GAAP is part of the problem

[kowboy]

Part of the current financial problem is the SEC's acceptance of GAAP in its present form, the generally accepted accounting standards.

1. GAAP was invented by accountants for the protection of the accounting industry and preferred by the Wall Street firms which it services, IMO.

2. GAAP does not require full disclosure and thorough downside risk assesment.

3. GAAP does not require aggregate, much less an itemized lisitng of counterparties classed by counterparty credit ratings who hold securitized and unsecuritized obligations.

4. GAAP permits less than full specific itemization of current derivatives positions.

5. There appears to be less than adequate assessment of managment's estimates for derivative risk reserve set asides.

4. GAAP does not require timely mark to market estimates.

5. GAAP allows risk to be transferred off balance sheet.

6. Enron at the time of its collapse was in compliance with GAAP.

Using GAAP financial statements, even the credit rating agencies have a less than stellar track record assesing current riskand valuation.

Using GAPP financial statements it's difficult for analysts, much less the average investor to get a realistic handle on estimating value. For example, the current inability of anyone to place an accurate value on the financials.

My view is that even though GAPP can technically be complied with, it can also be used by managment as a shield to hide behind if they choose to.

When a company is bought out on Wall Street, an immense ammount of due dilligence must be preformed in order to accurately assess real value. So how can one ever expect to make judicial and informed investing decisions when relying on GAAP in it's present form?

Comments?

 

[sjfan]

So what the hell do you want? Having the regulatory right to call up the CFO and have him answer any question you damn well please?

There has to be a balance between being as detailed in disclosure as possible and putting too much burden on the filers or disclose sensitive business information. The cost of compliance is a deadweight loss to society - a necessary one, but not a productive one.

GAAP is an evolving standard. No one saw the need for mark-to-market a hundred years ago. But when it arose, GAAP adopted to it.

 

[sjfan]

And just to respond to your points in parts,

Quote from kowboy:



1. GAAP was invented by accountants for the protection of the accounting industry and preferred by the Wall Street firms which it services, IMO.

In your opinion. GAAP is an standard so that reported balance sheets and income statements are comparable between companies. Otherwise, everyone's got their own definition of what's in each line item (or what line items to use)

2. GAAP does not require full disclosure and thorough downside risk assesment.

Full disclosure is a meaningless word because it's vague. GAAP is all about clarifying what to disclose. Furthermore, it does require management discussion of significant business risk.

3. GAAP does not require aggregate, much less an itemized lisitng of counterparties classed by counterparty credit ratings who hold securitized and unsecuritized obligations.

And why should it. This would only be applicable to finance companies. If required, it should be mandated by financial regulatory bodies, not accounting regulatory bodies.

4. GAAP permits less than full specific itemization of current derivatives positions.

Evolving. Used to be none. Now it's some. Maybe one day, all. No standard is perfect. When it was written, no one had derivatives positions. Also see my point about regulatory burden

5. There appears to be less than adequate assessment of managment's estimates for derivative risk reserve set asides.

Again, it's a reporting standard, not an enforcement standard.

4. GAAP does not require timely mark to market estimates.

where do you get this? For mark-to-market assets (which is the majority), GAAP requires the most recent mark. The frequency of reporting is set by the SEC, not GAAP

5. GAAP allows risk to be transferred off balance sheet.

No - GAAP gives provisions as to what kind of risk needs to be stated on balance sheet. Everything else is off. More and more things are now on.

6. Enron at the time of its collapse was in compliance with GAAP.

And the vast majority of companies who are on-going concerns are in compliance with GAAP. Fraud happens. Enron was outright fraud, not accounting loopholes.

I don't think you know what GAAP is.

 

[kowboy]

Quote from sjfan:

And just to respond to your points in parts,



I don't think you know what GAAP is.

Perhaps. Thanks for you feedback. I'm not an accountant. That's why I asked for comments.

The issue is that there has not been enough transparancy for downside risk for individual investors and even analysts when relying on 10-k's. I questioned the financial derivatives risk and resreves months ago here on ET.

Another example, I was reading GE 07 10-k yesterday. They have out $85 billion in unsecured notes to institutional and retail investors. There was no further breakdown or itemzation, no risk assesment specific or aggregate discussed. I'll bet the CFO and CEO know who's holding these and what the risk is and that the risk facor is known within the company. But since this isn't discussed you can't get a handle on it for making an informed investment decision. This $85 billion is 74% of sharelholder equity.

Thanks

 

[GermanTrader]

I book cash, not accrual. To hell with GAAP.

 

[sjfan]

Quote from GermanTrader:

I book cash, not accrual. To hell with GAAP.

Thanks for that buddy. But if GAAP goes with cash accounting rather than accrual, the usual problems with mark to market and everything will look MUCH MUCH worse? think about it, mark-to-market is an accrual accounting principal, not a cash account principal....

 

[sjfan]

Quote from kowboy:


Another example, I was reading GE 07 10-k yesterday. They have out $85 billion in unsecured notes to institutional and retail investors. There was no further breakdown or itemzation, no risk assesment specific or aggregate discussed. I'll bet the CFO and CEO know who's holding these and what the risk is and that the risk facor is known within the company. But since this isn't discussed you can't get a handle on it for making an informed investment decision. This $85 billion is 74% of sharelholder equity.

Thanks

Our analyst (I work for a large buy side institution) called by the CFO and asked. The CFO didn't answer, so he called up the banks and asked them. Since we trade a lot of stuff with the banks, they clarified it for us. Now, none of the information the bank gave us were inside information - just stuff that are otherwise buried in hard to access but public sources.

But that sucks for you because you aren't a big account and thus no one will talk to you.

There's no legal doctrine that small investors should have the same information access as big ones - that's why there's economy in scale.

(no, and before some idiot brings it up, this is not trading on inside information since either side [us or the bank] has fiduciary duty to the firm)

 

[balda]

1. GAAP was invented by accountants for the protection of the accounting industry and preferred by the Wall Street firms which it services, IMO.

Is there anything better?

2. GAAP does not require full disclosure and thorough downside risk assesment.

This is a wrong statement.

3. GAAP does not require aggregate, much less an itemized lisitng of counterparties classed by counterparty credit ratings who hold securitized and unsecuritized obligations.

4. GAAP permits less than full specific itemization of current derivatives positions.

5. There appears to be less than adequate assessment of managment's estimates for derivative risk reserve set asides.

Has nothing to do with GAAP.

4. GAAP does not require timely mark to market estimates.

Wrong again.

5. GAAP allows risk to be transferred off balance sheet.

Transferred where?

6. Enron at the time of its collapse was in compliance with GAAP.

Wrong. Enron was a complete fraud. Why Anderson had to shred all the audit documents if everything was in compliance?

 

[kowboy]

Quote from sjfan:

Our analyst (I work for a large buy side institution) called by the CFO and asked. The CFO didn't answer, so he called up the banks and asked them. Since we trade a lot of stuff with the banks, they clarified it for us. Now, none of the information the bank gave us were inside information - just stuff that are otherwise buried in hard to access but public sources.

But that sucks for you because you aren't a big account and thus no one will talk to you.

There's no legal doctrine that small investors should have the same information access as big ones - that's why there's economy in scale.

Thank you Sjfan for your feedback.

I appreciate you sharing this. That in order to make an informed decision, additional information beyond the filed statements needs to be gathered and verified before investing.

Shouldn't this be readily available and disseminated in some form? After all, this appears not to be proprietary information.

As you previously suggested there needs to a balance between putting too much burden on the filer vs accessable disclosure. But it's obvious the current system is not adequate.

 

[sjfan]

Quote from kowboy:

Shouldn't this be readily available and disseminated in some form? After all, this appears not to be proprietary information.

As someone from the perspective of those who have the infrastructure to capture those information - of course not. It's there - go find it. The law should not, I think, require the equalization of all profit opportunities.

As you say, none of it is proprietary information. So what's the need for further regulation. If an investor doesn't have to resources to make use of these information, then he is not competitive, just as is the reality in any other industry.