Shareholder letter 1987 – Accountants

Shareholder letter 1987- Accountants
(Immediate crash and aftermath of October, Berkshire loses 25% of its value, dropping from $4,230 per share to around $3,170.)

This years letter Buffet comments heavily on two things: accountants and Mr. Market.( I will write about this later)

While every bubble in the stock market or corporate profits is unexceptionally followed by the revelation of a few cooked up numbers and some big scandals. Invariably, be it any kind of corporate misadventure an accountant definitely has a signature on it certifying the veracity of the umbers and assumptions and blah blah…..

Buffet comments on the very fact that accountant audit statements have so many riders, that it is hard to believe or trust annual reports. Accountants only certify the corrupt practices of fly by night corporate managers, with enough safeguards to protect their ass. Anderson was the biggest mistake – it could not save itself.

   Buffet was commenting on the lack of sufficient provisioning in the insurance sector:

   Auditors annually certify the numbers given them by management and in their opinions unqualifiedly state that these figures “present fairly” the financial position of their Clients.  The auditors use this reassuring language even though they know from long and painful experience that the numbers so certified are likely to differ dramatically from the true earnings of the period.  Despite this history of error, investors understandably rely upon auditors’ opinions.  After all, a declaration saying that “the statements present fairly” hardly sounds equivocal to the non-accountant.

This is how an accountant’s disclaimer should read:

“We have relied upon representations of management in respect to the liabilities shown for losses and loss adjustment expenses, the estimate of which, in turn, very materially affects the earnings and financial condition herein reported.  We can express no opinion about the accuracy of these figures.  Subject to that important reservation, in our opinion, etc.”

     If lawsuits develop in respect to wildly inaccurate financial statements (which they do), auditors will definitely say something of that sort in court anyway.  Why should they not be forthright about their role and its limitations from the outset?
    
While the question is not about questioning accountants abilities to accurately judge. The fact of the matter is that they can’t do the job and that’s it.

No wonder such emphasis is being laid upon corporate governance and stuff. And also the fact of the matter that they very much earn from the people whose numbers they are supposed to judge…makes it hard to believe that its clients will ever honor a Good accountant.

Guess what he had to say about MBA’s

Moreover, our experience with newly-minted MBAs has not been that great.  Their academic records always look terrific and the candidates always know just what to say; but too often they are short on personal commitment to the company and general business savvy.  It’s difficult to teach a new dog old tricks.    

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