Caveat Emptor

After a decade that introduced Sarbanes-Oxley, increased disclosure, and increased regulation "America's pre-eminent forensic accountant" says that public company financial statements can be as misleading as ever.

Howard Schilit doesn't accuse companies of fraud or even technical accounting violations; in fact auditors seem obsessed with compliance with the letter of the law, especially rules about disclosure.

In general, the auditors' focus is on a legalistic interpretation. So, if you tied up your neighbor and robbed his house, but you disclosed it in footnote No. 23, it's okay.

When one reads the entire Barron's article, however, one is left with a reasonably sanguine impression of U.S. financial reporting. (The U.S. examples of questionable accounting relate to reclassification--not adjustment, there's a big difference--of items on the income statement and the treatment of contingent consideration, a liability that in this humble observer's view has offsetting mitigants on the asset side of the balance sheet. I can see your eyes glazing, so I'll stop.)

The examples from the wild, wild East are more troublesome: the tendency to switch accounting methods (e.g., depreciation, percentage-of-completion vs. completed contract) in an obvious attempt to hype earnings and the ability to book gains on asset purchases. To those who are thinking of investing in Asia an ancient phrase is appropriate: caveat emptor.