The Globe on MDC accounting

David Milstead writes, Accounting for the legacy of Miles Nadal at MDC, in today's Globe and Mail. The piece focuses on SEC questions "about the way it presented its earnings and accounted for its profitability".  Milstead takes "a close look at MDC's presentation of its financial results [and] reveals unusual accounting methods that call into question the company's financial health".   While there appears to be legitimate concerns about management and governance issues at MDC, Milstead glosses over these and the piece delves into the company's (arguable) over emphasis on EBITDA and its calculation.  (To be fair, I'm looking at this in isolation and the Globe may have already covered issues around expenses and compensation elsewhere during the ongoing MDC news cycle).

The tone of the piece implies a nefarious accounting scheme whereby the company reported inflated EBITDA to mislead investors while posting negative Net Income.  For example: "it was only on page five that investors might have found that the company's 2013 bottom line [under GAAP] was a net loss"!!!  Milstead even invokes the "1990s tech bubble" and the "2001 Enron scandal" to add a little oomph to the story.   A whistle blower was mentioned but not the substance of what the whistle was blown on.

Milstead asks "what, exactly, did Mr. Nadal build in all these years of running MDC?"  One should ask what, exactly, is Mr. Milstead trying to suggest to his readers?   The Globe gave this piece half a page of space plus a lead in from the front page of the Report on Business section. Nothing in this piece appears to be inaccurate, but there is an issue with the tone.

Problems with the tone of this article:

1. EBITDA is a common measure to disclose in a press release or MD&A.  It is not some convoluted trickery of accounting.  In fact, it's not even accounting--it is a non-GAAP measure. It is misleading to invoke invoke the name of Enron, which was engaged in fraud, in a comparison to MDC's use of EBITDA.
2. The calculation of EBITDA was not hidden from investors as the company notes, "EBITDA is a non-GAAP measure, but as shown above it represents operating income (loss) plus depreciation and amortization, stock-based compensation, acquisition deal costs, deferred acquisition consideration adjustments, one time incentive and profit distributions from affiliates."
3. Any reasonably competent user of financial disclosures should understand the difference between EBITDA and Net Income.  They should also read past page five of the press release and read the actual 10-K filing.
4. It is important for management to make disclosures based on the measures it feels is important in running the business.  If management feels that EBITDA is a useful metric, then that in itself is a useful piece of information for investors and analysts.  

The actual substantive accounting issue related to treatment of deferred acquisition costs was given short shrift at the end of the piece.  The entire piece could have been an in-depth look at the complexity of this debate (MDC's perspective vs the SEC's).  Granted, this would have been more work and made for a much more technical and boring piece.  But the goal of journalism should be to provide context and insight for readers rather than tabloidizing the latest story.