“You Must Be Kidding”

Back in the early 70’s, I began my business career as an auditor with Arthur Andersen & Co. It was at times a bit boring, but I always felt a real sense of purpose knowing I was doing my part to keep publicly traded companies honest when reporting their financial results. The independent Financial Accounting Standards Board, or FASB, established the rules. The rules themselves were known as Generally Accepted Accounting Principles or GAAP. It was important for every publicly traded company to get an “Unqualified Opinion” from their independent audit firm when reporting their annual financial results. A “Qualified Opinion” would have a negative impact on the Company’s share price.

Our GAAP was considered the gold accounting standard for the world. After all, could any investor trust the management of publicly traded companies to be completely objective and honest when reporting their financial results?

Well apparently, the SEC doesn’t believe that independently audited Financial Statements in accordance with GAAP are all that important in today’s business world. According to a recent article in the New York Times, publicly traded companies are allowed to make up their own accounting rules when reporting their financial results. I’m not kidding. It’s true, as long as they also report results according to GAAP. Can you guess which results are reported to the press and to analysts making buy and sell recommendations to investors?

So how large is the difference between GAAP and MHWT (management’s hype and wishful thinking)? From 2014 to 2015 net income for companies in the S&P 500 was up 6.6% using the MHWT. Using GAAP, there was actually a decrease of 11%. Using their own accounting rules 30 companies managed to turn a loss into a profit.

Apparently there were regulations passed 15 years ago to restrict this creative accounting but the SEC shows no desire to enforce those regulations. I guess this is just one more bit of evidence that Wall Street has too much influence over our elected representatives.

 

Note: If you want to read the article the title is “Fantasy Math Is Helping Companies Spin Losses into Profits”. (New York Times, April 24, 2016)

1 Comment

Filed under Home, Investments

One response to ““You Must Be Kidding”

  1. Jeff Wain

    Thanks for the heads up Dan. Always good to be reminded of the importance of caveat emptor. The gap between GAAP and users of financial statements is the colossal failure of the accounting profession. Cash is King!

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