BOOKS: The Tangled Web they wove

BOOKS: The Tangled Web they wove - Corporate America is justly taken to task in this well-timed book, but it could have probed more deeply into the Enron labyrinth, argues Howard Davies

by HOWARD DAVIES, Howard Davies is chairman of the FSA
Last Updated: 31 Aug 2010

Corporate America is justly taken to task in this well-timed book, but it could have probed more deeply into the Enron labyrinth, argues Howard Davies

How Companies Lie; A Larry Elliott and Richard J Schroth; Nicholas Brealey pounds 12.99

It's an ill wind that blows nobody any good, as they say, and amid the wreckage of global stock markets there is a mini boom in books about corporate greed, crooked accountants, compliant auditors and the other less appealing flora and fauna of business life.

Two years ago, we were snowed under with inspirational and euphoric texts on the new economy, trumpeting the worldly wisdom of 22-year-old web site designers. Now all that has changed. Publishers, ever slaves to fashion, have executed a swift side-shuffle from to dot.con.

In many respects, the approach taken in both kinds of book is very similar. The merchants knew precisely how the future would look, and how to make money in it. The dot.con sages know just how it all went wrong, and indeed - though we may have missed it at the time - told us it would all go wrong.

Elliott and Schroth have jumped on this bandwagon with a snappy title, so they should do well. But do they deserve to?

Well, their hearts are in the right place. They make some trenchant, and generally plausible, observations about what went wrong at Enron and elsewhere - although it's fair to say that we still don't know enough, even about the Enron case, however many acres of forest have been felled to support the press coverage to date. We still don't know how the management thought they could get away with their strategy in the long run, or what the non-executive directors thought they were up to. The only case brought to court so far focused on the question of document shredding by Arthur Andersen. It did not add much to our understanding.

In particular, Elliott and Schroth are right that the primary responsibility for America's corporate collapses, and the crisis of confidence in American companies, rests with boards of directors and executive management. Their summary is: 'Andersen has taken a lot of heat about Enron. The auditing profession has made its own bed in the past few years, and now it's sleeping in it. With Enron, though, the central fact is that the board of directors and the CEO were the prime movers.'

But that is about as good as it gets. The strapline on the book jacket describes How Companies Lie as: 'A guide to accounting trickery and financial engineering.' That, it ain't. Even Arthur Andersen's Houston office wouldn't sign off on that description of the content. The blurb describing the objective of the Nicholas Brealey business briefings, of which this is one, says that they offer 'an appealing solution to the dilemma of today's readers: how to keep up with the rapid pace of change in knowledge while leading time-crunched lives'.

I fear this review is too space-crunched to allow for a comprehensive description of how Elliott and Schroth fill their 192 pages. There is a touch of received market wisdom instead of tips for investors, and many aspersions are cast on the integrity of all and sundry. But this is not a 'how to' book in any meaningful sense.

The authors, one a headhunter and the other a technology consultant, are not financial rocket scientists. They have a good instinct for thinking that if a thing can't be understood, it's probably a doubtful practice, and that profits you don't understand are more dangerous than losses you do. But you will not learn here how Enron bamboozled the world with their off-balance sheet partnerships and special-purpose vehicles. For a fuller explanation of the tricks of the trade on Wall Street, we need to wait for former SEC chairman Arthur Levitt's book, provisionally entitled Take On the Street. Many brokers, analysts and accountants await that production with trepidation.

Elliott and Schroth do, nonetheless, focus attention on the right issues. What lesson should corporate America learn? If executives decide that the lesson is not to get caught, we are in trouble. If, instead, corporate executives draw the conclusion that ethical failures are costly for investors and for themselves, Enron will not have died in vain.

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