Mapgirl’s Fiscal Challenge

First off, I don’t own DELL stock or their computers. (Frugal girls like me go with cheap $400 generic boxes!) Second, I work for an accounting and finance team at work and helping the accounting team go over the numbers is part of my job.

Apparently Dell has stopped trading on the stock market because they are going to restate their earnings back to 2003. WHOA NELLY. That’s a long time.

Normally I don’t post about individual stocks, but I think this is really noteworthy to mention here for nascent stock investors. What does a restatement of earnings really mean?

1) It means that some auditors went through the books with a fine-toothed comb, thus incurring some serious audit expenses for the company.

2) It means that the company’s past performance may not have been as rosy as reported.

3) It means that they were probably not following FASB, the financial accounting standards that US CPA’s are expected to follow when doing accounting. This isn’t necessarily a horrible Enron-cooking-books scenario though. It may mean that they misinterpreted a few rules and are fixing the error. But it does means they should have had better guidance from their auditors since they’re paying so much for them, see #1.

4) What does guidance from auditors mean? It means that every year, a publicly traded firm puts out 4 audited financial statements and files them with the SEC. When an audit takes place, an audit firm (think PricewaterhouseCoopers, KPMG, Andersen, Deloitte, et al) will review the accounting practices of the firm and tell them what they are doing right and wrong and guide them in fixing their practices.

Why does all this matter? It matters because when you look at a company and begin your own research into whether or not it is a good investment, you are reading their audited financial statements. Therefore you are relying on them to give an accurate picture of the company’s health. Think of it this way, if a smoker goes into the doctor’s office and says I have a terrible cough, but doesn’t tell the doctor they smoke 2 packs a day, the doctor may think that the cough is from a simple bronchial infection and prescribe an antibiotic, when in actuality the patient has emphysema and needs an oxygen tank.

Accurate information is key in assessing a company’s proper market valuation. When those financial statements have to be restated for several years, that can make a serious difference in the company’s valuation.

Madame X at My Open Wallet pointed out a great article in the NYT about valuation by Graham and Dodd (the textbook writers on Value Investing, i.e. Warren Buffett’s style of investing). In the article, it says that Graham and Dodd advocated looking at P/E over 7 years, not just the trailing twelve months (aka ‘ttm’). If Dell is restating their earnings for 4 years, that could throw a 7 year valuation number seriously out of whack. It means it’s a systemic issue that had to be rooted out with some major research work. Food for thought. It’s not necessarily a horrible thing, as I said before, but it does mean that the guidance the company received over the last few years was lacking. I actually smell a lawsuit with the audit firm…

I netted out about ~$14,000.00. I was hoping to net ~$18,000.00, but I’ll take it. I can genuinely say that my Save-O-Meter, FSA and 401K totals that $14K, so I think I’ve accurately hit my personal goals for 2006, despite going over budget.

I drafted up a recap of 2006 with some goals for 2007, but now I see I’ll have to revise my goals for 2007 based on a new budget plan. I have to be realistic about what fits into my budget in terms of savings. (Oh wait. I think I’ve just written my dream goals…)

I suck at sticking to a budget. I really do. I don’t track every nickel and dime accurately especially when it comes to dining out and items paid with cash. But I can definitely see that I benefit from budgeting by being able to do a quick and dirty analysis.

Even if you blow your budget, make one anyway. It’s a navigational guide for your spending and saving, but don’t cry if you miss your turn. Just regroup by revising your budget to be more realistic, and get back on the proper route. Knowing what I might spend or have spent in the past allows for me to make adjustments. Another surprise was that my vacation travel, i.e. all those weddings, was overbudget by ~$300.00, the cross-country airfare of one wedding. If I hadn’t budgeted my whole year, I never would have foreseen that I had to cut my personal vacation to pay for those wedding trips. You regroup. You adjust. Even if you are damned lazy like I am.

How lazy am I? I probably only look at a budget report once a quarter. Quicken lets me see a montly income/expense graph when I log in. However, it’s pretty skewed due to quirks in my graph settings, based on accounts and budget categories to include. It’s messed up and I don’t think about it that much. I literally just count which months I haven’t spent more than I earned. (For the record, on the small graph it’s 8. On the full graph, it’s 9. See what I mean about it being kind of screwy?)

Quick digression: Most PFBloggers probably don’t have formal accounting training or work in accounting. (I should probably figure out how to do a poll. If you want, please comment with a yea or nay.) I would encourage everyone to take a basic college-level financial accounting class for a few reasons. A) You’ll learn how to make an income statement and a balance sheet, which is really all you’re doing for yourself when you prepare your net worth statements or budgets. It’ll make numbers less scary. B) You’d be surprised at how much money executive education programs make by teaching financial analysis to non-finance managers. It’s a marketable skill for your resume. C) You don’t have to major in it or be a CPA, just one single 101 course. I took mine after I graduated from college and found myself doing lots of accounting stuff at work. D) And it’ll help you see the importance of budgeting and why companies do it, even if you don’t do it for yourself.

Budgeting does not exist to set you up for failure. I don’t feel like I failed even though I missed my budget. Not at all. I am proud that even though I overspent, I hit two important savings goals I set for myself.

Please let me know if you don’t have a budget and if you’re going to try one for 2007. It’s a pretty good new year’s resolution if you don’t have one already and semantically, note that I wrote ‘TRY’, not ’stick to’. It’s an evolutionary process, which reminds me to ask Madame X, how long have you been budgeting and how do you get such budgeting perfection?