounting firm for lacking internal control. At stake – questions about 4 per cent of the firm’s assets and 1 per cent of the firm’s revenues last year. That doesn’t sound like much – if your idea of “not much” is $920 million.

Then, we also hear from Tamra Reynolds, the Brewers Chick, who has decided she wants a survey to see if she should instead be called the “Brewers Babe.” I've posted her email address at the end of the column, so you can have your say.

If you think my accounting story is filled with numbers, you should see what the Brewers Babe has come up with as she slices through Brewers statistics while she waits for opening day.

Thanks for visiting, and I’ll have more interesting news for you later on.

Michael Horne

Editor / Publisher

www.milwaukeeworld.com

horne@milwaukeeworld.com

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AUDITOR: JOHNSON CONTROLS LACKS “INTERNAL CONTROL OVER FINANCIAL REPORTING”

By Michael Horne

It is Annual Report season, and I get them by the dozens. I actually read the darn things, largely because I find them boring. However, every now and then something interesting appears in an annual report, and the recently-released Johnson Controls, Inc. report contains something very interesting.

According to the accounting firm PriceWaterhouseCoopers, Johnson Controls, Inc., a Milwaukee-based company that is the largest firm in Wisconsin, “did not maintain effective internal control over financial reporting as of September 30, 2005.”

This is not a very nice message to read from the auditors of a company that had $27 billion in sales in fiscal year 2005.

What is “effective internal control?”

According to the “Report of Independent Registered Public Firm” written by PriceWaterhouseCoopers and filed with Johnson Controls’ Form 10-K, “a company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.”

A company is expected to maintain internal control to maintain records that “in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, … provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company … and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. …

“A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.”

Specifically, the accounting firm said Johnson Controls, Inc. “did not have effective controls, including communication between the Company’s Treasury Department and Accounting Department, to identify the required financial statement disclosures to be included in the Company’s consolidated financial statements resulting from subsidiary guarantees applicable to certain third-party debt of the company.”

In other words, “we can’t be sure if anybody has had their hands in the cookie jar, because nobody knew how many cookies were in the jar to begin with, we don’t know how many new cookies have been added to the jar, we don’t know how many were taken out of the jar, and we’re not sure how many cookies are in the jar now.”

As a result, management “has excluded the recently acquired operations of Delphi Corporation’s global battery business from its assessment of internal control over financial reporting.” The sums represent 4 per cent of company assets and 1 per cent of company revenues, which works out to $645 million of the former and $275 million of the latter, as I reckon it.

The company, in its response to the auditor’s report, says “the control deficiency had been remediated as of September 30, 2005.”

Johnson Controls, Inc. had been featured in the Milwaukee Journal Sentinel for its work in rebuilding New Orleans. Milwaukee Magazine Editor Bruce Murphy, former editor of www.milwaukeeworld.com wrote that things are not as rosy in New Orleans as the daily paper would have us believe, citing an $80 million Johnson Controls contract, which predates the current administration, as being egregiously filled with graft even considering the Crescent City’s propensity for corruption. You can read about it here .

Milwaukeeworld made repeated attempts to contact Johnson Controls, Inc. for comment on this story, but the firm did not respond.

[UPDATE -- March 23rd, 2006 -- Although this item was posted more than two months ago, it has become Milwaukeeworld's most-visited article over the course of the past few days. I attribute this to the recent launch of Google Finance and of improvements at Yahoo Finance, both of which search engines prominently feature this item when one enters the keyword "Johnson Controls."
I am gratified that the search engine robots have been so kind to milwaukeeworld.com, and I thank all of you who have had occasion to visit the site.
I note that many of the visitors to this item are from Johnson Controls itself, which leads me to the opinion that perhaps the company might do a better job with its internal communications.
I should add that I notified the company that there is a great deal of interest in the story about the auditor's report, and once again offered company officials an opportunity to comment on this site.
As was the case previously, there has been no response from management, which seems shortsighted from my perspective.
If you have any comments or more information about Johnson Controls that you would like to share, please do not hestitate to contact me.
Michael Horne
Editor / Publisher
www.milwaukeeworld.com
horne@milwaukeeworld.com]

BREWERS BABE

By Tamra Reynolds

January 11, 2006 - Hello again Brewer fans. We had a little excitement going on this week with the Brew Crew. It seems that Bill Hall will once again be passed over for the starting third baseman position in favor of veteran Cory Koskie. Some articles I read actually billed Koskie as the better player, so I did some research of my own to see if I could verify this fact.

True, Koskie has 8 years experience to Hall’s 4, and his overall numbers are slightly better. But just to even it out, I broke it down into 4-year increments. First I compared errors. Bill Hall, at third base only, committed 9 errors in his four years with Milwaukee in 73 games at third. Koskie, in his first four years, committed 35 errors at third base in 378 games, and 39 in his last four years in 460 games. Which means Hall committed an error in 12% of his games at third, and Koskie committed an error in 9% of his games from 98-01, and in 8% of his games from 02-05. Ok, Koskie has the edge here, but it’s still a very close margin.

So then I decided to look at career errors. In all positions played, Hall committed 46 errors in 298 games in his 4 years, or 15%. Koskie committed a total of 75 errors in 863 games in his 8 years, or 8.6%. Koskie definitely comes out the winner in this situation, but again, he has 4 years on Hall. Career fielding percentages were slightly higher for Koskie as well, but not by much, .966 versus .959 for Hall.

I looked at batting averages next. Bill Hall has a career batting average of .265 in 1069 at bats. Koskie’s career average is .277. Again very close, so I broke it down. In his first four seasons, Koskie averaged .289 in 1407 at bats, and .266 in 1735 at bats his last 4 seasons. At first glance, it seems the two men’s averages were almost dead even for the last 4 seasons, until you notice that Koskie had over 600 more at bats than Hall.

So what do all these numbers mean, besides the fact that I have too much time on my hands? Maybe Koskie does have an advantage over Hall at third, but I don’t think that it in any way takes away from Hall’s overall value to this team. True Koskie bats left, which is always an advantage, but Hall is extremely adept at not one or two, but three key positions. Add this to the fact that Koskie has had several years as a starter, getting to play everyday, while Hall is still waiting for his chance to fill a starting role. Who knows what kind of numbers Hall could put up if given the chance?

Look what happened with my boy Brady Clark (who, by the way, is my favorite player) when he was given a chance to play every day. He led the team in batting averages and hits last season, not to mention putting up 13 home runs, (5^th best on the team), 53 RBI’s (again, 5^th best), and a .995 fielding percentage, committing only 2 errors all season. Another interesting tidbit about Brady is that he was the only Brewer to keep his batting average above .300 all season.

So again, what does all this mean? Not a lot, probably, to anyone in power. My point is that yes, Koskie does have better stats than Hall right now. But what kind of numbers could Hall have after playing everyday for almost eight seasons, as Koskie has? The way I see it is that Bill Hall has been there to pick up the slack at three key positions over the last two seasons. I have to wonder if he’ll stick around Milwaukee if he keeps getting passed over for a starting spot. He’s paid his dues. He deserves to get his shot. If we don’t give it to him, some other team will. That’s it for this week Brewer fans. 81 days to go!!

December 12th 20006 --- Hey there Brewer fans!  I have a correction to yesterday's post.  It was stated that I wanted to change my moniker from "Brewers  Chick" to "Brewers Babe."  That's not quite correct.  Several co-workers have suggested the change to me, so I suggested that we include a survey in yesterday's post to see what our readers think.  So I want you to do just that.  Drop me an email and tell me what you think the column should be called.



Tamra Reynolds

Let's hear from you -- lawgirl9171@yahoo.com