- Today, the Inner Dynamics of Business Are the Culprits
- Individualism Run Amok
- Diminished Sense of Personal Responsibility
- Emphasis On the Short, Short Run in Companies
- Investor Impatience
- Finance and Accounting Assume a Central Role
- Wheeling and Dealing
- Neglecting the Heart of the Business
- Breaking the Cycle
Finance and Accounting Assume a Central Role
The role and status of the finance and accounting functions of business have been enhanced in this new stock market. In many companies, the ability to manipulate numbers, income statements, and balance sheets is as, if not more, important than the ability to produce goods and services and being competitive in the marketplace. These corporate specialists, working closely with their outside counterparts—the auditors and the investment bankers—became the Brahmins of the company. Incredibly, in some companies, like Enron, accounting and finance became profit centers.
Naïve observers of business thought that accounting was simply a straightforward system of recording and reporting the "facts." In the same vein, it was taken for granted that the finance specialists helped the company to manage its funds. They sought to help balance inflows of cash (from operations) with expenditures. When necessary, they were knowledgeable on how to use external funding sources, such as banks and capital markets, to supplement those generated by operations.
Imaginative new financial products enabled companies to hide debt and losses, even converting some into profits. A variety of creative techniques became available to "smooth earnings." Skinny profit years could be pumped up, and fat years could be slimmed down. Off-balance sheet special purpose entities and finite reinsurance could be used to hide financially embarrassing liabilities and losses from the average investor and even from many investment analysts and regulators.
Byzantine financial transactions, "financial engineering," having nothing to do with building the business became the vehicle for "cooking the books." Both the profit and loss statement and the balance sheet and their accompanying notes had become less transparent. They had become another form of advertising.
What started as legitimate, modest massaging of the numbers to hit a bonus target or satisfy stock market analysts gradually became bolder and more deceptive. "Creative" new age approaches to accounting and the use of derivatives allowed top management to manipulate the apparent performance of their companies. Reported profitability and corporate financial soundness were often the product of the risk tolerance and creativity of these paired money and numbers managers— finance and accounting.
Some accounting shenanigans were foolish in the extreme: A major software company, Computer Associates, allegedly added the value of new contracts that were signed in the next year to the previous year’s income. Of course, the result was that the following year was missing the income from those contracts for year-end financial reporting. So it became necessary to manipulate the contract dates again. The process was repeated year after year—stealing income from a succession of years. In fact, nothing was being gained. The accounting deceptions were eventually uncovered, resulting in a costly prosecution.