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Title: The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America by Alex Berenson ISBN: 0-375-50880-5 Publisher: Random House Pub. Date: 04 March, 2003 Format: Hardcover Volumes: 1 List Price(USD): $24.95 |
Average Customer Rating: 4.11 (18 reviews)
Rating: 4
Summary: Interpretive Accounting... A History
Comment: This book takes the reader from the early days of the stock market to the recent scandals of corporate giants such as Enron and Tyco while weaving a common thread of accounting manipulation and political influence (or the lack thereof) of the SEC.
Mr. Berenson explains in detail how pressures from a myriad of sources created an environment where investors only focused on earnings, aka "The Number" and how corporate leadership bent the rules to give the investors what they wanted (and helped themselves along the way).
This is an enlightening book if you want to learn a little more on the motivation for all those "restated earnings" we all have heard about in the market recently.
Rating: 5
Summary: Insightful and easy to understand
Comment: I am a professor of finance and economics and must recommend this book for anyone with even a basic interest in corporate markets. I've asked my students to read The Number largely because it presents a fair and in-depth perspective on this fascinating economic fallout without ignoring the historical context. Berenson writes clearly and perceptively while analyzing from both top to bottom as well as left to right the market growth and its subsequent implosion.
Rating: 5
Summary: Equity investors out to know this material (and then some)
Comment: Mr. Berenson takes a very interesting approach to explaining the rise of the 90s bubble economy. The book opens with a wonderfully apt quote from Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it." The drive for Earnings Per Share (EPS) by analysts and investors guided by them, according to the author, leads them astray because the number is inherently imprecise. Earnings are stated by the company as an exact figure and EPS is simply that number divided by the number of outstanding shares of common stock.
However, earnings depend a great deal on the methods of accounting used by the firm. In the 90s we saw a rise in very aggressive accounting. Any system of rules that is intended to be applied generally over a wide range differing conditions is going to have gaps and unintended effects that distort the intention of the rules. General rules rely upon the good will and integrity of the participants to keep the intention or spirit of the rules in tact in order for the rules to have any real meaning in application. In sports we also have referees to keep the game fair, but both teams still have to intend to follow the rules completely. No game could be played if the participants tried to push every rule to an extreme interpretation. Aggressive accounting uses extreme interpretations of the Generally Accepted Accounting Principles (GAAP) to present as favorable earnings number as possible. This results in a higher (and therefore more pleasing) EPS number.
Analysts started giving forecasts of coming EPS reports for firms and those that met or slightly exceeded that forecast were rewarded with higher share prices because investors competed for their shares. Those that missed the forecast by even a penny per share were punished as investors abandoned their stock. Mr. Berenson demonstrates that many companies had reserves and other accounting tricks to make sure their EPS forecasts were always met. However, as companies grow this becomes harder to do. And for companies such as Tyco, Enron, Adelphia, and even the mighty General Electric, it finally became impossible. The most aggressive companies had presented such a distorted picture of reality that they collapsed. Those that were still within shouting distance of reality remained solvent, but still suffered a significant depression in their stock price.
Since the EPS is inherently inexact it seems strange that the markets would react so strongly to that single measure. Mr. Berenson calls the number a lie. I think he does that for rhetorical effect and one time he does admit it is a white lie. I think he has a very strong point for those companies using aggressive interpretations of GAAP. The author also provides a history of the SEC and calls for stronger enforcement powers and the staff to provide that enforcement. While there is certainly a good case to have an effective SEC with sufficient resources (there will be a debate on what this level is), Mr. Berenson has more faith in regulation than I do.
Even if I fully concede his point and support an SEC of enormous size, it still could not provide the necessary enforcement to keep companies in line if the market keeps rewarding companies for fudging the numbers. The market will provide what people want to buy even if they want to buy lies. I agree with Mr. Berenson that INVESTORS need to become better educated and make more demands of the management of the companies in which they invest. Investors, by NOT investing in companies who use very aggressive accounting, could affect the way finances are reported than any regulatory body.
Not every company can be a growth company. Heck, even Microsoft isn't a Microsoft anymore. Investors have to demand that financial statements actually present a real picture of the financial state of the firm rather then providing a manufactured dream of ever expanding growth. One of the strengths of this book is the compelling evidence Mr. Berenson provides of management spinning these euphoric visions just long enough to cash out and then let the bad news (read reality) come to light on someone else's watch.
This is a fine book. I think that anyone who has investments in public companies ought to read it and better educated themselves on the realities of the equities marketplace. I think Mr. Berenson's recommendations for public policy are measured and good for debate even if I don't personally agree with all of them. There are a few minor quibbles I have with some of his explanations, but they don't affect my recommendation.
The book has a couple of short appendices to help the reader understand the accounting issues involved. There are helpful notes for sources and an index.
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Title: Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean, Peter Elkind ISBN: 1591840082 Publisher: Portfolio Pub. Date: 13 October, 2003 List Price(USD): $26.95 |
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Title: Unaccountable: How the Accounting Profession Forfeited a Public Trust by Mike Brewster, Mike Brewster ISBN: 0471423629 Publisher: John Wiley & Sons Pub. Date: 28 March, 2003 List Price(USD): $27.95 |
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Title: Bull! : A History of the Boom, 1982-1999: What drove the Breakneck Market--and What Every Investor Needs to Know About Financial Cycles by Maggie Mahar ISBN: 006056413X Publisher: HarperBusiness Pub. Date: 21 October, 2003 List Price(USD): $27.95 |
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Title: Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market by John Mauldin ISBN: 0471655430 Publisher: John Wiley & Sons Pub. Date: 16 April, 2004 List Price(USD): $24.95 |
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Title: Origins of the Crash: The Great Bubble and Its Undoing by Roger Lowenstein ISBN: 1594200033 Publisher: The Penguin Press Pub. Date: 22 January, 2004 List Price(USD): $24.95 |
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