Buffett's Pal Munger Heads a Very Weird Company
Charles Munger is the chairman of Daily Journal Corp., a small California newspaper publisher. He also is Warren Buffett's longtime business partner and Berkshire Hathaway Inc.'s vice chairman. So it's understandable why many investors would be curious to know what stocks Daily Journal owns.
This week Daily Journal disclosed some of its equity holdings for the first time, triggering a flurry of news articles. The names included Wells Fargo & Co., Bank of America Corp. and U.S. Bancorp. That pretty much was the end of that story. But it turns out there is another interesting tale playing out at Daily Journal with lots of weird stuff that you wouldn't expect at a company where Munger heads the board.
Daily Journal's financial reporting is a mess. Nothing scandalous, mind you. But it's beyond mere sloppiness. The company is two quarters behind on its financial reports with the Securities and Exchange Commission, and it has provided only the barest of explanations why. Daily Journal this week said it would be late filing its report for the quarter ended Dec. 31 because it needed more time "to complete its assessment of the company’s internal control over financial reporting and the related audit for the fiscal year ended September 30, 2013." Daily Journal's auditor is Ernst & Young LLP.
The point of auditing internal controls is to make sure a company can do basic functions like maintain accurate financial records and detect unauthorized transactions. If a company's controls are weak, this means the numbers it reports may not be all that reliable.
This was the first year that Daily Journal was required to have its controls audited. It's a good problem to have. The requirement kicked in because the company's stock-market value had soared, which meant Daily Journal was big enough that it had to start complying with various rules that it didn't have to worry about before. The stock was trading today at about $157, giving the company a $217 million market value.
Munger is getting up there, sure. He turned 90 last month. But missing SEC filing deadlines isn't the usual style for his companies. Daily Journal also has other strange quirks that would be considered red flags at any other public company. Its chief executive officer, Gerald Salzman, is also the company's president, chief financial officer, treasurer, assistant secretary and principal accounting officer. How one man can do all these jobs by himself is beyond me. Usually the CFO reports to the CEO. Here he's the same person.
Maybe this helps explain why Daily Journal is having trouble closing its books and getting a clean audit opinion from Ernst & Young? Again, Daily Journal hasn't explained what the problem is. Salzman also is on Daily Journal's board, which has only five members. So he's a busy guy. Does he do windows, too?
Where is the audit committee in all of this? That's the three-person panel of directors that oversees Daily Journal's financial-reporting practices. The last time Daily Journal filed a proxy statement, back in December 2012, it said its audit committee had a chairman, but it didn't say who that person was.
The committee's designated "financial expert" is Daily Journal's vice chairman, J.P. Guerin, who was 83 when the last proxy was filed. (Salzman was 73.) Maybe Guerin is in charge? Again, don't know. When I asked a company spokeswoman, Tu To, if she could tell me who the audit committee's chairman is, she replied: "I'm sorry, I cannot." She declined to answer my other questions, as well.
In the meantime, the company has issued news releases to keep investors apprised of its results. It said net income in fiscal 2013 was $3.8 million, which excludes unrealized gains on Daily Journal's investments. Comprehensive income, which includes those gains, was $26.2 million. For the quarter ended Dec. 31, Daily Journal reported a $416,000 net loss and comprehensive income of $8 million. All of those numbers are preliminary and subject to revision.
As long as the results stick, and Ernst & Young eventually signs off, Daily Journal shareholders probably won't mind the mess. The stock is up 60 percent in the past year. But they shouldn't be left to wonder much longer. This isn't how a public company is supposed to do its financial reporting, especially one where Charlie Munger is chairman.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)
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