Comments on: The Importance of Accounting

By: Kirk Ward

Kirk Ward — Mon, 05 Jan 2009 18:24:41 +0000

I don’t think there is any way everyone is going to be satisfied. As mentioned in the post, accounting conventions at high levels merely create some form of consistency in treatment.

It doesn’t matter if the treatment is good or bad, as long as the treatment is consistently applied and full disclosure of supporting information is made.

By: Geoffrey Morton-Haworth

Geoffrey Morton-Haworth — Mon, 05 Jan 2009 01:57:07 +0000

Famous quote from Bethany McLean and Peter Elkind’s “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron” (2003), a former employee’s description of the process, “Say you have a dog, but you need to create a duck on the financial statements. Fortunately there are specific accounting rules for what constitutes a duck: yellow feet, white covering, orange beak. So you take the dog and paint its feet yellow and its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, ‘This is a duck! Don’t you agree that it’s a duck?’ And the accountants say, ‘Yes, according to the rules, this is a duck.’ Everybody knows that it’s a dog, not a duck, but that doesn’t matter, because you’ve met the rules for calling it a duck.” (Chapter 10, page 149).

My question – what makes other accounting firms so different from Arthur Andersen (except, of course, that they just haven’t been caught… yet)?

By: Independent Accountant

Independent Accountant — Sun, 04 Jan 2009 23:45:10 +0000

Even a stopped clock is right twice a day.

By: Blue Nile

Blue Nile — Sun, 04 Jan 2009 11:12:21 +0000

Accounting is a terrible subject that has lagged behind in advancement. In silicon valley, the startups are the companies that rely on cash. They dont care about accounting profit and loss. There are no public investors so the profit and loss is meaningless. All the investors in the form of VCs are curious about the cash burn rates and things are transparent enough to see what is happening with cash. Cash, as the textbooks say, is the lifeblood of the business. The companies are valued on the basis of cash (DCF models now a standard finance formula). Accounting statements are as we all know are economic statements.

I hope that cash flow statements gain ground and some research is done in how to present financial info to investors. The P&L is too old school

By: Jesus

Jesus — Sun, 04 Jan 2009 06:43:21 +0000

I don’t buy these arguments at all. Historical is the best I believe. It does not provide as much lee-way as you may seem to imply, but marking to market is not a good idea to me because you are basically creating gains/losses from inflation, which is exactly what got us into this mess in the first place. When you have a government that practices lax monetary policy you want those inflated gains to be reported on quarterly financials? That’s precisely what happened this last time around… HISTORICAL NO QUESTIONS ASKED.

By: Geoffrey Morton-Haworth

Geoffrey Morton-Haworth — Sat, 03 Jan 2009 22:15:14 +0000

Accounting deficiencies are surely not the problem. Accounting is just a language in which you can lie or tell the truth.

A piece in today’s Wall Street Journal makes this mind size: “Would You Pay $103,000 for This Arizona Fixer-Upper? That Was Ms. Halterman’s Mortgage on It; ‘Unfit for Human Occupancy,’ City Says”

This article tells of an unemployed owner, Marvene Halterman, with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. Her lender, Integrity (!), a small mortgage firm, used loans from big banks to generate mortgages to resell to larger financial institutions. Integrity made its money on fees and commissions unlike traditional mortgage lenders who profit by collecting borrowers’ monthly payments. According to Barry Rybicki, the loan officer who started Integrity, “If you had a pulse, you were getting a loan.”

For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000.

At closing, on Feb. 26, 2007, Integrity collected $6,153 in underwriting, broker, loan-origination, document, application, processing, funding and flood-certification fees, mortgage documents show. A few days later, Integrity transferred the loan to Wells Fargo, earning $3,090 more. Wells Fargo sold Ms. Halterman’s loan to London-based HSBC who bundled with 4,050 other mortgages as collateral for a security issued in July 2007. More than 85% of the mortgages were, like Ms. Halterman’s, “subprime” loans to borrowers with blemished credit.

Standard & Poor’s and Moody’s Investors Service gave the new security their top “triple-A” ratings, which suggested investors were extremely likely to get their money back plus interest.

S&P declined to explain its assessment. A Moody’s spokesman didn’t respond to requests for comment.

According to the Wall Street Journal, some $4.1 trillion in American mortgages were put into securities such as these between 2005 and 2006, including $1.6 trillion in subprime or other high-risk home loans. Among other investors, the Teachers’ Retirement System of Oklahoma bought $500,000 of the new security. Also buying in was bond-giant Pacific Investment Management Co.

In January, Ms. Halterman made the last mortgage payment. Foreclosure began in May. September brought eviction. Other loans backing the HSBC-issued security were souring, as well. As of November, 25% were foreclosed, in the foreclosure process or at least a month delinquent.

HSBC declined to comment.

This past Monday, the property sold for $18,000. After expenses, investors in the mortgage-backed security will probably divide up no more than $15,000 in proceeds.

This story is just one data point, but it shows why accounting conventions become irrelevant when (like Enron) mindlessness (not to say deceit) is widespread. What were Wells Fargo, Standard & Poor’s, Moody’s and HSBC thinking of? Frankly, I find it hard to think of anything less useful that the SEC could find to do right now than release studies like this.