There was a Doonesbury cartoon in The Guardian recently in which the character said to his daughter that she ought to read the newspapers.
She replied that she did, and had in fact just been reading the crime page, covering all the scandals and frauds. “That’s not the crime page,” said Doonesbury, “that’s the business page.” “Oh,” said his daughter. “I wondered why nobody ever went to jail.”
Executives at many US companies must be fervently hoping that they too will escape jail – though President Bush says they won’t. Nearer to home, the former chief executive of Allied Carpets was given a nine month sentence – suspended for two years – for misleading his auditors. And five former executives of DIY retailer Wickes are currently pleading not guilty to various charges brought by the Serious Fraud Office in the wake of that company’s near-collapse, which was brought on by false accounting. They will be praying that, if their barristers are unable to argue successfully the case for the defence, the barristers skills at the pre-sentencing pleas of mitigation will be up-to-scratch.
What’s bizarre to the man in the street is that most of these recent headline-grabbing cases don’t actually involve the loss of cash or any other asset. It’s not even a case of inflating the numbers by falsifying invoices. The right numbers are simply in the wrong place in the accounts.
So where is the fraud? The biggest theft takes place in the capital markets – although the figures do enrich senior executives through over-valued share options and undeserved performance bonuses.
Already some FDs are starting to squeal that auditors are now swinging the other way, and are being too strict on how the numbers are classified and reported. Well, that’s just tough. As Warren Buffett put it, “There is never just one cockroach in the kitchen” – so we’re all just going to have to choke a little while the place gets fumigated. In the mean time, it is essential that FDs take a lead in upholding the very highest standards of integrity. Growth-hungry investors will have to be fed a diet of expectations-deflating explanation and education – not fiddles and fudges.