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October 25, 2002 |
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As the General Electric’s of America continue to sculpt quarterly earnings results, one cannot help but wonder when needed changes to U.S. reporting standards will come to pass. This is not to say that such ‘standards’ should force companies to report the most damaging set of numbers, or that every possible ‘cost’ should always be included within the bottom line. Rather, only that a simple, universal reporting standard is required – a standard that allows companies to promote how wonderful their pro forma financial results are in the footnotes, not within the basic consolidated financial statements.
Standard and Poor’s released its first set of ‘core earnings’ numbers yesterday. And while the difference between ‘operational’ to ‘as reported’ to ‘core’ earnings was alarming, even more alarming still was that no sector was immune to the core earnings virus – all sectors would have reported lower core earnings compared to as reported. Utilities were close to par, reporting only 7 cents in stock option expenses and 1 cent in pension interest.
Using the basic data for the 12 months ended June 30, 2002, the S&P 500 was either trading at 37 times trailing earnings (as reported earnings) or 53.56 times earnings (core results) going into July. Yes, both numbers are ridiculously high when compared to the historical average for the S&P of 500 (16-17). However, one number, 53.56, is more ridiculous than the other. Why Webster? The SEC is expected to nominate candidates on Monday for their new accounting board. Supposedly this board is being created to clean up the accounting industry. Retirement fund executive John H. Biggs prefers ‘core’ type earnings results – in the past he has voiced that stock options should be expensed (which is further than Bush or Pitt have ever gone). By contrast, former CIA and FBI head William Webster probably doesn’t know what ‘core’ earnings are and/or the how important the debate on these types of earnings results is. Why is someone with no accounting experience even being considered as Chairman? Quite frankly, President Bush and Harvey Pitt are against cleaning up the accounting industry. They would rather arrest a few people and then tell investors that the markets are safe, all the numbers are clear and trustworthy, that they have done their jobs. Ironically, or so Pitt and Bush conclude, actually making the numbers clear and trustworthy would make current prices (markets) unsafe due to extreme overvaluation. Remember, ‘earnings were up and the average P/E is 37’ is more likely to generate investor confidence than earnings ‘were up and the average P/E is 53’ (as per the core earnings example). Although this is a simplistic example, it speaks volumes on why Bush wants to arrest everyone but not change any accounting standards. Webster Wins Perhaps the 78 year old Webster will spend his retirement years meeting with the Big “It's unfortunate that a public servant like Webster is being used as a pawn in a dangerous chess game by the Bush administration and Pitt”. WP There is nothing wrong with current policing (punishment) standards of the accounting industry – there will always be some who endeavor to break the law for financial gain no matter how harsh the penalty. However, there is something seriously wrong with corporate America and Wall Street accepting fabulous operating results as the gospel as the core numbers rot.
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