Buffett Deplores Trend of Manipulated Earnings
March 15, 1999
By RICHARD A. OPPEL Jr.
The executives who run companies for Warren Buffett
know that few things are as sure to anger the
legendary investor as dishonesty about how their
businesses are performing. So, too, has Buffett always
promised the people he works for -- the shareholders of
Berkshire Hathaway Inc. -- nothing less than total
candor.
But accounting gimmicks and misrepresentations to
investors have become so commonplace at public
companies that it has prompted Buffett, in his annual
report to shareholders, to make an extraordinary attack
on many of his fellow chief executives, who he says
have worked purposefully "at manipulating numbers and
deceiving investors."
"Many major corporations still play things straight,
but a significant and growing number of otherwise
high-grade managers -- CEOs you would be happy to have
as spouses for your children or as trustees under your
will -- have come to the view that it's OK to
manipulate earnings to satisfy what they believe are
Wall Street's desires," Buffett wrote in Berkshire
Hathaway's 1998 report, which was posted on the
company's World Wide Web site over the weekend.
"Indeed, many CEOs think this kind of manipulation is
not only OK, but actually their duty."
The Berkshire report, eagerly anticipated every year by
individual investors and professionals alike, provided
few surprises about Berkshire's holdings or Buffett's
investment outlook. It shows that he added slightly to
holdings in American Express, now the company's
second-largest equity investment after Coca-Cola, and
that he trimmed holdings last year in Wells Fargo, the
Walt Disney Co. and Freddie Mac.
He also sold much of what at year-end 1997 had been a
nearly $1.3 billion stake in the Travelers Group, which
later acquired Citicorp to form Citigroup. Shares of
Citigroup fell 8 percent in 1998, but the company is
not listed among Berkshire's equity investments worth
more than $750 million.
Buffett criticizes himself for selling shares of
McDonald's, which rose more than 60 percent last year.
All in all, Berkshire sold about $4.9 billion in shares
and other investments last year and bought about $1.9
billion, according to Berkshire's cash-flow statement.
"The portfolio actions I took in 1998 actually
decreased our gain for the year," he wrote. "In
particular, my decision to sell McDonald's was a very
big mistake. Overall, you would have been better off
last year if I had regularly snuck off to the movies
during market hours."
He also kept quiet on whether Berkshire still owns the
enormous silver hoard it disclosed last year and
certain other nonequity investments, except to say, "We
have eliminated certain of the positions discussed last
year and added certain others."
What is clear is that Buffett would like to make
another big acquisition, similar in size to the $22
billion purchase last year of the General Re Corp. He
has raised Berkshire's acquisition criteria
considerably: Buffett is now seeking companies with
pretax income of at least $50 million -- it was $25
million last year -- at prices of up to $20 billion,
twice as large as the uppermost limit he suggested last
year. And there is plenty of money on Berkshire's
balance sheet to pay for such purchases.
"The thing that really leaps off the page is the
increase in cash to $15 billion, and the fact that
management is clearly looking at much larger
acquisitions," said Alice D. Schroeder, an analyst at
Paine Webber. Buffett also says that although "cash
never makes us happy," he and his partner, Charles T.
Munger, have not found any big acquisition candidates
that fit the bill.
With a single, big acquisition having become more
important for Berkshire, Buffett's ire is rising at the
accounting tricks increasingly used in mergers.
"These managers often say that their shareholders will
be hurt if their currency for doing deals -- that is,
their stock -- is not fully priced, and they also argue
that in using accounting shenanigans to get the figures
they want, they are only doing what everybody else
does," Buffett wrote. "Once such an
everybody's-doing-it attitude takes hold, ethical
misgivings vanish."
Noting that one estimate of the tally for special
charges and write-downs reported during 1998 exceeded
$70 billion, Buffett lauded the efforts of Arthur
Levitt, the Securities and Exchange Commission
chairman, to end the practice of "earnings management."
Otherwise, he said, corporate financial results have no
more credibility than bogus golf scores. This is no
different, he continued, from a golfer reporting an
atrociously high score for his first round -- say, 140
-- and then shooting 80s for the next few rounds by
drawing down against the "reserve" established in the
first round.
"On Wall Street," he remarked, "they will ignore the
140 -- which, after all, came from a 'discontinued'
swing -- and will classify our hero as an 80 shooter
(and one who never disappoints)."
Copyright 1999 The New York Times Company
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