earnings `time bomb' looms in u.s

The Financial Accounting Standards Board is Helping the US to become a nation of indebted, greedy, and economically-ignorant dirtbags.



By David Evans

"New York, Dec. 30 (Bloomberg) -- According to its annual report released in March 2002, Verizon Communications Inc., the largest U.S. local phone company, had a strong year in 2001. In the opening pages of the report, the company announced an annual profit of $389 million.

Only those investors who dug into the small print at the back of the document learned that Verizon's reported earnings included $2.7 billion in gains from its pension fund investments -- profit that didn't really exist. The company pension fund actually lost $3.1 billion in 2001, a footnote on page 58 of the 68-page report revealed.

In reporting gains it hadn't made, Verizon didn't violate any rules. Like other U.S. companies, Verizon was following accounting practices as written in 1985 by the Financial Accounting Standards Board, which sets U.S. accounting standards.

The FASB rules say that in preparing income statements, companies should include estimated gains -- not actual gains or losses -- from pension fund investments.

Legal or not, the practice has incensed some investors. ``There's a serious illness pervading a portion of the financial market,'' says Kathleen Connell, California controller and a board member of the state's two largest pension funds: the California State Teachers' Retirement System and the California Public Employees' Retirement System.

She says accounting rules are allowing companies to artificially increase stock prices. ``Phantom pension earnings are portrayed as income,'' she says. ``It's a ticking time bomb.''

As the stock market plunged during the past three years, the pension funds of companies in the Standard & Poor's 500 Index lost more than $200 billion in value, according to studies by actuaries and several investment banks, including Credit Suisse First Boston and UBS Warburg LLC.

Losses Weren't Reported

Because of FASB accounting rules, many of those losses weren't reported on balance sheets.

If pension liabilities had been counted in financial statements, aggregate earnings for the S&P 500 would have been 69 percent lower than the companies reported for 2001, or $68.7 billion rather than $219 billion, the CSFB study found.

``We're starting to see billions of dollars of shareholder equity vaporized because of pension underfunding,'' says Marc Siegel, a senior analyst at the Center for Financial Research & Analysis, an accounting research firm in Rockville, Maryland. ``It's much more pervasive than anything Enron was doing.''

Over the past three years, most companies have allowed their pension fund losses to grow -- out of the sight of balance sheets and investors -- without addressing the problem, says David Bianco, who headed research into the issue for UBS Warburg.