Buffett Lashes Out At Accounting Practices
By Bill Rigby
Sunday May 5, 11:07 pm Eastern Time
OMAHA, Neb. (Reuters) - Billionaire investor Warren Buffett hit out on Sunday at bad accounting practices and huge stock option plans for greedy CEOs, but forecast no effective changes in the rules to curb the problems.
"The basic problem is that auditors feel they are working for management, not shareholders," said Buffett, talking about ways to improve the accounting industry after the collapse of energy trader Enron Corp.
Buffett was speaking at a media conference in his home town of Omaha, Nebraska, the day after his Berkshire Hathaway Inc.'s annual meeting.
Auditors must feel "more fearful of going along with management than not going along with management," Buffett said, arguing that for many years auditors have helped U.S. corporations make their results look more impressive.
U.S. regulators are currently looking at ways of improving the standards of audits, but no firm measures have been imposed. Buffett said he was pessimistic that any effective measures would be taken soon.
Separating consulting and audit work, or revolving auditors of companies to ensure no auditor gets too cozy with management, will not solve any problems, Buffett said, dismissing two measures being considered.
"Other big name auditors would have let the same things slip by," Buffett said, commenting on auditor Arthur Andersen's work with Enron, suggesting the malaise is industry-wide.
Andersen faces a criminal trial starting this week, accused of obstruction of justice by destroying thousands of Enron audit records while the energy trader's accounting was under investigation.
Enron was a "grotesque outbreak," Buffett said, but not the only case of bad accounting in the United States.
Buffett also attacked American CEOs' huge pay packages, in particular stock-option grants, which in many cases hurt firms and their investors by diluting stock already on issue.
"Essentially CEOs bargain with themselves" over pay, said Buffett, who has sat on several compensation boards of firms he owns or invests in. "They don't turn into bar-room brawls."
Buffett said he has no objection to stock options in principle, but many U.S. firms abuse then by not accounting for them as an expense, or setting the option price so low that managers do not have to achieve much to make huge profits.
"Something must be done about it," said Buffett, who supports a push by Federal Reserve chairman Alan Greenspan to get companies to account for stock options as an expense.
When they don't, it overstates a company's profits and dilutes shareholders' investments, Buffett and long-time business partner Charlie Munger said.
"Over time it adds up, giving away one to two percent of the company every year," Munger said, attacking firms which dole out large amounts of stock through cheap options.
Berkshire itself does not give out stocks or options as compensation, but Buffett said whoever succeeds him at the head of Berkshire may well get an option package. "But it would be constructed different from most," he added. |
