Funny that we've been discussing Lieberman and Dodd's complicity from the accounting side on FR for (many) months, but it takes Warren Buffett to get it mentioned in the NY Times.
Posted on 07/24/2002 7:18:22 AM PDT by aShepard
Who Really Cooks the Books?
By WARREN E. BUFFETT
OMAHA — There is a crisis of confidence today about corporate earnings reports and the credibility of chief executives. And it's justified.
For many years, I've had little confidence in the earnings numbers reported by most corporations. I'm not talking about Enron and WorldCom — examples of outright crookedness. Rather, I am referring to the legal, but improper, accounting methods used by chief executives to inflate reported earnings.
The most flagrant deceptions have occurred in stock-option accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom.
In calculating the pension costs that directly affect their earnings, companies in the Standard & Poor's index of 500 stocks are today using assumptions about investment return rates that go as high as 11 percent. The rate chosen is important: in many cases, an upward change of a single percentage point will increase the annual earnings a company reports by more than $100 million. It's no surprise, therefore, that many chief executives opt for assumptions that are wildly optimistic, even as their pension assets perform miserably. These C.E.O.'s simply ignore this unpleasant reality and their obliging actuaries and auditors bless whatever rate the company selects. How convenient: Client A, using a 6.5 percent rate, receives a clean audit opinion — and so does client B, which opts for an 11 percent rate.
All that is bad, but the far greater sin has been option accounting. Options are a huge cost for many corporations and a huge benefit to executives. No wonder, then, that they have fought ferociously to avoid making a charge against their earnings. Without blushing, almost all C.E.O.'s have told their shareholders that options are cost-free.
For these C.E.O.'s I have a proposition: Berkshire Hathaway will sell you insurance, carpeting or any of our other products in exchange for options identical to those you grant yourselves. It'll all be cash-free. But do you really think your corporation will not have incurred a cost when you hand over the options in exchange for the carpeting? Or do you really think that placing a value on the option is just too difficult to do, one of your other excuses for not expensing them? If these are the opinions you honestly hold, call me collect. We can do business.
Chief executives frequently claim that options have no cost because their issuance is cashless. But when they do so, they ignore the fact that many C.E.O.'s regularly include pension income in their earnings, though this item doesn't deliver a dime to their companies. They also ignore another reality: When corporations grant restricted stock to their executives these grants are routinely, and properly, expensed, even though no cash changes hands.
When a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don't belong in the earnings statement, where in the world do they belong?
To clean up their act on these fronts, C.E.O.'s don't need "independent" directors, oversight committees or auditors absolutely free of conflicts of interest. They simply need to do what's right. As Alan Greenspan forcefully declared last week, the attitudes and actions of C.E.O.'s are what determine corporate conduct.
Indeed, actions by Congress and the Securities and Exchange Commission have the potential of creating a smoke screen that will prevent real accounting reform. The Senate itself is the major reason corporations have been able to duck option expensing. On May 3, 1994, the Senate, led by Senator Joseph Lieberman, pushed the Financial Accounting Standards Board and Arthur Levitt, then chairman of the S.E.C., into backing down from mandating that options be expensed. Mr. Levitt has said that he regrets this retreat more than any other move he made during his tenure as chairman.
Unfortunately, current S.E.C. leadership seems uninterested in correcting this matter.
I don't believe in Congress setting accounting rules. But the Senate opened the floodgates in 1994 to an anything-goes reporting system, and it should close them now. Rather than holding hearings and fulminating, why doesn't the Senate just free the standards board by rescinding its 1994 action?
C.E.O.'s want to be respected and believed. They will be — and should be — only when they deserve to be. They should quit talking about some bad apples and reflect instead on their own behavior.
Recently, a few C.E.O.'s have stepped forward to adopt honest accounting. But most continue to spend their shareholders' money, directly or through trade associations, to lobby against real reform. They talk principle, but, for most, their motive is pocketbook.
For their shareholders' interest, and for the country's, C.E.O.'s should tell their accounting departments today to quit recording illusory pension-fund income and start recording all compensation costs. They don't need studies or new rules to do that. They just need to act.
Warren E. Buffett is the chief executive officer of Berkshire Hathaway Inc., a diversified holding company.
Warren Buffett--usually a social liberal--has suddenly gotten a clue and figured out why the market is tanking--too many clueless Democrats in Congress! (faints)
Given Buffett's enormous influence in the stock market, he might just lead the charge to clean up the mess. Maybe he's figured out what a bunch of scoundrels the Clintons really are? =)
Negative?
Well in most cases the "shareholders" would approve the appointment of a ham sandwhich as CFO if the executives and the board told them it would increase shareholder value.
The SEC has required companies to report EPS (earnings per share) on both an outstanding share and a diluted share basis for the past few years. This takes into account the number of "in the money" unexercized options.
So, I would think that if EPS was, say $1.00, and diluted EPS was, say $.90, off by 10%, that would give an investor some indication of the relative impact of expensing options.
Funny that we've been discussing Lieberman and Dodd's complicity from the accounting side on FR for (many) months, but it takes Warren Buffett to get it mentioned in the NY Times.
Pitt strikes me as a team player. Great in the boardroom, practical, flexible, knows which side the bread is buttered on... not the person needed right now. What is needed is a stern capitalist... a craggy Andrew Carnegie type of guy who will wring out the BS without killing the golden goose.
And we are in danger of killing the golden goose with all these laws Congress is contemplating.
The option itself has value even if it is under water. Look at the listed options and you can see that options below the strike price definitely do have a value which can be calculated.
When a corporation transfers something of value from its treasury (be it cash, a painting, stocks, options, software) to an employee, it is an expense and should show up on the P&L statement.
Mr. Levitt has said that he regrets this retreat more than any other move he made during his tenure as chairman.
IT seems to me it is time to bring some members of the SENATE before some committee investigating FRAUD to explain their reasons for such a vote!!!
(BTW--Hey JOEY LIEBERMAN...how are things going with CITI-GROUP banking, babes? Ya gonna talk about your cozy relationship with Enron's enabler anytime soon? We wait with baited breath for one ounce of honesty and integrity to escape your trembling lips!!)
You're absolutely right.
Without the "robust" economy, the impeached one would have been railroaded from office
He'd be smoking some of his soggy cigars from a two bit ranch in Arkansas, sitting along side his bitch, wondering what happened to my legacy!
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