With the news that Xerox will have to restate past earnings (update: triple that number), the official accounting cleansing season has opened. Expect more companies to acknowledge they let run doubtful account receivables beyond reason, from extending too many risky vendor loans to customers, to lengthening payment terms ad infinitum, to recognizing orders that weren’t officially sanctioned by customers yet as booked sales, to booking all of a recurring deal early on.
I hope Worlcom-class fraud isn’t rampant, but aggressive booking practices and revenue recognition patterns are nothing new. When you anticipate revenue that’s not really there yet to please investors, you’re only increasing your burden for times to come.
We should dispel the illusion than public companies have these smooth, predictable, quarter-to-quarter growing revenue streams. Investors should reward companies that acknowledge bumps in their business early on, instead of looking for uniformly rosy pictures. There’s just no business where you can guarantee you’ll always deliver, no matter what.
Sales pipeline forecasting is a rationalized fantasy, and management by decree ("the company picnic will happen on next Friday, so the weather will be fine,") is pushing companies to become more remote from their customers. When the gap between marketplace reality and spreadsheet fiction is too wide, something has got to give in. I have come to accept reality’s great reluctance to cave in to wishful thinking. It’s time investors did as well, and stopped asking companies to tell them bedtime stories. It’s time company leaders started showing courage and acknowledge there’s only so much they can master. There’s always a time when it’ll come to you you’re running in the air, as in those wacky cartoons.
Update: Paul Krugman: Flavors of Fraud.
07/01/02 update: IHT: Tweaked data haunt business.
07/14/02 update: The Economist: American capitalism.
07/29/02 update: Elizabeth Spiers: Quit Yer Whinin’.
03/04/03 update: CFO Magazine: What Goes Around.