Caterpillar and SiweiIn 2012 Caterpillar, a construction and mining firm in China, set about about acquiring another Chinese firm ERA – including its coal mining subsidiary Siwei. However Siwei was not totally being up-front about its bookkeeping. In fact, the company was only trading thanks to a ‘reverse merger’ with ERA, which was registered in Hong Kong. This avoided the regulatory hassle and scrutiny of floating. “Important to understand” said a spokesperson for Caterpillar in a statement: “Is that Siwei was a publicly traded company with audited financial statements.” Except, as Caterpillar auditors discovered, it wasn’t. An investigation found Siwei was guilty of “improper cost allocation” and made-up revenues and inventories, which allowed them to overstate profit and buff-up the acquire price. As a result of Siwei’s manipulative accounting, the deal was settled out-of-court for just £18m, down from an initial £101m.
The Enron ScandalThe Enron scandal was historic in terms of creative accounting. The ‘accounting’ in this particular incident, were a conflation of hype, lies and bad auditing. Why did Enron buffer reports and shift debts? Its growth – 311 per cent over the course of a decade – inspired the then-CEO to take up a diversification strategy. To go from Enron’s oil pipes and into an enormous set of manufacturing services besides, from electricity plants to pulp and paper plants – and an overhyped deal with Blockbuster, of all companies. Faith and blindness meant the stock market lapped up every overeager report. Even when they were too good to be true, like 56 per cent growth in 1999, and 87 per cent in 2000 – in an already multi-billion dollar company. What is it people say? ‘It’s not a lie if you don’t get caught.” Unfortunately, Enron’s optimistic diversification strategy was largely a failure, with many of its new businesses losing money. While the company continued to inflate reports, actual revenues were deflating. A lax auditing committee and a well-incentivized Arthur Anderson committee – whose profits from the client were estimated to be upwards of $50m, and worth a quarter of its income – meant that the mistakes were not caught until it was all too late. In a heartbeat, Enron’s stock collapsed from over $90 to less than $1; a $40bn (£29.5bn) lawsuit from shareholders ensued. Enron filed for bankruptcy with $63.4bn (£49.2bn) in assets – the largest corporate bankruptcy at that time. Arthur Anderson, after a series of litigations, collapsed. And, of course, many executives went to prison. Including CFO Andrew Fastow, who was released in December 2011, and started work as a document review clerk in a law firm in Houston. Which tells you that, even in the finance profession, crime doesn’t pay. Image source
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