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1
The art of more timely financial reporting
ICPAS seminar
“Towards a new era in more timely reporting”
October 23, 2004
Presented by Dr Raymond Ting, Group Financial Controller
Nucleus Electronics Ltd 2004 Copyright - Nucleus Electronics Ltd. All rights reserved .
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““Corporate governanceCorporate governance is the system by which is the system by which business corporations are directed and business corporations are directed and controlled. The corporate governance controlled. The corporate governance
structure specifies the structure specifies the distribution of rights distribution of rights and responsibilitiesand responsibilities among different among different
participants in the corporation, such as, the participants in the corporation, such as, the Board, managers, shareholders, and spells out Board, managers, shareholders, and spells out the the rules and procedures for making decisionsrules and procedures for making decisions
on corporate affairs”on corporate affairs”
3
2002: Year of the Scandal!(Source: Business Week)
2002: Year of the Scandal!(Source: Business Week)
• Enron• CMS Energy• Dynergy• Tyco• Reliant Resources• Computer Associates• Network Associates• Credit Suisse First Boston• Merrill Lynch• iCapital Markets• Trump Hotels
• Global Crossing• Lucent Technologies• Qwest Communications• Worldcom• Adelphia Communications• Edison Schools• Kmart• PNC Financial Resources• Waste Management• Informatics
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5
-150%
-100%
-50%
0%
50%
100%
150%
Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
6
7
The Finance Function
8
Changing CFO RequirementsChanging CFO Requirements
August 1982 – March 2000DJIA
11,000
3,000
800
IInitial
Growth
IIConsolidation/Acceleration
1982 1991 2000
Business Partner
Tax Cuts andFree
Trade
U.S. WinsCold Gulf
Wars
Y2K and Internet Bubble
IIIIrrational
Exuberance
March 2000 – December 2003 Corporate StewardDJIA
11,000
9,000
7,000
IIIRestoration of Stability
2000 2002 2004
IBear
Market
IICrisis of
Confidence
Post Y2K and Tight Fed Policy
9/11/01,Enron andAndersen
Sarbanes/Oxley, Public Co. Oversight
Steward
Strategist
CFO
Steward
CFO
Strategist
9
Sarbanes-Oxley Act - Summary
• The Act was signed into law on July 30, 2002 and includes eleven titled sections:
• Title I Public Company Accounting Oversight Board• Title II Auditor Independence• Title III Corporate Responsibility• Title IV Enhanced Financial Disclosures • Title V Analyst Conflicts of Interest• Title VI Commission Resources and Authority• Title VII Studies and Reports• Title VIII Corporate and Criminal Fraud Accountability• Title IX White Collar Crime Penalty Enhancements• Title X Corporate Tax Returns• Title XI Corporate Fraud and Accountability
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• Requires quarterly certification by the CEO / CFO of all companies filing periodic reports under section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 regarding the completeness and accuracy of such reports as well as the nature and effectiveness of internal controls supporting the quality of information included in such reports.
• Requires an annual report by management regarding internal controls and procedures for financial reporting, and an attestation as to the accuracy of that report by the company’s auditors.
Section 302
Section 404
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Aftermath of Enron Accounting Scandal
• Sarbanes-Oxley Act of 2002
• New NYSE Corporate Governance Listing Standards
• New Corporate Governance Rules adopted by SEC
• New Rules and Auditing Standards adopted or proposed by Public Company Accounting Oversight Board
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• “Last year’s Sarbanes-Oxley Act brought the most sweeping changes in corporate governance and financial disclosure for 70 years” (Financial Times, December 1, 2003)
• “Sarbanes-Oxley will be judged as landmark legislation. It is one of the most sweeping reforms since the 1933 Securities Reform Legislation.” (Beth Brooke, Global Vice Chair, Ernst and Young, September 15, 2003)
Importance ofSarbanes-Oxley Act of 2002
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• Signed into law on July 30, 2002
• Applies to publicly held US companies and foreign private issuers and their audit firms
• Establishes Public Company Accounting Oversight Board (PCAOB) to regulate accounting professionals who audit financial statements of public companies
• Provides for significant corporate governance reforms regarding – audit committees and their relationship with their auditors– financial reporting and auditing process
Sarbanes-Oxley Act of 2002
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Aftermath of Enron Scandal
New NYSE Corporate Governance Listing Standards• On February 13, 2002, Chairman of SEC asked NYSE to review its
corporate governance listing standards
• BOD of NYSE appointed Corporate Accountability and Listing Standards Committee to review current listing standards and make recommendations
• On June 6, 2002, Committee presented NYSE BOD with report recommending significant changes in how NYSE-listed companies are governed
• On August 1, 2002, NYSE approved Committee‘s recommendations
• On August 16, 2002, NYSE sent recommendations to SEC for approval
• On November 4, 2003, SEC approved new corporate governance rules
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Pre-Enron Corporate Governance Standards Listed companies must have a minimum three-person audit committee composed solely of independent directors.
Existing definition of “independence” precludes any relationship with the company that may interfere with the exercise of director's independence from management and the company.
Three year cooling-off period for former employees of the company and business relationships.
Requires all audit committee members to be financially literate and at least one must have accounting or related financial-management expertise.
Audit committee charter must provide that audit committee and board of directors have “ultimate“ authority to retain and terminate independent auditors
Requires shareholder approval of equity compensation plans for directors, but broad-based plans are exempt
Requires board of directors to adopt and approve a written charter for audit committee, which must be reviewed annually.
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Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
Independent directors must comprise a majority of board of directors.
No existing requirement.
Listed companies must have audit, compensation and nominating/corporate governance committees, each composed entirely of independent directors.
Listed companies must have a minimum three-person audit committee composed solely of independent directors. No existing rules requiring compensation and nominating committees
Non-management directors must meet without management in regular executive sessions.
No existing requirement.
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Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
For a director to be deemed "independent," the board must affirmatively determine the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
Existing definition precludes any relationship with the company that may interfere with the exercise of director's independence from management and the company.
Prohibit audit committee members from receiving compensation other than directors’ compensation fees
No existing restrictions
18
Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
Former employees of company or auditors of company – and their family members – may not be considered independent until five years after their employment ends.
Three year cooling-off period for former employees of the company and business relationships.
Every listed company must have an internal audit function
No existing requirement.
Require chair of audit committee to have accounting or related financial-management expertise.
Requires all audit committee members to be financially literate and at least one must have accounting or related financial-management expertise.
19
Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
Grant audit committee sole authority to hire and fire independent auditor and approve any non-audit relationship with independent auditor
Audit committee charter must provide that audit committee and board of directors have “ultimate“ authority to retain and terminate independent auditors
Require shareholder approval of all equity compensation plans.
Requires shareholder approval of equity compensation plans for directors, but broad-based plans are exempt
20
Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
Require companies to adopt and disclose corporate governance guidelines, codes of business conduct, and charters for their audit, compensation and nominations committees.
Requires board of directors to adopt and approve a written charter for audit committee, which must be reviewed annually. No existing rules requiring compensation and nominating committees, corporate governance guidelines, or codes of business conduct.
Any waivers of codes of business conduct for directors or executives must be disclosed.
No existing requirement.
21
Selected Final Recommendations of NYSE Corporate Accountability and Listing Standards Committee
Comparison with Current Rules
Final Recommendation Current Rule
Each listed-company's CEO and CFO must certify annual financial statements
No existing requirement .
Each listed-company's CEO must certify annually that he/she is not aware of any violation by the company of NYSE corporate governance standards.
No existing requirement .
NYSE may issue a public reprimand letter for violation of a corporate governance standard, in addition to the existing penalty of delisting.
No current provision for a public reprimand.
The NYSE urges every listed company to establish orientation program for new board members.
No such recommendation has been made previously.
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Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002
Decision MakerCEOBoa
rdOvers
eer ArchitectIn
spec
tor
CFO
Shareholder Principal
Management Leader
Business Developer
CommercialInnovator
Performance Owner
Tactical Pilot
Strategic Conductor
Strategic Planner
Capital Optimizer
Analyzer and
TranslatorStakeholder Manager
Recorder and
Reporter
Risk Manager
Policy Enforcer
Compliance Regulator
Policy Authorizer
Financial Auditor
Risk Assessor
Business Examiner
Management Advisor
Shareholder Ambassador
PerformanceManager
Fiduciary
Checks
Balances
Purpose
Strateg
ist
Plan
ner
Steward
Governor
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Meeting Stakeholder Expectations
ExecutiveManagement
Board ofDirectors
CEO
CorporateStaff
AuditCommittee
Business LineManagement
CustomersRatingAgencies
Creditors Suppliers
Investors
• Portfolio contribution• Performance
management• Sustainable growth• Corporate risk
• Sarbanes-Oxley • SEC reporting• Financial markets• Public interest
FinanceFunction
SEC andRegulators
Finance Function Stakeholders
• Governance• Stewardship• Control
• Strategic Vision• Insightful Analysis• Continuous Innovation
Stakeholder Expectations
• Independent fiduciary • Business partner
• Reporting Integrity
External Drivers Internal Drivers
Required Finance RoleRequired Finance Role
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Benefits to Client
Identifying and resolving root causes of delays and errors
Elimination of redundant and non-value added steps
Documenting and formalizing responsibilities to allow for cross-training, enhanced communication and accountability across departments
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Enhancing the Monthly Closing Process
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Reducing the Time for the Accounting Close
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Month-End Close Redesign
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Close Process Improvement
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Adoption of US Reforms in SingaporeAdoption of US Reforms in SingaporeThe Trickle Down EffectThe Trickle Down Effect
Leading companies not waiting for rules.
US Multi national corporations
Local public listed companies
VC financed companies and entities with public accountability
Private Companies(Owner Managed Entities)
?? ?
? ? ? ?
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Management information system
Data
Information
33
Accounting KnowledgeAnd Skills
General Business Knowledge and Skills
Record Keeping and
Reporting
Accounting Decisions Requiring Judgment
Understanding
Transactions
Comprehensive Understanding
Of Business Environments
Teaching, Understanding, Competency
1
4
3
2
CPA TRAINING
CPA LEARNING
EXPERIENCE
34
• Agree reporting structure
• Agree skill sets
• Agree scheduleReporting H
Joint ventureSubsidiary D
Subsidiary CSubsidiary BSubsidiary A
Subsidiary F
Subsidiary G
35
• Document centric
• Low frequency
• Limited details
• Low useability
• Data centric
• High frequency
• Detail rich
• Highly informative
The financial Report “The annual report of the 21st century will not be annual and it will not be a report: it will be an up to date informative, permanent dialogue”
Alan Benjamin (IACW)
Trend
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Financial Supply Chain
Shareholders
Government
Banks
Customers
CompanyCompany
BusinessProcess
BusinessPartners
Consolidate
General ledger
Management reports
Adjustments
Financial Statement
Audit
37
Demands increase
More infoMore infoMore frequentMore frequent
More detailMore detail
IAS/IFRSIAS/IFRS
Basel IIBasel II
SustainabilitySustainability
Audit FileAudit File
EMUEMU
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Implementation issues
Applying Accounting rules
Impact local chart of accounts
Reduced time to report
Increased level of detail
Controllability
Internal Transparency
39
Issues Financial Supply Chain
COMPLIANCE REPORTING(SGX-ST)
Reportingdeadline
Quarterly = 45 days
Full year = 60 days
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Issues Financial Supply Chain
REPORTING DEADLINE
Time toRelease results via MASNET
4 days4 days
3 - 4 days3 - 4 days
8 8 DAYSDAYS
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More timely reporting is needed for
Speed
Reduce costs
Efficiency
Reliability
What really mattersTypically
Transparency and reliablity
Optimize financial supply chain
Virtual close & real time monitoring
Rebuild trust and confidence
Instantly find the business data needed
Cross border comparison & analysis
42
Trends in reporting
• Financial Reporting….
• Faster• Broader• Deeper
today
tomorrow
Real time Beyond
tomorrow
43
THE BALANCE OF NATUREOR
(AN ANALOGY OF MANAGEMENT AND AUDITING)
List of Characters: Business Equivalent:(1) Rhino (1) Management(2) Tickbird (2) Auditors,(3) Tick (3) Inefficiencies
Ineffectiveness, Fraud, Waste, and Abuse
The Tickbird sits dutifully on the rump of the Rhino eating the Parasites that drains the blood of the Rhino. The Rhino tries to swat the Tickbird and would kill him if he could.
The vigilant Tickbird maintains his position, unwanted and misunderstood, on the rump of the Rhino.
44
High & Low Context Cultures
• Chinese• Korean• Japanese• Vietnamese• Arab• English• North American• Scandinavian• European
• High-Context Culture
• Low-Context Culture
45
Most important drivers shaping a
firm’s strategic options fall into
twotwo categoriesFirm’s competitive
capabilities and market position
Nature of industry and competitive
conditions
Matching Strategy to a Company’s Situation
46
Product Development
& Mgt
SourcingRFP/
Tender
Contract Negotiation
& Mgt
Purchasing & Payables
Mgt
Scheduling &
Production
Inventory Mgt
Customer Order and
Billing
Receivables Management
Customer Relationship
Mgt
Planning & Forecasting
Sales & Marketing
Contract Negotiation
& Mgt
Customer Service &
Supply CA
SH
Supplier Relationship
Mgt
AN
AL
YS
IS &
ST
RA
TE
GY
CA
SH
PA
YA
BL
ES
RE
CE
IVA
BL
ES
jIN
VE
NT
OR
IES
47
The Business Model
Compliance
Management
Market
Financial report
Competition Stakeholders
Costs structure
Sales and marketing
Com
mer
cial
dec
isio
n Financial reporting
Business analysis model – “the wheel of fortune”Business analysis model – “the wheel of fortune”
48
Anything so fundamental as implementing a new or
different strategy involves aligning the organization’s
culture and structure with the requirements for competent
strategy execution.
49
A clear view of the situation, the problems and the options is a pre requisite to support:
Financial situation, cash needs, recent & forecast performance, security, risks & sensitivities
Financial Issues
Strategy
Markets & Products
Processes
Organisational Issues
For survival, turnaround and growth
Competitive positioning & competitive advantage
Core competencies & value chain efficiency
Management & structural reviews
50
Employees are …………..
• The eyes, ears, mouth and conscience of the organisation
• Eyes/ears pick up intelligence
• Mouth delivers believable messages (ideally with e-mails)
-150%
-100%
-50%
0%
50%
100%
150%
Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
Insi
der t
radi
ng
expo
sure
s
51
Customs duties
Transfer pricing issues
A=L+OE-R+EA=L+OE-R+E
PROFIT AND LOSS ACCOUNT
Sales X
Purchases (X)
Manufacturing (X)
Overheads (X)
Financing (X)
Profit X
Tax charge X
Profit after tax X
BALANCE SHEET
Tangible assets X
Intangible assets X
Net current assets X
X
Capital X
Reserves X
Funding debt X
X
VAT and sales taxes
Cross border issues
Location of activities
Treasury
Foreign exchange
Funding
Location and exploitation of intellectual property
Cross border issues
Profit repatriation flows
Monetising tax assets
Trade debts
Liabilities
Property taxes
Employee taxes
International executive taxation
52
There is no formula to “calculate” significance, however, there are general guidelines:
• Quantitative factors:– Value of transactions– Volume of transactions
• Qualitative factors:– Risk of significant misstatement of a financial
statement element in the absence of internal controls.
Management ultimately decides significant controls.
53
Operational Controls
Compliance Controls
Control
Evaluationand Attestation Process Improvement
and Control Integrations
Re-architecture of Risk and Control
Reporting
Real TimePerformanceand ControlReporting
BusinessInfo-StructureOn Demand
Process TransformationCO
NT
RO
LS
IM
PR
OV
EM
EN
T
PROCESS IMPROVEMENT
Risk & Performance Optimization
in leading edge companies
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55
56
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PricewaterhouseCoopers LLPAvoid going too low
The Corporate Life Cycle©
LIQUIDATION
DEMISE CURVE
IDEA
M/A ACTIVITY
GOING PUBLIC
RAPID GROWTH
TURNAROUND / EXIT
MATURITY
IN TROUBLE,NOT AWARE
LOST CONTROL
LOST THE BUSINESS
IN TROUBLE BUT IN CONTROL
Timely reporting/pace of change
STEEP PACE OF CONSTANT CHANGE IN A VERY COMPETITIVE ENVIRONMENT
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Corporate Governance:Good intentions are not enough
Punitive consequences
…personal liability, even for negligence
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Corporate Governance is a Burning Issue
U.S.: The Sarbanes-Oxley Act (June 2002) requires you to:– Meet aggressive deadlines for financial reporting– Be personally liable for accuracy of your numbers– Face steep fines, jail time, de-listing of your company even for
negligence in reporting (not just for willful deception)
International Accounting Standard to reconcile geographical differences in reporting by 2005:
– European Union, Australia, Singapore to adopt IAS– U.S. FASB and IAS letter of intent to align– Streamlined reporting process, especially for multi-nationals– Align external and internal reporting
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Board Oversight Is Only The Tip of The Iceberg
• From the board room to the cubicle – it’s everybody’s business
• Requires strategic alignment and operational efficiency at all levels
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Set Up Your Business Processes For Compliance
• Ensure you have access to accurate, timely and relevant information
• Establish robust processes to ensure failsafe internal controls
• Enforce policies and procedures,and ensure trained staff
• Comply efficiently, not at the cost of profit
63
Business Systems Bring Efficiency To Compliance
• Automation reduces risk of errors• Prevents circumvention of controls• Reduces processing costs• Captures the state of your business at any
time• Provides vehicle for training and education
on time at low cost• Let’s you monitor skills and awareness of
your staff
64
Business Systems: the “Engine” of Solid Business Practices
• Visibility: reduce risk through timely, accurate, relevant, consistent information
• Control: enforce policies and procedures through automated processes
• Efficiency: automate to maximize speed and accuracy
65
Good Governance Requires Best Practices Across Your Enterprise
Visibility
Control
Efficiency
66
VisibilityAccess to Timely, Accurate, Relevant Information
• Gain an accurate view of purchases, payments and outstanding commitments
• Maintain a single, global view of entire company’s financial activity
• Timelier access to accurate workforce information worldwide
• Visibility into sales pipeline, customer satisfaction, market shifts, etc..
67
ControlAffect Change Quickly
Track suppler performance and ensure that the supply base delivers according to purchasing business goals
• Define roles and responsibilities for procedures and set measurement criteria for compliance
• Establish, document, communicate, policies & procedures. Enforce training requirements for staff at all levels
• Incent best behavior with automated incentive compensation
68
EfficiencyMinimize Administrative Overhead Costs
Purchase product traceability to minimize the risk of product recalls and warranty services costs
• Centralize finance and administrative functions
• Make education available through multiple channels
• Repeatable and scalable marketing, sales, and customer service processes
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Corporate Performance Management: Complete and Integrated Business Intelligence
Visibility
Control
Efficiency
Real-time enterprise view of your operations
Automate and integrate
Establish measurements, set targets, and execute
70
Information Technology: Single Source Of Truth
Visibility
Control
Efficiency
Centralization for consistency of information
Automate to lower costs and minimize errors
Workflow enforces best practices
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BO
AR
D
AU
DIT
OR
CE
O/C
FO
Visibility
Control
EfficiencyBusiness Systems
Information Technology
ACHIEVETIMELY REPORTING DEADLINES
8 CALENDER DAYS FROM MONTH END
72
Close Your Books With Confidence
Reduced Close Time
7
8
8
20
0 10 20 30
ST Eng
SNP Corp
Nucleus
Qian Hu
3 Q 2004result
Days to Close
73
Close Your Books With Confidence
Reduced Close TimeFY 2004
8
8
8
8
6
5
5
6
0 5 10
1 Q
2Q
3Q
4Q
Actual days
NELdeadline
Days to Close
74
Close Your Books With Confidence
Reduced Close Time
57
50
15
8
0 20 40 60
2001
2002
2003
2004
NELreportingdeadlines
Days to Close
75
Close Your Books With Confidence
Reduced Close Time
11
46
73
247
0 100 200 300
<= 45 days
45 - 60
61 - 75
76 - 90
SGX - 377FY2003reporting
Days to Close
76
Corporate GovernanceYou Are Accountable
• To your shareholders and all stakeholders
• To your CEO and Board of Directors
• To your company’s employees
• To the SGX or other regulatory agencies
• Principles-based accounting standards
77
Is Compliance Worth the Trouble?
1 Improve Business Processes
2 Protect Market Value
3 Avoid Costs of Non-Compliance
4 Raise the Standing of Finance
78
Conclusion
DJIA
15,000
12,000
9,0002004