[user3939382]

I'm reminded of an analysis I heard about GE from a friend of mine in finance. He said for a while (many years ago) everyone knew the earnings were cooked because the consistent performance was basically impossible, but everyone was making money and went along with it. He said one way they were able to cover their tracks is every so often changing their accounting methodologies enough so that long term comparisons like this were rendered useless for forensic accounting purposes. I find that all very interesting if it's true.

[somethoughts]

One thing to watch out for - is to look at continued growth of the line item - Goodwill and Intangibles on the balance sheet. Goodwill is when it pays well over book value to buy another company. Intangibles are hard to value assets like IP (a movie library, patents, etc.).

Excessive goodwill occurs when a legacy company can no longer organically grow earnings so it has to buy other companies (perhaps over paying) to show earnings growth.

Intangibles can make a debt laden balance sheet less negative if the value of "synergy and secret sauce" are over stated and never written down.

You can see GE's Goodwill and Intangibles peaked in 2017 when Jeffrey Immelt got replaced and John Flannery started to do the write-downs for which he was sacked. Larry Culp seems to be doing it more even handedly.

https://www.wsj.com/articles/how-ge-built-up-and-wrote-down-...

https://www.macrotrends.net/stocks/charts/GE/general-electri...

[lotsofpulp]

Governments do this with deferred compensation schemes like defined benefit pensions and retiree healthcare. There are conveniently no laws around calculating the cost of benefits, and of course no recourse for today’s leaders not funding them in the first place, so they can hide a lot of today’s labor costs in understated pension and retiree healthcare liabilities.

[rudyfink]

You might enjoy a book called Financial Shenanigans (https://www.amazon.com/Financial-Shenanigans-Fourth-Accounti...). It's essentially examples of detective stories based on financial statements.

[alimov]

I haven’t read the book, but was wondering if you might be able to answer this: is the general theme that companies are able to do this legal thing of changing practices and use it maliciously? And while it might be a well known phenomenon, nobody is actively trying to prohibit it via laws & regulations? the question is serious but also - *Clairvoyance limit test )

[2Gkashmiri]

look. in india, when someone wants to "inflate sales", they have to pay "indirect tax" or GST on it. at 18%, it gets VERY expensive to do this thing. say you want to double your sales. fine, the government says. just pay full 18% tax on the new 100% sales, which defeats the entire purpose of this. sure, you can increase expenses all you like and the "income tax" law says as long as an expense is actually incurred and is related to business and is not disallowed by law, it is permitted so you can reduce your incometax by any factor but still.

from this year i think, there is something called "expenditure tax" so in case of a p&l statement, if you increase your expenses to reduce NPBT, you pay MORE expenditure tax and vice versa so even this loophole is now effectively closed.

[rapht]

All companies cook their earnings to a certain extent, exactly in view of having a nice, regular, consistent performance... because markets over-react (in one way or another) to anything that is not nice, regular, consistent.

The only thing not subject to interpretation is cash, but you have kind of the reverse problem: most of the time, it's difficult to intepret anything from it... of course, that's why modern accounting was invented. As we say in French: c'est le serpent qui se mord la queue (the snake's biting its own tail).

[deepsun]

Yes, but at the same time there are GAAP (generally accepted accounting principles), limiting how much you can change the methodologies, so you can rig only so much.

[Rocket89]

One of the new laws regarding accounting was daily mark-to-market accounting of assets and investments. $AMZN just took a $7.6B hit due to this ($RIVN write down). So it’s hit or miss. I remember Buffett complaining about this change a year back or so.

[Ntrails]

Is this the same magic that means microsystems has to take a MtM writedown every time its bitcoin tanks, but cannot do so when it goes up? xD

I am generally pretty pro expecting the MtMing of liquid assets, but very sympathetic to areas where hard to price illiquids are unpleasant

[formerkrogemp]

The accounting of "cryptocurrency" is still being developed, but, yes, Bitcoin holdings take an impairment when their value drops below a certain point. This doesn't typically affect cost basis. It may be deducted as losses on a tax return but that might impact cost basis. I've heard from other accountants (a year or so ago, so take this with a lump of salt) that some companies are trying to account for cryptocurrency as inventory, as a "hot asset," as cash equivalents, or as intangibles.

[easytiger]

Another trick is constantly buying companies/writing off stuff and abusing "goodwill" to give hard to compare yoy accounts. I can think of a number of companies who did things like that (e.g. Steinhoff) that later got found out (though they did other things too like pushing debt off their balance sheets to patsy companies)

[raymondmoay]

You are right, this is as general as it can get for the initial screening phase for me. I then deep dive into the reports.