EARNINGS AND ACCOUNTING PRACTICES:                                      

Some of the companies which attracted so much investment during the bull market turned out earnings that were much less than expected, and we mean much less. To make things even worse, we do not even know which of these companies' earnings reports can be relied on because of the liberties many companies have taken with accounting standards.

What is really going on in the accounting rooms of funds and brokerage houses won't be known for a while, but is quite common during periods of sharp decline for funds to go bad or otherwise have to correct their bookkeeping.   We cannot help but wonder how soon the first big one will break.

Accounting practices at one time were based on how much money a company took in, less what their expenses were, the net result being net income or loss.  This method is part of the "GAAP" (General Accepted Accounting Principles) method of reporting earnings. Now instead, abstract theories are being applied to accounting methods, most notably the "pro forma" method of reporting earnings, and some practices which were once banned have become commonplace.

Some companies now use the "pro forma" method of reporting earnings, which gives them wide liberties in when to deduct expenses.   If expenses are not deducted in the current quarter but rather deferred to be subtracted sometime in a later period, that of course will distort the companies earnings, making them appear better than what they actually were.

We hear about such things as EBIDTA (a ridiculous word designed to hide real profit or loss).  It means Earnings Before Interest Taxes Amortization.  Many companies have decided to disguise their earnings in this fashion.  Where once Profit or Loss was what everyone wanted to know, companies are now stressing Cash Flow.

As an example, at the end of February 2001, almost a year after the fact, Gateway Computer Co. announced it is restating its previously reported quarterly financial results during the first three quarters of 2000 and revising previously announced full-year financial results to reflect the retroactive adoption of new accounting principles as well as a revision in the accounting treatment for certain items. This helps to demonstrate the flexibility of accounting methods and how earnings can be changed out of the blue without warning.

Now there are reports that the U.S. Securities and Exchange Commission (SEC) is investigating the accounting of some companies.  This has the potential of being another bomb - we have been questioning the accounting practices of companies for a long time.

We also are seeing a negative change in the way business is done.  It seems now that the money to be made in business is made more through stock transactions, mergers, stock options, etc. than by running a good business. Many of the big giant blue-chip companies have fallen prey to this basic change in business principles.

Many companies have cut back on their staff so much there is not enough to service their customers and keep business going.  Most people hear the now popular cliché "Your call is important to us" as they try, often in vain, to reach companies with which they do business.  Things are definitely changing in America.

Stock prices in general remain at high earnings multiples, internet and technology stocks especially, so there is little fundamental reason for stocks to go back to their absurdly overpriced levels.

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