Doug, let me add a few more things we need. We need strict banking regulations to prevent the kind of thing that is going on in Asia right now. And perversely, we need the IRS!!!
Sure, nobody likes to pay taxes, and virtually nobody likes the IRS, but let me give you one very overlooked reason for why the IRS benefits shareholders. GAAP accounting is fraught with assumptions and ultimately depends on the honesty of management to present an income statement and balance sheet that jibe with the financial position of the company. Auditors are really useless in this exercise as demonstrated by the recent history of companies like Cendant and Oxford Health Plans. But one reality check I routinely perform is to compare the taxes actually paid by a company to its provision for income taxes. This difference can be a red flag indicating that the company is playing games with revenue recognition or depreciation. But no company purposely overpays its taxes, so a big differential may indicate some creative accounting. Now don't get me wrong, any decent management will use the fastest depreciation it can for tax purposes, and so there will naturally be some timing differences. I'm just cautioning investors to watch for deferred income taxes, and to be thankful that the existence of the IRS at least allows us to see this red flag.
TTFN,
CTC |
