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Accounting alchemy changes expenses--presto change-o!--into assets. Are you feeling confused? Consider the feline curled up on your sofa: she isn't sleeping, she's thinking about developing a better mousetrap. So, the [...]

Shareholders could pay dearly for illusory growth How can you fool most investors most of the time? One method that works particularly well is to create growth in sales and [...]

This article presents the author's perspective on accounting and securities regulations in Canada. He contends that the present regulatory and investigative system is not working. He is critical of the switch to the International Financial Reporting Standards, which reduces oversight and the ability of Canada to set its own rules.

Focuses on the accounting methods used by companies in the so-called New Economy. How the use of innovative financial reporting methods can mislead investors; Topic of non-repetitive versus continuing activities and stock value multiples; Suggestion that investors learn to separate figures on an income statement to accurately assess a firm's performance; Explanation of the financial statement of Ballard Power Systems Inc., which follows Canadian GAAP, or generally accepted accounting principles.

Focuses on accounting practices in Canada which make it possible for companies to make their financial statements look better than they are. Example of BioChem Pharma Inc. which created CliniChem Development Inc. to handle its research; Loss in the shares of CliniChem which is not reflected in BioChem's financial statements; Opinion that investors should not rely solely on accounting numbers when choosing stocks.

The article discusses Ponzi schemes and hedge fund manager Bernie Madoff. The major difference between an unsustainable investment Ponzi where cash distributions exceed income and the Madoff fraud is legal disclosure. The Ponzi-like income trust and the Ponzi-like effects in some accounting rules are mentioned.

The article mentions performance measures used by Canadian businesses to make themselves appear more profitable than they are. Companies have been able to influence investors with pro forma profit figures, which are not as reliable as other accounting measures. Distributable cash for some income trusts is simply the before-tax profits. Aeroplan Income Fund has a method for calculating its distributable cash that delays expense recognition.

Focuses on how adopting international accounting standards would affect Canadian investment. View that Canada's accounting rules are baffling to investors; The example of BCE Inc. which used both Canadian and U.S. rules for reporting income; Uncertainty about auditing under international rules; The issue of asset writedowns.

The article discusses stock-option expense reporting. Fifty years ago, considerable effort was needed to convince Canadians to abandon the practice of investing almost exclusively in bonds, and instead to purchase some equities. If equity investors continue to be cheated by lax regulatory oversight and easily manipulated financial reporting, we could quickly come full circle. Investors are becoming disenchanted again because Canada has not engaged in a serious securities reform process. In the absence of strong accounting rules in Canada, investors have to put their faith in a scant number of so-called accounting principles that companies are supposed to follow. There are considerable gaps in the principles that must be filled in by executive judgment. The freedom of individual choice naturally results in widely divergent financial reporting among companies, and thus, a lack of comparability and utility for investors. This year, Canadian firms started expensing employee stock options as a cost on the income statement. The change means that investors should pay considerably more attention to how these costs are calculated. Many of the factors that go into the estimate of option life are difficult to quantify even for management, such as corporate financial outlook, estimates of early option exercises and option forfeitures. More frustrating for investors is the fact that assumptions like financial outlook, or expected forfeitures, do not need to be disclosed. Worse, some companies do not even bother to meet the minimal disclosure requirements in certain areas. Investors should at least be aware of the fundamental problem caused by accounting principle-setters in Canada: they allow for excessive management judgment in financial reporting but make minimal effort to improve the disclosure of those assumptions through a culture of more prescriptive accounting rules and principles.

Explains that investors should be careful of using financial statements produced by accountants and auditors because the methods used to make the statements may not have been designed for investment purposes. Details of the recent report by the auditor general in Canada on the sponsorship scandal; Importance of investors knowing the motivation behind financial statements before investing; Two categories of attest audits; Five types of financial reports.

Focuses on investment in the airline industry. How to evaluate the company's credibility; The importance of considering operating costs along with profit; Discussion of WestJet Airlines Ltd., which is replacing its older aircraft with newer planes; How maintenance and depreciation are linked for accounting purposes and affect investor income; How WestJet depreciates its Boeing 737-700 aircraft; Idea that accounting calculations could be over-optimistic.

Presents the opinion that investors need to understand the language of corporate financial statements. Changes made to the Canadian principles of accounting; Discussion of the cost of land.

Presents a quote from Al Rosen on Nortel Networks Corp., written May 29, 2000. Financial information on global telecommunications giant Nortel, including its rising stock price; Criticism of the analysts; Observation that Nortel's first quarter operating results excluded the acquisition costs the company incurred to boost its revenue; Outlook for the company.

Focuses on pensions and the accounting methods used by companies to calculate returns. Discussion of the underfunding of Canadian corporate pension plans; How underfunding is defined by the current value of future obligations; Problem of reporting pension expense, which depends on the expected return on plan assets; Issue of using reported pension gains to boost overall earnings and artificially to support corporate profits in a weak economy; Suggestion that more attention be put to the accounting assumptions and rules to produce less controversial figures.

Corporate reporting of 2002 annual results is now under way, and it is likely to produce some especially strange numbers in Canada. Even before the 2002 accounting changes, many of Canada's top companies reported significantly lower income and shareholders' equity numbers when using US accounting rules. Likewise, more than four times as many reported significantly higher shareholders' equity under Canadian Generally accepted accounting principals (GAAP) than reported significantly higher shareholders' equity under US GAAP. Every time the accountants change the idea of income, investors lose a little more confidence in the financial statements they read. Investors should particularly watch for goodwill, pensions and currency translations when examining the latest annual reports.

Year-end is the time to look back at what we have (or is that haven't?) accomplished in terms of improving Canadian corporate accountability, and also to look at what could be ahead for 2003. Company financial results for 2002 are likely to be overly optimistic and inflated because of several recent accounting rule changes. Investors have to realize that reported profit improvements in 2002 may have little to do with corporate efficiency and lots to do with questionable changes to the accounting rules. For proof, just look at some of the financial reporting choices that are allowed in Canada, but not in the US. Companies that suffered certain intangible asset impairments during 2002 were allowed to recognize the loss by retroactively reducing shareholders' equity as of the end of 2001. Tightening Canadian accounting doesn't seem to be on the radar screen for 2003, mainly because of the self-interest that exists in the standard-setting community. The Accounting Standards Board (AcSB) claims to have no connections to the audit practitioners, but who's kidding whom? The AcSB literally shares a home and budget dollars with the Canadian Institute of Chartered Accountants, or CICA (which includes the auditors who sell their services to the companies that benefit from the rules). The bottom line is that current proposals to fix corporate accountability in Canada seem grossly deficient. More Canadian investors will surely lose their savings, and more foreign investors will lose patience with Canada.

Comments on the efforts of auditors in Canada to restore investor confidence in financial reporting. Status of accounting rules for auditors; Ruling of the Supreme Court in Canada in the Hercules v. Ernst & Young case; Delegation of professional regulation groups to oversee auditors; Adoption of accounting principles such as goodwill, currency translation, and pensions; Attitude of the public towards the controls on financial reporting.

Focuses on fine print in financial statements and the oversight of auditors in Canada. Way that Canada allows its auditors to set accounting rules; Discussion of a footnote which explains the pension plan benefits of employees; Mention of the annual report of Hudson's Bay Co.

Argues against using generally accepted accounting principles (GAAP) to solve problems with pro forma accounting. Uniqueness of financial reporting in 2002 because companies will have to dissect their goodwill assets; Definition of goodwill as the excess that is paid to acquire another company above the fair market value of the acquired company's identifiable assets and liabilities; Effect of not expensing any goodwill, including higher net values.

Discusses the accounting practices of companies in Canada, in light of the collapse of Enron Corp. Accounting legislation in Canada; Issue of interest in accounting; Mention of standards for property accounting; Outlook for the collapse of Canadian companies.

Focuses on ways that Canadian companies will account for falling stock prices. Discussion of so-called goodwill accounting, which is based on emphasizing balance sheet values; Pension accounting, which is income-statement-based and attempts to match employee benefit expenses against revenue produced; Concern of investors over the subtraction from the pension expense of management's expected rates of gain on pension plan assets.

Discusses accounting standards in Canada which allow companies to understate their business losses. Details on the practice of conservatism in accounting; How a company can go about understating losses; Implications of the practice.

Reports on financing for corporations in Canada during a time of a slow economy. How companies can use hybrid security issues, which under Canadian accounting rules are considered equity, and are considered debt in the United States; Difficulties concerned with hybrid securities including instability; Analysis of the Four Seasons Hotels Inc.'s use of hybrid securities.