July 15, 2002

Our view is that we now need to enact a series of positive incentives in order to eliminate the corporate managers' desire to produce financially engineered results and replace that desire with the pursuit of true economic profits. One simple way to move corporate officers and accountants in this direction is to require them to use only one set of accounting reports. We don't care whether it is pro-forma or GAAP. Our view is that whatever they show investors, they should show the IRS and pay taxes. If CEOs cook the books to overstate their financially engineered profits they will pay higher taxes and the shareholders will be unhappy. On the other hand if the CEOs understate the profits the IRS will be unhappy. The use of a single set of books will force the shareholders and IRS to perform checks and balances on the corporate statements. This in turn will make the process more transparent. We fear an overreaction and/or poor implementation of the laws attempting to remedy the current situation. If misapplied, the proposed changes could make matters worse. They could result in corporation having to generate a third set of books: One for investors, one for the IRS and one for regulators. The fear being that the recent actions by Congress and the president could result in an increase in government regulations and that could further slow down a fragile economy. (full article attached)

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