The Securities and Exchange Commission says the quality of corporate accounting is still flawed -- especially when it comes to accounting for workers' pensions on corporate balance sheets.
You see, under current accounting rules, companies can report that investments in their pension plans earn money even in years when they don't. Then they can include the pretend gains in their overall operating earnings.
This makes no sense at all. Corporate accountants justify the ploy as a means of "smoothing" out earnings from year to year. But we've heard this one before. "Smoothing" can justify almost any tinkering with numbers. What's really smoothed over are the facts.
The SEC studied 200 companies, including America's hundred largest, and found their pension plans underfunded by about $86 billion. But on their financial statements, these companies showed net pension assets of $91 billion, which they used to pump up their balance sheets.
The maneuver has led to some whoppers. United Airlines projected its pension fund would earn $740 million back in 2000, making the company look profitable. In fact, United's pension fund gained only $21 million. If the company had used this real figure it would have shown an overall operating loss. Two years later, of course, United filed for bankruptcy. And now it's ended its pension fund, $10 billion in the hole.
David Zion, with Credit Suisse First Boston, has analyzed the reported earnings of America's 500 largest companies. He found that stripping out their hypothetical pension returns and other non-market pension values reduced their total earnings in 2001 and 2002 by 67 percent. That's more than $100 billion in each of those two years. We're talking big money here.
The surprising thing is that this is still standard practice. Even after Enron and related accounting scandals, it's still perfectly legal for companies to pump up their balance sheets by billions of dollars that don't exist, through fancy pension accounting.
The Financial Accounting Standards Board wants to stop these abuses but, as you might expect, big companies and their actuaries want to keep things as they are.
But what about the pension funds themselves? And mutual funds, and all the other institutional investors that rake in billions a year in fees from small investors like you and me to make investments on our behalf? Why aren't they raising holy hell about these pension accounting abuses? What are we paying these institutions for, anyway? Maybe the real problem here is that the big institutional investors still aren't doing their jobs.
Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace.
