Accounting for true motivations

Readers of this blog will know that we will never tire of discovering new instances of accounting trickery. We see it time and time again in the corporate world. CEOs and CFOs become masters in presenting the numbers of their businesses in ways that, all too often, create a better perception of the underlying economics than what is the case in reality.

But it’s not just a corporate world dynamic. Politicians too are skilled in positioning the “truth” in highly convenient ways to tell a story they want told. Indeed, just like in the corporate world, accounting can be manipulated to serve the purposes of the author’s true motivations.

One recent example that came across our desk related to the Australian government’s recent Mid-Year Economic and Fiscal Outlook (MYEFO). Australian Treasurer, Scott Morrison, revised down tax revenue by $30.7 billion over the next four years; and yet, the budget deficit deteriorated by only $10.4 billion over the same period.

How is this possible? What happened to the other $20 billion? Treasurer Morrison would have you believe the strong budget forecast in the face of reduced tax revenues is the result of strong government cost-controls. But these contributed just $2.5 billion. Instead, the source of the bulk of the savings stemmed from some “clever” accounting adjustments. As Macrobusiness points out here:

• “It’s discovered that childcare benefits aren’t being taken up at the rate expected, so it’s lopped $7.6 billion off the amount it expects to pay.
• It’s discovered that pension payments are growing more slowly than expected, so it’s lopped off another $2.7 billion.
• The support for carers program is also costing less than expected, so it’s lopped off another $1.9 billion.
• All up these “parameter variations,” colloquially known as “hollow logs”, amount to $12.2 billion.”

So there you have it. A nation’s government has looked its people in the eye and grossly misled them (again) using clever accounting. True motivations tend to win out over the unbiased truth – just as we see is so often the case in the corporate world.

As always, it’s an important lesson for investors (and citizens alike): “trust but verify” – to borrow the Russian proverb from former US President Ronald Reagan. So often we discover in the verification process that the trust has been abused.

Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.