The Semantics of the Past Are about Categorization

Everything other than the immediate present has a semantic component to it, and the possibility of semantic misunderstanding. It is not the time itself (although on reflection the passage and marking of time is a semantic issue in itself) but the fact that anything not at hand must be described using words. This includes description of things (as previously described), as well as actions. The recording of transactions is a semantic issue.

Why Your Physician Is So Concerned about What He or She Calls Your Operation

When a physician takes out your appendix, he or she fills in some paperwork where the physician names the procedures that were performed. The physician has hundreds of thousands to choose from, but luckily most specialists have a few hundred that they regularly perform.

The problem is that there are many different ways to describe the procedure that was performed. Some descriptions have a lot of individual activities ("make abdominal incision," "cauterize appendix artery," etc.); others are "groups" that include all the activities normally encountered in an appendectomy. Still others describe various complications.

What difference does it make, after you've been sewn up and are recovering, what the physician called the procedure? Depending on how physicians code a procedure, their reimbursement can change by as much as 20% to 30%. If they happen to use terms that Medicare or others have deemed inconsistent (for example, coded for a routine appendectomy and also coded for the abdominal incision), this could result in steep fines, or even prison time.

Restating Earnings

Restatement of earnings would be an academic issue if it weren't for the fact that billions of dollars of equity are routinely made or unmade when companies restate earnings, which is nothing more than the reclassification of transactions that occurred in the past, giving them new meaning.

Let's take just a moment and look at the semantics of "restating earnings." These days it is not uncommon for a firm or a firm's auditors to announce that they are "restating their earnings." Wall Street reacts swiftly and unilaterally: The stock price is pummeled. But let's take a look at what really happened.

First, unlike in a very small business, there is no shoe box full of transactions that were suddenly discovered that would change the financial health of a company. (If you were running a bed-and-breakfast that was humming along making a nice little profit, and all of a sudden you discovered your manager had racked up tens of thousands of dollars on your credit card and split, that would be a case of new transactions being discovered.) But in no case that I know of, with publicly traded companies restating earnings, have there been any "new" transactions.

There were sales. There were contracts. There were investments. In each case they were recorded. When they are recorded they are placed into such categories as "current period revenue," "capital expenditures," "contingent liabilities," or "nonmaterial third-party transactions." At some point after the fact, someone else comes along and says, "Hang on, you misclassified these transactions; according to these criteria (from GAAP or elsewhere), these transactions should be reclassified." In many cases these were not miscategorized by mistake. In many cases they involved intentional distortion. However, we should note that in each case the act of restating was the act of recategorizing preexisting events, using criteria that existed at the time.

At some level, we might think that this is purely pedantic hairsplitting. But huge amounts of wealth are being made and lost around semantic distinctions. It may behoove us to find out a bit more about how this really works. It may be possible in the future to bring semantic discipline to this categorization process at the source.