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How much of it is bollocks?
Jan. 8th, 2009 07:35 amIf a gun were put to your head, what percentage would you say of the gross "profits" since the year 2000 will eventually turn out to be fictitious?
This is no mere angels on the head of a pin question. If we knew this number for certain, then we have some idea of how much money has been lost to the real economy that the accountants asured us we really had. Of course, it doesn't include the more significant sum that is future losses caused by a recession, but it's a useful number nevertheless. It's a lot easier to forecast the future if you know what has actually happened in the recent past.
After the Madoff $50bn scandal, we now have the Satyam $1bn scandal (well, let's call it $1bn-plus). The chairman of the Indian outsourcing company confessed he had invented fictitious cash and bank balances worth $1bn. Ramalinga Raju (winner, Ernst & Young India Entrepreneur of the Year Award) made up sales and profits to make the margins look better. I eagerly anticipate PricewaterhouseCoopers' doubtless exceedingly logical explanation of how they, as auditors weren't in any way to blame for failing to uncover this.
What it means is that auditors' signing-off only protects you against the most basic stuff. Any deliberate deception by a team of senior managers will fool any auditor and any regulator without much difficulty, for the simple reason that people in business tend to be smarter than the people policiing the business.
Corporate governance is an important area and is one not often mentioned by those recommending investment in emerging markets. At least if you invest in UK and US listed operations, you have a better chance of finding out what is going on, and it is rather harder to run massive frauds along the lines that can be achieved in the listed emergeging market companies or in the unlisted US/UK sector.
Where the problems arise is if a listed US company has a subsidiary that operates elsewhere (see, AIG Financial Products). The opacity of some financial services companies' accounts is frightening, because inconvenient stuff can be listed (but not explained) under those subsidiary numbers. Fairfax, Mapfre and Swiss Re have all had me tearing my hair out at the complexity of their subsidiary operations, and these are the more highly regarded operations. The ones in which I have less faith (names withheld because I quite like the idea of staying alive) just defy belief.
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This is no mere angels on the head of a pin question. If we knew this number for certain, then we have some idea of how much money has been lost to the real economy that the accountants asured us we really had. Of course, it doesn't include the more significant sum that is future losses caused by a recession, but it's a useful number nevertheless. It's a lot easier to forecast the future if you know what has actually happened in the recent past.
After the Madoff $50bn scandal, we now have the Satyam $1bn scandal (well, let's call it $1bn-plus). The chairman of the Indian outsourcing company confessed he had invented fictitious cash and bank balances worth $1bn. Ramalinga Raju (winner, Ernst & Young India Entrepreneur of the Year Award) made up sales and profits to make the margins look better. I eagerly anticipate PricewaterhouseCoopers' doubtless exceedingly logical explanation of how they, as auditors weren't in any way to blame for failing to uncover this.
What it means is that auditors' signing-off only protects you against the most basic stuff. Any deliberate deception by a team of senior managers will fool any auditor and any regulator without much difficulty, for the simple reason that people in business tend to be smarter than the people policiing the business.
Corporate governance is an important area and is one not often mentioned by those recommending investment in emerging markets. At least if you invest in UK and US listed operations, you have a better chance of finding out what is going on, and it is rather harder to run massive frauds along the lines that can be achieved in the listed emergeging market companies or in the unlisted US/UK sector.
Where the problems arise is if a listed US company has a subsidiary that operates elsewhere (see, AIG Financial Products). The opacity of some financial services companies' accounts is frightening, because inconvenient stuff can be listed (but not explained) under those subsidiary numbers. Fairfax, Mapfre and Swiss Re have all had me tearing my hair out at the complexity of their subsidiary operations, and these are the more highly regarded operations. The ones in which I have less faith (names withheld because I quite like the idea of staying alive) just defy belief.
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