Last paragraph, lol:
London Sunday Times
SUNDAY JANUARY 20 2002
If you can't understand the accounts, it could be that the company wants it to be that way
PAUL DURMAN
IF money is the root of all evil, then complexity is the root of all accounting scandals. Enron only proves this.
The lesson for investors and trading partners is clear. If you cannot understand the detail of a company’s accounts, it may not be because you lack financial sophistication. The reason you cannot understand the complex transactions so poorly explained in the notes is often far more simple. You are not meant to.
The first clue to the mounting problems at Polly Peck, the fruit-trading business that collapsed in 1990, was the foreign- currency losses hidden away in the notes to its accounts. Asil Nadir, the chief executive, was able to report huge profits only because he was ignoring the overseas losses, which he was running up by offering ruinous credit terms to the citrus growers of northern Cyprus. Polly Peck was able to maintain the fiction of profitable growth only by shipping in millions of pounds in cash.
The financial troubles of Robert Maxwell were obscured by the multitude of private firms that he ran alongside his public companies, Maxwell Communication Corporation (MCC) and Mirror Group Newspapers. Maxwell funnelled hundreds of millions of pounds, much of it from the Mirror’s pension fund, through the private firms and into offshore trusts, which used the money in a doomed attempt to prop up McC’s share price.
A few years earlier, Ferranti International, a long- established defence contractor, sleep-walked to disaster when it bought International Signal and Control (ISC), a secretive American company. It soon turned out that ISC had much to be secretive about. Many of its contracts were bogus, and the company was virtually worthless. Ferranti, once a £1 billion company with 26,000 workers, was ruined by its £420m takeover.
More recently, Versailles Group was briefly a stock- market high flyer, seemingly generating extraordinary growth from an obscure area of trade finance. Those connected with the company struggled to explain just how Versailles’ financing deals worked. When the group collapsed two years ago, it soon emerged that the firm’s apparent success was built on bogus trades between scores of phantom companies.
Even in the straightforward retail business, the small print can hide a multitude of sins. Wickes, the DIY chain, was brought to its knees in 1996 when a scandal was uncovered in its buying department. The company had been bolstering its profits by charging upfront fees to suppliers who wanted Wickes to sell their goods. The practice obscured the true cost of sales, allowing Wickes to overstate its profits by more than £50m.
Many of the companies that have fallen from grace were at one time or another highly successful. That was certainly true of Enron, Polly Peck and Versailles. Raging bull markets, such as Britain and America enjoyed in the late 1990s, make it easier to hide weak accounting, particularly if companies are growing rapidly through acquisition. In optimistic times, few analysts look for flaws in great success stories. As the market deflates, however, even the biggest and best companies face tough new scrutiny.
Enron is a particularly savage example. But Cisco Systems, the computer- networking group that was briefly the world’s biggest company, is also facing difficult questions.
A recent analysis by Business Week found Cisco’s true level of profitability was unfathomable. The company has made so many acquisitions and has made such aggressive use of provisions that it has become “almost impossible to piece together how much Cisco actually invested or how much it earned on its capital”.
One expert reckons that Cisco has suppressed $18.2 billion in costs, sharply reducing the amounts the firm has to charge against reported profits.
Cisco claims that it is conservative. Yet, in the past, it has had employees working until midnight at the end of its financial quarter, loading computers and other equipment onto lorries so that it can claim these as sales in its accounts.
That does not sound particularly conservative. |
