Accounting
the only ones to feel the squeeze. Analysts are being pressured by large institutional investors and companies seeking to manage expectations. Everyone is seeking the win. Auditors are being accused of being out to lunch, with the clients. Many accounting firms are coming under scrutiny as some of their clients are being investigated by the SEC for irregularities in their practice of accounting. Cendant and Sunbeam both left accounting giant Arthur Anderson holding a big ol’bag full of unreported accounting irregularities. Auditors from BDO Seidman addressed issues of GAAP with Thing New Ideas company. The Changes were made and BDO was replace for no specific reason. Herb Greenberg calls the episode, "A reminder that the company being audited also pays the auditors’ bill." The Kind of conflict of interests that leads us to question the idea of how independent the auditors are. All of these pressures allow questionable accounting practices to obfuscate the reporting process. Generally accepted accounting principles are intended to be a guide, not a procedure. They have been developed with intended flexibility so as not to hinder the advancement of new and innovative business practice. Flexibility that has left plenty of room for companies to stretch the boundaries of GAAP. Levitt focus’s on five of the most widespread techniques used to deliver added flexibility. "Big Bath" restructuring charges, creative acquisition accounting, "Cookie Jar" reserves, "Immaterial" misapplications of accounting principles and the premature recognition of revenues. These practices do not specifically violate the "letter of the law," but are gimmicks that ignore the spirit and intentions of GAAP. Gimmicks, according to Levitt, that are "an erosion in the quality of earnings and therefore the quality of financial reporting." No longer is this just a problem perceived in small corporations struggling for recognition. Throughout the financial community, companies big and small are using these tools to smooth earnings and maximize market capitalization. The "Big Bath" restructuring charge is the wiping away of years of future expenses and charging them in the current period. A practice that paves the way to easy future earnings growth by allowing future expenses to be absorbed by restructuring liabilities. Large one time charges that will be ignored by analysts and the financial community through a little convincing and notation. In note fifteen of the Coca-Cola company’s 1998 annual report shows seven nonrecurring items from the past three years. Fours of these charges are restructuring charges, most significantly in 1996 in this note. In 1996, we recorded provisions of approximately $276 million in selling, administrative and general expenses related to our plans for strengthening our world wide system. Of this $276 million, approximately $130 million related to streamlining our operations, primarily in Greater Europe and Latin America. These one time write-offs become virtually insignificant footnotes to the financial reporting process. Extraordinary charges that are becoming unusually common. Kodak has taken six extraordinary charges since 1991 and Coca-Cola has taken four in two years. The financial community has to wonder how "unusual" these charges are. Creative acquisition [next page]