Standard & Poor’s 500 Shades of Grey

Andrew Fastow, chief financial officer at Enron during one of the largest corporate frauds in U.S. history, knows how easy it is for businesses to misbehave when faced with grey-area decision-making. He sees principle-breaking everywhere today — in business deals, political fundraising, and tax avoidance. There can be a contradiction between “doing what’s right” and “doing what the rules permit.” It is important for managers to understand where judgment needs to be applied in financial reporting, keeping in mind that the use of differing accounting estimates and policies can result in significant variation within financial results. Leaders must also consider the alignment between an organization’s long-term strategy and its incentive systems. When it comes to misleading numbers in the marketplace, it is important not to confuse “accounting” with “reporting.” An analysis last year of results from 500 major companies warned that the gap between the so-called “adjusted” profits that analysts often cite when advising investors and actual bottom-line earnings, which companies are legally obliged to report, has widened dramatically in recent years. A more recent study found that 90 per cent of the companies listed in the Standard & Poor’s 500-stock index used non-GAAP results when reporting results to the market last year, a significant increase since 2009. Ultimately, board members should ask tough questions whenever official result figures vary significantly from the numbers used to entice investment. Or as Fastow puts it, it is time for directors of companies to “Stop worrying about personal liability and start worrying about shareholders and other stakeholders by looking at the real risks and dealing with them, instead of looking the other way and being happy not knowing what is really going on.”