Accounting issues

Some thoughts toward what will eventually become chapter 7 of my book, the chapter on Accounting and Valuation.

... The problem is not simply that the wrong accounting choices fool the tax authorities. The problem is not even that they fool investors. For our purposes in this book, the gravest difficulty is that the wrong accounting choice can prove a means by which management fools itself about the value of its company, its reserves of cash and other assets, and its strategic options. ["Big Oil's Accounting Methods" etc. 2006.]

Consider to understand this an accounting issue less obviously tied to inflation than the LIFO/FIFO imbroglio. Consider the question of the expensing of stock options.

In the dotcom-a-go-go years of the 1990s, neither the law nor accepted accounting principles required employers to recognize that in issuing stock options to their employees they had in effect expended enterprise wealth, i.e. stock options were not expensed.

Stock options were a critical part of the compensation package for many of the high-tech start-ups that give those years their distinctive flavor. The practices of not expensing such options allowed start-ups to show a profit sooner than otherwise would have been the case, and this in turn helped keep the original investors happy, while allowing start-ups to bring in new investors.

That was the argument -- when arguments came to be necessary -- for continuing to use stock options without calling them an expense. Yet it was also the argument for calling them an expense. For the obvious problem with the use of stock options was that they diluted the value of the company's equity. At some point some number of the options will be exercised and this increases the amount of stock outstanding -- there is a larger supply of that stock, then, capable of satisfying whatever the market demand may be.

For internal managerial purposes, too, it is important to know what is happening and what is likely to happen to the value of equity. It has a great impact on the company's ability to raise money quickly, on its ability to purchase other firms or to maintain its independence against those who would purchase it, and so forth.

Indeed, one could make an argument that the Financial Accounting Standards Board's politically motivated retreat from an expensing mandate was a signal -- something akin to a starter's pistol -- for the dotcom boom. In 1993 the FASB recommended a rule that would have installed expensing as part of the generally accepted accounting principles (GAAP) in the United States.

[My readers will want to know a bit about what the FASB is, if I have not already provided that info.]

Joe Lieberman (D-Conn.) a Senator from the state where the FASB has its headquarters, sponsored a Senate resolution declaring that the new proposed accounting standard would have "grave consequences" for entrepreneurs.

Indeed, on March 25, 1994, roughly 3,000 gathered at the San Jose Convention Center, in San Jose, California, protesting the threat posed by those distant Connecticut accountants to their beloved stock options. Kathleen Brown, the state treasurer, daughter of the once-and-future Governor Jerry Brown, addressed the crowd.

According to an account in FORTUNE, she shouted, "Give stock a chance," and the crowd loved it.

Lieberman and like-minded folks did manage to kick up enough of a fuss so that the FASB backed down, and continued to allow Silicon Valley and its favorite accountants to pretend that they were giving out something costless.

In face of political pressure, the FASB retreated. It said that in the main body of their books, companies could continue to pretend that options were, in effect, free. The retreat was not complete, though, because the FASB still required disclosure in footnotes.

This seemed like an awkward compromise to everyone, and unsurprisingly debate continued. By 1197 two analysts, Micahel L. Goldstein and Jonathan Freedman, had estimatef that the profits that corporations were showing about 5% the artifact of this rule and increased use of oiptions it encouraged.

The debates were kicked up several notches in intensity after the dotcom collapse. Heck, the debate was on The Simpsons. In an episode that aired in April 2002, ["I Am Furious (Yellow)"], Bart and Lisa were briefly employees of a dotcom company, paid in options. The company goes broke, and the siblings discover that their options are worth $0. But they have one million of them!

Bart to Lisa, "What's one million times zero?" then in a low growl he continues, "and don't tell me zero!"

The Hartford Courant

The leading source of dead-tree news in my neck of the woods, the HARTFORD COURANT, has apologized, although in rather lawyerly language rather than in any terms that would be satisfyingly abject, for repeated plagiarism.

[This is not breaking news, BTW. Anyone who wants breaking news should go elsewhere. This is my blog, I'll get around to things when I do.] Anyway, last week the Journal Inquirer's managing editor, Chris Powell, complained in a letter to the publisher of the Courant, that the latter had been "misappropriating on a wholesale basis local stories published in the Journal Inquirer." It appears that this has been going on since July.

Last weekend, Jeffrey S. Levine, the Courant's senior vice president, said in a statement that the paper in the past month has been experimenting with new strategies regarding the "aggregation" of news. They were trying to be hip and google-like. In the process, they forget some rules they should have learned in kindergarten.

"While attribution to the JI of the occasional big story we have broken may be welcome, the Courant's frequent use of the JI's work to report ordinary events in the towns in which our circulation overlaps is not welcome -- it's theft of copyrighted material and costly to us," as Chris Powell put it.

There were five other papers, aside from the JI of Manchester, that have apparently been ripped off in all this aggregation.

That isn't the only pile of crap the Courant has stepped into lately. It has placated Sleepy's, a chain retailer of beds and matresses, and a major advertiser, in a way quite pathetic.

George Gombossy has served as the consumer advocate columnist, under the heading "Watchdog," at the Courant for many years. In that capacity, he wrote a piece about a state investigation that Sleepy's may be selling mattresses with used boxsprings, selling them as new.

That's precisely the sort of thing they were paying him to write. Hence the term "Watchdog."

Apparently, not enough of a lapdog, though. He's been fired.

Here's his final column

and here is his website, where he proposes to carry on with his life's work.

A church finance bill?

The very nomenclature sounds archaic. A "church finance bill" in the legislature of one of the states of the United States?

And my state, at that?

But there it is ... Senate bill 1098. Dropped into the hopper earlier this month.

AN ACT MODIFYING CORPORATE LAWS RELATING TO CERTAIN RELIGIOUS CORPORATIONS.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Section 33-279 of the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2009):

(a) A corporation may be organized in connection with any Roman Catholic Church or congregation in this state, by filing in the office of the Secretary of the State a certificate signed by the archbishop or bishop and the vicar-general of the archdiocese or of the diocese in which such congregation is located and the pastor and two laymen belonging to such congregation, stating that they have so organized for the purposes hereinafter mentioned.


That's how it begins. But of course the point of the bill wasn't to require that certain paperwork be placed in the hands of the Secretary of State. The point was to make sure that the "lay members of the congregation" rather than the clergy have control over finances.

The bill -- now withdrawn after a brief and intense publicity storm -- would have mandated that the "administrative and financial powers" of a diocese be subject to a board of directors, which would have to have a minimum of seven members, more than half of whom lay members.

To be fair, there was also a subsection with this language "Nothing in this section shall be construed to limit, restrict or derogate from any power, right, authority, duty or responsibility of the bishop or pastor in matters pertaining exclusively to religious tenets and practices."

But body and spirit in this life are awfully (awefully) intertwined. This looks like a power grab.

The bill has died a quick death, but that it was even considered in this era leaves me astonished and forces meditation about what kind of era this is.

When Markets Collide

When Markets Collide is the title of a quite well-written book by Mohamed el-Erian, an economist who worked at the International Monetary Fund for 15 years, and has since worked at Salomon Smith Barney, the Harvard Management Company, and PIMCO.

(Gee, he can't keep a job, can he?)

I read large chunks of it during my train rides Wednesday, from Stratford CT to Manhattan in the morning and back the other way in the evening.

Love that spinning top cover art. The "equator" of the globe presented as a top is considerably to the north of the actual equator, though. the pseudo-equator seems to pass through the Yucatan peninsula.

More seriously: I don't agree with the author's Keynesianism in macro-economics but ... disagreement is why they run the horse races.


I appreciated his summary of theories about the "market for lemons."

Used cars are a product with non-obvious defects. Consumers are aware of this, of the danger that they'll end up with a lemon, but they sometimes do have to enter this market anyway. With what result?

With the result, as el-Erian tells it, that perfectly fine non-lemons end up selling for a price less than they would were accurate information more generally available and appreciated. The fear of a lemon forces a discount on the whole second-hand jalopy markets, and some people get non-lemons cheap.

I suppose something like that was the theory behind early versions of the TARP [Troubled Asset Relief Program]. The troubled assets on banks' books include, to simplify considerably, the rights to the flow of money from mortgaged homeowners. Some of these homeowners are "lemons." They'll likely default. Others won't default, though, and the troubled banks might under ideal circumstances sell the rights to the good mortgages for significant chunks of needed cash. But as with cars, the taste of the lemons infects the non-lemons.

But this still leaves us with the age-old question durected by citizens to those who would govern them: "Why do you think you're smarter than us?"

Why are the administrators of the TARP presumed to be better at deciding what is or isn't a lemon than the private sector?

I'll say no more, but parts of this book do help frame the discussion nicely.

"Extrapolated" Conclusions

Judd Bagley, the proprietor of the blog "AntiSocialMedia," maintains in his latest posting there that nobody has ever shown anything he's said to be wrong.

Then he adds a neat little parenthetical qualification, for which I will personally take credit. He writes, "Yet, with a single (quickly rectified) exception, every conclusion extrapolated here has proven accurate."

The exception that I presume he has in mind involves a reporter named Susan Antilla, of Bloomberg News, who has written critically of Mr. Bagley's favorite company, Overstock dot com. That's always a good way to draw Bagley's attention, which it seems to have done.

Antilla is also the ex-wife of Dennis Leibowitz. For the particulars of why that's important to Mr. Bagley see what I wrote in September.

Anyway, after Bagley went out on a limb on an IV bulletin board and referred to the present-tense Antilla-Leibowitz marriage, he was immediately informed of the divorce. He chose not to believe it, and to write up his disbelief in Antisocial. He even suggested Antilla's divorce lawyer may have failed to file the appropriate papers, so she may still be married without knowing it.

Now, this is a matter on which there can't be a lot of room for confusion. I happen to be a member of the bar of the state of Connecticut (that is itself a matter of public record, as easily verified as is marital status!) and I know that a divorce can be verified with ease.

Anyway, after this was explained sufficiently to Bagley, he eventually deleted the babbling from his website. Since he's been called on it before, I do believe that's the "one exception" to his accurate "extrapolations" he now acknowledges so fleetingly.

We shouldn't let him off the hook too easily here, especially given the odd word "extrapolation" itself. He made a false statement of fact on an easily verified matter. What was supposedly extrapolated?

I'm not inclined to accept his implicit factual claim (in that parentheses) that this was his only factual error. He hasn't hired me as a fact checker, after all. But I'm pretty confident that is the factual error that inspired the parenthesis, because of an exchange he and I had on the subject in September of last year.

At that time, Bagley e-mailed me to note that I had referred to "demonstrably false assertions" of his. He asked which assertions were those. I replied, referencing Susan Antilla. He responded to that, claiming that he hadn't made the marital claim about Susan Antilla in his blog, only on IV. That was a demonstrably false assertion itself, as I pointed out to him in his reply. Deleting something from a blog doesn't mean it was never there. Deletion isn't a memory hole.

He replied telling me, "Forget Susan Antilla," [I'm sure he would like me to] and asking me for other examples of his falsehood, on the theory that learning of them would help him develop as a writer. At this point I was getting tired of the game, and I didn't reply.

As I had expected, he soon thereafter posted a very long blog entry in which my name plays a very small part. He puts me on a list of his blog's "harshest critics" and complains in general that none of us have replied to his e-mail. "My e-mail must be broken" he says, in what I suppose is meant to be irony or sarcasm or something stylish.

Just in case anybody who read that has now found your way here. Mr. Bagley's e-mail isn't broken. I did reply to his initial request about whether he had said anything demonstrably false, and I pointed out to him that he had. He told me to "Forget Susan Antilla." I did so, and accordingly did not respond subsequently. Now I see that all of this rates a parentheses from him.

Ah, so I have not lived and breathed entirely in vain.

Why am I taking note of it only now, five months later? Well, because Bagley doesn't occupy many of my neurons for very long and I've let time slip by occupied with other matters.

But I come back to it because I do feel a certain non-emotive indignation at being listed, as I now have been, as among Mr. Bagley's blog's "harshest critics." That's language that just makes you say: huh? If I'm among that blog's harshest critics, it leads a charmed life indeed. I've written of it rarely, and if any "harshness" has crept into my writing on the subject, I'm unaware of it. Correcting the Antilla error isn't harshness. It's fact finding. Positing the absense of any need for an article about Mr. Bagley on wikipedia may be as "harsh" as I've gotten. But, hey, there's no article on wikipedia about me, either, and that's honky-dory at this end.