COMMENTARY ON CHAPTER
You can get ripped off easier by a dude with a pen than you can
by a dude with a gun.
—Bo DiddleyTHE NUMBERS GAME
Even Graham would have been startled by the extent to which compa-
nies and their accountants pushed the limits of propriety in the past
few years. Compensated heavily through stock options, top execu-
tives realized that they could become fabulously rich merely by
increasing their company’s earnings for just a few years running.^1 Hun-
dreds of companies violated the spirit, if not the letter, of accounting
principles—turning their financial reports into gibberish, tarting up ugly
results with cosmetic fixes, cloaking expenses, or manufacturing earn-
ings out of thin air. Let’s look at some of these unsavory practices.
AS IF!
Perhaps the most widespread bit of accounting hocus-pocus was the
“pro forma” earnings fad. There’s an old saying on Wall Street that
every bad idea starts out as a good idea, and pro forma earnings pre-
sentation is no different. The original point was to provide a truer pic-
ture of the long-term growth of earnings by adjusting for short-term
deviations from the trend or for supposedly “nonrecurring” events. A
pro forma press release might, for instance, show what a company
would have earned over the past year if another firm it just acquired
had been part of the family for the entire 12 months.322(^1) For more on how stock options can enrich corporate managers—but not
necessarily outside shareholders—see the commentary on Chapter 19.