Money Laundering, 3rd Edition

85

“What is the use of a book,” thought Alice, “without pictures

or conversation?”

Lewis Carroll, Alice’s Adventures in Wonderland

Perfection has one grave defect; it is apt to be dull.

W. Somerset Maugham, The Summing Up

There is only one place you will nd any pictures or conver-

sation in the kinds of books accountants keep: the annual

report to shareholders of a corporation. Otherwise, and I’ll be

right up front about this, accounting books and records are

pretty dull. Perhaps this is because accountants try awfully

hard for perfection, coming lots closer than most professions,

such as doctors or lawyers.

In this chapter, we’re going to cover some basic account-

ing principles and examine some of those perfect books and

records that accountants keep. Despite the fact that the mate-

rial may be dull, it’s good to have an idea of how these things

work. Later on, when you’re looking at the balance sheet of a

corporation and wondering whether it’s a shell or some kind

of a scam, you may be able to use some of this knowledge.

“You don’t seem to have the usual qualifications we’re

looking for in an accountant.”

Also, if you’re into investing, this chapter covers the basics

of what you need to know to evaluate a company to make

that investment decision. In fact, that’s exactly what those

fancy annual reports are really all about. Why should you,

the stockholder, buy or keep our stock? Here, check out our

slick, full-color, multipage report. Lots of pictures and even

some conversation: the “Message to Our Shareholders.”

Actually, the reports prepared by accountants, all of which

follow a very rigid set of clearly dened rules, are used for

a variety of purposes. Banks use them in making loan deci-

sions; businesses use them in making all sorts of decisions—

whether to buy or sell, whether to extend or refuse credit,

whether to acquire or divest. Reports such as the balance

sheet and income statement are used to track progress and

to compare performance against other periods, divisions,

or businesses. The accountants’ work is like a Swiss Army

knife for business—it has a thousand uses.

Because the accuracy of their reports is so important,

the accountants’ club, in this case the American Institute of

Certied Public Accountants (AICPA), has set forth a long list

of rules and regulations to be followed by all its members. These

rules, known as the Generally Accepted Accounting Principles

(GAAP), dictate how records are to be kept and results reported.

Since everybody’s supposed to follow the same rules, you can

look at the balance sheet of a car parts business in Florida and

one from a timber business in Idaho and be fairly sure that they

will allow you to make a reasonable comparison.

Everything leading up to the bottom line on that balance

sheet is covered by those GAAP rules. All of the numbers on

that sheet are traced backward to the original transactions that

created them and always (at least in theory) in the same con-

sistently reliable way. Again (in theory), an accountant should

be able to walk into a corporation with the annual report and

work backward from there, verifying every number along the

way. They really do this, by the way; it’s called an audit.

An audit is made possible by something called an audit

trail, and the GAAP rules dictate exactly how this path is

to be laid. The trail is created with documents created in a

set pattern and sequence, in which nancial transactions are

recorded, classied, summarized, and reported. Figure 9.1

illustrates this process.

Instead of starting at the bottom of the pyramid, we’re going

to begin with the top, looking at the nancial reports of a cor-

poration, and work our way down from there. For our in-depth

review of how everything ows to the preparation of these two

reports, we’re going to use an example from real life: the books

and records of Chicago gangster Al Capone. Al’s business,

Alphonse Capone Second Hand Furniture, Inc., was selected to

make things more interesting. Trying to put Al’s books together

while retaining as much historical accuracy as possible was an

enjoyable exercise. See Figure 9.2 for some notes about this

process and the presentation of the information.

There are one or two things to keep in mind in review-

ing the annual report of any publicly held corporation: First,

the company is required by law to prepare these reports,

to keep the owners (i.e., shareholders) and the government

(i.e., Securities and Exchange Commission) informed about

9

Introduction to Books and Records