Originally posted by crw:
Wow, I always thought that the old "bean-counter" argument was mostly anecdotal... something that people think is happening but in reality the whole thing is somewhat blurred. But here we have a real live breathing accountant telling us that's exactly his criteria! I realize he's just following orders, but in this day I can't believe the shortsightedness of this!!! Like someone said, they're doing a good job of accounting themselves into bankruptcy.
I haven't done a good job of explaining this, so I'll try again.
It isn't my job to tell management what to do - I just apply rules to the numbers that they report, and make sure that they are reporting things accurately.
The numbers themsleves tell management what to do.
If management wants to show a profit or a loss in a given area, they allocate or rescind funding, shift resources, make capital investments or close down facilities to have the desired effect.
My job is to make sure that the effect being reported in their regulatory filings is truly what's happening.
Those numbers in their 10-Q and 10-K reports are the grist in Wall Street's mill. It is the data that analysts use to give credit ratings, make buy or sell recommendations, and drives trading amongst investors (knowledgeable ones, and otherwise.)
The Street cares about one thing - growth.
Growth is reflected by earnings.
Earnings are predicted, and trading volumes on the Street between the time the predictions are made and the earnings are released are based on those predictions.
When a company meets or exceeds the predicted earnings, then things are OK.
When a company misses its earnings forecast, then things get nasty. The stock price takes a hit, as institutional investors sell their holdings. Management's compensation is invariably tied to earnings and the corresponding stock price, so the CEO, COO, and CFO all take home smaller bonus packages for that period.
Therefore, management will do whatever it takes to hit their projected earnings.
The founder of MCI, Bernie Ebbers, would hold meetings with his senior accounting and financial managers to beat them over the head about earnings. As far as he was concerned, the only thing that counted for anything at MCI was meeting Wall Street's expectations FOR FINANCIAL PERFORMANCE. If that meant selling good services and a quality product, fine. If that meant spending money for corporate retreats, team-building efforts, and new-age motivational seminars, that was fine too. If that meant committing fraud, releasing false financial data, and cheating investors with fake information, he didn't want to know about it, but that's what he wanted them to do.
Unfortunately for Bernie, he chose the latter. This former Sunday school teacher, who created MCI from a diagram that he drew on a napkin ion an Atlanta diner one evening several decades ago, is serving several decades in prison. For fraud.
All because those earnings had to be at a certain level to justify his bonuses.
If you think for a second that GM won't sell a piece of garbage to you in the interests of keeping earnings higher than they would be if the car were better quality, then you're naive. If it's cheaper to maintain a reserve for warranty purposes rather than implement a better quality intake manifold gasket, you can forget about ever seeing that gasket get implemented. That is, unless they are required to do so through regulation, or someone makes the financial case to the Board that improved quality is critical to future projected earnings, so an effort to emphasize quality must move beyond the marketing pitch and really be implemented in the production process. This has happened at GM (despite what everyone thinks) but it has taken a long time, and is still being implemented.
I don't mean to insult anyone (although several of you have decided to take some fairly simpleminded shots at me, apparently) but that is the way that public companies work.