WorldCom Finds $3.8 Billion Error, Fires CFO

[Dauphin]

pchang:

Annual accounts would be prepared annually.

What point are you making?

[pchang]

Whether GAAP or IAS, the spirit behind the rules is a more open distribution of a public company's financial status. In the US, the SEC requires quarterly reporting. I believe the LSE requires semi-annual reporting. Most other exchanges require only annual reporting. That means that in many cases, the most recent financial report available is nearly 2 years old. That some companies willfully mislead the public is a separate issue. I believe that no matter the standard used, there will always be criminals.

[Bereta_Eder]

i think the main difference with regulations based on broad principles is the wider freedom of regulatory bodies to itnerpret the rules.

(aka fewer: the law allowed me to do that" lines from companies)

less law... to have more.. law abindness...

[Dauphin]

If you have a semi-efficient (or better) capital market the accounts and frequency of publication should not impact on the share valuation.

Most of the important (general) information held within accounts should already be available to the public anyway.

[TCO]

BC, I don't have an accounting textbook. Just a workbook. (hard to look stuff up here.) It lists 9 key concepts:

-dual aspect
-money measurement
-entity
-going concern
-cost
-conservatism
-materiality
-realization
-matching

I did not find the phrase "true and fair" but of course such a plattitude has to be litigated anyway, if not defined. (Ecth has a point.)

Anyway, my limited impression of US accounting is not that it is taught as a manipulative game. The 9 concepts above try to give a framework for fairness.

[Bereta_Eder]

well critics say that the GAAP rules encourage companeis to follow the letter rather than the spirit of the law.

(not that europe is immune to financial scandsls by any means... Lernout & Hauspie Speech products?)

[TCO]

Colon, ok. You had a question about offloading assets (that the management is admitting that they are not the best managers for that asset.)

That is not a dramatic issue. Many managers/consulting firms/B-school professors would phrase it in just this way, "we are not the best manager for this asset." Just because an asset is crappy is no reason ot unload it. Because the market will value it poorly anyway if it is crappy. You have to beleive that the market has some reason for valueing it more than you.

[TCO]

Originally posted by Sagacious Dolphin
If you have a semi-efficient (or better) capital market the accounts and frequency of publication should not impact on the share valuation.

Most of the important (general) information held within accounts should already be available to the public anyway.

Valuation has a graph of DCF to market value for different auto companies from all over the world. The correlation is over .9. But P/E, M/B etc. vary widely. Partly becuase of differences in accounting. moving to FCF valuation solves a lot of that problem.

[pchang]

How and where?

Outside the US, Canada, and UK, I find it very difficult to get up to date financial statements from companies. The most reliable source has been their annual reports. These usually come out 1 quarter after the end of their fiscal year. I usually can't get them in DB form for another 6 months after that (so I can run analyses, screens, etc.).

[Dauphin]

Originally posted by GP


Valuation has a graph of DCF to market value for different auto companies from all over the world. The correlation is over .9.

If it wasn't, then the concept that shares are valued at the discounted rate of perpetual dividends is wrong.

[Dauphin]

Originally posted by GP
-dual aspect
-money measurement
-entity
-going concern
-cost
-conservatism
-materiality
-realization
-matching

Concepts are the same, pretty much, but it is the execution that appears different.

Anyway, my limited impression of US accounting is not that it is taught as a manipulative game. The 9 concepts above try to give a framework for fairness.

All accounting is treated as manipulation . Its just that there's fair play and there's bending the rules.

[TCO]

My copy of Valuation does not comment on the issue of which accounting system is more subject to fraudulent manipulation. It's also dated 1994...and presumably is based on older research. So European accounting changes in the 90's would not be reflected.

Main point of the chapter 13 article is that the accounting treatments can vary widely, but that cash is cash. For instacne countries vary in how goodwill is treated, how depreciation is treated, consolidation of subsidiaries, etc. etc.

They have examples of D-C reporting a $105 million loss under German rules in 1993 (first 3 q), but that it would have been a $1.19 billion loss under GAAP. Also have an example of Aegon (Dutch) having a 3.8% ROE* under GAAP and a 14% ROE under Dutch rules (not sure what year). However, the calculated free cash flow is the same in both cases. (Meaning you can deconvolute the differences.)


*ROE is a very slippery metric and prone to manipulation anyway...in any system.

[moomin]

GP: While I can't say I'm really up to snuff on accounting and it's assorted dark rituals and practices, my gut feeling, having worked extensively with accountants to prepare my units reports, is that US GAAP is easier to, eh, affect creatively than European regulations. Mainly this has to do with that "full and fair" policy that the Brits managed to slip into EU law when they joined. It gives the state the power to squash, of course, but it also makes hiding stuff like this much more difficult.

A trade-off, as with most things.

[Saras]

GP

--"My copy of Valuation does not comment on the issue of which accounting system is more subject to fraudulent manipulation."

There are other books, you know

[Urban Ranger]

Originally posted by Adam Smith
Worldcom says, with a straight face, that GAAP tells us to capitalize this switching equipment, which GAAP says has a life of 10 years. Reality is that the equipment will be technically obsolete in two years, so it shoud either be expensed or have a 50% depreciation rate.

Do you know if it's Cisco equipment?