"It's the economy, stupid!"

In case you missed it, the stock market is in the shitter right now:

http://www.salon.com/business/wire/2002/07/19/dow/index.html

Bush better be praying to the economic gods for a recovery in the next couple of years, and not one of those slow recoveries that starts during the election process. That type of recovery didn’t help his Dad and won’t help him no matter how many terrorists are out there.

-DavidCPA

The really creepy thing is that, based on historical price/earning ratios, it’s got between 25-50% to go before it’s “fairly valued.”

Greenspan said years ago that the market was overvalued – not in so many words, but that was the gist of it. That guy’s pretty sharp. He saw this market downturn coming.

An excoworker of mine (who cashed out in 1999 and made a cool 100k!) told me the market was gonna deflate big time arnd y2k (off by 2 years!)… Well not in so many words, he just told me, “I hope you have a full time job before it comes. Its going to be tough to find a job the next decade.” I laughed at him, but he was right! He also said Bush would drag the economy down even further when he became president. And he’s a Republican too!

etc

?

Accountants lie through their teeth for the last 5 years and the president takes the blame?

Well, has he done anything apart from give a speech?

He’s doing what he can, that is to say he’s not threatening to Veto what’s already moving through Congress on the subject. That speech was pretty bad though. National outrage seems to merit a bit more than a “Tsk, Tsk” to me.

Accountants lie through their teeth for the last 5 years and the president takes the blame?

The President is NOT responsible for companies cooking the books in the past. He IS responsible for developing recommendations that will prevent this from happening so often in the future. At a minimum he can set the tone of the debate on the subject. Bush has just seemed too hesitant to bite the hand that has fed him.

-DavidCPA

Sheesh. Everyone wants to blame their favorite politician target for the dishonest accounting in a few companies. Democrats want to blame Bush because his speeches aren’t good enough. Republicans want to blame Clinton because this stuff started during his reign and somehow tie his lying and screwing interns in the oval office to dishonest accounting practices.

Folks, this isn’t due to any president’s anything, nor to Republican or Democratic inside trading. This is just cheating accounting practices. Greenspan looked so pained when the Senate committee asked for his approval of their posturing desire to go pass a law (doesn’t matter whether it helps or hurts, they just wanna pass a law and brag about it.) He told them that they didn’t need to do anything, and inferred all they could do is screw it up (they have no clue nor expertise in accounting, and most have no clue as to how business works.)

One sign of how completely ineffective our political system has become is how everyone immediately wants to blame every problem on the other political party - and how we immediately look to Washington and want that collection of professional Bozos/power junkies (both sides of the aisle) to fix every problem. When they’ve proven over and over they are incapable of doing anything except attack each other and try to grab more power.

Well, Slate had a pretty convincing article recently that claimed that the laws that allowed these abuses to happen stemmed from Gingrich’s Contract With America. They changed some of the ways you can pay CEOs and tax laws and they allowed the Arthur Andersen Audit/Consultant thing.

But I’m not partisan enough to believe that Newt and Company foresaw this stuff happening as a result. Lackey’s right, the blame game is pretty stupid.

I don’t think that they had the foresight to see this stuff happening, but in their zeal to let everyone do whatever the hell they wanted, they ignored all the warning signs.

Former SEC head Arthur Levitt gave a speech in 1998 at NYU that essentially spelled out, point by point, exactly what has been happening over the last year. Every attempt he made to strengthen regulations was shot down by Newt and Company (with some help from a handful of moronic Democrats) and it actually got the point where the funding for the SEC was threatened.

As for Bush’s speech, when Lou Dobbs (who will never be mistaken for liberal or anti-business) dedicates a commentary at the end of his show to Bush’s speech and basically goes ballistic about how ineffective/pointless it was, well, that tells me that even those in business think we need to toughen the laws.

Forgot to include this: http://www.businessweek.com/bwdaily/dnflash/feb2002/nf20020219_2045.htm

Democrats pointed out at the time that making it really hard to sue CEOs and companies for lying about their financial statements would, surprise!, create incentives to do such a thing.

Rationally, it’s entirely in a CEOs self-interest to pump-and-dump. How many people do you think will go to jail from Enron? That’s why we need laws.

Oh, the definitive article on why this is all so bad politically for Bush (from a Republican, no less):

http://www.nypress.com/15/29/news&columns/beans.cfm

What kills the President is that every time Harken comes up, Democrats get to retell the story of how he made his money. And this, basically, is the story of the spectacular unfairness with which moneymaking opportunities are lavished on the politically connected. It is the story of a man who has been rewarded for repeated failures by having money shot at him through a fire hose. It is the story of a man who talks with a straight face about having “earned” a fortune of tens of millions of dollars, without having ever done an honest day’s work in his life.

Oh, are big players in the markets really getting desperate enough that the head of the NYSE has to beg investors not to bail out?

http://channels.netscape.com/ns/news/ns/story.jsp?floc=FF-PLS-PLS&id=404199446&dt=20020721162500&w=RTR&coview=

With the Dow perched just above the psychological threshold of 8,000, Grasso made a plea for investors to keep a cool head and think about long-term goals like saving for retirement or their children’s college education.

“Please be patient,” he prodded. “Please don’t do something that emotionally feels good but in the long term will be a mistake.”

I have to ask a silly question, because it’s one I’m not economically savvy enough to even claim to know the answer to. But since there are a bunch of accounting types around…

With all the companies coming out saying that they’ve been overstating earnings for the past several years, does this mean that the supposed economic boom of the late 90’s was all a fraud?

We know people on a whole were spending more money, you can’t fake that. But companies were talking about how much money they were making, and now we find out that most of these so called profits were due to unethical accounting practices.

So can we really be in an economic downturn when the supposed boom looks to me to have been all smoke a mirrors?

And while I realize that a majority of companies report their earnings honestly, it still makes me question every earnings release from the past 5 years. I mean, I already know that the Fortune 500 company that I work for is using many accounting tricks so that it doesn’t have to count its expenses against it’s earnings. There is no SEC investigation though because it’s all perfectly legal. But legal or not, these accounting tricks to keep expenses off the books just seems like, well, lying to me. Just because your books say you didn’t pay that $5 million in employee salaries doesn’t stop the fact that, guess what? you paid out $5 million in employee salaries! You don’t have that cash anymore, despite what your accountants are saying.

Whew, once again, got off on a rant and clouded my original question.

I’ll take a run at a few of these:

With all the companies coming out saying that they’ve been overstating earnings for the past several years, does this mean that the supposed economic boom of the late 90’s was all a fraud?

No, I don’t think so. Many companies did very well during the late 90’s and people did spend a lot of real money for real products. One of the primary drivers behind the accounting scandals is the emphasis to continually improve earnings. Wall Street expects continuously improvings earnings to support higher stock prices which in turn drives executive compensation (salary, bonus and stock options) which drove those said executives to manipulate the books which many Wall Street analysts blindly believed. Executives need to have the courage to admit when things are going bad, take the financial hit and reorganize the business to do better. Many executives either lack the intestinal fortitude to bite that bullet or lack the intelligence and determination to turn things around. From the testimony of most of the troubled company CEOs before Congress, they aren’t as bright as they once seemed. Getting an MBA from Harvard is not a guarantee you can successfully run a business.

And while I realize that a majority of companies report their earnings honestly, it still makes me question every earnings release from the past 5 years. I mean, I already know that the Fortune 500 company that I work for is using many accounting tricks so that it doesn’t have to count its expenses against it’s earnings. There is no SEC investigation though because it’s all perfectly legal. But legal or not, these accounting tricks to keep expenses off the books just seems like, well, lying to me. Just because your books say you didn’t pay that $5 million in employee salaries doesn’t stop the fact that, guess what? you paid out $5 million in employee salaries! You don’t have that cash anymore, despite what your accountants are saying.

I am not familiar with what your company is trying to do, but your point about cash is very good. The financial statements are comprised of three reports: balance sheet, income statement, and statement of cash flows. The transaction you describe is keeping the expense from appearing on the income statement, but it is reflecting in the statement of cash flows and the balance which a reasonable analyst will review to fully understand a company’s financial position. As long as the footnotes to the financial statements fully disclose the accounting treatment, a good financial analysst can understand what is really going on. So unless your company is doing it fraudulently, the transaction isn’t that big a deal.

Rob from Boston…got an opinion.

-DavidCPA

“I am not familiar with what your company is trying to do, but your point about cash is very good. The financial statements are comprised of three reports: balance sheet, income statement, and statement of cash flows. The transaction you describe is keeping the expense from appearing on the income statement, but it is reflecting in the statement of cash flows and the balance which a reasonable analyst will review to fully understand a company’s financial position. As long as the footnotes to the financial statements fully disclose the accounting treatment, a good financial analysst can understand what is really going on. So unless your company is doing it fraudulently, the transaction isn’t that big a deal.”

OK, that makes sense. All of the little memos we keep getting tend to make me nervous. I’ll sum up what they say here real quick to give ya an idea on what we’re being asked to do.

To paraphrase the memos: We are trying to keep our promise to shareholders by maintaining a double digit growth in 2002. In order to meet this goal, we are asking everyone to make sure you report your time to capitalizable projects.

So my thought was, what the hell is a capitalizable project. At first I thought this was telling us to make sure that if we do work for one of our customers that we report time to their projects so we can make sure they get charged properly for our time. But after many meetings on the subject and a little training course for project managers, I find out that my interpretation is wrong.

What they mean instead is to make sure we put our time to projects that are classified as “capitalizable”, meaning that the government (SEC I assume) doesn’t require them to report it as expenses this year. Instead, they get to spread the cost reporting out over X number of years so that it looks like we shelled out less money this year and thus had higher profits.

I know it’s legal and all, but it just seems strange to me. Then again, most of the practices in accounting are strange to me.

It’s legal, but that really doesn’t sound like GAAP. “Hey, employee pay is a depreciating capital expense!”

To paraphrase the memos: We are trying to keep our promise to shareholders by maintaining a double digit growth in 2002. In order to meet this goal, we are asking everyone to make sure you report your time to capitalizable projects.

Jim,

As long as you are in a position that works on capitalizable projects, it just sounds like a reminder from accounting to me. Several of the people in my department work on large IT projects that are capital items. They need reminding from time to time to charge this time correctly. If you (and the audience for these memos) don’t work on capital projects at all, then that may be something different :?

So my thought was, what the hell is a capitalizable project. At first I thought this was telling us to make sure that if we do work for one of our customers that we report time to their projects so we can make sure they get charged properly for our time. But after many meetings on the subject and a little training course for project managers, I find out that my interpretation is wrong.

What they mean instead is to make sure we put our time to projects that are classified as “capitalizable”, meaning that the government (SEC I assume) doesn’t require them to report it as expenses this year. Instead, they get to spread the cost reporting out over X number of years so that it looks like we shelled out less money this year and thus had higher profits.

As I said above, it is perfectly legitimate to record labor costs as part of capital projects or for products that you will resell.

Capital Projects: Items that have a useful life of more than one year should be capitalized and depreciated (tangible items) or amortized (intangible items) over the useful life of the asset. For example, if your company leases a new building, the cost of installing new network cable (and the associated labor) should be recorded as an asset and depreciated over the useful life of the cable installation (3 - 5 years probably). Accrual accounting at its finest :D

Products for resale: When GM builds a car, the time of the guys working on the assembly line is included as inventory which is an asset on the balance sheet. When the car is sold to a consumer, the cost of inventory (including assembly labor) is charged to expense as cost of goods sold.

-DavidCPA

Wierd. So what’s to stop a company from finding creative ways of classifying virtually all labor expenses as assets?