Investing Guidelines: Management Tenets 105term “accounting scandal” because the misdeeds centered on accounting
trickery and because the outside auditors who were supposed to verify
the accounting reports were themselves named as parties to the actions.
It’s far broader than accounting, of course; it’s about greed, lies, and
criminal acts. But accounting reports are a good place to look for signs of
trouble. In his 2002 letter to shareholders, Buffett warned investors to be
careful in reading annual reports. “If you’ve been a reader of f inancial re-
ports in recent years,” he wrote, “you’ve seen a f lood of ‘pro-forma’
earnings statements—tabulations in which managers invariably show
‘earnings’ far in excess of those allowed by their auditors. In these pre-
sentations, the CEO tells his owners ‘don’t count this, don’t count that—
just count what makes earnings fat.’ Often, a forget-all-this-bad-stuff
message is delivered year after year without management so much as
blushing.”^29
Buffett is plainly disgusted by the scandals. “The blatant wrongdoing
that has occurred has betrayed the trust of so many millions of sharehold-
ers.” He blames the heady days of the 1990s, the get-rich-quick period
he calls the Great Bubble, for the deterioration of corporate ethics. “As
stock prices went up,” he says, “the behavioral norms of managers went
down. By the late 90s, CEOs who traveled the high road did not
encounter heavy traff ic. Too many have behaved badly, fudging numbers
and drawing obscene pay for mediocre business achievements.”^30 And
in too many cases, their companies’ directors, charged with upholding
shareholder interests, failed miserably.
Director Negligence and Corporate Governance
Part of the problem, Buffett suggests, is the shameful tendency of
boards of directors to blithely rubber-stamp whatever senior manage-
ment asks for. It is a question of independence and guts—the degree to
In the long run, of course, trouble awaits managements that
paper over operating problems with accounting maneuvers.^28
WARRENBUFFETT, 1991 [NOTE THE DATE OF THIS REMARK.]