OOOPPPSSSYYYY AOL makes MINOR accounting errors...

[binny]

That total something like 49 Million

Gee I can understand an accounting error and maybe bouncing a few $5. checks but $49 MILION???????


They said they " misplaced 3 transactions that equaled $49 Million"

OOOPPPSSSS

 

[Steve H.]

Actually, considering their annual revenue hovers around the $10 Billion range, $49 million is not that large of an adjustment.

 

[danacara]

Re: accounting - I wish more people understood just how little of accounting is science vs. art. American Law is deliberately a little vague on formalized accounting rules, because each industry needs to decide for themselves how to present their transactions in a way that actually expresses the condition of the company.

Let's take expensing options, for example. Options have no absolute price - all we have is a model that roughly quants them. In fact, even coming up with that model was such an unbelievable accomplishment that the two guys that created it won the Nobel Prize. Suppose Disney issues Michael Eisner 100 call options to buy Disney stock at $10 in August 2003, and the stock is currently at $15.06 (that's the price right now). According to this model, each option is worth $3.80 right now, so Disney's best guess is to book $380.00 of expense, more or less.

Let's speed up to one year from now. Suppose in August 2003, the stock is actually at $9. Since Eisner's options allow him to buy at $10, but he could actually buy at $9 in the open market, he's not going to exercise them. The options are worth $0. Now, the company adds $380.00 of an expense that they never even had back into their books. It's a $380.00 transaction that never occured, and generated no cash flow. Most people consider that to be pretty bad accounting.

Let's say that the stock is actually at $17. Now, Eisner can buy them at $10 and sell them right back at $17, so each option is worth $7, for a total of $700. But a year ago, the company only booked $380 or so in expense, so now they need to add $320 in new expense to their books. This is fine, except that the number from last year was again not predictive, and this new cost is not related in any way to an actual cash loss that the firm incurred.

If we could predict the future, expensing options would be easy. However, we can't, and all expensing options does is complicate an already complex financial statement with a lot more information that (1) tells you nothing about the company's actual business activities, (2) might wind up being meaningless, and (3) vary wildly in cost with changes in the stock price through time.

Accounting in this case is not straightforward. The best and brightest academic pointy-heads all over the country have been thinking about this for years, and have not come to a consensus. This is one of perhaps a thousand or more examples of cases where the "right accounting decision" is unclear. Criminals exist, but quite often an accounting restatement is related to some mistreatment that is actually due to unclear rules, new innovations in derivatives, or difficult mergers.

Thank you for letting me get that off my chest, I've been thinking about it every time I turn on CNBC.

 

[Steve H.]

No offense Dana, but what does this have to do with the AOL story?

 

[danacara]

Not a whole lot, directly, but since we are all talking about ethics in accounting these days - I hoped a short discussion of the fact that accounting is not cut-and-dry would have a place in this. AOL's restatement is probably not due to fraud, and to immediately assume that fraud is to blame is premature. Also, emerging issues like expensing options and unit-count inventory make accounting more complicated and "gray" than ever.

Fair question though, Steve.

 

[binny]

I didnt think it was fraud It just amazes me that it was that big of an oopppsss you know? I guess youre right though Steve in the grand scheme of things it isnt that big of a deal

 

[danacara]

Expensing options is a $160 Billion dollar deal. That's the expected impact it would have on corporate balance sheets. And here we thought that accounting wasn't a sexy profession! $160B!