(somewhat OT Enron/accounting stuff).
I think it's worth talking about Enron because it has some valuable lessons for all stocks.
First, people should realize that ENRN really had a floorless (toxic) convertible outstanding. This didn't take the normal form (and wasn't disclosed), but in substance that is what was going on. They guaranteed some payments in their own stock with the dollar amount fixed. Hence when their stock declined the amount of new shares they would have to issue snowballed.
Second, people are going to have no tolerance for "off balance sheet" gimmicks. In biotech, ELN has been the biggest culprit here. The ELN devices weren't nearly as egregious as ENRN, but I'm prepared to bet we'll never see another R&D partnership in the near-term.
Third, biotech accounting is generally squeaky clean compared to most industries. The dirty secret in accounting is that accountants fuss about making sure the cents column adds up correctly while letting the company make aggressive assumptions (about things like bad debt reserves) that have a huge impact on the bottom line. My cure would be to force disclosure of an error bar - every time the company makes a critical estimate they need to disclose the consequences of a reasonable "high" estimate and a reasonable "low" estimate. This would be true even for binary decisions - for Enron there should have been a disclosure of what the consequence of consolidating the partnerships would have been, as well as what the consequences of using different estimates for their energy contracts.
Note that biotech accounting doesn't have these close decisions. Biotech accounting in fact is incredibly conservative because of the way R&D is expensed. There is also little opportunity for channel stuffing and non-arms-length sales.
Finally, I'd like to talk a little about pro forma accounting. The accounting board really brought this plague on themselves because of the way they used to account for goodwill. This brought the "real" numbers into disrepute and opened the door for companies to focus on "choose it yourself" accounting. This goodwill charade is now gone, and so what is mainly left are the non-cash compensation charges that happen with certain stock option transactions. These are also essentially irrelevant to earnings, but at least they are a much smaller amount.
What to do about "one-time" charges is hard. If they truly are one-time then it's reasonable to show pro forma numbers with them excluded. (It's funny how companies don't like to exclude one-time gains, though).
Bottom line is that accounting is hard and non-exact. I just wish they would give up trying to pretend it's just nice and precise bookkeeping, though.
Peter |
