4/14/2005

Beefing Up The Numbers

I recently read an article, A New Lease On Accounting, that has found restaurants, retailers, and cellular services are using their lease payments to make their bottom line look better. Why are all these companies trying to boost their bottom lines? The owners set incentives and benefits if a manager can reach a certain goal. Owners also try to make their company look more profitable than it really is. The incentive there is to increase the shareholder value and make the company look good to investors and creditors. I think that this is unprofessional. As an accountant the financial statements are to be stated fairly and objectively. Employees should receive bonuses only if profits are increased in an honest and ethical way. Punishments should also be affixed to deter employees from misstating the numbers.

3 comments:

trudy said...

Here I think is the reverse effects from the principle-agent theory. Usually the worry is that the agent will do what is best for him and not for the company. In this case the owner is watching out for his own needs and possibly forcing and bribing the employee to comply

Eric said...

I think Sam is right playing the number game to increase ones own person gain is wrong. Owners need to be aware of this when giving out bonuses!

Dr. Tufte said...

-1 on Trudy's and Eric's comments for grammatical errors.

This actually is a fairly old technique in finance, that derives from the unequal treatment of leasing and buying under our tax system.

The bogeyman here is not incentive contracts, but rather a tax system that doesn't incorporate very well the idea that it might be in owners' interest to write incentive contracts.