EBITDA: A Fraud

Earnings Before Interest, Taxes, Depreciation, and Amortization: EBITDA.

The hot ticket promoted by the now-dead-and-disgraced Arthur Anderson accounting firm.

After Enron, the acronym became a parody: Earnings Before Indictment, Trial, Disposition and Ass-in-jail...

It was also a great way to earn a bonus--if your bonus was based on EBITDA (which, of course, Arthur recommended.)

Here's how that went down at Enron (but they are merely an icon...)

Conspiracy of Fools chronicles one of the discussions about EBITDA among Enron senior managers. One guy pointed out to Rebecca Mark, a Harvard Business School graduate star of the company, that EBITDA was meaningless because one could improve EBITDA simply by borrowing money at 10 percent and investing it in T-Bills at 5 percent and that was essentially what Mark was doing. She was borrowing money at X% to purchase businesses that would return no more than (X-4)% in a best-case scenario.

IOW, what counted was "earnings," regardless of interest expense to achieve those "earnings." You could literally take the Company into BK while showing an outstanding EBITDA.

Wonder why Arthur Anderson is dead?

Wonder no more.

HT: Tom McMahon