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Accounting Gimmickry raises its Ugly Head...

Banks had dug up graves for themselves and in order to save themselves, I believe, there will be more cases of accounting gimmicks involved. We have highlighted a handful of these, and you will discover a few on your own… All we have to do is keep our eyes open and believe in the all supreme “common sense”.

According to Foresight Analytics, California, delinquent payments 30 or more days late reached 4.3% during the 2Q09, the worst since the recession in the early 1990s. An estimated $7.0 billion of commercial mortgages were in foreclosure in 2Q09, nearly four times the level in 4Q07, when the recession began. Because banks are getting clobbered by bad commercial real estate loans, financing for development deals is hard to come by. The problem is compounded by lower prices for commercial real estate properties, which have fallen 24% during the past year. 

Commercial real estate prices are depressed and performance has been poor, with delinquencies and defaults rising. Commercial mortgage defaults jumped four-fold, from $9.4 billion in 4Q07 to an estimated $38.0 billion in 2Q09, according to Foresight Analytics. Just as mounting job losses exacerbated the subprime mortgage crisis nationally, banks are coping with business failures across the country, fueled by the recession. According to the American Bankruptcy Institute, 16,014 businesses filed for bankruptcy in the 2Q09. That's the most of any quarter in 15 years, and double the 7,985 filed in fourth-quarter 2007, when the recession began. The ABA's composite ratio, which tracks eight loan categories, hit a new high of 3.35% of all accounts; the highest recorded since the industry group began tracking the rate in the mid-1970s, and tops the previous record of 3.23% set in 2Q09.

Can we expect banks to get out of this mess anytime soon? The problems are so severe that any near-term improvement in fundamentals of banks should come as a surprise to us. As a result, accounting irregularities are increasingly being witnessed in the US. US Securities and Exchange Commission (SEC) had recently launched an informal inquiry into revenue recognition practices of Apollo Group Inc. Internet retailer Overstock.com underwent scrutiny from government regulators last month over accounting of certain expenses. These two companies are some of several big-names that disclosed accounting irregularities over the last few weeks.

The current environment is merely propagating the concept of “survival of the fittest”. And to prove to the general public that they are fit enough to carry on; banks may reveal a little and hide a little