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Blackstone’s 'Enron' Accounting

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The Blackstone Group’s accounting methods are under further scrutiny today. The Wall Street reported on the first page of it’s C section that Blackstone plans to book estimated future gains from investments as current revenues. Under the plans disclosed in the filings for its public offering, Blackstone would book the present value of fees it expects to receive on its investments at the time the investment is made. If the expected fees increased, the firm could book additional fees prior to the receipt of any actual revenue from the sale of the investment.
In some sense this accounting method will allow Blackstone to present the capital markets with a picture of itself that more closely resembles its own internal perspective. Private equity firms have made tremendous gains in recent years, in part because they have longer time-horizons than the average stock holder. By employing what accountants call “fair value” accounting, Blackstone hopes it will be able to meet market expectations for smooth current revenues while maintaining its traditionally longer term outlook.
But some look at this as gaming the system, and fear that Blackstone can use “fair value” accounting to deceive capital markets. One investment banker we spoke to called it “Back to the Future Accounting” because it allows the firm to capture gains from the future and bring them into the present, if only on paper.
The Wall Street Journal goes so far as to bring up the dreaded E-word: “This method once was used by many companies, most notably Enron Corp., and led accounting rule makers a few years back to ban firms from booking immediate gains from certain transactions that didn't trade in active markets.” And just in case you miss the point, the Journal quotes three experts who disapprove of Blackstone’s accounting choice. Only one expert in favor of fair value accounting is quoted. (Although the paper notes that "fair value" is officially approved and that Blackstone refused to comment for the story.)
Blackstone Tests Fairness of Using 'Fair Value' Rule [Wall Street Journal]
Earlier on DealBreaker: Blackstone Delving Into Black-Scholes Book-Keeping [3.30.07]