Magic and the balance sheet

Magic and the balance sheet

It’s not often you see the words “magic” and “alchemist” in Lex.

For those who don’t know it, Lex (@FTLex on twitter) is a business insight regular column, on the back page of the Financial Times. It’s always an important read.

On Tuesday, Microsoft published quarterly reported earnings of $5.5bn – well ahead of market expectations, giving the stock a boost. The way this number was calculated did not comply with GAAP (generally accepted accounting principles). On a strict GAAP calculation, the earnings were $3.1bn.

Microsoft came in for quite some criticism over this. Lex correctly pointed out that Microsoft hasn’t done anything wrong here. The company has good reason for non GAAP treatment, and has presented the GAAP and non-GAAP calculations side by side.

The SEC nonetheless has a beady eye on all non GAAP reporting. Lex is rightly cautious about accounting “alchemists” and the “magical” non-GAAP accounting machine. When we can’t trust the numbers, bad things happen.

But we do need to be careful with words here: “alchemy” and “magic” appear in Lex with a meaning close to deceitful and duplicitous, and that’s a shame. It sells business short.

Most highly successful companies do have a great deal of “alchemy” and “magic” about them. They are the often the near invisible threads at the heart of success. It is important not to diminish them or give them a bad name.

Every time a leader gets more effort from their teams than you pay for or could ever write into a role description, a form of magic is at hand…

Every time you see a company taking a long hard look at how things are – the usually accepted “frame” within which things work – and then makes the leap of innovation that shifts the rules, changes the story, there is alchemy in the air.

Every time we create a new story, that gives hope, galvanises action, reveals the possible and inspires people to create solutions that amaze us all, at the heart of this is magic and alchemy ….

Nothing in this requires the supernatural, and none of it calls for deceit. It is the magic of making something new happen and from that comes all the value that GAAP seeks to ensure is correctly reported.

We absolutely and totally need both magic and alchemy in business and in our boardrooms.

But it’s got nothing to do with making up the numbers at reporting time.