THE ART OF CREATIVE..

THE ART OF CREATIVE ACCOUNTING
A commentary on the rationales used by CEO’s
and Government to get something from/for nothing.

By Victor Drummond (c)
July 2009

The practice of rewarding corporation officers and/or employees for above average performance has been accepted by most governments and the average person as fair and justified.

Average performance criteria are easy to establish. Unions negotiating with employers, over the years, have generally arrived at mutually acceptable working conditions, perks and benefits that employees are expected to deliver and receive.

In the United States of America, and Canada, a typical working day begins at 8.00am with a mid-morning 15 minute rest-room (coffee) break around 10.00 am and a 1 hour Lunch Break at 12.00pm.

The afternoon work session resumes at 1.00pm with a mid-afternoon 15 minute rest-room break around 3.00pm and the work day ends at 5.00pm. This constitutes a typical 8 hour work day for the average employee.

A typical 40 hour work week consists of 5 work days, generally beginning on a Monday Morning and finishing on a Friday afternoon. There are variations to this routine which include such alternatives as shift work, and work weeks that do not begin on a Monday.

Conventional working conditions also include a 14 day paid vacation in the work-year. This perk is normally included in union contracts and is also a feature in Canada’s labour laws.

When typical employee performance enters into the picture an employer may temporarily hire a time and motion specialist to produce a performance table displaying below-average, average, and above average employee performance. Factors such as units produced per shift and unit quality are considered when producing a performance report.

Armed with a time-study report the employer may then add other factors, such as employee attendance, lateness, attitude towards others, and personal decorum in order produce criteria for assigning outstanding performance reward(s).

It has been a long established practice of corporations headed by a Chief Executive Officer (CEO) and a Chief Financial Officer (CFO) to approve profit sharing rewards if the corporation meets or exceeds growth and/or profit targets for the prior year. It would not be unusual for a CEO and/or CFO to receive a performance bonus of $100,000, and more, when the corporation exceeded monetary and/or sales targets by a substantial margin.

These performance bonuses fall under the classification of “Incentive Reward Programs” which not only serve to reward the highly skilled executive for the results obtained but also deter the person from leaving the corporation for another position with a competitor.

CEO’s and CFO’s were not the only corporation employees to be offered incentive reward perks. Salesmen are often given cash bonuses when they exceed their monthly sales quota and restaurant employees are often provided free, or reduced cost, meals in lieu of higher wages.

It became very common for Hi-Tech Corporations to offer key employees the opportunity to acquire shares in their employer corporation, during and after the extended stock market boom in the Communications field from 1985 through June of the year 2000.

As the boom progressed the raiding of Corporations skilled employees became commonplace and in order to deter valued employees from accepting hiring bonuses, and additional employment perks offered by competitors employers expanded their incentive reward programs to include most employees, not just the executive and scientific staff.

In mid-July 2000, the Hi-Tech stock market boom began to falter and corporations engaged in the communications field found their sales declining along with their financial forecasts and their shares losing value on the worlds stock markets.

CEO’s and CFO’s that had become accustomed to receiving six figure salaries plus five to six figure performance bonuses suddenly found themselves faced with salary cuts, plant closings, employee termination payouts and encouraging employees, entitled to pensions, to retire.

In consideration of this distressful situation with potential loss of performance bonuses a number of CEO’s managed to have their board of directors approve the upkeep of their performance bonuses.

After all was said and done these were the same leaders of industry that had brought their organizations from obscure communications corporations to world leaders in their field.

Organizations such as JDS Optics, a relatively unknown organization in 1980 became a world leader in the field of fibre optic data transmission by 1999 as the JDS Uniphase Corporation, in Canada and the U.S.A.

The Northern Electric Company, supplier of Telephones and switching systems to Canada’s Bell Telephone, and Provincial Telephone Systems, had grown several times larger under the title of Nortel Networks Inc.

Were not the highly skilled executives, of corporations with this kind of track record, still needed in time of decline to guide these ships of commerce through the rough times ahead?

With a bit of warped logic one could be convinced now that the economy was beating these organizations into oblivion the present CEO’s were even more valuable than before. So while the corporate ship was sinking it was still believed appropriate to keep them in place by way of the usual performance incentive bonuses.

This piece of creative accounting went unchallenged, for the first five or so years of the current economic depression, but recently those with clearer heads have raised the alarm regarding how ridiculous it has been, and still is, to pay performance bonuses to executives that can not perform in this economy. And the money for these bonuses is being paid out of taxpayers money supplied to these corporations, as bail-out money, to help them even survive.

Some members of Canada’s House of Commons (HOC) have gone on record as condemning paying performance bonuses where no creditable performance has been provided and condemning corporation executives for their creative accounting logic to pay themselves a performance bonus from nonexistent corporate funds.

But wait a moment. Where do any Canadian HOC members find the right to condemn anyone for taking money from a nonexistent source of funds? Where have these minions of decency, honesty, integrety and righteousness been for the past seven or eight years while the government of Canada has been taxing honest ,hard working Canadians huge amounts, in real dollars, on nonexistent “phantom” income?

Talk about the pot calling the kettle black. At least the corporate executives, who accepted taxpayers bail out money to pay themselves performance bonuses, did not send bailiff’s to expropriate taxpayers money and/or property to collect tax money on income that never existed.

The creative corporate executives did not directly force anyone to deplete their retirement savings to pay a tax and/or penalty on money they never saw.

My dear MP’s. If you can sit silent while your own organization abuses Canadian taxpayers with the application of warped logic that is more creative accounting than that used by some Corporate leaders -- to maintain their performance bonuses in the face of needing a government bail-out -- then you have no right to condemn those corrupt corporate leaders.

And my dear readers. If you can vote for your local candidate, running for election to Canada’s House of Commons, without demanding they provide you, and all Canadians, with proper representation, then you have and will continue to have the kind of government you deserve.

See you at the election polls for the next federal election, O’Grady

Victor Drummond ©