Cracking the Books: Introduction: Why Accounting Matters By Jesse Eisinger Senior Writer 9/21/98 10:08 AM ET Math is hard, as the ill-fated Barbie said. But it matters. Accounting blowups like Cendant (CD:NYSE), Sunbeam (SOC:NYSE) and Livent (LVNTF:Nasdaq) have repeatedly seized investors' attention in the past year. Accounting fiascoes, these disasters have shown, are worse than routine sales or earnings shortfalls for investors. They destroy the fundamental bond between shareholders and the companies they own -- the profit and loss statements that investors rely on in deciding where to deploy their capital. Accounting doesn't only matter in cases of fraud, however. Even honest companies can work up their numbers in controversial, but perfectly legal, ways to make their bottom lines pleasing to Wall Street. Wall Street is America's ongoing opera of optimism, and corporate America's financial statements are its upbeat score. So long as stocks are rising, investors don't worry about the arcane accounting issues that can help keep the music allegro. If this bull market has bred anything, it's sloppy accounting and lax oversight from inexperienced investors. Keeping up with the many ways companies can fudge their numbers can be overwhelming. Some companies make dozens of acquisitions, taking separate charges for each one and making their reported numbers all but impossible to understand. Others finance their customers and give them enormous leeway in paying them back. Still others have restructured so repeatedly analysts cannot tell what the real growth rates are. All these techniques can obscure how much the company earns and how much those earnings are growing. This weeklong series, Cracking the Books, aims to expose these earnings-enhancing techniques. By poring into the far reaches of Securities and Exchange Commission filings and speaking to the sources who don't open up to just anyone, we've highlighted some of the more questionable decisions companies can make in preparing their financials. We hope to bring up the issues sell-side analysts and chief financial officers would prefer that you not think about. Readers will see some recurring themes in this series: LHS Group (LHSG:Nasdaq), a major billing-software company, and Shared Medical (SMS:NYSE), a health-care information services company, present questions about how much their customers owe. Kellogg (K:NYSE) and Gateway (GTW:NYSE) liberally employ writeoffs to clean up their financials. We go beyond examinations of specific company bookkeeping because we want to give readers tools to better understand the market. In Kevin Petrie's insightful piece on Cisco (CSCO:Nasdaq), readers will discover that -- if accounted for in a different, more conservative fashion -- the stock options that the tech giant must pay to its employees would crimp the networker's earnings. And yet stock options aren't just a high-tech issue; they've become an important piece of compensation packages across many industries. Readers will discover that raising questions about powerful companies' accounting sometimes can exact a price. As Suzanne Kapner found out in examining accountant Albert Meyer's recent troubles after a series of hard-hitting analyses of Coca-Cola (KO:NYSE), individuals who question Wall Street's party line can find themselves unemployed. And because accounting can at times be confusing, reporter and former accountant Tracy Byrnes and Associate Producer Bob James have put together an interactive primer that offers tips and techniques you can use to explore the statements yourself. But more than any single detail of any our stories, what we hope you'll take from this series is the understanding that accounting is no idle academic exercise. Accounting counts, figuratively as well as literally. Without the real numbers, there's no way to determine if a brilliant-sounding business plan is gold -- or just gold-plated. And without true accounting, there are no real numbers.
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