Posted at 10:36 p.m. PST Saturday, Dec. 8, 2001
Companies need to be kept in check
BY DAN GILLMOR
Mercury News Technology Columnist
On a recent trip to Asia, I listened as several Western business people complained about the difficulties of doing business in China and other parts of Asia. Some of their woes stemmed, they said, from deficiencies in financial ``transparency'' -- the lack of reliable data on which to base decisions, stemming from lax governmental rules on disclosure.
And I kept wondering: Compared to what?
Countless investors in the United States have lost trillions of dollars in a system that has all but encouraged opaque financial reporting in recent years. Only now, far too late to help the victims, are people in power doing anything to curb the offenses.
The current Exhibit A is Enron. As details emerge about the energy-trading company's plunge from grace, we're hearing once again about corporate officers who hid highly questionable if not fraudulent practices, and supposedly independent accounting firms that signed off on the misrepresentations.
But the Enron story is only the latest example, a sequel to the technology bubble of the late 1990s. Both reflect a rat's nest of dubious practices among companies and their allies, not to mention an abject failure of oversight.
In the category of opaque reporting, give the prize to ``pro forma'' earnings. Companies have ginned up these numbers to create the impression that they're doing better than what they'd report under ``generally accepted accounting practices,'' or GAAP.
Fast-growing tech companies, in particular, have argued that GAAP reporting wasn't adequate in their situation, that they needed the phony numbers to better explain what they were doing and where their finances were heading. We in the media, sorry to say, have tended to report ``pro forma'' earnings without sufficient context.
What group of insiders issued worshipful reports on those pretend earnings? Yes, it was the investment banks' highly paid ``analysts,'' whose employers were collecting huge underwriting fees from the tech firms.
My colleague Scott Herhold is scathingly critical of the accounting firms that continue to endorse ersatz balance sheets while, in blatant conflicts of interest, collecting multimillions in consulting payments apart from standard accounting fees. Herhold is absolutely correct, but let's remember another gang of guilty parties.
I'm referring here to the people who are supposed to exercise oversight over the financial system -- Congress, regulatory agencies and industry groups. It's clear enough by now that we can't trust corporate officers to regulate themselves, not when they put their gazillions in compensation at risk if they tell the truth.
Among the guilty parties is the Financial Accounting Standards Board, or FASB. Rather than require honest treatment of stock options, which are compensation and should be reflected in earnings statements, FASB has backed down under pressure from the tech industry that relied so completely on options for so long.
FASB, which has an unfortunate tendency to allow companies to hide the really bad stuff in footnotes, has flat-out ducked the pro-forma reporting scandal. The standards group explains this by saying it has no authority over what companies put in press releases or tell analysts. That's true, but if FASB made a fuss it would have an impact.
Federal regulators are even more culpable, because they're supposed to be the cops on the beat. Yet the Securities and Exchange Commission, in particular, has all but ignored its duties in recent years.
The commission wasn't too busy to chase, properly, small fry who used Internet discussion sites to pump up stocks and then dump them when suckers bought the shares. But the regulators basically winked at the Wall Street analysts who issued all those ridiculous reports. Of course, the analysts worked for firms that were part of the establishment.
Wall Street has promised to clean up its act, a vow that you should take about as seriously as a tobacco addict's insistence that he'll just have just this one last cigarette before he quits. Well, maybe one more.
Last week, the SEC threatened to do something about the way companies tell the public about supposed earnings. ``The antifraud provisions of the federal securities laws apply to a company issuing `pro forma' financial information,'' the agency warned in a statement.
Based on the record to date, the SEC's warning won't inspire any serious changes in executive suites. This watchdog, as the saying goes, tends to be a lapdog on the big issues.
The ultimate culprit, of course, is Congress. With millions of dollars rolling into campaign coffers from corporate chiefs and business groups, lawmakers aren't even pretending to care. Oh, they hold occasional hearings when egregious offenses hit the newspapers, but Congress is much more liable to cut corporate taxes than actually require companies to behave more honestly.
Maybe, in the end, the libertarians will be proved right. Maybe the market will take care of itself when investors stop deluding themselves, when they stop being so greedy.
Maybe. But when average investors start believing that the market has been rigged or tilted, they'll sensibly run for cover. That could trigger a wider meltdown.
What we need is proper oversight. In today's anything-goes business climate, who's going to provide it? |
