153Chapter10. Making (Up) Numbers
A
ccounting shenanigans have plague dbookkeeping since it was
invente dby Luca Pacioli in 1494, an dthere is no reason to ex-
pect that the next 500 years will stray from the historical pattern.
No amount of rule making—from accounting, auditing, or else-
where—can ensure the integrity of financial reporting. Rules cannot
eliminate managerial discretion, and there will always be the possi-
bility of imaginative, unorthodox, creative, and even fraudulent fi-
nancial reporting.
Investors an dmanagers shoul dexpect it an d, instea dof wishing
it away, take pains not to be its victims or accomplices. Just think
of the notorious accounting frauds of relatively recent memory—
from Leasco, National Student Marketing, and Penn Central in the
late 1960s an dearly 1970s to Cen dant, MicroStrategy, an dSunbeam
in the late 1990s an dearly 2000s. These frau ds sting investors, an d
managers who engage in them shoul dknow they will be caught,
punished, and made to pay (though investors will not profit in the
process).
The nonfraudulent cases are often the trickier to deal with. They
consist of a variety ofsmoothing techniquesdesigned to massage the
whole range of financial numbers, from the ratios discussed previ-
ously to income itself. Income smoothing, also known as earnings
management, exploits the flexibility of generally accepte daccounting
principles to classify transactions or allocate them by time perio dto
achieve favorable financial reporting.PERENNIALSSEC Chairman Arthur Levitt delivered a series of major speeches in
the late 1990s and early 2000s identifying several long-standing ac-Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use