As David Shapiro discussed on Rational Radio this week, Discovery has taken some flak for “aggressive accounting” – specifically, for the way it values its long-term contracts. I haven’t done research on this, so I have no comment on Discovery’s practices, other than to note that valuations of long-term cash flows are always at least partially subjective, especially in insurance, and as long as the assumptions are sound, things usually work out OK (unless they don’t).
However, more generally, the growth of aggressive accounting techniques is cause for alarm. Most of the more spectacular corporate blow-ups we’ve seen worldwide have involved the use of aggressive accounting techniques, either to put proverbial lipstick on pigs or to cover up outright fraud. A quick Google News search for the phrase will give you an anxiety-provoking sense of what I mean.
That the growth of aggressive accounting techniques seems to be occurring at the same time as a crisis in the auditing profession is especially worrying. Without clear, transparent, fair, reliable, and accurate financial statements, it is almost impossible for investors to make rational choices. That means that the wise allocation of capital becomes impossible, and that means slower growth and lower living standards all round.
