Putting “Corporate Scandals” in Perspective
26 December 2006 at 11:58 am Peter G. Klein 2 comments
| Peter Klein |
Enron, WorldCom, Arthur Andersen, Parmalat. . . . The list goes on and on. Maybe you didn’t hear about this one though:
The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year. On top of that, the entity’s total liabilities and unfunded commitments rose to about $50 trillion, up from $20 trillion in just six years.
If this announcement related to a private company, the news would have been on the front page of major newspapers. Unfortunately, such was not the case — even though the entity is the U.S. government.
This is from a letter by the US Comptroller General appearing in the 24 December Washington Post (via Don Boudreaux). See also James Sheehan’s prescient 2002 article, “Real Accounting Fraud,” about the post-Enron frenzy in Washington, DC. “It is particularly frightening that a group of people skilled mainly at feeble speechifying and crass fund-raising would consider itself qualified to stand in judgment of corporate accounting scandals. All members of Congress are direct participants in the biggest accounting fraud going — the federal government — and have never lifted a finger to bring it under control.”
Entry filed under: - Klein -, Classical Liberalism, Institutions. Tags: .
1.
Gary Peters | 2 January 2007 at 1:20 pm
Finally, an entry for us accounting nerds to leave comments. What is interesting about the mentioned letter is that these warnings come from the US Government about the actions of the US Government. The US Comptroller provides a great summary video of the fiscal issues at http://www.gao.gov/newcomers.vid.html
Depending on the context of the discussion, I suppose one could argue that a distinction needs to be made between actions that reflect “excessively poor stewardship” versus “fraud”. If a CEO spends all the company’s money on personal perks or poor investments but tells the shareholders that he/she is doing so, then it is not clear that we have a case of “Fraud.” The question then is: “why do the shareholders not vote the CEO out of office?” However, then we would be digressing to Peter’s stance on voting.
2.
Peter Klein | 2 January 2007 at 10:14 pm
Gary, nerds from all disciplines — even accounting — are welcome here. (Definition of econometrician: someone who’s good with numbers but doesn’t have enough personality to be an accountant.)
Your point is a good one, though one would have to admit, even without my extreme views on voting, that the feedback mechanism here is rather weak.