Jack TenneyExtra Point

by Jack Tenney, Publisher

August 2002

Accounting Practices

My mother didn't raise me to be an accountant. How'd she know?

Oh, the things I've had to wrestle with! Reserves, tax stunts, debt codicils, management rep letters, options, warrants, reorganizations, product liability exposures, inventory valuations. Thank goodness for the last 20 years I've been legit. Writing stuff, being a publisher, taking vacations during tax season that's the life.

For those of you with kids you fear are going to turn into accountants, allow me to offer some advice.

As catechisms pointed out the difference between venial and mortal sins, accountants, especially CPAs, must learn to discern between representations that are merely misleading and those that are material. Consider accounts receivable and reserve for doubtful accounts. When a company is growing like a weed, its receivables are sure to follow; and when the going gets tough, receivables will decline but usually not as much as the sales. That's because when the going gets tough, customers seldom pay their bills faster.

So, how should the reserve for doubtful accounts be adjusted?

In reality, the percentage of receivables that won't ultimately be collected is higher during good years. That's because fast-growing companies in fast-growing industries must, by definition, do lots of business with new, brash, bold customers (aka lemmings). When the sales curve pauses, the last buyers jump off the cliff prior to settling their accounts. However, when sales are sluggish and the industrial sector is contracting, the remaining customers tend to be old, well-capitalized, savvy survivors and, hence, more likely as a group to settle their accounts, albeit slower.

By the way, CFOs worth their salt build reserves at highest possible rates (after meeting EPS market expectations) in the go-go times so as to be able to skinny down the reserves in the stop-stop times, thus cushioning the effect on EPS. CFOs tend to do the right things for the wrong reasons.

So, is the constant misrepresentation of net accounts receivable material?

It used to depend on two things to CPA auditors:

1. The two-adverb test, as in, "So, is the puff in the reserve 'really-really' material?"

2. If the answer to number one was "Well, not 'really-really' material, I guess," then the question was whether the client was current in paying the audit fees.

Nowadays, the two-adverb test will be out and CPA firms will have to make up the diff in audit fees collected by increasing the amount of time they spend counting pennies, nickels and dimes. So, ask your kids if they really-really want to pass their time between weekends counting pennies, nickels and dimes. If they do, then they'll have a lot of work because it looks like the reaction to Enron et al has all the earmarks of a full-employment program for bean counters. Heck, I might even get back in the game. I really-really liked ticking and tying.