Megan McArdle explains what a “big bath” is and how the current rash of scandals might be a political version of this financial accounting trick:
I confess, when I woke up this morning, I half expected to find that Obama had confessed to being one of our lizard overlords, or made an offhand mention of the time he’d had the CIA price out a drone attack on Mitt Romney’s headquarters. Between Benghazi, the discovery that Kathleen Sebelius has been leaning on insurers to finance their Obamacare PR, uncovery of a freelance political inquisition by the IRS, and last night’s revelation that the Department of Justice had been trolling through the phone records of AP reporters, this has been the most scandalicious week in living memory. I mean, sure, none of it rises to the level of Watergate. But while the gravity may pale in comparison, the volume is breathtaking. So breathtaking that it’s tempting to think that the administration is doing this deliberately.
In finance, there’s an art known as “Big Bath Accounting” which is used to manage earnings expectations. Here’s how it works: if you know you’re going to have a bad quarter, you look around for anything else that might go wrong in the future, and you decide to “recognize” that bad news now. Inventory looking a little stale? Write it down, man! Customers getting a little slow to pay? Now would be a good time to write off their accounts as bad debt. Is there some uncertainty in the projections about depletable assets like oil stores? For heaven’s sake, why not use the low end of the projections rather than the medium or high end? And we should really book some sort of charge to account for the risk that the Yellowstone supervolcano will explode, killing hundreds of thousands and covering the entire western half of the United States in volcanic ash, and in the process severely dampening demand for our premium line of Wyoming-themed memorabilia.
Corporations call this “cleaning up the balance sheet”. Accounting professors call it things I can’t print because this is a family blog.
