“Throw it into the Crack!”

Twice in my career, I have worked in financial reporting in an insurance company where an accounting change would happen because of an acquisition, or some other type of corporate event, such that there would be a change in the accounting periods.  It did not have to be like Goldman Sachs, where they moved their yearend from November to December.

At such a time, there would be an inclination to clean up the balance sheet, because no one would see the income statement effect from adjusting values closer to economic reality.

American investors focus on the income statement, but they would be better to focus on the balance sheet, particularly on the change period-to-period.  Why?

Twice I have seen the ethic of “throw it into the crack,” where no income statement damage occurs, but losses are quietly recognized.  The income statement shows little effect, though the balance sheet takes a whack.

There are always weaknesses in accounting, and the temptation is to make adjustments while out of the spotlight.  Thus the temptation tothrow accounting adjustments into the “crack,” when the opportunity is there.

Recommendation to readers: look at the change in the balance sheets, and ignore earnings.