January 28, 2002
From the desk of Mindles H. Dreck:Lockbox Accounting
I knew Enron's limited partnerships sounded familiar! They remind me of the famous social security "Lockbox".
Here's me in a prior post:
..I've figured out how to make sure I'm wealthy in my retirement: I wrote a check to myself for $1 billion and put it in a lockbox. So now I know I'll be a billionaire....Hmm, I don't really need $1 billion when I retire. I've got some pressing problems now, so I think I'll spend $100 million today. Good thing I've got that lockbox.
The Enron partnerships were accounting entities full of questionable self-valued assets supported by Enron stock that increased Enron's net worth and allowed it to keep the truth of deteriorating asset values off its financial statements. The Lockbox, or social security surplus, is a fictional accounting entity full of I.O.U.s both from and to the U.S. Government that somehow increases its net worth and keeps nasty truths out of its financial statements. Same idea, huh?
A reader sends in the following update of an old joke to illustrate the "immaculate reproduction" this accounting can achieve:
In case you were wondering how Enron came into so much trouble, here is an explanation reputedly given by a Colorado Aggie Professor to explain it in terms his students could understand:Capitalism
You have two cows. You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.Enron Capitalism
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by your CFO who sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on six more.
On the subject of government accounting, many of you know that critics of government fiscal policy often suggest that if the federal government used the same accounting principles as the private sector, its books would look radically different. The biggest culprit is spending commitments. The government only recognizes an expense when it happens, whereas GAAP (Generally Accepted Accounting Principles) suggests you start recognizing an expense when you commit to it. Other differences are inventoried in this book review.
The review linked above is of a book by Joseph J. DioGuardi called Unaccountable Congress. DioGuardi was a congressperson who worked at an accounting firm prior to being elected to office. That accounting firm started issuing U.S. financial statements according to GAAP in 1975. The firm's name was Arthur Andersen & Co.
Posted by Mindles H. Dreck at January 28, 2002 6:25 AM | Technorati inbound links"); ?>