AES: A Deeper Dig In The Accounting House

Back in March, The AES Corporation (AES) put a hold on their previously issued financials for a whole host of “remediation” issues - remediation in the sense that their repair of internal controls revealed many reporting errors. (Not “remediation” in the sense of restoring polluted land to a cleaner state.)

They’ve been digging deeper since then and planted another non-reliance flag on the 2006 financial package. Reason: a failure to properly adjust a “special obligation” in its Brazilian power operations linked to local tariffs and Brazilian accounting principles, plus a failure to re-evaluate a lease contract after a modification had a depressing effect on net income, to the tune of $57 million in 2006. Hairy, complicated stuff. Net income was overstated by $42 million in 2005, and understated by $3 million in 2004.

All taken into account in the revised 10-K. As the complexity-killer committee moves into its mission, this case is a good reminder that it’s not always the accounting that makes for complexity. Complex operations with complex transactions result in accounting complexity when they’re reported. Don’t shoot the accounting messenger.