Felicia Muftic " Bye-bye, voodoo accounting
March 1, 2009
You do not need to live in Haiti to practice voodoo and become a zombie. Spare yourself the trip because you can find it right here in the good ol’ USA. It exists in government and our private sectors.
There are no better systems than capitalism and democracy. Both depend upon educated, rational human beings making decisions based upon weighing one factor against another and using criteria of their own choosing to make those decisions. Sometimes those criteria are made in a person’s own self-interest or other instances in what they believe to be for the general good of their country or in keeping with their religious and moral compass, or even an ethic of being their brother’s keeper.
Here’s the rub: Facts and information can get so twisted that rational decision-making becomes darned near impossible. One of the biggest contributors to the muddle is voodoo accounting that is practiced by both the public and private sectors to mask information that might be damaging to the hiders.
Barack Obama’s address to Congress last week contained a point that was easily overlooked in the grand scope of his address, but which was profound. In the budget, he stated he is including the cost of war. For the past eight years, the $500 billion cost of fighting the wars in Afghanistan and Iraq was not part of the budget. This was voodoo accounting of the state of the nation, a Bush administration practice that Obama is putting to rest.
Voodoo accounting has been distorting investor choices and even creating zombies in the financial world. By some trick of black magic, what would normally be considered liabilities or sheer speculation become assets, and institutions, which would be no more than zombies if rational accounting standards were honored, appear to be alive and kicking. Their balance sheets looked healthy; the institutions are still moribund.
A little-understood potion fed to the nation is “mark to market.” The value of assets held by our financial institutions has been declining in the recession, and Wall Street wants their assets valued by what it cost them to acquire. They do not want their assets valued by what they could sell them for on the market at today’s price. Furthermore, they want taxpayers to bail them out by buying their assets at their original worth, especially their cancer of loans and mortgages gone bad. As their institutions are put to the stress test by the Obama administration, this becomes a very big deal in determining who is a zombie subject to some form of bailout with heavy duty strings attached and who can make it on their own.
This mark to market voodoo accounting (and its consequences) is like your neighbor getting a loan based on an appraisal done five years ago. They are able to borrow $300,000 when their house is only worth $240,000. The banker selectively applied some rule that made the use of that appraisal acceptable ,when in reality, after the trip to Las Vegas, the neighbor defaults, the bank gets into trouble and taxpayers come to the rescue of the bank
One cause of the credit collapse is that bankers ignored the tried and true rules of determining creditworthiness in a fit of greed to make the deal, get the origination fee, and to sell the loan obligations to someone else as bonds. Credit rating agencies perpetuated the voodoo by rating these questionable instruments as AAA bonds, which were then sold to unsuspecting investors around the world. When the mortgage holders who had a marginal ability to keep up with their payments because their payments reset and ballooned, or they began losing their jobs, it became obvious that the AAA ratings were a sham, and the financial sector collapsed.
Fortunately, it appears that the Obama administration is not willing to approve of voodoo accounting in determining the use of second half of the TARP/financial sector bailout money.
Other voodoo accounting practices have caused havoc with investors.
Bernie Madoff and R. Allen Stanford simply fabricated their balance sheets and asset valuation out of thin air. Joe Nacchio, former CEO of Qwest, now on his way to the big house, counted fiber swaps as revenue. Enron used accounting tricks to hide massive amounts of debt, to create fictitious revenue, and enrich senior management. Worldcom fraudulently manipulated their books to give the appearance of consistent profit growth where none actually existed.
So what is the antidote to voodoo accounting? More government rules and regulations? Better enforcement? Letting the sun shine in? Inclusive budget accounting? Probably it is a mixture of them all. At least Obama has promised to tell us the hard truth and he seems well on his way to making good on that promise, in spite of the fallout from the sticker shock.
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