The Post 200: Art of Accounting
With Neil Irwin
Post Financial Staff Writer
Tuesday, April 29, 2003; 2 p.m. ET

Accounting problems have been at the heart of corporate scandals plaguing public firms on Wall Street and around the world. The rules of accounting are often subtle and always seem to be shifting. These changes are something that most of the public firms on the Post's Top 200 list have to accommodate.

Join Washington Post staff writer Neil Irwin for a discussion on Tuesday, April 29 at 2 p.m. ET about how changing accounting standards are impacting Washington-area companies.

Every year, the Washington Post business section compiles a list of the 200 biggest companies in the region. These companies include the largest public and private financial, biotech, information technology and telecom institutions headquartered in the metropolitan area. The list of companies are ranked based on revenue from the prior fiscal year, except financial institutions, which are ranked by assets.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Neil Irwin: Welcome to an online chat about accounting. I just hope the Washingtonpost.com server can handle the massive crowds. And don't get to randy with these accounting questions--the Weingarten chat was earlier, and there will be no references to off-balance sheet poop.

Anyway, thanks for joining me, and send in those questions about the Post 200, accounting at local companies, or whatever's on your mind.

Fairfax, Va.: How have the latest accounting scandals affected the economy in the Washington area? Specificially with the fallout of WorldCom?

Neil Irwin: The short answer is that the economic imapct of the scandals in Washington hasn't been much different from in the rest of the country. WorldCom has had to cut thousands of jobs since the disclosures--but probably would have had to anyway. Arthur Andersen had over 2000 employees locally--but most of them have been absorbed by Ernst & Young and other firms.

So the real economic impact of the scandals on the Washington area is that they made investors skittish about all kinds of companies, making raising capital or expanding that much harder. The scandals are one of the reasons companies all over the country, including here, didn't begin hiring and expanding las year.

Gaithersburg, Md.: How have the accounting changes affected companies that weren't involved in the scandals?

Neil Irwin: The short answer: it's made them have to spend a lot more time and money to make sure their accounting is kosher.

For example, I talked to Dendy Young, CEO of GTSI, a government contractor with fairly simple accounting. His firm has had to spend more time working with accountants to make sure everything was done right, and even added two members to the board of directors to handle the increased responsibility fo being on the audit and other committees.

In all, it adds up to a new layer of costs, even for honest companies.

Waterford, Mich.: How should the stock options be treated? It, obviously is an economic cost involved in running a business, but how would we represent it in balance sheet so that it gives a more accurate picture of the business?

Neil Irwin: I'm no opinion monger, and it's up to others to decide what is best. But there are a lots of people who know far more about these things than me (Warren Buffett, for one) who argue that stock options represent a cost for shareholders as surely as a cash bonus does and should be accounted for appropriately. The problem is that not treating them as an expense creates skewed incentives for companies in offering compensation.

That said, even though they aren't calculated in financial results, companies must include the cost of stock options in footnotes of their SEC filings, so a person so inclined can calculate his or her own estimate of what the company's earnings would be if options were expensed. And many companies, especially in the technology industry, argue against this vociferously and believe that stock options should not be considered an expense.

Virginia: This may be a dumb question but are the accounting standards and regulations the same for government companies as they are in the private sector? Do many in the private sector (loan companies such as Sallie Mae, Fannie Mae, etc. for example) have to accomodate government regulations?

Neil Irwin: The accounting standards for so-called government sponsored enterprises, like Fannie Mae and Freddie Mac, are the same as for private companies. Historically, they haven't filed SEC reports on their results, though, however they have made public documents with the same information that would be in SEC filings. But while there's that subtle difference in their process, another big difference is that Congress monitor the GSE's quite carefully, given that the entire point of them is that the federal government implicitly backs their loan portfolios.

Arlington, Va.: I'm an auditor, and I've worked for both the Big 6 (when it was the Big 6) and a local firm.

There is a definite culture at the big firms that whatever the client says, goes. The big firms are absolutely terrified of losing their biggest clients.

Smaller firms, however, seem to act with much more integrity. At least at the firms I've worked for, we don't bow down to the client. If they refuse to follow GAAP, we dump them as a client or qualify the opinion.

My conclusion is that the rules governing auditing work, and are effective. The problem is that the biggest firms ignore them, and then the AICPA does nothing because the AICPA board is made up all of Big 4/6/8 partners and former partners. The AICPA is what needs overhauling, not accounting standards.

Neil Irwin: Thank you for the interesting thoughts.

The impression I get is that the Big 4 accounting firms (as they're now down to) were considerably tougher last year than in the past, especially with former Andersen clients, trying to make sure they don't sign off on the next Enron.

The question--and I don't know the answer to it--is how long that increased attention will last.

Washington, D.C.: I am interested in how new accounting standards and laws about CPA's and independence are going to impact small CPA firms in the future. Large firms have the ability to branch off and separate their auditing practice from thier tax and consulting practices. But how do smaller firms keep those things separated? What does "John Doe, CPA" do when he helps create the financial statements, give financial advice and audits Billy Joe's Convenience Store when Billy Joe can't afford a large CPA firm to audit his books? Are smaller firms eventually going to have to become more specialized like the larger firms for the sake of independence?

Neil Irwin: You're right that smaller accounting firms could face a dilemma, but there's one key difference. The accounting problems we've seen in the past year are most severe among companies that are immensely complicated. Billy Joe's Convenience Store probably isn't buying derviatives to hedge on the price of gas, nor setting up off-balance sheet partnerships. Moreover, Billy Joe has little incentive to try to hide losses the way Enron did, given that it's Billy Joe's money and not that of public investors.

So how the new attention and regulation of accounting will affect smaller accounting firms, I don't know, but I wouldn't expect it to be massive.

Alexandria, Va.: How much guilt should we heap on the venture capitalists for all the shady accounting that went on?

Neil Irwin: One thing to keep in mind is that the shady accounting that burned large numbers of investors generally occurred at public companies; by the time a company is public, venture capitalists have generally cashed out and aren't involved with the companies anymore. Moreover, as investors in young firms, VC's would generally have an interest in getting honest reports of companies' performance, as a check on the executives.

That said, one can argue the take-no-prisoners culture of hype that surrounded the tech boom--that was fueled in part by VC's, led to the dishonest accounting we've seen at some companies. But they're certainly not at the top of the list of people to blame.

Washington, D.C.: Andersen, Enron, Global Crossing. All seemed to happen during the Clinton/Gore years, They sure mixed politics with businesses, a no-no during Reagan/Bush.

Neil Irwin: I think blaming the firms' unethical behavior on politics is a stretch. (Beyond which, Enron had big ties to G.W. Bush). Almost all large complicated companies have big lobbying operations and their executives tend to give money to politicians. There are far more companies with political ties to both parties that had honest accounting than those that didn't.

Washington, D.C.: The Post 200 was great!!! My question, based on the research that you guys did, could you tell me what sectors of the Washington area are holding up the strongest?

Neil Irwin: Thanks, though the editor of the section, Terry O'Hara, and graphics maven Denny Brack deserve the credit for this year's excellent Post 200.

In the last two years, the local business community has really returned to its roots. The telecom companies that were the big newcomers from 1996-2000 are gone or ailing. The dot-coms are virtually non-existent. But the government contracting firms, especially those involved in defense, are still growing gradually, along with some consultant and business service types.

To be sure, the growth from those sorts of companies isn't anywhere near as rapid as what the tech sector did in the late '90s. But, unlike Boston or San Francisco where there are virtually no sectors fo the economy expanding, at least we have a source of growth here.

Virginia: MicroStrategy seemed to go down deeper. Is Michael Saylor doing anything with the accounting thing?

washingtonpost.com: Transcript: MicroStrategy's Michael Saylor (washingtonpost.com, June 21, 2000)

Transcript: Post reporter Mark Leibovich on the Rise and Fall of MicroStrategy (washingtonpost.com, Jan. 9, 2002)

Neil Irwin: MicroStrategy had its accounting problems aired and resolved before anybody realized how shaky the foundations of Enron et al. really were. The SEC charged Saylor with fraud, a complaint that was settled without him admitting or denying guilt.

Now, the company is grappling not so much with accounting problems as with a more fundamental issue: businesses are not spending much money on the kind of expensive software that they sell, hence MicroSrategy's slide. Its revenues were $180 million in 2001, versus $148 mllion in 2002. However, by reducing its costs, the company swung from a loss to profitability last year.

Tysons Corner, Vienna, Va.: Not an accounting question, but I'm just wondering who, in the DC biz scene, would make your list of current Big Shots?

Neil Irwin: Anybody whose company is on the GSA Schedule.

Washington, D.C.: I work for a non-profit. The auditors came in with their usual arrogant and bossy attitudes. Most were young. If they could talked to the lower staff, they will learned a lot about the fraud and abuse.

Neil Irwin: You touch on something that corporate executives are increasingly realizing, after problems at Enron, WorldCom, and now US Foodservice. Often the people at the ground level of a company can get a feel for what's going on-or at least a slice of what's going on--that higher-ups cannot. A senior executive at a large company (or nonprofit) can become so isolated from the rest of the firm, and get his or her information only through vice-presidents and other immediate subordinates, and in the process lose perspective on what is really happening. This doesn't happen only with accounting fraud; I'm told that at many tech companies salespeople and other grunts were well aware that their business was collapsing for months before senior executives went into crisis mode.

Oakton, Va.: Do you think that the current responses made by the accounting (re: auditors) industry is actually having a detrimental impact on the economic recovery? I am thinking in terms of a tighter enforcement of FAS regulations (115 in this case) than in the past, which can dampen earnings. I wonder if the pendulum has swung to far now in an effort for the accounting industry to insulate itself from future problems. Thoughts?

Neil Irwin: There is absolutely no question that tighter accounting standards, including the one you mention, are exacting additional costs on corporate America. Higher fees to auditors, hiring more internal accounting staff, that sort of thing. I doubt it's enough of a cost to have a drain on this halting economic recovery. But it's a cost nonetheless.

The question policymakers are weighing is whether these additional costs will result in better, more reliable information about corporate health getting to investors, to the degree that it's worth the extra money. Regulators are saying yes, and companies are going along with it.

Neil Irwin: That said, by adding to the cost of being a public company, tighter accounting standards may make going public a less attractive option for growth. My colleague Nick Johnston is working on a piece about a formerly public company that has gone private--and is thrilled not having to deal with SEC filings and analyst conference calls and the like. But the judgement of regulators is that if you're going to sell shares to the public, you're going to have to spend x much more time and effort to make sure you're telling the public the truth.

Alexandria, Va.: I agree with Arlington, that much of the blame for these problems lies with the AICPA. Our industry is now in real danger of coming under federal oversight simply because the AICPA refused to go after the big boys when they broke the rules. It's shameful, and I hate the fact that I have to send them money every year just to remain a CPA.

Neil Irwin: Thanks for the comments.

Washington, D.C.: There are a ton of tech companies on the Top 200 list again this year. But how many people really own stock in them?

Neil Irwin: I don't know how many own stock in them, but they remain a large portion of the D.C. corporate community--though a far less profitable portion of that community than in the past.

Somewhere, USA: Reagan/Bush not mixing politics/business? What do you call Enron (secret meetings in the White House that don't have to be disclosed)and Halliburton (contracts to Cheney's former employer that don't have to be bid on)? Washington D.C. is intent on bashing Clinton/Gore, but I really do think the horse is long dead. Mixing business and politics has long been a favorite of both parties, and I doubt Republicans are interested in changing, given their penchant for wealth-building. Sheesh!

Neil Irwin: Thanks for the comments.

Washington, D.C.: How was the Post 200 compiled? How are these companies ranked?

Neil Irwin: Washington Busienss editor Terry O'Hara and a crew of motley news aides submerged themselves in voluminous 10-K filings for two months' straight, until they came up for air and brought with them a list of the 125 largest public companies with headquarters in the area, ranked by revenue, 20 largest financial institutions ranked by assets, 15 largest local private companies, and 20 largest public companies in Md. and Va. outside the DC area.

washingtonpost.com: That's a wrap. Thanks for joining us.

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