Tread lightly through these accounting minefields

In the current economic climate, there is tremendous pressure- and personal incentive for managers- to report sales growth and meet investors' revenue expectations. As a result, more companies have been issuing misleading fin ancial reports, according to the SEC, especially involving game playing aro und earnings. But it's shareholders who suffer from aggressive accounting s trategies; they don't get a true sense of the financial health of the compa ny, and when problems come to light, the shares they're holding can plummet in value. How can investors and their representatives on corporate boards spot troubl e before it blows up in their faces? According to the authors, they should keep their eyes peeled for common abuses in six areas: revenue measurement and recognition, provisions and reserves for uncertain future costs, asset valuation, derivatives, related party transactions, and information used fo r benchmarking performance. Ifa disaster strikes, it will most likely be in one of these accounting minefields. This article examines the hazards of each minefield in turn, using examples like Metallgesellschaft, Xerox, MicroStrategy, and Lernout & Hauspie. It a lso provides a set of questions to ask in order to determine where a compan y's accounting practices might be overly aggressive. For those whose greate st interest is in fairly valuing the business- not presenting it in the bes t possible light- these questions are the first line of defense against cre ative accounting. Accounting game players are adroit, but it's both foolish and dangerous, co ntend the authors, to declare oneself ignorant and hence powerless against their machinations. They argue that members of corporate boards need to be financially literate.