Accounting problems can grow unnoticed like mozo bamboo plant
September, 21st 2006
It may be tough to believe, but `money is in accounting', as one learns from a recent posting on http://accounting.smartpros.com, sourced from The Topeka Capital-Journal. The report says that major accounting firms in the US "are snapping up accounting graduates to cope with the sweeping changes in the profession."
One such change was the Sarbanes-Oxley (SOX) Act passed in 2002 in response to major corporate and accounting scandals. Though the accounting industry lacks the appeal of other industries, graduates with CPA (certified public accountant) tag can hope for salaries ranging from $30,000 to $50,000, it says. "Accountant with a doctorate can earn more than $100,000 teaching accounting at a university."
SOX, as you may remember, came in the wake of Enron and WorldCom debacle. "Enron wasn't the first to bend existing accounting principles. It was just the first to bend them to the point that its business failed," writes Alicia Korney, Editor, WebCPA (www.webcpa.com). Her story is about the speech by PCAOB (Public Company Accounting Oversight Board) member Charles Niemeier at the New York State Society of CPAs' annual SOX conference.
`Dormant up to five years'
To Niemeier, `problems at the root of the accounting environment' were more like `the mozo bamboo plant.' How so? It seems `the South-East Asian bamboo plant can appear to lie dormant for up to five years, before growing as much as a foot a day and to more than 100 feet total'! Writes Korney: "The suddenness of that growth spurt is a bit deceptive though, he said. For much of those early years, the plant is developing a complex root system. It's only then that it has the foundation for its shoots to take off." True. Accounting problems too build up over time. Niemeier had one more analogy to offer: "You can't regulate honesty. But that doesn't mean you should ignore safety belts."
Recounting the Enron tale, Martin Weiss has this to say in a September 18 article on www.moneyandmarkets.com: "At Enron, 21,000 employees and many more investors assumed that the company's books were real. Then, one day they discovered it was all a hoax." Disaster followed. The story was similar in many other companies such as Adelphia Business Solutions, Global Crossing, Kaiser Aluminum, Kmart, McLeodUSA, National Steel, and so on. "Every one had distorted its numbers. Every one went bankrupt. Each left a trail of ruined lives in its wake."
Weiss, who is the editor of the financial newsletter, Safe Money Report, refers to a June 2002 presentation. There, he had drawn attention to the fact that 94 per cent of 50 major Wall Street firms he'd reviewed, "continued to publish `buy' or `hold' ratings on these failing companies right up to the day the companies filed for bankruptcy."
`Little white lies'
Weiss' report to the US Congress, submitted in July that year, had drawn attention to how `the nation's major auditing firms' had given `a clean bill of health to 42.1 per cent of the public companies that filed for bankruptcy soon after their audits.' But Weiss' story is not about the corporate scandals that rocked the world of business and accounting, governance and regulation too early in the new century. "Washington's Enron-style accounting makes the great corporate scandals of this decade look like little white lies by comparison," says Weiss.
His article provides a link to a December 2005 media advisory on www.gao.gov, the site of the US Government Accountability Office. "For the ninth straight year, the US GAO is unable to provide an opinion as to whether the consolidated financial statements of the US government are presented fairly, in all material respects, in conformity with generally accepted accounting principles," it begins. "The same government that is aggressively pursuing corporations for bad accounting is the most guilty of similar practices," charges Weiss.
He also refers to `John Williams' Shadow Government Statistics' on www.shadowstats.com, for the `analysis behind and beyond Government economic reporting'. Williams, is `thoroughly convinced that government manipulations are hoodwinking taxpayers and investors'. Weiss cautions, therefore: "Inflation is at least three percentage points worse than what they're telling you. Unemployment and the budget deficit are over double. The national debt is at least five times bigger than official tallies." Wonder how the numbers are closer home.
`Don't take government stats for granted'
"This is not a conspiracy. It just happens naturally," explains Weiss. And he alerts that `the greatest scam of all time' can adversely impact your money. His first recommendation is, "Don't take government stats for granted." Second advice, "Take steps to protect your assets from the ravages of inflation." Weiss counsels "continuing allocation to gold- and energy-related investments, despite any temporary ups and downs." And the third tip is, "Keep a substantial portion of your money as safe as possible to protect yourself from the day when the truth starts pouring out."
To end on a positive note, let me take you to www.ssrn.com, to view a September 6 paper titled Towards A Positive Theory of the Determination of Accounting Standards, by Ross L. Watts and Jerold L. Zimmerman. The authors explore factors that influence "management's attitudes on accounting standards that are likely to affect a firm's cash-flows and in turn are affected by accounting standards".
What are these factors? "Taxes, regulation, management compensation plans, bookkeeping costs and political costs," say the authors. They then combine all these into a model that predicts things that can be disturbing. Such as, that large firms experiencing reduced earnings due to changed accounting standards favour the change. What about the other firms, which oppose the change? They do so, "if the additional bookkeeping costs justify the cost of lobbying." Not too positive, is it?