Not as they seem

The birth of a balance sheet at the end of the financial year is indeed an act of creation.

Not as they seem

If a hypothetical psychiatrist were to engage your correspondent in a word association exercise, and nominate the word “career”, nowadays it would met with the response “bleak” – or possibly “despair”. But things were not always thus.

There was a fleeting window in which the response would have been a crisp “promising.”

In that golden interval, your correspondent was once asked to provide a publicity photo.

He arranged a visit to the hairdresser and a trip to the drycleaner. He purchased a new shirt (white, of course) and a new tie (red, likewise), and paid obsessive attention to the shine on his shoes. He ventured to the rarified surrounds of the executive floor to provide a suitable backdrop wherein the kindly photographer identified an angle at which his double chin was not evident.

(Your correspondent has attempted to re-create that angle for the last 20 years, to no avail.)

The end result was a photograph that was beyond dispute a photograph of your correspondent – but which in fact bore only a passing resemblance to his everyday appearance.

“All ancient history, BoLR,” cry his despairing readers. “What has this got to do with anything?” they demand.

Your correspondent’s misty-eyed reminiscences have been prompted by his observations of the extraordinary contortions that his employer undertakes in preparation for the end of the financial year.

Why the contortions?

Management of public companies are scared witless by the prospect of a negative opinion from a share analyst – well, they must be. For these reasons they abhor high yield but volatile business opportunities, because they don’t want to miss earnings guidance. They know that they will be compared to their peers across all manner of financial ratios and that the bottom ranker faces a “sell” recommendation while the top ranker will most likely be graded a “buy”.

Hence the twists and turns (and hence the advantages of the private equity models that escape all that silliness).

Of course this prompts the question: Why do the eagle-eyed external auditors allow this distortion? The reality is that while your correspondent’s opinions are black and white, the accounting standards encompass shades of grey, and this is the field of play for the unhappy auditors.

Not only do they understand the business far less than they believe, they must apply accounting standards that encompass choice and discretion. And so this blog serves as the introduction to an occasional series in which your correspondent will explain how auditors’ work is even more pointless than they realise.

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