When it comes to percentage-of-completion accounting. "It's just between management and God," says Robert Olstein, a New York securities analyst who makes a living finding fault with companies' accounting reports. There's no way on earth anyone can challenge whatever figures management want to use.
Percentage-of-completion accounting is used for contracts that extend over more than one financial year. Although other accounting methods can be used, most companies report home and expenses based on the percentage of the entire project that is completed during the given year.
But a company can only guesstimate what the total costs will be, what the final profits will be, and what percentage of the work is completed. Even a conscientious company can report figures that prove totally inaccurate: if a company wants to play with the numbers, there is little chance an outside accountant will challenge them.
Consider the percentage-of-completion reporting by one defense contractor. The table shows the year, the estimate during that year of the project's final profit, and the reported profit or loss for that year.
In 1970, the defense contractor predicted the contract would result in a $10.3 million profit over about five years. For 1970, the company reported part of that profit, a $2.4 million gain.
In 1971, the firm scaled down its estimate for the total profit to $9.7 million, and estimated the year's gain as $2.7 million.
In 1972, however, the firm estimated it would make only $8 million for the entire contract, but it had already reported $5.1 million in profit. So for 1972, it reported a $5.1 million loss-even though it expected a profit for the project.
In 1973, the company predicted a $3.5 million loss for the project but reported a $4.1 million loss for 1973 alone.
In 1974, the situation reversed. The company said it expected a $7 million profit for the project, and to correct previous reported losses, listed a $10. million gain for 1974 alone-more than it expected for the entire five-year contract.
These roller-coaster figures wre used to press claims against the government Renegotiation Board. Accountants, inexperienced in the construction business and presured by management seldom question the company's own estimates of what profits might be.