Bad Business

49

Marty Siegel came to my office carrying a pigskin attaché case and looking like he was on his way to an inauguration.

"Are you sure you're an accountant?" I said.

"I am the best accountant in the world," Marty said.

"I know that," I said. "But you're supposed to be geeky and wear glasses and a pocket protector."

"Would contacts cover me?" Marty said.

"Accountants don't wear contact lenses."

"And if they're any good they're not hanging around with you, either," Marty said. "Be glad I'm atypical."

Marty put his pigskin attaché case carefully on the seat of one of my client chairs and sat just as carefully in the other one. He was tall and lean with long black hair that waved back over his ears. He wore a black silk suit, a white shirt with a Windsor collar, and a white silk tie. His face was clean-shaven and pefectly tanned. He even had a little cleft in his chin.

"I've arranged for you to do a full audit at Kinergy," I said.

"Access to the site?"

"Yep."

"Nothing off limits?"

"Nope."

"No time limitation?"

"Nope."

"You have something on the CEO?"

"Yep."

"Good," Marty said. "What I've seen so far, they could use a good audit."

"You already know things?" I said.

"Of course," Marty said. "Would I be the world's greatest CPA and not know anything yet?"

"Whaddya know?"

Marty looked at my coffeemaker. The pot was nearly full.

"You got coffee made?"

"Yes."

"Gimme some," Marty said.

I handed him a cup and he got up and poured himself coffee and sat down and crossed his legs, making sure to adjust his pants at the knee so the crease wouldn't bag.

"Any publicly held company," Marty said, "is required by law to make quarterly and annual financial filings. The quarterlies are called lOQs and the annuals are lOKs."

"Isn't that something?" I said.

"You wanna learn something or not?" Marty said.

He drank some coffee.

"Hey, this stuff isn't bad," he said. I nodded modestly.

"The filings are public. You can go to the SEC website and look them up. What you'd be especially interested in, if you were a really amazing CPA instead of some kind of semi-legal thug, would be three documents. The balance sheet, the income statement, and the statement of cash flow."

"I resent being called a semi-legal thug," I said.

"Okay," Marty said. "Illegal thug."

"Thank you."

"Any good accountant can learn a lot from those documents," Marty said. "And the great ones, like me, know to pay close attention to the footnotes."

"So whaddya know?"

"You know what mark to market accounting is?"

"No."

Marty looked pleased.

"Do you know what cost, or as it is sometimes known, accrual accounting is?" he said.

"Also no."

Marty leaned back and drank some coffee and got himself more comfortable in my chair.

"And," I said, "if you begin to tell me in any detail I will jam you into your attaché case."

"You wouldn't understand detail anyway," Marty said. "Say you kept a ledger, which in your case is unlikely, but say you did, and say you're making knuckle knives. You sell one to Hawk for a buck, and you debit your asset column one dollar, and credit your liabilities column one dollar. The two columns are always supposed to be equal."

"I don't have a ledger," I said.

"I know," Marty said. "And if you did, the columns would never be equal. But this is hypothetical."

"And Hawk's already got a knuckle knife."

"Shut up and listen," Marty said. "So you keep your ledger and somebody says how much money you got and you say a buck, and they say show me, and you take the buck out of your pocket and wave it under their nose."

I nodded. We'd get there eventually. Pushing him wouldn't do any good. Marty was one of those guys who knew so much about a thing that he had to tell you far more about it than you ever wanted to know.

"But," he said and paused.

"But?" I said.

I knew he was pausing for dramatic effect, I might as well help him enjoy it.

"Suppose you and Hawk have a deal. He'll buy a knife every year for five years. So you debit a buck from the asset side, and you credit five bucks on the liabilities. Because that's what the deal's worth over time."

I nodded.

"Get it?" Marty said. "See the problem?"

"What if Hawk dies or backs out of the deal?"

"Yes," Marty said.

He was thrilled.

"Or somebody comes by the first year and says show me the cash?" he said.

"l take out my one dollar," I said.

"And suppose the guy that's asking has just fixed your sink and seeing that you had five dollars in revenue, does it for credit, and now he wants his five smackers."

"I don't think I've heard anyone say smackers since I dumped all my Perry Como albums."

"Never mind that," Marty said. "What I described in grossly oversimplified terms is another kind of accounting called mark to market."

"Thank God for the gross oversimplification," I said.

"And here's a little embroidery," Marty said. "Say you think the cost of knuckle knives will go up over time, so you, or probably I, at your behest, because you pay me a monstrous retainer every year, and I am in your pocket, make a projection of how much the price will rise, and decide that they'll be worth two bucks, five years hence."

"Hence," I said.

"Yeah, hence. I went to the fucking Wharton School, remember. So now you've got a deal worth ten simoleons, and you credit that. But how much actual cash you got?"

"A simoleon," I said.

"See?"

"Is that what's going on at Kinergy?"

"I believe so."

"And the advantage of that is that it inflates your revenue?"

"Yes."

"Which makes your stock worth more?"

"Yeah, and if you need to show an even bigger profit you can just move the curve."

"Predict that knives will sell for two-fifty," I said."And then I can show a credit of twelve-fifty."

"Exactly."

"And it's legal."

"Sure, mark to market is perfectly legal, often useful, sometimes necessary, in companies where a reasonable curve can be projected. But it's less, ah, less appropriate for a company like Kinergy, whose product may fluctuate wildly because of war, or climactic events, or political decisions, or economic circumstance, or the death of some Arabian sheik."

"And you might find yourself with a cash-flow problem."

"Yeah. You have to pay your employees, for example, in cash. If you have debt to service, and if you're cash poor, you have to service that in cash. And you have to do it now, not five years from now."

"So," I said. "Worst case?"

"You can't pay your bills. You go bankrupt."

"Is that what's going on at Kinergy?"

"Might be," he said. "It seems to me that they should be showing more loss and less profit than the lOQs are reporting."

"You think someone's cooking the books?"

"Something's going on," Marty said.

"When you do the audit," I said, "can you find out what it is?"

Marty looked at me as if I had just said something in Greek. "Am I the world's best CPA?" he said. "Of course I am. If there's chicanery, will I find it? Of course I will."

"That's a relief," I said.