Enron and Singapore
Singaporean banks now have to change auditors every five years to prevent a repeat of Enron's debt-hiding tricks. How to recognise good bad and ugly accounting. By Larry Haverkamp
Mar 14, 2002

Q: Can I make money from understanding the on-going accounting controversy?

A: Yes, you can.

Singapore follows the International Accounting Standards (IAS), as do most European countries. In some ways, IAS is more conservative than US accounting standards.

For example, Enron's debt-hiding tricks would not have been permitted under the IAS or Singapore's Statement of Accounting Standards.

But Singapore has also had its share of bankruptcy surprises. The largest here was Asia Pulp & Paper (AP&P) which had $24.6 billion in debts.

Though less than Enron's $75 billion debt, it's an example of how even Singapore's accounting standards could not provide an early warning of AP&P's collapse.

Three problems:

One: All publicly-listed companies must pay an accounting firm to audit their books each year.

Who pays the auditing fees? These are paid by the company whose accounts are being audited. Of course, this presents a conflict of interest.

In 2001, Andersen Accounting received $45 million in auditing fees from Enron. Issuing an unfavourable auditing opinion of Enron's accounts would have been like biting the hand that fed it.

This conflict holds for auditing firms throughout the world. At the moment, it looks like a problem with no solution.

(One US congressman has proposed letting the government do the auditing, but no-one is taking this proposal seriously.)

Two: Asian companies use different, not fewer, accounting tricks.

For example, the equivalent of Enron's debt-hiding partnerships is the practice of Asian companies hiding debts through bank guarantees for their affiliate
companies.

A recent example: Mr Li Ka-shing's Hutchison company used one of its small subsidiary companies to borrow $25 billion for Hutchison's use. Hutchison guaranteed the loans.

Then, Hutchison claimed to be a low-debt and low-risk company. The truth was, it had a $25 billion obligation which was shown only as a contingent liability footnote on its financial statements.

It is not possible to find out the terms and conditions of this $25-billion loan guarantee. The best you can do is to trust Mr Li and wish him a long and honourable life at the helm of Hutchison.

Three: Contrary to popular perception, it is not an auditor's duty to look for fraud, conflicts of interest, criminal wrong-doing, or mismanagement. Their duties are limited to checking for compliance with accounting rules.

For example, if a company boss wants to put his girlfriend on the payroll at $30,000 a month, the auditor's job is to make sure that her salary is properly
recorded as debit to salary expense and credit to cash.

That's all.

It is not the auditor's job to determine if her high salary is justified.

Three solutions:

One: If the auditors aren't looking out for fraud and mismanagement, then who is? That is the job of the board of directors. But many are rubber-stamp boards which are not independent of management.

They do not ask the hard questions or insist on internal audits that seek out mismanagement and fraud.

This is where good corporate governance comes in. It provides a system of checks and balances, so that outside directors are always looking over the shoulders of management.

Ultimately, Singapore's push for a corporate governance code will diminish the risk of financial disasters like AP&P.

Two: Increase the penalty for auditing mistakes. In the US, the penalty for shoddy auditing is shareholder lawsuits. These can cost auditors a fortune if found guilty.

Last week, Andersen Accounting offered $1.4 billion to shareholders and employees of Enron if they would agree not to bring lawsuits for Andersen's shoddy auditing.

Could large damage awards encourage more careful company audits in Singapore? It is worth considering.

Three: A tip-off as to whether a company has something to hide is its use of aggressive versus conservative accounting. It is difficult for you to determine if a company uses aggressive accounting, but auditors can.

Why not require auditors to add one sentence to their annual auditing opinion, simply to say whether the auditing firm considered the firm's accounting
practices to be aggressive or conservative?

It would provide vital information to investors and lenders which they don't have now.

(Known as "Dr Money" Larry Haverkamp, PhD in Economics, has taught business courses for 25 years in the US and Singapore at polytechnic and university level.)