BusinessWeek has an interesting piece on the accounting funny business companies employ to smooth out their earnings or to patch their leaky balance sheets.
Culprit No. 1, unsurprisingly, goodwill, which is an intangible asset booked in mergers and acquisitions that BW points out evaporates in downturns, but whose nebulous value accountants can get out of immediately writing down.
Bloomberg’s Jonathan Weil’s written a lot of stuff on this, for instance, this column on newspapers’ insanely inflated goodwill assets. BW itself mentions Gannett’s $7.5 billion goodwill writedown from earlier this year.
It’s good that the writer here, Mara Der Hovanesian, points to specific current examples, too, rather than just talking about the concept or looking at past examples of goodwill tomfoolery. And the anecdote is choice:
That’s just the kind of situation investors in Huron Consulting Group (HURN) could face. The firm, launched by former consultants of the defunct Arthur Andersen Group, snapped up several companies after going public in 2004. Huron’s related goodwill: $506.5 million, according to research firm Audit Integrity. But the researchers figure goodwill shouldn’t be that high, and estimate Huron has inflated its earnings over the years by $56 million.
Arthur Andersen, huh? BW reports the firm is being investigated by the SEC for another accounting issue.
The mag also looks at how companies manage their cashflow, specifically pointing to Amazon taking longer to pay its suppliers and how firms can delay recognizing delinquent accounts.
Back to goodwill, there’s a good rule of thumb in here for reporters looking for accounting shenanigans:
To ferret out potential problems, accountants look for companies whose goodwill assets amount to 20% or more of total assets. That’s a sign that goodwill is making up an increasingly large portion of the balance sheet—and profits may get whacked later.
Weil last year told me another:
…if a company is trading for less than its book value, one of first things I do is look at the balance sheet and I see if there’s any individual asset that supposedly is worth more than the company’s market value.
And there’s plenty of work to go around. BusinessWeek reports that Audit Integrity says 12 percent of the richest 5,500 public companies meet that 20 percent-goodwill threshold.