When Holy Ledgers Lie



No more easy money for corporate criminals. Just a hard time–President
George W Bush vowed as he proposed a Corporate Reform Bill in a White House East
Room ceremony. This bill was empowered to increase penalties for accounting
fraud and provide new ground for prosecuting corporate corruption. Corporate
misconduct had brought in its wake, weak stock markets, and approaching
Congressional elections. With corporate integrity at an all time low, this law
was necessary to get the moguls of corporate America to pull up their socks!

The recent onslaught of corporate scandals has rocked the financial markets
and shaken investor confidence. The scandals have included Enron, WorldCom,
Tyco, ImClone, Adelphia, and Kmart. Firms like WorldCom compounded the problem
by attempting to hide their warts through accounting fraud –a tactic which
recently acquired notoriety thanks to that other failed giant, Enron. And the
example of Xerox only paved the path for media giant AOL Time Warner, which
resorted to unconventional advertising deals to inflate its income.

Counterfeit Coterie
Enron–juggled accounts to appear profitable
WorldCom–profit and loss statements converted to capital expenditure
Xerox–bribed officials to get work done
AOL Time Warner–sold ads on behalf of online auction giant eBay Inc
Tata Finance- A F Ferguson–withdrew financial report prepared by Y M Kale

The defaulters
Enron was the first of the recent business scandals that have devastated
investor faith, contributed to a multi-trillion-dollar market downturn, and made
corporate reform a political imperative. Records show that the numbers were
shams and the portrait was a fake. Enron’s profits were a mirage. The company
was making little profit, if any.

The next in line, WorldCom revealed that it had swept $3.8 billion in
ordinary expenses off its profit-and-loss statement by counting them as capital
expenditures, which are deducted from revenue over a longer period, not
immediately. The company had previously reported profits of $1.5 billion for
2001 and $130 million for this year’s first quarter. The restatement of
earnings submitted by the company is expected to be the largest in business
history, and it appeared likely to wipe out all of WorldCom’s profits from the
beginning of 2001.

The latest in the list
The latest entrant to this elite club is media mammoth AOL Time Warner. The
Securities and Exchange Commission (SEC) has been probing the transactions of
AOL Time Warner after a Washington Post report claimed that the America Online
unit boosted online advertising revenue through ‘unconventional deals’ from
the year 2000 to 2002.

With its takeover of Time Warner imminent, AOL sought to maintain its
breakneck growth in advertising and commerce revenue. AOL converted legal
disputes into ad deals. It negotiated a shift in revenue from one division to
another, bolstering its online business. It sold ads on behalf of online auction
giant eBay Inc, booking the sale of eBay’s ads as AOL’s own revenue. AOL
counted stock rights as ad and commerce revenue in a deal with a Las Vegas firm
called PurchasePro.com Inc. Without the unconventional deals, AOL would have
fallen short of analysts’ estimates of the company’s growth in ad revenue in
three-quarters in 2000 and 2001.

Homegrown untruth
On our shores the recent Tata Finance- A F Ferguson case stinks. The
withdrawal of the report on Tata Fin’s (TFL) accounts by A F Ferguson was a
case of professional misconduct. The report compiled by Y M Kale apparently had
critical observations about the functioning of TFL and comments about poor
corporate governance practices in the company. The report also unearthed
questionable inter-group transactions by several Tata group companies. The
Americans have now passed a law, and the nation seems to be making the
much-needed repairs. This is a reminder to our corporate executives to abstain
from defrauding investors and employees for personal gain.

Dhanya Krishnakumar In New Delhi

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