Magic Tricks - New Business October 21, 2009, 6:47PM EST...

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New Business October 21, 2009, 6:47PM EST Magic Tricks on the Corporate Books With the stroke of a pen, companies can make themselves appear more financially fit than they are By Mara Der Hovanesian Accounting shenanigans bubble to the surface every few years. In the dot-com days the trick was to book virtual revenues. After the tech bust, tinkering with expenses was all the rage. Now forensic auditors and analysts worry that troubled companies are playing fast and loose with asset valuations and cash management. These recent numbers games, which rely on some familiar techniques, may be the most troublesome yet. Companies that employ aggressive accounting tactics aren't just inflating earnings and cash flow—their motive may also be to hide a true financial picture from lenders to avoid losing credit and other lifelines. "It's not like a penny of earnings-per-share problem," says Mark LaMonte, chief credit officer at ratings agency Moody's Investors Service ( MCO ). "These things will knock you off the cliff completely." And the gimmicks only underscore the tenuous nature of the earnings recovery, which currently is lifting investors' spirits. New discretionary accounting rules have made it easier for companies to engage in such behavior. In recent years companies have moved to "fair value" accounting, in which assets are based on current market conditions rather than on historical prices. With many markets like real estate drying up and buyers fleeing, the exercise isn't an exact science. "When it comes to valuation, what one person thinks can be completely different from the next," says John P. Glynn, a partner at PricewaterhouseCoopers who heads the firm's valuation practice. The fear is that companies may be relying on inflated estimates for all sorts of assets, including contracts, commodities, and real estate. If so, some nasty surprises for investors and lenders may be lurking on the books. Delaying Writedowns?
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This note was uploaded on 06/17/2011 for the course LITERATE 101 taught by Professor Paul during the Spring '11 term at Aligarh Muslim University.

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Magic Tricks - New Business October 21, 2009, 6:47PM EST...

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