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Minyan Mailbag: Cooked Books



"There is nothing sadder than an aging hipster." - Dr. Evil

Time mocks us all; delighting most in ironic humiliation of those trying to fight him.

Yesterday, in a fit of hubris notable even by my personal standard, I insisted it was Saturday. I was jet-lagged. I was tired. I hadn't seen a good friend in too long. Besides, it felt like Saturday to me, damnit. Saturday it would then be!

Having thus decreed, Jeffmacke went golfing. Just as he is wont to do on Saturdays.

As Jeffmacke feebly defied time (in a mostly-bogies way), Jeffmacke's time-shifting-company (!) long-position, TiVo, reported earnings. While so doing, TiVO shared a plan of dramatic foolishness, causing TiVO's stock to tank more than a penny for every minute of the conference call.

It was not, in fact, Saturday. The only thing going back in time that day would be the value of Jeffmacke's portfolio. Time cackled at Jeffmacke, jolting him... me... back into the first person.

Shifting to happier topics...

Minyanville Mailbag Spectacular: "Can you Smell What the Boss is Cooking?" (hint: "the books")

Sparing everyone yet another all-TiVO column, Minyan Bob writes:

You are absolutely correct about the ubiquitousness of number-fudging. I was a business strategy consultant for over 20 years and saw it first hand. Here's the story behind the story:

  • Books are cooked to ensure that CEOs and other senior managers receive large payouts on "incentive compensation" schemes; at the very least, it guarantees they will be allowed to keep their jobs (which generally means large payouts anyway); it is sold to the broader organization under the heroic-sounding guise of "maximizing shareholder value."

All kinds of lunacy is justified on that basis. I remember at one major oil company, they went to single-ply toilet paper, and the management committee was proudly told "This simple change will create over $175K in shareholder value!"

No kidding. (NB: When oil hits $70 per bl it's my understanding that Big Oil will begin wiping with two-ply C-Notes.)

  • Financial engineering takes place at virtually every level in most companies; anyone with P&L responsibility knows that career-success depends almost entirely on making (or beating) their own personal numbers. As a result, most companies have no financial data (internal or external) that can provide reliable information about their performance or prospects (a fact that continues to support a thriving consulting industry).

  • Reg FD /has/ had an effect: Previously, when a company was in deep trouble, they would tell the IR guy to call up a few Wall St blabber-mouths and vaguely allude to the fact that big things were in the offing--a ploy that invariably worked. Now, thanks to FD, they just lie on the conference call.

  • Sarbanes-Oxley /has/ made some people slightly more nervous about lying; but mostly, it has become an oft-cited excuse for avoiding unpleasant or dreary tasks ("Nah, we can't do might cause a Sarbanes-Oxley problem.").

    All of this is true. It wasn't always like this (I'll be glad to tell you how it all evolved, if you're interested), but as long as people continue to get away with such behaviors, I don't believe things will improve.

    [Of course, these are simply the opinions of me, Minyan Bob. Though based on years of experience, my views are in no way to be inferred to be accusations of companies living or dead nor are they (neccessarily) the views of Jeff Macke or Minyanville.]

Dear Minyan Bob,

Thanks for the outstanding email (which I've taken the liberty of gently editing before it fell into the hands of our legal pit-bull, J-Dog)!

I think you captured the folly of this Legislation Bubble when you touched on the motivations of individuals throughout organizations. For anyone motivated to climb a company ladder, there is strong incentive to "beat your numbers" repeatedly. The risk/ reward ratio for fudging here or there along the way is heavily skewed towards reward.

Everyone does it, it feeds on itself and the next thing you know you've got an organization where the numbers have all the legitimacy of post-1995 baseball or world class Track & Field.

Olympic drug testing is the sporting world's version of Sarbanes-Oxley. In the wake of rampant cheating, the track power's that be began furiously testing for "performance enhancing drugs". This practice led to scores of high-profile scandals.

What it did not lead to was "clean" sporting events. The big-money jocks simply worked around the tests and were rewarded with suspicion and millions of dollars. The scapegoats and unlucky got caught. The public is more convinced than ever that the athletes are dirty.

Sounds quite a bit like the NYSE, to me.

Position in TIVO

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