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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

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

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

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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