Accounting and Private Equity

The essence of accounting in the context of private equity is to tell you whether the company you are dealing with is trying to rip you off or do legitimate business. There is a certain human fallibility and tendency to believe other people and hope for the best and cling onto these hopes even with the result of acting highly irrationally. In general, companies that are going concerns that have good accounting that show their income, cash flow and balance sheets are solid are not going to be in the business of ensnaring you in some damaging business deal. This matters far more than any words than say as words are cheap. It is the same way when we deal with someone with a good job, career prospects and so forth, we tend to trust them more than someone that walks off the street even if that person who walks off the street says all the right things you want to hear. There also is the general reputation of a city, if people come from a city of repute like Seattle we tend to trust them. The type of feeling that we are surrounded by crooks, that is usually known as a mood disorder in psychiatry where we begin to emotionalize business dealings which may all be fair but we begin to attack their character on the basis of our moods. What is a mood? I think it is best defined as a political vantage point or role play we are taking at a moment. For example these days I am quite sympathetic to Liechtenstein which basically has the attitude of drink milk, love life, make money. It is important to recognize if the person talking doesn’t know what he is doing there’s no sense in listening to what he is talking about. Same if he can’t overcome his moods such that it’s always about politics and not about business, then we go elsewhere. Stay tuned for more on the intersection of law and social science.

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