
Downturns are accounting crooks’ worst enemy - lactobacillis
https://www.economist.com/business/2020/04/18/the-economic-crisis-will-expose-a-decades-worth-of-corporate-fraud
======
nknealk
For those who have never read a 10K in their life, the SEC requires all
companies who publish non-GAAP metrics to also (1) publish GAAP metrics more
prominently than non-GAAP metrics and (2) publish a reconciliation on how they
arrived at their non-GAAP measure from the published GAAP metrics.

Here’s a writeup of the SEC rules on non-GAAP metrics in earnings reports:
[https://www.protiviti.com/US-en/insights/sec-issues-
guidance...](https://www.protiviti.com/US-en/insights/sec-issues-guidance-non-
gaap-measures)

There’s a difference between what Enron did (ie. fraud) vs presenting
alternative ways to measure business performance. If an investor thinks
community adjusted EBITDA is a good metric to judge a business and then loses
all their money, that’s on the investor. Even our most recent poster child of
non-GAAP shenanigans publishes the GAAP numbers ahead of the non-GAAP measures
(see eg. Page 111 which is the first mention of “adjusted EBITDA” presented
below GAAP metrics vs page 21 on which the GAAP income statement is first
published):
[https://www.sec.gov/Archives/edgar/data/1533523/000119312519...](https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm)

------
Havoc
Worth pointing out that this is largely a US only problem. Rest of the world
uses IFRS which clamped down on that non-GAAP adjustment stuff pretty hard
because well it’s not exactly a subtle gambit

~~~
CapriciousCptl
I think non-GAAP adjustments were mostly used in the article as a rough marker
of "crookedness" that you can measure. Because by far, worldwide, the primary
means of fraud involves revenue recognition and other accounting shenanigans
(very much recommend the book by the same name) that both IFRS and GAAP are
vulnerable to. It's just that's much harder to find that stuff out. But, when
the SEC notices a problem with your revenue recognition policies affecting
your revenue by a few percent, the SEC comes down on you hard. KHC was an
example of that last year or maybe 2 years ago with the new rules in ASC606.

It was news to me that IFRS cracked down on non-GAAP adjustments, particularly
because I follow some foreign filers in the US and haven't noticed much of a
difference. But then again, I don't follow a lot of companies with the type of
management that harps on EBITDA and adjusted EBITDA anyway. According to
Charlie Munger, "I think you would understand any presentation using the word
EBITDA, if every time you saw that word you just substituted the phrase,
“bullshit earnings.”

~~~
Havoc
Agreed regarding revenue being the bigger issue.

>It was news to me that IFRS cracked down on non-GAAP adjustments

It's mostly achieved by prohibiting adjustment for "extraordinary items". That
stops 90% of this bullshit right there. I gather US GAAP has done the same but
kept the concept of non-recurring items.

Whether presenting "Alternative Performance Measures" is allowed at all
depends on the country specific regulator. Where they are it's generally in
addition to the IFRS measures and if you look at ESMA (EU regulator) they
require a reconciliation and various other stuff about fair presentation
thereof:

[https://www.esma.europa.eu/file/1689/download?token=VQsQ7JzC](https://www.esma.europa.eu/file/1689/download?token=VQsQ7JzC)

------
Tehdasi
The Bezzle, which I think has been on a HN post before:
[https://klementoninvesting.substack.com/p/the-
bezzle](https://klementoninvesting.substack.com/p/the-bezzle)

------
thih9
Sadly I can’t read it (mobile safari, private mode), I’m being asked to create
an account.

~~~
Rexxar
On firefox you can just switch to reader mode and reload the page.

~~~
_Microft
If Firefox does not offer reader mode by itself, prepend _about:reader?url=_
to the url to force loading the page in reader mode by the way.

~~~
exhilaration
Thanks for the tip. I'm curious, do you know how some sites prevent the reader
mode button from appearing?

~~~
_Microft
From what I would guess, it might be rather that these pages do not conform to
what Firefox expects from a page to be suitable to be shown in reader mode.
Large pieces of text with a few pictures in them or something like that. If
you check back in a few hours, I might have posted more information on this.

~~~
_Microft
This might be the right place to look into:

[https://hg.mozilla.org/mozilla-
central/file/default/toolkit/...](https://hg.mozilla.org/mozilla-
central/file/default/toolkit/components/reader)

Especially:

[https://hg.mozilla.org/mozilla-
central/file/a6a5a4f31ea26906...](https://hg.mozilla.org/mozilla-
central/file/a6a5a4f31ea26906e584e162b8d9485e6cacca32/toolkit/components/reader/Readability-
readerable.js#l51)

 _Edit: this is a potshot._

------
neonate
[https://archive.md/xEhMd](https://archive.md/xEhMd)

------
tick_tock_tick
What a horrible article most investors understand Chinese companies lie about
their number all the time. The non Chinese example is WeWork which was
completely rejected by the market and failed to go public?

~~~
gandalfian
And Enron, Olympus, bt, WorldCom, Tesco, those people who bought dragon
dictate and the African firm whose balance sheet was entirely supported by a
large green gemstone. Just to name a few off the top of my head. Trying to
work out a firm's true assets, liabilities and income is a genuine problem.

~~~
neximo64
What’s this gemstone company?

~~~
gandalfian
Turns out it was red, but was an £8000 african stone but ended up in an
english company as a 200,000 stone and then transferred to a bankrupt english
construction firm as an 11 million pound asset! Ended in tears. Unclear what
eventually happened to the stone.
[https://www.google.com/search?q=Gem+of+Tanzania](https://www.google.com/search?q=Gem+of+Tanzania)

