Just Curious

Balance sheets...

Ben Graham's introductory text on "the Interpretation of Financial Statements" (1937) has been a very interesting read so far. It is interesting to see how accountants even back in those days (Wall Street back in the 30s) were able to come up with totally legal strategies in creating a mirage of their corporations' performance.

One example would be their treatment of a corporation's "intangible assets." (Ch.8) Good-will, patents, and leaseholds and trademarks are considered "intangibles," meaning they are those assets of the corporation that cannot be touched, or weighed, or measured. Even back in those days, it is common for accountants to "write down" the good-will their corporations had, to, say, a nominal value like USD 1, even when the market price of their shares indicated that the public valued the good-will at over, say, 300 million dollars. This usually happens after a corporation's business has improved, and when the corporate executives decide to make corresponding deduction in their surplus, etc. (which are on the liabilities, not the assets, side of the balance sheet...) just to be "more conservative" in their accounting policy.

So yes even back in the 30s companies had already learned to do very legal, yet very deceiving stuff on their statements.

The funny thing is how Graham keeps on using railroad companies, electric power companies, etc. in his book. I suppose this reflects a different eras than our own...

posted by James Chang @ 12:12 PM