"Cooking the Books"

The president and the chief financial officer (CFO) have a breakfast meeting.  The president asks the question, "What will our earning be for the current quarter?"  The CFO responds, "What do you want it to be?"  That is the current reality in large financial institutions.  This is not a new phenomenon.  Top financial officers have had a bag of tricks to "smooth" earnings.  Smaller corporation simply don’t have the experience or tools to play the game.

A recent major bank just announced their earnings.  They exceeded Wall Street estimates.  Why?  They redefined past due mortgages.  If mortgages were past due at 120 days, there were procedures in place in increase loan losses which reduced the bottom line.  How do you improve earnings?  Increase the past due window to 180 days.  All of a sudden, bad loans become good loans and your earnings shoot up and you beat Wall Street’s estimates.  Also, the overall market becomes optimistic that the worst is over.  Companies who pay dividends tend to realistically report earnings since they distribute cash to their shareholders on a periodic basis.

In the Clinton era, the government would "cook the books" as well.  If unemployment became a problem, redefine who would be classified as unemployed.  If inflation became a problem, just change the method by which the index was calculated.  Use of "Hedonic adjustments" was the justification of the calculation change.  The following discussion from Wikipedia provides a better understanding:

In economics, hedonic regression, also hedonic demand theory, is a method of estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value of each characteristic. This requires that the composite good being valued can be reduced to its constituent parts and that the market values those constituent parts. Hedonic models are most commonly estimated using regression analysis, although more generalized models, such as sales adjustment grids, are special cases of hedonic models.

An attribute vector, which may be a dummy or panel variable, is assigned to each characteristic or group of characteristics. Hedonic models can accommodate non-linearity, variable interaction, or other complex valuation situations.

Hedonic models are commonly used in real estate appraisal, real estate economics and Consumer Price Index (CPI) calculations. In CPI calculations hedonic regression is used to control the effect of changes in product quality. Price changes that are due to substitution effects are subject to hedonic quality adjustments.

"Cooking the books" assumes that you will recover from the adversity forcing you to cook.  This simply forces you to over-compensate in the future for the current losses.  Losses force the cleansing cycle to take place.  Companies are forced to rethink their spending and expansion plans.  Ultimately the question is: "What is fruitful?"  This is a fundamental Biblical principle.  The Law of the fruit trees, etc. speaks of removing unfruitfulness.  Look around your house.  What is unfruitful?  Get rid of it.  If it is of value, ask yourself if there is someone you know who could use it?  This principle is applicable to companies as well as households.

"Cooking the books" is simply an illusion supported by man’s quest to control.  The president and CFO were manipulating the numbers to insure their survival and bonuses.  The current economic system rewards unequal weights and measures.  Our Heavenly Father will judge this system.  Will HE find it wanting?  The writing is on the wall:

Dan 5:24

"Then the fingers[fn3] of the hand were sent from Him, and this writing was written.

Dan 5:25

"And this is the inscription that was written:

MENE,[fn4] MENE, TEKEL,[fn5] UPHARSIN.[fn6]

Dan 5:26

"This is the interpretation of each word. MENE: God has numbered your kingdom, and finished it;

Dan 5:27

"TEKEL: You have been weighed in the balances, and found wanting;

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