You write down expenses in the hope that the future will look brighter," he said. "One purpose is to provide a form suited to the publication of a corporate report." "It all comes back to purpose," said Charles Callard of Callard Asset Management in Chicago. They are guidelines for presenting business results in ways intended to be consistent over time and across companies. The point is, accounting rules are not laws based on social and moral imperatives. Today, many companies want to mimic GE's success, even as GE is under fire by critics of its accounting practices. for years, because the company reported consistent growth, based in part on accounting manipulation, Weil said. Q-But aren't accounting rules clear enough to avoid manipulation by mischievous financial managers?Ī-One investor's evil manipulation is another's beloved "smoothing." Investors have applauded General Electric Co. Roman Weil, a professor of accounting at the University of Chicago Graduate School of Business, said that Andrew Fastow, former chief financial officer of Enron Corp., "would not have been a CFO in the old days. As a result, investors were misled and betrayed." In announcing the fine, Stephen Cutler, the SEC's director of enforcement, said: "For Xerox, the accounting function was just another revenue source and profit opportunity. Those skilled in creative accounting moved high in management ranks.Įarlier this month, the Securities and Exchange Commission levied the largest fine ever for accounting fraud, $10 million against Xerox Corp.
In effect, accounting creativity became a business strategy, often replacing creativity in improving customer satisfaction. Second, the current emphasis on short-term results has transformed financial reporting to a prominent role in business operations from its traditional role as an objective umpire. Today, options are seen as a major cause of overstated profits. For example, executive stock option awards are not required to be deducted as an expense, because they were simply seen as a way to align management interests with shareholder interests.
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