In his recent interview with New Economic Thinking, Jim Chanos discussed the egregious fraud that is occurring right in front of our faces. Here’s an excerpt from the interview:
Chanos: The most prominent is right in front of our faces by the aggressive use of proforma reporting metrics by corporate America. If you look at most corporate reports right now they do not publish at first and foremost and front and center their gap results, they report adjusted metrics.
So GE, stogy old GE is a great example of this. GE put its earnings out two weeks ago. And GE had 16 pages of adjustments in its earnings report for the fourth quarter, to get you to the number that they wanted you to get to as to what they thought their profits would be adjusted.
Not what they were, what they were adjusted if you take out a bunch of bad stuff. And Silicon Valley has taken this almost to an absurd level. I have companies that are going to report that have 80% of their revenues are share based comp expense, where they’re just issuing stock instead of cash to their employees.
And under the current guise companies add that back to their P&L, they say that’s not an expense. So increasingly, it gets to this equity based world that we’re in, more and more companies, particularly aggressive companies, are paying their employees lavishly in stock because they don’t consider it an expense.
And the SEC has guidelines on this that it is just not enforcing. And so routinely you’ll hear someone like an Uber or a company like that talk about, “We are now adjusted profitable and this is the first time in 10 years we’re a prof-”
And then you look at the financial statements closely and you realize they’re still losing money. And that is to me kind of black is white and white is black.
And I think it’s something that the SEC and other regulators should have cracked down on a long time ago. I’d love to report to my partners our investment results without the bad stocks. I’d get thrown in jail if I do that.
You can watch the entire discussion here:
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Certainly a lot of companies are excessive with respect to adjustments to earnings but the Accounting Standards Board is partly responsible and needs to update areas where the current Generally Accepted Accounting Standards fail to recognize material changes in businesses in the last forty years that make financial statements misleading. International Financial Reporting Standards used in much of the world solve a lot of the issues that make US reporting misleading. As an analyst, I find the treatment of intangibles in the US to be the biggest issue. Many US technology companies understate their earnings materially as a result of their compliance with US GAAP with respect to amortization. To a lesser degree REITs also understate earnings by progressively depreciating hard assets that are carried at a fraction of their value. It guarantees that balance sheets are false and misleading.