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Two Sets of Company Books

The average Joe or Jane has little idea about the corporate landscape except to hear the whining from Australian mining magnates that they’re too poor to pay a mining tax. Occasionally we read about the huge fuel subsidies given to those same miners, but for the most part we have little idea. The MBA program certainly educated me on that score.

I once heard someone Internet famous say that MBAs ruined the World. To qualify for the MBA program at UTAS you need to prove seven years in business and possess an undergraduate university degree. My undergraduate degree was in Computing. The MBA curriculum roughly covers the curriculum of a standard undergraduate degree in business at a more advanced level with a higher standard of work and adds another six months of statistics, economics, law and managerial finance.

I spent yet another six months as a specialisation on top of my MBA qualification studying Journalism and Media Studies with an extra unit of Investigative Journalism after graduation.

It’s that last course within the MBA, Finance for Managers, that introduces the second set of company books. This course teaches about risk assessment, rates of return, project and company valuation, the time value of money, bonds, amortisation and asset devaluation… all that potentially shady stuff we read about when a large company goes bust and people head off to prison. It’s the area of international business accounting I perceive as the legal mafia in the cash hen house.

The truth is that large companies keep one set of financial books showing cash flow in and cash flow out at a purely accounting level. They show this book to the tax office. This is the only finance book most citizens are aware exist in the business. However, large companies also keep a set of managerial finance books where they choose how they want to play the profit and loss game.

For example, the company might purchase 20 new trucks and a factory extension and choose to devalue those assets over the next five years at a specific rate that maximises profit. Or they might build a 10 billion dollar dam and count that money as income in varying staggered amounts, rather than declaring zero income for nine years and reaping a 10 billion dollar windfall in the tenth. The company gets to work out the most profitable way to count the money.

Just take note that managerial finance within the MBA program always made me feel a little uncertain about what’s really right for society. This is totally focused on the maximisation of shareholder wealth. No other stakeholders are considered.

We all remember the dismal failure of Enron that surprised the World. But it was pointed out to me while studying managerial finance that Enron’s books held a key to the downfall. For four out of five years Enron’s first set of books – accounting books – sent to the taxation department showed a loss. The tax department knew Enron’s real financial position.

It was the managerial finance books that Enron were showing and quoting to investors and the public – money counted as income that wouldn’t be received for years. That was never received. Money that was invented with shady deals and creative accounting. On those managerial financial records Enron was a resounding success with untold billions in profit. Except, in reality they were… broke.

So while you have your next cup of tea or coffee I’d like you to think about whether Australian mining companies can really afford to pay a big fat mining tax for all that fuel subsidised free minerals banquet they have to deal with on a daily basis. Whether they really deserve the free pass we hand them in an industry where personal fortunes are in excess of tens of billions of dollars.

Imagine how much better life would be if you could play creative accounting every year on your earnings and taxation. But I wouldn’t hold my breath on that one.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark (aka nortypig) and I live in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a photographer making pictures with film. A web developer for money. A business consultant for fun. A journalist on paper. Dreams of owning the World. Idea champion. Paradox. Life partner to Megan.

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