In order to keep on raising capital from credulous investors (and,
unfortunately, credulous pensions funds) one of the scams of the young
dotcom companies up to about a year ago was to advertise heavily on one
another's web sites and book the 'revenues' in their accounts. If the
dotcoms were skilful enough in balancing their reciprocal adverts, no money
needed to change hands; but investors, comforted by these fictitious
performance figures -- as reported by dutiful auditors -- would pour more
money into share offerings.
In the case of most of the dotcoms, the chickens have already come home to
roost but, apparently, many more hollow swops are yet to be exposed in the
case of telecoms companies. The collapse of Global Crossing two weeks ago,
one of the largest, has revealed huge irregularites in its accounts. The
scam now appears to be widespread. In order to fill in the gaps in their
own cables and thus to show the world that they had 'backbone networks'
with global capability, the firms would lease large chunks from one
another. In their accounts -- once again dutifully reported by their
auditors -- huge revenues would seem to be pouring in. And, once again, not
a great deal of troublesome coinage needed to be transferred.
The scam was even more sophisticated in the case of the telecoms companies
because they would not only book the current year's 'revenues' from leasing
some of their own capacity, but also tot up 10 or 20 years' of such and
plonk those into their balance sheets. I've used the past tense to describe
this because the practice has probably already been brought to a screaming
halt, but the full extent of these scams has yet to be revealed. We can
expect that several more large telecoms companies will collapse in the near
future.
Like Enron (which did the same sort of thing between its own subsidiaries),
all the above are frauds, but whether all the perpetrators will ever be
brought to justice is a moot point. The sheer scope of the practices and
the costs of collecting the necessary information in order to prosecute
successfully means that it's likely that only a small proportion of the
crooks will go behind bars.
But, apparently, there's a similar sort of accounting practice that still
remains on the right side of the law, and this involves what are called
'infeasible rights of use' (IRUs) which means that future revenues are
booked up front as asset sales in current accounts rather than spread over
the life of a contract. The overall effect of this is to enhance real,
underlying growth. If investors or financial analysts don't read the
accounts extremely carefully then they are likely to be duped as to the
real condition of a business.
Although the number of crooked companies is likely to be only a small
proportion of the whole, the reverberations that are likely to spread in
the next year or two with further bankruptcies will, in my opinion, bring
equity shares even lower. The last 18 months' slide in the stock market has
already caused hundreds of thousands of investors in insurance companies
and pensions funds in England to lose quite a large fraction of their
expected pensions (up to 25% in some cases), and I guess this has happened
in other countries, too. So the tale of woe is likely to continue for some
time yet.
Some of the great scandals of the 19th century concerned sub-standard
goods, particularly food. These largely disappeared in the 20th century
because most firms value their reputation, and the widespread adoption of
franchising has also helped to establish common standards. However, the
more recent scandals of sub-standard 'financial goods' of the 20th century
must now be stamped out during the 21st.
This supports my view -- and what I think is an unstoppable trend -- that
all information that concerns individuals and businesses which transact
with the public must be placed automatically in the public domain. The
lateral transmission of information and the consequent exposure of bad
practice is a far more effective deterrent than government legislation and
regulation -- although necessary for moral and exemplary reasons.
Unfortunately government action is nearly always after the event and able
to be evaded by even cleverer crooks.
Keith Hudson
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�Writers used to write because they had something to say; now they write in
order to discover if they have something to say.� John D. Barrow
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Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED]
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