I'm so glad I don't work in Finance anymore, especially with all these accounting scandals going on. All finance and accounting departments for every publicly traded company will be heavily scrutinized from now on.

In the 12 years I worked in Finance, I worked for three publicly traded companies. They all has suspect accounting practices. Two of the companies were traded on Nasdaq and the other one traded on the New York Stock Exchange. All three companies used Deloitte and Touche as their accounting firms, so I was never exposed to the Arthur Anderson folks. I knew people who worked there though since people in Finance and Accounting go back and forth between public and private companies.

I even have a Worldcom story in my closet. Actually, it's about their subsidiary MCI. I worked in the MCI finance department for about a couple of years. I remember one quarter back in the 1989, or maybe even 1990, my boss told me that there was some kind of tax write off that they weren't going to report because it would materially affect the stock price. He said if anyone found out, he would lose his accounting license. He said they were going to report the tax write-off in the following quarter, just not this quarter. At the time, I didn't think anything of it, thinking everybody does weird stuff with their books. However in light of the Enron and now Worldcom scandals, I guess he should be glad no one found out.

At the next company I worked at, the one traded on the NYSE, we used to report earnings growth all the time in our press releases, even though technically, the company never really had enough revenue to cover expenses. All of that company's revenue growth came from investment income. Since the stock market was booming at the time I worked there, my company's investment returns were phenomenal. I asked my immediate boss about it and he laughed and said, "Sad, isn' it?"

I used to wonder why those brilliant Wall Street analysts never caught on and questioned us, but they let it slide. I have since come to believe that everybody does it and knows about it, and it's okay. My boss's boss told me once, he was glad I wasn't an investment analyst because if I was, he would be afraid of me. I wasn't sure if he was compilmenting me or not.

At the third publicly traded company, I worked in the IT department for the CIO. She basically hired me to do all the finance stuff since she had a worldwide budget of $30 Million. I think I used to do the same stuff that got Worldcom in trouble.

On the news, they said that Worldcom had improperly accounted for $3.8 billion in capital expenditures. The neat little accounting trick that got Worldcom in trouble is you can amortize capital expenditures over time. I don't remember how it goes exactly, but it's something like 3 years for software and 5 years for hardware and furniture. Anyway, simply what this means is, if you bought say $1 million worth of computer hardware in 2002. Instead of having to report or incur the expense in the year bought, 2002, you can report the expense over five years or the useful life of the product.

I used to jokingly refer to is as the "corporate credit card plan" because amortization of capital expenditures works like a credit card, especially if you're one of those people who never pay your bills in full every month. Corporations, especially publicly traded ones love it, because they can use the amortization to offset higher than normal expenses and still report an increase in revenue which translates into earnings growth and then stock growth.

All companies would have loved to amortize Y2K expenses, but the SEC put at a stop to that. They said that money spent to upgrade to Y2K could not be amortized and had to be incurred in the year done. Since Y2K was an upgrade, it could not be considered new software or hardware. If the SEC hadn't put their foot down on this issue, I think we woudl have probably seen more companies charged with improper accounitng methods.
I spent two weeks going over FASB, the Federal Accounting Standard Boards, and looking up accounting cases to see what expenses you could be legally capitalized and still pass a public audit. Because of new accounting laws for intellectual property which came about in I think, the early 1990's as a result of computers and technology, companies started capitalizing like crazy and not just physical equipment, but employees, consulting fees, conferences, etc.

Since you needed people to build software or build hardware, all of their time, even the food they ate sometimes or even their plane fares, could all be capitalized and amortized over 3 to 5 years.

God, the stuff I used to put in my amortization column was just amazing. But I did my research and I was definitely following FASB rules and accounting cases. And when D&T came to audit me, I had my paper trail ready and so I passed my audit with flying colors.

Those accounting/finance people at Worldcom probably got a little too carried away when they capitalized $3.8 billion. I'm sure they started amortizing acquisition costs, because you could technically say that cost to acquire a company is directly related to the cost of bring a piece of software or hardware to the company. There are no hard and fast rules for amortization, since computers and technology really added a new dimension to the amortization issue.

The problem is if you start capitalizing stuff and saying that it's for hardware or software, you need to make sure that the hardware or software project is viable, actually works, actually goes to market. If the project doesn't finish, you have to eat the expense in the year you abandon the project, sometimes even in the year you actually incurred the expense. I wonder if this is what happened at Worldcom. They over amortized on hardware/software projects that failed.

I mean, Worldcom couldn't help it I guess. The went on a huge acquisition binge, bought out all these companies and just at the time, they finished the buyouts, the bottom fell out of Wall Street and they couldn't sell their hardware/software. All those hardware/software projects had to be abandoned because there was no one around to buy them. In the meantime, Worldcom had started capitalizing all the expenses and spreading the expense out over 3 to 5 years. And when it came time to report their earnings, they pretended like the hardware/software projects were stll going, when in reality they were actually abandoned.

Poor Worldcom. I'm just glad I don't have to deal with Finance and money anymore. It's such a dirty business. And it's like that I think at all companies, especially at the public traded ones.

My favorite finance story is from the NYSE company I worked at for five years. Our beloved CFO, who was on the wagon/off the wagon alcoholic, would go to a bar with the CEo and over senior VPs in the afternoon, drink like fish, when he was off the wagon, decide some time while drinking what our earnings should be. Then they would come back, drunker than hell and hand my boss a paper bar napkin. The bar napkin has the numbers we were going to report that quarter. It was our job in Finance to get to the numbers on the napkin and make it all look legitimate and be able to pass a public audit. And we could do it too. Sad isn't it?

Most companies are having such a hard time, especially with a substantially lowered stock market. If you think people made money during the dot com stock craze, think about corporations. All corporations have money invested in the stock market. But when the dot come bubble burst, regular people lost money and so did most companies.

I think that's why most publicly traded companies can't report any earnings growth anymore. They don't have their investment income returns to help wih their earnings growth. There are very few companies whose revenue pays for their expenses. Corporations are like normal people; they totally spend more than they make.

Where these financial scandas will lead is anybody's guess. I'm just glad at hell i'm not in finance anymore.