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D. Murali

COMPETING with infiltrating terrorists, violent insurgents and backstabbing politicians are the shifty accountants when it comes to stories that hog the headlines. "The parade of catastrophic accounting scandals" never seems to end, like the catwalks on a free-to-air channel.

Beauty is but skin deep, they say, but almost everybody is comfortable with that limitation because none expects, for instance, the pancreas to look charming.

But you tell them that financial health is but balance-sheet deep, or that the feel-good-factor is but what is apparent, they are not happy; the innards have to be okay.

Sadly, however, true to the name, balance sheets are often used as big sheets below which hide naked truths, such as a debt mountain or an asset abyss.

To help, here comes Hidden Financial Risk, by J. Edward Ketz, a book from Wiley (www.wiley.com) on how to understand `off-balance sheet accounting'. The author runs an interesting column in SmartPros.com, and it is called `Accounting Cycle: Wash, Rinse and Spin'. A loaded statement that can be seen as an affront by number-crunchers.

The blurb explains, that the book identifies the incentives for managers to deceive investors and creditors about the firm's financial risk, analyses the different methods of off-balance sheet accounting and also explains how investors can deconstruct them. "Executives, accountants, and individual and institutional investors will find the book to be a powerful examination of the present, shifting accounting landscape," promises the back cover.

The preface has damning stuff about how the `mess' came about when managers began to engage in "earnings management" — a phrase that means "they cannot make profits legitimately, so they will exaggerate and abuse accounting numbers until the reported numbers make them look good."

They were not alone. "Aiding and abetting this process of earnings management have been board of directors who never asked serious questions, corporate lawyers who were eager to push the limits, stock brokers and investment bankers who did not care how they made a buck, financial analysts who worried little that they served as used-car salesmen for their investment banking firms, auditors who looked he other way, an impotent Financial Accounting Standards Board, an overextended SEC, and members of Congress who would tolerate almost anything for sufficiently large campaign contributions." Much of that applies here too.

The author is all praise for Abraham Briloff, "the best-known accounting critic," whom the large accounting firms wanted to silence through litigation.A chapter titled `balance sheet woes' speaks of the options in the corporate manager's toolbox by which he can hide liabilities. "My investments went ouch!" That's how Ketz has titled part I of the book. The `know-how' of hiding comes in part II; and `failures that lead to deceptions' are in the next part. The last one is on making financial reports credible, where something macabre happens: the author turns a heavy tombstone to exhume Andersen because it "has the solution — really!"

A book you can read in the hiding, if the perpetrators are around.

BookValue@hotmail.com

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