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The Hard Reality of Cooked Books



There I was, more or less minding my own business, and seemingly out of nowhere the fury of the Russian Bear (Prof. Vitaliy) came crashing down on me. Unlike, say, Napoleon or Rocky (IV), I didn't mean to pick a fight.

Not to say I won't fight back with a fusillade of bullet points. It isn't much of a defense, I'll grant you, but I'm not actually certain that we disagreed in the first place. I just need to put up enough of a fight so Vitaliy doesn't take me for a patsy, like, say, FDR.

  • I didn't mean to imply, suggest or make anyone "trip" on the idea that I'm in favor of executives "manipulating" earnings to achieve Street estimates. I'm not in favor of any such thing. I just think that the behavior is more the norm than the exception.

  • Such behavior makes intuitive sense, actually. There is always a great deal of discretion in financial reporting. It simply can't be standardized; not by FASB, not by Sarbanes nor Oxley. There are plenty of reasons to lean towards making discretion the part of valor by prodding earnings reports to better fit estimates.

Beyond making it easier for a CEO to keep his job, meeting or beating estimates makes the Street less contentious, keeps the company focused on things other than the stock and works towards keeping the stock supported (making the CEO's life easier in countless ways beyond simply his own enrichment).

  • It's wrong to pretend that such behavior doesn't exist. That's why we pour through the reports, to find kernels of information as to things a company / executive does that "aren't right" or, on the bullish side, are more conservative than normal. (Back when Microsoft (MSFT) made so much money that they would understate their reports, to cushion out-quarters, nobody really criticized them for it. Just because it's "conservative" fake reporting doesn't mean it's not illegal, in theory.)

  • On the point of "Sarbanes-Oxley making earnings reports honest" it's simply not true. We had sufficient laws to penalize CEO's who went from fudging to massive fraud. We simply didn't enforce these laws, as a society.

    Sarbanes-Oxley is a flawed concept, poorly executed by people who, as a body, didn't have any idea what they were talking about. As an extreme comparison (since you seem to dig those), Sarbanes-Oxley is akin to trying to reduce murder levels by making it illegal in more ways. As though you could literally get away with murder, if you could only find a way to kill someone in a way no one had yet made illegal.

    "Vlad the Impaler was objectionable but no one could do anything about it because 'impaling people' wasn't expressly forbidden by moral or legal code until years later."

    There is a distinct and discernable difference between flat out making up fake business and manipulating numbers. The former is Sunbeam, the later is "pretty much any company you can name".

    We didn't need to spend countless billions complying with endless new regulations to tell the difference between fraud and discretion.

  • I hope this clears up my point, somewhat. Towards that same goal, allow me to reiterate, "Vitaliy, your son will never meet my daughter." Nothing personal. It's a chromosonal thing.

With that, I'm calling a Superman II audible by changing the calendar to better fit my desires. Whatever day is it where you are, I'm calling it "Saturday" here and hitting the gate a bit early.

I've got a golf swing in desperate need of repair, after Ojai.

No positions in stocks mentioned.

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