Lies Damned Lies and Financial Statements

t was no surprise that many other problems appeared once a bright light was shone on Enron's accounting irregularities. Awakened by the mighty crash of Enron's collapse, investors and regulators began closely examining the accounting practices of other companies, too.

Under this overdue scrutiny, stock prices fell, bankruptcies multiplied, jobs were lost, and retirement savings evaporated. The damage to companies paled against the damaged confidence of coworkers and investors worldwide.

Financial obfuscation is not new, but has certainly reached new heights of absurdity in the public markets during the past 15 years. For one's own protection, an entrepreneurial investor must know how to read a financial statement. To that end, we offer our usual advice: simplify!

By definition, public companies must parade their results before the public, and they do so in the form of a financial statement. Like the fabled emperor, companies want to look their best when they appear in public, so they put a lot of effort into dressing up their financial statements. Some wish to show off their fine physique, earned through long hours at the gym. Others wish to hide some subtle imperfection. Still others want to disguise their true selves. You may recall that the emperor was tricked into wearing nothing— and his subjects accepted this because they were told he was wearing a suit of fabric so fine that only the finest people could see it. In this context, knowing how to read a financial statement can bring a whole new meaning to transparency in business.

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