International -- Readers Report
Getting to the Bottom of Cisco's Numbers
"Cisco: Behind the hype" (Cover Story, Jan. 21) quotes Abraham J. Briloff, professor emeritus at Baruch College, as saying that Cisco Systems Inc. "suppressed a grand total of $18.2 billion in costs" when it accounted for certain acquisitions by the pooling-of-interests method. Yet you challenge accounting for $3.8 billion in research and development write-offs as purchases-- which suggests that using either method is somehow inappropriate.
I'm sure that "Cisco follows generally accepted accounting principles" would be a less engaging story. Until the Financial Accounting Standards Board issued new rules as of July 1, 2001, companies were required by GAAP to account for acquisitions as poolings when certain criteria were met, and as purchases when they were not. Neither Cisco nor any other company had a choice--accounting as a pooling or purchase was dictated by the terms of the deal. And GAAP required (and continues to require) immediate write-off of in-process R&D acquired in a purchase.
Dennis R. Beresford
Professor of Accounting
University of Georgia
Athens, Ga.
Editor's note: The writer is former chairman of FASB.
I applaud your editorial "One accounting code for all" (Jan. 21). However, your derisive views of pro forma earnings in "Cisco: Behind the hype" are off the mark. Our professional association, Financial Executives International, along with the National Investor Relations Institute, published guidelines on the use of such metrics last year. When used constructively and in compliance with the FEI/NIRI guidelines, such metrics give much-needed information to investors. In fact, pro forma earnings try to get at the cash flow and operating earnings you call for in the editorial.
Philip B. Livingston
President and CEO
Financial Executives International
Morristown, N.J.
What you didn't ask: Why do Cisco and similar companies "fudge" their accounts and even feel the need to do so? Surely, the guilty parties are the equities markets and the "analysts."
If the analysts knew their stuff, they would realize that any market is finite. Thus, overlending to startups would create overcapacity, would create meltdown, would mean a revenue downturn for those supplying such markets. The question is, would Warren Buffett take a big position in Cisco, or any other company, tech or not, if the price-earnings ratio were 95? I doubt it.
Michael C. Feltham
Shoeburyness, England
I could not suppress a wry smile when I read about Cisco and learned that as the second [fiscal] quarter closed, CFO Larry R. Carter oversaw a frenzied rush to cram machines on trucks so they'd be counted as "sold."
About 18 years ago, when I was working for Wang Laboratories Inc. in Lowell, Mass., I remember rumors about the same practice: large trucks driving around with unfinished inventory so that it could be counted as sales and maintain Wang's "phenomenal" growth.
Sadly, it didn't help in the long run, and Wang disappeared, taking a large number of employee pensions with it, including mine. Curiously, Cisco CEO John Chambers was a senior vice-president at Wang around that time and obviously learned some lessons very well--but clearly not quite well enough.
Jon Wilkie
Weybridge, England
Larry Carter, Cisco's CFO, maintains that pro forma numbers more accurately portray the company's operating results--because they exclude volatile charges, such as acquisitions. Carter says: "It's sort of like, `What do you like, vanilla or chocolate? We're going to give you both, so you can choose."' BusinessWeek correctly points out that "in the latest quarter, more than a third of Cisco's pro forma earnings come not from operations but from interest and other income." When it comes to "operating results," it sounds as if Carter and CEO John Chambers are serving a generous helping of mud pie in the face of investors.
Robert Bubnovich
Irvine, Calif.
Resolving Britain's Euro Dilemma
"Blair's stealth euro strategy" (European Business, Jan. 21) concludes: "It is hard to imagine why [Tony] Blair, Europe's most successful politician, would want to put his reputation on the line for such a hotly contested issue." In fact, the reason why is very easy to state: Joining the euro would be good for the British economy. Perhaps you should have asked the Confederation of British Industry.
Paolo Brera
Milan
You are missing (and so is Tony Blair) an important aspect of this new currency development. The possibility of introducing the euro as an additional currency to circulate in parallel with all the others was always in the cards. However, the leaders and their civil servants lacked imagination. Margaret Thatcher and John Major did talk about the "hard ecu" as an alternative. But the European Union held out for the unique euro. Euro creep in Britain, Denmark, and Sweden could be avoided by formally instituting a parallel currency regime for each, i.e., no "creep," but the replacement of a trade-determined proportion of their existing currencies by euros. Pride is protected, and companies have a choice of currencies to trade in.
Noel Mulcahy
University of Limerick
Limerick, Ireland
Democracy Is the Best Insurance against Corruption
In "Don't bank on democracy in Afghanistan" (Economic Viewpoint, Jan. 21), Robert J. Barro suggests that an efficient authoritarian regime might be preferable to the "soft weapon" of democracy in Afghanistan. It is an old myth that authoritarian regimes are more efficient: Mussolini, it was claimed, made the trains run on time. But many other things went so terribly wrong that the punctuality of trains became an issue of minor importance. The history of the last century shows numbers of authoritarian economic disasters at least equal to the number of democratic ones.
The best insurance--although frustratingly insufficient against corruption and other forms of economic abuse and mismanagement--is still the checks and balances of a democracy with strong institutions.
Morten Sorensen
Copenhagen
Thinking beyond the PC
Cliff Edwards' comment in "Come on, Steve--think beyond the Mac" (Information Technology, Jan. 21) about hype leading to a letdown is valid. With regard to Apple Computer Inc.'s business strategy, however, you totally miss the point. The suggestion is for Apple to compete with a multitude of handheld device manufacturers and PC manufacturers, most of which are downsizing, slashing prices, and killing off product lines. To foray into a market where competitors constantly undercut each other, and where price, not innovative products, is king, would be certain doom. You're ignoring one of Apple's main strengths: integrated software and hardware.
Come on, Cliff--think beyond the PC.
Zack Yonzon
Makati City, Philippines
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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