Beneath the numbers

BOOK REVIEW

It was as if the world had turned upside down. For a dizzying stretch in 2001 and 2002, nearly every day brought fresh, front-page news of multi-billion-dollar financial deceptions, spectacular bankruptcies, and executives in handcuffs.

Public disgust grew with every sordid revelation. Yet just a few months earlier, business people had been celebrities - objects of public fascination and envy. Evidently, the world of business was changing.

Upto early 2000, stock market was a perfected democracy, a radically egalitarian realm where barriers of wealth, education, race and gender were erased by information that was reliable and equally accessible to all. That faith was shattered by a stock-market collapse that began in March 2000. Trillions of dollars in market value vapourised in the subsequent slide.

The loss of belief and the obliteration of confidence in the market's basic fairness were more damaging. Top executives of Enron frantically dumped their shares even as they urged public and their own employees to buy the company's stock.

Securities analysts at Merrill Lynch, probably America's most respected investment firm, routinely derided in private the stocks that they tirelessly hyped to the public. The revelations of corporate dishonesty and executive excess have prompted an angry public backlash against business houses.

But as investigators searched for someone to blame, more than a few investors found themselves looking in the mirror and asking some hard questions. Could they have seen the train wreck coming? Were there red flags hidden in corporate accounts and warning signs lurking among figures and footnotes? There were, in most cases.

Accounting systems come in different flavours, and they all offer wide scope for mischief. From Australia to Asia and Moscow to Brussels, companies have collapsed and fortunes have been lost because of shoddy governance, executive greed, slipshod auditing and overly aggressive accounting.

Many of these collapses and the frauds that preceded them, make the Enron debacle look like a Sunday picnic.

Profits You Can Trust: Spotting and Surviving Accounting Landmines by H David Sherman, S David Young and Harris Collingwood shows us the many ways the accounting system can be gamed to fabricate an inaccurate, misleading or even fraudulent depiction of a corporate's financial and operational well-being.

The book is primarily concerned with the abuse of the discretion that managers are afforded under most international accounting systems. Accounting can be deployed as a kind of fun-house mirror, exaggerating some features of business - sales or earnings, for instance - and obscuring others, such as costs.

Corporate managers often encourage such distortions mostly to ensure job security. But the motivation to cheat is not always personal. Managers do distort their numbers to maintain their company's access to the capital markets, to meet lending requirements and to gain an edge in recruiting.

The authors of Profits You Can Trust don't presume to minimise the complexities of accounting, nor do they claim that the book will create expert financial sleuths overnight. They agree that the vagaries of international accounting regimes significantly complicate any analysis.

"But our experience has convinced us that just as in literature there are only five basic plots, there is a basic and quite limited repertoire of accounting games," they explains.

Because accounting trickery knows no borders, the book includes a generous helping of examples of deceptive reporting from both the US and the rest of the world.

By encouraging the practice of informed skepticism, the book contributes to a business environment where profits - and the corporates that perform them - are again worthy of our trust. Written in largely non-technical language, the authors provide a concise road-map to detecting, preventing and remediating accounting trickery.

Tired of getting snookered on financial accounting issues in your investments? Profits You Can Trust will enable you to spot accounting landmines without earning a CPA.

PROFITS YOU CAN TRUST
Spotting and Surviving Accounting Landmines

Authors: H David Sherman, S David Young and Harris Collingwood
Publisher: FT Prentice Hall
Edition: 2003, hardcover
Price: Rs 1,197

(Book courtesy: Crossword)