The damage runs deep
With the national media struggling to get to grips with yet another accounting scandal, many TV and radio outlets have been doing what they always do at times like these: turn to specialist magazines for help.
And so a handful of Accountancy Age staff have been recruited in recent weeks to explain what has been going on at every scandal-hit corporate from Enron to Andersen, Xerox to Equitable Life.
But there has been one question that stumped us and everyone else, it seems: how could WorldCom, to adopt its own understated turn of phrase, use ‘inappropriate transfers of line costs’ to capitalise almost $4bn of expenses? And how could the company’s then auditor, Andersen, have missed it?
It is almost impossible to conceive of a scenario in which the motive might have been honourable. Only an SEC inquiry – and a possible US Justice Department probe – is likely to reveal what really lay behind the decision.
Within 48 hours of the WorldCom revelations we learned of developments at Xerox. On the face of it, this appeared to be more of an old-fashioned accounting scandal: early recognition of revenue. And what’s a couple of billion between financial friends?
Of course post-Enron, more accounting irregularities were bound to creep out of the woodwork. Auditors (external and internal) as well as companies themselves have been on a heightened state of alert – not to mention politicians, regulators and journalists.
But to have three such high-profile cases so soon after one another (as one BBC correspondent put it: ‘We seem to be up to a scandal a day’) is catastrophic – for investors, and for the people who work for the companies and auditors affected.
And it renders hollow the argument that Enron was a one-off.
After this unholy triumvirate, reputations really are on the line. The reputation of the accountancy profession has already been dragged through the mud. But now there is a real sense that the wider public is now losing faith in the financial community at large.
It’s no wonder that trust in investment bankers, analysts and all the other groups that make up the City is on the wane when corporate fraud and mismanagement is taking place against a backdrop of depressed stock markets and a full-blown pensions crisis.
Enron is very different to WorldCom which in turn is not the same as Xerox. But for the three scandals to come so quickly after one another it demonstrates that there are a number of ways of masking the true financial position of a company. Repairing the damage of the last few months will take years.