Companies and States Lying about Finances

States are hiding their liabilities and companies are exaggerating their stock market attractiveness by lying about finances.

First there was Enron and then a few years later the housing collapse when we learned that the ratings on the mortgage-backed securities were completely misleading.

And yet the same scams keep happening as people continue lying about finances.

Drudge shared two stories last night that I think go together. Both states and publicly held companies want to appear to be in a more sound financial position than they really are.

According to the Associated Press,

 As the stock market climbs ever higher, professional investors are warning that companies are presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they’re doing better than they really are.

What’s worse, the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they’re largely passing along the rosy numbers in reports recommending stocks to investors.

[…]

An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years.

At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

So you can trust the financial analysis about as much as you can trust the science of a global warming alarmist.

And then there is this from the Financial Times:

Paul Volcker, former chairman of the Federal Reserve, has warned that US states rely on faulty practices to balance their budgets, masking the true nature of their finances and leading to poor policy making.

While states have returned to better health after the depths of the financial crisis and recession of the last decade, many remain under “heavy pressure,” with overall tax revenues, adjusted for inflation, barely recovered from their pre-recession peaks.

“The continued fiscal stress is tempting states to continue, and even intensify, budgeting and accounting practices that obscure their true financial position, shift current costs on to future generations, and push off the need to make hard choices on spending priorities and revenue practices,” Mr Volcker said in a report released on Monday by the Volcker Alliance, a government reform group he founded in 2013.

The “fiscal stress is tempting” them? How would Volcker and his associates observe them being tempted? I suspect what is really going on, and the rest of the article seems to me to support my suspicion, is that they are seeing the states succumb to the temptation.

So we have over-valued companies and over-valued states all getting ready to suddenly give us “unexpected” and “disappointing” news.