Accountants’ reputation in shreds

AN American banker friend sent me an email message on contemporary corporate behaviour. It read …

“Capitalism: You have two cows. You sell one and buy a bull. The herd multiples and the economy grows. You sell the cattle, invest the proceeds and retire on the income.

“Enron capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank. You then execute a debt/ equity swap so that you get four cows back with a tax exemption for five cows. The milk cash flow rights on six cows are transferred via an intermediary to a Cayman Island company, secretly owned by a senior executive, who then sells seven cows back to the listed company. The annual accounts show the company owns eight cows, with an option on six more.”

Now do you see how a company with $62 billion in assets is declaring bankruptcy?

This is no joke. Not to the 20,000 Enron workers, the majority of whom unwisely invested the bulk of their pension funds in the company’s stock. Not to the many small shareholders who were wiped out. And not to the tortured former Enron vice-chairman Cliff Baxter, who shot himself last month.

The initial fallout from the Enron collapse has showered down on auditors Arthur Anderson and the accounting profession in general. The revelations about document shredding were particularly shocking.

Enron scallywags have trousered hundreds of millions of dollars. But the full implications have not yet sunk in. If the seventh biggest company in America has cooked the books, how many other corporate chefs are there around the world? How big a hit might international banks take from unsuspected bad loans? How many fund managers have ploughed money into dodgy companies, relying on someone else’s due diligence when playing “match the index”?

The credibility of accounts is the bedrock of investor confidence. We all rely on the “true and fair” sign-off by auditors – even though they put the onus on the company for supplying the right numbers.

Once confidence is dented it is hard to restore. There must be swift moves to make accountants more accountable.

Scores of lawmakers have accepted donations from Arthur Anderson and Enron. It seems well known journalists also had their noses in the trough, accepting “consultancy” fees from the company. The role Wall Street professionals played is yet to be probed.

Predictably enough, the Enron founder Kenneth Lay holds a doctorate in economics.