A must read for any who would invest in financial markets
Alex Berenson has done the public a huge public service with this book. He clearly and logically describes serious problems with the US Stock markets, based on corporate avarice, greed and cowardly, dishonest politicians. His sections on the creation then the gutting of the SEC are perceptive and insightful. His overview of the decline of corporate accounting standards, led by the big US accounting firms, including, of course Arthur Anderson give a clear picture of the problems and what needs to be done.
We need transparent and honest markets. We don't have them.
A great book for experienced investors and for novices.

The Number
A book about accounting written by a nonaccountant. A waste of your time and money. My copy went into the trash.

Very good
Concise and crisply written. Shows in a way how the 1990s were an inevitable outcome of prior history

What Might Those Quarterly Earnings Mean?
New York Times business reporter Alex Berenson has written a book that every investor should read. "The Number" traces the history of Wall Street trends, bubbles, busts, and the accounting fashions that accompanied them from the 1920s to the present day. He explains how the cult of The Number was born, making quarterly earnings reports the last word on any company's health, and how this facilitated the chicanery at Enron, Tyco, and the scandalously large paydays for incompetent corporate executives that have made headlines across the nation in recent years. "The Number"'s primary focus is actually on the evolution of accounting practices over the past 80 years. Berenson asserts that a disintegration of standards and an increase in conflicts of interest in the accounting profession prevent potential and current shareholders from understanding any company's health or its stock's true value. In other words, accounting slight of hand is such that it would take a detective to figure out if a company is making money or losing it. In explaining how and why, "The Number" gives us a fascinating, very readable history of the numbers and the people behind the trends since this nation first went crazy over the stock market in the 1920s. Mr. Berenson definitely has a viewpoint. He is in favor of stricter regulation for the accounting industry, perhaps more than is necessary or practical. But he makes some good points. And "The Number"'s chronicle of how things are on Wall Street and how they got that way is invaluable for any investor. Alex Berenson's writing is interesting, easy for anyone to understand, and his insights are essential to understanding what quarterly earnings reports do and don't mean, whether they be for big corporations that are the backbone of our economy, or little ones that may make or break your nest egg.

Equity investors out to know this material (and then some)
Mr. Berenson takes a very interesting approach to explaining the rise of the 90s bubble economy. The book opens with a wonderfully apt quote from Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it." The drive for Earnings Per Share (EPS) by analysts and investors guided by them, according to the author, leads them astray because the number is inherently imprecise. Earnings are stated by the company as an exact figure and EPS is simply that number divided by the number of outstanding shares of common stock.

However, earnings depend a great deal on the methods of accounting used by the firm. In the 90s we saw a rise in very aggressive accounting. Any system of rules that is intended to be applied generally over a wide range differing conditions is going to have gaps and unintended effects that distort the intention of the rules. General rules rely upon the good will and integrity of the participants to keep the intention or spirit of the rules in tact in order for the rules to have any real meaning in application. In sports we also have referees to keep the game fair, but both teams still have to intend to follow the rules completely. No game could be played if the participants tried to push every rule to an extreme interpretation. Aggressive accounting uses extreme interpretations of the Generally Accepted Accounting Principles (GAAP) to present as favorable earnings number as possible. This results in a higher (and therefore more pleasing) EPS number.

Analysts started giving forecasts of coming EPS reports for firms and those that met or slightly exceeded that forecast were rewarded with higher share prices because investors competed for their shares. Those that missed the forecast by even a penny per share were punished as investors abandoned their stock. Mr. Berenson demonstrates that many companies had reserves and other accounting tricks to make sure their EPS forecasts were always met. However, as companies grow this becomes harder to do. And for companies such as Tyco, Enron, Adelphia, and even the mighty General Electric, it finally became impossible. The most aggressive companies had presented such a distorted picture of reality that they collapsed. Those that were still within shouting distance of reality remained solvent, but still suffered a significant depression in their stock price.

Since the EPS is inherently inexact it seems strange that the markets would react so strongly to that single measure. Mr. Berenson calls the number a lie. I think he does that for rhetorical effect and one time he does admit it is a white lie. I think he has a very strong point for those companies using aggressive interpretations of GAAP. The author also provides a history of the SEC and calls for stronger enforcement powers and the staff to provide that enforcement. While there is certainly a good case to have an effective SEC with sufficient resources (there will be a debate on what this level is), Mr. Berenson has more faith in regulation than I do.

Even if I fully concede his point and support an SEC of enormous size, it still could not provide the necessary enforcement to keep companies in line if the market keeps rewarding companies for fudging the numbers. The market will provide what people want to buy even if they want to buy lies. I agree with Mr. Berenson that INVESTORS need to become better educated and make more demands of the management of the companies in which they invest. Investors, by NOT investing in companies who use very aggressive accounting, could affect the way finances are reported than any regulatory body.

Not every company can be a growth company. Heck, even Microsoft isn't a Microsoft anymore. Investors have to demand that financial statements actually present a real picture of the financial state of the firm rather then providing a manufactured dream of ever expanding growth. One of the strengths of this book is the compelling evidence Mr. Berenson provides of management spinning these euphoric visions just long enough to cash out and then let the bad news (read reality) come to light on someone else's watch.

This is a fine book. I think that anyone who has investments in public companies ought to read it and better educated themselves on the realities of the equities marketplace. I think Mr. Berenson's recommendations for public policy are measured and good for debate even if I don't personally agree with all of them. There are a few minor quibbles I have with some of his explanations, but they don't affect my recommendation.

The book has a couple of short appendices to help the reader understand the accounting issues involved. There are helpful notes for sources and an index.