can-GE-survive-its-cooked-books?

https://www.forbes.com/sites/petercohan/2018/12/15/can-ge-survive-its-cooked-books/#3b4ac8292841

Firstly - motherhood statement - Accounting irregularities are nothing new to the Corporate World. Technically, many of these "cooking" happens within the SEC guidelines in the USA ( or Companies Act or other applicable governing Acts for Indian companies). History is replete with such instances of Accounting gone awry ( to put in benignly).

Secondly - the USA - that apostle of GAAP Accounting, who preaches transparency to the world, are the major culprits. Remember that giant $54Billion "Accounting error" in MCI Worldcom that took the company under? Andersen Consulting was pulled up by the SEC, for MCI as well as the other major disaster - Enron.  But then , like Amoeba, the firm was absorbed/ bought over, but strangely enough none of the partners went to jail, presumably because it was all within the existing laws. Which is why they tried to tighten it was Sarbennes-Oxley Act and a help of others. So, while systemically, the SEC has been trying to fix this, gaping holes continue, and are exploited by the Managements of many companies in collusion with the external auditors, under the shield of " being within the law".

Secondly, while in paper, the rules are clear, the authorities look the other way, when it comes to risk managment. How else does one explain the Collateralized Debt Securities, which enabled the Financial companies like Lehmann, Bear Stearns etc to leverage the same collateral more than a 100 times over? Unless, of course, the SEC admits that comonsense was not applied to question why a single collateral is leveraged multiple times over, and where is the SLR/ CRR requuirement, if margin calls are made.   I am convinced that the authorities had colluded with Wall Street.  Sending one Raj Rajarathnnam or Bernie Madoff to prison is not the answer. Systemic risks needs to be looked at holistically.

Thirdly, the role of credit agencies is question, to say the least. What were Moody's, S&P etc doing when Enron and MCI happened? What did they do to US sovereign rating when 2008 happened? How come the USA enjoyed AAA+ rating even in the worst time of it's financial history? If they cannot warn prospective lenders about the risks, through fair rating, then aren't they actually misrepresenting facts, and misleading the gullible investors and public at large?? If GE stock is down to less than $10 today, just back in history to see when their corporate bonds were derated last. You will find it shocking.

The same applies to India too. What were CARE, CRISIL, Moody's etc doing when IL&FS happened? Again, if the IBA really had it's way, more than half of Public Sector Banks would be NCLT cases, technically, since their nett worth is completely eroded due to bad debts. The same may apply to entities like Indian Railways, Air India etc ( nearly so) , but since these are government entities, they are not really covered under Companies Act, and are answerable only to the Parliament, and so, that is OK.

Year 2018 saw three small-cap companies in India severely affected by cooked-up books. Manpasand Beverages, PC Jewellers and Vakrangee Software.   If you get time, do a google search and read through the issues there. You will be shocked that the auditors had colluded with the management, to cook up books. PC Jewellers and Vakrangee, in fact , have a maze of cross holding, that is nothing but amazing!!

And if you thought only the USA and India have this, then think again!

In Korea, 2 of the 4 Chaebols have already gone belly-up due to Financial irregularities. If China were to really open up their books of Accounting, the sheer amount of bad debts in their Bank's Balance sheets, whill surely take the country down under. But then, they do not claim to be transparent, in any way, so there is no pretension. In Malaysia, the same is the case with many state run enterprises, including Malaysian Airlines. In fact, government owned airlines in most countries are already belly-up. Alitalia, SwissAir, Air France, KLM Thai Airways, Korean Air... that list is endless.. 

Many contingent liabilities are supposed to be captured there, but they are discretionary in nature, based on what the auditor is given as info. If, for whatever reason, the management fails to document any mattter of material impact, the auditors are not obligated to  factor that in.

Also, If my company has an accounting policy " no liability shall be created without a valid Purchase order", then my Accounting team will technically not be able to provide for the liability. But it comes to revenue/ cost matching, the profits will look bloated to that extent, since no provision has been made. So, Sarbennes Oxley cannot really cover this. This aspect continues to be a gap in GAAP. I am seeing this practically. In response, many companies get the project owner to certify about the impending liability, and make a cost provision, even if no PO exists yet. But many others, in their quest for higher Earnings per Share ( Wall street reporting, on which CEO and Board bonuses hinge), overlook it.

Many such issues continue to exist. If you look at PNB's case in Nirav Modi Saga, you will be left wondering about the role of the internal auditors.

As I said before, the issues are complex. There appears to be no singular solution. On the one hand, companies spend a fortune, these days, on compliance-related documentation. On the other hand, such cooking of books continue, rather unabashedly, and mostly within the purview of the laws.

The catch is the in the auditor's footnote to the B/S.

Many contingent liabilities are supposed to be captured there, but they are discretionary in nature, based on what the auditor is given as info. If, for whatever reason, the management fails to document any mattter of material impact, the auditors are not obligated to  factor that in.

Also, If my company has an accounting policy " no liability shall be created without a valid Purchase order", then my Accounting team will technically not be able to provide for the liability. But it comes to revenue/ cost matching, the profits will look bloated to that extent, since no provision has been made. So, Sarbennes Oxley cannot really cover this. This aspect continues to be a gap in GAAP. I am seeing this practically. In response, many companies get the project owner to certify about the impending liability, and make a cost provision, even if no PO exists yet. But many others, in their quest for higher Earnings per Share ( Wall street reporting, on which CEO and Board bonuses hinge), overlook it.

Many such issues continue to exist. If you look at PNB's case in Nirav Modi Saga, you will be left wondering about the role of the internal auditors.

As I said before, the issues are complex. There appears to be no singular solution. On the one hand, companies spend a fortune, these days, on compliance-related documentation. On the other hand, such cooking of books continue, rather unabashedly, and mostly within the purview of the laws.

Bottomline - I am convinced that balance sheets are cooked up everywhere - mostly within the laws. The regulators look away, and so do external auditors, very often. Thanks to equity culture, which requires the CEO and boards to survive one quarter at a time, these are inevitable.