Who is accounting for whom?
Worldcom and Enron could happen in Ireland
Highly paid business executives being led handcuffed from their plush corporate headquarters - it couldn't happen here? Well think again. Despite the protestations of the wider financial community, they are driven by the same short-term profit mentality and dubious business practices that have lead to catastrophe in the US, as workers see not just profits disappear but their jobs and pension funds too.
JOANNE CORCORCAN investigates the lax financial regulations in the 26 Counties and shows how the American disease is not just alive in Ireland but is developing its own Irish hybrids.
In 1995, Nick Leeson infamously brought down Barings bank, with losses of up to $800 million. At the time, the world was shocked that such a disaster could happen right under a company's nose, and risk management measures were introduced almost everywhere.
Seven years later, and the Enron, Elan, AIB, AOL, and WorldCom scandals, to mention but a few, are again shaking faith in the finance industry.
"The accountancy profession has taken a hit and a number of steps have to be taken to restore credibility to the profession," Roger Acton of the Association of Chartered Certified Accountants stated earlier this year. The general position of stockbrokers and accountants in Ireland is that nothing on the scale of what's happening internationally could possibly happen here, but recent events show that nowhere is safe from this sort of fraud.
In June, China held one of the country's biggest ever stock manipulation hearings. It produced an avalanche of embarrassing details about the involvement of China's securities companies in fraudulent dealings. Scores of security outlets were named for providing about 1,400 false accounts to the scandal's central figure, Lu Liang, allowing him and his associates to generate false trading.
In July, it was announced that US giant WorldCom was facing a $3.85 billion accountancy scandal, which ended in the largest bankruptcy in US history.
Also last month, the US Department of Justice and the Securities and Exchange Commission began an inquiry into AOL Time Warner's accounting practices. Last week, the same two agencies began investigating complaints into Adelphia, a major cable operator in the US.
Closer to home, earlier this year, AIB faced a catastrophe when it was discovered that one of its subsidiaries, Allfirst, had amassed foreign exchange losses of $691 million, seemingly all related to trader John Rusnak.
At the beginning of this month, a leaked report from the EU Court of Auditors criticised accounting controls over the European Union's Û98 billion annual budget, saying they are insecure and unreliable.
The paper, obtained by the Financial Times, supports claims made by Marta Andreason, the Commission's former chief accountant, who was acrimoniously removed from her post in May after expressing concern at the lack of security in the process.
There is a litany of cases, some on our doorstep, and yet brokerage researchers here are reluctant to accept the possibility of a domestic financial timebomb.
Stuart Draper, head of research at Dolmen Security, says it is less likely that fraud could manifest itself here.
"The difference between Ireland and the US is that here, financial transactions are principle based, while in the US they're rule based. This means that in the US various treatments that are not outside of the rules can be used, sometimes illegally. The principle based system is more complex and less easy to manoeuvre within."
Draper also claims that the structure of the markets in Ireland mean fraud is less likely to happen here. "Our stockmarket still has old economy stocks. Ireland hasn't seen the same pressure to encourage growth as some of the large international companies have seen.
"In this country, companies are keen to point out the simplicity and transparency of their businesses. Although we probably do have some fraudulent accounting going on, I really don't think that there are widespread problems here," he added.
Recent events in Britain, however, which also uses the principles system, show that Ireland could possibly have a ticking bomb waiting for a whistle blower to set it off.
In Britain, city analysts are now facing potential draconian regulations after the Financial Services Authority said it had found evidence that they had misled investors with biased stock picks. City Watchdog said it could introduce a range of measures, including US style disclosure requirements. Sir Howard Davies of the FSA said the evidence clearly showed that analysts had systematically made recommendations more positive than market performance would justify.
This came hot on the heels of a similar incident last month in New York, where the rule system is used. Merrill Lynch, the world's biggest broker, paid $100 million to settle charges by New York's Attorney General that it issued biased stock picks to win lucrative investment banking business.
It is no secret to finance workers in this country that the practice of double accountancy exists. Aidan Clifford from the Association of Chartered Certified Accountants says: "The accountancy standards board is continually catching up in an increasingly complex business environment, but it is very difficult to draft standards. There will always be accountants who will devise systems to work their way around a new standard so that it is most beneficial for them."
Despite some finance workers' denials that grand scale fraud could ever happen here, it is has already happened to some extent with the AllFirst/AIB fiasco, and the Ansbacher accounts. In the first case, AIB should have been monitoring the American situation from Ireland, and clearly they were not. The result now is that Irish customers are paying for AIB's mistakes.
In the case of the Ansbacher accounts, it was an Irish accountancy company, Stokes, Kennedy and Crowley, that many of the account holders claim was advising them to place money in Ansbacher. In another case, that of Enron, chief executives were for years plucked from the ranks of Arthur Anderson, an independent auditing company banned in the '80s from ever again practising in Britain for a series of finance scandals.
This shows it is possible for trouble to be brewing in our finance world, without being noticed. The 26 Counties is hardly immune to financial scandals, as the tribunals, and discovery of illegal offshore accounts has shown in the last ten years. We can only assume that these scandals are just the tip of the iceberg, considering the short length of time in which they were discovered. What they have also shown us is that for a long time there was corruption in this country, and yet it was denied.
It is true that the corruption did begin in the US. This was because short term speculative trading began there first. But researchers here who say that Ireland is still trading in an old stock economy have their heads in the sand. Old stock companies such as AIB and Cement Roadstone, have shown their ability to allow extensive fraud to exist in their ranks. The huge amount of new companies are causing their own problems.
For example, just ask why the Moriarty Tribunal is having to investigate the awarding of the Esat licence, when Irish auditors KPMG oversaw the project originally. Or how Elan, an Irish-American company, managed to keep secret for years that it was counting royalties for drugs which it had sold, in its books, before it had received them, eventually creating a massive cash flow problem.
It took a recession in the US for the corruption to be revealed. The economic boom in Ireland is heading towards its end, to be met most probably by a recession. Corruption in Ireland could be considered systematic at the moment, with a clear line between economic advisors, consultants and auditors yet to be drawn.
It is clear too that the Dublin government is at the very least guilty in dragging its heels in dealing with the gaping holes in accountancy regulation in the 26 Counties.
In 2005, all listed companies within the EU will have to adopt international financial reporting standards. This will supposedly formalise the process across Europe, facilitating greater transparency between companies and allowing stakeholders a better view of a company's financial performance.
We may have already experienced our first major scandal by that stage, an event which an increasingly cynical public is bracing itself for.
Even the finance industry is aware of the potential, despite their denial. Wendy Chin of CPL Careers register says, "right now internal auditing and compliance departments are already tightening up because they know that everyone is waiting for the next Elan or Enron to happen". Operation risk managers are now being offered salaries of between Û50,000 and Û80,000, whereas before their role was not considered an absolute necessity
If the industry itself is worried, even if it claims it's not, how worried should the public be?
With four tribunals uncovering a financial maze that includes slush funds, secret unlicenced private banks, tax fraud, undisclosed offshore bank accounts and dubious political practices, not to mention a looming inquiry into the sale of the second mobile phone licence, it is clear that all is not well in the 26 County financial community. How long before we see the 'perp' walk in Ireland? Equally important, is how many Irish workers could lose their jobs and pension funds here.
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