So, we’ve seen the Corporate Executive’s manifesto. We have even seen their ridiculous compensation. And, most of those issues are based upon the fact that these executives find ways to confuse, to obfuscate, and to misreport the developments of their firm to the public (including their stockholders).

Even the Wall Street Journal [WSJ] (who hired Audit Analytics to effect this study of the firms on the S&P 1500 index) is taking up the bandwagon. Because it is clear when these firms invent new terms to describe their (abysmal) performance like “adjusted net income” or “adjusted operating income”, they are the same firms most likely to be guilty of misreporting GAAP results, of having significant accounting problems that will eventually show up. (The executives are clearly hoping that happens AFTER they leave the firm or retire.) I actually love one of the new terms the WSJ coined, “earnings before bad stuff”.

 

What did Audit Analytics find? Only 3.8% of those firms that followed GAAP had to restate earnings (during the period 2011 through 2015). To me, it was alarming that 7.5% of those following GAAP failed to maintain adequate internal controls. (This didn’t seem to alarm the auditors.)

But, for those firms who employed those “earnings before bad stuff” and other creative measures, almost twice as many were forced to restate their earnings during that same period. And, 11% of these “creatives” failed to maintain adequate internal controls.
(Just so you know, Audit Analytics didn’t load the dice either. They did not include Valeant Pharmaceuticals or the Lending Club in their study. So, it’s possible the miscreants- oh, wait, the “creative” types- may actually have more problems than this study indicated.)

And, as I have clearly stated repeatedly, the special metrics have uses- as long as the conventional ones are the primary monitors of KPI (key performance indicators). These metrics are critical when a firm is bringing a slew of new products to market, when it is retrenching and closing facilities, etc. But, too many of these “creatives” routinely use such measurements; moreover, they are not bringing new products to market or abandoning business sectors which would justify the need for additional metrics to describe their performance.

Audit Analytics’ findings were was not an isolated finding either. Calcbench and Radical Compliance found, in their examination of some 816 public entities, that 2015 earnings were inflated by $ 164.1 billion when non-GAAP metrics were employed. Which is exactly why the SEC (Securities and Exchange Commission issued those new guidelines against creative accounting this past May.)

Now, if you look at the “creatives” more carefully, you will notice how much the stock compensation numbers have changed from reality. And, those stock compensations are what the firms have paid their executives for their “stellar performance”.

But, that also begs the question. When a firm has 500, 1000, or 10000 employees, how much of the performance is related to the CEO’s sole performance? How much is actually related to the entire executive team- including the efforts of its middle management?

Sure, the CEO sets the tone. Sure, the CEO has the final say on which plan gets executed. Sure, the CEO monitors performance. But, to claim that the entire success of the firm is related to one person- or even to just 5 folks when there are 100K employees? Give me a break. (Again- these folks have a big impact on corporate performance, but…)

I, for one, am sick and tired of these “I did it myself” types. We even have one such …… running for president now. (Amazingly, this same person has caused many of his firms to file bankruptcy, to fold away- and won’t share his tax returns. Oh- and let’s make this perfectly clear. The only way you get your taxes audited year after year after year is by having year after year after year your tax returns manifestly changed after said audits. [In other words, the IRS requirs oneto pay significantly higher taxes than was first claimed.] Otherwise, one could claim harassment and have the entire repeated audits cease.)

Let’s stick to real numbers to monitor performance. Like the ones these same firms (or a Presidential candidates) report to the IRS. Because they must tell the truth there- or suffer criminal penalties.