Kula Consulting Blog

 Hello, is anybody there?  Is this mic on?  Is the end of the financial world as we know it just a few days away?

 

As I read the financial news, listen to talk radio and play phone tag with my broker it certainly feels like apocalypse now. It’s like this: I bank at WaMu, Morgan Stanley is my broker, and I have no idea who (or what country they live in) really holds the mortgage on my home. Thank goodness I’m not in arrears or default!.  And don’t even talk about my rapidly dwindling retirement accounts!

 

In an effort to keep from “taking a long walk on a short pier,” I have done a little research on the US economy to try and gain a little perspective on where we are today and where we have been.

 

Stock Market Not as Volatile as it Appears

 

First let’s look at the DOW. The DOW closed today (9-18-08) at 11,020 - up about 400 points from yesterday.  A year ago the number was 14,080, resulting in a 21% decline in a year.  When compared to January 2, 2001, the DOW has increased 1140 points from the 9880 number about eight years ago.  Even two years ago the DOW was only 520 points higher than today’s close.  Not a jump-off-the-bridge type of loss.

 

The NASDAQ performance is even more interesting to me than the DOW. At the start of 2000, the NASDAQ index was 2059. It closed today at 2199 - a slight plus or push at worst.  But a year ago the index stood at 2670 or 471 points higher than today.  Short-term down, but long term up a little.

 

Perhaps the old investing advice of diversify and hold for the long term is still pretty good advice. Someday I’ll take it.  Better yet, buying in a down market is also good advice. Just take heed of these two caveats:  1. You have any loose cash sitting around; 2.  You are able to recognize a down market from a crashing market.  It’s a good thing we can still buy coffee in a tin can. The cans come in handy as a place to stash cash when your bank goes under!

 

USA GDP, National Debt Not so Great

 

The US national debt as of today is roughly $9.65 trillion.  The 2008 domestic GDP  stood at around $14.3 trillion. So our debt to GDP ratio is about 67% of GDP.  On that basis the country is way better off than I am.  My total debt would be way over 300% of my gross annual production (income). Keep in mind that I’m doing fairly well compared to the average person.

 

But, still, we owe 67% of GDP?  That cannot be a good thing. Plus, our off-balance sheet debt (contingent liabilities) must be huge as well after the recent Wall Street bail-outs, my generation retiring and unfunded cost of two wars.  Note to self:  The FDIC only has around $45 billion on hand to “insure” our bank deposits, or about 50% of the amount “invested” in AIG this week.  Mommy, I’m scared.

 

But, let’s finish the numbers.  Got to have a chart. Oh, here it is:

 

Date            Debt                  GDP             Debt/GDP (%)

 

2008          $9.65 trillion    $14.3 trillion        67%

2000          $5.66 trillion    $9.95 trillion        57%              (I like writing “trillion”.)

1992          $4.17 trillion     $6.2 trillion         67%

 

The ratio of debt to GDP is the same now as it was sixteen years ago, but the total debt has been growing at an annual rate of 6.7% from the total at the end of 2000.  GDP has grown at a 4.5% rate from the 2000 number.  It seems to me that it would be better if those growth rates were reversed.  I would rather see GDP grow at 6.7% and debt at 4.5%.  Could be a good goal to shoot for.

 

One more thing:  The US GDP is about 25% of the world’s GDP.  Pretty much the same percentage as at the end of 2000.  It looks like we are maintaining our position in the world, but are not pulling away from the competition.  (See China Olympic Opening Ceremony!)

 

What’s This All Mean to Accountants?

 

I don’t know about you but, by taking this look back on the financial and economic past,

I am feeling less anxious about our current situation.  We will get through it.  But, I am concerned about the “unknown unknowns” in the financial markets.  In particular I’m concerned about the role of the accounting profession in the financial reporting area.

 

Over the past eight years we have seen significant changes in financial reporting, internal controls and public accounting independence regulations.  We lost a great firm - Arthur Andersen - because of the Enron fraud. Further, the country has spent billions implementing and updating controls per SOX legislation.

 

We were supposed to get better financial reporting and lessen the opportunities for abuse as a result of those changes.  But look at AIG, WaMu and Morgan Stanley’s recent financial statements. Would you have seen major issues in them that would lead you to believe these firms were in deep financial trouble?  I’ve looked at their financials and the red flags were not visible.  If they are in deep trouble, why aren’t their major issues transparently obvious to the average reader of financial statements?

 

Has the accounting profession been focused on the wrong “bright, shiny objects”?  Why didn’t the accounting standards and reporting requirements uncover the red flags that used to lead to a going concern, qualified opinion? 

 

I don’t know the answer, I’m just a recruiter (and a CPA), but someone in the profession should be trying to find out why this crisis didn’t show up early in the financials of these firms.  Maybe we should be focusing our accounting research efforts of making the audit and financial reporting more useful to investors and shareholders rather than merging GAAP with the international standards. 

 

What are your thoughts on this? Inquiring minds want to know.