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WeWork Drops 7% On Announcement Of Accounting Error

Tim Worstall
Tim Worstall trader
Updated 2 Dec 2021

Something that no investor wants to see, WeWork (NYSE: WE) announced an accounting error to the market. WeWork’s stock dropped that 7% immediately afterward. The big question is what happens next? 

Leave aside the question of how good the business is in itself. There are those who question the very idea of WeWork’s model – taking long leases in order to rent them out short term might be seen as little more than the most horrendous liquidity mismatch – which is what did for those estimations of a float at tens and tens of billions originally. Others would point out that at current valuations that risk and model seem to be fully paid for. There are those who want small and short leases and someone, somewhere, can make money out of providing them.

The problem is when a company has to restate accounts because of error. That always worries – because if they missed this thing or bit then what else have their internal controls missed? Given the background at WeWork, that worry is of course magnified. Are we at the start of some monster like Wirecard? 

There is also the other view to hold which is that many of the SPAC companies that have done deals recently have been making exactly the same mistake. Further, that they’re all having to ‘fess up and announce the mistake to the market.

The actual problem in detail at WeWork – as we know so far that is – is that certain of the stock issued in the  Special Purpose Acquisition Corporation – the SPAC – should have been classified as temporary equity, not permanent. For they can be cashed in under certain circumstances, so they’re not a permanent part of the underlying capital of the company. 

This is a problem common to many SPACs. It’s just one of those things that got missed in the rush to take part in the market frenzy, the details of how certain different classes of equity needed to be classified. It’s even possible to insist that it doesn’t mean anything very much. 

Many such companies have had to announce such restatements. And they do all apply to the periods before the mergers with the operating companies – there’s no reflection on the operating business at all. It’s even true that WeWork announced this in the 10 Q results back on November 15th but no one noticed nor cared much. The SEC has insisted that a further, 8K announcement be made by WeWork so that everyone does get it. 

This leaves traders with a view to take. If it’s all a storm in teacup and everyone’s done it then a 7% drop in WeWork’s stock price looks overdone. We might expect a recovery, therefore. Or, there’s that other view, which if they’ve got this wrong then what other problems exist within their accounting system? Not particularly that management is doing something wrong, but that if the accounting system can’t check for something like this then what else can’t it check for? 

Depending on which view prevails that WeWork stock price could go either way.

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Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.