Here is something for you from my old memory vault.
Back in the early-90s, before AOL became the behemoth
capable of swallowing Time Warner, the ISP was routinely
charging advertising expenses to capitalization. There was
a brief squawk that this was ridiculous, that it was just
a way to make the company look viable, when it was
losing money like crazy. The folks running AOL kept
doing it, I guess, until they didn't need to anymore as
the customer base finally got big enough to make
the profitable. Charging advertising to a capitial
account looks very similar to what WorldCom did.
Yet there AOL-Time Warner sits, with that pretty
feather sticking out of her whiskered chops.
Do you think that this actually fools anyone?
The press is calling it a fraud. Possibly, it could be, but not all disagreements about whether a cost should be capialized or expensed are indicative of fraud. The issue is not always that clear.
EBITDA is not a number reported on the income statement. The income statement would show income before interest and taxes, then the interest expense and then the taxes. Reporting earnings before interest and taxes (EBIT) allows comparisons among companies with different capital structures. However, depreciation and amortization are reported as operating expenses. The statement of cash flows shows cash flows from operations. EBITDA is often viewed as a proxy for operating cash flows.
Corporate boards of directors need to take a stronger oversight role of their companies. However, I oppose more government regulations.