5/28/2013

The number game


Playing with numbers can bring great benefits to some and make losers of some innocent folks. One simple number game is the estimation of utilities usage that affects every household. For instance if the average utility bill is $100 pm, and if the meter is only read every third month, the usage of two months will be estimated. To maintain some consistency, the estimates must be done with care, probably by using the latest readings or the moving average, or something in that order, to keep the estimates realistic. But in practice, the method can still bring about distorted results.

Take for instance a festival when there more cooking take place or more people are at home, that particular month would drive up the bill and would affect the next average. It is ok actually if not of the GST or taxes based on the month’s bill. When there is a surge due to a wrong estimate, the household will end up paying more taxes for that bill. When the bill is readjusted after an actual reading is made, would the extra taxes, though small in amount, be refunded? The extra payment comes about when the rate is variable and higher at higher usage particularly water tax. Some households will thus have to pay a bit more taxes that they don’t have to but because of estimation.

In the corporate world, the numbers can also be juggled to give the best returns to whoever wants it. As an example, if a profit of $1m is expected and no extra bonus will be paid, a company with 3 or more years of $1m profit will not have to pay extra bonuses to the management on a profit sharing scheme. But by recognizing, in line with or overriding accounting principles, some profits may be delayed or not recognized and accumulated to another year. So a company may show 2 years of $500k profits only to show a startling performance of $2m profit on the third and ending with a big payout to the management.

This could be a deliberate result of manipulation. But at times, it is due to business cycle. The best example was quoted by Prof Tan Khee Giap during a programme on GDP aired on CNA. He pointed out the great GDP growth of 15% in year 2011, I think, was such a case. The result of that spectacular growth was due to the shrinking of the GDP in the previous years. The base for growth computation shrank accordingly. Thus when the economy returned to its previous numbers, the growth rate or percentage of growth became so much bigger than normal.

A reward system that is based on the growth rate will thus compute a huge payout to the management. And because the growth rate was so big, the payout could be disproportionally big relative to the average payout though the company/economy did not do anything spectacular in real terms.

What happens or could happen in such a situation is for management to take recognition of the low base and the real productivity and massage down the payout. If not, the management will be rewarding themselves happily with outrageous bonuses and still looking very legitimate and deserving, because the bonus formula said so.

The number game can be played very cleverly and ingeniously to benefit the players or designers of the game.

4 comments:

Anonymous said...

Dear Millionaire Ministers.
Please lead, follow or get out of our way.

Please decide soon while there is still courtesy in this request.

Matilah_Singapura said...

>> The number game can be played very cleverly and ingeniously to benefit the players or designers of the game

Absolutely right. Which is why you have to crunch the numbers yourself. The con artists know that most people won't do this due to laziness, blind trust and faith, or sheer "maths phobia".

GDP numbers are particularly suspect: How is the GDP calculated and presented? By income or expenditure or production? Is government spending included? (it usually is, that leads to false impressions)

Corporations are also motherfuckers. They anyhow tembak earnings and profit projections to make themselves "look good" especially when there is M & A activity.

Now with low interest rates, corporations are borrowing money to pay dividends (e.g. Apple -- borrow at near 0%, pay dividend of 2+ %) or borrow at near 0% to buy back their own stock -- in either case the stock price goes up, and gullible investors get fooled once again.

Where there is money, there are scams.

Caveat emptor.

bond said...

Thats the reason we must change the ruling party every now and then to keep them from learning the tricks, extending their claws and playing dirty to screw people. Once the weeds grow long enough, it is very difficult to uproot them by hand. Probably need a very big tool.

Anonymous said...

Let Singapore be ruled by somebody who doesn't care about numbers. You like, you pay, don't like, don't pay.

If pay, pay anything you want.

If buy water from neighbour country, 1 cent per litre or 10 cents per litre, all ok. No need negotiate.

If kana fined for illegal car park, fine $50, I pay $10 also can. Pay only what you can afford.
Stay A class pay C class rates, also can. Up to you lah bro.

Numbers not important.