STREET DOGS

From the Money Game by Adam Smith:

You can see that there are a lot of numbers floating around Wall Street, that the game is played with numbers... Numbers reported as sales and earnings, and earnings, in anybody’s systems, are one of the most important factors.

But what are earnings?

It really ought to be easy. You pick up the paper, and Zilch Consolidated says its net profit for the year just ended was $1m or $1 a share. When Zilch Consolidated puts out its annual report, the report will say the company earned $1m or $1 a share. The report will be signed by an accounting firm, which says that it has examined the records of Zilch and “in our opinion, the accompanying balance sheet and statement of income and retained earnings present fairly the financial position of Zilch. Our examination of these statements was made in accordance with generally accepted accounting principles.”

The last four words are the key. The translation of “generally accepted accounting principles” is “Zilch could have earned anywhere from 50c per share to $1.25 a share. If you look at our notes one through 16 in the back, you will see that Zilch’s earnings can be played like a guitar, depending on what we count or don’t count. We picked $1. That is consistent with what other accountants are doing this year. We’ll let next year take care of itself.”

Numbers imply precision, so it is a bit hard to get used to the idea that a company’s net profit could vary by 100% depending on which bunch of accountants you call in, especially when the market is going to take that earnings number and create trends, growth rates, and little flashing lights in computers from it. And all this without any kind of skulduggery you could be sent to jail for.