Business Management - Take It Back From the Accountants

Written by: Jackie Reeves, Bell Rock Capital, LLC

I firmly believe it is time for the business leaders, the entrepreneurs, the visionaries to take back the reigns of their companies’ from the accountants! For as long as I can remember, business leaders have pursued long term goals, laid out 3-5 year business plans for their respective Board’s of Directors and at times, cursed the scrutiny of “going public” primarily because it forced them to think and more importantly, act on a short term, that is, quarterly basis. I’ll save the woes of being a public company for another time. Many CEO’s are likely looking back to those time as “the good ‘ole days.”

This week I was struck by the awareness of the CNBC commentators as they realized through an interview with a sells-side analyst that the financial institutions’ management teams had accounting limitations placed upon them as to what and when they could or could not write-down assets! Now, perhaps because I have been wrapped in the world of financial institutions for so long, I thought this point was well vetted by now, but I am beginning to think not!

Now is as good a time as any to make a stance, especially since there is consideration that GAAP, Generally Accepted Accounting Practices, may be replaced by IFRS, International Financial Reporting Standards, or perhaps a blend of the two disciplines. I am in favor of a back-to-basics approach.

From my perspective, the move to full balance sheet mark-to-market accounting was quite intriguing when the march towards that goal began at least ten years ago. It sparked many an intellectual conversation as well as more sophisticated mathematical skills to be applied to analyze books of business both on and off the balance sheet. However, is it a prudent and reasonable practice in the real world?

I have come to believe that it is not a prudent real world practice. Not all assets have a market in which to mark the assets each and every day, but in this accounting world, it is being forced to occur. So, when an asset does not have a buyer, is the true value zero? Is it 25% below where it had previously traded or 50% lower? Maybe 75% lower? Also, even though these financial institutions report quarterly, the daily movements of credit spreads have created tremendous volatility across this sector because of the interpretation of the accounting impact these movements may have on earnings. Then, add to this mix the rating agencies playing catch-up with reality and companies are required, under accounting guidelines, to write-down these downgraded instruments.

In essence, I believe what the accountants are saying with these rules is do not underwrite or facilitate transactions of assets that may not have a daily price because these companies will be called upon to validate it at least every quarter, if not more frequently. So, I believe it is a few accounting rules that are stymieing the credit process.

To be sure, I am all for increased granularity, transparency, and I simply love more and more data. And I can say that I was very curious about how all of these new accounting rules world play out as they were unfolding, because I love math and I too was thinking well, more is good! In application, however, these rules are forcing senior managements to do things simply because the accounting rules exist, rather than focusing on running and growing their businesses for the long term. I have recently taken a few steps back and looked at the big picture, and these accounting rules seem completely out of synch with running a global business for the long term.

Now, unfortunately many of the current bulge-bracket CEOs have only recently occupied the corner office and these accounting rules may not necessarily be addressed during their first 90 days. But, I believe as they peel back the onion and reflect back on their prior experiences, they too will realize that they need to take the business of business back from the accountants.