<<<If you have or come across articles confirming your position on SAB 101, please post a link. It's an interesting
hypothesis.>>>
IMO, SAB 101 was a VERY important rule change. The thing I find amazing is a total lack of any articles on the subject. The whole thing happened almost completely in stealth mode. I suppose you could call my hypothesis a pet theory, of the opinion variety, but it's virtually the only theory I've been able to come up to explain what happened.
Up until SAB 101, the number of companies that would report wonderful revenue for 18-24 months, then take a massive inventory write down charge, were almost the rule rather than the exception. Channel stuffing was a common topic on message boards. I suspect there were a lot of frustrated class action lawyers who were unable to do anything when a stock lost half its value overnight on the periodic inventory corrections. It's also a safe bet the SEC got plenty of complaints.
There's no reason SAB 101 couldn't have gone into effect immediately, but from the looks of SAB 101A and SAB 101B, there was a fair amount of opposition to the change. The effect of delaying implementation of SAB 101 for a year gave money managers plenty of time to close out their positions on the companies most likely to be affected. The timing coincides nicely with the beginning of the tech meltdown starting around March of 2000.
For most affected companies, SAB 101 went into effect in Q4 of 2000, that also happens to coincide with a rash of profit warnings which occurred at the same time. All available economic data at the time was not only favorable, but rock solid. Unemployment was low, productivity was high, consumer confidence was at record levels, etc. In other words, there was absolutely NOTHING to suggest economic weakness in the US, EXCEPT the sudden rash of profit and revenue warnings.
With the incentive to over produce in order to pad the numbers eliminated, there was no reason to justify the overhead of over production. In early 2001 you couldn't go much more than a day without seeing "restructuring" articles involving massive layoffs. That was the general pattern throughout most of 2001 as companies worked to match capacity to sell through. With the lower amount of revenue which was allowed to be reported, companies also worked to cut back other expenses including capital spending.
My opinion is a lot of the damage could have been mitigated if the SEC would have made some kind of effort to inform the general public of the impact of the rule change, but the entire situation was allowed to be spun as a meltdown in the US economy. The spin factor did far more damage than the rule change could have possibly done alone. While most CEOs knew the reason for their own revenue shortfalls was SAB 101, the economy was used as a scapegoat and I suspect most of them talked themselves into believing there was something else going on. The cutbacks to allow for previous over production were exaggerated out of panic attacks over the economy. So many US companies are interdependent on mutual capital spending projects, that the cutbacks had a ripple effect that kept increasing every time the tide went out.
That's my theory anyhow. I can't link to any articles because to the best of my knowledge there aren't any. And I doubt you will see one for at least another 10 years. At the same time you won't find a single article on the economy with an analysis on WHY it took a instant nosedive from top to bottom almost overnight. The only catalyst during that period of time was the change is the way revenue was booked.
Feel free to poke holes in my reasoning as I'm sure I don't have all the answers and the above is the best I've been able to come up with that seems to cover available information. Since my theory is the main cause of my current bearishness, I'm more than open to discussion. My argument pretty much comes down to: If SAB 101 did cause the current mess, what is the likely impact of enough accounting reform to prevent future Enrons? A lot of companies aren't going to be reporting the same kind of numbers they have in the past and the market will react to the change. |
