REAL Accounting Fraud / Artikel mises.org

verfasst von --- ELLI ---, 01.08.2002, 15:31

<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=1012</font>


<font face="Verdana" color="#002864" size="5"><strong>Real Accounting Fraud</strong></font>


&nbsp;
<font size="4">by James M. Sheehan</font>


<font size="2">[Posted August 1, 2002]</font>


<font size="3">[img][/img] Politicians
intent on re-election have stirring up a media frenzy over"corporate
governance," exploiting the bankruptcies of a handful of companies like
Enron and Worldcom.&nbsp;New accounting industry and corporate financial
reporting rules are being imposed with reckless abandon in Washington, D.C.&nbsp;</font>




<font size="3">Yet the political class that seeks to grant itself sweeping
new power over the private sector lacks even a basic understanding of business.</font>




<font size="3">It is particularly frightening that a group of people skilled
mainly at feeble speechifying and crass fund-raising would consider itself
qualified to stand in judgment of corporate accounting scandals.&nbsp;All
members of Congress are direct participants in the biggest accounting fraud
going--the federal government--and have never lifted a finger to bring it under
control.&nbsp;&nbsp;</font>




<font size="3">Whether it is placing massive Social Security liabilities
"off budget," losing billions of dollars in aid to Russia and other
foreign governments, or mismanaging trust fund accounts for Native Americans,
the feds seem to have a congenital inability to be honest about public financial
matters.</font>




<font size="3">The government itself is guilty of massive financial
malfeasance and corruption, but it is never punished.&nbsp;&nbsp;Even the
corporate welfare agencies most responsible for propping up Enron--the Ex-Im
Bank and the Overseas Private Investment Corp--seem forgotten in the ongoing
witch-hunt associated with corporate responsibility.&nbsp;The Securities and
Exchange Commission (SEC), we are told, needs to be rewarded with more money,
staff, and power to stop from bungling its job yet again.</font>




<font size="3">The same crew in the nation’s capital that could not bring
itself to discipline the ethical misbehavior of Bill Clinton or Gary Condit now
deigns to restructure the way all businesses prepare their financial statements.
Yet, during congressional hearings over Worldcom, it became apparent that few
politicians know much at all about business.&nbsp;</font>




<font size="3">One ignorant lawmaker, during his pontification disguised as a
question, was stumped to think up the name of any high profile bankruptcy
besides Enron (he said the word"and" about 10 times before giving
up).&nbsp;Another seemed to be under the impression that Worldcom had lost $3.8
billion, rather than miscategorized $3.8 billion of operating expenses as
capital expenses.&nbsp;"Do you know now where that money went?" the
congressman asked repeatedly, as the witnesses stared at him in amazement.</font>




<font size="3">The entire House committee mistakenly believed that Salomon
Smith Barney telecom analyst Jack Grubman helped Worldcom perpetrate fraudulent
bookkeeping, calling him as a witness and grilling him along with company
officials.&nbsp;Wall Street analysts play no role in preparing financial
statements for companies.&nbsp;One lawmaker asked Grubman if he had ever advised
an investor to sell Worldcom stock, not understanding that research analysts do
not advise individual investors.&nbsp;</font>




<font size="3">Moreover, the pols seemed confused to learn that the primary
purpose of investment banks is to raise money for corporations, thus they
generally tell investors what to buy, not what to sell.&nbsp;When Grubman tried
to explain his job to the committee, the confused congressmen lashed out and
accused him of evading their questions. Tongue-tied Congresswoman Maxine Waters
(D-Calif.) mistakenly referred to Grubman’s employer as"Salomon Barney
Frank," mixing up its name with the representative from Massachusetts.</font>




<font size="3">The same people who cannot remember the names of major
corporations pretend to understand accounting while they are preening before the
television cameras.&nbsp;If these solons really knew how misleading corporate
accounting was, surely they would have acted to correct the problem before now.</font>




<font size="3">The reality is that they are as surprised as anyone by the
accounting-related scandals that have taken place in recent months.&nbsp;They
didn’t pass laws because they really don’t understand accounting very well.
Their biggest illusion is that they have the power to force companies to be
"truthful."</font>




<font size="3">The pols have demanded that corporations present their
financials in"black and white,"&nbsp;not recognizing any gray area in
the reporting of a company’s profits.&nbsp;Yet in practice, accounting is full
of gray areas. This is the textbook definition of accrual accounting.&nbsp;It
involves computing the expected cash consequences of business activities in the
form of revenues or expenses.&nbsp;If more"precise" cash accounting
were used, companies would not be able to compare their economic performance in
different periods.&nbsp;Their accounting information would be more accurate, but
it would be useless to outsiders.</font>




<font size="3">The"matching principle" of accounting says that
expenses should be recognized in the period when the revenue they generate is
recognized, unless the expenses cannot be reasonably estimated yet. Sometimes,
the value of expenses is hard to define, or the value is spread out over
multiple accounting periods. Corporate assets are becoming increasingly
difficult to value, since they consist of intangibles such as intellectual
content, goodwill, and network advantages. Who but the management can reasonably
estimate such things?</font>




<font size="3">Oblivious to the realities of accounting, posturing
politicians are now trying to centrally control corporate accounting standards.
Yet, overly rigid accounting standards--the product of past government reform
efforts--have created the problems we see today.&nbsp;In the past, financial
reporting was based on broad principles that were relatively easy to apply.&nbsp;International
and British accounting standards are still based on broad principles that govern
basic situations.&nbsp;They do so on the theory that detailed rules are too easy
to evade.&nbsp;Principle-based accounting works well, but the proliferation of
lawsuits combined with the SEC’s regulatory zeal have caused auditors to
abandon that approach.&nbsp;</font>




<font size="3">The SEC now tries to impose rules to deal with nearly every
ambiguous situation, in order to prevent every conceivable fraud or misleading
representation.&nbsp;The government has pressured the Financial Accounting
Standards Board (FASB), ostensibly a private regulatory body, to adopt overly
complex and confusing rules.</font>




<font size="3">Like alcohol prohibition laws, overly rigid accounting rules
are easily evaded.&nbsp;Some companies evade them to improve accuracy, while
others do it to artificially inflate their earnings. For good or for ill,
slightly altering the nature of a transaction can generate a unique set of
circumstances not covered by the overly specific accounting rules.&nbsp;This
explains why misleading financial statements can be in full compliance with
Generally Accepted Accounting Principles (GAAP).</font>




<font size="3">Managerial discretion ensures that accounting will always be
inexact.&nbsp;Yet, curtailing management discretion can only result in less
informative accounting.&nbsp;Some companies develop a reputation for forecasting
ability.&nbsp;Others develop a reputation for"missing" their numbers.&nbsp;Sometimes,
forecasting accuracy will not become apparent for several quarters or even years.&nbsp;For
regulators and politicians to pretend otherwise is pure folly.</font>




<font size="3">Because the U.S. government is ratcheting up the regulation of
accounting standards, earnings quality will actually suffer.&nbsp;With the
threat of SEC investigations and lawsuits, no company will be able to make risky
forecasts or assumptions in its financial reports.&nbsp;Therefore, internal
forecasts and assumptions the company actually uses in its internal planning
will be totally excluded from management’s discussion and analysis of its own
books.&nbsp;&nbsp;Information that is potentially valuable to investors will
tend not to be disclosed, lest the forecasts turn out to be slightly flawed or
mistimed.&nbsp;&nbsp;CEOs do not want to be criminally prosecuted for possible
errors by their employees.</font>




<font size="3">The government class is set to amass tremendous new powers
over accounting. Because it does not understand accounting, or apply any kind of
accounting standards to itself, it does not even realize how its rules will only
make things worse.&nbsp;&nbsp;When the unintended consequences come to pass,
expect politicians to demagogue the issue and propose even more stringent
regulatory controls.&nbsp;They understand little about business, but they do
understand that more regulation ultimately equals more campaign contributions.</font>


<hr align="left" width="33%" SIZE="1">


<font size="2">James Sheehan is a financial professional in New York. He is
the author of&nbsp;<em>Global
Greens</em>&nbsp;(Capital Research Center, 1998), a book that documents
government funding of environmental extremist groups.&nbsp; Send him&nbsp;MAIL,
and see his Mises.org&nbsp;Articles
Archive.


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• REAL Accounting Fraud / Artikel mises.org - --- ELLI ---, 01.08.2002, 15:31