2001 Enron Scandal
Easter BunnyAn Accounting System Built on Lies
Stand by for a Dekom oversimplification. “Accrual based accounting” just might be “a cruel based accounting.” Today, it is required of “C” corporations with annual gross receipts of $25M or more over the past three years. Basically, when this method of accounting was created, the clearly inebriated accountant who thunk it up lived in a simpler age. The underlying notion was to match the cost of a manufactured product against the expected revenue generated by that product. The same could said of company operating expenses. An example? The company makes a car in calendar 2025, but by the time it is sold, it’s 2026. Easy, I can fix that, said the woozy accountant taking another swig from that bottle of bourbon in his desk drawer. I’ll just move the numbers around. But that was long before massive mergers and acquisitions, tons of subsidiaries, off-balance sheet financing and all kinds of fun business tricks. Pass the bottle. I can fix that!
The notion was to put income and directly related costs in the same column, which meant you either had to wait till you had both numbers – but Uncle Sam didn’t want to wait for his share of taxes – or project the income you expected to generate in the future and deduct your real costs against that. In short you would accrue expected (future) income, apply your costs against that (OK, it gets more intense when you add depreciation, etc. where an asset wears out and needs to be replaced someday), and you can figure out how much you made.
As the corporate world got infinitely more complex, how you determine what you had to report to shareholders, the government, etc. became a maze of constantly changing variables, often different rules for different industries. In the United States, the required standardization is set by the Financial Accounting Standards Board (“Fas-Bee” for short) and is equally impacted by state and federal tax codes, which are particularly weird because rules tend to go to the highest bidder (e.g., effective lobbyist) influencing the relevant legislature as to why his client’s company deserves special treatment. The green eyeshade accountant has been replaced by lots of computing (add AI to the mix) and dedicated software that takes all those rules and accounting changes into consideration, after serious manipulation by the relevant chief financial officer, to spit out the various formats of financial and income tax reporting.
Life sure would be easier if corporations were more like individual families. Mom and Pop tend not to run depreciation numbers and do not take that projected revenue they may earn in the future into account… cause it don’t buy groceries! At least families look only to the hard dollars they receive (or can borrow) and the hard costs of what they buy. The “cash basis” we know and love.
But accrual accounting is what the corporate world lives by, and as I said, Uncle Sam loves to be able to tax monies that are expected to be received in a later tax year, so those projections are not facts! And for some industries, like show biz, those numbers are more wishes than bankable estimates. The film and television industry has a euphemism for those projections: income forecasting. So basically, the feds require most corporations to lie (guess?) about those numbers. The stock market, which often bases share values on those projections (earnings), is yet another reason for corporations to project “earnings”… within “reason.”
The pressure for more conservative estimating rules (e.g., the 2002 Sarbanes–Oxley Act) on such projections came to light when energy giant Enron entered into a complex maze of new deals, holding companies, subsidiaries, joint ventures that allowed the company to project hundreds of millions of dollars of “expected future earnings” from a new business… that… er… wasn’t really… operational yet?! Result: In 2001, Enron filed the biggest Chapter 11 (reorganization) bankruptcy experienced up to that time. Criminal (fraud and related) charges were filed, senior managers went to prison, and… well… here we are. So effective liars and those who can make underlings lie for the them are rewarded?!
So just tell me which President of the United States currently faces a litany of economic failures that he and his sycophants recast as success? Could it be the same President who was convicted of accounting crimes? As Tom Boggioni, writing for the May 18th Raw Story, tell us, Donald Trump thinks a little “legitimate” tweaking of accounting rules might actually make him look good. “As part of Donald Trump's administration's purge of federal employees who are believed to not be willing to support his agenda, there is a new move afoot to make it permissible to fire federal financial analysts if their reports don't paint the pretty picture the president demands.
“According to a report from the Guardian's Robert Tait, government ‘number-crunchers’ may find themselves out on the street if they submit reports that make the current administration look bad… That has led to worries that future reports coming out of the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) will have been manipulated before they are released to the Federal Reserve and the press.
“As Tait wrote, fears of staffers ‘intentionally subverting presidential directives’ could set the stage for the White House to ‘fire statisticians employed to produce objective data on the economy but whose figures prove politically inconvenient, experts warn.’…That, in turn, could lead to efforts by the administration to ‘cook the books’ and deceive the markets and the public…
“Explained government accounting expert Erica Groshen of Cornell University, ‘There are a number of changes to the civil service that make it much easier for the administration to try to interfere with the activities of the statistical agencies and that worries me.’…In a briefing paper she authored, she warned, ‘Bureau of Labor Statistics’ leaders could be fired for releasing or planning to release jobs or inflation statistics unfavorable to the president’s policy agenda,’ adding, ‘By making it easier to remove employees if a president determines that they are interfering with his or her policies, it increases the potential for passivity or political loyalty to be prioritized over expertise and experience.’” What, investors, bankers and corporate planners cannot trust government numbers and have to devise their own substitute metrics?! Gee, we’ve never seen that before.
I’m Peter Dekom, and intentionally lying on official governmental accounting reports is OK… but who goes to jail when caught, the fomenter of the wrongful pressure (the bosses’, bosses’, bosses’ boss, DJT) or the poor schlub who fudged the books as desired?
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