Thursday, August 12, 2004

An explanation of dirty accounting tricks by public companies

Welcome to the looking-glass world of accounting, where losses are magically transformed into gains and inconvenient financial facts that can’t be explained away are simply ignored. As many board members, especially those on audit and compensation committees, have lately learned to their disgrace, management can overstate revenue or understate expenses, pass off one-time windfalls as recurring gains, or, conversely, disguise recurring losses as singular events. Sometimes even those methods aren’t sufficient to produce the desired results: profits, or at least the appearance of profits. Do unscrupulous managers then simply give up and admit the sad financial truth? Not likely. More often, something other than profitability—something usually called EBITDA or pro forma earnings—becomes the designated measure of a company’s well-being. Even cash flow, which conventional wisdom says can’t be faked, turns out to be vulnerable to distortion and gimmickry.
Read on in this excellent explanation of how numbers are made up and how investors are being misled