>>Victor, cheer up. The US is entering 2000 with the strongest national economy in history.<<
William, I don't want to rain on your parade, but entering 2000 we'll have some accounting methods- particularly high-tech ones that will have to be addressed.
Will that stop me from buying others like you? Hell no, but I have my finger on the trigger on every speculation stock I own.
Like last week with Dscm.:-(((
>>
August 28, 1999
At last, Alan Greenspan is offering food for thought: Large U.S. corporations, the Federal Reserve chairman belatedly understands, are cooking the books.
Yesterday at a speech in Wyoming, Greenspan said what wise observers such as billionaire Warren Buffett have been saying for some time: The accounting methods employed by large companies -- particularly high-tech ones -- overstate earnings Often egregiously. In some cases, almost criminally
What Greenspan did not say is obvious: During the current bull market, just as in other past bubbles, stock prices have risen far faster than corporate earnings and the overall economy.
But since earnings are overstated, this gap between stock prices and underlying economic reality is wider still. The gap has been widening for years, and may continue to do so in our stock-crazed culture, but at some point, policy-makers may have to wrestle with malodorous accounting abuses. Greenspan said so yesterday.
Maybe we can enlist him in the reform movement. Previously, the Fed -- and particularly Washington politicians -- have fought attempts by the Financial Accounting Standards Board to introduce reality into corporate financial statements.
Yesterday, Greenspan tackled one of the most common abuses: High-techs, in particular, grant stock options right and left (sometimes up to 10 percent or 15 percent of total stock outstanding) but don't take them as an expense. When stocks fall and options fall out of the money, they are simply repriced.
Companies' failure to charge fair value for options against income has inflated profits by 1 to 2 percentage points annually for the last five years, according to a Fed study, Greenspan said yesterday.
Some say the effect is far worse than that. Some critics say that some of the largest high-techs would actually have been in the red the last few years if they had properly accounted for stock options.
Jack Ciesielski, a consultant to Deutsche Banc Alex. Brown, concluded last year that earnings of 62 of the Standard & Poor's 500 companies were overstated by 10 percent.
The high-techs tend to be the highest-priced stocks, points out New York economist Edward Yardeni of Deutsche Banc Alex. Brown. Investors are "putting most of their money into stocks of companies whose managements are working especially hard to (manipulate) earnings," Yardeni says. So an eventual day of reckoning, if there is one, may take a big toll.
Also, Yardeni notes, the huge stock options influence management to use other accounting abuses to appease Wall Street to keep the stock high.
As Buffett has pointed out, companies have a trick called a "restructuring charge," and costs that should be spread out over a number of years are dumped into one bad quarter. Trouble is, these so-called "one-time" restructuring charges keep recurring and recurring
Also, companies use mergers "to dishonestly rearrange the value of assets and liabilities in ways that will allow them to both smooth and swell future earnings," Buffett says.
Arthur Levitt, chairman of the Securities and Exchange Commission, has also lobbied valiantly for accounting realism. For example, Levitt has flayed companies for using unrealistic assumptions for estimating liabilities for such items as sales returns, loan losses or warranty costs. That's like stashing accruals in cookie jars during good times and reaching into them in bad times, Yardeni says.
Like Buffett, Levitt criticizes accounting used in mergers. Often, the acquisition price is booked as in-process research and development, so it can be written off as a one-time charge, thereby erasing future drag on earnings.
Levitt also cites the prevalent premature recognition of revenue. Some companies ring up a sale well before it is actually consummated, the product is delivered, or at a time when the customer still has options to terminate the deal.
As Yardeni points out, Americans have been piously urging Asian companies to adopt better accounting standards and make more relevant disclosures. This is happening "at the very same time that our financial statements are becoming more opaque," he says.
Greenspan has been a critic of Asian opacity. Now he is eating humble pie: He realizes that America doesn't let the light come through, either.<<
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