The Hindu Business Line : Earnings game

The big bath, creative acquisition accounting, miscellaneous ‘cookie jar reserves’, abuse of materiality, and manipulating revenue recognition. These were ‘the five different accounting practices for manipulating the results that epitomised the trickery of the earnings game,’ which Arthur Levitt spelt out in a speech in September 1998.

As chairman of the SEC , Levitt had been ‘battling since the mid-1990s to strengthen the independence of the auditing profession that he believed was in the thrall of its clients,’ recounts David Uren in The Transparent Corporation: Managing Demands for Disclosure ( www.vivagroupindia.com ).

“Spurred by a report that nine executives in a regional Price Waterhouse office had illegally made personal investments in 80 companies they audited, he demanded a company-wide investigation which turned up 8,000 such violations.”

If you were to look for signs of earnings management on a systematic basis, two trigger points would stand out, Uren explains. “At around break-even point, companies would try hard to stay out of the red and in the black. Also, companies would much prefer to show positive growth in their profits, rather than a fall.”

Imperative read.

Money management

Multinational corporations may either choose to administer their global finances internally through national, regional, or global treasuries, or externally using international or local banks, writes John S. Hill in International Business: Managing Globalization ( www.sagepublications.com ).

He cites, as examples of the first type, Siemens Financial Services (which acts as its own internal bank, coordinating 70 billion commercial payments throughout its 190-country network), and Cargill (an international agricultural, food and industrial firm, which processes transactions through treasuries in the US, England, and Singapore).

The second type, that is, external administration, is preferred by companies in their earlier stages of internationalisation, says Hill. For instance, “UK retailer Tesco operates in nine countries and uses Citibank’s regional facilities in central Europe and HSBC’s in Asia.”

An alternative is the use of national, rather than international, banks, as in the case of Fiat, which liaises with prominent national banks, and oil giant Conoco, which uses local banks for cash collections. “Brazil’s financial market restrictions during the late 1990s (foreign exchange controls and prohibitions against intra-company netting and offshore accounts) caused many firms to totally localise their Latin American financial strategies.”

Comprehensive study.

Human security

The fight against the scourges of poverty, inequality, and the threat of environmental collapse will define the twenty-first century, as the fight against slavery or for universal suffrage defined earlier eras, observes Duncan Green in From Poverty to Power: How Active Citizens and Effective States can Change the World ( www.academicfoundation.com ).

He cautions that a world of ever-deepening gulfs between ‘haves’ (of wealth, technology, water, soil, carbon) and ‘have-nots,’ a dualistic world of insiders and outsiders, can only cause the needless suffering of continents, nations, and excluded groups within otherwise wealthy countries.

The old ways (low-intensity democracy, trickle-down economics, dirty growth, inept global governance) have been found wanting, notes Green. He calls for the reclaiming of ‘security’ to mean ‘human security’ – a combination of empowerment and protection that targets vulnerabilities particularly afflicting poor communities and individuals.

“’Security’ must no longer mean armed, gated communities and endless war.”

In a chapter on ‘the international trading system,’ the author rues that the positive contribution of businesses to development through wealth creation, innovation, and technological transfers is often undermined by a deeply unjust structure of global governance that accords them vast privileges and powers but few responsibilities.

“Corporations must be subject to effective regulation by states as part of a renewed social contract geared to generating sustainable growth with redistribution,” Green demands.

Recommended addition to the ‘global’ readers’ shelf.

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