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To: John Pitera who wrote (18230)	2/5/1999 9:36:00 AM
From: Cynic 2005	Read Replies (1) \| Respond to of 86076

Oh, those pesky accounting details... February 5, 1999 Flaky Accounting on the March? "Chainsaw Al" Dunlap put a colorful face on funny accounting (or a funny face on colorful accounting) when he overbooked revenues for grills at Sunbeam. This alone cost Ronald Perelman, who had just taken a sizable chunk of Sunbeam stock in return for Coleman, $500 million. Then we had Walter Forbes, late of Cendant, and George Soros, who took a hit when Waste Management was forced to restate several years of earnings. In all three cases, market participants or the companies themselves eventually ferreted out the problem, and share prices were knocked down, punishing their executives in the wallet as well as outside shareholders who could have done a better job monitoring them. We strain to think of a more effective way of sanctioning bad accounting. With these companies' pratfalls before them, executives logically might be expected to respond with more caution rather than less. But the Securities and Exchange Commission has been taking a look in light of the proliferation of stock-option plans and the pressure on companies to make Wall Street's earnings targets, and the SEC's soundings tell it something is going on, though we're not sure what. Surely when uncertainty exists over what constitutes permissible accounting, some of the competition between companies will be transferred into the accounting area. If it becomes the norm when doing technology mergers to take a big write-off for research and development efforts (one of the SEC's betes noire), a company would be almost irresponsible not to take a write-off if its peers are taking one. By such means does the inherent and necessary flexibility in GAAP give rise to informal traditions that make for comparability. Moreover, except by selling out his stake and fleeing to the Bahamas in the rosy glow of a doctored earnings report, it's hard to see how a CEO could be anything but the victim of his own doctoring. Maybe that's why, with a speech in September, Chairman Arthur Levitt emphasized "wishful thinking" and "illusion" rather than outright villainy. This seems just the right focus. Mr. Levitt has been hell on the auditing profession, which he charges has been reluctant to challenge "aggressive" accounting because the Big Five get half their revenue from consulting work for many of the same companies whose books they flyspeck. True, surveys by Business Week and CFO magazine separately reported that half of financial executives claim to have been pressured by their bosses to tweak the books in a flattering direction. Then again, the CEO of one big bank, known for its excellent risk management during the Asian and Russian turmoils, complained that his CFO wouldn't let him reduce its sizable loan-loss cushion for fear the SEC would descend and accuse it of the sin of "earnings management." This followed the SunTrust spectacle, in which the SEC forced a Georgia bank to cut its loan-loss provision by $100 million. Apparently the SEC suspected the bank of trying to create a cookie jar with which to disguise miserable earnings at some future date. There followed a brief skirmish with banking regulators, papered over by a joint statement essentially saying the SEC and the Fed felt each other's pain. Now the agency has brought charges against W.R. Grace because it slipped some leftover reserves from a subsidiary into its income statement. Arguably, the SEC should exercise some leadership to keep companies from chasing each other to the edge of absurdity when the rules are inescapably arbitrary to begin with. On the subject of the R&D writedown, the agency gave America Online and MCI WorldCom a paddling for what it regarded as excessive charges after big acquisitions. Try as we might, we see no trend here, just the normal Pushmi-Pullyu of a business that, after all, does permit a great deal of fuzziness. The larger impetus all along has been for greater accountability. Boards have become more activist. Executives are on the hook for the share price, which at the end of the day reflects long-run earning potential. As for the fear that earnings-target myopia has corrupted Wall Street, tell that to the Internet stocks: Investors seem to know what they're interested in, and sometimes it's earnings and sometimes it's not. As long as reserves are booked in plain sight, it's not entirely clear why managements should not be allowed to save a kitty to boost reported income on a rainy day if they think that's what investors want. But whatever lies ahead for companies and the stock market generally, we suspect a meltdown over accounting fraud isn't it.