Corporate crime and accountancy fraud
Corporate crime is booming once again in America. America has always been the natural home and global capital for corporate crime. In 2005 a long line of American ‘whiz kid’ CEOs have gone to jail with life or near life sentences. Examples include Dennis Kowzloski and Mark Swartz of Tyco, John and Timothy Ragas of Adelphia, Andrew Festow of Enron, Martin Glass of Rite Aid, Jamie Olis of Dynergy Sam Wicksal of I m Clone and of course Bernie Ebbers of World Com. By persecuting individuals and sparing companies - Enron, World Com, Arthur Anderson, Tyco and Rice Aid continue to survive and often, thrive - American judges have shown their awareness of the link between burgeoning corporate crime and impending capitalist crises.
The American justice system’s commitment to capitalism has been graphically demonstrated by its treatment of Arthur Anderson and KPMG - two of the global accounting industry’s ‘final four’. Both Andersen and KPMG have admitted to serious fraud and both have been spared by the American Supreme Court and the American Justice Department. Arthur Andersen settled out of court with World Com investors in April this year, and in May the American Supreme Court overturned its 2002 conviction. The judgement amounted to exonerating Arthur Andersen.
The American Department of Justice has been extremely reluctant to bring legal action against KPMG European Union regulators have warned it that bringing KPMG to the courts would destabilise the global accountancy industry. KPMG’s corruption is well known.
An American Senate committee report issued in May this year exposed the fraudulent and highly lucrative tax avoidance business run by KPMG for years, and in July KPMG admitted "full responsibility for unlawful conduct" with respect to what the Senate described as "abusive tax practices". Abusive tax practices are of course not confined to KPMG. Deloitle Touche has moved swiftly to avoid action with regard to misconduct of its associated firms in a case filed by investors. The Senate Report hinted at similar business deals involving Price Waterhouse Coopers and Ernst and Young. The American Justice Department, however, is bending all the rules unscrupulously to avoid the collapse of another ‘final four’ accountancy firm and to prevent it from following in Arthur Andersen’s footsteps. A decision not to punish KPMG severely will be interpreted as a license for continuing frauds. Other accountancy firms through out the world will feel that it is lucrative and beneficial to take the sort of risks that KPMG took when it advised clients on how to undertake tax frauds.
The ‘easy’ alternative of punishing CEOs while exonerating corporations is also becoming unpalatable. CEOs have expressed reservations about the ‘chilling effects’ of enhanced conceptions of individual legal responsibility for corporate transactions. As long as corporate America’s godfather Dick Cheney continues to call the shots at the White House, it will be impossible to dismantle the protective barriers, which shield most American corrupt CEOs. Accounting fraud will continue to flourish in America.
Accounting fraud is increasingly common throughout America. Major accounting frauds have been discovered at General Electric and the AIG in 2005. The Standard and Poor downgrade of GM and Ford shares was also partly fuelled by accounts related suspicions: with the explosive growth of ‘fair value’ accounting - and its official endorsement by American regulators in 2005, the scope for accounting fraud has expanded enormously. A 2005 study by Glass Lewis found that investors lost almost $1 trillion during 1999-2004 due to accountancy related frauds.
Fair Value accounting allows firms, in connivance with their auditors, to declare what profits suit them - fair value is thus unfair value in this precise sense. Fair Value accounting allows accountants to assign imagined estimated value to items such as bank loans and buildings. A 2004 study by Bergstesser and Rauh has shown that such estimates are usually widely off the mark and very easy to manipulate. They found robust evidence of deliberate tampering of statistics to influence M and A, new issue and stock option deals. Further evidence of fraud is presented by Lev, Li and Sougiamis’ 2005 study which shows that fair value accounts estimates are worthless as indicators of a company’s future performance, because they are in the main fraudulently estimated. Federal Reserve based records show that bond and loan fair value estimates are so volatile that they are practically worthless.
Mathematical model based calculations of ‘fair values’ of financial assets are nothing but fraud. This is because market values of all assets are speculatively determined in capitalist order, without reference to any objectively determined foundation, and as chaos theory shows there are no rational grounds underlying speculation. ‘Rational’ expectations are a myth. A 2005 much awaited Ernst and Young report admits this when it recognises that" estimated ‘fair value’ for intangible assets, unquoted securities, derivatives, pension costs and share based payments appear in company accounts at a hypothetical market price based on management’s assumption about the future and using a valuation model. We consider that it is inappropriate to refer to such estimated value as fair value. Fair Value accounting has deliberately been made increasingly incomprehensible to conceal fraud.
What are American regulators doing to deal with all this? Paradoxically, they are watering down the implementation of the Sarberne-Oxley Act (SOX) to facilitate accountancy fraud. SOX was a panic reaction to the enormous accountancy frauds of 2002. Today the imperialist press - the Financial Times, the Economist, the Wall Street Journal - is full of demands to roll back SOX. It requires management boards to waste a "huge proportion of time on reporting procedures". SOX is accused of "addressing symptoms not causes" and "costs significantly exceed benefits". In May 2005, the American Public Company Accounting Board (PCAOB) -a body established under SOX- chided management for being "overly cautious and mechanical" in interpreting SOX. The American Securities and Exchange Commission has also called for greater management discretion. Section 204 of SOX, requiring management to maintain "an adequate internal control structure and procedures for financial reporting", has come in for heavy criticism. This is said to cost America about $1.4 trillion and according to Deloitle, 700,000 additional man-hours. It is also said to be leading to a further concentration of the accountancy industry. The ‘final four’ - Deloitle, Ernst and Young, KPMG and PWC-are said to hog 98 per cent of the SOX related business. SOX, it is said, discourages risk taking. There is little evidence to show that SOX has reduced fraud..
It is predicted that William Donaldson’s replacement by Christopher Cox as American Security and Exchange Commission Chairman in June 2005 will lead to a "lighter application of SOX", according to the Financial Times.
The American business press is urging on Mr. Cox "to screw SOX" and scrap Article 204. No doubt he will do so, but you eat an apple bite by bite, not all in one go.
That accountancy fraud thrives in America is hardly surprising. Corruption is the American way of life. A 2001 Dept of Justice study found that 43 per cent of all income in America is in some form connected to the booming national crimes industry. Moreover, corruption has deep historical and cultural roots. Fifteen million Red Indians were methodically slaughtered and an entire continent looted and plundered over two and a half centuries through political and financial fraud and corruption. Today, the American government is inextricably involved in similar action in Iraq, Afghanistan and much of Latin America. America is the natural home of fraud and its global capital.
But America is also the sole surviving capitalist hegemony and capitalism is a system, not a Habermasian life world. Objectively (from an Islamic perspective) finance is fraud, capitalist property is theft, but a capitalist order structures finance and capitalist property so that they flourish as normal social practices. Historically, this has required a reconciliation of the practices legitimised by welfare (consumption) maximisation with those required by the need for profit (surplus) maximisation. Capitalist fraud is action, which (a) either prevents a corporation from maximising profit or (b) enables it to maximise profit in a manner considered illegal because it inhibits welfare (consumption) maximisation by the political representatives of free citizens. Neo-liberal capitalism shies away from recognising that the capitalist state must be empowered to prevent both types of capitalist fraud. It subscribes to the mistaken (but time-honoured) belief that markets can be self regulating - i.e. that shareholders can discipline (in a Foucaultian sense) managers and that profit maximising behaviour of individuated (corporate) persons will automatically unintentionally lead to the maximisation of social consumption (welfare).
Global capitalism has shown both assumptions to be untenable. Managers cannot be disciplined by shareholders in ways that do not inhibit accumulation. Efficient markets do not maximise social consumption. Moreover, dominant political forces, especially in America, are systematically obstructing the search for viable institutional restructuring to address the agency problem and the growing problem of governing the market. Social democracy is dead in America and America is killing it in Europe, Japan, China and India. Those working for the overthrow of capitalist order may therefore live in hope.
from here
The American justice system’s commitment to capitalism has been graphically demonstrated by its treatment of Arthur Anderson and KPMG - two of the global accounting industry’s ‘final four’. Both Andersen and KPMG have admitted to serious fraud and both have been spared by the American Supreme Court and the American Justice Department. Arthur Andersen settled out of court with World Com investors in April this year, and in May the American Supreme Court overturned its 2002 conviction. The judgement amounted to exonerating Arthur Andersen.
The American Department of Justice has been extremely reluctant to bring legal action against KPMG European Union regulators have warned it that bringing KPMG to the courts would destabilise the global accountancy industry. KPMG’s corruption is well known.
An American Senate committee report issued in May this year exposed the fraudulent and highly lucrative tax avoidance business run by KPMG for years, and in July KPMG admitted "full responsibility for unlawful conduct" with respect to what the Senate described as "abusive tax practices". Abusive tax practices are of course not confined to KPMG. Deloitle Touche has moved swiftly to avoid action with regard to misconduct of its associated firms in a case filed by investors. The Senate Report hinted at similar business deals involving Price Waterhouse Coopers and Ernst and Young. The American Justice Department, however, is bending all the rules unscrupulously to avoid the collapse of another ‘final four’ accountancy firm and to prevent it from following in Arthur Andersen’s footsteps. A decision not to punish KPMG severely will be interpreted as a license for continuing frauds. Other accountancy firms through out the world will feel that it is lucrative and beneficial to take the sort of risks that KPMG took when it advised clients on how to undertake tax frauds.
The ‘easy’ alternative of punishing CEOs while exonerating corporations is also becoming unpalatable. CEOs have expressed reservations about the ‘chilling effects’ of enhanced conceptions of individual legal responsibility for corporate transactions. As long as corporate America’s godfather Dick Cheney continues to call the shots at the White House, it will be impossible to dismantle the protective barriers, which shield most American corrupt CEOs. Accounting fraud will continue to flourish in America.
Accounting fraud is increasingly common throughout America. Major accounting frauds have been discovered at General Electric and the AIG in 2005. The Standard and Poor downgrade of GM and Ford shares was also partly fuelled by accounts related suspicions: with the explosive growth of ‘fair value’ accounting - and its official endorsement by American regulators in 2005, the scope for accounting fraud has expanded enormously. A 2005 study by Glass Lewis found that investors lost almost $1 trillion during 1999-2004 due to accountancy related frauds.
Fair Value accounting allows firms, in connivance with their auditors, to declare what profits suit them - fair value is thus unfair value in this precise sense. Fair Value accounting allows accountants to assign imagined estimated value to items such as bank loans and buildings. A 2004 study by Bergstesser and Rauh has shown that such estimates are usually widely off the mark and very easy to manipulate. They found robust evidence of deliberate tampering of statistics to influence M and A, new issue and stock option deals. Further evidence of fraud is presented by Lev, Li and Sougiamis’ 2005 study which shows that fair value accounts estimates are worthless as indicators of a company’s future performance, because they are in the main fraudulently estimated. Federal Reserve based records show that bond and loan fair value estimates are so volatile that they are practically worthless.
Mathematical model based calculations of ‘fair values’ of financial assets are nothing but fraud. This is because market values of all assets are speculatively determined in capitalist order, without reference to any objectively determined foundation, and as chaos theory shows there are no rational grounds underlying speculation. ‘Rational’ expectations are a myth. A 2005 much awaited Ernst and Young report admits this when it recognises that" estimated ‘fair value’ for intangible assets, unquoted securities, derivatives, pension costs and share based payments appear in company accounts at a hypothetical market price based on management’s assumption about the future and using a valuation model. We consider that it is inappropriate to refer to such estimated value as fair value. Fair Value accounting has deliberately been made increasingly incomprehensible to conceal fraud.
What are American regulators doing to deal with all this? Paradoxically, they are watering down the implementation of the Sarberne-Oxley Act (SOX) to facilitate accountancy fraud. SOX was a panic reaction to the enormous accountancy frauds of 2002. Today the imperialist press - the Financial Times, the Economist, the Wall Street Journal - is full of demands to roll back SOX. It requires management boards to waste a "huge proportion of time on reporting procedures". SOX is accused of "addressing symptoms not causes" and "costs significantly exceed benefits". In May 2005, the American Public Company Accounting Board (PCAOB) -a body established under SOX- chided management for being "overly cautious and mechanical" in interpreting SOX. The American Securities and Exchange Commission has also called for greater management discretion. Section 204 of SOX, requiring management to maintain "an adequate internal control structure and procedures for financial reporting", has come in for heavy criticism. This is said to cost America about $1.4 trillion and according to Deloitle, 700,000 additional man-hours. It is also said to be leading to a further concentration of the accountancy industry. The ‘final four’ - Deloitle, Ernst and Young, KPMG and PWC-are said to hog 98 per cent of the SOX related business. SOX, it is said, discourages risk taking. There is little evidence to show that SOX has reduced fraud..
It is predicted that William Donaldson’s replacement by Christopher Cox as American Security and Exchange Commission Chairman in June 2005 will lead to a "lighter application of SOX", according to the Financial Times.
The American business press is urging on Mr. Cox "to screw SOX" and scrap Article 204. No doubt he will do so, but you eat an apple bite by bite, not all in one go.
That accountancy fraud thrives in America is hardly surprising. Corruption is the American way of life. A 2001 Dept of Justice study found that 43 per cent of all income in America is in some form connected to the booming national crimes industry. Moreover, corruption has deep historical and cultural roots. Fifteen million Red Indians were methodically slaughtered and an entire continent looted and plundered over two and a half centuries through political and financial fraud and corruption. Today, the American government is inextricably involved in similar action in Iraq, Afghanistan and much of Latin America. America is the natural home of fraud and its global capital.
But America is also the sole surviving capitalist hegemony and capitalism is a system, not a Habermasian life world. Objectively (from an Islamic perspective) finance is fraud, capitalist property is theft, but a capitalist order structures finance and capitalist property so that they flourish as normal social practices. Historically, this has required a reconciliation of the practices legitimised by welfare (consumption) maximisation with those required by the need for profit (surplus) maximisation. Capitalist fraud is action, which (a) either prevents a corporation from maximising profit or (b) enables it to maximise profit in a manner considered illegal because it inhibits welfare (consumption) maximisation by the political representatives of free citizens. Neo-liberal capitalism shies away from recognising that the capitalist state must be empowered to prevent both types of capitalist fraud. It subscribes to the mistaken (but time-honoured) belief that markets can be self regulating - i.e. that shareholders can discipline (in a Foucaultian sense) managers and that profit maximising behaviour of individuated (corporate) persons will automatically unintentionally lead to the maximisation of social consumption (welfare).
Global capitalism has shown both assumptions to be untenable. Managers cannot be disciplined by shareholders in ways that do not inhibit accumulation. Efficient markets do not maximise social consumption. Moreover, dominant political forces, especially in America, are systematically obstructing the search for viable institutional restructuring to address the agency problem and the growing problem of governing the market. Social democracy is dead in America and America is killing it in Europe, Japan, China and India. Those working for the overthrow of capitalist order may therefore live in hope.
from here
posted by Alghazalians at 10:05 PM
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