Hidden financial risk understanding off–balance sheet accounting (2003)

[...]... many errors and a culture that fostered “aggressive accounting. ” DEBT? WHAT DEBT? Financial Leverage The theory of finance posits that expected returns are a function of risk Risk itself is comprised of many different aspects, including business risk, inflation risk, political risk, and financial risk Here I am concerned primarily with financial risk, which deals with the negative aspects of having... data in the accounting records The report also states that “aggressive accounting is not necessarily improper accounting. ” While it is true as written, this assertion is a bit misleading The point is that financial statements should communicate information to shareholders A little aggressive accounting may not impede this process too much, but there comes a point when a lot of aggressive accounting. .. concrete, financial economists talk about financial leverage, which attempts to measure either the amount of debt in the financial structure or the amount of fixed interest charges in relation to the overall cost structure Since the latter is difficult for analysts to glean from public financial statements, here I shall operationalize financial leverage as some ratio of debt that occurs in the financial. .. “THEY HAVE NO PROFITS”1 Some writers have criticized corporate accounting, but until recently they have been few in number Perhaps the best-known accounting critic is Abraham Briloff, who wrote Unaccountable Accounting (1972), More Debits Than Credits (1976), and The Truth About Corporate Accounting (1981).2 These books have two themes First, accounting distortions, improprieties, and even frauds are more... experienced accounting scandals of one type or another; many were frauds carried out by the management team Fifty firms with accounting scandals is 50 too many Exhibit 1.1 Corporations with Recent Accounting Scandals Adelphia Amazon AOL Time Warner Arizona Baptist Foundation Aurora Foods Boston Chicken Bristol-Myers Squibb Cendant Cerner CMS Energy Commercial Financial Services Conseco Creditrust Delta Financial. .. those accounting scandals dealing with the underreporting of corporate liabilities These scandals include Enron, Global Crossing, Adelphia, and WorldCom, so I certainly take account of the important scandals of this time period While I start with an overview of the many accounting and auditing failures in corporate America, I focus on financial risk As clarified later in this chapter and in the next, financial. .. by looking at the equity method, lease accounting, and pension accounting From that base, I then look more carefully at special-purpose entities, their use and their abuse, and examine more carefully the amount of debts involved and how firms have deceitfully hidden these debts from their balance sheets The rest of this chapter provides a thumbnail sketch about accounting and auditing abuses, including... Mason After this, I review the concept of financial risk and then take a more in-depth look at Adelphia, Enron, Global Crossing, and WorldCom, since these malfunctions specifically entail lies about each firm’s true amount of debt I conclude with some thoughts on accounting ethics and why I think these accounting frauds form a serious threat to American society ACCOUNTING PROPHETS: “THEY HAVE NO PROFITS”1... surrounding the plethora of accounting and corporate scandals in recent years I examine the nature of the accounting scandals, why they have occurred, and how to overcome them I also inspect the failure of corporate governance, the failure of regulation, and the failure of the accounting profession in preventing these scandals from taking place Unfortunately, there have been so many accounting and corporate... (AICPA) Happily, Briloff continues to write about accounting scandals, but unhappily the stock market decline due to accounting lies has proven his allegations correct We all would have been better off if the accounting profession had listened to Briloff’s wisdom instead of throwing stones at him Eli Mason has also performed diligently the role of accounting critic He has served the profession in a . Cataloging-in-Publication Data Ketz, J. Edward. Hidden financial risk : understanding off-balance sheet accounting / J. Edward Ketz. p. cm. Includes bibliographical references and index. ISBN 0-4 7 1-4 337 6-4 . h0" alt="" Hidden Financial Risk Understanding Off–Balance Sheet Accounting J. Edward Ketz JOHN WILEY & SONS, INC. 00 Ketz FM 5/21/03 9:58 AM Page iii This book is printed on acid-free paper should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 20 1-7 4 8-6 011, fax 20 1-7 4 8-6 008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer