Staff Reporter

Who would have thought that auditing would become corporate America's latest contact sport?

As publicly held companies are continually pressured by Wall Street to bring in impressive earnings, quarter after quarter, it's the number crunchers who find themselves caught in the middle. They're the ones, after all, who must compute, report, analyze and finally sign off on a company's performance.

Except that there are all kinds of ways to arrange the figures.

While creative accounting by public companies is as old as the stock market itself, the Securities and Exchange Commission is becoming concerned that things are getting out of hand.

In a recent speech, SEC Chairman Arthur Levitt said, "Too many corporate managers, auditors and analysts are participating in a game of nods and winks. In the zeal to satisfy consensus earnings estimates, wishful thinking may be winning the day over faithful representation."

It's a phenomenon that is clearly being felt among L.A.'s community of accountants, consultants and equity analysts.

"There have clearly been some failings," said Gregory Garrison, who heads the Los Angeles office of PricewaterhouseCoopers LLP. "The SEC has taken a look and seen that the interpretation of certain rules has not been as rigid as it should have been. There is a problem, and we all have to listen to what the SEC is saying."

Levitt says he is especially concerned about the excessive use of write-offs by companies involved in mergers or acquisitions.

Write-offs are typically expenses or debt that a company records as a one-time "exceptional" charge. While some of the charge-offs are for past or current expenses, an increasing number of firms have been writing off projected future expenses as well.

By booking future expenses, a company can effectively boost its reported profits in the years ahead. Those higher projected earnings, in turn, often result in a boost to the company's stock price.

"They know they are going to have a bad quarter, so they load up the quarterly report with all the exceptional costs they can," said Marla Harkness, head of research at Brentwood-based Oakwood Capital Management, and former president of the L.A. Society of Financial Analysts. "They load all the bad news into the one quarter so they can get it out of the way and Wall Street can forgive them. And as we get later in the economic cycle, we are more likely to see more bad quarters and more such write-offs."


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