Billionaire investor Warren Buffett is the latest money man to voice concern over some of the numbers coming out of Wall Street.
In his annual letter to investors in his Berkshire Hathaway corporation, Buffett brought his big guns to bear on executives who are passing off financials that are misleading to shareholders.
The industrialist also had some terse words to say about analysts who broadcast the figures because they fear losing access to sources in the market if they told the truth, he claimed.
At the root of Buffett’s argument is how to compare earnings and performance between companies when their executives interpret which expenses to include and leave out of the accounts.
This lack of consistency, he says, means a company’s true earnings are often masked and investors are encouraged to pour money into a business that might be in a much worse trading position than they seem.
Phoney expenses
“The numbers are phoney and do not stack up in many cases,” Buffett said.
“Failing to report stock based compensation when reporting earnings to shareholders inflates income and profits.”
Buffett feels paying with stock is an expense and ought to be offset against income to reduce profits. He also argues that issuing shares or options dilutes the value of existing shares and their worth to investors.
The blow-up comes down to the way companies approach their accounting.
Many hold up Valeant Pharmaceuticals as an example of how figures can seem misleading.
The company did not include costs for mergers, research or stock-based compensation as business expenses in accounts.
Hidden expenses
In the first three quarters of 2015, the company looked to have earned $2.7 billion, but accounting rules applied to the accounts reduced that figure to $70 million.
The company is redrafting accounts after share values dropped by around 60%.
Buffett suggested investors should also look at other places in the accounts for hideaway expenses that could alter the bottom line.
He admitted amortisation and depreciation costs in his own corporation’s figures can change the earnings and profit levels.
“Watch the noses grow of investment bankers or chief executives when they claim pre-depreciation amounts as a guide to a company valuation,” said Buffett.
