Wednesday, August 18, 2004

Say It Loud, Say It Proud -- `Shareholder Value!

According to Orit Gadiesh, chairman of management consultants Bain & Company, in a WSJ article of August 3rd, 2004, fraud cases not only dominate the headlines; their fallout makes senior managers more circumspect and risk-averse.

Gadiesh argues that because of scandals like WorldCom's, many CEOs shy away from bold pronouncements or actions. Instead, they're preoccupied with mounting concerns, some seemingly outside of running the business, that add up to huge distractions for CEOs:

  1. The first is defending themselves against the charge that all senior executives are crooks; crooks, moreover, who justified their crimes by citing shareholder value as their gospel. Many CEOs understand they can't win this debate. So they remain silent. They deal, instead, with the hassles of Sarbanes-Oxley, Congress's attempt to legislate trust, and the Higgs rules in the U.K.
  2. The second, related, CEO distraction is corporate image. CEOs are spending more and more time on the reputational front, promoting good deeds in social responsibility in an effort to be seen as "giving back."
  3. The third CEO preoccupation encompasses geopolitical risks, terrorism and the state of the global economy. For instance, U.S. companies increasingly worry about the "American-ness" of their brands overseas

However according to Gadiesh, CEOs have to reclaim their agenda. They must have the confidence to set long-term goals and the will to communicate those goals clearly. So it's long-term shareholder value creation that matters and CEOs need to earn the public's trust the old-fashioned way -- through performance. Because ultimately, the trust that companies build through continuous, solid performance outshines every other consideration.

Tuesday, August 17, 2004

***** Websites on Corporate Fraud

I found this ***** comprehensive website on financial scandals, maintained by Roy Davies. The site has massive fraud contents including:
Classic Financial and Corporate Scandals
BCCI, Barings, Daiwa, Enron, Sumitomo, Credit Lyonnais, Bre-X, Lloyds, NASDAQ, Savings and Loan, WorldCom, Parmalat etc.
Scandals involving Central Banks
Criminal or scandalous activity involving the pillars of the international financial system.
Political Corruption
Corruption in governments and official organisations in Great Britain, Europe, the United States, Japan and other countries.
Organized Crime:
The Cosa Nostra or Mafia, the Yakuza and other major criminal organisations and their role in financial scandals.
Money Laundering
How it is done and what is being done about it.
Bankers Behaving Badly
Cases of sexual harassment, racism, embarrassing e-mails, and outrageous extravagance.
Official Regulatory and Anti-Fraud Organisations
Links to the web sites of official organisations combating fraud.
Other Organisations Fighting Financial Crime
Professional Bodies, Investigative Services and Forensic Accounting.
Plus many links to other sources of information on Financial Schandals.

What are your favorite Websites on Fraud?

Enron Capitalism

Feudalism: You have two cows. Your lord takes some of the milk.

Fascism: You have two cows. The government takes both, hires you to take care of them and sells you the milk.

Communism: You have two cows. You must take care of them, but the government takes all the

Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Enron Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt-equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred through an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The Enron annual report says the company owns eight cows, with an option on one more.

Free Anti-Fraud guide by E&Y UK

Fear of F. should force every company director to take responsibility for their company's defenses and ensure that they have strong controls in place. This is the view of a report published by Ernst & Young in the UK.

A Guide titles "F.: Real solutions to a real risk" spells out the most common types of F. and gives guidance on various ways in which their impact can be minimized. The guide spells out the most common types of F. likely to hit businesses, from straight forward asset misappropriation, to false accounting and corruption. It also seeks to dispel the myths surrounding ‘computer F. – in the eyes of Ernst & Young’s fraud investigators, computers are only an additional tool in a fraudster’s scheme.

In common with any crime prevention strategy, the key to minimising the risk of F. lies in understanding why it occurs, identifying vulnerable business areas and implementing procedures to protect these areas.

Matters to be considered and incorporated within a F. contingency plan include:

  • Agreeing the F. contingency plan
  • Who leads the investigation
  • Setting objectives and powers of the investigation team
  • Conducting the investigation – identifying the suspects, obtaining and preserving evidence
  • Working with the police
  • Reporting and publicity

For a free copy of "F.: Real solutions to a real risk" you can call Rukshan Permal of E&Y UK on +44 [0]20 7951 9781.

Thursday, August 12, 2004

An explanation of dirty accounting tricks by public companies

Welcome to the looking-glass world of accounting, where losses are magically transformed into gains and inconvenient financial facts that can’t be explained away are simply ignored. As many board members, especially those on audit and compensation committees, have lately learned to their disgrace, management can overstate revenue or understate expenses, pass off one-time windfalls as recurring gains, or, conversely, disguise recurring losses as singular events. Sometimes even those methods aren’t sufficient to produce the desired results: profits, or at least the appearance of profits. Do unscrupulous managers then simply give up and admit the sad financial truth? Not likely. More often, something other than profitability—something usually called EBITDA or pro forma earnings—becomes the designated measure of a company’s well-being. Even cash flow, which conventional wisdom says can’t be faked, turns out to be vulnerable to distortion and gimmickry.
Read on in this excellent explanation of how numbers are made up and how investors are being misled