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Smoothing Out Earnings is Finance-Speak for ‘Cooking the Books’

Posted by Larry Doyle on September 14, 2009 2:41 PM |

When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.

I witness it again in Bloomberg’s commentary, Beware Bankers Spinning Story of Smooth Results:

The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.

Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.

The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.

Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.

Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.

Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.


  • Moy

    Outrageous demands these financial institutions have, should not be met at any cost.

  • coe

    LD – for my two cents, it seems the regulators, accountants, and certainly the politicians don’t stand a chance in keeping up with, no less getting ahead of the recent structural complexities found in banking..I believe this to be true for on- and off-balance sheet activities, for assets as well as for liabilities and even for equity ..truth be told, the many nuances in the proliferation of complex structural “solutions” – consider SIVs, synthetic credit derivatives, puttable advances, swapped commercial loans, convertible preferred, binary notes – just to name a few, simply didn’t exist a decade or two ago, and if anyone is really honest about it – owe their very existence to an unquenchable drive to arbitrage legislation, regulation, accounting standards, performance and pay metrics et al..I’ve long pilloried the accounting standard setters for their asymmetrical and unfair model – and now there is more of the same..”smoothing” is a gentle word that would provide for “manipulation” – a word with many more negative connotations…it’s a problem when many of these constituencies are either intentionally or unintentionally gaming the system – for anyone trying to get to the heart of the matter it’s a bit like playing “Whack-a Mole” at a carnival..beat back one issue, and another one pops up on another corner of the playing field – and it’s a playing field “owned” by the same participants whose behavior screams for more transparency are right, it has to start with regulatory reform with teeth and honor, and spread from there..never expect human behavior to pursue something not in its own best self interests..clearly, the same is true of Wall St, banking, Main St., and all walks of life..tilt on, Don Quixote – the supply of windmills is never-ending!!!

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