EBITDA

VAGUE. The accounting profession loves acronyms. EBIT, EBITDA, EAT, EPS, and their kind are common sightings in corporate annual reports. Acronyms are convenient in the best of times, but could be vague and confusing in the worst of them. This is where the accountant is most at home, in a situation so ambiguous that nobody understands what anything is all about anymore.

I should qualify the previous statement. Not all accountants have lost their sense of integrity. Not everyone has turned his back on the principles of GAAP (Generally Accepted Accounting Principles), to which they are eternally sworn to uphold. But some have, as the recent stories of corporate fraud have only too visibly demonstrated.

I have no problems with this dichotomy. It mirrors real life, after all. There are the good guys, and then there are the bad. My issue is with the confusion between the good and the bad in the financial world.

In the real world, the bad guys go to jail. Here, the bad boys get the glory. They have all the pay rises and the fat bonuses. Treading on the thin line between honesty and the absence of it is applauded at the highest corporate circles, encouraging even more dangerous financial acrobatics.

We remember Nick Leeson, or at least some of us must do. Who would forget the boy who single-handedly brought down the venerable Baring Brothers, and had it bought from the receivers for one pound by ING?

He was the perfect example of values gone horribly wrong. He fiddled his reports, fooled his superiors and broke all the rules that ever existed. Yet he had a luxury apartment in Singapore’s most affluent district, drove flashy cars, wore nice suits, and vacationed where most of us could only dream to be. He got caught out in the end, but instead of universal condemnation, there was even adoration from some. His life became a movie, several books were written about him and his exploits, and he is now a cult hero of sorts.

Welcome to the new world of professional depravity!

Until very recently, the bad boys still got all the glory. Only this time, even if their tricks had gotten simpler, no one seemed to notice until the harm had been done.

Fiddling with the books—the simplest trick of accounting magic there is, had the experts looking the other way. Everybody was too busy watching the trend graphs, the obvious escaped their attention. Or maybe the not so obvious.

Nick Leeson actually lost cash, real money. By investing in complex swap transactions that bet on the Nikkei the wrong way, he bankrupted Barings, his bank.

The accountants at Worldcom, meanwhile, merely painted a different story to what was really happening at the company.

But the world is now all the worse for it.

All because of an acronym. EBITDA. An innocuous acronym. Earnings Before Interest, Taxes, Depreciation and Amortization. Between what the company first reported and what its restated earnings report now owns up to, is a hole a few billion dollars deep in EBITDA.

The routine? Move normal repairs and maintenance expenses into fixed assets, and defer their recognition for a few years. EBITDA increases. Share prices go up.

Everybody is happy. Happy at least until the whole scam is uncovered. Then misery ensues, affecting everyone, you and me included. All because of EBITDA. (More next week).

Published in the Sun Star Daily, Saturday, August 03, 2002 (http://www.sunstar.com.ph/static/ceb/2002/08/03/bus/batuhan.ebitda.html).