May 02, 2005
Outback CFO Resigns, Blames Accounting Profession
Posted by Gordon Smith

Last week Bob Merritt resigned as CFO of Outback Steakhouse, citing the "increasingly negative regulatory environment in which we now operate" and his feeling that "the environment is not going to get any better anytime soon." He pointed to the "recent lunacy over lease accounting" as an example, and asserted that changing rules in this area represent a "complete failure of regulatory and other bodies that oversee financial accounting and reporting." Merritt asks, "if accounting firms can change their views on something like long-term lease accounting, setting off 150 restatements ... and then conclude that the companies have material internal control weaknesses, what's next?"

He claims that reporting about the restatements  "is a strong reflection of the growing presumption that all business people are dishonest." He wants to say more on this topic, but feels restrained by the forum. For the whole announcement, listen to the webcast of Outback's first quarter earnings conference call (go to the 1:35:05 mark for Merritt's announcement).

The more we hear about the problems associated with financial reporting, the more this looks like a problem for which fingers can justifiably point in all directions. Merritt takes aim at auditors and "regulatory and other bodies" (a reference that is probably intended to include FASB, Congress, and the SEC). Why stop there? Certainly Merritt's own colleagues -- America's CFOs -- also deserve a share of the blame. And while many corporate managers are being demonized unfairly, there are plenty of genuine bad actors in that crowd, too.

If corporate America were a trauma patient working through the stages of recovery, we might conclude that it has passed through denial and shock, but has not yet worked through anger to get to resolution. I am tired of the anger stage. I hope the accounting profession gives us all a heads up when they are ready to move on to resolution.

Thanks to reader Timothy Lacy for alerting me to this story.

UPDATE: Here is the full text of Merritt's statement.

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"Gordon Smith at Conglomerate links to a story about the resignation of the Outback CFO who said: I'v ..." [more] (Tracked on May 2, 2005 @ 16:13)
» Outback Steakhouse CFO Quits Because of the Regulatory Environment from White Collar Crime Prof Blog ...
"Prof. Gordon Smith (Wisconsin) on the Conglomerate Blog has an interesting post about the resignatio ..." [more] (Tracked on May 3, 2005 @ 7:59)
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Comments (4)

1. Posted by Vic Fleischer on May 2, 2005 @ 23:03 | Permalink

I don't know that much about lease accounting, but I do know that it's often used deceptively to lower debt ratios (and improve return on investment) -- i.e., it makes the company look smaller because they don't "own" the restaurants, and the profits look more impressive as a result. Similarly, shifting depreciation off the income statement increases earnings.

Merritt's complaint sounds an awful lot like a tax director complaining when the IRS cracks down on tax shelters. If you wanted simpler accounting, you should have just bought the restaurants outright. Am I way off base here?

2. Posted by Gordon Smith on May 3, 2005 @ 6:41 | Permalink

Vic, I'm not sure I would say "deceptively," since what is "real" in accounting is often not all that clear, but otherwise you have it right. I'm not sure that the crackdown on tax shelters is the right analogy. The problem here is that companies enter into long-term agreements on the assumption that they will be accounted for in a particular way, only to find out that the accounting requirements are changed. Of course, the accounting changes do not change the underlying substance of the transaction, and my impression is that the Outback CFO wanted to focus his attention on substance.

3. Posted by Jeff Hobart on May 3, 2005 @ 13:18 | Permalink

I teach financial accounting to lawyers from time to time.
Professor Kenton Yee of the Columbia Graduate School of Business has noted in his teaching materials on Earnings Quality that there are Five Basic Human Needs:
1. The need for food.
2. The need for water.
3. The need for fire.
4. The need to keep expenses out of net income.
5. The need to keep debt off the balance sheet.

Obviously, the key ultimate issue to ask is what is the material effect of adding the capitalized operating leases to the financial statements, in terms of reported profitability and risk.

P.S. My impression is that tax shelter abuse may be the larger reporting environment problem, but others may disagree.

4. Posted by nitish on February 4, 2006 @ 6:02 | Permalink


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