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Investment view

More years ago than I care to remember – when old Labour held power – a firm of chartered accountants in this country hit a spot of bother. I cannot be precisely certain what it was they did wrong but I do recall a cartoon which showed a civil servant rushing in to the office of the Chancellor of the Exchequer, exclaiming he had good news and bad news. The good news was that the economy was doing better than expected. The bad news was the figures had been audited by…..and a prominent accountancy firm was named.

The accountancy practice concerned has been through many amalgamations since and today sits among the great and the good of this troubled profession. I seem to remember the senior partner at the time requested – and received – the original of this cartoon, which he framed and hung in his office. I cannot imagine the boss of Andersen taking a similar approach today.

The media have had a field day with the troubles at WorldCom. The BBC even sent its Today programme business presenter to New York to get reaction. It happened that the day following the WorldCom announcement there was a big dinner in the financial district (just as we had our own Mansion House dinner on the day the news broke). This gave the opportunity for senior figures in the financial community to sound off about the shortcomings of American business. It was almost as if the bastion of capitalism and creator of the most efficient wealth-creating machine the world has ever known was indulging in a spate of self-flagellation. Yes, it is worrying what has happened in the US but it would be wrong to assume all companies behave in this way.

In a way, the fact that Andersen was the auditor to Enron and WorldCom came with a sense of relief. At least another auditing practice is not involved although, in the case of WorldCom, it appears a more basic manipulation of figures was at the core of their problems, unlike the complex machinations of the finances within Enron. We have the staggering news that the sacked boss of Enron borrowed hundreds of millions of dollars from the company. Other executives were involved in incestuous financial deals and it is this blurring of the interests of directors and shareholders that will need to be dealt with once and for all if confidence in the veracity of US financial reporting is to be re-established.

The market took it all very badly. In a way, this appeared an over-reaction. WorldCom was already on the ropes and the company under investigation by regulators. The shares had fallen to a point where it was worth little more than 1 per cent of its value at the peak, so it is not as if the news that a black hole had been blown in its balance sheet will do much to add to the wealth-erosion that has been a feature of the telecommunications industry over the past two years. But we need to trust the figures we read in company reports and accounts and there will many who are concerned both at the real level of profitability in American companies and over what the board may be getting up to away from the gaze of shareholders.

The initial nervous reaction to the WorldCom news was relatively short-lived but it did confirm that the breakout on the downside of the long trading range was real and no aberration. Markets turn on bad news. Whether the revelations that emanate from Clinton, Mississippi are sufficiently calamitous to provide the catalyst for that final sell-off is far from certain. But there seems little doubt now that America will have to demonstrate that its accounting practices are robust and that investors really can trust the numbers delivered to them by the financial community. Who knows, good may well come out of this unfortunate saga.


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