Geoff, I think we're once more in synch.
The problem I have with your hypothesis is that I don't understand how you see increasing sales at the cost of profit now or in the future advancing the interests of a management that is trying to entrench itself. In other words, how does that cause an increase in fragmentation of ownership or lead to a board of directors that is more sympathetic towards management?
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GAAP accounting vs. Federal income tax accounting. GAAP accounting is really a set of guidelines for how management reports profits to shareholders. As such, it allows management considerable latitude in its estimates. For example, it may choose any reasonable number for the life of an asset for depreciation purposes. You are essentially relying on management to honestly present its estimates on a wide variety of issues including reserves for bad debt, inventory levels etc. IMO, auditors don't do a sufficiently detailed job of overseeing either the accounting conventions adopted by the companies, or the actual estimates used by management for 10-Ks.
Look, for example at the history of Oxford Health Plans. Here management knew what was going on, yet they misrepresented the financial condition of the company which allowed them to dump stock while at the same time presenting a rosy picture to shareholders. I believe that a lot of this kind of thing would disappear if companies were required to use Federal Income Tax Accounting for the basis of reporting. Sure, short-term profits are penalized because of more stringent definitions of sales, accelerated depreciation and other measures. But at least management would not be tempted to overstate profits because it would penalize them in terms of taxes actually paid. You get a feeling for how much funny profits there are by looking at the difference between "Provision for taxes" (on the income statement) and federal income taxes paid (in the footnotes). You also get a feeling for the cumulative effect of these differences in the balance sheet ("deferred income taxes"). That's why I always preferred looking at cash flow as a measure of performance over profitability, but it takes some financial acumen to recast the statements in a form useful to investors. Perhaps the easiest way is to use the statutory rate to back into taxable earnings.
I could go on at length on this subject, but I'm starting to suffer from writers cramp, so I'll just stop right here.
Note about Florida: there are some wonderful old Cuban restaurants in the Tampa area (dating back to the turn of the century). The rock crab is great!
TTFN,
CTC |
