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O P I N I O N
Question those financials
“There are many ways to ‘cook the books’ so they show certain results. Here are some typical problems that we see showing up in the financial statements of A/E firms.”
A thought occurred to me the other day. I always tell our students in my Small Enterprise Management class at the Walton College that they cannot take any financials they see from a privately-held business at face value. Yet, I don’t know that I have ever cautioned The Zweig Letter ’s readers similarly about the specific ways these numbers are distorted in A/E firms.
Mark Zweig
What I am saying is that there are almost always distortions and misrepresentations. Some of these are done willfully, and some occur out of ignorance. And some occur, believe it or not, from following GAAP (generally accepted accounting principles). There are many ways to “cook the books” so they show certain results. Here are some typical problems that we see showing up in the financial statements of A/E firms: 1)Inaccurate revenue accruals. This is the single most important number you have. Many times individual project managers and/or firm owners will understate or overstate their earnings on a project deliberately or out of ignorance on how to do it. Or they don’t even consider revenue “revenue” until it is billed to a client. This will then potentially affect
every single calculation of utilization or effective multiplier or utilization (in some cases) that gets made based in part on that number. Question it! 2)Inaccurate marketing costs. There are two primary ways this gets misstated. First is that companies roll all project-specific marketing costs into a job once it is won. This is the largest chunk of marketing expenditures and when you do that it looks like the company is spending less on marketing than it actually is. The other way this gets overstated is when anyone is allowed to charge time to marketing with no oversight. People do this because they have nothing billable to do and it looks better to management than “general overhead.” 3)Personal expenses that show up as business expenses. There are so many of these buried in the
See MARK ZWEIG, page 4
THE ZWEIG LETTER March 2, 2020, ISSUE 1334
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