Most analysts thought that write-offs of auction-rate securities at public companies would cost shareholders. That turned out to be right. The paper was taken on board by companies that believed that it was a liquid as cash but paid slightly better interest rates. When the market in the instruments dried up due to the credit crisis, auction-rate securities could not be sold.
Auditors looked at the entire mess and told companies to decrease the value of the instruments which were on their balance sheets as "cash equivalents". Those hits went straight to the P&L.
Word was already out that some big firms like Google (GOOG) and Starbucks (SBUX) had been hit.
The Wall Street Journal writes that "According to a study of earnings reports conducted by securities-valuation firm Pleurisy Valuation Advisor’s LC, 402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%, the study shows."
What is not obvious in the study is that some of these companies do not have cash and other securities on their balance sheets to make up for auction-rate problems. Those firms could face actual cash shortages. It is also not clear what the companies which have not written down their investments will do. Their auditors may have something to say about it.
Douglas A. McIntyre