Advertisement

Monitor

Reading Time:3 minutes
Why you can trust SCMP
0

HERE IS A little home truth that has great application to all the reports of corporate scandals now coming out of the United States - drowning people will clutch at straws in the hope of saving themselves.

It happens the whole world over when a big bull market has drawn to a close and corporations find their share prices falling and their margins pinched just when they had structured themselves for another period of growth.

Put yourself in the shoes of a corporate director at a board meeting as this unwelcome truth begins to dawn. The finance director has just finished going through his transparencies and it has become clear that the golden rule of booking profits only when they are in the bag and booking losses when you see them coming could wipe out at least half the firm's stated capital this year.

If this is what goes in the earnings announcement the share price will tumble much further, banks will start getting nasty, the big acquisition will be off and the sale of that loss-making subsidiary at five times what it is worth is no longer in the cards.

More to the point for our director, all those profits he thought he had built up in his options will go out the window too.

So the finance director makes it easy. It is a temporary setback, he says, and pulls out another set of transparencies to show that everything will come good again next year.

There is a price, however, to get to next year smoothly. Those losses cannot be booked immediately. They will be treated as long-term investments. Some expenses will also be capitalised and with a little more finagling, although the finance director will not call it that, everything should be all right.

Advertisement