The Hindu Business Line : On bathrooms and balance sheets

A HI-TECH toilet that is so artfully camouflaged by a forest-green kiosk that people often mistake it for a subway entrance or a phone booth, writes The New York Times, about a coin-operated `convenience' in Manhattan. Something that cost $587,000 to design and install, and bleeds $52,000 a year to maintain. "Inside, there's kind of a bad smell to it, like the disinfectant is trying to beat the smell out. But it's not. The urine is winning," is a user comment. There are detailed instructions, posted in seven languages, and teenagers decide not to bother. "Even if you understand English, it's not 100 per cent clear," says another.

A different story is about similar problems that investors face, not with bathrooms but balance-sheets. Barry Diller of InterActiveCorp joins Warren E. Buffett of Berkshire Hathaway in a panel discussion on corporate governance at a conference, but when Diller's company published its quarterly earnings, there was "a thicket of pro forma figures".

In the NYT article titled "Financial Disclosure, the Barry Diller Way", Gretchen Morgenson explains: "InterActive often charges its customers what it identifies as `taxes and fees' for several popular travel destinations.

To a traveller accustomed to paying steep hotel occupancy taxes, the amount may look mainly like a tax, with a small fee added. But because the tax paid by the company is based on the wholesale, not the retail, room rate, the fee portion is much larger than it might seem. On each transaction, the companies appear to pocket as profit an amount that some taxing authorities may end up contending is theirs."

What are the numbers? Here is an example. "In the first quarter of 2003, the average cost per room paid by Hotels.com (which is a part of the InterActive conglomerate) was around $84, including taxes. Assuming an occupancy tax of 13 per cent, Hotels.com would have paid $11 in taxes per room.

According to the company, customers pay $120, on average, for a room. At a tax rate of 13 per cent, that would mean a tax of a little more than $16 per room night. Because Hotels.com paid $11 in taxes on the room per night and received taxes and fees of $16, that would translate into a profit of around $5.

"In the quarter, Hotels.com recorded 2.3 million room nights, generating operating profit of $27.2 million. If local tax officials had taken the $5-a-room-night difference, operating earnings would have fallen by $11.5 million, or 42 per cent of the amount the company recorded."

Even if state tax authorities choose not to pursue InterActive for past or future taxes, consumers may not appreciate paying an amount that they believe covers a tax but that instead is profit for InterActive, concludes Morgenson.

The country's premier accounting body the ICAI may not have answers to how one can build better toilets, but it sure has the ammo to make financial statements look something different from boilerplates. Because, inside, there is kind of a bad smell to these published accounts, like the disclosure requirements are trying to beat the fishy things out. But they are not. Usually, it is the craft that is winning, not the controls.

hindubusinessline@hotmail.com

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