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Editorial: The cat and the fiddle

Editorial: The cat and the fiddle

Several recent high-profile corporate accounting diddles have put pressure on equity markets the world over. Surely it is just the tip of the iceberg. I think it would be a fool who seriously thought we are not going to see many more companies suffer from investor backlash over questionable bookkeeping practices.

It is highly likely that corporate watchdogs controlling the reporting and accounting requirements of companies listed from New York to Tehran will be tightening the procedures, checks and balances by which they operate.

Since the giddy days of celebrating a new millennium much has changed in terms of the world's perception of publicly traded companies First there was the inevitable dot-com bomb, then the Enron fiasco which forced securities authorities around the world to tighten regulations. More recently we have WorldCom misrepresenting itself to the tune of $US4 billion and a trusted old name like Xerox exposed for being not all kosher.

It is now merely a matter of time before another one of the major IT hardware or software vendors is exposed for misleading its shareholders about the true state of its business' health. We have already had the Asia-Pacific branch of Enterasys exposed earlier this year for a book cooking worth $4 million which saw three staff summarily dismissed and the US Securities and Investment Commission involved.

In Australia, of course, we had the Liberty One, OneTel and HIH disasters which rocked the local stock exchange, and in HIH's case forced the implementation of a Royal Commission.

There are many ways in which a company can disguise costs or boost revenues, the two fundamental measures by which a profit and loss, or "bottom line", figure is derived. So long as senior executives are remunerated based on share price performance, the temptation will always be there to fudge these figures.

Whether it is disguising its costs as capital investment, much like the dive-bombing telco WorldCom, or whether it is overstating revenues as did the shamed Xerox, the fact is that these companies are slaves to their share price. To corporate cowboys with incentives based on stock value, any measure that will improve the share price is considered fair game, until it is outlawed or uncovered. I suspect there are many other tricks being employed by bean counters to make the bottom lines on many ledgers appear attractive.

How much attention is paid to stock options? There are many well-known market analysts and commentators who believe companies that offer all of their staff share options are also understating the true costs incurred in the conducting of their business. The real cost of the staff they employ is understated as they are on "packages" that include the attraction of buying shares at a set price at a later date.

Assuming the stock goes up in value, this is a benefit for the staff that compensates for lower wages. It is a handy way to transfer a business cost until a later date and just about all the big name companies in the IT industry do it.

The bad news is that in the end we will all suffer, irrespective of whether we directly owned shares in the offending company or not. Large institutions and super funds are the biggest investors in global equity markets, and when these exchanges falter, so too does the worth of our retirement packages.

Elaborate hoaxes where innocent investors do their money cold are devastating for all stock exchanges and should not be tolerated. Only time will tell just how many more companies are pulled up for the type of accounting discrepancies that have been brought to bear in recent times.


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