Friday, April 26, 2002

Cooking The Books

What happens when a company's pension fund loses value? It gets counted as an increase in earnings. Really. Floyd Norris has a good piece on this particularly offensive accounting trick in today's New York Times (registration required). Here's a taste:

"So how did billions in losses turn into nearly $2 billion in profits? Verizon assumed that its pension plans would earn profits of 9.25 percent last year, and it reported income as if that assumption were true, something it was able to do under the current ridiculous accounting rules. Its earnings would have been even better had it assumed a 9.5 percent return, as General Electric did, or a 10 percent return, as I.B.M. did. In fact, both those companies lost money in their pension plans last year, as did most big companies."

"A study by Milliman USA, a benefits consulting firm, found that in 2001 the reported results of 50 large companies included $54.4 billion of profits from pension fund investments. In fact, the pension funds lost $35.8 billion from investments last year."

"The losses are buried in annual report disclosures that few can understand. Harvey L. Pitt, the chairman of the Securities and Exchange Commission, has promised to make annual reports more understandable. This would be a good place to start. Even better would be a new accounting rule requiring actual results to be used

My most recent column for Fast Company magazine concerns funny numbers on Wall Street and the threat they pose to investor confidence. You can read it by clicking here.