Buffett's 1988 letter on accounting tricks and CEO missteps

If you think accounting tells the whole story of a business, you are in for a surprise. And if you assume senior management is always accountable for their decisions, think again. In his 1988 letter to Berkshire Hathaway shareholders, Warren Buffett peels back the curtain on some uncomfortable truths, the kind that most CEOs would rather keep hidden. This story, a part of our series on Buffett's letters, lays out his insights on seeing through corporate facades, questioning accepted wisdom, and staying grounded in fundamental business principles. Buffett digs into the limitations of accounting standards, the unspoken immunity of senior executives, and the real cornerstones of a great retail business. He even shares his cautious approach to risk arbitrage — a strategy where most people overestimate their odds of success. Let's delve into his lessons: Numbers that lie When it comes to accounting, Buffett's stance is clear: don't take GAAP at face value. Generally Accepted Accounting Principles (GAAP) are supposed to bring clarity, but more often than not, they fall short. The problem is that while GAAP numbers give the appearance of precision, they don't always reflect economic reality. And worse, sometimes, they are deliberately manipulated. Imagine you are a manager reporting to your boss. Would you just throw some basic numbers at him and hope he gets the picture? Of course not. You would explain the context, nuances, and what the numbers actually mean. Yet many CEOs fail to do this and, instead, hide behind GAAP to avoid giving a fuller picture. The reality is that not all earnings are created equal. Sometimes, managements even use creative interpretations of GAAP to show a smoother trend than reality warrants. They m

This article was originally published on April 02, 2025.