Harvard’s Big Bath

We are all familiar with the notion of a bath in our communal lives, but the term “big bath” is equally common in the corporate world. Big Bath is an earnings management technique whereby a one-time charge is taken against income in order to reduce the value of an  assets.  This technique is often employed in a bad year, e.g., when sales are down, or when a company reports losses, to account for overvalued assets on the balance sheet.

Although the process is discouraged by auditors, it is frequently used by public companies. A notable feature surrounding big baths is that this accounting treatment tends to coincide with new management team because the new management team can then blame the one-time charges on the prior management team while simultaneously calibrating current reported income to unusually low levels thereby making it easier to meet or beat income in future periods.   

Big Bath in Non-profit Sector

Does Big Bath happen in the non-profit sector? Bien sûr!

 Harvard University has the largest endowment fund in the world with assets around $37 billion. The new chief of Harvard University’s endowment, Narv Narvekar, actively pushed to slash the value of some of its investments in natural resources portfolio of forests, farms and vineyards given his bearish outlook on some of the assets. Although Harvard University has the largest endowment, it was the only Ivy League endowment which generated less than 10% in the most recent year, which is why there was a “change of guards” at fund management level.

New endowment chiefs often have an incentive to write down investments they inherit because it is easier to blame the losses to the prior investment chief. It also helps remove potentially overvalued assets. Mr. Narvekar described Harvard Management Co. as having “deep structural problems” that would take five years to restructure. “An honest, reflective, and clear-sighted recognition of these problems is the first critical step towards generating solutions,” he wrote in his first annual letter in September, 2017.

Under Mr. Narvekar, Harvard reduced the value of its natural-resources investments by more than 25%, which is an unprecedented amount of a write-down (Harvard had valued the portfolio at roughly $4 billion at the end of the prior fiscal year).

Big Subjective Decisions

Many asset managers and appraisers say valuing assets that trade infrequently or aren’t generating cash—trees, for example, take years to grow before they can be sold for timber—is difficult. However, the new chief investment officer indicated that some natural-resources investments carried more risk than previously calculated. Therefore, he raise the discount rate (because the risk was high), which caused some investments to lose value.

Valuations for the endowment’s private assets were approved by the board, reviewed by Harvard and “the valuation process was independently verified by external auditors,” board Chairman said in a statement.

Big Pay Day

Harvard has guaranteed Mr. Narvekar at least $6 million a year for his first three years on the job. Additionally, the Chief is expected to earn additional performance-based compensation which is expected to be closely tied to the endowment’s performance in the long term.

When a non-profit sector mimics the pay of the for-profit sector in order to generate high future returns on the largest endowment fund!


January 25, 2018

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Accounting’s Got Talent

accountingtoday-top-100Financial economics, as the title of the discipline suggests, is an embedded field within mainstream economic sciences. Therefore, it should not come as a surprise that quite a few Nobel Laureates in economics are finance professors who have done pioneering work in financial economics.

Closely linked with economics and finance, mainstream accounting research is derived from economics and financial economics. While there are a few strong delineators between finance, economics and accounting, the three fields intermingle and influence one another which is why it is difficult to have a strong grasp of one without at least a basic understanding of the other two.

Yet, accounting has never been considered part of mainstream economic sciences which is why no accounting researcher has won the Nobel Prize. Not to be outdone, the accounting profession has created a list of 100 most influential individuals, thought leaders, and visionaries who are responsible for shaping the accounting profession.

Requirements For Top 100

Gaining entry into the coveted top 100 Most Influential Person in Accounting is a daunting task. The Accounting Today complied the Top 100 list using the following criteria.

  • Innovator and creator. The individual must have created new ways to market the accounting/auditing professional services.
  • Educator. The individual must have taught the profession something the profession didn’t know already.
  • Regulator. The individual must have been involved in enforcing rules which had a game changing influence on the profession.
  • Elevator. Individuals who help achieve the ideals of the profession, or and those who are actively planning the future of the profession, are deemed the most influential of all.

What is the gender composition? Among the top 100 most influential accounting professionals, 70% are males and the remaining 30% are females.

Top 5

The top 100 most influential accounting professionals then voted to pick the Top 5 thinkers within the profession. The Superstars in Accounting are:

  1. Barry Melancon: President and CEO of AICPA
  2. Tom Hood: CEO and Executive Director of MACPA
  3. Mary Jo White: Chair, SEC
  4. Russell Golden: Chairman of FASB
  5. Ron Baker: Founder of VeraSage Institute


Surprisingly, no academic made it to the Top 100 list. Although academics meet the threshold requirement as an educator, presumably, Accounting Today does not consider academics to be influential enough to teach something to the profession that the profession didn’t know already. Academics are merely disseminating accounting/auditing knowledge that is already codified by the profession so academics are not deemed as innovators in the field.

We salute the Top 100 Most Influential Accounting Professionals!

Chatham; September 10, 2016



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Beware of Corporate Nip-Tuck

nip-tuckU.S. public companies must prepare their financial statements according to generally accepted accounting principles (GAAP) and much of the investor attention is concentrated on the Income Statement to asses a company’s operating performance. Any income or earnings to be GAAP compliant must be a separate line item reported on the Income Statement.

Over the last few decades, companies have been increasingly deviating from US GAAP earnings/income by underscoring some form of an adjusted income/earnings, also known as pro-forma earnings (e.g., EBITDA, or adjusted net income). What investors may not realize is that any pro-form number is not GAAP compliant and therefore the adjusted number may convey a biased assessment of the company, which may be the hidden purpose. 


The adjustments allow companies to exclude expenses such as asset write-downs, impairments, restructuring charges, losses from foreign-currency translations that management believes is not relevant to the company’s most fundamental operations. It should not come as a surprise that most adjusted measures tend to portray a much healthier image of corporate earnings. Companies are willing to go to any lengths or use any definition of earnings to avoid reporting losses.

According to Deutsche Bank research, about one in 10 major companies use the term adjusted EBITDA, up from one in 40 a decade ago. The difference between standard and adjusted earnings is also growing. Deutsche Bank expects the gap to widen to 40% in the fourth quarter of 2015, from 20% or 30% in recent periods. According to Wall Street Journal analysis, about a quarter of earnings disclosed in earnings announcements don’t comply with GAAP.


United Technologies Corp. CEO Greg Hayes reported “…by adhering to accounting rules, we’re actually confusing people more than we were helping people understand what’s going on in the business. This is a simplification and really allows the investors to more easily understand what the businesses are doing.”

The implication is that we don’t need to adhere to accounting standards, we don’t need to worry about complying with the SEC reporting requirements, and we don’t need auditors or their attestation. Let us disregard the mechanisms in place to generate financial information that is representationally faithful, reliable and transparent; instead, let us trust the numbers generated by management according to what they believe is the best definition of earnings. A compelling story.

Regulatory concerns

 According to Mary Jo White, Chair of the Securities and Exchange Commission, “Non-GAAP measures are used extensively and in some instances may be a source of confusion.. This area deserves close attention.”

Regulators occasionally take companies to task for de-emphasizing US GAAP accounting numbers. The SEC has queried companies at least 100 times since 2006 about non-GAAP measures. For example, the SEC told T-Mobile US Inc.  to include figures that comply with accounting rules in its quarterly earnings release. The company had only used adjusted Ebitda, and omitted net income.


Trust the company’s bottom line number, which is net income, and beware of pro-form or adjusted numbers generated by management!



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