Another write-down related to subprime loans is coming from UBS AG (NYSE: UBS), this time to the tune of $10 billion. Combined with write-downs in the third quarter, the company will have a total of $12.6 billion in write-downs related to subprime issues this year.Those write-offs will likely put UBS in the red for the entire year. The company has two investors ponying up almost $12 billion to help fill the gap. One is the Government of Singapore Investment Corp and the other is an undisclosed investor from the Middle East.
Management says that the new write-downs are in line with the current mortgage markets. Finance experts aren't so sure. It's widely known that the creation of reserves and the booking of write-offs involves a great deal of judgment on the part of management.
Third-party users of the financial statements are relying upon accurate and conservative estimates regarding risks and the markets, in combination with good judgment applied by management.
Experts are concerned that write-offs and reserves could be either overstated or understated by big banks. If understated, future periods could see losses that should have been recognized now.
But why would a bank choose to overstate the write-offs and reserves now? Management could decide that this quarter or year is already ruined financially, and a little larger of a hit won't do much damage to the company as a whole. This larger-than-necessary expense could create a "cookie jar" from which management could pull to make financial statements in future periods look better.
Investors will surely be eyeing the subprime write-downs carefully, as they may have an impact on many future reporting periods.
Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Accounting. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.
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Reader Comments (Page 1 of 1)
12-11-2007 @ 3:41PM
Thomas said...
How does the cookie jar work exactly from a "make financial statements in future periods look better" perspective? If they try to reverse some of the writedowns wouldn't it have to come back through OCI and not through the income statement? (sorry if this is an obvious question, I'm not an accountant).
12-11-2007 @ 3:24PM
Tracy Coenen said...
Great question! If they create a too-large reserve now, they will have to reverse some of it in later periods. The accounting entry to reverse that reserve increases income.
More detail about the issue is found in this article I wrote: http://www.allbusiness.com/accounting/fraud/4967624-1.html