8 August 2007

Lies, Damned Lies, and Accounting

I spent a small but significant amount of time yesterday searching for a cost code to justify the spending of 60 pence. I mention this partly, I confess, to get the frustration and rage that caused me to scream in my office and cause consternation to my colleagues out of my system. But also to offer it as an example of how, in an era where the accountant is an unlikely king and accountability is espoused on all fronts, the petty is rigorously enforced whereas fraud on a grandiose scale is routinely ignored.

I am thinking, you will have guessed, of corporate fraud, of the type practised by Enron executives. Inflating the value of your stock by counting money you haven't received or even invoiced for yet. That particular techniques, known as counting 'unbilled receivables' was invested by the leading accountancy firm then called Arthur Anderson. Oil companies also engage in this creative accounting when, as Shell recently admitted it had done, they overestimate the value of their reserves, which, in oil companies terms, is the value of your companies and hence your stock.

It appears that the rule is, the more preposterous the fraud the more unlikely it is that we will notice. As Kierkegaard famously pointed out about Christianity, if you want to get a whole mass of believers you need to create a really big lie. Which brings me to the money system: the biggest example of fraud that it is virtually impossible for us all to avoid. Galbraith pointed out that the gap between one financial collapse and the last is roughly equal to the length of time it takes those who suffered to forget about it. You can find it detailed in economics books, but who is daft enough to wade through those?

So, here is a brief quotation from Galbraith about how the last crash came about:

Speculation begins when a price is going up and the presumptively wise expect a further increase. They buy and thus produced the increase. More buy, and more and yet more are attracted. Each price increase affirms the good sense of those who have bought before. Those who doubt are reviled as creatures of defective imagination. The buying and the supporting mood continue until the available supply of mentally vulnerable, economically viable buyers is exhausted. Then come the changed views of the prospect, the rush to get out, the pressure now of creditors demanding repayment of the loans that financed purchase, thus forcing sale. In short, the crash.

Sound familiar? I wouldn't be taking on too much debt if I were you. If you own bricks and mortar it is still yours after the crash. But if you own debt it will not be very much use to you.


  1. To an extent - as long as it's bricks and mortar you plan to live in (and therefore whose £££ value doesn't matter, rather than bricks and mortar you're viewing as an investment).

    John B

  2. Maybe, John. But many people, including many people I know, have bought houses to live in at vastly inflated prices.

    So we have a situation where people are taking on mortgages that they will struggle with from the very first month, leaving them one leaky roof or car MOT failure away from trouble.

    As it's now typical for couples to need both incomes utterly maxed out to buy the cheapest homes there's simply no slack. When the inevitable collapse of the credit bubble comes and large-scale redundancies it's going to be a bloodbath.

    A couple of generations ago our Grandparents spent their time saving for the inevitable rainy days of the economic cycle. Nowadays people believe Gordon Brown's 'Tractor production is up' nonsense of 1.9% CPI inflation, miracle unemployment stats and that a global monetary system always teetering on the edge is 'economic stability'.

    It's going to be a real shock for many.

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